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Analysis: Hong Kong’s IPO reform poised to open the funding taps for tech start-ups

Analysis: Hong Kong’s IPO reform poised to open the funding taps for tech start-ups

Funding taps are set to open for technology start-ups as Hong Kong’s bourse operator slashes valuation prerequisites and opens the IPO door for more kinds of Big Tech companies.

One October afternoon, Arthur Chan Chi-chuen received news that would change his seven-year-old start-up forever.

Sitting in his office at the Hong Kong Science and Technology Park, Chan’s domain expert from the science park accelerator team said Hong Kong’s stock exchange was seeking public feedback on a plan to enable promising start-ups – even those that have not earned a single cent in revenue – to raise capital through a new listing regime.

The news was a godsend for Chan, a 44-year-old computer engineer who founded SagaDigits Group with another alumnus of the Hong Kong University of Science & Technology.

“The new listing regime offers a third option for us” that could accelerate the artificial intelligence and location tracking start-up’s access to capital by two years, Chan said in an interview with South China Morning Post. “It will be faster and easier for us to raise funds, as long as we can achieve the valuation needed, even if we fail to reach the income or profit targets. This is really very good news for us”.

Arthur Chan Chi-chuen, co-founder of local start-up SagaDigits and Director and CEO of Compathnion Technology, photographed in Central on 19 May 2020.


Under the proposals announced in October by Hong Kong Exchanges and Clearing (HKEX), which operates the bourse, one of the rules in the new Chapter 18C of the regulations will allow pre-revenue Big Tech companies that have a valuation of at least HK$15 billion (US$1.9 billion) to raise capital. For companies that have earned at least HK$250 million in revenue in the financial year prior to listing, the required valuation will be just HK$8 billion.

Until now, many start-ups have found it hard to list in Hong Kong as they faced one of the most onerous listing requirements among the world’s major capital markets: at least HK$80 million (US$10.19 million) in combined profit from the three years preceding the listing, the highest worldwide. Unprofitable applicants need a valuation of at least HK$4 billion and a minimum of HK$500 million in annual revenue to qualify.

It gets better from there. The exchange will consider five types of Big Tech firms – specialist technology companies – that qualify under the new requirements. These include companies in hi-tech sectors such as cloud computing and artificial intelligence, as well as those in the advanced hardware sector covering electric and autonomous vehicles, semiconductors and metaverse. Companies in new materials, new energy and new food and agriculture technologies are the others.

“Hong Kong is home to the world’s most vibrant and diverse new-economy ecosystem, and we are always looking for ways to attract the most innovative companies to our markets to raise funds,” said Nicolas Aguzin, CEO of HKEX in a statement to the Post. “The proposed new listing rules for specialist technology companies offer an exciting new route to market for some of the companies of tomorrow, and we look forward to sharing the results of our consultation in due course.”

Many market participants still consider the bars set out in the proposed new rules too high, and have expressed their concerns to HKEX during the recent consultation period.

As such, the exchange has decided to cut the thresholds to between HK$10 billion and HK$12 billion for pre-revenue firms and to between HK$4 billion and HK$6 billion for firms with revenue, according to two sources who spoke to the Post on condition of anonymity. A final decision is due to be made after discussion with the Securities and Futures Commission before the end of this month.

“The reduction of the threshold makes sense as it will allow more companies to qualify to apply to list under the new regime,” said Kenneth Ho Shiu-pong, head of equity capital markets at Haitong International.

Ho said a number of Haitong’s start-up clients want to apply for listing under the new regulations.

UBS, the largest listing sponsor in Hong Kong last year, has been in discussions with a number of issuers about listing under the new regime, according to John Lee Chen-kwok, its Hong Kong-based vice-chairman and head of Greater China global banking.

“Although the listing requirements for these technology companies are even lower in the US and the mainland, many companies will want to list in Hong Kong given the depth of the investor base and market liquidity,” Lee said.

A listing in Hong Kong can help issuers navigate away from the geopolitical tensions between the US and China, he added.

“As international investors widely trade in the Hong Kong stock market, listing in Hong Kong can tap [global funding] and promote the brands of the start-ups to the world,” Lee said. “They would not enjoy such benefits with a listing in Shanghai or Shenzhen, as the mainland markets are primarily domestic investors.”

Hong Kong, which has been the world’s largest listing market seven times in the past 14 years, managed third place in 2022, having languished in 10th through the summer. A flurry of deals in the latter part of the year brought the total to 75 deals and US$12.69 billion raised, according to Refinitiv. However, that funding total represents a 70.5 per cent decline year on year.

Some 110 firms will raise around HK$230 billion through Hong Kong IPOs in 2023, accounting firm Deloitte predicted in December.

The new reforms – the most significant since 2018 when companies with multiple voting rights and pre-revenue biotechnology firms were first allowed to list – will be popular and may help Hong Kong to regain the coveted top spot in the IPO rankings, said Edward Au, Deloitte’s southern managing partner.

“It is only after the listing reforms in 2018 that we have large technology firms such as Alibaba and Baidu listing here,” Au said. “Hong Kong has already become a favourite destination for technology companies to list. The new reform is going to bring the Hong Kong initial public offering market to a higher level.”

Some 256 new-economy companies and biotechnology firms have listed on the exchange during the past five years, raising a total of HK$914.7 billion, which represents 64.8 per cent of IPO funds raised during that period.

Daily trading of stock in new-economy companies hit HK$36.1 billion in January – nine times the volume in 2018. Such trading has grown from 4 per cent of average daily turnover in 2018 to 25.8 per cent in January.

The 2018 reforms have also made it easier for technology companies listed in the United States or the United Kingdom to have secondary listings in the city, paving the way for Alibaba Group Holding, Baidu and NetEase to list in Hong Kong. Alibaba owns the Post.

The Hong Kong stock exchange has become the world’s second-largest biotechnology fundraising hub, with 56 IPOs raising a total of HK$116.3 billion since the reforms in 2018 through January of this year, exchange data shows.

These listings have created a new-economy ecosystem in Hong Kong, prompting the Hang Seng Indexes to introduce the Hang Seng Tech Index as a new benchmark in 2020.

“The new listing regime will not only attract Hong Kong and mainland start-ups to list but will also attract Southeast Asia start-ups to tap capital here,” said David Chang, founder and chief executive of start-up focused venture-capital firm MindWorks.

The new listing reforms come at the right moment, as right now is a “winter time” for start-ups looking to raise funds, Chang said.

“Companies that need money to carry out their research have faced difficulties in raising funds from the private market,” he said. “They can now consider listing in the stock exchange to finance their projects.”

The reforms will work in tandem with actions HKEX is taking to fulfill another ambition: increasing international listings. The exchange will open an office in London in the first half of this year, following fast on the heels of a New York office opened in December.

Shares of Standard Chartered, as well as those of Swire Pacific, L’Occitane, and Samsonite, will be accessible to mainland China investors starting on March 13 in an expanded Stock Connect cross-border trading scheme. Chang said this will encourage more international firms to consider listing in Hong Kong.

“Companies will be interested in the new regime because a lot of these high tech companies need capital for their R&D and continuous development,” said Victoria Lloyd, partner in Baker McKenzie’s capital markets practice in Hong Kong.

The cachet of being listed as a specialist technology company may also prove alluring. “There is a school of thought that even if companies could qualify under the normal listing rules, they would like to go for a listing under Chapter 18C for reputation reasons,” she said.

Chan’s company, SagaDigits, is best known to the public from the beginning of the Covid-19 pandemic in 2020, when its tracking technology helped the Hong Kong government develop electronic wristbands that were used to track the movements of infected people.

The firm has now shifted its focus to other uses in retail and shopping malls in Hong Kong and other parts of Asia including Vietnam.

“At the end of the day, we will still need to work hard to generate income and profit for our shareholders,” Chan said. “However, if we can list and raise funds at an earlier stage, we can have the capital to finance our research and development, which will be vital to our growth.”

SagaDigits raised HK$10 million in its most recent fundraising round in 2016 from a local family that does not want to be identified. The company has started to make a profit but is some distance from the HK$80 million, three-year profit benchmark.

With the new reforms, SagaDigits is within striking distance. Chan is now aiming for IPO under Chapter 18C, based on revenue of HK$250 million in the last financial year and a valuation of HK$6 billion.

“Getting listed would be a validation of my conviction that vision and diligence, as well as teamwork, truly pay off,” Chan said. “The listing reform is helpful to having our listing dream come true.”

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