Hong Kong can tap IPO potential of tech start-ups with innovative listing reforms

Many tech start-ups that drive the economy remain in pre-profit, which hinders main board listing and access to needed R&D funds
Listing reforms can unlock this potential and meet Hong Kong’s financial and tech hub goals

Catherine Leung

Published: 6:45am, 2 Aug 2022

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During his two-day visit to Hong Kong marking 25 years since the handover, President Xi Jinping made clear his vision for the roles Hong Kong is to play in China’s growth: an international tech hub and an international financial centre.

To China, being self-reliant in technology is no longer something that’s nice to have; it is essential, especially given the geopolitical landscape.

The mainland’s advancement in software as a service (SaaS), artificial intelligence, mobility, cloud computing, robotics and quantum computing are strong examples of what top-down governance and bottom-up creativity can give rise to. Hong Kong’s success in areas such as biotechnology, drone technology and digital health has been equally encouraging.

But even with such staunch support, Hong Kong still has work to do to enhance its capital markets infrastructure and mindset to realise President Xi’s goals.

Tech firms drive global innovation and play a central role in the economic development of countries. In segments such as SaaS, which is the predominant segment for business-to-business enterprise software, there are a significant number of large, high-quality players.

The US SaaS market is estimated to reach US$113.5 billion this year, around 10 times larger than China’s, which is set to grow rapidly.

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Unlike traditional industries, tech companies require major investment in research and development to grow. In addition, many remain “pre-profit” despite beginning to generate revenue, a limbo status that can block the research and development funding they need.

A listing on the main board of Hong Kong’s stock exchange is often out of reach, as it now requires a three-year aggregate profit of not less than HK$80 million (US$10.2 million) and a capitalisation of HK$500 million.

There is potential to create an alternative set of eligibility criteria that more accurately reflects the status of so many high-potential tech companies. One reference is the Nasdaq Stock Market, which uses revenue multiples instead of profitability to measure a firm’s listing eligibility.

Pedestrians are reflected in a window of the Nasdaq MarketSite in New York on June 15. Photo: Bloomberg

Should we take no action, we’d be missing a significant opportunity. First and foremost, for our stock market, attracting technology companies to list here will be a big boost to our market size and liquidity.

According to our research, more than 500 deep-tech companies from different jurisdictions are listed either in the US or mainland China with a combined market capitalisation of HK$16.8 trillion. That is already 43 per cent of the capitalisation of the entire Hong Kong market as of June 30.

The 2000 dotcom crash was a cautionary tale for many investors, but the current wave of innovation is fundamentally different from the companies of the dotcom era.

Perceived risks did not stop our bourse from advancing its standards in the past. For example, the 2018 specific criteria permitted listings of biotech companies, many of which were “pre-revenue”.

We should view SaaS companies, the drivers of mainland China’s digital economy, in a similar way. Many are quality companies with solid technology, an identifiable and accessible market and a demonstrable growth trajectory supported by real demand.

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The good news is that Hong Kong is contemplating solutions to meet the fundraising needs of large-scale advanced technology enterprises, according to the authorities. But a firm decision is needed soon and Hong Kong, to retain its status as a leading hub for IPOs, cannot afford to stand still.

To realise the goals for Hong Kong prescribed by President Xi is a call of duty. It requires a mindset change: to embrace innovation at all levels and to take the associated risks. New ideas may not work and discoveries may fail. Hong Kong should be an environment where new ideas can be tested, and where the most promising ones can grow via our capital markets.

To give more momentum to the listing of disruptive technology companies, Hong Kong should revisit its merit-based listing approval regime and make it more disclosure-oriented. While the former relies on the prevailing wisdom and judgment, the very nature of disruptive technologies requires a different approach.

Hong Kong stock exchange must strive to make most of new listing policies

The last thing we want is a lengthy listing process, or worse, cutting-edge tech companies being turned away, hindering Hong Kong’s competitiveness as a tech hub.

Beyond benefiting the local stock market, a meaningful reform agenda will also enrich Hong Kong’s tech ecosystem. Having a listing infrastructure tailored to helping tech firms raise funds will shorten the life cycle for venture capital and private equity, their main investors at present. With a quicker exit, the redeemed funds can be invested into other companies, leading to increased dynamism.

A more welcome fundraising environment will also attract companies to set up offices in Hong Kong, conduct R&D activities here or elsewhere in the Greater Bay Area and create jobs. This is a win-win opportunity that this city shouldn’t ignore.

Hong Kong is at a watershed; it can regain its groove as a leading IPO hub and retain its title as an international financial centre. The immense opportunities presented by the tech industry are right on our doorstep: an all-hands-on-deck approach should be adopted to ensure they are not missed.

Catherine Leung is chairperson of the Chambers of Hong Kong Listed Companies

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