New listing rules have bolstered the SAR's bid to attract more high-growth tech enterprises to list locally, making the city more competitive and attractive as a premier global fundraising hub. Oswald Chan reports from Hong Kong.

As of March 31, Hong Kong Exchanges and Clearing, which runs the city's bourse, has added the new Chapter 18C to its main board listing rule, allowing pre-commercial companies with at least HK$10 billion ($1.27 billion) in market value to sell shares - down from the previous threshold of HK$15 billion.

For commercial companies, a market value of no less than HK$6 billion will be required for offering initial public offerings in the special administrative region, compared to the previous requirement of HK$8 billion.

The moves are part of Hong Kong's broader efforts to lure more specialist technology firms in sectors like next-generation information and technology, advanced hardware and software, advanced materials, new energy and environmental protection, as well as new food and agriculture technologies, to go public locally, hence consolidating Hong Kong's standing as a global financial center.
The modified listing rules are based on adjusting two listing requirements - the market-cap threshold and sophisticated shareholder criteria - which are more user-friendly and attractive to enterprises, particularly potential or emerging unicorns, while ensuring investor protection.

"We have launched a range of important new strategic initiatives, such as our new specialist technology company listing regime and Stock Connect eligible stocks and trading calendar enhancements, and we welcomed a host of new issuers and products to our markets," says HKEX CEO Nicolas Aguzin.

Financial analysts expect the new rules to make Hong Kong a more attractive listing destination for technology-focused and growth companies. Enacting Chapter 18A in 2018 triggered a boom in pre-revenue biotech company listings in Hong Kong, fortifying the city's premier biotechnology fundraising market in Asia. Chapter 18C will allow specialist technology firms that would otherwise be unable to meet the existing listing rule requirements to go public locally.

"We are confident the new regime will help drive growth in talent and investments for specialist technologies in Hong Kong and beyond. In the long run, building a specialist technology financing ecosystem will diversify Hong Kong's capital markets and create a more appealing environment for both issuers and investors," says KPMG China New Economy and Life Sciences Partner Irene Chu Ngar-yee.
For specialist technology companies with high growth potential, the revised listing rules will significantly raise their access to capital to fund their research and development, and set the path to commercialization. This is because specialist technology companies are usually unable to meet the profit, revenue and/or cash flow listing requirements, as they are often in the R&D or pre-revenue stage that makes them difficult to obtain the funds to go public.

"The listing rule changes address specialist technology companies' ongoing capital needs with direct access to a large and diversified international investor pool, while they would not enjoy such benefits on the Chinese mainland markets, which primarily consist of domestic investors," says John Lee Chen-kwok, vice-chairman and head of Greater China at UBS Global Banking.

Virginia Lee Yuen-man, a partner at Clifford Chance Hong Kong says, "The uniqueness of Hong Kong's market is that, with HKEX's Stock Connect programs with the mainland, additional access to mainland capital is another advantage for Hong Kong." She expects the listing-rule changes to encourage hard-tech mainland firms and innovative technology companies from Southeast Asia and the Middle East to opt for listings in Hong Kong.

Consolidating leading role
Besides specialist technology benefiting from the new listing rules, Hong Kong's position as a leading global financial center will be cemented. "We believe a rising proportion of new-economy stocks could help increase the overall representativeness of the Hong Kong stock market, enabling them to enjoy a valuation premium with stronger liquidity flow, drive higher turnover, and enhance diversity," says Melody Lai Yeye, chief strategist at China Renaissance Securities (Hong Kong).

Virginia Lee agrees, "The bigger picture and impact from introducing this regime is that it will invigorate the liquidity of Hong Kong's capital market and create a more competitive exchange internationally. Such an initiative also aligns with the HKSAR government's broader efforts to strengthen the city's status as a leading global financial hub."

UBS Global Research China Financial Analyst Kevin Chu Hiu-wai believes the reforms cater to investors' concerns about HKEX's long-term competitiveness and help "justify its valuation premium", compared with its peers".

"As the intersection of diversified funds, Hong Kong Stock Exchange's launch of Chapter 18C will see greater participation of international capital willing to take a share of the mainland's high-quality development dividends," according to a research report by mainland bank ICBC International. "Chapter 18C not only has higher requirements for market value, but also has clearer and stricter requirements for R&D, the number of third-party investors and the proportion of investment," the report says.

The bank argues that changing the listing rules will also provide a financing link platform for science and technology innovation enterprises in the Guangdong-Hong Kong-Macao Greater Bay Area by enabling replicable capital market experience to support the long-term development of mainland innovative enterprises driven by technological innovation.

Financial analysts expect the new listing rules to make Hong Kong a more convenient listing venue and a preferred destination for Chinese companies to switch their listings in American depositary receipts to the HKEX's main board.

"The new listing regime may facilitate the homecoming of ADRs as companies that do not currently qualify for a main board listing will be eligible. This strategic move helps these firms mitigate potential risks associated with scrutiny from a single stock exchange, while paving the way for them to capitalize on higher valuations and superior returns in their home market," says Lai.
ADRs refer to negotiable certificates issued by a US depositary bank that represent a specified number of shares of a foreign company's stock. By trading on the US market, as any domestic shares would, ADRs enable foreign firms to attract US investors and capital, free of the hassles of, and expenses involved in listing on US stock exchanges. US investors are also offered a way to purchase stocks in overseas companies that would not otherwise be available.

Returning to HK
Stiffer scrutiny of Chinese businesses in the United States combined with Chinese worries about data security for US-listed companies has forced mainland companies to return to Hong Kong to list. There were 18 new listings on the Hong Kong Stock Exchange, raising HK$6.7 billion, in the first quarter of this year - down 55 percent from the same period in 2022. The bourse's IPO pipeline remained strong during the quarter, with 92 active applications as of March 31.

According to financial market information provider Refinitiv, IPOs, including original IPOs and secondary listings, in the SAR (on the main board and the Growth Enterprise Market) raised a total of $837.2 million as of March 31 - down 52.9 percent for the same period in the previous year, but saw 41.7 percent growth in the number of issuances. IPO issuances, including secondary listings by mainland companies, dominated the new listings in Hong Kong and accounted for 93.7 percent of the market share in terms of proceeds, with a total of $784.1 billion - down 46.4 percent from the same period in 2022.

Mainland technology behemoth Alibaba Group Holding said recently it will spin off its six businesses to pursue their respective fundraising and listing plans, adding an impetus to reinvigorate Hong Kong's fundraising market. In March, the conglomerate announced it will split into six business units. With the exception of Taobao Tmall Commerce Group, which will remain wholly owned by Alibaba, the other five units in cloud computing, smart logistics, digital business, local services, as well as media and entertainment, will continue with their own fundraising and listing plans. The group's reorganization is aimed at reducing regulatory risks and easing government scrutiny following the mainland authorities' crackdown on technology companies in the past few years. Looser connections among business units are also in line with the regulatory stance of encouraging competition. Alibaba's logistics arm, Cainiao Network Technology, is reported to be making preparations with banks for an IPO in Hong Kong by the end of this year, paving the way for the first of the tech behemoth's six business units to go public.

Moody's Investors Service says the potential listings for each unit will "broaden funding access for the company as a whole so that the separate business unit management teams will also have more incentives to push for better performance and efficiency".
Financial analysts see more mainland technology companies spinning off their units for separate listings in Hong Kong. JD - the mainland's largest e-commerce group - applied to the Hong Kong Stock Exchange to spin off its property and industrial units, Jingdong Property and Jingdong Industrials, in late March, paving the way for some of this year's biggest listing debuts by mainland technology behemoths. The move came days after Alibaba revealed its reorganization plans that have spurred anticipation of a revival of mainland technology IPOs.

Contact the writer at [email protected]