Hong Kong must take a lead in tech listings or forever play catch-up
The changes to Hong Kong stock exchange’s listing rules last month seemed reluctant and timid, considering how profound the consequences are likely to be.
The dilemma facing Hong Kong Exchanges and Clearing (HKEX) for years was about more than being arbitraged against other stock exchanges over dual-class shares and losing the listing business of world-class mainland tech companies.
The deeper malevolence is that there are no rational reasons for management or owners of a listed company to demand dual-class shares or weighted voting rights. They usually claim their company culture is special. Or the technology is so vast and complex that they need protection from troublesome predators or activists, or even worse – the ignorant vagaries and decisions of outside shareholders over issues like management pay or dividend payouts.
Every manager and owner thinks they and their businesses are special. However, if your business is so hard to comprehend, why should it be listed for average public investors? It’s a paradox no one can answer. Indeed, it should just trade among sophisticated institutional investors. Like Facebook did before its IPO. In that case, critics said it traded out its full value in the private equity market, leaving little for the IPO, which may have accounted for its price drop right after the flotation.
The corporate governance contortions that investors must force themselves through with mainland companies now ranges from dual-class shares and VIE (variable interest entity) structures to restrictions on foreigners to gain access to accounting working papers in China due to secrecy laws.
The consultation paper on the proposed listing-rule changes acknowledged the difficulty of defining a “new economy” or high-technology company. The term is vague and not restricted to any one group of industries. Then, all of a sudden it proposes to initially limit eligible tech companies to biotech enterprises with a minimum expected market capitalisation requirement of no less than HK$1.5 billion.
HKEX needs to come to terms with the “new economy” because the exchange must play a critical role besides waiting for China to serve up billion-dollar “unicorns” for its listing factory. Waiting for China to tell it what to do has paralysed all of Hong Kong, and HKEX is no exception.
The sudden choice of biotech seems arbitrary, awkward and downright unusual for Hong Kong’s exchange, which used to be dominated by family-owned property developers, banks and in the last 20 years mainland companies. Biotech is an ill fit because it is not an extension of any traditional Hong Kong industry that draws upon any Hong Kong expertise.
That expertise does not just include biotech research and development, but regulation, manufacturing and end-product development. Much of that critical process and infrastructure is currently in the US or Europe. Biotech’s particular investment complexities include achieving regulatory approvals in the US or EU.
According to Reuters data, US drug approvals hit a 21-year high in 2017, with 46 new medicines being approved – more than double the previous year. The EU recommended 92 new drugs including generics, up from 81.
Indeed, vice-chairmen in this area tell me that one of the criteria for a biotech CEO is a track-record in leading a product through the complex trial and approval process of the US Food and Drug Administration. And many of the biotech issuers prefer to list on US exchanges because of the speciality analyst coverage and funds that don’t exist in Hong Kong.
According to the HKEX report, the explanation for the biotech selection is that the activities undertaken by biotech companies tends to be strictly regulated (for example, by the US Food and Drug Administration) and will provide investors with a frame of reference to judge the value of companies that do not have traditional indicators of financial performance. Biotech companies also made up the majority of those in the pre-revenue stage of development over the last 10 years seeking a US listing.
But using that logic the HKEX should allow flight-technology companies to list because they too are well documented and monitored by the US Federal Aviation Administration, which regulates all aspects of civil aviation in the US.
HKEX must carve out a leading role in technology listings, otherwise it will always be catching up. Playing it conservative, being a humble service provider rather than a pioneer seems to be their safe bet. They are happy to be wholly dependent on China providing the billion-dollar, “unicorn” listing candidates.
China is awash with aggressive venture capital whereas Hong Kong is lacking in risk capital beyond property or restaurants and bars. At some point, its domestic private-equity market may evolve enough to not require companies to seek an immediate listing, which gives them a choice to seek other exchanges. Technology fuels unpredictable capital market developments. HKEX risks looking backwards in the rear-view mirror while trying to drive forward.
HKEX must evolve and accept low-level business and innovative ideas that may fail. Unfortunately, it is encumbered by being a comfortable, profitable enterprise in the unique position of not having to assume much innovation risk. The original idea to establish a start-up tech board was probably too overwhelming given HKEX’s current culture. But, its fearful attitude only increases its risk of falling behind and becoming irrelevant in the technology business.