HKEX urged not to let start-ups list too soon
Top regional officials at McKinsey’s and EY warn exchange to be ultra-careful and selective in choosing which firms can list on proposed New Board
Two of the world’s top business consulting groups, McKinsey’s and EY, have urged Hong Kong Exchanges and Clearing (HKEX) to be ultra-careful and selective in choosing which firms will be allowed to list on its proposed New Board, or what some are calling “The Third Board”, stock market which will target new-economy, start-up companies.
The New Board will be operated separately from the main board and the Growth Enterprise Market (GEM).
McKinsey’s managing partner of Greater China Joe Ngai said HKEX should only let in start-ups that have solid business models and high prospects of profitability.
“It’s a good idea for HKEX to propose the launch of a new market for start-up companies as many will not be able to match the requirement of the main board or the GEM to list.
“But early-stage start-ups should not be allowed to list. If they only have a concept or an idea and no solid business performance or income, they would present too risky a prospect for investors,” he said, speaking at last week’s World Economic Forum in Dalian last week.
“If the exchange simply allowed these start-ups to list, it may end up with a market full of poor quality companies, and that would be a repeat of what mistakes were make when the GEM was created.
The GEM was set up in 1999, positioning itself then as the Hong Kong version of the Nasdaq in the US for hi-tech companies to list. But it has been widely considered as a flop in attracting quality tech firms to list in Hong Kong.
Last year only 3 per cent of funds raised in Hong Kong were technology firms, with most funding raised going into traditional industries such as banking and brokerage firms.
In May 2017, average daily turnover for the GEM was still only HK$742 million (US$95 million), under 1 per cent of the main board’s daily average for the same months and even lower than when it was launched with great fanfare in November 1999
HKEX launched a consultation paper a fortnight ago proposing the Third Board. It is planned to be split into two separate smaller markets: a premium one open to all investors for companies that can match the main board’s high requirement, but which have a dual-class share structure which is banned on the main exchange, and another one for start-ups, in which only professional investors to trade only.
Ngai believes the Third Board would attract more technology firms to list if retail investors were to trade on it too.
“Hong Kong retail investors are smart. Many of them are veterans who can make their own investment choices,” Ngai said.
Adding his backing, too, for only carefully selected entry to the New Board, Jack Chan Hoi, EY’s managing partner of financial services of Greater China area, said HKEX must be fearful of allowing start-ups to list too early.
“HKEX needs to be selective in the choice – they have to be solid businesses,” Chan said.
“The much better option for early-stage start-ups is venture capital or incubator funding. It would be better to let start-ups grow to a certain size and strength before allowing them to list on the proposed new market.
“The quality and prospects of any company on the board must be impressive,” Chan said, adding he is aware of many mainland start-ups who might like to use the proposed new board to raise funds.
“Hong Kong is a liquid market used by many international investors. HKEX’s proposed new board should attract both mainland start-ups and large technology firms to list in Hong Kong.”