Start-ups listed on Beijing’s ‘new third board’ eye Hong Kong IPOs

Agreement between Hong Kong bourse operator and exchange for start-ups in Beijing seen as paving the way for dual listings

PUBLISHED : Wednesday, 02 May, 2018, 6:30am
UPDATED : Wednesday, 02 May, 2018, 6:30am

A number of Chinese start-ups trading on National Equities Exchange and Quotations, or Beijing’s “new third board”, are eyeing flotations in Hong Kong after the city launched new listing rules this week, according to lawyers and bankers.

“Some of our customers, who are now listed on the new third board, have shown an interest in listing either on Hong Kong’s GEM, or the city’s main board. They would like to list here, as listing in Hong Kong is recognised as good for promoting their businesses in international markets,” Stephen Chan Yiu-kwong, a partner at US-based law firm Dechert, said in Hong Kong.

Hong Kong Exchanges and Clearing, which operates Asia’s third-largest stock market, launched its biggest listing reform in 25 years on Monday. It now allows technology companies with dual-class shareholding structures, as well as biotechnology companies with no revenue, to list in the city.

Several enquiries but no applications on Day 1 of Hong Kong’s new listing rules because of Labour Day break

The GEM is the HKEX’s second board. Previously called the Growth Enterprise Market, it does not require companies to have a profit record, but they need a combined cash flow of HK$30 million (US$3.82 million) in the two years leading up to their listing. The HKEX’s main board is for bigger companies and requires them to have a combined profit of HK$50 million in the three years leading up to their listing.

In another move that is expected to attract more technology companies to list in Hong Kong, the HKEX signed an agreement with National Equities Exchange and Quotations (NEEQ) in Beijing two weeks ago. NEEQ was started in 2012 to help fund innovative start-ups as mainland China’s third exchange after Shanghai and Shenzhen. By the end of last year, 11,600 companies had signed up to trade on it; it has raised 400 billion yuan (US$63.06 billion) since its inception. 

e agreement will enhance the sharing of information and cooperation between the two exchanges.

“The agreement signed between the HKEX and NEEQ has paved the way for companies now trading on the new third board to list with the HKEX,” said Jeffrey Chan Lap-tak, founding partner of Oriental Patron Financial Group.

“Mainland rules require that new third board companies must delist from the board before they can apply for new listings in Shanghai and Shenzhen, while the HKEX can accept their dual listing in both Beijing and Hong Kong,” he said, adding that this puts the HKEX in a better position than the stock exchanges in Shanghai and Shenzhen.

‘Father of red chips’: China depository receipts will limit secondary listings in Hong Kong by big tech firms

Chan also said that while many of the start-ups traded on the new third board might not have big enough profits to meet the requirements of the main board, they could qualify to listed on Hong Kong’s GEM. Biotechnology companies could also meet the Hong Kong main board’s listing requirements after Monday’s reform, which allows large biotechnology companies without revenue but valued at HK$1.5 billion at the time of flotation to list.

Mainland rules require that new third board companies must delist from the board before they can apply for new listings in Shanghai and Shenzhen, while the HKEX can accept their dual listing in both Beijing and Hong Kong
Jeffrey Chan Lap-tak, founding partner, Oriental Patron Financial Group

Gary Cheung, chairman of the Hong Kong Securities Association, said NEEQ companies would like to list in Hong Kong for its more flexible listing requirements and quicker approval process.

“The companies that want to list in the mainland markets have to wait for months, or even years, to get an approval from the China Securities and Regulatory Commission. Although the CSRC has quickly approved some individual cases recently, the fast track is not for all companies. Many technology companies would thus like an IPO with the HKEX,” said Cheung.

“The new third board companies that want to target international investors and raise international funding will also like to list in Hong Kong. This will become a major reason for technology companies to list with the HKEX. But the investors who want to invest in these companies need to understand that these start-ups have high failure ratios. They need to understand the risks of investing in the sector,” said Cheung.