HKEX eyes third board to draw more technology start-ups to Hong Kong
HKEX has launched a consultation for a third board which would allow more technology and new-economy start-ups to list in the city
Being one of the leading international financial centres, Hong Kong may need to explore emerging opportunities and to match capital with diverse types of enterprises. And one key growth opportunity
is in innovation and technology companies.
Looking at this chance, the Hong Kong Exchanges and Clearing (HKEX) has launched a public consultation for a third board, after the main board and the growth enterprise market, to allow more technology companies to list in the city.
Hong Kong’s capital market is known for its ability to help with public offerings of consumer or retail and real estate businesses, and financial services institutions.
But due to market valuations and the focus of the city’s institutional investors, technology companies often find Hong Kong less attractive as a listing destination compared with the United States, according to Edward Au, co-leader, national public offering group at Deloitte China. “For example, listings of these companies at the GEM [growth enterprise market] are unlikely to arouse interest from funds, which set their eyes on MB [main board] companies [with a] larger market capitalisation and higher liquidity.
“There have been successful listings through meeting the cash flow or market capitalisation requirements at the MB if [it has not] achieved the profit thresholds for listing,” Au says. “But there [are still] companies being turned away from the capital market, mainly because of being unable to meet these financial yardsticks. For technology companies, it is typical to have no profit or low cash flow, but more intangible performance like online traffic, at their development stage. So there may be a need to develop a separate set of listing criteria for these businesses in order to open the door of the capital market to them.”
Benson Wong, entrepreneur group leader of PwC Hong Kong, says Hong Kong’s IPO market led the world in terms of funds raised in 2016. “The financial services sector accounted for 69 per cent of total fund raising, while just 3 per cent was contributed by the technology sector. There is huge fund-raising demand from technology and new-economy companies, many of which have adopted a dual-shareholding structure. This is currently not allowed under Hong Kong main board and GEM board listing requirements.”
Paul Lau, head of capital markets at KPMG China, believes Hong Kong has always been a great platform for many types of companies to access capital, while preserving high regulatory standards. The establishment of a new board for emerging companies and companies with non-standard governance structures will help attract more technology companies to list in the city. “As investing in emerging companies involves greater risks, the third board may be opened to professional investors only. A disclosure-based regime and a less burdensome approach to sponsoring due diligence may follow. Meanwhile, professional investors should be able to judge the merits of an emerging growth company.
A disclosure-based regime for the new board should alleviate the regulator’s burden in assessing the suitability or sustainability of a listing applicant’s business. A streamlined listing process will also help reduce the costs, making it more affordable for emerging companies. A mechanism needs to be in place for the transfer of these companies to the main board when they emerge as key market players.”
Looking at technology companies with a non-standard governance structure, Lau thinks an enhanced corporate governance structure – for instance, increasing the minimum number of independent non-executive directors on the board – could be in the listing criteria to protect investors. Possessing a good compliance history is also important, he adds. “The stakeholders could consider allowing access for both retail and professional investors. The present ‘centre of gravity’ requirement for secondary listing could be removed, which would allow US-listed China tech firms to apply for a secondary listing in Hong Kong.”
Ringo Choi, EY’s Asia-Pacific IPO leader, believes that HKEX could learn from the experience of mature markets, such as the New York Stock Exchange and the Nasdaq Stock Market. “More flexible listing requirements tailored to the needs of technology firms could be adopted; for example, less stringent requirements on revenue and profit, allowing listing with dual-class share structures, simplifying the listing process and reducing the listing cost for special companies to attract technology companies and new-economy companies.
“However, the relaxation of listing requirements calls for stricter measures to protect the interests of investors. To safeguard investors, HKEX could consider a strict delisting mechanism to protect the rights and interests of investors and keep listed companies qualified. Proper investor education is needed to ensure that investors in the market fully understand the risks and have better risk management abilities,” Choi adds.
Wong says: “To ensure the quality of the companies listed on the third board, there should be a clear, fair and effective delisting mechanism for companies that perform poorly. The failure rate for start-ups is higher than for established companies. An effective delisting mechanism will ensure that
only sound companies remain listed. This will help maintain the overall quality of the third board.”
The introduction of a third board should allow for more flexible shareholding structures, including dual-shareholdings, Wong believes. “Lower entry requirements, including on profitability, cash flow and market capitalisation, could also be considered so that start-ups with growth potential can more readily fulfil listing requirements.
To safeguard investors, we recommend that the third board should only be open to professional institutional investors at the beginning. It can then be gradually opened up to retail investors as they become more familiar with the associated risks and the characteristics of the companies listed on the third board.”