HKEX Allows Unprofitable Biotech Firms to List on Main Board Under New Chapter 18A

2017Year12Month15Day,The Stock Exchange of Hong Kong Limited (SEHK), a subsidiary of HKEX, announced that it has decided to implement plans to broaden the existing listing regime by adding two new chapters to the Main Board Listing Rules:

For pre-revenue companies, if applying for listing under the new chapter applicable to biotechnology companies pursuant to the Main Board Rules, the expected minimum market capitalization must reach RMB 1.5 billion.

Additionally, it is recommended that companies with a market capitalization of RMB 10 billion and revenue of HKD 1 billion be permitted to list in Hong Kong using a weighted voting rights (WVR) structure. Companies with a market capitalization of HKD 40 billion at the time of listing would be exempt from the revenue test, allowing them to list even without generating any revenue.

As early as June 2017, the Hong Kong Stock Exchange proposed the concept of dual-class share structures, paving the way for Chinese companies with no revenue and those listed on overseas markets to return to Hong Kong for secondary listings. Six months later, the announcement was formally made, which undoubtedly represented positive news for biotechnology enterprises.

Biotechnological innovation is a capital-intensive sector, and it is difficult for companies to achieve profitability in the short term.Taking innovative drug companies as an example, the incubation of an innovative drug project, from molecular screening to market launch, requires at least10years. During this period, most companies were unable to generate revenue, and companies inAEquity opportunities are scarce, placing both investors and founders under pressure. In such circumstances, some companies choose to list on the NASDAQ in the United States.

The Nasdaq listing requirements do not mandate that companies must already be profitable. Meanwhile, if a company aims to engage in more overseas mergers and acquisitions in the future, listing abroad will undoubtedly offer greater convenience.

However, the window of opportunity in the U.S. capital markets is critical; companies must rush to go public during this open period. Meanwhile, as an investment-oriented market, Nasdaq generally assigns lower valuations to companies compared to China’s A-share market.

Furthermore, although the Nasdaq market does not mandate profitability, it imposes requirements on a company’s level of innovation and team structure; consequently, some enterprises may still encounter certain difficulties in listing on Nasdaq.

Looking at the Hong Kong market, changes have been particularly evident in recent years following the successive launches of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect.

In 2016, the average daily trading volume on the Hong Kong Stock Exchange was approximately HK$67 billion, rising to around HK$100 billion in 2017—a growth of 30% to 40%. Companies listed in Hong Kong, such as Meitu, WuXi Biologics, and China Literature (Tencent’s reading platform), have achieved relatively favorable valuations.

“Southbound capital accounted for 1%-2% of the daily trading volume in the Hong Kong stock market in 2015, rose to 3%-4% in 2016, and reached 5%-6% in 2017, showing a clear upward trend,” said Zhong Chuangxin, Senior Vice President of the Listing and Issuance Services Department of the Hong Kong Stock Exchange. These figures all demonstrate the Hong Kong market’s receptiveness to mainland Chinese enterprises.

Moreover, most biotechnology companies boast exceptionally high and rapidly growing returns on equity (ROE), signaling a market that is rising swiftly. Constrained by their choice of listing venues, numerous high-quality domestic companies in China are awaiting opportunities to go public. Should these enterprises list on the Hong Kong stock exchange, they would undoubtedly send shockwaves through the market.

Under ideal conditions, NASDAQ is not the most desirable listing venue; most companies would actually prefer to list on China’s A-share market. However, given the stringent requirements, an A-share listing is not a realistic option.

With relatively attractive valuations and a favorable environment for cross-border M&A, the Hong Kong stock market presents a well-balanced option. The recent opening of the Hong Kong market to pre-revenue biotechnology companies will create additional exit channels for investors in this sector, while also stimulating their investment activities in the market. Undoubtedly, this will bring new opportunities for both investment firms and enterprises.