The new economy in Hong Kong is sluggish as evident from the low uptake of finance for startups. The total market capitalisation of the new economy in the Nasdaq and the New York Stock Exchange accounted for 59% and 44% respectively while merely 3% in Hong Kong over the past 10 years, according to the Hong Kong Stock Exchange. The market capitalisation of industries such as pharmaceuticals, biotechnology and life sciences, healthcare equipment and software & services, only represented 1% of the total!
Therefore, I am pleased to learn that the HKEx proceeded on a consultation of establishing New Board and review of the existing Growth Enterprise Market (GEM) and Main Board. The New Board will include two segments:
1 New Board PRO
Designed for “not yet profitable companies", this refers to the startups of new economy that are still burning up money – nearly 70% of these companies listed in the United States last year are not profitable.
However, the scope of startup entitled to financing has yet to be defined by this New Board.
First, what is the definition of “new economy industry"? Is it defined by association with Internet? Does it cover the recently popular bicycle rental business in the Mainland and Hong Kong?
Since the New Board only opens to professional investors – that is, for investors with at least HK$8 million investment, the HKEx has much “relaxed" requirement on the initial listing. Having said that, it is difficult for startups to attract professional investors since they have minimal presentable track record. They also have to invite at least 100 professional investors to consider their business plans, which is a big challenge to a startup without broad connection.
At the same time, although the listing “does not require a track record or minimum financial requirement", it requires a market capitalisation of HK$200 million, which is even higher than the requirement of HK$150 million in GEM! Besides, it is not easy for the startup to switch to the long-established GEM, as there is a new proposal requiring the GEM companies to have a cash flow of HK$30 million instead of HK$20 million within two years.
So there is a doubt whether the new proposal could benefit the financing of startups.
2 New Board PREMIUM
Designed for companies that have already met the existing financial and track record requirements of the Main Board, that is, enterprises of a considerable size.
I believe that this is relevant to the dual-shares structure which allow shares with unequal voting rights to be listed, and mainland companies to be listed in Hong Kong as secondary listing.
For dual-shares structure, the United States currently allows companies, mostly technology firms including Facebook and Google, to be listed locally, and Singapore is also studying the same arrangement. Hong Kong insisted on “one share, one vote" in the past. As a result, we lost the listing business of Chinese e-commerce juggernaut Alibaba Group. Alibaba then turned to the United States for listing and it was reported as the biggest financing of new shares in 2014, breaking world record in the meantime.
However, as Carlson Tong Ka-shing, Chairman of the Securities and Futures Commission said in media interviews: “The SFC supports the consultation to allow the public to share their views on the dual-shareholding structure… the regulator will only agree with any listing rule changes if it would develop the market and provide sufficient protection measures for small investors." For example, whether the new buyers have a right to inherit pre-existing dual-sharing privilege, and whether the privilege will have a time limit, etc. are the major concerns of small investors.
According to the HKEx, companies which fulfilled the New Board listing requirements but failed to be listed in Hong Kong in initial public offering (IPO) over the past 10 years have a total capitalisation amounting to US$49 billion (approximately HK$382.2 billion), representing 17% of the IPO financing in the same period. I certainly hope that the new proposal will enable Hong Kong to grasp this kind of huge business opportunity. However, I also hope that it will act as a financing platform for startups and SMEs, so that these enterprises could survive, and will also inject new impetus into Hong Kong’s economy.
Dr. Winnie Tang
Honorary Professor, Department of Computer Science, The University of Hong Kong