Chinese Unicorns are rushing for IPO in Hong Kong

Almost all of us have heard of or had experience working for a startup: a diverse, vibrant and intense environment with the magic to bring something as incorporeal as an idea to life.

However, all these fascinating ideas require not only constant innovation to remain competitive. Money, and a lot of it, is necessary to sustain smooth, unimpeded growth. Hence it is fair to say that it is every startup’s dream to become a unicorn and acquire IPO status for further expansion.

China, a nation home to 1.4 billion of population which sees 4,000 new startups sprouting on a daily basis, ranks 2nd for the total number of unicorn enterprises it breeds. It has been a thriving environment for business, nurturing industry leaders with a global presence.

However, the massive increase in the number of startups has also resulted in unprecedentedly intense competition, in turn diluting the pool of funding from Chinese venture capitalists. To survive, startups have to come up with plans to save themselves from the shortage of readily available capital. To this end, some startups with stronger financial foundations have set foot in the Hong Kong Stock Exchange, HKEX, in a rush to reach IPO.

This, in spite of high thresholds. With Hong Kong legislation only approving IPO applications of startups with company valuations of over 10 billion HKD (approximately 1.3 billion USD), this group move-out is hazardous. Some unicorns may exhaust themselves and drown before they even cross the ocean.

In the proceeding paragraphs, we will take a closer look at why Chinese unicorns are desperate to achieve IPO in the market, why they are unanimously choosing Hong Kong, and what to expect for future challenges.

Why IPO?

Before answering this question, let us first understand what IPO is. IPO, an abbreviation which stands for Initial Public Offering, is the first time when private enterprises raise investment capital by offering their stocks to the public.

Besides being easier to raise investment funds, businesses that have crossed the threshold into IPO gain reputation and public trust along with returns on investment and a reduced personal risk. On the other hand, demerits include huge expenses, greater scrutiny by SEC, SFC or other financial authorities, and the loss of control over one’s own company as ownership is diluted.

Why Hong Kong?

In short, let’s think of an analogy to explain this logically: you are someone looking for a potential relationship partner. To limit the amount of effort and time wasted building castles in the air, you rationally exclude the most popular ones, since you’ll never have the chance to approach him/her. Secondly, you exclude those who are geographically distant and live in a world twelve hour apart. Thus, you are left with she who is not too popular, and also lives not too far from you. Perfect! This is exactly why Chinese unicorns choose Hong Kong. Not only is it more IPO- friendly than domestic markets (e.g. Shanghai), it boasts not too much competition, and it is close by with no time difference – the sweet spot.

To begin with, in terms of listing rules, Hong Kong has become more welcoming of Unicorns in recent years. HKEX has made amendments to listing rules, allowing “Weighted Voting Rights” structures. Simply put, WVR structures permit companies to issue classes of shares that carry disproportionate rights. While it was once taken out of commission because it was difficult to manage, Hong Kong’s market endured great loss and pain when it missed the chance to host Alibaba’s IPO, and so WVR structures were brought back online.

Additionally, listing in Hong Kong requires less waiting time. Statistics from 2016 show that in Shanghai’s Stock Exchange (SSE), it takes around 2 years for a unicorn to finish the IPO process. Based on that, corporations that fit in well with the timeline are ones which do not urgently need investment capital.

Being in the same time zone as China is an additional bonus HKEX possesses. The advantages of staying in the same region, manifest themselves as citizens and underwriters have similar understandings of products and services, potentially increasing company’s overall valuation when applying to be listed.

Finally, following the connection of Hong Kong with Shanghai and Shenzhen, Hong Kong stock market has become a gathering place for mainland and overseas funds. Thus, unicorn enterprises that are listed in the Hong Kong Stock Exchange after IPO have the opportunity to raise funds from both mainland China and elsewhere, a relatively better prospect than attempts to acquire a CDR (Chinese Depositary Receipt).

Challenges ahead

Overall, Hong Kong IPO market has been quite robust. According to KPMG Report, The Mainland China and Hong Kong 2018 Q1 IPO Review, there were 62 new listings in the first quarter of 2018, raising HKD 24.4 billion in total with an increase annually.

However, some experts are pessimistic about the legislation changes, especially regarding the implementation of WVR structure, in Hong Kong market. Owing to the regulatory environment is different from that of US, whether the unicorns listed will benefit or not remains to be determined.

Being the first enterprise to adopt WVR structure in 2018 HKEX market, Xiaomi’s IPO is now the second largest tech listing since Alibaba. The result of this IPO? Share price sank 6% from their listing price, despite gains in the broader market covered most of the losses. To sum up, let us cross fingers for Xiaomi and other brave unicorns that are dashing their way for listing in HKEX.

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Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed on our blog, please drop us an email at [email protected] and let us know how we can help.