Listing of Tech Companies in Hong Kong
Technology companies may list in Hong Kong on one of the Stock Exchange of Hong Kong Limited’s (Stock Exchange) two boards: the Main Board and the Growth Enterprise Market (GEM).
The Main Board caters for companies with a profitable operating track record or that are able to meet alternative financial standards. It is designed to give these companies an opportunity to raise further funds from the market in order to finance future growth. GEM, on the other hand, caters for small and medium sized companies and has lower admission criteria. GEM currently acts as a stepping stone to Main Board listing provides a streamlined procedure for transfer to the Main Board once a GEM-listed company meets the criteria for listing the Main Board.
In 2017, there were several major technology (tech) companies listed in Hong Kong, including Yixin Group Limited (Yixin) (Stock Code: 2858), ZhongAn Online P & C Insurance Co., Ltd. (ZhongAn Insurance) (Stock Code: 6060), China Literature Limited (China Literature) (Stock Code: 772) and Razer Inc. (Razer) (Stock Code: 1337). However, prior to 2017, Hong Kong’s record of attracting listings of new economy companies was weak primarily because the weighted voting rights (WVR) structures, adopted by some of the top tech companies in the world prevented their listing on the Stock Exchange, as WVR structures breach the Exchange’s “one share, one vote” rule. A WVR structure, or a dual class share structure, gives the company’s founders voting rights disproportionate to their percentage holding of the company’s shares ensuring that they retain control notwithstanding that their ownership is greatly diluted on the issue of new shares for the public offer on listing. Tencent Holdings Limited (Tencent) is one of the relatively few major Chinese tech companies which does not have a WVR structure and it is listed on the Stock Exchange. Other major Chinese tech companies, such as Alibaba Holdings, Baidu, Inc. and JD.com, Inc. however listed in New York where both the New York Stock Exchange and NASDAQ allow the listing of companies with WVR structures for all types of companies.
Recently, there has been an increase in the number of tech stocks listing on the Hong Kong Stock Exchange. The Stock Exchange has also proposed allowing tech and other new economy companies with WVR structures to list on a new third board. Although the results of the public consultation on a third board have yet to be published, there have been press reports suggesting that the Exchange may allow the listing of companies with WVR structures on the existing Main Board if they can meet its financial tests and other listing criteria. For further information on the Stock Exchange’s proposals, please see Charltons’ June 2017 Newsletter, and for the latest updates, please see Charltons’ October 2017 Newsletter.
In applying to list on the Stock Exchange, tech and other disruptive companies must be able to satisfy the financial requirements and other listing criteria of the board on which listing is sought. The listing requirements include financial requirements, market capitalisation requirements and trading record requirements. As listed companies, tech companies must comply with the Listing Rules’ ongoing obligations, and are not subject to any special regime or requirements under the Stock Exchange’s Listing Rules. No particular exemptions from these requirements are available to tech companies.
Main Board listing applicants must be able to satisfy one of three financial tests:
- The profits test
The applicant or its group must have recorded profits of at least HK$20 million in its most recent financial year and aggregate profits of at least HK$30 million in the two years before that. Applicants listing under the profits test must also have an expected market capitalisation at the time of listing of at least HK$200 million.
- Market capitalisation/revenue/cash-flow test
This test applies to applicants with:
a market capitalisation of at least HK$2 billion at the time of listing;
revenue of at least HK$500 million for the most recent audited financial year; and
positive cash flow from operating activities carried out by the applicant or its group of at least HK$100 million in aggregate for the three preceding financial years.
- The market capitalisation/revenue test
Applicants must have:
- a market capitalisation of at least HK$4 billion at the time of listing; and
- revenue of at least HK$500 million for the most recent audited financial year.
In the case of Yixin, ZhongAn Insurance, China Literature and Razer, their listings relied on the market capitalisation/revenue test.
A new GEM applicant or its group is required to have a positive cash flow of HK$20 million in aggregate for the two financial years immediately preceding the issue of the listing document. New GEM applicants are additionally required to have a minimum market capitalisation at the time of listing of at least HK$100 million.
A Main Board listing applicant must have a trading record of not less than three financial years. It must also be able to demonstrate management continuity for at least the three preceding financial years, and ownership continuity and control for at least the most recent audited financial year.
The Hong Kong Stock Exchange will accept a shorter trading record period under substantially the same management in the case of an applicant seeking to list under the market capitalisation/revenue test if the applicant can demonstrate to the satisfaction of the Stock Exchange that its directors and management have sufficient and satisfactory experience of at least three years in the line of business and industry of the listing applicant and management continuity for the most recent audited financial year.
The Stock Exchange may also accept a shorter trading record period and/or may vary or waive the profit or other financial standards requirements, including in exceptional circumstances, if the applicant or its group has a trading record of at least two financial years and the Stock Exchange is satisfied that the applicant’s listing is in the interests of the applicant and its investors.
The Hong Kong Stock Exchange requires GEM applicants to have a trading record of at least two financial years. They must also have management continuity throughout the preceding two financial years, and ownership continuity and control throughout the preceding full financial year. The Stock Exchange may accept a shorter trading record period and waive or vary the ownership and management requirements, including in exceptional circumstances under which the Stock Exchange considers it desirable to accept a shorter period.
Yixin, Mainland China’s largest online automobile retail platform in 2016 by volume and value of automobile retail transactions, listed on the Hong Kong Stock Exchange on 16 November 2017. The platform has two business segments: (1) transaction platform business (a platform on which Yixin facilitates automobile transactions by consumers and auto loans to consumers offered by its auto finance partners, and which provides value-added services and advertising and subscription services), and (2) self-operated financing business (Yixin’s own automobile financing lease services and operating lease services business).
The Hong Kong public offering was oversubscribed by more than 560 times, and the offer price was HK$7.70 per share, the maximum price in the offer price range. Yixin raised HK$6.77 billion, and its market capitalisation on listing was HK$48.33 billion. Yixin listed under the market capitalisation/revenue test, with its revenue for the year ended 31 December 2016 being approximately RMB1488 million.
ZhongAn Insurance IPO
In September 2017, ZhongAn Insurance IPO raised nearly HK$12 billion on the Hong Kong Stock Exchange. The Hong Kong public offering was oversubscribed by more than 390 times. ZhongAn Insurance is an online-only Insurech company in China that develops ecosystem-oriented insurance products and solutions for various consumption scenarios.
ZhongAn Insurance listed under the market capitalisation/revenue test. The company was valued at HK$85.96 billion on listing – at the time, the largest tech IPO in Hong Kong in 2017. Its total income for the year ending 31 December 2016 amounted to RMB3412.7 million (approximately HK$4,077.9 million).
ZhongAn Insurance disclosed in its prospectus that it incurred a net underwriting loss during the track record period (the three years and three months ended 31 March 2017) and a net loss in the first three months of 2017, and that it expects to incur a significant loss in 2017.
China Literature IPO
China Literature, which operates the leading online literature platform in Mainland China as measured by the scale and quality of its writers, readers and literary content offerings, listed in Hong Kong on 8 November 2017. China Literature listed its shares on the Main Board by way of spin-off from Tencent, by satisfying the market capitalisation/revenue test with its revenue for the year ending 31 December 2016 equalling RMB2.56 billion (approximately HK$3.0 3billion) and its market capitalisation on listing was HK$49.85 billion.
The final offer price for China Literature’s shares was HK$55 per share, and the funds raised amounted to approximately HK$8.33 billion. China Literature’s shares were oversubscribed by 626 times, and investor capital of HK$520 billion was secured (the second largest amount ever in Hong Kong). The first day share price closed at HK$102.4, an 86% increase from the IPO price.
On 13 November 2017, Razer raised approximately HK$4.13 billion in a global offering that was oversubscribed by more than 290 times, with an 18% share price rise on its trading debut. Razer is a lifestyle brand for gamers that offers an integrated portfolio of gaming hardware, software and services.
With an offer price of HK$3.88 per share, Razer’s market capitalisation upon listing was HK$34.4 billion. Razer satisfies the market capitalisation/revenue test with its revenue for the year ending 31 December 2016 amounting to US$392.1 million (approximately HK$3,058 million).
Razer disclosed in its prospectus that it did not pay any dividends during the track record period (the three financial years ending 31 December 2014, 2015 and 2016 and the six months ended 30 June 2017) and does not intend to pay any dividends in the near future. It had losses of US$20.4 million, US$59.6 million and US$52.6 million for the years ended 31 December 2015 and 2016 and the six months ended 30 June 2017, respectively, and expects to remain loss-making for the years ending 31 December 2017 and 2018. Razer also had negative net cash flows from operating activities for some periods during the track record period. Razer noted however that it plans to achieve profitability through the growth of their systems and peripherals businesses.
 South China Morning Post, “Listing frenzy continues: Li Ka-shing-backed Razer prices IPO near top of range; Yixin way oversubscribed”, 11 November 2017.
 South China Morning Post, “Li Ka-shing-backed Razer rallies 18pc in Hong Kong trading debut after US$528m IPO”, 13 November 2017.