One of the most important capital market trends in Hong Kong this year is the increased number of homecoming IPOs, as more US-listed Chinese companies are undertaking a second listing in Hong Kong. So far this year, there are five companies that have completed dual-primary listings in the city, compared to three last year, and none in 2020.

The most recent example is Alibaba Group Holding, which recently obtained approval to convert its Hong Kong-listed stock into a primary listing¹. The conversion is expected to take place before the end of 2022, and it will be a significant development for Hong Kong, as it shows one of China’s largest technology companies putting its trust in the city as a venue for both capital raising and trading.

Coming home to China

Technology companies are at the forefront of Chinese companies that have completed dual-primary listings over the last year. Electric vehicle manufacturer Xpeng Motors set the scene with a landmark deal in the summer of 2021, and it was followed by FinTech software company OneConnect Financial Technology Company and online question community Zhihu.

The main benefit of a homecoming listing is exposure to a new investor base – namely, Asian investors that are now able to buy and sell the company’s stock during their trading day. A primary listing in Hong Kong might require meeting higher requirements and a longer process than a secondary listing, but it makes the stock meet an import criterion  for inclusion into Stock Connect. This means investors from Mainland China can trade shares via the initiative’s Southbound Channel.

Asian investors are not only another source of liquidity for a listed company. If Alibaba is included in Stock Connect for example, a large part of Mainland China’s enormous investor base will be able to invest in the technology giant for the first time. These investors will also bring a very different perspective to Chinese companies than overseas investors that mostly trade stocks in New York.

Capturing opportunities in technology

Homecoming listings are bringing some of the world’s most innovative companies to list in Hong Kong, which adds to the city’s allure as a listing venue for the new economy companies that will power the next wave of growth in the Chinese economy. FSDC research found that 73% of IPO funds raised in 2021 in Hong Kong were by companies in technology, media and telecoms companies, as well as healthcare, life sciences and industrials^2.

How can Hong Kong capitalise on this strong foundation to continue attracting technology companies over the coming years? An FSDC whitepaper Hong Kong as an International Finance Centre – Enhancement of Hong Kong’s IPO offerings³, published earlier this year, made several practical suggestions on how the city can better serve the financing needs of technology companies.

For a start, it is important to recognise that new economy companies require heavy investment in research and development, which leads to a longer product development cycle. The upshot is that many technology companies are looking for funding without the strong revenue profile that investors demand.

Hong Kong can address this by providing flexibility in its listing regime, in a way that allows tech firms to list at their early stage of development, while at the same time safeguarding investors. The city has a successful track record attracting companies in another new economy sector that also has long development cycles that delay revenue and profits – namely, biotech. New rules introduced in 2018 have quickly made Hong Kong the second-largest listing venue globally for biotechnology businesses.

Another issue relates to the IPOs of companies with weighted voting rights (WVR) – a popular structure for technology companies. Listing rules state that these companies must be “innovative”.

Some banking and legal professionals believe that this requirement is subjective and brings uncertainty that could discourage companies, even if they are qualified, from seeking a listing in Hong Kong. Greater clarity on what counts as “innovative” will allow the right businesses to list in the city, while ensuring that the WVR structure does not become commonplace.

Benefits for corporates and investors

By enhancing its capital markets offering, Hong Kong will maintain its world-leading position as an IPO market. Companies will benefit from a diverse investor base that includes both international institutions and their counterparts in Mainland China, while investors from all over the world will be able to gain exposure to a growing selection of China’s new economy companies. By capturing these opportunities Hong Kong will stay ahead of the pack in an increasingly tech-driven world.  

¹ Alibaba filing

² FSDC

³ ibid