Investment risks to note

When we speak of technology companies, tech giants like Apple, Tesla and Google immediately come to mind. And investors may want to turn back time and go back to the days when they were just startups.

Specialist Technology Companies wishing to apply for listing in Hong Kong are likely to be relatively early stage companies that are still developing their products and services. These could include companies that have not yet commercialised their specialist technology products or services and generated any revenue. While these companies have potential to become the next tech giants, it remains an indisputable truth that only a limited number of startups manage to withstand the challenges and successfully endure.

As investment risks of Specialist Technology Companies are relatively high, companies applying to list under the Specialist Technology Companies listing regime have to display a warning statement on the cover of the listing document to remind investors to take into account the related risks before making an investment decision. Key investment risks of Specialist Technology Companies include the following.

When investing in a listed company, we should always examine its valuation to determine whether it is worth investing in or not. Since the list of specialist technology industries and acceptable sectors includes sectors that are emerging, general investors may not be aware of, and even the analysts may not be familiar with, those industries. Therefore, it may be difficult to accurately predict the potential market size of a Specialist Technology Company, or if it will succeed in addressing the needs of that potential market.

As most of the Specialist Technology Companies are pioneers, there may be very few peers or even no listed peers available for comparison. The lack of reference and comparable data may make it difficult to reach a consensus on the valuation of these companies. In other words, they may experience greater price volatilities and insufficient liquidity after going public.

As it is difficult to value Specialist Technology Companies, there is a higher risk of overstated valuation of Specialist Technology Companies at the initial public offering (IPO). To raise more funds for business development, Specialist Technology Companies may try to set a higher IPO price. Whilst HKEX’s new listing regime for Specialist Technology Companies has included some requirements to facilitate a more robust price discovery process at the time of IPO of Specialist Technology Companies, investors are still subject to the risk of buying overpriced stocks due to the difficulty in valuing such companies.

Compared to commercial companies, it is even more difficult to reach a consensus on the valuation for a pre-commercial company since its business model may change significantly later in the pursuit of commercial success. Meanwhile, the commercialisation of pre-commercial companies is vulnerable to market speculation, which in turn affects the stock prices.

Unlike the biotech industry, the products or services offered by Specialist Technology industries, except for a few areas such as autonomous driving and new food and agriculture technologies, are not subject to competent authority regimes. That means these products or services are not required to be evaluated or approved by a competent authority. There are no milestones set by an independent external body to mark the progress of product development of these companies. Investors cannot rely on any independent processes when assessing the technical capabilities and commercial feasibility of the products, or the progress the companies have made towards commercialisation or other goals.

Due to their novelty and highly specialised nature, certain specialist technologies may only be understood by the R&D teams of the companies or experts in the field. Accordingly, investors may not fully comprehend the business model or the technology behind and may be misled and suffer losses when the technical and commercial feasibility of the products or services are intentionally exaggerated. For pre-commercial companies, investors may only be able to evaluate the viability of the products or services upon commercialisation, resulting in a relatively high misstatement risk.

As Specialist Technology Companies are still in the early development stages, they may not have sufficient, or any, revenue to support their R&D and operations. They are subject to a higher risk of corporate failure if they are unable to secure sufficient external funding. After going public, they may issue additional shares or other equity securities to obtain additional capital, diluting the existing shareholders’ equity.

Like pre-revenue biotech companies, it is uncertain whether pre-commercial Specialist Technology Companies can successfully commercialise their products or services or generate sufficient revenue after listing. If they fail to do so, investors may lose part of or all of their investments.