Investing in new economy companies
Proposed by the Hong Kong Exchanges and Clearing Limited (HKEX), the amendments to the Listing Rules to facilitate the listing of companies from the new economy came into effect on 30 April 2018. Pre-revenue and pre-profit biotech companies, and technology giants with weighted voting rights (WVR) structure, or the so-called dual-class shares structure, can seek listing in Hong Kong subsequently.
The changes in the listing regime is intended to attract more companies from the emerging and innovative sectors to list in Hong Kong to bring about more new investment opportunities. However, this gives rise to a new set of questions, including how to value biotech companies that are in the early stages and have yet to generate revenue and profit. Under the WVR structure, some key individuals including the founders and key management hold specific class of shares that are attached with higher voting power than ordinary shares. This leads to issues relating to shareholder rights and corporate governance as well as investor protection. A key characteristic of new economy companies is their high growth potential. However, high growth does imply high risk. It is essential for investors to be well-equipped, and understand the characteristics and associated risks of these companies and the new listing rules in order to make informed investment decisions.
Biotech and technology companies have hogged the limelight in recent years, and major exchanges compete for lucrative IPOs from those promising tech startups. The strong performance of tech stocks in recent years has fuelled investor interest and expectations on the upcoming new economy IPOs. However, given the optimistic environment and the knowledge gap, investors can easily underestimate the associated risks and overvalue the stocks.
Whether or not to invest in new economy companies will be a common question of many investors. Investors should consider their investment objectives, risk tolerance and time horizon as part of their decision-making. They should be careful not to follow the herd but to do their own homework.
18 July 2018