The new listing regime introduces two new types of companies to the Hong Kong stock market, namely pre-revenue biotech startups and innovative companies with weighted voting rights (WVR) structure. These companies become the focus of the new listing regime.
Unlike other listed companies, biotech startups have yet to generate any revenue and cannot meet the Financial Eligibility Tests of the Main Board. Below are points to note when considering investing in biotech startups:
Low survival: Biotech startups mainly engage with research and development (R&D) of biotech products. It can be a lengthy process that takes as much as a decade. The product development must go through multiple clinical trials and obtain approvals from the relevant healthcare regulator. The company may go out of business if product development fails and cannot secure the necessary approval. In such cases, investors can potentially lose all their investments.
Substantial funding needs: R&D is a money-burning activity. With no revenue nor product in the market, biotech startups may need to raise funds constantly via rights issues and placings to maintain the R&D. However the fundraisings will gradually dilute the interests and future earnings of the shareholders.
Difficult to value: As biotech startups have yet to generate revenue and their future earning visibility is low, it is hard to value the companies using traditional methods, for example with price-to-earnings (PE) and price-to-book (PB) ratios or discounted cash flows.
In contrast with the "one share, one vote" principle, WVR companies will issue two types of shares: the ordinary shares held by general shareholders and shares with WVR usually held by the founders of the company. The voting power attached to WVR shares is greater than ordinary shares, which can be as much as 10 times. Below are points to note when considering investing in WVR companies:
Definition of new economy: Only companies in the innovative sectors are eligible to list under the WVR structure. As technologies advance by leaps and bounds, the meaning of new economy also evolves with time, and becomes hard to define.
Voting power: The founder in theory only needs to hold 9.1% of the WVR shares to secure the majority voting rights of the company. As such, with the exception of certain important resolutions that need to be voted based on "one share, one vote", shareholders will be unable to veto any resolution proposed by the company, even though it is not in line with the general interest of the shareholders.
Corporate governance: The WVR structure protects the significant control of the company’s founders; it also prevents the directors and senior management of the company from being removed by shareholders. Without being accountable to the shareholders, they may not act in the best interest of the company and its shareholders.
18 July 2018