Despite attempts to make listing in China more attractive, the country still has a way to go if it wants to seriously compete with Nasdaq for biotech Initial Public Offerings (IPOs).
The Shanghai Stock Exchange launched a Science and Technology Innovation Board (STAR) in July 2019 as an attempt to reform IPO regulations and encourage innovative companies to list, but after initial successes, it seems biotech companies still favour listing in the US over Shanghai or Hong Kong.
At the China Showcase during JP Morgan’s 2020 Conference in New York in January, the panel “Reshaping the IPO market” discussed the future of Chinese IPOs. Panelists concurred it is easier and quicker to list in the States, given the less stringent process and maturity of the market. Joe Lai, MD of Investment Banking for China Renaissance said, “If you look at the US, from the regulatory approval process it’s more disclosure-based and in Hong Kong … you have to go through that very difficult vetting process.”
Chinese IPOs suffer a key drawback when secondary offerings are considered, an area where NASDAQ has a clear advantage. While the panel agreed that multiple listings are a great way to diversify financially, Daniel Pyne, MD of Corporate Finance for Haitong Securities, said, “If you’re doing this as a one-shot deal, that’s fine. But if you’re worried about what you’re going to do for the secondary offering perspective, you’re very limited in terms of what you do with it in China.” Describing the benefits of listing on the more developed US markets, he added “It’s not difficult to use that stock as currency for future acquisitions. If, however, you are going to do a listing in China, you’re going to have a more difficult time using that stock as active currency.”
It seems the valuations hold more weight in the US, too. The panel discussed the much higher valuations being received in Hong Kong and on the STAR board. Lai explained, “valuation on A-Share (referring to the two mainland China stock exchanges, Shanghai and Shenzhen) or even STAR sometimes doesn’t really make a lot of sense because it is just a distortion of the supply and demand.” The panellists linked this to the type of investors active in each market, agreeing that the higher percentage of institutional rather than retail investors in the US-led to more realistic valuations.
The panel also acknowledged the focus of Chinese investors is companies that can ensure quick profitability – such as CMOs or CROs. Alex Yuen, Managing Director at Jefferies Hong Kong Ltd explained, “I think investors will also come back to the company and say, how’s your commercialization? Because they all ultimately they want to focus on how you’re going to sell the drug in China, as that leads to profitability or at least to your next stream of revenue.”
China is taking further steps to create a more favourable environment for public listings. Government legislation is set to take effect on March 1, replacing the convoluted pre-approval process with a simpler registration-centric method, which may help the markets mature and lead to more successful biotech listings.