Despite promising changes in listing rules, Hong Kong is still facing challenges in tech IPOs, this is mainly down to its underperforming secondary market and competitive pressures which are intensifying.

Highlighting this challenging environment, and amid emerging market selloffs, 34% of Hong Kong IPOs fell below their IPO price on the first trading day during the first three quarters of the year, according to EY. The two biggest new economy issuers, Xiaomi and Meituan, which accounted for 23% of the total funds raised in Hong Kong in the first nine months, saw their share prices drop by 16% and 24% as of end of November since their IPOs respectively.

In terms of the value of funds raised, 2018 marked another good year for Hong Kong Stock Exchange (HKEX). EY data also shows that total funds raised by IPOs in the first nine months of 2018 reached HK$240 billion (US$30.65 billion), a dramatic increment of 174% from the previous year.

For the HKEX, the US has traditionally been its major competitor in luring Chinese unicorns. According to Dealogic, NASDAQ has the largest market share of 28% in global tech IPO as of the end of November. In 2014, in a major coup for the Americans, Alibaba chose New York for its IPO, a plum listing which is regarded as HKEX's biggest missed opportunity over the past ten years and its repercussions triggered the latest dual listing reform.

This major miss came as a shock as some analysts had expected that the Chinese unicorn story would be better understood by Hong Kong investors due to the language advantage. However, investment bankers have not yet figured out how to price new economy companies in Hong Kong.

"It has to do with expectation. You need to give time to the market, for banks to adjust to the new economy stocks. In US, they are more used to this, more sky-high valuations, they seem to understand more about pre-revenue biotech stocks. They seem to know how to price new TMT stocks properly." says a head of investment banking at a Hong Kong-based Chinese bank in an interview with The Asset.

The shortage of liquidity also hinders the support given to the Hong Kong listed new economy stocks. This is partly explained by the fact that dual class structured companies, such as Xiaomi, are unable to be incorporated into Stock Connect, and therefore southbound investors are unable to access the new economy listings, according to mainland exchanges.

"The reason for having the dual class structure is to cultivate a broader audience and to allow more flexibility to compete with US exchanges." says deputy head of a European investment bank, "The liquidity of US is still more than Hong Kong."

Despite Hong Kong's efforts to attract Chinese unicorns, US is still favoured by technology and IT companies. Aside from Bilibili and IQiyi, two Chinese technology that are already listed in the US, reports are circulating that Tencent Music will be listed in the US later this year or early next year.

Meanwhile, mainland exchanges are also looking to retain onshore issuers though new initiatives such as Chinese depositary receipt (CDR) and new tech board. The latter initiative was unveiled last month by Chinese President Xi Jinping during China International Import Expo in Shanghai. This technology board in Shanghai will adopt a loosely-regulated mechanism for IPOs.

"The new board will be used as a pilot for a registration-based IPO system. Rather than needing specific regulatory review and approval, issuers will just need to submit specific documents, without having to go through a regulatory approval process, which can often take time," explains Nikki Tanner, head of APAC market infrastructure, Deutsche Bank.