Chinese biotechnology and health care companies have become a steady source of initial public offerings in Hong Kong, accounting for more new listings than any other sector in the first six months of 2021 and making up half of the 10 deals that attracted the most bids.

Funds raised are expected to hit a record US$27.3 billion for the six-month period, making Hong Kong the world's third-largest IPO market behind the two leading US exchanges, data from Refinitiv shows.

The main driver was several multibillion-dollar deals by Chinese internet and media companies that helped Hong Kong retain its global top-three ranking after it slipped from the second spot at the end of last year.

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IPOs by companies such as New Horizon Health, a cancer screening provider, and dental care provider Angelalign Technology, both overbought by several thousand times by investors, were a bright spot during a first half in which the number of IPOs actually fell to just 47, the lowest since 2016 and down 25 per cent from the same period a year ago. Biotech and health care firms accounted for about a third of the total.

Since the Hong Kong stock exchange introduced reforms in 2018 to allow pre-revenue biotech companies to list, Chinese firms have taken full advantage, even surpassing the number listed on the Nasdaq and the New York stock exchanges as of June 21, according to Refinitiv.

A total of 13 deals by Chinese biotech and health care firms raised US$4.2 billion in Hong Kong, compared with nine listings raising US$1.7 billion in the US, a leading market whose history of raising capital for the sector spans several decades.

"For a capital market as sizeable as Hong Kong to allow for the listing by start-up biotech companies even if they still do not have any revenue or profit, this is positive brand building for many Chinese biotech start-ups," said Ring Choi, Asia-Pacific IPO leader at EY. "We expect that the sector's strong listing momentum will continue for the next one or two years".

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For the full year, EY forecasts that Hong Kong will raise a total of HK$350 billion (US$45 billion). Choi said Chinese biotech and health care issuers were also encouraged by the enthusiasm for their offerings, as investors brushed aside the risks of backing a pre-revenue company for the potential of higher returns in the future.

The Covid-19 pandemic has increased investors' appetite for biotech and health care stocks, but their performance has made a big difference too, industry players said.

Vaccine developers and medical device makers that were previously little-known to investors in the region have managed to attract an even wider investor base after their listings, thanks to some stunning debut performances.

Biotech and health care was the lead sector in terms of first-day returns, with an average 53 per cent gain, compared to 30 per cent by the telecoms, media and tech sector, data from EY shows.

Another driver of Chinese biotech and health care issuers seeking a listing in Hong Kong was the tightening of listing rules by China's exchanges and securities regulator, according to analysts.

A slew of new measures to improve the quality of listed companies, such as on-site inspections to check on the IPO candidates' financial documents and business operations, have caused many to ditch their listing plans.

Hong Kong can continue to rival the US as the preferred listing hub for the sector as long as investors are confident in the quality of the candidates, according to Nisa Leung, a managing partner at Qiming Venture Partners, a Chinese venture capital firm with US$5.9 billion of assets under management.

"We need to bring good quality companies to Hong Kong. And for the investing ecosystem to further develop, there need to be even more biotech firms with differing sub-sectors raising capital via IPOs here," said Leung.

More than 25 biotech companies invested by Qiming will seek an IPO globally over the next 20 months. In the past 15 months, 18 of its portfolio companies have already completed IPO, Leung said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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