Deal Evaluation: XtalPi’s (QuantumPharm) $126.7m IPO on HKEX

On June 13, shares of Chinese language firm QuantumPharm, also referred to as XtalPi (HKEX: 2228), began buying and selling on the principle board of the Hong Kong Inventory Trade (HKEX). Shares have been priced at HK$5.28 apiece and opened at HK$5.39, with an intraday excessive of HK$6.58 in keeping with a HKEX disclosure. The agency managed to boost complete proceeds of HK$989.3 million ($126.7 million) via the debut.

XtalPi boasts itself as a man-made intelligence (AI)-powered drug and new materials discovery firm. Established in 2015 by three quantum physicists on the famend Massachusetts Institute of Technology (MIT), the agency combines quantum physics, AI, cloud computing and automatic robotics to offer analysis and improvement (R&D) options and merchandise.

Such options goal industries together with pharmaceutical and biotechnology; petroleum and renewable vitality; and superior supplies. Statistics from Frost & Sullivan steered that the agency has served 16 out of the 20 largest world biopharmaceutical corporations.

CITIC Securities (Hong Kong) acted as the only sponsor of the transaction, whereas general coordinators included CLSA, China Worldwide Capital Company (CICC), Deutsche Financial institution Hong Kong Department and China Retailers Financial institution Worldwide Capital. Sidley Austin acted as authorized advisor to the issuer for Hong Kong and US legal guidelines, whereas Fangda Companions suggested XtalPi on Chinese language legal guidelines.

New guidelines

The corporate’s itemizing in Hong Kong marks the primary transaction from an AI-powered drug and new materials discovery firm being listed on the town’s bourse.

From a regulatory perspective, this deal can be vital being the primary tech firm to be listed underneath HKEX’s 2023-issued guidelines Chapter 18C, which goals to draw extra hard-tech and deep-tech corporations to listing publicly in Hong Kong.

“The brand new financial system sector is quickly altering the best way wherein we reside and work, and this new path to market will help among the most revolutionary and progressive corporations of the long run,” mentioned Nicolas Aguzin, HKEX’s former chief govt officer (CEO) when saying the brand new guidelines final yr, with a view to establishing Hong Kong as “Asia’s premier biotechnology fundraising market”.

The Chapter 18C, titled ‘Specialist Technology Corporations’, was added to HKEX’s itemizing guidelines and went into impact March 31, 2023, encouraging itemizing functions from revolutionary and new tech sectors.

A spokesperson for the HKEX advised FinanceAsia that this has been a part of the bourse’s ongoing itemizing reforms, to “accommodate the fundraising wants from the main corporations of tomorrow”.

In accordance with Chapter 18C, a income threshold of HK$250 million for the latest audited monetary yr was drawn as a distinction between candidates which might be both ‘industrial’ or ‘pre-commercial’. Whereas totally different necessities on market capitalisation, working capital, R&D expenditure and investor base have been listed out for each sorts of corporations.

XtalPi’s income for the yr of 2023 recorded Rmb174.4 million ($24 million), being categorised as a pre-commercial firm in keeping with Chapter 18C. For such candidates, the principles require a minimal HK$10 billion of market capitalisation; a minimum of 30% of R&D expenditure as a proportion of complete working expenditure; in addition to a working capital stage, together with IPO proceeds, capable of cowl 125% of prices for a minimum of a yr’s time.

The issuer can be recognized for its prestigious early-stage investor base, which embody Chinese language and world massive names together with Tencent, HongShan Capital and Google. XtalPi has raised $732 million of funds, pre-IPO, from early-stage traders as of end-2023, in keeping with filings.

Tech-heavy

Meng Ding, capital markets accomplice at Sidley Austin, who led the staff that was concerned within the deal, advised FA in a dialog that the best complexity in the course of the staff’s interplay with the change staff was round proving the issuer’s eligibility for Chapter 18C as a ‘specialist Technology firm’.

He mentioned the brand new guidelines are a “substantial itemizing rule enlargement” for the HKEX, after the introduction of a earlier Chapter 18A in 2018, which solely targeted on biotech corporations with confirmed core merchandise.

As a substitute, the Chapter 18C listed out 5 industries and 20 sectors which might be relevant, bringing a key process for a authorized advisor to pinpoint the relevant sector that XtalPi is in.

“There was nice focus from the change staff for us to elucidate how the issuer’s Technology falls throughout the acceptable sectors, and extra particularly, which particular merchandise and applied sciences match into the necessities,” he mentioned.

In apply, Ding identified that IT was essential to differentiate the issuer’s enterprise line and underlying applied sciences – XtalPi’s options serve drug and new materials discovery industries, which entails hi-end techs together with crystallography and quantum physics. Nonetheless, what qualifies the corporate for Chapter 18C is the underlying AI fashions that assist IT serve its purchasers.

The issuer is, ultimately, categorised underneath ‘next-generation Information Technology – synthetic intelligence – synthetic intelligence-powered options’.

This, in keeping with Ding, is a lesson discovered from early-stage interplay with the bourse that would apply to future listings underneath the brand new guidelines: to clarify and provide detailed disclosure of the precise qualifying applied sciences adopted by the issuer.

Alternatively, the Chapter 18A requires candidates holding a minimum of one core product past the idea stage, one which should be evaluated and accredited by a ‘competent authority’, for instance, the US Meals and Drug Administration (FDA) and China’s Nationwide Medical Merchandise Administration (NMPA).

Whereas Chapter 18C doesn’t bear comparable necessities for its candidates, issuers should show what is known as a ‘credible path’ to attaining the income threshold of HK$250 million.

All events should be additional cautious by way of evaluating the core Technology and enterprise mannequin of the issuer, particularly with out the endorsement from a third-party governmental authority, Ding defined. On the similar time, an inexpensive stability was wanted between disclosing all enterprise particulars and demonstrating a reputable progress path.

The method was described by Ding as a mutually helpful expertise, wherein the corporate, the HKEX, authorized advisors and monetary sponsors, work collectively to deal with technological problems and to make sense of the issuer’s commercialisation path.

“XtalPi’s enterprise traces contain quantum physics, one of the summary and complex scientific areas ever since, and there have been only a few folks within the Finance business who’re very aware of IT,” he mentioned. “Nice efforts have been paid to elucidate such science and applied sciences in easy-to-understand methods for all events concerned.”

Ding, who himself holds a Ph. D in physics from MIT and was a former technologist of AMD, advised FA that the Sidley Austin staff is engaged on one other attainable itemizing underneath the Chapter 18C.

On maintain

Whereas the Chapter 18C was added to HKEX’s itemizing guidelines in March 2023, this primary of its variety deal got here after over a yr.

Simon Chan, govt director of worth and threat advisory at JLL better China, defined that one of many key components lies within the efficiency of Hong Kong’s inventory market, primarily mirrored by the benchmark Grasp Seng Index that has seen many fluctuations, beneath a key 20,000 buying and selling line. As of June 25, the market sat at round 18,000 after recovering from round 15,000.

“Issuers would seemingly maintain their itemizing, if attainable, for a greater market sentiment and therefore the next valuation,” he mentioned.

International consulting agency KPMG lately downgraded its estimate for the Hong Kong IPO market’s complete fundraising quantity in 2024, from HK$100 billion to HK$60 billion, citing excessive rates of interest, geopolitical tensions and a very constructive outlook of huge itemizing candidates final yr.

Figures for the primary three month in 2024 steered IT was the worst first quarter since 2009, in keeping with JLL’s Chan. New capital raised via IPOs dropped by 30% to HK$4.7 billion, in comparison with a yr in the past. Equally, KPMG statistics steered a 35% lower in fundraising as of June 13. 

There would possibly, or won’t, be indicators of enchancment within the second half. This could possibly be defended on choices by the US Consumed rates of interest.

Earlier in January, comparatively low valuation for Hong Kong-listed shares and a mean price-to-earnings (P/E) ratio at round 8 have partially managed to push the Grasp Seng Index up from its backside, mentioned Chan.

XtalPi’s debut on the Hong Kong bourse was oversubscribed by 75 occasions from traders and obtained about HK$4.3 billion of orders, in keeping with Finance.yahoo.com/information/quantumpharm-becomes-hong-kongs-third-093000530.html”>media reviews. The providing value was additionally positioned near the low finish of a HK$5.03 to HK$6.03 vary, an act seen by some as to intentionally go away room for appreciation on the IPO day, which did occur.

XtalPi didn’t reply to FA’s emailed request for feedback.

Extra IPO listings needs to be anticipated general over the subsequent couple of months, regardless of lagging deal sizes in comparison with the bourse’s world friends.

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