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

FA recently asked experts on their experience working on the first listing under HKEX’s newly introduced Chapter 18C for tech firms in the new economy.

On June 13, stocks of Chinese company QuantumPharm, also known as XtalPi (HKEX: 2228), started trading on the main board of the Hong Kong Stock Exchange (HKEX). Shares were priced at HK$5.28 apiece and opened at HK$5.39, with an intraday high of HK$6.58 according to a HKEX disclosure. The firm managed to raise total proceeds of HK$989.3 million ($126.7 million) through the debut.

XtalPi boasts itself as an artificial intelligence (AI)-powered drug and new material discovery company. Established in 2015 by three quantum physicists at the renowned Massachusetts Institute of Technology (MIT), the firm combines quantum physics, AI, cloud computing and automated robotics to provide research and development (R&D) solutions and products.

Such solutions target industries including pharmaceutical and biotechnology; petroleum and renewable energy; and advanced materials. Statistics from Frost & Sullivan suggested that the firm has served 16 out of the 20 largest global biopharmaceutical companies.

CITIC Securities (Hong Kong) acted as the sole sponsor of the transaction, while overall coordinators included CLSA, China International Capital Corporation (CICC), Deutsche Bank Hong Kong Branch and China Merchants Bank International Capital. Sidley Austin acted as legal advisor to the issuer for Hong Kong and US laws, while Fangda Partners advised XtalPi on Chinese laws.

New rules

The company’s listing in Hong Kong marks the first transaction from an AI-powered drug and new material discovery company being listed on the city’s bourse.

From a regulatory perspective, this deal is also significant being the first tech company to be listed under HKEX’s 2023-issued rules Chapter 18C, which aims to attract more hard-tech and deep-tech companies to list publicly in Hong Kong.

“The new economy sector is rapidly changing the way in which we live and work, and this new route to market will support some of the most innovative and progressive companies of the future,” said Nicolas Aguzin, HKEX’s former chief executive officer (CEO) when announcing the new rules last year, with a view to establishing Hong Kong as “Asia’s premier biotechnology fundraising market”.

The Chapter 18C, titled ‘Specialist Technology Companies’, was added to HKEX’s listing rules and went into effect March 31, 2023, encouraging listing applications from innovative and new tech sectors.

A spokesperson for the HKEX told FinanceAsia that this has been part of the bourse’s ongoing listing reforms, to “accommodate the fundraising needs from the leading companies of tomorrow”.

According to Chapter 18C, a revenue threshold of HK$250 million for the most recent audited financial year was drawn as a distinction between applicants that are either 'commercial' or 'pre-commercial'. While different requirements on market capitalisation, working capital, R&D expenditure and investor base were listed out for both types of companies.

XtalPi’s revenue for the year of 2023 recorded Rmb174.4 million ($24 million), being categorised as a pre-commercial company according to Chapter 18C. For such applicants, the rules require a minimum HK$10 billion of market capitalisation; at least 30% of R&D expenditure as a percentage of total operating expenditure; as well as a working capital level, including IPO proceeds, able to cover 125% of costs for at least a year’s time.

The issuer is also known for its prestigious early-stage investor base, which include Chinese and global big names including Tencent, HongShan Capital and Google. XtalPi has raised $732 million of funds, pre-IPO, from early-stage investors as of end-2023, according to filings.


Meng Ding, capital markets partner at Sidley Austin, who led the team that was involved in the deal, told FA in a conversation that the greatest complexity during the team’s interaction with the exchange team was around proving the issuer’s eligibility for Chapter 18C as a ‘specialist technology company’.

He said the new rules are a “substantial listing rule expansion” for the HKEX, after the introduction of a previous Chapter 18A in 2018, which only focused on biotech companies with proven core products.

Instead, the Chapter 18C listed out five industries and 20 sectors that are applicable, bringing a key task for a legal advisor to pinpoint the applicable sector that XtalPi is in.

“There has been great focus from the exchange team for us to explain how the issuer’s technology falls within the acceptable sectors, and more specifically, which specific products and technologies fit into the requirements,” he said.

In practice, Ding pointed out that it was crucial to distinguish the issuer’s business line and underlying technologies – XtalPi’s solutions serve drug and new material discovery industries, which involves hi-end techs including crystallography and quantum physics. However, what qualifies the company for Chapter 18C is the underlying AI models that help it serve its clients.

The issuer is, in the end, categorised under ‘next-generation information technology – artificial intelligence – artificial intelligence-powered solutions’.

This, according to Ding, is a lesson learned from early-stage interaction with the bourse that could apply to future listings under the new rules: to make clear and offer detailed disclosure of the exact qualifying technologies adopted by the issuer.

On the other hand, the Chapter 18A requires applicants holding at least one core product beyond the concept stage, one that must be evaluated and approved by a ‘competent authority’, for example, the US Food and Drug Administration (FDA) and China’s National Medical Products Administration (NMPA).

While Chapter 18C doesn’t bear similar requirements for its applicants, issuers must demonstrate what is called a ‘credible path’ to achieving the revenue threshold of HK$250 million.

All parties need to be extra careful in terms of evaluating the core technology and business model of the issuer, especially without the endorsement from a third-party governmental authority, Ding explained. At the same time, a reasonable balance was needed between disclosing all business details and demonstrating a credible growth path.

The process was described by Ding as a mutually beneficial experience, in which the company, the HKEX, legal advisors and financial sponsors, work together to tackle technological complications and to make sense of the issuer’s commercialisation path.

“XtalPi’s business lines involve quantum physics, one of the most abstract and complicated scientific areas ever since, and there were very few people in the finance industry who are very familiar with it,” he said. “Great efforts were paid to explain such science and technologies in easy-to-understand ways for all parties involved.”

Ding, who himself holds a Ph. D in physics from MIT and was a former technologist of AMD, told FA that the Sidley Austin team is working on another possible listing under the Chapter 18C.

On hold

While the Chapter 18C was added to HKEX’s listing rules in March 2023, this first of its kind deal came after over a year.

Simon Chan, executive director of value and risk advisory at JLL greater China, explained that one of the key factors lies in the performance of Hong Kong’s stock market, mainly reflected by the benchmark Hang Seng Index that has seen many fluctuations, below a key 20,000 trading line. As of June 25, the market sat at around 18,000 after recovering from around 15,000.

“Issuers would likely hold their listing, if possible, for a better market sentiment and hence a higher valuation,” he said.

Global consulting firm KPMG recently downgraded its estimate for the Hong Kong IPO market’s total fundraising amount in 2024, from HK$100 billion to HK$60 billion, citing high interest rates, geopolitical tensions and an overly positive outlook of large listing applicants last year.

Figures for the first three month in 2024 suggested it was the worst first quarter since 2009, according to JLL’s Chan. New capital raised through IPOs dropped by 30% to HK$4.7 billion, compared to a year ago. Similarly, KPMG statistics suggested a 35% decrease in fundraising as of June 13. 

There might, or might not, be signs of improvement in the second half. This could be defended on decisions by the US Fed on interest rates.

Earlier in January, relatively low valuation for Hong Kong-listed stocks and an average price-to-earnings (P/E) ratio at around 8 have in part managed to push the Hang Seng Index up from its bottom, said Chan.

XtalPi’s debut on the Hong Kong bourse was oversubscribed by 75 times from investors and received about HK$4.3 billion of orders, according to media reports. The offering price was also placed close to the low end of a HK$5.03 to HK$6.03 range, an act seen by some as to deliberately leave room for appreciation on the IPO day, which did happen.

XtalPi didn’t respond to FA’s emailed request for comments.

More IPO listings should be expected overall over the next couple of months, despite lagging deal sizes compared to the bourse’s global peers.

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