When it comes to "why choose Hong Kong stocks," most analyses focus on valuation discounts, high dividend returns, or southbound capital flows. Yet what truly makes the Hong Kong market irreplaceable by other markets is its asset supply capacity—especially the Chapter 18A biotech segment that has gradually taken shape since the 2018 listing regime reform. This segment gives investors exposure to innovative drug assets that the A-share market cannot easily replicate in the short term, making it an essential piece for understanding the unique value of Hong Kong stocks. Valuations can converge, but the "increment" in asset types is the real moat of the Hong Kong market.

The Chapter 18A Institutional Dividend: The Door Hong Kong Opened for Pre-Profit Innovative Drug Companies

In April 2018, HKEX amended its Listing Rules to add Chapter 18A, allowing biotech companies that have not yet achieved profitability—or even generated any revenue—to list in Hong Kong. This arrangement was a pioneering move among the world's major exchanges, rapidly propelling Hong Kong into the ranks of the globe's leading biotech financing hubs and forming an East-West pairing with Nasdaq.

• Differentiated listing requirements: Core metrics such as market capitalization and R&D pipeline progress replaced the traditional profitability test, giving innovative drug companies—whose development cycles often span a decade and which remain in a long-term "cash-burning" state—access to public market financing;
• Continuous rule iteration: HKEX subsequently introduced a new listing chapter for Specialist Technology Companies, further broadening the coverage of "hard tech" assets—a consistent approach in its institutional supply;
• Reshaping of market structure: The share of biotech companies in Hong Kong's new-listing market has kept rising, gradually forming a segment with distinct style characteristics that can be systematically studied.

By contrast, although the A-share market has accommodated some pre-profit companies through arrangements such as the fifth set of listing standards on the STAR Market, it remains largely profitability-oriented, with more cautious coverage and pace. A large number of companies still in the clinical stage with no commercialized revenue can currently find a venue for listing and continued financing mainly in Hong Kong stocks.

Why Is This an Asset Unavailable in the A-Share Market?

For mainland investors, the value of the 18A segment is first reflected in "availability." A considerable number of Chinese innovative drug companies have chosen to list exclusively in Hong Kong without issuing A-shares, meaning that any capital seeking to share in the dividends of China's innovative

Hong Kong stocks have no daily price limits, feature well-developed short-selling mechanisms and derivative instruments, and allow bulls and bears to fully interact, making asset pricing more closely aligned with fundamentals. For innovative drug companies where "the pipeline is the value," information such as clinical data and licensing progress is priced in rapidly by the market, and valuation misalignments typically persist for shorter periods than in markets constrained by daily price limits.

2. An Internationalized Investor Base

Hong Kong stocks attract global long-term funds, specialized biopharmaceutical funds, and industrial capital, whose valuation frameworks are aligned with international practice—for example, discounting based on pipeline success probabilities and estimating peak sales against comparable overseas products. This pricing system has given China's innovative drugs a valuation language comparable to that of their international peers, and has drawn sustained attention from incremental overseas capital.

3. A Smooth Refinancing and M&A Ecosystem

Innovative drug companies require multiple rounds of capital infusion over long R&D cycles. Hong Kong's refinancing mechanisms, such as placements and rights issues, are flexible and efficient, and the secondary-market M&A exit channel is relatively smooth, providing institutional support for companies to weather the R&D cycle. This is a soft strength that many emerging markets have yet to develop.

Opportunities and Risks Go Hand in Hand: Investing in 18A Requires a New Framework

It must be emphasized that the high elasticity and high risk of the 18A segment are two sides of the same coin, and investors should not focus solely on the industry narrative:

• Most companies are not yet profitable and rely on continuous financing to advance R&D; if a pivotal clinical trial fails or a licensing deal stalls, share prices may swing sharply;
• Liquidity is highly polarized: leading names trade actively, while some small-cap companies see thin daily turnover, so the entry and exit costs for large capital should be assessed in advance;
• The absence of daily price limits amplifies single-day volatility, making position management and stop-loss discipline even more important than in A-shares;
• At the industry level, structural pressures such as intensifying R&D competition and payer-driven price negotiations persist, and companies with homogeneous pipelines will face sustained valuation compression.

Therefore, investing in 18A cannot simply follow the thematic speculation logic of A-shares; it is closer to a hybrid of "venture capital + secondary market." Investors should focus on: the clinical progress and competitive landscape of core pipelines, the R&D runway supported by cash on hand, the quality of cash flows generated from out-licensing, and the execution capabilities of management and R&D teams.

Practical Tips for A-Share Investors

• Participate with a portfolio mindset: Diversify the risk of a single pipeline failure through biotech-themed ETF

  Conclusion: Cheap valuations are merely the "surface" of Hong Kong stocks, while their unique assets are the true "substance." What the Chapter 18A biotechnology sector represents is the asset supply capability unique to Hong Kong as an international financial center—for the first time, it gives mainland investors the opportunity to directly hold Chinese innovative drug assets from a global perspective in their own trading accounts. For investors pondering "why choose Hong Kong stocks," this scarce industry exposure may carry greater long-term allocation significance than a temporary valuation discount.