Should You Subscribe to a Loss-Making IPO?

Hong Kong does not require every listed company to be profitable before listing. The Main Board has different listing routes, and some are designed for companies that may not yet have stable profit.

The clearest examples are Chapter 18A biotech companies and Chapter 18C specialist technology companies. HKEX says Chapter 18A provides a listing route for clinical-stage, pre-revenue biotech companies, while Chapter 18C provides a pathway for specialist technology companies, including pre-commercial companies, to access capital for R&D and growth.

That is why you may see an IPO with losses, limited revenue, or even no meaningful commercial sales yet. The company may still be eligible under a special framework. But eligibility is not the same as attractiveness. Passing the listing gate does not mean the stock is worth your money.

This is where many small investors get lazy. They see “loss-making” and immediately say no, or they see “AI”, “biotech”, “new energy” and immediately get excited. Both reactions are too simple.

A company can lose money because it is expanding stores, hiring engineers, building factories, funding trials, giving discounts, or just running a poor business. These are very different situations.

In my experience, the first useful question is: why exactly is the company losing money? If the losses are caused by temporary investment into a business that is clearly scaling, that may be acceptable. If the losses come from weak demand, low pricing power, bad margins or rising admin costs, be much more careful.

A decent prospectus should explain the loss drivers clearly. If you finish reading and still cannot tell where the losses come from, that is already a warning sign.

For a loss-making IPO, revenue growth is usually the first number people check. Fair enough. If the company is not profitable, at least the business should be growing.

But revenue growth alone is not enough. I have seen plenty of IPO stories where revenue looks impressive, but the quality is not great. Growth may come from one major customer, a short-term contract, aggressive discounts, subsidies, or a hot market cycle that may not last.

Ask yourself: is the company growing because customers genuinely need its product, or because management is spending heavily to buy revenue? Those are not the same thing.

Good growth should feel repeatable. It should be supported by customer demand, product competitiveness and a business model that can eventually make money.

A company can grow revenue and still be a terrible business if it loses money on every sale. That is why gross margin matters.

Gross margin tells you whether the company can sell its product or service above direct cost. If gross margin is negative or very thin, the company needs a very strong explanation. Maybe it is still scaling production. Maybe early costs are unusually high. Or maybe the business simply has poor economics.

Then look at operating loss. Is the loss narrowing as revenue grows? Are sales and marketing expenses becoming more efficient? Are admin expenses under control?

• The pattern I like to see is simple:
• Revenue rising for a sensible reason
• Gross margin improving or at least staying healthy
• Operating loss narrowing over time
• Cash burn becoming more controlled
• Management explaining the path clearly

Loss-making companies survive on cash. That sounds obvious, but investors often ignore it when the story is exciting.

Cash burn is especially important for biotech, technology and pre-commercial companies. Before real commercial revenue arrives, they may need years of spending on R&D, clinical trials, product development, production facilities, marketing or compliance.

IFEC has warned that specialist technology companies may still be at an early development stage and may not have enough revenue to support R&D and operations. If they cannot secure external funding, the risk of failure is higher; if they raise money again later, existing shareholders may be diluted.

So ask a very practical question: after the IPO, how long can the company survive without raising money again? If the answer is “not very long”, you need to price in dilution risk.

A loss-making IPO does not need to become profitable tomorrow. But it should have a believable path.

For a biotech company, the path may depend on clinical trial progress, approval from regulators, commercial launch and reimbursement. For a specialist technology company, it may depend on product commercialisation, customer adoption and manufacturing scale. For a consumer brand, it may be about store maturity, marketing efficiency and repeat purchases.

The thing is, if the path to profit depends on too many “ifs”, the risk rises quickly. If it needs perfect trial results, fast market adoption, falling costs, no new competitors and strong pricing power all at once, be realistic. That is not an investment case; that is a wish list.

For profitable companies, investors can at least look at P/E. It is not perfect, but it gives a starting point. For loss-making companies, P/E is useless because there is no E.

That is why investors often look at revenue, gross profit, cash runway, product pipeline, market size, technology strength and peer valuation. But this is where hype can easily sneak in. A company may tell a very big market story, then ask investors to pay today for profits that may or may not arrive years later.

IFEC has also warned that specialist technology companies can be difficult to value, especially when the sector is emerging and there are few comparable listed peers. That difficulty can increase the risk of an overstated IPO valuation.

Frankly, if you cannot explain why the valuation makes sense without using vague words like “huge potential”, you probably do not understand the deal well enough.

In Hong Kong, the stock short name can give you clues. HKEX’s naming convention uses “B” for certain biotech companies that did not demonstrate they could meet the normal Listing Rule 8.05 financial requirements. It uses “P” for pre-commercial specialist technology companies that do not meet the revenue requirement under Rule 18C.03(4).

These letters do not mean the company is bad. They simply tell you the company has special features and may carry more uncertainty. For regular investors, treat B and P as reminders to read the prospectus properly, especially the risk factors, cash runway, product pipeline and commercialisation plan.

A loss-making IPO can still be very popular. The company may have a trendy sector, famous backers, strong cornerstone investors or a convincing growth story. But popularity does not remove business risk.

Retail investors usually apply through the Hong Kong Public Offer. Larger institutions and selected investors usually participate through the International Placing. These are different pools, and the public offer size can be small at the beginning.

Under the current HKEX framework, IPOs may use different public subscription allocation mechanisms. Mechanism A starts with a smaller public tranche and may trigger clawback to increase the public allocation if demand is strong. Mechanism B has a higher minimum public tranche but no clawback mechanism. Either way, a strong public subscription does not guarantee that you will receive meaningful shares.

Allotment still depends on valid applications and the final allocation basis. If you use margin to apply for a hot loss-making IPO, remember this awkward outcome: you may receive very few shares but still pay financing cost. Or, if demand is weaker than expected, you may receive more shares than you wanted in a risky company.

This is probably the most important practical point. Loss-making IPOs often come with exciting stories: breakthrough technology, big addressable market, “platform” business model, founder vision, strategic investors, future commercialisation. Some of these stories are real. Some are just expensive narratives.

IFEC has warned that IPO investors can focus too much on potential return and overlook risk; even popular IPOs can fall below the offer price after listing. For loss-making companies, that warning matters even more because valuation often rests on future expectations, not current profits.

Look, if you are subscribing only because everyone online is talking about it, you are not investing. You are chasing a queue.

Before subscribing to a loss-making IPO, ask these questions:

Why is the company losing money?

Is revenue growing for a sustainable reason?

Is gross margin improving?

Are operating losses narrowing or widening?

How much cash is the company burning?

How long can IPO proceeds support the business?

What exactly needs to happen before the company becomes profitable?

Is the valuation reasonable compared with proper peers?

Does the stock name carry a B or P indicator?

Can I accept a sharp drop after listing without panicking?

A loss-making IPO is not automatically a bad IPO. But it is definitely not something you should treat casually.

Some companies lose money because they are investing ahead of a real opportunity. Others lose money because the business model is not strong enough. The difference matters a lot.

For regular investors like us, the job is not to guess whether the story sounds exciting. The job is to check whether the company has real demand, improving economics, enough cash, a sensible valuation and a credible path from losses to sustainable profits.

If that path is clear, the IPO may be worth further study. If the path is vague, I would rather miss the first-day pop than get stuck holding a beautiful story with ugly numbers.