Detailed Explanation of Drip Irrigation Investment IPO: Li Xiaojia Returns to HKEX with Financial Innovation

The financial innovation of Drip Irrigation has entered a new stage.

Drip Irrigation International Investment (hereinafter referred to as "Drip Investment"), established less than a month ago, has already launched an assault on the main board of the Hong Kong Stock Exchange.

When discussing the incubation of Drip Investment, one cannot overlook the founder and chairman of the board, Li Xiaojia, who served as the president of the Hong Kong Stock Exchange for 11 years.

In 2021, after leaving the Hong Kong Stock Exchange, Li Xiaojia co-founded Drip Irrigation with Dongying Financial founder Zhang Gaobo, hoping to open up financing channels for small and micro enterprises in mainland China overseas through cash flow yield investments (hereinafter referred to as "cash rights investment"), which are neither equity nor debt.

The endorsement of the founders and the brand-new model quickly attracted the attention of the capital market; after the C round of financing in 2023, Drip Irrigation's valuation rose to $1.7 billion, entering the unicorn club.

Now, Drip Irrigation has gone through two phases: self-funded investments and trial operations at the licensed Macau Stock Exchange (hereinafter referred to as "MSE"); as of July 1, 2025, Drip Irrigation's financing amount has reached 5.573 billion Macau Patacas (approximately 4.937 billion RMB).

Li Xiaojia's expectation for Drip Investment is to open up a public fundraising channel outside of the MSE.

Currently, Drip Investment, which has not yet commenced operations, has chosen to adopt the Chapter 21 of the Hong Kong Stock Exchange Listing Rules (hereinafter referred to as "Chapter 21") for its IPO targeting investment companies.

Drip Investment will hire the investment management company under Drip Irrigation as the investment manager; upon completion of the issuance, subscribing investors will constitute all shareholders of Drip Investment.

Drip Investment has also stated that all raised funds will be used for cash rights investment.

At a small media exchange meeting on June 23, Li Xiaojia stated that "Chapter 21" will become a "converter" that connects the market.

In the traditional financial framework, Drip Irrigation, which targets cash rights, is undoubtedly a new entity.

Convincing investors is not easy, and the lack of institutional and large-scale funding will also limit the speed of development.

According to Li Xiaojia's plan, Drip Investment through the "Chapter 21" IPO will, on one hand, become standardized securities through listing, and on the other hand, utilize the raised funds to complete non-standard financing in the target scenarios. "Investors buy stocks, and we use financing for investment. These logics are already within the traditional investment framework."

According to the approval process, if there are no significant regulatory concerns after Drip Investment submits its application, the Hong Kong Securities and Futures Commission and the Hong Kong Stock Exchange will each issue up to two rounds of opinions, and Drip Investment could be listed as early as September.

However, controversies surrounding the Drip Irrigation model persist.

Breaking into the Hong Kong Stock Market "Chapter 21"

The uncertainty surrounding Drip Investment's IPO path stems from the Hong Kong Stock Exchange's attitude towards "Chapter 21" companies.

In the early 1990s, to adapt to the rapidly expanding financial market, the Hong Kong Stock Exchange specifically established Chapter 21 in the Listing Rules, allowing companies with no actual business and solely investment objectives to go public.

Such companies are not required to meet profitability, market capitalization, or cash flow requirements, but the sale targets are limited to professional investors, and they must disclose net asset values monthly to ensure transparency; Unlike SPACs (Special Purpose Acquisition Companies), "Chapter 21" companies need to invest in a wide range of diversified targets, with a single investment not exceeding 20% of net asset value and equity in the invested company not exceeding 30%.

Around 2014, some "Chapter 21" companies were used for shell speculation, leading to tighter regulations.

The most recent listing case of a "Chapter 21" company dates back 14 years to the investment in China's new economy;

Even Li Xiaojia himself admitted that during his 11 years at the Hong Kong Stock Exchange, there has never been a listing case of a "Chapter 21" company.

The long-abandoned path has made the market more cautious about the choice of drip irrigation investment.

Li Xiaojia stated at the communication meeting that the "Chapter 21" regulations have been in existence for decades, and similar systems are also reflected in the European and American markets; the previous restrictions were mainly related to poor liquidity caused by asset opacity.

"'Chapter 21' company investment directions are mostly non-standard, with uncertain underlying asset values leading to stock price discounts, which investors dislike," said Li Xiaojia. "Some companies have issues such as manipulating the market through insider trading."

He believes that using cash with strong liquidity as the target can accurately reflect net asset value, and monthly audits can ensure transparency of net assets.

In the early stages of this model, Drip Irrigation Investment used its own funds to invest in small and micro stores;

After 2023, it began to provide financing services for listed projects in the capacity of an exchange, with participants in the exchange being regulated financial institutions from abroad, and professional investors can also invest through designated brokers.

Now, Drip Irrigation Investment can raise funds through the exchange, capture the cash flow of invested companies, and process it into securities; the inflow is non-standard cash flow assets, while the outflow consists of quasi-standardized shares in the cash rights asset portfolio.

As of July 1, 2025, Drip Irrigation Investment has achieved a total financing amount of nearly 5 billion yuan, of which 4.4 billion yuan is its own funds invested in small and micro stores.

These funds mainly come from the leading fund composed of Drip Irrigation Investment's own funds and LP contributions, with a small portion coming from professional investors after the transformation of the Australian Stock Exchange.

Nearly 90% of the total financing amount being self-owned funds may indicate that the financing capacity of cash rights is still limited.

Li Xiaojia believes that post-listing drip irrigation investment will become a "converter" within the Drip Irrigation Investment system.

The equity issued by drip irrigation investment is the standardization and shareholding of cash rights asset portfolios; fundraising through the Hong Kong Stock Exchange eliminates the hassle of persuading and changing investors.

Currently, Drip Irrigation Investment plans to issue 3 billion shares, with the issuance price yet to be determined.

Revenue Model Breakdown

The market's hesitation towards Drip Irrigation Investment products may be related to its unique innovative form.

The operational logic of Drip Irrigation Investment itself is not complicated.

In the first stage, it first invests its own funds in small and micro stores, extracting daily cash flow as returns according to the agreed period and ratio.

For store owners, this form avoids equity dilution and does not put them in the predicament of repaying principal and interest during poor operations;

Investors do not need to consider valuation bubbles or debt disputes but must bear the risk of losses if the invested enterprise fails to generate cash.

In the second stage, Drip Irrigation Investment was approved by the Australian Stock Exchange, and investment contracts were further packaged, combined, securitized, and layered, released to investors with different risk preferences in the public market Li Xiaojia once stated that the Drip Irrigation product belongs to a non-equity, non-debt joint venture model, but there are many discussions in the market regarding the classification of cash flow yield investments.

Some investors believe that this is a debt without clearly defined creditor rights, and that the funding costs for small and micro enterprises on the Drip Irrigation platform are high, lacking one-to-one underlying assets during fundraising, and having a funding pool, which combines characteristics of both usury and P2P;

Others believe that the risk-sharing relationship of Drip Irrigation is similar to equity.

However, some legal professionals have indicated that the Drip Irrigation product is essentially closer to ABS (Asset-Backed Securities).

Li Shou-shuang, a senior partner at Dacheng Law Firm, pointed out that the discussion on whether Drip Irrigation is equity or debt is mainly based on the existing legal framework that separates equity and debt, "but equity and debt are a spectrum, not absolutely opposed."

Li Shou-shuang noted that debt and equity are two poles of a spectrum, but there is still a middle ground where products like asset securitization exist, "Drip Irrigation is essentially a type of 'asset-backed security,' and its products and subsequent public trading are part of the asset securitization process."

Formally, the cash flow yield product of Drip Irrigation is a transaction of specific cash flows.

Unlike traditional ABS, the securitization part of small and micro stores is the allocated cash flow, rather than the underlying assets that generate cash flow, and there is no need to complete the legal transfer of ownership of the securitized assets.

Drip Irrigation also has a quasi-SPV mechanism.

For example, an automated allocation system directly connects to POS machines, and the SaaS platform intercepts store revenue sharing, ensuring partial asset isolation;

The Australian Securities Exchange has SPV (Single Asset Financing Vehicle) digital accounts that can aggregate multiple store contract certificates to form an asset pool.

Since its establishment, the form of Drip Irrigation products has also been iterating.

After investors sign contracts with the invested enterprises, the Australian Securities Exchange will issue equity certificates according to the contracts, serving as the basis for subsequent products; from 2023 to date, the name of this certificate has undergone three rounds of changes.

The initial certificate was the DRO (Daily Revenue Obligation), which later changed to RBO (Revenue Based Obligation). In Li Xiaojia's introduction to Drip Irrigation investments, this tool has been upgraded to CCO (Cashflow Contingent Obligation).

However, the upgrade of the tool does not affect the essence of the Drip Irrigation product.

Drip Irrigation has not detailed the differences between CCO and RBO, and merely tracking from the literal meaning, the upgraded Drip Irrigation product regarding allocated revenue or cash flow may have adjustments.

How is the profitability?

The market discussion on the Drip Irrigation investment model does not seem to have affected the enthusiasm of institutional investors.

In November 2021, Drip Irrigation received $50 million in Series A financing from Sequoia China, followed by $70 million in Series B financing in 2022 and $450 million in Series C financing in 2023, with a total financing scale of $570 million.

After the Series C financing, Drip Irrigation's valuation has reached $1.7 billion, becoming a bona fide unicorn company For potential investors in Drip Irrigation Investment, the realistic concerns about returns may be more sensitive than the nature of the product itself.

From August to December 2022, the fund product MCLF established by Drip Irrigation Tong with its own funds had an actual return rate between 5.6% and 7.2%, with the annualized return rate exceeding 27.2% at its peak;

The return rate for the entire year of 2023 was between 8.4% and 12.1%, slightly down year-on-year, but still stable.

However, starting in 2024, the yield of MCLF has shown a downward trend, even leading to losses.

Skeptics believe that the continuous decline in Drip Irrigation Tong's returns has validated the vulnerability and investment risks of small and micro enterprises during a downturn cycle;

But Drip Irrigation Tong explains that the decline in returns may be related to the transition of project funds from self-owned to joint ventures, resulting in lower recovery efficiency and diluted returns.

The future investment targets of Drip Irrigation Investment will have three directions: business-type, asset-type, and enterprise-type:

The business-type is currently the main business of Drip Irrigation Tong, which provides development, expansion, and working capital for small micro stores such as chain restaurants and barbershops;

The asset-type provides liquidity for PE/VC institutions or parent funds that hold unlisted equity and face funding difficulties;

The enterprise-type provides operating cash flow (loans for rent, salaries, etc.) for small and medium-sized technology innovation enterprises in the early stages of entrepreneurship.

Regarding the issue of funding efficiency, Li Xiaojia stated that in the future, they will utilize partner networks and AI technology to explore opportunities to improve recovery and reinvestment efficiency.

Disclosure Solutions

The past performance or risk indicators of Drip Irrigation Tong cannot answer all current doubts about drip irrigation investment.

Under the Drip Irrigation Tong model, the risk for investors lies in the difficulty of demanding a hard guarantee from invested enterprises when they do not generate cash flow.

Investors without equity or debt rights also find it difficult to understand the financial situation of invested enterprises; key aspects such as revenue sharing, cash flow, and performance must be managed by Drip Irrigation Investment;

In response, Drip Irrigation Investment entrusts key enterprises that control the funds, orders, and systems of invested enterprises, such as payment companies and e-commerce platforms, to formulate revenue-sharing plans and relies on payment systems to monitor cash flow.

With layers of delegation, combined with contract combinations and securitization, public market investors and invested enterprises find it difficult to establish direct contact, making it hard for investors to identify operational risks of invested enterprises;

Invested enterprises may also evade revenue sharing through cash or private transfers, leading to moral hazards.

In this situation, ensuring that investors accurately grasp the underlying assets will become a long-term issue for Drip Irrigation Tong.

Currently, the solution provided by Drip Irrigation Tong is a digital integration AI technology investment operation system called "Drip Irrigation Star."

This system includes services such as asset and user registration, transaction execution and recording, settlement, and information capture disclosure, allowing investors to view portfolio information in real-time and complete fund management operations such as transaction execution, position monitoring, and fund receipts and payments.

The Australian Securities Exchange, which has been operating for nearly two years, may serve as a reference.

The current Australian Securities Exchange has four types of products: RBO (Revenue Sharing Certificates), SPV (Single Asset Financing Vehicles), SPAC (Special Purpose Acquisition Companies), and ETF (Exchange-Traded Funds) After entering the "Drip Irrigation Star" system, you can view the basic information of the underlying assets on the Australian Securities Exchange (ASX) in the RBO section.

Xinfeng found that a cloud-based Guizhou restaurant that completed its subscription has raised AUD 224,000 on the ASX, with a current profit-sharing ratio of 11.66%;

The system has statistics on the ARM (system capture) and the average monthly revenue reported by the above-mentioned Guizhou restaurant, and also discloses the project matching date, termination date, and cumulative receipts.

The information disclosure for the SPV is even more comprehensive.

Xinfeng found that a Sha County snack SPV has disclosed information covering key details such as the first payment per share, forecasted actual income deviation, estimated income, actual income, and repurchase trigger conditions.

However, regarding the asset-type and business-type cash rights that will be included in drip irrigation investments, neither the prospectus nor Li Xiaojia himself has provided a detailed explanation of the information disclosure principles.

Whether PE and VC institutions can directly adopt the information disclosure template of small and micro stores is also a test.

Drip Irrigation Tong stated that after a successful listing, MIFC will conduct relevant disclosures according to regulatory requirements for Chapter 21 listed companies; the board of directors will also publish corresponding investment content as appropriate, with the channel being the listed company's website.

Li Xiaojia revealed that after the launch of drip irrigation investments, investment tools, partner networks, and the "Drip Irrigation Star" system will be iteratively updated.

As information on disclosure details, tool differences, system changes, and other aspects is made public, the market's questions about drip irrigation investments may receive more complete answers