Introduction
Amid the high level of interest relating to the Belt and Road (一带一路) Initiative of the Chinese Central Government, the Securities and Future Commission (“SFC”) delivered a statement in April 2017 regarding its approach to listings of certain infrastructure project companies on The Stock Exchange of Hong Kong Limited (“SEHK”). Infrastructure project companies are generally recognised by the SFC as having special risks attached to them, and are accorded greater levels of scrutiny during the listing application process to ensure that the infrastructure project companies are suitable for listing on the SEHK. The recent statement from the SFC aims to provide a measure of clarity regarding its view of such listings and to enhance the attractiveness of Hong Kong’s capital market by permitting more listings of infrastructure project companies, in particular those falling within the Belt and Road Initiative.
Statement of the SFC
The SFC has set out a list of mitigating factors which, if one or more are present, will improve the risk profile of an infrastructure project company and reduce the likelihood of the SFC in exercising its discretionary power to reject the proposed listing:
1. large shareholding by a relevant PRC SOE, sovereign wealth fund, substantial listed company or substantial and globally-active institutional investor;
2. committed project financing from a sizeable PRC, Development or International bank;
3. overnment where the project assets are located has direct involvement or shareholding; and
4. the project is located in a jurisdiction that is a signatory to the IOSCO MMOU, or where the SFC has sufficient comfort that it can obtain relevant public and non-public information about the activities of the company in the jurisdictions in which it operates.
This list of factors is not exclusive and other attributes may be proposed in substitution. It is also likely that not all of these attributes will be applicable in any one case.
SEHK Listing Rules and Waiver Conditions
On the other hand, under the current SEHK Listing Rules, a Main Board listing applicant normally must (i) have a minimum track record period of three financial years and (ii) meet certain minimum financial standards requirements (such as the profit test of at least HK$20 million in the latest financial year and at least a total of HK$30 million in the first two financial years, and a Growth Enterprise Market (“GEM”) applicant generally must (i) have a minimum track record period of two years and (ii) satisfy different financial standard requirements (such as possessing operating cashflow of at least HK$20 million in aggregate for the two financial years) in order to qualify for a listing on the SEHK.
With newly-formed infrastructure project companies, however, Main Board Listing Rules (Main Board Listing Rule 8.05B) and GEM Listing Rules (GEM Listing Rule 11.14) in fact allow the SEHK to accept shorter track record period and/or waive such financial listing requirements if certain conditions are met. A summary of such waiver conditions are set out below:
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SEHK Listing Rules Waiver Conditions |
| – Listing applicant must be a party to and have the right to build and operate (or participate in the results from the operation of) the infrastructure project(s) (Note)
– At the time of listing, listing applicant must not be engaged in any businesses other than those stipulated in the infrastructure project mandate(s) or contract(s) – The infrastructure project(s) must be: ● carried out under a long term (at least 15 years) concession or mandate awarded by a government; and ● of a substantial size (i.e. company’s share of the total capital cost of the projects is at least HK$1 billion) -If the listing applicant is involved in more than one project, the majority of its projects are in the pre-construction or construction stage – The bulk of the proceeds of the offering must be used to finance the construction of the project(s), and not to repay indebtedness or acquire other non-infrastructure assets – The list applicant is restricted from acquiring other type of assets or engage in activities which will result in a change of business in the first three years after listing – The listing applicant’s substantial shareholders and management must have the necessary experience, technical expertise, track record and financial strength to carry out the project(s) to completion and to operate the project(s) thereafter. In particular, its directors and management must have sufficient and satisfactory experience of at least three years in the line of business and industry of the new applicant – Enhanced disclosure requirements may be imposed, such as the inclusion into the listing document of business valuations, feasibility studies, sensitivity analyses and cash flow projections Note: Examples of infrastructure projects include the construction of roads, bridges. tunnels, railways, mass transit systems, water and sewage systems, power plants, telecommunication systems, seaports and airport |
Implications
It appears from the current listing rules that Hong Kong regulators place a high priority on protecting the interests and investments of retail investors. The statement from the SFC can be seen as its desire to open up Hong Kong’s primary stock market to different infrastructure project companies, particularly those relating to the Belt and Road Initiative. Coupled with the New Board proposals, it could represent an opportunity for Hong Kong to capture the future growth from the Belt and Road, becoming a more attractive listing venue for infrastructure projects in Asia as well as playing a key role in bridging the infrastructure funding gap.
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