10 Apr 2019

The Stock Exchange of Hong Kong Limited (the “Exchange”) publishes listing decision on why the Exchange rejected certain listing applications

Background

On 22 March 2019, the Exchange published a listing decision (LD121-2019) to provide guidance on the reasons for rejecting 24 listing applications. The Exchange acknowledged that there was a noticeable increase in the number of listing applications rejected in 2018 as compared to previous years. The aforementioned increase was due to a heightened level of scrutiny exercised by the Exchange in its assessment of suitability of listing applicants (the “Applicant(s)”), and the exercise of its discretion to determine whether there are facts and circumstances to form a reasonable basis to believe that the Applicants are likely to invite speculative trading upon listing or to be acquired for their listing status. The Exchange placed particular emphasis on the Applicants’ (1) commercial rationale for listing and whether there was a genuine need for funding, and (2) valuation and the methodology used, when vetting the listing applications.

Summary

The table below provides a summary of the reasons for rejection raised by the Exchange:

Reasons for rejection Issues
Suitability
1. Lack of commercial rationale for listing and thus no genuine funding needs Fifteen Applicants failed to:

(a)        substantiate the commercial basis for the proposed expansion plans, and the proposed expansion plans were not commensurate with their previous business strategies and financial performance;

(b)       explain how their application of the IPO proceeds makes commercial sense, and where the Applicants intended to utilise the IPO proceeds to acquire land or property for use as a showroom, office premises or retail outlets, the cost savings gained from owning as opposed to leasing the properties was noted to be insignificant; or

(c)        demonstrate a genuine funding need as the Applicants had previously relied upon internally generated funds to finance their operations during the track record period (the “TRP”) and would be able to fund the proposed expansion plans with internal resources and/or debt financing.

 

2. Unsupported valuation Three Applicants failed to justify:

(a)        why their forecasted price-earnings ratios were higher than those of industry peers and the basis on which the peers were selected; and

(b)       how such valuations were reasonable in light of the Applicants’ history and profit forecasts.

 

3. Packaging One Applicant failed to demonstrate that different companies recently restructured under the listing group had operated as a single economic unit during the TRP, which led to the perception that the Applicants’ reorganisation had been done solely to meet eligibility requirements under the Listing Rules.

 

4. Deterioration of financial performance One Applicant showed a significant deterioration in their financial performance during the TRP and there was insufficient basis to believe that their situation would improve as their diversification into a new segment was recent and long term prospects of the new business were uncertain.

 

5. Suitability of director/person of substantial interest or controlling shareholder Three Applicants’ director(s) or person(s) of substantial interest or controlling shareholder(s), who had significant influence on the operations and management of the Applicants during the TRP, had previously been convicted of offences relating to dishonesty, thus rendering the Applicants unsuitable for listing.

 

6. Sustainability of business A substantial portion of the Applicants had a substantial portion of revenue during the TRP derived from a separate business operated by their controlling shareholder(s), which in particular led to the following observations and/or concerns:

(a)        the delineation of the Applicants’ business from its controlling shareholder(s) did not conform to industry norms;

(b)       the arrangements with the Applicants’ controlling shareholder(s) were not on normal commercial terms; and

(c)        there was uncertainty whether the Applicants’ arrangements with independent customers would generate similar amount of sales.

 

Eligibility
7. Failure to meet the minimum net profit requirements after excluding non-ordinary course income
8. Failure to meet the qualification requirements for transfer from GEM to Main Board
Other reasons
9. Failure of the sponsor to satisfy the independence requirement

Conclusion

The listing decision reflects (1) the change in the Exchange’s listing reviewing process; and (2) the new initiatives of the Exchange shown in recent developments such as (a) the GEM Listing Rules amendments in February 2018; and (b) the Consultation Paper regarding Backdoor Listing published in June 2018. For further details, please refer to our news updates published on 5 March 2018 and 11 September 2018.

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