Hong Kong exchange backs down on contentious plan to double profit qualification for IPOs after outcry

Enoch Yiu
·4-min read

Hong Kong Exchanges and Clearing Limited (HKEX) has decided to water down its proposal to drastically raise the profit qualification for a Main Board listing in the world’s third-largest stock market, yielding to strong opposition to the plan, according to a source close to the exchange.

Companies seeking to raise funds on the HKEX’s Main Board must have earned at least HK$80 million (US$10.3 million) in combined profits in the three years prior to the listing, compared to the current requirement of HK$50 million, the source said. The HKEX will announce the change after approvals by the Securities and Futures Commission (SFC), the source said, declining to be named.

Over a two-month public consultation period that ended in early February, the bourse operator received overwhelming opposition from stockbrokers, accountants, investment bankers and legislators to its plan to more than double the qualifying threshold to HK$125 million, the source said.

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The about-turn by the exchange underscores how the HKEX – itself a publicly traded company with the world’s biggest market valuation – must balance its pursuit of a robust pipeline in initial public offerings (IPOs) with an acceptable minimum standard and quality on the exchange. Listings on the bourse, the world’s largest market for IPOs in seven of the past 12 years, soared ninefold to HK$136.6 billion in the first quarter as 32 companies including Baidu and Bilibili raised funds in secondary listings to hedge their finances from US legislation.

The coronavirus pandemic, which has dented corporate earnings across the board and saddled Hong Kong with its worst recession on record, was also a major consideration for the HKEX to pare back its plan, the source said. The exchange will also allow companies to apply for waivers from the profit requirement on merit, the source said.

In addition, a reboot of the GEM market for growth enterprises is also under way to help small and medium enterprises (SMEs) raise capital on the so-called second board of the exchange, the source said. A spokesman at the HKEX declined to comment, saying only that the consultation conclusion will be announced in due course.

The HKEX gave two options for a minium profit requirement in its original proposal, its first amendment since the threshold was created in 1994. The first option would raise the three-year profit bar to HK$125 million, while the second would have at least HK$150 million in the three years leading up to the listing.

One of the busiest days of 2019, when the shares of six companies made their trading debuts on the HKEX. Photo: Nora Tam
One of the busiest days of 2019, when the shares of six companies made their trading debuts on the HKEX. Photo: Nora Tam

These new financial thresholds would have vaulted Hong Kong pass London and New York to become the world’s most stringent, and excluded all but the most profitable companies from ever raising capital. Up to 62 per cent of the 745 companies that listed on Hong Kong’s Main Board between 2016 and 2019 would not have made the cut if the HKEX’s most draconian threshold had been in place, according to an estimate in the HKEX consultation paper.

“It seems the HKEX only wants to attract mainland [Chinese] technology giants to list here, and is no longer serving the fundraising needs of Hong Kong companies any more,” said the legislator Regina Ip Lau Suk-yee during a March meeting in the Legislative Council meeting.

Still, the HKEX has been fighting a rearguard battle to instil financial discipline and deter so-called shell companies from listing, through inflating their profitability. The exchange was particularly anxious to stop giving shell companies the “perceived premium attached to the listing status,” according to its original plan.

Shares of the Hong Kong exchange operator fell by 0.5 per cent in a declining market to HK$468.20, giving the company US$76.4 billion in market capitalisation, more than the CME Group and the Intercontinental Exchange. HKEX shares have surged 85 per cent in the past 12 months.

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