Hong Kong exchange operator’s push to raise the bar for IPOs meets with stiff opposition

Enoch Yiu
·4-min read

Hong Kong Exchanges and Clearing faces an uphill battle to push through its proposal to drastically raise the profit threshold for companies seeking a listing on its main board, a blow to the exchange operator’s push to enhance corporate governance on the HK$54 trillion (US$7 trillion) bourse.

HKEX proposed a tripling of its profit requirement for listing applicants in November, to clean up problematic corporate behaviour, enhance the quality of market constituents and to protect investors.

However, lawmakers, accountants, and brokers have complained that the move would bar many small local firms from raising funds, especially now that the pandemic has dented their profits during the city’s worst economic recession on record. This stiff opposition could lead to the exchange abandoning the fight or make amendments to its plan.

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“The proposals seem to discriminate against small-and-medium enterprises, particularly those in the traditional industries,” said Raymond Cheng Chung-ching, president of the Hong Kong Institute of Certified Public Accountants, representing 46,000 accountants in the city. “Many of today‘s blue chips companies and mega-corporations started as SMEs.”

Picture: HKEX
Picture: HKEX

Last week, the stock exchange operator ended a two-month consultation to lift the profit requirements for companies seeking to list in Hong Kong in two ways.

The first option increases the three-year profit requirement to HK$125 million, while the most recent year requirement rises to HK$50 million, HKEX said. The second option triples the profit requirement to at least HK$150 million in the three years leading up to a listing, up from HK$50 million The profit requirement will also triple to HK$60 million in the most recent financial year, up from HK$20 million.

The proposed thresholds would make Hong Kong the toughest exchange in the world in terms of option two, higher than the New York Stock Exchange’s bar. It would be the second-highest profit threshold in terms of profit requirement of most recent year before the listing, just behind Singapore’s exchange.

The proposals would theoretically have barred 62 per cent of the 745 companies that listed on Hong Kong’s main board between 2016 and 2019, according to an estimate in the exchange’s consultation paper.

“The proposed profit threshold too high for most Hong Kong companies,” said Tom Chan Pak-lam, chairman of the Hong Kong Institute of Securities Dealers. “If the exchange goes ahead with the proposals, it would prevent small and medium-sized companies listing on the mainboard. So smaller investment banks and brokers would also lose related business opportunities.”

The plan is part of Hong Kong financial regulators’ efforts to deter listings by so-called shell companies that inflate their profitability. The exchange said it was unsure if some small listed companies listed to raise funds to develop their businesses or sought a listing to “manufacture potential shell companies for sale after listing given the perceived premium attached to the listing status.”

The stock exchange’s main board has been the world’s largest initial public offering market seven times over 12 years.

HKICPA’s Cheng said the exchange should not assume that all SME listing candidates aim to create a shell company and it should tackle this problem in other ways such as stronger enforcement.

Lawmaker Regina Ip Lau Suk-yee is against the HKEX’s proposal. Photo: Jonathan Wong
Lawmaker Regina Ip Lau Suk-yee is against the HKEX’s proposal. Photo: Jonathan Wong

“A minimum profit requirement has nothing to do with corporate governance and little to do with investment risk. Companies which make profits before the listing can make losses afterwards,” said David Webb, a former director of HKEX and a shareholder activist in his submission to the exchange, which he posted on his website.

Several lawmakers also voiced their concerns in one of Hong Kong’s Legislative Council meetings last week.

“It seems the HKEX only wants to attract mainland tech giants to list here and does not serve Hong Kong companies wishing to raise funds any more,” said legislator Regina Ip Lau Suk-yee.

The proposed change in profit requirements will be HKEX’s first since 1994 when the rule was introduced.

Leading firms in the internet or biotech space, and innovative segments in general, are good investments from early non-profitable stage, said David Gaud, Pictet’s wealth management Asia chief investment officer.

“Preventing earlier access to smaller investors via public offering is a disadvantage to those investors,” he aid. “Pre-IPO due diligence process and publishing are meant to highlight the risks and advantages of the asset. The non-profitability criterion is there, it can be put in perspective along with the other, also relevant, criteria.”

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