Further to my previous article “Proposed Changes to the Profit Requirement for Main Board IPO” published in May 2021 (the “Article”), The Stock Exchange of Hong Kong Limited (“Stock Exchange”) published the consultation results shortly after the publication of the Article.
Consultation of the Stock Exchange
To recap, the Stock Exchange published a consultation paper in November 2020 (“Consultation Paper”) proposing to increase the profit requirement for Main Board IPO listing applicants. The Stock Exchange proposed 2 options for the increase, one proposing to increase the overall profit requirement by 150% of the current profit requirement (“Option 1”) and the other proposing to increase the overall profit requirement by 200% (“Option 2”).
Noting that some companies with a proposed small market capitalization at the time of application that might not be able to meet their profit forecast post-listing and the concerns raised by respondents to the Consultation Paper on the proposed increase in Main Board profit requirements, the Stock Exchange adopted a profit increase which is neither Option 1 nor Option 2. The new profit requirement adopted by the Stock Exchange is a modified version of Option 1 and Option 2 (“Modified Profit Requirement”), being HKD35 million for the most recent financial year prior to the listing application and HKD45 million in aggregate for the 2 preceding financial years, representing a 60% increase from the current profit requirement and a change in the profit spread from 60%:40% to 56%:44%. With the Modified Profit Requirement, the implied historical P/E ratio drops from 25 times to 14 times. The Stock Exchange is also prepared to grant relief from the profit spread under the Modified Profit Requirement in order to allow more flexibilities to listing applicants, on a case-by-case basis. The Modified Profit Requirement takes effect on 1 January 2022.
Although the Modified Profit Requirement is less than Option 1 and Option 2, still with such increase, it will inevitably drive away small size companies who are only marginally able to meet the current Main Board profit requirement. On the other hand, with the Modified Profit Requirement, small market capitalization companies which might otherwise not be eligible for listing on the Main Board under the proposed increase under Option 1/Option 2 can still apply for Main Board listing if they satisfy the new requirement.
In fact, as previously mentioned, the Stock Exchange accepted 102 Main Board IPO listing applications between January and April 2021 since the publication of the Consultation Paper, the number of new Main Board listing applications received by the Stock Exchange between May and August 2021 was 135, indicating that even more companies are aiming to take advantage of the last chance to be assessed based on the current profit requirement.
The impact of the Modified Profit Requirement remains to be seen but at least it has the effect of pushing forward the IPO plans of companies with low profits who may not qualify to be listed on the Main Board after the new profit requirement rules come into effect. We can expect to see even more new Main Board IPO applications to be submitted to the Stock Exchange prior to the Modified Profit Requirement coming into effect.
If you wish to learn more about listing in Hong Kong, please feel free to speak to our Simon Wong.
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 Consultation Conclusions – The Main Board Profit Requirement
 Progress Report for New Listing Applications – Main Board IPO Applications