Professional Interpretation

At present, the United States and Hong Kong capital markets are the most popular choices for domestic companies to list overseas. Due to its important position in the world capital market and special geographical location, listing in Hong Kong is the best choice for many domestic companies. However, many applicants have recently been rejected by the Hong Kong Exchanges and Clearing Market (including Main Board and GEM). This note by the International Affairs team form Beijing Docvit Law Firm briefly discusses the reasons for the failure of listing in Hong Kong.

I. The Purpose of Listing Is Not Clear

1. The applicant failed to demonstrate the need for expand of its business and manpower;

2. The applicant has sufficient funds to prove that it needs to obtain financing through listing;

3. The use of fundraising funds is not commensurate with future business strategies.

II. Whether the applicant is sustainable after the listing is extremely uncertain

1. The applicant has a low profit margin and is constantly regressing. It may not be able to continue to operate after listing;

2. Certain loans and guarantees provided by some applicants, which are microfinance companies, do not comply with the local policies applicable to microfinance companies, and the applicant may face the cancellation of the business license;

3. The business of the applicant during the business record period has been banned by government policies. And the applicant plans to adjust its business model after the listing. The transformation of business model and/or product portfolio will greatly affect business model, cost structure, profitability and risk assessment of the applicant, but the applicant failed to prove that the new business is sustainable.

4. The applicant outsourced the business of the products it sold during the business record period, and then it intends to shift its business focus to producing and selling another new product after the listing. The new business is fundamentally different from the existing business of the applicant. The management has no experience in operating new business and the applicant has failed to demonstrate the sustainability of the new business.

5. The applicant maintains a positive cash balance only from bank financing;

6. The applicant's gearing ratio and net current liabilities were high;

7. The market share of the applicant brand was low and there was a downward trend;

8. After the manufacturer terminated the supply of a major product, the financial statements of the applicant showed a retrogression.

9. In order to improve its business, the applicants plan to shift their business focus to the second brand after the business record period, but the brand has a lower market share;

10. During the business record period, the applicants failed to address the impact of rising operating costs and the financial performance was reversed. Although the applicants implemented the throttling measures in the last year of the business record period, the trend of the applicants' business retreat could not be stopped. At the same time, the management failed to prove that it was able to reverse the performance of the applicants after the business record period.

III. Cannot apply the “continuity of ownership and control throughout the full financial year” ( GEM Listing Rules, Article 11.12(2))

1. In the recent financial year, some of the controlling shareholders withdrew and the sponsor failed to prove that the former controlling shareholder was a passive shareholder during the relevant business record period;

2. During the period from the recent financial year to the pre-IPO, there was a significant change in the voting rights of some controlling shareholders;

3. One of the controlling shareholders is no longer a controlling shareholder after the most recent financial year, and the sponsor has failed to prove that the change has little effect on management. It is not possible for investors to assess how the applicant manages the business only under the influence of the remaining controlling shareholders based on the previous financial performance of the applicant.

IV. CANOT apply the minimum profit requirement (Main Board Listing Rule, Article 8.05 (1) (a))

1. The applicant must hold a license to carry out its principal business. If the applicant do not has the license, the income of this part is non-compliant business income. If it does not calculate the income from non-compliance business, it will not meet the minimum profit requirement;

2. Parts of the operating expenses of the applicant come from the interest-free loan of the controlling shareholder. The interest-free loan is an abnormal commercial term. If the loan is calculated, it will not meet the minimum profit requirement.

3. The amount of non-compliance loans of some micro-finance company applicant is huge. If the non-compliance loan income is not calculated, it will not meet the minimum profit requirement.

V. CANOT apply the minimum market capitalisation requirement (GEM Listing Rule, Article 11.23(6))

Since the applicant is listed on the GEM in the form of introduction and there is no public offering in the listing, the applicant relies on the forecast P/E ratio to estimate its market value. The value is calculated based on very subjective and random assessment data. The Hong Kong Stock Exchange considered that the applicant has not satisfactorily proved that it is eligible for listing.

VI. Over-reliance on the external environment

1.    A property management service provider provides property management services based on a single estate. During the business record period, over 90% of the applicant's revenue came from the largest customer and/or major product. Applicants' income during the business record period is dependent on their respective customers, but reliance is not two-way and complementary, that is, their respective customers do not rely on them. And the applicant organization failed to prove that it has the ability to reduce its reliance on a single housing estate after the business record period.

2.    The industry operating technology and/or industry regulatory environment is constantly changing, but the applicant lacks experience in selling new/upgraded products. Therefore, it failed to attract new customers during the business record period to reduce reliance. At the same time, the applicant failed to demonstrate that it can reduce its reliance on a single customer after the business record period.

3. The existing venue of the applicant, engaged in the catering industry, has a short lease term. The rise in rental costs has a large impact on the company's business, and the company's bargaining power is low.

VII. Executive misconduct (Main Board Listing Rule, Article 3.08 and 3.09)

During the business record period, several senior executives were convicted of commercial bribery.

VIII. CANOT apply the minimum cash flow requirement (GEM Listing Rule, Article 11.12A(1))

During the business record period, most of the applicants' income came from unconditional subsidies from local governments, but these subsidies were not directly related to the main business. The Hong Kong Stock Exchange considers that such grants are not obtained in the day-to-day business of the applicant. If the subsidies are deducted, the applicant does not meet the minimum cash flow requirements.

IX. Others

1. The controlling shareholder and major shareholder have the act of selling shares during the business record period

2. The applicant organization did not obtain the relevant construction permit before starting construction/operation of important factories.