THE EXCHANGE’S MARKETS
The Exchange operates two markets, the Main Board and the Growth Enterprise Market (GEM). The Main Board caters for companies with a profitable operating track record or that are able to meet alternative financial standards. It is designed to give these companies an opportunity to raise further funds from the market in order to finance future growth. GEM, on the other hand, caters for smaller growth companies and has lower admission criteria. GEM also acts as a stepping stone to Main Board listing.
The post-listing obligations of GEM and Main Board listed companies are now broadly similar. The principal remaining difference is that quarterly reporting is mandatory for GEM companies, whilst for Main Board issuers it is a Recommended Best Practice only under the Corporate Governance Code.
KEY QUALIFICATIONS FOR LISTING ON THE MAIN BOARD
(a) Suitability for listing
The applicant must satisfy the Exchange that the applicant and its business are suitable for listing.
(b) Operating History and Management
A Main Board listing applicant must have a trading record period of at least 3 financial years with:
- management continuity for at least the 3 preceding financial years; and
- ownership continuity and control for at least the most recent audited financial year.
An exception exists for companies applying to list under the market capitalisation/revenue test (please see below). For these companies, the Exchange may accept a shorter trading record period under substantially the same management if the applicant can demonstrate that:
- its directors and management have sufficient and satisfactory experience of at least 3 years in the line of business and industry of the new applicant; and
- management continuity for the most recent audited financial year.
(c) Financial Tests
Main board listing applicants are required to satisfy one of 3 tests: the Profit Test; the Market Capitalisation/Revenue Test; or the Market Capitalisation/Revenue/Cash Flow Test.
The Profit Test (Rule 8.05(1)) requires the applicant or its group to have profits of at least HK$20 million in the most recent financial year and aggregate profits of at least HK$30 million in the two years before that. Such profit must exclude any income or loss of the applicant (or its group) generated by activities outside the ordinary and usual course of its business.
Applicants listing under the profits test must also have an expected market capitalisation at the time of listing of at least HK$200 million.
Under the Market Capitalisation/Revenue Test, an applicant with an expected market capitalisation at listing of at least HK$4 billion, will meet the financial requirement for listing if it has revenue of at least HK$500 million for the most recent audited financial year. This test is for larger listing applicants that are able to generate substantial revenue.
Under the Market Capitalisation/Revenue/Cash Flow Test there is no profit requirement for a listing applicant which has an expected market capitalisation at the time of listing of at least HK$2 billion. Instead the applicant must have:
- at least HK$500 million in revenue for the most recent audited financial year; and
- positive cash flow from operating activities of at least HK$100 million in aggregate for the three preceding financial years.
Financial Requirement Waivers
A new applicant Mineral Company that cannot satisfy the profit test, the market capitalisation/revenue/cash flow test or the market capitalisation/revenue test of Main Board Rule 8.05, may be accepted for listing if it establishes to the Exchange’s satisfaction that its directors and senior management, taken together, have a minimum of 5 years’ experience relevant to the exploration and/or extraction activity that the Mineral Company is pursuing. Details of such experience must be included in the applicant’s listing document.
A Mineral Company is a company for whom exploration for, and/or extraction of, natural resources such as metal ores, mineral concentrates, industrial minerals, mineral oils, natural gases or solid fuels account for 25% or more of the total assets, gross revenue or operating expenses of the company and its subsidiaries.
However, a pre-production stage company seeking a waiver needs to show a clear path to commercial production. The Exchange expects most companies seeking a waiver to be at the development stage, although companies which are in production are not necessarily precluded as they may have junior assets which are yet to be developed. Companies that are in production will however need to be able to show a clear path to profitability in order to be accepted for listing. Pure exploration companies are not considered suitable for listing.
Waivers for non-Mineral Companies
The Exchange may also accept a shorter trading record period and/or may vary or waive the financial standards requirements for:
- newly formed “project” companies (for example a company formed to construct a major infrastructure project); or
- in exceptional circumstances, if the applicant or its group has a trading record of at least two financial years and the Exchange is satisfied that the applicant’s listing is in the interests of the applicant and its investors.
Calculation of revenue
For both the Market Capitalisation/Revenue Test and the Market Capitalisation/Revenue/Cashflow Test, only revenue arising from the applicant’s principal activities and not items of revenue or gains arising incidentally will be recognised. Revenue from “book transactions” is disregarded.
(d) Shares in Public Hands
There must be an open market in the securities for which listing is sought. In general, this means that at least 25% (by number) of the listing applicant’s issued shares having an expected market capitalisation at the time of listing of at least HK$50 million, must be held by the public. Securities are not publicly held if they are owned by persons who are “core connected persons” of the issuer, persons whose securities have been financed by a core connected person, or persons accustomed to take instructions from a core connected person in relation to their shares. “Core connected persons” include directors, chief executives or substantial shareholders (i.e. holders of 10% of the voting power at general meetings) of a company or any of its subsidiaries or a close associate of any of them.
Where a listing applicant has more than one class of securities, the total securities of the listing applicant held by the public (on all regulated markets including the Hong Kong Stock Exchange) must be at least 25% (by number) of the applicant’s total issued shares. However, the class of securities for which listing is sought must not be less than 15% (by number) of the applicant’s total issued shares, and have an expected market capitalisation at the time of listing of not less than HK$50 million.
Where the DRs listed in Hong Kong are fungible with the underlying shares, the total shares and shares represented by DRs of the listing applicant held by the public on both the Exchange and any relevant overseas market(s) will count towards the 25% (Rule 19B.08).
Exchange’s Discretion to Accept Lower Public Float
For large companies, with an expected market capitalisation in excess of HK$10 billion, the percentage required to be in public hands, may, at the Exchange’s discretion, be lower (but not lower than 15%) provided that:
- the Exchange is satisfied that the number of securities and their distribution will enable the market to operate properly with a lower percentage;
- the issuer makes appropriate disclosure of the lower prescribed percentage of public float in the listing document;
- the issuer confirms the sufficiency of public float in successive annual reports after listing; and
- a sufficient proportion (to be agreed in advance with the Exchange) of any securities to be marketed contemporaneously in and outside Hong Kong, must normally be offered in Hong Kong.
This public float waiver is available only on initial listing. It cannot be applied for post-listing if the issuer subsequently satisfies the HK$10 billion market capitalisation requirement.
(e) Minimum Number of Shareholders at Time of Listing
Securities new to listing must have an adequate spread of shareholders. The number will depend on the size and nature of the issue, but there must be a minimum of 300 holders.
In addition, not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders.
After listing, there is no requirement for a minimum number of shareholders. The issuer must however continue to comply with the minimum public float requirement.
(f) Market Capitalisation
The expected market capitalisation at the time of listing of a new applicant must be at least HK$200 million and the expected market capitalisation of the securities held by the public must be at least HK$50 million. If a listing applicant lists under the Market Capitalisation/Revenue/Cash Flow Test or Market Capitalisation/Revenue Test it must have an expected market capitalisation at the time of listing of HK$2 billion or HK$4 billion, respectively. Most companies at the time of initial flotation have a market capitalisation of around HK$200 million. Further issues of securities of a class already listed are not subject to this limit, and, in exceptional cases, a lower expected initial market capitalisation may be acceptable, although the Exchange will have to be satisfied as to the marketability of the securities.
(g) Working Capital Sufficiency
A listing applicant must have sufficient working capital for the group’s present requirements, that is for at least the next 12 months from the date of publication of the listing document.
A new applicant Mineral Company is required to demonstrate that it has sufficient working capital for 125% of the group’s requirements for the next 12 months including general, administrative and operating costs, property holding costs and the cost of any proposed exploration and/or development.