The Stock Exchange of Hong Kong ("SEHK") recently
announced that companies whose financial situation has been
temporarily and adversely affected by the current economic downturn
may nevertheless qualify for listing even though they do not
strictly meet the minimum profit track record. Whilst relaxation in
requirements will be determined on a case-by-case basis, private
equity investors may now have the opportunity to exit their
investments by way of an IPO on the SEHK despite the negative
effects of the financial crisis on their portfolio
Under the Stock Exchange of Hong Kong
("SEHK") listing rules
("Listing Rules"), a company applying
for listing on the Main Board must satisfy one of the three
following basic tests to be eligible for listing:
the profit test,
the market capitalization/revenue/cash flow test, or
the market capitalization/revenue test.
However, under the Listing Rules, the SEHK may waive, modify or
not require compliance with the Listing Rules in individual
As a result of the recent global economic downturn, the SEHK has
determined that it may relax the profit test where it is satisfied
that a fall in the profits of a company applying for listing is
linked to the downturn rather than to the commercial or operational
viability and management of the applicant.
Under the existing profit test, a company applying for listing
must have an adequate trading record, which means that the company,
or its group, must have a trading record of not less than three
financial years during which the profit attributable to
shareholders must, in respect of the most recent year, be not less
than HK$20 million and, in respect of the two preceding years, be
in aggregate not less than HK$30 million.
Basis for Relaxation
The SEHK will consider each application on its own merits based
on the facts and circumstances of the company applying for
Profit Track Record
Under the relaxed profit test, whilst a company applying for
listing need not have profit attributable to shareholders of at
least HK$20 million in its most recent financial year:
it must nevertheless have an aggregate profit attributable to
shareholders of at least HK$50 million in respect of the last three
financial years immediately preceding the application for
it should be able to show that, were it not for temporary
conditions, its operating profit over those three years would have
been significantly in excess of HK$50 million; and
it should be able to show that the conditions which led to its
inability to meet the existing profit test are temporary.
Consistent with the linkage between the relaxation and the
economic downturn, the three year track record period must include
at least one financial year that ended on or after 31 December
A company applying for a relaxation will need to describe to the
SEHK the measures that it has taken or will take to mitigate the
impact of the temporary conditions on future profits. In like vein,
the listing document must adequately disclose the likelihood of
continuance or recurrence of these conditions.
Cashflow & Working Capital
Although the existing profit test does not require a company
applying for listing to meet any minimum cash flow or working
capital requirements, to qualify for the relaxation:
a company must have positive cashflow generated from operating
activities in the ordinary and usual course of business before
changes in working capital and taxes paid in the last financial
year during the track record period; and
a company must demonstrate that it will have adequate working
capital for 12 months' operation after listing.
A relaxation in the existing profit test is welcome news for
investors of privately held companies who may wish to exit their
investments through a listing of those companies. Whilst the
changes do not open the door for troubled companies to list, they
do lower the regulatory thresholds for strong and viable companies
to list in a challenging stage of the economic cycle.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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