On 20 May 2021, the Stock Exchange of Hong Kong Limited (the “HKEx”) published conclusions to its consultations on the Main Board Profit Requirement (the “Consultation Conclusion”).
After consideration of the needs and interest of the stakeholders, the HKEx decided to:
- increase the profit requirement by 60%, resulting in an aggregate profit threshold of HK$80 million (currently $50 million) for the three preceding financial years; and
- to amend the profit spread to a 56%:44% split such that the minimum aggregate profit required for the first two financial years of the track record period will be HK$45 million and that for the final financial year will be HK$35 million (collectively, the “Modified Profit Increase”). The profit spread under the current rules is a 60%:40% split, i.e. that the minimum aggregate profit required for the first two financial years of the track record period is HK$30 million and that for the final financial year will be HK$20 million.
The Modified Profit Increase will come into effect on 1 January 2022. The proposed increase in the profit requirement will affect companies at an early development stage or small and mid-sized companies which intend to list on the Main Board. The purported purpose of the increase is to maintain the quality of the Main Board by setting appropriate initial listing criteria to attract companies of the desired profile and to protect the interests of the investing public.
The HKEx also adopted its proposal to grant relief from the profit spread in case-specific circumstances to provide flexibility to companies, provided that the listing applicant meets an increased aggregate profit threshold of HK$80 million (“Profit Spread”). It is stated in the Consultation Conclusions that the HKEx will ordinarily, among other things:
- evaluate the listing applicant’s business nature and the underlying reasons for its inability to meet the Profit Spread; and
- imposed conditions where appropriate, including disclosure of the listing applicant’s profit forecast in the listing document.
It is possible that the HKEx may grant a waiver from the revised Profit Spread under the Modified Profit Increase. The HKEx will:
- critically assess the need to include a profit forecast in the listing document to enable investors to make an informed decision on the position and prospects of an issuer; and
- may make enquiries on how the issuer’s IPO price was determined with reference to the book-building process.
The revised Profit Spread will also be implemented on 1 January 2022.
Any Main Board listing applications (including renewals of previously submitted applications or GEM transfer applications) submitted on or after 1 January 2022 will be assessed under the Modified Profit Increase. A listing applicant will not be permitted to withdraw its listing application before it lapses and resubmit the listing application shortly thereafter before the effective date of the Modified Profit Increase such that the listing applicant will be assessed in accordance with the current profit requirement for a longer period.
For assistance with IPO matters or assessment of the proposed issuer’s profit requirement, please contact us today.