On 27 November 2020, the Stock Exchange of Hong Kong Limited (the “HKEx”) published a Consultation Paper proposing to increase the Main Board profit requirement. Under the current regime, Listing Rule 8.05(1)(a) requires a new applicant to have a minimum amount of profit attributable to shareholders, currently (a) HK$20 million in the most recent financial year, and (b) HK$30 million in aggregate in the two preceding financial years.
Reason for the Change
The HKEx felt that since the market capitalization requirement was increased in 2018 from HK$200 million to HK$500 million without a corresponding increase in the profit requirement, there has been an increase in listing applications from small cap issuers who only marginally met the profit requirement but recorded relatively high historical P/E ratios as compared with those of their listed peers. Small cap issuers means issuers who apply to list on the Main Board with a proposed market capitalization at the time of listing equal to or less than HK$700 million. This gave rise to regulatory concerns which impact on the overall quality of companies seeking listing on the Main Board.
The Proposal to increase the Profit Requirement
The HKEx proposes to increase the profit requirement in two ways:
Option 1 – by 150%, based on the percentage increase in the market capitalization requirement in 2018, which will increase the minimum amount of profit attributable to shareholders to HK$50 million in the most recent financial year and $75 million in aggregate in the two preceding financial years; or
Option 2 – by 200%, based on the approximate percentage increase in the average closing price of the Hang Seng Index from 1994 to 2019, which will increase the minimum amount of profit attributable to shareholders to HK$60 million in the most recent financial year and HK$90 million in aggregate in the two preceding financial years.
The HKEx believes that the both proposed options can effectively address the issue of misalignment of the profit requirement with the increased market capitalization requirement. The increased profit requirement will further distinguish between issuers listed on GEM and the Main Board, thereby offering investors in Main Board companies the confidence of investing in more sizeable companies that are able to meet high market standards on the Main Board.
In light of the fact that companies may have commenced plans to apply for a Main Board listing relying on the current profit requirement, in order to minimize the impact of this proposal, the HKEx will introduce a set of transitional arrangements. It was proposed by the HKEx that if the changes in the Consultation Paper are adopted, they will not be effective earlier than 1 July 2021. Main Board listing applications submitted before 1 July 2021 will remain subject to the pre-existing regime. Such applications will be allowed to be renewed once after 1 July 2021 for continued assessment under the pre-existing profit requirement. For any subsequent renewals, the application will be assessed under the new increased profit requirement.
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