Analysis of The Exchange’s Reform of the Main Board Profit Requirement– Right Time for Hong Kong To Move On?

REASONS FOR INCREASING THE PROFIT REQUIREMENT

On 27 November 2020, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a consultation paper on the Main Board Profit Requirement. The consultation paper proposes to increase the profit requirement of Main Board listing and improve the overall quality of listed companies on the Exchange. Since 1994, the minimum profit requirement under Rule 8.05(1)(a) of the Main Board Listing Rules has never been adjusted. In 2018, the minimum market capitalisation requirement under Rule 8.09(2) of the Main Board Listing Rules was increased from HK$200 million to HK$500 million. Currently, the profit requirement for Main Board listing, which has been remained unchanged for 26 years, is unable to be aligned with the revised market capitalisation requirement, nor can it meet the current economic development requirements. Therefore, it is not only necessary but also feasible to adjust the current profit requirement of Main Board listing. On 20 May 2021, the Exchange published consultation conclusion relating to the profit requirement for Main Board listing (the “Conclusion”). The Conclusion confirmed the new profit requirement for Main Board listing.

ADJUSTED PROFIT REQUIREMENT

According to the initial proposal, in order to adapt the profit requirement of Main Board listing to the current market capitalisation requirement and market development, the Exchange has introduced two profit requirement reform options. (1) The profit requirement will increase by 150% based on the increase in market capitalisation requirement in 2018. Under this option, the three years net profit in aggregate of a Main Board listing applicant must reach HK$125 million, and the net profit of the most recent financial year must not be less than HK$50 million. (2) The profit requirement will increase by 200% based on the approximate increase in the average closing price of the Hang Seng Index. Under this option, the three years net profit in aggregate of a Main Board listing applicant must reach HK$150 million, and the net profit of the most recent financial year must not be less than HK$60 million. From the comparison in the table below, it can be found that there is a huge difference between the aforementioned two profit requirement amendment options and the current profit requirement of Main Board listing adopted by the Exchange. The market expects that this major adjustment of the profit requirement will have a material impact on the overall Hong Kong equity capital market.

After the promulgation of the proposed new profit requirement, many professional institutions in the market put forward their own suggestions. Although most professionals believe that maintaining a high level of market quality and ensuring that the Main Board can attract high-quality companies to list in Hong Kong is very important, considering the current economic situation affected by the epidemic, it is recommended to lower the proposed threshold of the new profit requirement. Therefore, as stated in the final consultation conclusions, the Exchange will increase the profit requirement by only 60%, i.e. the aggregated profit requirement for the three financial years will be changed to HK$80 million, the minimum aggregated profit requirement for the first two financial years of the track record period will be HK$45 million and the minimum profit requirement for the last financial year will be HK$35 million. The final profit requirement is much lower than the proposed profit requirement in the previous consultation document, and it provides more opportunities for companies to be listed in Hong Kong.

POSITIVE EFFECT OF THE NEW PROFIT REQUIREMENT

The author believes that the adjustment of the profit requirement will bring four positive effects. First, the increase in the profit requirement will substantially improve the quality of the listed companies on the Main Board in Hong Kong. According to the relevant information revealed in the consultation paper of the Exchange, based on the statistics obtained from Hong Kong listed companies during the period from 2016 to 2019, under both option 1 and option 2, it is expected that the number of listing applicants will reduce by 60%. However, more than half of the listing applicants have a small market capitalisation and their market capitalisation is below HK$700 million. Therefore, in the future, the market capitalisation of eligible Hong Kong Main Board listing applicant will be substantially increased and the average market capitalisation of the Main Board listing applicants will be more than HK$700 million, which is compatible with the current market capitalisation requirement and will also assist in combating the manufacture of shell companies for sale after listing.

Second, the increase in the profit requirement will further distinguish the functional difference between Main Board and GEM in Hong Kong. The companies that do not meet the listing criteria under the new profit requirement may consider applying for listing on GEM in Hong Kong. On 15 December 2017, the Exchange published the consultation conclusions on amending GEM Listing Rules to reposition GEM as an independent market designed for small or mid-sized companies. At the same time, the cash flow requirement for GEM listing applicants will increase from a minimum of HK$20 million to a minimum of HK$30 million, and the minimum expected market capitalisation at the time of listing will increase from HK$100 million to HK$150 million. Since there is no profit requirement for listing on GEM, it is a suitable choice for small or mid-sized companies. This will further distinguish the different service functions between Main Board and GEM and hence allow companies of different size to choose an appropriate listing platform.

Third, the increase in the profit requirement will further enhance Hong Kong’s status as a leading international financial centre. According to the information in the consultation conclusions of the Exchange, the increased profit requirement bridges the gap between the profit requirement for Hong Kong Main Board companies and that in other major overseas capital markets. As shown in the table below, after the adoption of the new profit requirement, the Hong Kong Main Board capital market will undoubtedly raise the threshold for companies to enter into the Hong Kong capital market. It will therefore enhance the status of Hong Kong as a world-class financial centre.

Fourth, the consultation conclusions adjust the profit requirement to a level that is compatible with the world’s major capital markets (such as the New York Stock Exchange and the Nasdaq market) and also help to ensure that Hong Kong’s listing profit requirement are compatible with the profit requirements in other international capital markets. For some companies that have been listed overseas wish to return to Hong Kong Main Board for listing, similar listing profit requirement will also help the companies fulfil the requirements under the listing rules of both places and encourage Chinese companies that have already listed overseas to return to Hong Kong for listing.

Meanwhile, the author is of the view that the increased profit requirement will definitely reduce the number of companies seeking to list in Hong Kong and affect the trading volume in Hong Kong’s equity capital market in the short term. Due to the significant adverse economic effect of the current pandemic, the income and profitability of many private companies have been severely impacted. Although the Exchange stated that it would implement the new profit requirement after 1 January 2022, there is uncertainty about whether the economies of Hong Kong and mainland China can recover in the next six months.

In any event, the reform of the profit requirement for Main Board listing by the Exchange has its historical inevitability, and it can also promote the alignment of the profit requirement and the market capitalisation standard for Main Board listing in Hong Kong. Despite the fact that the increased profit requirement will result in the reduction in the number of Main Board listing applicants in the short term and will have a negative impact on the Hong Kong capital market, the author believes that it is the right time for Hong Kong to increase the profit requirement at this moment and the new reform measures will help to improve the quality of listed companies on the Hong Kong Main Board and promote the sustainable development of Hong Kong capital market in the future. 

Profit attributable to shareholders in the most recent financial year

Profit attributable to shareholders in the most recent financial year

Profit attributable to shareholders in the most recent financial year

Current requirement

HK$20 million

HK$30 million

HK$50 million

Option 1 – 150%

HK$50 million

HK$75 million

HK$125 million

Option 2 – 200%

HK$60 million

HK$90 million

HK$150 million

 

Market

Three years profit in aggregate (HK$ million)

Final year profit (HK$ million)

Main Board in Hong Kong

80

35

Australian Securities Exchange

6

3

NASDAQ Global Select Market

85

17

New York Stock Exchange

93

16

Singapore Exchange Limited
(Main Board)

No requirement

170


 

Partner, Jeffrey Mak Law Firm


Ms. Ji Hui is the partner of Jeffrey Mak Law Firm. She is a Hong Kong qualified lawyer and has a Master of Law degree. She mainly specializes in corporate nance related legal services, including but not limited to bond issuance of large-scale state-owned enterprises and private enterprises, including public bonds, private placement bonds and perpetual bonds, etc, and initial public offering of the shares of Chinese enterprises on the main board or GEM board of Hong Kong Stock Exchange. She also represented Chinese enterprises to deal with various loan transactions and merger and acquisition transactions.