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This section comprises decisions on cases handled by the Listing Committee and/or the Listing Division, to enhance transparency and market understanding of their interpretation of the Listing Rules. Each decision was based on its specific circumstances and is not a precedent for future cases.
Effective from 1 January 2011, listing decisions will be published under a new naming format as illustrated below:
Before 1 January 2011 On or After 1 January 2011
Listing decisions published before 1 January 2011 continue to bear the old references.
LD Series Number First
Listing Rules/ Topics Particulars LD120-2018 03/2018 Main Board Rule 9.03(3)
GEM Rules 12.09 and 12.14
To provide guidance on why the Exchange returned certain listing applications LD119-2018 03/2018 GEM Rule 2.09 and Chapter 11 To provide guidance on why the Exchange rejected certain listing applications LD118-2018 03/2018
Main Board Rules 6.01(3), 6.10 and 13.24 Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24
HKEX LISTING DECISION
HKEX-LD120-2018 (March 2018)
Summary Parties Company A to Company D — Main Board and GEM listing applicants whose applications were returned by the Exchange in 2017 Issue To provide guidance on why the Exchange returned certain listing applications Listing Rules Main Board Rule 9.03(3)
GEM Rules 12.09 and 12.14
Related Publications HKEX-LD84-2014, HKEX-LD91-2015, HKEX-LD101-2016 and HKEX-LD106-2017 Decision The Exchange returned the listing applications
PURPOSE1. This Listing Decision in the Appendix sets out the reasons why the Exchange returned certain listing applications from 1 January to 31 December 2017. For the reasons listing applications were returned before this period, please refer to the listing decisions stated in "Related Publications" above.
APPLICABLE LISTING RULES2. Main Board Rule 9.03(3) (GEM Rule 12.09(1)) requires an applicant to submit a listing application form, an Application Proof and all other relevant documents under Main Board Rule 9.10A(1) (GEM Rules 12.22 and 12.23), and the information in these documents must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date.3. If the Exchange decides this information is not substantially complete, the Exchange will not continue to review any documents relating to the application. All documents, including Form A1 (Form 5A for GEM cases) (except for the retention of a copy of these documents for the Exchange's record) submitted to the Exchange will be returned to the sponsor (GEM Rule 12.09(2)).
Returned cases in 2017 Company Reasons for return Company A
(a GEM Applicant)
Company A had two businesses: (a) a trading business where it acted as a principal, bore the inventory and credit risks, and recorded revenue and cost of sales from the transactions; and (b) an agency business where it acted as an agent, did not bear any inventory and credit risks, and recorded agency income which was more profitable than the trading business.
The application was returned because the disclosure in the Application Proof aggregated the two segments into the trading business and had very little disclosure on the agency business. The agency business was not clearly distinguished from the trading business and the different risks and business models were not explained. As such, a reasonable investor cannot appropriately assess Company A's two businesses and make a fully-informed investment decision.
(a Main Board Applicant)
Company B provided brokerage and risk solutions services ("Brokerage Business").
In the last year of its track record period ("Year 3"), Company B started to invest in equity and structured products for its own account ("Proprietary Trading Business"), which accounted for a majority of its revenue and profit in Year 3. The Proprietary Trading Business was also expected to be more material to Company B going forward because Company B planned to expand this business segment.
The Application Proof was returned because there was insufficient disclosure on the Proprietary Trading Business in relation to (i) Company B's investment strategy; (ii) funding of investments; (iii) risk management; and (iv) the cost and the percentage level of interest in each investment and the actual performance/ return of the investments, to allow investors to make an informed assessment on Company B.
(a Main Board Applicant)
Company C provided system related services. Its proposed listing date was 16 January 2018 and it provided a profit forecast memorandum covering the year ending 31 December 2017.
The application was returned because Company C failed to provide, at the time of filing its Form A1, a profit forecast memorandum covering the period up to the forthcoming financial year end date after the date of listing, as required under Rule 9.11(10)(b). Based on its proposed listing timetable as stated in its Form A1, this period should have been the year ending 31 December 2018.
This is the same reason two listing applications were returned in 2014 and 2015. See details of Company K in HKEX-LD91-2015 and Company C in HKEX-LD101-2016.
(a GEM Applicant)
The information submitted by Company D was not substantially complete as required under GEM Rule 12.09(1) because Company D failed to include the required financial information in the Application Proof.
Based on the proposed timetable set out in Company D's Form 5A, the expected final prospectus date and the expected dealing commencement date are in April 2018. Accordingly, the accountants' report must include the financial information for the two years ending 31 December 2017 according to GEM Rules 7.03(1) and 11.10.
As the Application Proof only included financial information covering the two years ended 31 December 2016 and the seven months ended 31 July 2017, the information submitted by Company D was not "substantially complete".
This is the same reason five listing applications were returned in 2014 and 2016. See details of Company B and Company J in HKEX-LD91-2015 and Company D, Company E and Company F in HKEX-LD106-2017.
HKEX LISTING DECISION
HKEX-LD119-2018 (March 2018)
Summary Parties Company A to Company C — GEM listing applicants whose listing applications were rejected by the Exchange in 20171 Issue To provide guidance on why the Exchange rejected certain listing applications Listing Rules GEM Rule 2.09 and Chapter 11 Related Publications HKEX-GL68-13, HKEX-GL68-13A, HKEX-LD92-2015, HKEX-LD100-2016, HKEX-LD107-1 and HKEX-LD107-2017 Decision The Exchange rejected the listing applications
PURPOSE1. This Listing Decision in the Appendix sets out the reasons why the Exchange rejected certain listing applications from 1 January to 31 December 2017. For the reasons listing applications were rejected before this period, please refer to the listing decisions and guidance letters stated in "Related Publications" above.
APPLICABLE LISTING RULES2. Chapter 11 of the GEM Rules sets out detailed eligibility requirements which a new applicant must fulfill and state that both the applicant and its business must, in the opinion of the Exchange, be suitable for listing.3. GEM Rule 2.09 states that suitability for listing depends on many factors. Compliance with eligibility requirements under Listing Rules does not itself ensure an applicant's suitability for listing. You may refer to HKEX-GL68-13 and HKEX-GL68-13A which provide guidance on the factors that the Exchange would take into consideration when assessing whether an applicant and its business are suitable for listing under GEM Rule 11.06.
Rejection cases in 2017 Company Reasons for rejection Company A
(a GEM Applicant)
Company A operated a printing business.
The application was rejected on suitability grounds on a number of factors:• Company A's controlling and substantial shareholders had previously established, listed and disposed of a printing business. In particular, they sold their interests in this printing business shortly after their lock-up expired. This raised concern on whether the shareholders would be committed to nurture Company A in the long-run.• Company A did not substantiate its business need to substantially expand its facilities and human resources. In addition, Company A could have funded its expansion plan with internal sources, and did not demonstrate that it seem to need external funding. The use of proceeds was not commensurate with its historical and future business strategies.
(a GEM Applicant)
Company B operated restaurants in Hong Kong.
The application was rejected on suitability grounds since the sustainability of Company B's business was extremely uncertain due to the following factors:
Low and declining profit margin
During the track record period, half of Company B's restaurants were loss-making and some closed down. Company B's profit-making restaurants also recorded declining operating margins mainly due to the slowing economy and increase in rental and labour costs. Despite the various measures implemented to reduce cost and improve revenue, Company B's net profit margins remained low and below inflation. Assuming restaurant operating costs and headquarter overhead further increased in line with inflation, Company B may not be able to sustain its business after listing.
Susceptibility to escalating rental costs
All of Company B's restaurants operated on leased properties and rental expenses as a percentage of Company B's revenue had been increasing during the track record period. Rental cost in Hong Kong remains high and is a market threat to restaurant operators. Company B is particularly sensitive to escalating rental expenses given that (a) it recently closed down a full service restaurant due to rental increase; and (b) restaurant operators generally have lower bargaining power when negotiating lease renewals given the significant capital expenditure incurred to set up restaurants and the reinstatement costs in the event of non-renewal.
Short lease period
Most of the lease agreements of Company B's restaurants were for two to three years only without an option for renewal. As at the latest practicable date, a majority of Company B's restaurants lease agreements will expire in less than one year and Company B had not been able to reduce its rent when renewing its leases after the track record period. There is an imminent risk that these leases may be renewed on unfavourable terms.
(a GEM Applicant)
Company C was an entertainment content provider in Hong Kong which organised and produced concerts for its artistes and produced concerts for other concert organisers.
The listing application was rejected on eligibility grounds because Company C was not able to comply with the ownership continuity and control requirement under GEM Rule 11.12A(2) based on the following:(i) during its most recent financial year, one of its three controlling shareholders (the "Former Controlling Shareholder") ceased to be a controlling shareholder. The sponsor failed to demonstrate that the Former Controlling Shareholder was a passive shareholder during the relevant track record period; and(ii) after its most recent financial year but before the date of listing, there was a material change in the voting interests between the two remaining controlling shareholders, who constitute a group of controlling shareholders .
1 This does not include two GEM listing applications which were rejected by the Securities and Futures Commission under section 6(2) of the Securities and Futures (Stock Market Listing) Rules.
HKEX LISTING DECISION
HKEX-LD118-2018 (published in March 2018) (Updated in August 2018, October 2019 (Rule amendments))
Party Company A — a Main Board issuer Issue Whether Company A had a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24 Listing Rules Main Board Rules 6.01(3), 6.10 and 13.24 Decision Company A had failed to maintain a sufficient level of operations or sufficient assets to meet Main Board Rule 13.24. Accordingly, the Exchange commenced the delisting procedures under Rule 6.10
1. Company A and its subsidiaries (Group) were principally engaged in retail sales of second-hand motor vehicles (the Second-hand Vehicles Business), involving the Group purchasing through sale agents second-hand motor vehicles and putting them up for sale in a showroom or on the internet in Hong Kong. It had also started a money lending business (the Money Lending Business) about two years ago. The Group operated these businesses by a small number of employees.
2. Over the past five years, the Group's business performance and financial position had been deteriorating. The Group's revenue decreased by near 95% to less than HK$5 million. The Group had recorded net loss and negative operating cashflow. As at the latest financial year end, the Group had total assets and net assets of HK$50 million and HK$40 million respectively. Its assets comprised mostly cash, loan and interest receivables and a prepaid lease payment.
3. The Exchange queried whether Company A was maintaining sufficient operations or assets as required under Main Board Rule 13.24.
4. In response, Company A submitted that it was able to satisfy Rule 13.24 because:
a. Following relaxation of the relevant PRC regulation a few months ago, the Group commenced a business of wholesale distribution of new branded motor vehicles in the PRC (the Vehicles Wholesale Business). It sourced new branded motor vehicles in fleet from overseas suppliers and sold them to a small number of car dealers in the PRC on an indent basis.
b. According to Company A's forecasts, the Vehicles Wholesale Business would significantly increase Company A's revenue for the second half of the current financial year and the revenue from this business would triple for the next financial year. This was based on a few confirmed orders, non-legally binding framework agreements with a few customers, and an assumption about the average monthly increase in the sales volume during the forecast periods (for which Company A did not provide a clear basis). Company A expected to incur a loss for the current financial year and only record a minimal profit in the next financial year.
c. For the existing businesses, Company A would cease the Second-hand Vehicles Business and reallocate its resources to the Vehicles Wholesale Business. It would continue to generate minimal revenue from the Money Lending Business.
APPLICABLE LISTING RULES AND GUIDANCE MATERIALS
5. Main Board Rule 2.03 states that—
"The Listing Rules reflect currently acceptable standards in the market place and are designed to ensure that investors have and can maintain confidence in the market and . . ."
6. Main Board Rule 13.24 states that—
"An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."
7. Main Board Rule 6.01 states that—
"Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:—
. . .
(3) the Exchange considers that the issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of the issuer's securities (see rule 13.24). . ."
(Rules 6.01(3) and 13.24 were amended on 1 October 2019. See Note 1 below.)
8. Main Board Rule 6.10 states that—
"There may be cases where a listing is cancelled without a suspension intervening. Where the Exchange considers that any circumstances set out in rule 6.01 arise, it may:
(1) publish an announcement naming the issuer and specifying the period within which the issuer must have remedied those matters which have given rise to such circumstances. Where appropriate the Exchange will suspend dealings in the issuer's securities. If the issuer fails to remedy those matters within the specified period, the Exchange will cancel the listing. The Exchange may treat any proposals to remedy those matters as if they were an application for listing from a new applicant for all purposes, in which case, the issuer must comply with the requirements for new listing applications as set out in the Listing Rules; or
9. Listing Decisions (LD35-2012 and LD88-2015) describe the purpose behind Main Board Rule 13.24 and provide guidance on the application of the Rule:
". . .Rule 13.24 is intended to maintain overall market quality. Issuers that fail to meet this Rule are "blue sky companies" where public investors have no information about their business plans and prospects. This leaves much room for the market to speculate on their possible acquisitions in the future. To allow these issuers' shares to continue to trade and list may have an adverse impact on investor confidence.
. . .
When applying Rule 13.24 to issuers whose shares are trading on the Exchange, the Exchange generally allows their shares to continue to trade as long as they have an operation and meet the continuing disclosure obligations. If the Exchange were to suspend these issuers because of their low level of activities or assets values, public shareholders would have no access to the market for trading the issuers' shares. To balance the public shareholders' interests with the need to maintain market quality, the Exchange suspends trading only in extreme cases.
. . ."
10. Listing Decisions (LD115-2017 and LD116-2017) elaborate the criteria that the Exchange would consider to assess an issuer's compliance with the Rule:
". . .Rule 13.24 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities. Without quantitative criteria for sufficiency, this Rule calls for a qualitative test and is assessed based on the specific facts and circumstances of individual cases.
. . . to balance public shareholders' ability to access the market to trade in the security with the need to maintain market quality, the Exchange would suspend trading only in an extreme case. When making the assessment, the Exchange takes into account the current regulatory concerns and the acceptable standards in the market."
The Exchange treated cases with the following characteristics as extreme cases:
". . .
(a) a very low level of operating activities and revenue; for example the issuer's business does not generate sufficient revenue to cover its corporate expenses, resulting in net losses and negative operating cashflows;
(b) the current operation does not represent a temporary downturn, the issuer had been operating at a very small scale and incurring losses for years; and
(c) the assets do not generate sufficient revenue and profits to support a continued listing.
In these cases, the issuers are not operating substantive businesses, and the value of the businesses (excluding the listing status) is minimal, if any. There is a question whether the Rule requirement to carry on a sufficient level of operations or have assets of sufficient value is met. The Exchange considers it necessary to apply Rule 13.24 in these cases with a view to maintaining investors' confidence and overall market quality.
Once suspended, the issuer would be given a remedial period to submit a resumption proposal to demonstrate that it has a viable and sustainable business to re-comply with Rule 13.24. If the issuer fails to do so, it would be delisted according to the delisting procedures under Rules 6.01(3) and 6.10. . ."
11. Rule 13.24 imposes a continuing obligation on an issuer to maintain a sufficient level of operations or assets to warrant its continued listing. To meet this obligation, an issuer must satisfy the Exchange that it has a viable and sustainable business. For this purpose, an issuer must provide the Exchange with sufficient empirical evidence or compelling supportive information to support its case (for example, a track record of its business).
12. In this case, the Exchange considered that Company A had failed to comply with Rule 13.24 and this was an extreme case:
(a) The Group's existing level of operations had, for years, remained very low and recorded net losses and negative operating cashflows. Company A would cease the Second-hand Vehicles Business and did not expect the Money Lending Business to grow substantially in the future.
(b) Company A sought to rely on the Vehicles Wholesale Business and its revenue forecasts for the next two financial years to meet Rule 13.24. However, the Exchange noted that:
(i) The business model of the Vehicles Wholesale Business was substantially different from that of the Second-hand Vehicles Business. The Vehicles Wholesale Business was a business of wholesale distribution of new branded motor vehicles in the PRC conducted on an indent basis relying on a small number of car dealers, compared to the Second-hand Vehicles Business involving retail sales in Hong Kong of second-hand motor vehicles selected and acquired by the Group. The Vehicles Wholesale Business was, therefore, a new business of Company A, which commenced only a few months ago and lacked a track record.
(ii) The development of the Vehicles Wholesale Business was preliminary with uncertain potential. The customer base for the Vehicles Wholesale Business was limited. It was not clear how Company A would source new customers or enter into new sales agreements to support the business growth.
(iii) A significant portion of the revenue projections from the Vehicles Wholesale Business was based on non-legally binding framework agreements and assumptions about the monthly increases in sale volume which were not supported by signed agreements, committed sales orders or otherwise.
(c) Based on its latest financial report, the Group had total assets of HK$50 million and net assets of HK$40 million only, which comprised mainly cash, receivables and a prepayment. As noted above, the Group's assets had not generated sufficient revenue and profits to ensure Company A to operate a viable and sustainable business. Nor had Company A demonstrated that its assets would enable it to substantially improve its operations and financial performance.
13. The Exchange decided that Company A had failed to maintain a sufficient level of operations or assets of sufficient value to meet Rule 13.24. Accordingly, the Exchange commenced the delisting procedures under Rules 6.01(3) and 6.10.
14. According to Company A's subsequent submissions, a significant portion of the committed sales orders under the Vehicles Wholesale Business (noted in paragraph 4(b) above) was not delivered on schedule. The actual revenue from the Vehicles Wholesale Business for the corresponding period was substantially lower than its projected sales.
1. The amended Rule 6.01 states that:
“Listing is always granted subject to the conditions where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:-
(3) the Exchange considers that the issuer does not carry on a business as required under rule 13.24; or
The amended Rule 13.24 states that:
“(1) An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.
Note: Rule 13.24(1) is a qualitative test. The Exchange may consider an issuer to have failed to comply with the rule in situations where, for example, the Exchange considers that the issuer does not have a business that has substance and/or that is viable and sustainable.
The Exchange will make an assessment based on specific facts and circumstances of individual issuers. For example, when assessing whether a money lending business of a particular issuer is a business of substance, the Exchange may consider, among other factors, the business model, operating scale and history, source of funding, size and diversity of customer base and loan portfolio and internal control systems of the money lending business of that particular issuer, taking into account the norms and standards of the relevant industry.
Where the Exchange raises concerns with an issuer about its compliance with the rule, the onus is on the issuer to provide information to address the Exchange’s concerns and demonstrate to the satisfaction of the Exchange its compliance with the rule.
2. Rule 13.24(1) makes it clear that an issuer must carry out a business with a sufficient level of operations to warrant its continued listing. The issuer must also have sufficient assets to support its operations.
The Rule amendments would not change the analysis and conclusion in this case.