1 November 2019

Wonderscape Holdings Limited - Decision of the Listing Review Committee
On 16 October 2019, the Listing Review Committee heard an application by Wonderscape Holdings Limited (the Company) for a review of the decision of the Listing Committee, set out in a letter dated 26 July 2019, rejecting the Company’s application to list on the Main Board.
Having carefully considered all the facts and evidence, and all the submissions (both written and oral) presented by the Company and the Listing Department, the Listing Review Committee decided to overturn the decision of the Listing Committee and to allow the Company to proceed with its application for listing.
We set out below the Listing Review Committee’s reasons for its decision. Please note that this necessarily represents only a summary of the Listing Review Committee’s analysis, and does not purport to set out exhaustively the facts or address all of the arguments presented.
1. The Company and its subsidiaries (together, the Group) provide beauty treatment services and sell aftercare and cosmetic products. The Group also franchises its business in various cities in Asia, London and New York. Revenue for the Group comes primarily from its business in Singapore, and other Asian markets including Malaysia, the PRC and Hong Kong. Approximately 90% of revenue currently comes from the Group’s services businesses. Revenue from product sales is about 7% to 8%.
2. The Group plans to raise net proceeds of approximately $108 million from listing.
3. The Group intends to use the proceeds primarily for its expansion plans, namely to: (1) provide collateral to a prominent financial institution in Singapore (Bank A) in order to establish a merchant facility (the Bank Collateral) (approximately 43% of net proceeds); (2) develop, market and distribute its latest product (the Product Marketing), known as “TWO L(I)PS” (approximately 34% of net proceeds); and (3) establish a facility (the Training Facility) which can be used as both a training academy (e.g. for therapists) and a research and development facility (approximately 10% of net proceeds).
Applicable Listing Rules and guidance
4. Rule 8.04 provides that both the issuer and its business must, in the opinion of the Exchange, be suitable for listing. Rule 2.06 provides that suitability for listing depends on many factors, and reiterates the Exchange’s discretion to accept or reject applications for listing.
5. Guidance on factors which may be relevant in the Exchange’s assessment of suitability for listing can be found in, amongst other things, Guidance Letters HKEX-GL68-13 and HKEX-GL68-13A (GL68-13A). Suitability for listing is based on a qualitative review and there is no bright-line test. However, applicants will normally be expected to demonstrate adequately, amongst other things, the commercial rationale for listing, including by reference to their proposed use of listing proceeds, and their future objectives and strategies for business operations and growth. GL68-13A is directed at the Exchange’s concerns that the primary motivation for some listings is the listed status itself and the speculative activity and price volatility that it encouraged. It sets out examples of the characteristics of such issuers and the areas in particular it requires sponsors to provide a robust analysis. In this context it also expects the Listing Department to conduct a qualitative review of suitability, including an assessment of its business strategy and its commercial rationale for listing.
Listing Department concerns
6. The Listing Department had concerns regarding the commercial rationale of the Group’s expansion plans.
7. In respect of the Bank Collateral, it was noted that the Group had previously maintained a collateral-free merchant facility with Bank A and other banks, which provided instalment payment plans (IPP) to credit card customers of the banks. However, Bank A had in 2018 requested the Group to provide collateral for such a facility. As the Group did not provide the collateral, it was no longer able to accept payment through Bank A IPP, and sales from Bank A IPP declined by about 96%, or S$3.5 million. However, sales from IPP with other banks, in particular certain Bank B and Bank C, had increased, and the net decrease in IPP sales in 2018 was only 15% (S$1.4 million).
8. On an assumption that, by providing the collateral, Bank A IPP sales could be restored at 2017 levels, it appeared that the Group would generate additional after-tax profit of about S$0.5 million (under $3 million) per year. The Listing Department questioned the reasonableness of this use of such a substantial portion of the proceeds. It was not clear whether the opportunity cost of alternative investments for this sum had been considered.
9. In respect of the Product Marketing, the Listing Department considered that the Group had not substantiated the reason for incurring approximately $28 million on marketing. It was noted that total annual marketing expenses in the Track Record Period were about $10 million; the Group expected to cross-sell its products through its existing network; the Group was already marketing online and via social media without any particular additional expense; and the Group had only incurred about $4 million on marketing the relevant product between August 2018 and April 2019.
10.    Further, there was a concern that the prospects of the Group’s new products were highly uncertain. The Group has to date primarily been a services, rather than a products, business and so there was a concern about whether the Group had relevant experience. Demand for the new products was an unknown, and the Group forecasted a net loss for the relevant products in FY2019 and FY2020.
11. In respect of the Training Facility, it was noted that the Group was already able to train many therapists in the facilities currently available and the necessity for new premises for training had not been substantiated. In relation to research and development, it was noted that the Group had worked with third parties on product development, manufacture and testing, and had relatively limited research and development expenses.
Listing Committee decision
12. The Listing Department’s concerns as described above were shared by the Listing Committee. The Listing Committee considered that in relation to the Bank Collateral, the Company did not provide any cost benefit analysis with regards to the use of HK$46 million as collateral and it was unclear what would be the opportunity costs to the Group of locking up the $46 million; in relation to the Product Marketing, the Company had not substantiated why it needs to incur $28 million to promote the new brand; and in relation to the Training Facility, the Company had not substantiated the reasons to set up an integrated training and R&D facility. Based on the submission before it, the Listing Committee agreed with the Listing Department’s conclusion and rejected the Company’s application.
Main arguments before the Listing Review Committee
The Company’s submission in summary
13. The Company’s main submissions in relation to its expansion plans can be summarised as follows.
14. The Company submitted that its business strategy includes: increasing the profit margins of its existing outlets, in priority to expanding their number; using the opportunity afforded by the listing to expand and promote its own intimate personal care product range which presently accounts for only a small part of its business; accepting the terms of a credit card merchant facility from one of its banks which requires it to deposit cash collateral with the bank; and leasing and equipping new premises for its training and product development activities.
15. In relation to the Bank Collateral, the Company submitted amongst other things that revenues for treatment services are primarily derived from sales of prepaid packages, and the vast majority of customers pay by credit card, with Bank A as the card issuer preferred by the Group’s customer base. The Company did not want to have to provide collateral for the merchant facility but considered it a necessity in order to retain and win customers. The Company noted that the collateral was a deposit and so remained a valuable asset. Adding S$0.5 million per annum to the Group’s profit would be a worthwhile return.
16. In relation to the Product Marketing, the Company submitted the Group is following a natural expansion path by moving from its historical focus on services into sales of related products. The Group has long sold its own and selected other products for post-treatment care, and has recently made two key hires in respect of marketing, and accordingly has the relevant experience. The marketing plans seek to build a new customer base into which the Group’s other offerings can be cross-sold. The targeted product industry is substantial and independently forecasted to grow strongly. A substantial investment in marketing is common during the product introduction phase and it was essential for the Group to market aggressively in order to establish the Group and its product. The Company had provided in the prospectus a detailed breakdown of the anticipated expenses.
17. In relation to the Training Facility, the Company submitted that the Group has simply run out of space, and its existing facilities cannot cope with current demand and expected growth. Moving training to a separate facility would free up space at the headquarters for other business purposes. The Group will achieve cost-savings between July 2019 and December 2020 if it is able to bring its research and development in-house.
18. To the extent that any concerns remained, the Company submitted that they could be addressed by disclosure.
The Listing Department’s submission in summary
19. The Listing Department considered that the Company’s submissions did not satisfactorily address its concerns regarding the Company’s expansion plans, and the Company had not provided additional information to substantiate the commercial rationale for its listing. It maintained the views expressed in its report to the Listing Committee.
20. In relation to the Bank Collateral, the Listing Department questioned the reasonableness of applying 43% of the net proceeds to pay the collateral as the opportunity costs to the Group of locking up the sum were unclear.
21. In relation to the Product Marketing, the Listing Department did not challenge the Company’s business decision to develop its new product line, but queried the proposed use of proceeds, and the Listing Department reiterated its concerns about the prospects of the new business.
22. In addition, in relation to the Training Facility, the Listing Department questioned whether the savings of cost claimed by the Company could be achieved, as the proposed facility was not expected to be completed prior to the end of FY2020.
23. The Listing Department was not questioning the Company’s business strategy or its business decision to develop a new product line. The Listing Department was considering the Company’s plans on the use of proceeds with a degree of professional skepticism, and considered the plans did not look consistent with the Company’s history and therefore, was concerned whether they were justifiable. The Listing Department was not convinced that further disclosure could address its concerns, as the information that it would expect to see had not been produced by the Company through the vetting process or in its submissions. The Listing Department did, however, concede that the application was a borderline case.
Listing Review Committee’s views
24. The Listing Review Committee received and considered the written submissions from the Company and the Listing Department. During the hearing, both the Company and the Listing Department were given opportunities to make further verbal submissions and answer questions from members of the Listing Review Committee on its business strategy and newly launched products.
25. The Listing Department confirmed that its concerns did not relate to the Company’s business strategy and understood the Company’s intention to expand. However, the Listing Department questioned the way the Company proposed to expand because the amount of money it would commit to the expansion did not seem to be consistent with what it had done before and did not seem justifiable.
26. No concerns were raised by the Listing Department on the probability that the Company would only meet the minimum market capitalisation threshold by a small amount. The Listing Department confirmed that the Company’s valuation was not the basis for its recommendation of rejection. The Listing Review Committee therefore concluded that the Listing Department accepted that the Company meets the minimum requirements for profitability, continuity of management, market capitalisation on listing and value of new securities held by the public under Rules 8.05 and 8.09.
27. The Listing Department’s objection to the listing application, as presented to both the Listing Committee and the Listing Review Committee, referred to paragraphs 4.1 and 4.2 of GL68-13A. GL68-13A requires the Listing Department to examine an application with professional skepticism and in this regard, the Listing Department and the Listing Committee have certainly made such an examination. The Listing Review Committee noted that under paragraph 4.1 of GL68-13A (extracted below), a qualitative review on suitability may consider matters such as whether the listing is consistent with its business strategy, including the proposed use of proceeds and whether the applicant has genuine funding needs:
  “4.1    Since the publication of this guidance letter, we have observed that certain listing applicants and their sponsors have treated the characteristics we listed in paragraph 1.4 as a checklist. We emphasise that our focus is a qualitative review on the applicant’s suitability such as whether a listing of the applicant is consistent with its business strategy, including the proposed use of proceeds and whether the applicant has genuine funding needs……”
28. Considering all the written and verbal submissions, the Listing Review Committee did not consider that the Company had the characteristics of an applicant to which GL68-13A was principally directed, in that it appeared to the Listing Review Committee that the development of the underlying business, rather than obtaining listing status, was the Company’s motivation to apply for a listing. The application of paragraph 4.1 of GL68-13A and the analysis it expects should be seen in the context of GL68-13A as a whole and the issues it was designed to address. The Listing Review Committee found that the proposed listing of the Company is consistent with its business strategy, and considered the Company’s explanation of its business strategy including its proposed use of proceeds in relation to the Bank Collateral, Product Marketing and Training Facility appeared to have been carefully thought out by the Company and to be credible. It was evident that the Company’s growth had been funded in large part by its own discretionary cashflows. The proposed listing will provide a substantial new source of funding. It is to be expected that this will allow the Company to accelerate its business plans and to consider expenditures which are more substantial than it had been able to make in the past. This disparity between past and proposed expenditure is not of itself a disqualification for listing. Overall, the Listing Review Committee accepted that the Company has genuine funding needs.
29. The Listing Review Committee accepted that the expansion of the Company’s own intimate personal care products is at an early stage of development so that an assessment of it can only be made on the basis of projections and there can be no certainty that these projections will be achieved, and that the proposed credit card merchant facility will tie up capital, which in the absence of cross-selling or up-selling opportunities of its intimate care products and therapies, will only yield a modest return. These are both aspects of the Company’s application on which the Listing Department expressed concerns. However, upon a qualitative review of all the relevant facts and circumstances before it (including concerns of the Listing Department), the Listing Review Committee is of the view that the Company has sufficiently demonstrated a commercial rationale for its listing. Some of the Listing Department’s concerns (including detailed implementation of the business strategy including the Company’s proposed use of proceeds) may be addressed by additional disclosure in the prospectus.
30. For the reasons summarised above, the Listing Review Committee decided to overturn the decision of the Listing Committee and to permit the Company to continue its application for listing.
Please note that decisions of the Listing Review Committee do not represent binding precedents, and do not constrain the discretion of or otherwise bind the Exchange or other committees (including without limitation the Listing Review Committee in respect of other matters).