16 December 2019

Muse Group Holdings Limited – Decision of the Listing Review Committee
On 9 December 2019, the Listing Review Committee heard an application by Muse Group Holdings Limited (the Company) for a review of the decision of the Listing Committee, set out in a letter dated 12 September 2019, rejecting the Company’s application to list on the Main Board.
Having carefully considered all the facts and evidence, and all the submissions (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 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 Group currently operate seven retail stores in two clusters: one in Tsim Sha Tsui and one in Causeway Bay, under the brand name “Muse”. The Group sells luxury/branded fashion products. About 90% or more of its revenue comes from sales of apparel, footwear and handbags.
2.    The Group intends to raise net proceeds of approximately $145 million by listing on the Main Board. Of this, about half is intended for use to open six new retail stores across Hong Kong between 2020 and 2022 (comprising about: (i) 28.3% or $40.9 million mainly for purchase of inventory; (ii) 18.6% or $26.9 million mainly for decoration, rental and equipment costs; and (iii) 3.3% or $4.8 million mainly for staff cost) (the Store Expansion Plan). Other major proposed uses of the proceeds include expanding the Group’s e-commerce business, marketing and brand management, enhancing its warehouse space, transportation fleet and procurement team.
3.    The Group’s revenue has increased slightly over the Track Record Period, from $1,266 million in FY2017 to $1,331 million in FY2019.
4.    The Company’s directors believe that there is and will be market demand to support the plan to open six new stores, particularly from overseas visitors (including from the PRC). Amongst other things, the Company relies on a forecast from an industry consultant which expects retail sales of luxury/branded fashion products to increase at a CAGR of 5.6% from 2019 to 2023. The forecast takes into account, amongst other things, expected growth in the tourism industry and affordability of residents in the PRC and Hong Kong.
Listing Department’s concerns
5.    The Listing Department considered that there is insufficient basis to justify the demand for the additional retail stores. Amongst other things, the Listing Department noted that the Group has only recorded minimal revenue growth during the Track Record Period, despite increasing from five to seven stores, and the Group has underperformed the market in that time. The Group had little or no same-store growth rate from FY2017 to FY2019, and had closed down two retail stores in the Track Record Period. The Listing Department also noted that the retail market has been and is likely to continue to be negatively impacted by the economic uncertainty and decline in the tourism from mainland China arising from protests in Hong Kong.
6.    The Listing Department considered that this is a borderline case, but that on balance the Company had not satisfactorily demonstrated the commercial rationale for listing, and the Company was thus unsuitable for listing under Rule 8.04.
Applicable Listing Rules and guidance
7.    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.
8.    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. Paragraph 4.1 of GL68-13A says consideration may be had as to 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.
Listing Committee’s decision
9.    The Listing Committee decided that the Company failed to demonstrate the commercial rationale for its expansion plan and accordingly that the Company is not suitable for listing under Rule 8.04.
Main arguments before the Listing Review Committee
The Company’s submission in summary
10.    The Company submitted, amongst other things, that the Group had outperformed the market – it referenced its own CAGR of 10.2% between FY2014 and FY2019 against an industry CAGR of 0.9% in approximately the same period. Despite the economic downtrend in Hong Kong, the Group’s overall revenue in the third quarter of 2019 was up over 3% from the same quarter the previous year. The Company submitted that, although its more recent revenue growth lagged behind the industry as a whole, this was because the Group did not (and, due to the absence of funds, was unable to) open new retail stores in order to tap into revenues from customers shopping in areas other than those in which the existing clusters are located.
11.    The Store Expansion Plan targeted the development of clusters in specific places in Hong Kong, and would allow the Group to penetrate into new areas and capture a higher market share and achieve higher revenue growth.
12.    Looking only at statistics for same-store growth rates would not present a full picture, as clusters are expected to generate a disproportionate volume of sales in the main store.
13.    Although there has been a fall in tourism numbers in 2019, particularly from the PRC, the Group’s sales increased during April to September 2019 compared with the corresponding period in 2018, primarily attributable to the Group’s loyal bulk purchase customers. The Company submitted that whilst bulk purchase customers may communicate and place orders with the Group online or by telephone, they would still visit the physical stores in order to look at or try products before placing a purchase order. Having further stores and clusters in Hong Kong would help to increase growth both from individual retail customers and bulk purchase customers.
14.    The Company was optimistic that the Group could overcome the downturn due to, amongst other things, continued economic growth in the PRC, its sales to bulk purchase customers, and an expected recovery in the retail market and tourism industry when the protests and related issues die down in Hong Kong. It was also submitted that the current unrest in Hong Kong would enable the Group to negotiate more favourable rents for its existing and future leases.
15.    During the hearing, the Company’s representative (being the founder, majority shareholder and Chief Executive Officer) submitted that it had never been intended that the Company would become a shell company, and he would therefore voluntarily offer an undertaking to maintain absolute control and a majority shareholding of at least 51% for at least five years after listing (the Undertaking).
The Listing Department’s submission in summary
16.    The Listing Department considered that the Company’s presentation of financial results and statistics in its submission to the Listing Review Committee was misleading, as they masked the fact that the Company’s growth during the Track Record Period has been flat, by cherry-picking data and excluding certain costs or other unfavourable data. Amongst other things, the Listing Department noted that looking at growth across a period longer than the Track Record Period would distort average growth figures as it would include the period of high growth before the Track Record Period – the more recent growth figures are likely to be a better indicator of future growth and are weaker.
17.    The Listing Department noted that the retail downturn in Hong Kong had continued and the outlook remained uncertain, and even if there could be resilience to the retail downturn through sales to bulk purchase customers, those customers communicate with the Group’s sales personnel online, rather than in physical stores, so the opening of additional retail stores should be irrelevant to growth in sales to bulk purchase customers.
Listing Review Committee’s views
18.    Having considered all the submissions, the Listing Review Committee considered that this was not only a borderline case (as noted by the Listing Department) but also a very difficult case. The Listing Review Committee considered that the Company had demonstrated a commercial rationale for listing, and its intended use of proceeds is consistent with the Company’s business strategy.
19.    The key issue relates to the Company’s Store Expansion Plan. On this issue, the Listing Review Committee noted that the Company had continued to achieve positive sales growth, albeit modest, during the third quarter of 2019, in what has undoubtedly been a challenging retail environment in Hong Kong. The Company submitted that it expected growth to continue in the remainder of the current financial year. The Company further submitted that in order to ensure continuous growth of the Group, the Company would be required to increase its purchases from its 240 brands suppliers, thus necessitating outlay of more cash. The Store Expansion Plan is consistent with such a strategy. Following a question by the Listing Review Committee, the Company confirmed during the hearing that, if the Company was permitted to continue with its application for listing, the Company was willing to include in its prospectus a formal profit forecast, reviewed by the Company’s reporting accountants, for the current financial year ending 31 March 2020 (the Profit Forecast).
20.    The continued growth in the current financial year was attributed primarily to bulk purchase customers. There were conflicting submissions from the parties on whether growth in sales to bulk purchase customers was sensibly achieved by expansion of retail stores, given the apparent preferment by such customers of online sales. In this regard, the Listing Review Committee considered that the Company’s expansion plan appeared to involve both the establishment of further retail stores and the development of its e-commerce business, although this was not apparent from the prospectus and may therefore also not have been apparent to the Listing Committee. The Listing Review Committee considered the Company’s submission that there could be synergies between these two selling methods, in that having more retail stores could help drive online sales, and having an enhanced e-commerce platform could help increase demand in the retail stores, was a reasonably held view. The Listing Review Committee also takes the view that sales through omnichannels is the modus operandi for retailing apparel and accessories these days. As such, the intended use of proceeds for the Store Expansion Plan is reasonable and consistent with the business development of the Company.
21.    In reaching its decision, the Listing Review Committee expects that, if the Company continues with its application for listing: (a) it should include the Profit Forecast in its prospectus (so that investors may know that the Company’s sales are not going to decline materially at least in the current financial year ending 31 March 2020), and (b) the Undertaking should be executed in favour of both the Exchange and the Company (in form and substance reasonably satisfactory to the Listing Department).
22.    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).