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GL35-12

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HKEX GUIDANCE LETTER
HKEX-GL35-12 (May 2012) (updated in July 2013 and April 2019)

Subject Guidance on profit forecast and special dividend
Listing Rules Main Board Rules 2.13(2), 4.04(1), 8.06 and 11.16 to 11.19 and Paragraph 34(2) of Part A of Appendix 1

GEM Rules 7.03(1), 11.10, 11.11, 17.56(2), 14.28 to 14.31 and Paragraph 34(2) of Part A of Appendix 1
Related Publications Guidance Letter HKEX-GL25-11 – Conditions for waivers from strict compliance with Main Board Rule 4.04(1) and GEM Rules 7.03(1) and 11.10 (“GL25-11”)

Guidance Letter HKEX-GL58-13 – Guidance on confirmations required on the accountants’ report, pro forma financial information and profit forecast in Application Proofs and subsequent draft listing documents (“GL58-13”)

Guidance Letter HKEX-GL98-18 – Guidance on disclosure in listing documents - listing applicants' names; statistics and data quoted; listing document covers; non-disclosure of confidential information; and material changes after trading record period (“GL98-18”)
Author IPO Vetting Team

Important note: This letter does not override the Listing Rules and is not a substitute for advice from qualified professional advisers. If there is any conflict or inconsistency between this letter and the Listing Rules, the Listing Rules prevail. You may consult the Listing Department on a confidential basis for an interpretation of the Listing Rules, or this letter.

1. Purpose
1.1 The purpose of this letter is to provide guidance and clarification on profit forecast and payment of special dividend after listing based on distributable profits for any period before listing which includes an unaudited period.
1.2 The Exchange expects new applicants to follow this guidance letter when preparing their listing applications. An Application Proof that does not follow this guidance may be considered not substantially complete as required under the Listing Rules (added in April 2019).
2. Relevant Listing Rules (deleted in April 20191)
3. Guidance

Profit forecast and profit estimate
3.1 It is best practice for all financial information included in a new applicant’s listing document to be audited. Therefore, if a new applicant wishes to provide more recent financial results beyond that required under the Main Board Rules 4.04(1) and 8.06 (GEM Rules 7.03(1), 11.10 and 11.11), it should include audited financial results of the stub period rather than a profit estimate covering the same period. New applicants should also refer to GL98-18 for guidance on disclosure of material changes after trading record period.
3.2 A profit forecast means any forecast of profits or losses. It also includes a profit estimate which is an estimate of profits or losses for a financial period which has ended but for which the results have not yet been audited or published. Where a new applicant discloses its unaudited net profit/ loss figure or other financial figures which can explicitly or implicitly result in disclosure of the new applicant’s estimated level of profits/ losses since the latest audited period end (e.g. disclosure of both revenue and net profit margin), this will constitute a profit forecast/ estimate and therefore subject to the relevant requirements under the Listing Rules2.
3.3 The inclusion of a profit estimate in a listing document is only required when a new applicant applies for a waiver from compliance with Main Board Rule 4.04(1) (GEM Rules 7.03(1) and 11.10)3. Otherwise, the inclusion of a profit forecast in a listing document is a commercial decision. Accordingly, the absence of a profit forecast is not a risk and should not be disclosed as a risk factor.
3.4 As with any information included in a listing document, the profit forecast must be prepared to such a standard as would justify reasonable reliance upon it by investors4. The directors and sponsors have a responsibility to ensure that any expert report included in the listing document is a fair copy of or extract from that prepared by the expert, fairly represents the expert’s view and does not omit material facts of an unfavourable nature or fails to accord them with appropriate significance. As such:
(i) the principal assumptions on which a profit forecast is based must be reasonably specific to the new applicant5 and disclosed in the listing document6;
(ii) the sponsors should conduct due diligence in relation to the expert’s background and experience, and the reasonableness and appropriateness of their scope of work performed;
(iii) the accounting policies and calculations for the profit forecast must be examined and reported on by the reporting accountants and the report must be set out in the listing document; and the listing document should not contain any disclaimer by the reporting accountants warning investors not to rely on the profit forecast7; and
(iv) under no circumstances may there be any language, disclaimer or risk factor in the listing document that serves to curtail the application of the Listing Rules in a manner that is not consistent with the responsibilities of the directors and sponsors.
Payment of a special dividend after listing based on distributable profits for any period before listing which includes an unaudited period (“Pre-Listing Period”)
3.5 Where a new applicant proposes to pay a special dividend to its pre-listing shareholders after listing based on the distributable profits for the Pre-Listing Period (“Special Dividend”), it must disclose in its listing document the Pre-Listing Period, the expected dividend payout ratio, who is entitled to the Special Dividend, timing of payment and how the Special Dividend will be funded.
3.6 New applicants should perform a special audit post listing (“Special Audit”) to ascertain the accuracy of the distributable profits for the Pre-Listing Period and hence the accuracy of the amount of the Special Dividend, regardless of whether the estimated amount of Special Dividend is disclosed in the listing document. The new applicants should also disclose in the listing document that they will (i) perform the Special Audit on the Pre-Listing Period and when the Special Audit is expected to be completed; and (ii) announce the amount of the Special Dividend payable determined by the Special Audit.
3.7 If the new applicant discloses additional information on the Special Dividend beyond those required in paragraph 3.5 above such that the new applicant’s estimated level of profits/ losses since the latest audited period end can be derived from the Special Dividend8, the new applicant must disclose a profit forecast in the listing document9 (see paragraph 3.2 above).

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1 This section has been deleted to avoid duplication of the relevant Main Board and GEM Rules. Reference to the relevant Listing Rules is included in the body of the guidance letter.
2 Main Board Rules 11.17 and 11.18 and Paragraph 34(2) of Part A of Appendix 1 of the Main Board Rules (GEM Rules 14.29 and 14.30 and Paragraph 34(2) of Part A of Appendix 1 of the GEM Rules).
3 Main Board Rule 4.04(1) (GEM Rules 7.03(1) and 11.10) requires the new applicant to include in its accountants’ report its consolidated results for each of the three financial years immediately preceding the issue of the listing document. The waiver conditions that we would impose when granting a waiver to this rule are set out in GL25-11.
4 Main Board Rule 2.13(2) (GEM Rule 17.56(2)).
5 For example, “downturn of the economy” is overly general, whilst “changes in inflation rate and commodities price in the case of an applicant in the mining industry” is considered specific.
6 Main Board Rule 11.19 (GEM Rule 14.31).
7 New applicants should refer to GL58-13 for relevant guidance.
8 Main Board Rules 11.16 and 11.17 (GEM Rules 14.28 and 14.29).
9 Main Board Rule 11.18 (GEM Rule 14.30).