Introduction

On 27 November 2020, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued a consultation paper on the proposed changes to Rule 8.05(1)(a) of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) to increase the profit requirement for listing on the Main Board of the Stock Exchange (the “Main Board”) and introduce temporary conditional relief from the profit requirement if the proposal to increase the profit requirement is adopted (the “Consultation Paper”), and invited public comments on the proposal.

Under the Consultation Paper, the Stock Exchange proposed to increase the profit requirement from HK$50 million to HK$125 million, by 150%, or to HK$150 million, by 200%. Further details of the Consultation Paper are set out in our article published in December 2020: HKEX proposes to increase the profit requirement for a Main Board listing.

The consultation period ended on 1 February 2021. ONC Lawyers have submitted a response to the Consultation Paper and our views are summarised in this article.

Opposition to the increase of profit requirement

ONC Lawyers do not agree with the proposal to increase the profit requirement by either 150% to HK$125 million or 200% to HK$150 million for the reasons set out below.

Excluding smaller companies from listing on the Main Board and limiting their business development

Following the introduction of new chapters to the Listing Rules in 2018, the Stock Exchange has in recent years tried to attract companies from overseas (including the Mainland China) and companies engaging in different industries, in particular biotech companies and new economy companies, to list in Hong Kong. We welcome the agenda of attracting potential listing applicants with diverse backgrounds. At the same time, we consider that the opportunities for smaller companies engaging in other industries in Hong Kong, Asia and other regions to list on the Main Board and to raise capital in Hong Kong for their business development should not be deprived of. It is believed that, the Stock Exchange, as the sole operator of stock market in Hong Kong, should take the role of supporting and facilitating the growth of companies in Hong Kong, in particular the small and medium-sized companies. Increasing the current profit requirement significantly would inevitably exclude this group of companies from listing on the Main Board and limit their business development, which in turn, would not be in the interest of Hong Kong as a whole.

Weakening the competitiveness of the Main Board

The Main Board’s current profit requirement is the third highest amongst the selected overseas main markets specified in the Consultation Paper. Increasing the profit requirement by either options will result in the Main Board having the highest profit requirement, which is far higher than those of NASDAQ (being HK$85 million) and NYSE (being HK$93 million), and weaken the competitiveness of the Main Board as potential Main Board applicants would seek to list in overseas markets instead of the Main Board. Diversity of listing issuers and investors is a key to the prosperity of Hong Kong stock market and risk management. The proposal of increasing the profit requirement significantly would drive away a group of companies of different backgrounds from listing on the Main Board, which is not beneficial to the long term development of the local financial market and relevant industries.

The proposal would not effectively tackle the listed company quality issues

It is understood that the proposal is aimed at improving the quality of the Hong Kong stock market. However, it would be unfair to attribute the quality issues to listing of smaller companies. Being a listing applicant or listed company which is smaller in size in terms of profits, market capitalisation, operation or other financial or operational figures at a particular point of time does not necessarily mean that such company is of poorer quality. The growth potentials of companies which are smaller in size, the prospects of the industries they are engaged in and their needs for capital raising and apply for listing on the Main Board for the purpose of long-term business growth should not be totally denied.

Listing on GEM is not an alternative

The Stock Exchange suggested that smaller companies which cannot meet the increased profit requirement as proposed can still access the capital market by listing on GEM. In reality, listing on GEM is not an attractive option for these listing applicants due to the more stringent post-listing compliance obligations and the inability to be transferred to the Main Board in an efficient manner in terms of cost and workload.

Not an appropriate time to increase the profit requirement

In recent years, the Hong Kong economy was, to a larger extent, adversely affected by the social movement in Hong Kong commenced in 2019, the outbreak of COVID-19 and the intense relations between China and the U.S. In 2009, the market was adversely affected by the financial crisis and the Stock Exchange proposed to consider granting waivers to the Main Board listing applicants from complying with the profit test requirements. The current market condition is similar to that of 2009, if not worse. It would appear unreasonable for the Stock Exchange to refuse to grant waivers to applicants from complying with the current profit requirement, and to raise the profit requirement substantially to hinder companies from listing on the Main Board. In view of the current economic situation, we consider that it is not an appropriate time to increase the profit requirement. It is suggested that the Stock Exchange should re-consider the extent of the proposed increase of the profit requirement and the timing of effecting any proposed increase of the profit requirement, and where necessary, to publish another consultation paper in respect of any proposed change in the profit requirement when the market fully recovers from the pandemic.

Suggestion of decreasing the minimum market capitalisation

The high implied historical P/E ratio, being one of the main reasons for the subject proposal mentioned in the Consultation Paper, is mainly due to the drastic increase in the minimum market capitalisation requirement from HK$200 million to HK$500 million in 2018, which was viewed by many as a controversial decision. We consider that, increasing the profit requirement to lower the implied historical P/E ratio will likely further lower the attractiveness of the Main Board rather than rectifying the problems. As such, we suggest that the Stock Exchange should take this opportunity to review the decision in 2017 which took effect in 2018 and consider to decrease the minimum market capitalisation requirement from HK$500 million to HK$300 million.

Granting of temporary relief

Many companies have been facing great difficulties to survive in the market recently. In view of the volatility of the pandemic situation, it is difficult to foresee when the global economy would recover fully from the pandemic. In the circumstances, we strongly suggest the Stock Exchange to grant the current and potential listing applicants temporary relief from the profit requirement even if the current profit requirement is not increased, similar to what the Stock Exchange did in 2009 in response to the financial crisis. Otherwise, some of the listing applicants may have to suspend their listing plans or to consider to list in other financial markets with lower profit requirements and/or with more appropriate relief measures.