HKEX Raises Main Board Profit Requirement to HK$80 million
The first increase since 1994 set to take effect on 1 January 2022
Background
On 20 May 2021, The Stock Exchange of Hong Kong Limited (Exchange) published its conclusions on the consultation paper on the proposed increase of the profit requirement for new listings on the Main Board (Profit Requirement).
The Exchange concluded to proceed with an increase to HK$80 million after considering the responses received.
A summary of the original consultation proposals can be found in our previous article here.
Market feedback
The Exchange received 115 non-duplicated responses of which almost 70% were institutional respondents and slightly more than 30% were individual respondents. Less than 20% of the respondents agreed to increase the Profit Requirement.
Those who did not support the proposal did so for various reasons, such as due to concerns for the ability of small and mid-sized companies (SMEs) and traditional companies to list on the Main Board, as well as the competitiveness of Hong Kong vis-à-vis other major stock exchanges.
Changes at a glance
The upcoming changes in summary are as follows:
Increased minimum aggregate profit: The minimum aggregate profit threshold will be increased from HK$50 million to HK$80 million, ie an increase of 60% (Modified Profit Increase). This was modified from the Exchange's original proposal to raise the Profit Requirement by 150% (Option 1) or 200% (Option 2).
New profit spread and threshold: The spread of profit requirement for the first two financial years of the track record period and the final financial year will be adjusted to 56%:44% (Profit Spread). In other words, the minimum aggregate profit for the first two financial years of the track record period will be HK$45 million, and that for the final financial year will be HK$35 million.
The table below summarises the current and new Profit Requirement:
This will result in an implied historical P/E ratio of around 14 times, which sits between the spectrum ranging from the lower end represented by Option 2 (8 times) and the higher end constituted by the current Profit Requirement (25 times). This is also in line with the average P/E ratio of the Hang Seng Index between 1994 and 2020.
The Modified Profit Increase will become effective from 1 January 2022. The Exchange will be prepared to review and grant relief from the Profit Spread on a case-by-case basis.
On the basis of the Modified Profit Increase, out of 745 Main Board listing applications which relied on the Profit Requirement submitted between 2016 and 2019 (both inclusive), 35% (compared to 59% under Option 1 and 65% under Option 2) would have been ineligible to list on the Main Board.
The Exchange also states that it will closely monitor the situation and will consider to review the Profit Requirement if needed.
The way forward
The Exchange is keen to act as a gate-keeper to ensure an orderly market and to protect the investing public. The Exchange also will continue cooperating with the Securities and Futures Commission (SFC) to combat various regulatory matters discussed in the consultation paper and the consultation conclusions. Concurrent with the Profit Requirement consultation conclusions, both the Exchange's Consultation Conclusions on disciplinary powers and sanctions and the SFC and the Exchange's Joint Statement in relation to IPO-related misconduct were issued on the same date, reflecting the approach taken by the Exchange and the SFC aimed at addressing some of the regulatory concerns discussed in the Profit Requirement consultation paper.
In addition, the Exchange will launch a review of GEM and its positioning and market perception, and may publish a consultation paper in due course to solicit market feedback on prospective reforms.
