Hong Kong Stock Exchange proposes to change Main Board profit requirement
The Stock Exchange of Hong Kong Limited, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), has published a consultation paper on the Main Board Profit Requirement.
HKEX Head of Listing Bonnie Y Chan explains that the key purpose of the proposal to increase the profit requirement for a Main Board Listing is to enhance the distinction between a Main Board and GEM listing in Hong Kong, offer issuers clearer choice, and investors greater clarity.
The minimum profit requirement under Main Board Rule 8.05(1)(a) has not been changed since its introduction in 1994. Since the minimum market capitalisation requirement under Main Board Rule 8.09(2) was increased from $200 million to $500 million in 2018, the Exchange has seen an increase in listing applications from issuers that marginally met the Profit Requirement, but had relatively high proposed market capitalisations.
The Exchange believes this misalignment of the Profit Requirement, with the increased Market Capitalisation Requirement, has raised regulatory concerns as to the quality of companies seeking Main Board Listings.
Due to these factors, the Exchange is proposing:
- Option 1: to increase the Profit Requirement by 150%, based on the percentage increase in the Market Capitalisation Requirement in 2018. The minimum profit attributable to shareholders will be increased, from $20 million to $50 million in respect of the most recent financial year of the trading record period, and from $30 million to $75 million in respect of the two preceding financial years.
- Option 2: to increase the Profit Requirement by 200%, based on the approximate percentage increase in the average closing price of the Hang Seng Index from 1994 to 2019. The minimum profit attributable to shareholders will be increased, from $20 million to $60 million in respect of the most recent financial year of the trading record period, and from $30 million to $90 million in respect of the two preceding financial years.
Given the impact that such proposal might have on companies which have already commenced their listing preparations, the Exchange also proposes introducing transitional arrangements if the increment proposal is adopted. The Exchange will also introduce temporary conditional relief from the increased Profit Requirement to facilitate the listing of quality companies whose financial results have been temporarily and adversely affected by the COVID-19 pandemic and the economic downturn.
The Exchange invites broad market feedback on the substance of its proposals. The two-month public comment period will end on Monday, 1 February 2021.