Listing readiness: financials, governance, structure

Three questions come up first with any board considering Hong Kong: whether the numbers qualify, what the board has to look like, and how much of the existing financial reporting carries across. The Exchange answers all three in rule text, and that is where we start. What follows draws on the Main Board rule text itself, with rule numbers included so your advisers can check every line.

Suitability comes first

Before any threshold gets measured, the Exchange applies a judgement call. Rule 8.04 states that both the issuer and its business must, in the Exchange's opinion, be suitable for listing¹. That sits above the numerical tests. A company that clears every figure below can still face questions about its business model or its regulatory position.

Three financial tests, one of which must be met

Rule 8.05 requires a new applicant to satisfy one of three tests: the profit test, the market capitalisation/revenue/cash flow test, or the market capitalisation/revenue test¹. All three share a foundation. Each requires a trading record of not less than three financial years, management continuity for at least the three preceding financial years, and ownership continuity and control for at least the most recent audited financial year¹. Ownership that changed in the most recent audited year, or management that changed within three years, raises a threshold question before the figures even matter.

The profit test is the one most mid-market companies measure themselves against. Profit attributable to shareholders must be not less than HK$35,000,000 in the most recent year and not less than HK$45,000,000 in aggregate across the two preceding years¹. Profit from activities outside the ordinary and usual course of business is excluded, and so are associated companies and other entities recorded using the equity method of accounting¹.

The market capitalisation/revenue/cash flow test is for companies generating cash but not yet the required profit. It asks for a market capitalisation of at least HK$2,000,000,000 at the time of listing, revenue of at least HK$500,000,000 for the most recent audited financial year, and positive operating cash flow of at least HK$100,000,000 in aggregate over the three preceding financial years¹.

The market capitalisation/revenue test drops the cash flow requirement and doubles the size threshold: a market capitalisation of at least HK$4,000,000,000 at the time of listing and revenue of at least HK$500,000,000 for the most recent audited financial year¹.

Market capitalisation is measured at the time of listing¹. Companies relying on the second or third test carry pricing risk into the qualification itself.

When three years is not available

Under Rule 8.05A, the Exchange will accept a shorter trading record under substantially the same management, but for the market capitalisation/revenue test only¹. Two conditions apply. The directors and management must have sufficient and satisfactory experience of at least three years in the applicant's line of business and industry, disclosed in the listing document, and there must be management continuity for the most recent audited financial year¹. A young company taking this route is also committing itself to the HK$4,000,000,000 market capitalisation threshold¹.

The board the Exchange expects to see

Board composition sits in Chapter 3, in specific numbers rather than principles. Rule 3.10 requires every board of a listed issuer to include at least three independent non-executive directors, at least one of whom must have appropriate professional qualifications or accounting or related financial management expertise². Rule 3.10A adds that independent non-executive directors must represent at least one-third of the board². For a board of nine, that is three; for a board of ten, four².

The Exchange's note to Rule 3.10 describes financial expertise as experience as a public accountant or auditor, or as a chief financial officer, controller or principal accounting officer of a public company, together with experience of internal controls and of audited financial statements of public companies². The board decides case by case whether a candidate qualifies².

The requirement does not end at listing. Under Rule 3.11, if the number of independent non-executive directors falls below three, falls below one-third of the board, or the financially qualified director is lost, the issuer must immediately inform the Exchange, publish an announcement, and fill the gap within three months².

The audit committee has its own rules under Rule 3.21. It must comprise non-executive directors only, with a minimum of three members, a majority of them independent, and it must be chaired by an independent non-executive director². At least one member must carry the financial expertise described in Rule 3.10(2)².

For a founder-led North American or Australian company, these numbers usually mean recruiting independent directors before the application is filed. Candidates who know the Listing Rules and are willing to chair an audit committee are not found quickly.

Comply or explain

The Corporate Governance Code sits at Appendix C1 to the Listing Rules and has two layers. The first is mandatory: issuers must include a corporate governance report prepared by the board in their annual reports, containing all the information in Part 1 of the Code, and any failure to do so is a breach of the Listing Rules³. The second layer is the code provisions, which run on a comply or explain basis³.

Issuers must state whether they have complied with the code provisions for the relevant accounting period, in both their annual reports and their interim reports³. An issuer may deviate from a code provision, provided it sets out in the Corporate Governance Report the considered reasons for the deviation and explains how good corporate governance was achieved by other means, with a clear rationale for the alternative steps and their outcome³. Interim reports may refer back to the preceding annual report, provided any new deviation is explained³.

A company need not conform to every provision, but it must be prepared to write down, twice a year, exactly why it does not.

Accounting standards for the accountants' report

Rule 4.11 governs the financial history in the accountants' report. The results and statement of financial position must normally be drawn up under Hong Kong Financial Reporting Standards, International Financial Reporting Standards, or China Accounting Standards for Business Enterprises in the case of a PRC issuer that has adopted them for its annual financial statements⁴. The issuer must apply one of these bodies of standards consistently, and cannot change from one to another⁴.

A company reporting under a domestic framework outside those three will need its trading record restated, and the restated figures are the ones the Rule 8.05 tests get measured against¹⁴. Where restatement is needed, it belongs at the front of the preparation plan.

Where to start

We suggest three pieces of work before any adviser is engaged.

• Have your auditors restate three years of results under a standard accepted by Rule 4.11, then test them against each Rule 8.05 test with non-recurring items removed¹⁴.
• Map the board against Rules 3.10, 3.10A and 3.21: count the independent non-executive directors, confirm one qualifies as financially expert, and name the audit committee chair².
• Read the code provisions in Appendix C1 against current practice and list each deviation you would need to explain³.

The output is a gap list. The next step is to hand it to a Hong Kong sponsor and a reporting accountant and ask each to confirm, in writing, which gaps must be closed before the application is filed and which can wait until after listing.

Next in this stage: The Hong Kong IPO timeline, stage by stage

Request a confidential conversation

The Education Centre→