Capital Markets Quarterly

Capital Markets Quarterly - January 2024

2024-01-09

Howse Williams' Capital Markets Quarterly aims to provide you an overview of the various regulatory and market updates in the fourth quarter of 2023, with summaries of some of the key amendments in the rules and guidelines, as well as important decisions made by the regulatory authorities in Hong Kong. We will also highlight some of the major market transactions over the last 3 months.

A) Regulatory Update

The Stock Exchange of Hong Kong Limited (the "Exchange")

Amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules") and GEM Listing Rules

The proposals of the "Consultation Conclusions on GEM Listing Reforms" published on 15 December 2023 have been implemented and amendments to the Listing Rules have been made for the implementation of such proposals. Key changes to the Listing Rules include (a) introducing a streamlined transfer mechanism for eligible GEM issuers to transfer from GEM to the Main Board without the need to appoint a sponsor to carry out due diligence and produce a “prospectus-standard” listing document; and (b) exempting GEM transfer applicants from paying the Main Board initial listing fee.

The GEM Listing Rules have also been amended for the adoption of the abovementioned proposals. Key changes to the GEM Listing Rules are set out below:

Introducing a new streamlined transfer mechanism to enable eligible GEM issuers[1] to transfer to the Main Board without the need to appoint a sponsor to carry out due diligence or produce a “prospectus-standard” listing document;

Introducing a new alternative “market capitalisation/ revenue/ R&D test”[2] for an initial listing on GEM that targets high growth enterprises heavily engaged in research and development (R&D) activities;

Reducing the post-IPO lock-up period imposed on GEM issuers’ controlling shareholders to 12 months; and

Removing mandatory quarterly reporting requirements and aligning other continuing obligations of GEM with those of the Main Board[3].

Both the revised Listing Rules and GEM Listing Rules to implement the GEM listing reforms took effect on Monday, 1 January 2024.

Guide for New Listing Applicants

The Exchange published the Guide for New Listing Applicants (the “Guide”), which consolidated and enhanced all currently effective guidance letters and listing decisions related to new listing. Certain updates to the existing new listing guidance can be found here. Going forward, the Exchange will issue new guidance by way of updating the Guide instead of publishing separate/ standalone guidance letters and listing decisions. The corresponding guidance letters and listing decisions have been archived.

The Exchange has provided a clean version and a blacklined version (which highlights the abovementioned updated guidance) of the Guide.

The Guide is divided into six main sections and an annex:

Eligibility and suitability for listing;
Special listing regimes;
Disclosure in a listing document generally applicable to all New Listing applicants;
Specific topics relating to a New Listing application;
Other listing structures;
Other matters; and
Annex – streamlined listing decisions.

A copy of the Guide is available here.

Update to Guidance Letters

Following the "Consultation Conclusions on Proposals to Expand the Paperless Listing Regime and Other Rule Amendments" published in June 2023, a Guidance Letter HKEX-GL118-23 has been published to provide guidance on the manner in which documents must be electronically delivered to the Exchange for an application for authorisation of the registration of a prospectus in accordance with the Listing Rules and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). FAQs No. 119-2023 to 136-2023 have been updated to assist listing applicants and listed issuers to understand and comply with the relevant Listing Rules.

A Guidance Letter HKEX-GL117-23 was published by the Exchange in October 2023 setting out the framework for granting a waiver to allow an issuer to conduct an automatic share buy-back program on the Exchange and to continue the program throughout the Restricted Period[4].

The Exchange also updated Guidance Letter HKEX-GL116-23 which provides guidance on recommended disclosure of business valuation which forms a primary factor in the determination of the consideration and guidance on disclosure of the basis of consideration for notifiable transactions, regardless of whether an independent valuation is disclosed.

Consultation Paper on Severe Weather Trading of Hong Kong Securities and Derivatives Markets

In November 2023, the Exchange published a consultation paper on the proposed operational model and related arrangements for Hong Kong's securities and derivatives markets, for them to remain operational during severe weather conditions, with the view to maintain Hong Kong's markets to be available to investors regionally and internationally during regular trading hours.

Currently, market operation arrangements around severe weather events are linked to the severity of typhoon, rainstorm or "Extreme Conditions" warnings issued by Hong Kong local authorities. Since 2018, severe weather events have resulted in 11 instances of market-wide trading suspensions, four of which took place in 2023. These trading suspensions last between several hours and a full trading day.

Under the Exchange's proposals, severe weather conditions will no longer have automatic consequential impact on the continuity of trading. The Exchange intends for its securities and derivatives markets, including Southbound and Northbound Stock Connect, derivatives holiday trading and afterhours trading, to be open and available to all local, regional and international investors during severe weather conditions.

During a severe weather event, the trading, post-trade and listing arrangements will be substantially the same as those during regular trading days, with some necessary adjustments needed to ensure the market’s operational resilience, and the safety of market participants, as the provision of some services provided via physical outlets would be unavailable. For example, a buy-in exemption may be granted to Clearing Participants who are unable to deposit physical securities to the Exchange's clearing house for settlement purposes under severe weather conditions; the last registration date for some corporate actions be postponed if that day falls on a severe weather event.

Consultation Paper on Proposed Amendments to Listing Rules Relating to Treasury Shares

The Exchange also published a consultation paper on proposed rule amendments to introduce a new treasury share regime. The key proposals include:

Requirement to cancel repurchased shares removed, so that issuers may hold repurchased shares in treasury subject to the laws of their places of incorporation and their constitutional documents;
Resale of treasury shares by an issuer governed in the same manner as the Listing Rules that currently apply to an issue of new shares;
Fair market maintained, mitigating the risk of stock market manipulation and insider dealing by: (i) imposing a 30-day moratorium period to restrict a resale of treasury shares (whether on or off-market) after a share repurchase; and an on-Exchange share repurchase after an on-Exchange resale of treasury shares; and (ii) prohibiting a resale of treasury shares on the Exchange during the Restricted Period or if it is knowingly made with a core connected person; and
Consequential rule amendments made as follows:
- allowing new listing applicants to retain their treasury shares upon listing, with any resale of these shares subject to the same lock-up requirement as an issue of new shares;
- requiring issuers (being holders of treasury shares) to abstain from voting on matters that require shareholders' approval under the Listing Rules;
- excluding treasury shares from an issuer’s issued or voting shares under various parts of the Listing Rules (e.g. public float and size test calculations);
- requiring an issuer to disclose in the explanatory statement its intention as to whether any shares to be repurchased will be cancelled or kept as treasury shares; and
- clarifying that a resale of treasury shares by an issuer or its subsidiary includes resale of treasury shares through their agents or nominees.

The Exchange’s Disciplinary Actions

In the fourth quarter of 2023, the Exchange published sanctions in 8 cases which involve (i) transactions involving connected parties or failure to disclose and comply with procedural requirements, (ii) directors’ failure to safeguard listed issuer’s interests and cooperate in investigations, (iii) inaccurate and incomplete disclosure of financial information or delay in publication of financial results, (iv) inaccurate and incomplete disclosures in listing document and (v) deficiencies in the listed issuer’s internal controls and risk management systems. Listed issuers should exercise caution and put in place proper check and balance, and transaction monitoring mechanisms.

News release date	Issuer/ directors involved – summary of conduct

19 December 2023	A former director of Brilliance China Automotive Holdings Limited (Stock Code: 1114) The Listing Division conducted an investigation into the former director’s discharge of directors’ duties and obligations under the Listing Rules. The former director did not respond to the Division’s investigation and reminder letters. He failed to cooperate in the investigation. In addition to a public censure, a Director Unsuitability Statement was imposed against the former director.
12 December 2023	A former director of Xinjiang La Chapelle Fashion Co., Ltd. (in reorganisation) (Stock Code: 6116) In September 2021, the listed issuer discovered that the former director had appropriated RMB9.5 million of the listed issuer’s funds. The funds were transferred out of the listed issuer in 2019 purportedly as normal, routine payments to a customer. However, the customer immediately transferred the funds to a company of which the former director was the legal representative, director and substantial shareholder. The former director did not repay the appropriated funds. He also failed to respond to the Exchange's enquiries. The former director committed serious breaches of his duties to the listed issuer and obligations under the Listing Rules. In addition to a public censure, a Director Unsuitability Statement was imposed against the former director.
4 December 2023	Hong Kong Resources Holdings Company Limited (Stock Code: 2882) and eight directors Between June 2018 and March 2019, the listed issuer’s subsidiary granted loans to borrowers totalling $74.4 million. By early 2019, some interest repayments in respect of the loans had become overdue. The listed issuer's auditors raised concerns regarding the loans, noting that there were inadequate controls in place for the money lending business, and that the due diligence on the borrowers’ ability to repay was insufficient. The auditors were also concerned about, and disagreed with, the listed issuer’s expected credit loss assessment. However, the interim report published thereafter did not say anything about the auditors’ concerns, and gave the impression that there were no issues with the loan repayments. No expected credit loss provision was taken by the Company. A few months later, during the audit process for financial year end, the auditors continued to raise concerns regarding the loans. The auditors questioned their commercial rationale and the lack of follow-up action when sums had become overdue. All the borrowers defaulted on the loans. The Company recorded a 100 per cent impairment loss of around $86 million. The interim report was not accurate and complete. It omitted material facts of an unfavourable nature and, as a result, misled investors. The board of directors at the time were responsible for the accuracy and completeness of the interim report but failed in their duties. They failed to critically consider the issues raised by the auditors when making the expected credit loss assessment. They should have ensured the relevant disclosures were accurate. The audit committee was found to be have been notably ineffective. There was also a failure by the directors in respect of the internal controls for the money lending business. There were insufficient checks and balances to restrict the powers of individual directors in relation to the granting of loans. There was insufficient due diligence and credit risk assessment. There was a money lending policy, but it was wholly inadequate, demonstrating a lack of understanding of a proper internal control system. Two of the directors failed to respond to the Exchange's enquiries. Censures were imposed against the listed issuer and eight directors, while Prejudice to Investors’ Interests Statements were imposed against two of the directors. Six of the directors were further directed to attend trainings on regulatory and legal topics including Listing Rule compliance.
21 November 2023	Sun Cheong Creative Development Holdings Limited (Delisted, previous stock code: 1781) and eight former directors Through and following its listing in 2018, the executive management of the listed issuer resided in three founding family members. In a short period around the end of 2019, all three family members effectively stopped managing the listed issuer. They left the listed issuer in a chaotic state. They failed to discharge their duties in managing the listed issuer and ensuring that its business and operations could continue after their departure. After the founding management left the listed issuer, the other directors encountered significant difficulties in controlling and operating the listed issuer. Amongst other things, the listed issuer’s factories were sealed off by a PRC court, and the listed issuer was unable to provide certain accounting records to its auditors. As a result, the listed issuer was unable to publish its 2019 financial results on time. The listed issuer provided misleading information about the causes of the delay to the Exchange and in the listed issuer’s announcements – it attributed the delay solely to the COVID-19 pandemic, but did not disclose the material difficulties the listed issuer was facing. In approving these misleading communications, four former directors breached their duties. Censures were imposed against the listed issuer and seven former directors, while Director Unsuitability Statements were imposed against four former directors (in addition to public censures), including the former chairman and chief executive officer. One of the former directors was criticised. The Exchange further directed 17 hours of training on regulatory and legal topics and Listing Rules compliance for each of the four directors who were censured or criticised.
9 November 2023	A director of China Fortune Investments (Holdings) Limited (Delisted, previous stock code: 8116) Following disciplinary action in 2021, a non-executive director of the listed issuer was criticised by the Exchange, and was directed to attend 20 hours of training on Listing Rules compliance. The non-executive director did not comply with the training direction, even when reminded to do so. In failing to comply with the training direction, the non-executive director has committed a serious breach of the Listing Rules. He claimed that he did not receive the Exchange's reminders to comply with the training direction as he was not using the email address he had provided to the Exchange. He also claimed he was not familiar with the use of computer and electronic devices. The Exchange concluded that these were not excuses for his failure to comply with the Exchange’s directions. A Director Unsuitability Statement was imposed against him.
31 October 2023	China Fortune Holdings Limited (Stock Code: 110) and eight directors Between 2014 and 2019, the listed issuer entered into a number of connected transactions via its subsidiaries. The listed issuer failed to comply with the disclosure and procedural requirements under the Listing Rules for these transactions. The listed issuer’s internal controls and supervision over its subsidiaries were seriously deficient. There were no reporting procedures or mechanisms in place to ensure the listed issuer was kept apprised of the subsidiaries’ affairs, and no systems for checks and balances over the exercise of power by the subsidiaries. The listed issuer had previously been warned by the Exchange for a breach of the Listing Rules relating to connected transactions, but the directors still failed to identify any inadequacies in the listed issuer’s controls and take remedial action. Censures were made against the listed issuer and three directors, while a Director Unsuitability Statement was imposed against one of the directors. Five other directors were criticised by the Exchange. The Exchange further directed the appointment of a compliance adviser for a period for two years, a review of the listed issuer's internal controls, and the seven directors who were censured or criticised by the Exchange to attend training on regulatory and legal topics and Listing Rules compliance.
26 October 2023	A former director of China Tian Yuan Healthcare Group Limited (Stock Code: 557) The Listing Division had conducted an investigation into, among other things, whether the former chief executive officer and executive director of the listed issuer had discharged her duties and obligations under the Listing Rules. For the purpose of the investigation, the Listing Division sent an investigation letter and a reminder letter to the former chief executive officer and executive director to her last known correspondence address on record, but received no response from her. She had failed to cooperate in the investigation. In addition to a censure, a Director Unsuitability Statement was imposed against her.
5 October 2023	C-Link Squared Limited (Stock Code: 1463) and two former directors The listed issuer entered into service agreements on the day of, and very shortly after, listing. Pursuant to these agreements, non-refundable payments of HK$38.5 million were made to the service providers within a week of listing. This substantial sum was equivalent to more than half of the listed issuer’s IPO proceeds from listing, but these transactions and payments were not disclosed at the time. The payment of the fees to the service providers heavily contributed to a material shortfall in the listed issuer’s net profit and loss, when referenced to the listed issuer’s profit and cash flow forecast memorandum submitted at the time of listing. The failure to (1) disclose those potential engagements in the listed issuer’s profit memorandum or listing prospectus, (2) fully assist the sponsor to perform its due diligence work, and (3) consult the compliance adviser before paying the service fees, resulted in insufficient information being provided to the investing public at the time of listing, and exposed the listed issuer to significant financial risk. Censures were made against the listed issuer and two former executive directors. In addition to being censured, the two former directors had undertaken (1) to resign from all directorships and senior management positions in the listed issuer/ its subsidiaries within 28 days from the date of publication of the Statement of Disciplinary Action, and (2) not to take up any directorship or senior management positions in any listed issuer in Hong Kong in the future.

Securities and Futures Commission (the “SFC”)

Takeovers Bulletin No. 67

Submission of documents to the Executive

The Codes on Takeovers and Mergers and Share Buy-backs ("Takeovers Code") now require parties to submit ruling applications and documents electronically to the SFC at [email protected]. This requirement is set out under the revised Section 8.1 and Rule 12.1 of the Takeovers Code, which came into effect on 29 September 2023. Notwithstanding the revisions to the SFC's rules, the Executive continues to receive physical copies of ruling applications and documents which are no longer required. Payments of fees due under the Takeovers Code can continue to be settled by cheques delivered to the Executive in addition to telegraphic transfers.

B) Market Update

There were 16 new Main Board and 1 new GEM IPO applications accepted by the Exchange and 26 IPOs launched in the fourth quarter of 2023 that consists of a diverse range of businesses. Examples of some of the recent Main Board listings are:

Issuer	Description
Henan Jinyuan Hydrogenated Chemicals Co., Ltd. - H Shares (Stock Code: 2502)	A supplier of hydrogenated benzene-based chemicals and energy products in Henan province, primarily focusing on the production and processing of (i) hydrogenated benzene-based chemicals, which principally include pure benzene, toluene and xylene; and (ii) energy products comprising LNG and coal gas. Its retail offering was over-subscribed by 41.8 times with an estimated net proceeds from the IPO of approximately HK$246.07 million. To date, its market capitalisation reaches approximately HK$238.91 million.

REPT BATTERO Energy Co., Ltd. - H Shares (Stock Code: 666)	A lithium-ion battery manufacturer in China which focus on the R&D, manufacturing and sales of lithium-ion EV battery products and ESS battery products. Its retail offering was over-subscribed by 0.3 times with an estimated net proceeds from the IPO of approximately HK$2,013.08 million. To date, its market capitalisation reaches approximately HK$5.50 billion.
Xiamen Yan Palace Bird's Nest Industry Co., Ltd. - H Shares (Stock Code: 1497)	A leading brand in China’s edible bird’s nest ("EBN") product market, and a company dedicated to the development, production and marketing of high-quality modern EBN products. Its retail offering was over-subscribed by 82.6 times with an estimated net proceeds from the IPO of approximately HK$256.46 million. To date, its market capitalisation reaches approximately HK$2.95 billion.
Shenghui Cleanness Group Holdings Limited (Stock Code: 2521)	A cleaning and maintenance services provider in China and one of the well-established property cleaning service providers in Guangdong province. Its retail offering was over-subscribed by 32.4 times with an estimated net proceeds from the IPO of approximately HK$73.5 million. To date, its market capitalisation reaches approximately HK$576.87 million.
WuXi XDC Cayman Inc. (Stock Code: 2268)	A leading contract research, development and manufacturing organization focused on the global antibody-drug conjugate and broader bioconjugate market and dedicated to providing integrated and comprehensive services. Its retail offering was over-subscribed by 49 times with an estimated net proceeds from the IPO of approximately HK$3,483.3 million. To date, its market capitalisation reaches approximately HK$34.67 billion.
Beijing UBOX Online Technology Corp. - H Shares (Stock Code: 2429)	A vending machine operator in China with a 7.6% market share in terms of gross merchandise value in 2022. Its retail offering was over-subscribed by 10.3 times with an estimated net proceeds from the IPO of approximately HK$154.9 million. To date, its market capitalisation reaches approximately HK$10.69 billion.

[1] The qualifications of a streamlined transfer required for an eligible GEM issuer are set out in Section III in Chapter 2 of the Consultation Conclusions on GEM Reforms.

[2] The requirements that a GEM listing applicant must meet under the new test are set out in Section I(A) in Chapter 2 of the Consultation Conclusions on GEM Reforms.

[3] The proposal to align continuing obligations of GEM with those of the Main Board include:

Removing the requirement to appoint a compliance officer of a GEM issuer;
Shortening the engagement period of the compliance adviser of a GEM issuer to a period that is equivalent to the relevant Main Board requirement; and
Aligning GEM’s periodic reporting timeframes for annual reports, interim reports, and preliminary announcement of results for the first six months of each financial year with the relevant timeframes under the Main Board.

[4] Rule 10.06(2)(e) of the Listing Rules

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Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; fraud; distressed debt; investment funds; virtual assets; financial services/corporate regulatory and compliance.

As an independent law firm, we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.

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