It is no secret that the Hong Kong Stock Exchange (HKEX) offers businesses a gateway to substantial capital and global visibility. As of September 2024, the HKEX features 2,298 companies on its Main Board and 323 on GEM. This impressive roster highlights Hong Kong’s appeal as a prime destination for companies aiming to raise capital and broaden their investor base.

Boasting a market capitalisation of approximately HK$36.9 trillion (approx US$4.7 trillion), the HKEX is predicted to reenter the top five of the global IPO rankings in 2024. This scale of trading underscores the immense potential for companies to access significant investor capital.

This article will provide a full, step-by-step guide to launching an IPO in Hong Kong, covering listing criteria, key stages, and critical participants in bringing a company to market.

Understanding Hong Kong Stock Exchange

The HKEX operates as the city’s primary securities market. It offers two distinct platforms for companies seeking to go public: the Main Board and GEM.

The Main Board caters to well-established companies with substantial track records and meets stringent financial criteria. It attracts larger corporations and provides access to a wide pool of institutional and retail investors.

In contrast, GEM serves as an alternative for small and mid-sized, growth-oriented companies. It features less stringent listing requirements, allowing emerging businesses to access public capital markets earlier in their development.

Compared to other major exchanges, the HKEX’s unique value proposition is its strategic position as a bridge between mainland China and international markets. This unique role allows listed companies to tap into both Chinese and global investor bases, potentially leading to higher valuations and increased liquidity.

The HKEX’s regulatory framework tightly aligns with international standards, fostering investor confidence and maintaining market integrity.

Main Board Listing Criteria 

Before being considered to list on the HKEX Main Board, companies must meet specific financial and operational requirements. These criteria ensure that only qualified businesses gain access to this premier platform.

Financial Requirements: 

Applicants must satisfy one of the following three financial tests:

• Profit Test:

1. 1. • Minimum aggregate profit of HK$80 million over the past three years
      • At least HK$35 million profit in the most recent year
      • At least in aggregate HK$45 million profit for the two preceding years

• Market Capitalisation/Revenue Test:

1. 1. • Minimum market capitalisation of HK$4 billion at listing
      • Revenue of at least HK$500 million for the most recent audited financial year

• Market Capitalisation/Revenue/Cash Flow Test:

1. • Minimum market capitalisation of HK$2 billion at listing
   • Revenue of at least HK$500 million for the most recent audited financial year
   • Positive cash flow from operating activities of at least HK$100 million in aggregate for the three preceding financial years

Trading, Management, Ownership Stability:

• Trading record of a minimum of three financial years
• Management continuity for at least the three preceding financial years
• Ownership continuity and control for at least the most recent audited financial year

Shareholder Base:

• Minimum of 300 shareholders at the time of listing

Public Float:

• At least 25% of total issued share capital must be held by the public (or down to 15% with market capitalisation at the time of listing of not less than HK$125,000,000 and approval of the HKEX)

As with any leading exchange, these criteria aim to maintain the quality and stability of Main Board listings, protecting investor interests and market integrity.

GEM Listing Criteria

GEM offers a more accessible route for small and mid-sized companies to go public. Its requirements are less stringent than those of the Main Board, supporting emerging businesses in their growth journey.

Key GEM listing criteria include:

Financial Requirements:

Applicants must satisfy one of two following financial tests:

1. The cash flow test:

• Positive cash flow from operating activities of at least HK$30 million in total for the two preceding financial years

1. The market capitalisation / revenue / research and development test:

• a market capitalisation of at least HK$250 million at the time of listing
• revenue of at least HK$100 million in total for the two preceding financial years, with a year-on-year growth of revenue over the two financial years
• expenditure on research and development of at least HK$30 million in total for the two preceding financial years

Management and Ownership Stability:

• Management continuity for at least the two preceding financial years
• Ownership continuity and control for at least the most recent audited financial year

Public Float:

• Public float between 15% – 25% if the market capitalisation of the issue at the time of listing exceeds HK$10 billion

GEM’s more flexible criteria allow small and mid-sizedcompanies to access public capital earlier in their development, fostering innovation and growth in the Hong Kong market.

Assembling a Team of Advisors for Listing on the HKEX

A successful IPO involves several key players, each contributing unique expertise to the listing process. As part of your listing initiative, it is widely advised to assemble a team comprised of expert advisors. 

You may choose to source these experts yourself, but it is generally recommended that you partner with a trusted, local service provider such as InCorp that can provide and/or source these experts on your behalf. Ideally, you should appoint these advisors 6 to 12 months ahead of your proposed listing. These advisors are including, but not limited to:

1. Listing Applicant (Your Company):

• Furnishes comprehensive business information
• Assists with due diligence
• Helps draft the prospectus
• Provides picture and future
• Presents to potential investors

2. Sponsor:

• Appointed at least two months before application submission
• Represents the company to communicate with the HKEX
• Conducts due diligence on the company, shareholders, and management
• Ensures prospectus accuracy and completeness
• Coordinates all parties involved in the IPO
• Multiple sponsors can be appointed, with at least one independent to the company

3. Reporting Accountant:

• Prepares financial reports for the prospectus
• Provides assurance services
• Issues financial comfort letters to sponsors and underwriters
• Reviews cash flows, profit forecasts and valuation

4. Legal Advisers:

• Two teams: one for the company, the other for sponsors and underwriters
• Offer legal guidance and opinions throughout the IPO process

5. Additional Key Figures:

• Property Valuers
• Company Secretary
• Market Research Consultants
• Internal Control Advisers
• Investors/Public Relations Consultants
• Receiving Banks
• Share Registrars
• Financial Printers
• ESG advisers
• Registered Agent (if applicable)

Each of these roles plays a crucial part in guiding a company through the complex IPO journey, ensuring compliance with regulations and maximising the chances of a successful listing.

The Three Stages of Launching an IPO in Hong Kong

The process of launching an Initial Public Offering (IPO) on the HKEX comprises three distinct stages. Each stage is essential in preparing your company for public listing, ensuring regulatory compliance, and positioning your offering for success in the market. Let’s examine these stages in detail:

Stage 1: Preparation

• Timeline: 1-2 years before listing application submission

• Summary: Assess readiness, restructure if necessary, and prepare essential documentation

Company Evaluation:

Companies must evaluate whether they:

• Meet all applicable listing requirements
• Can address existing legal or accounting issues

Corporate Realignment:

Following the assessment, companies often:

• Restructure the listing group, ensuring directors possess the required qualifications and experience
• Incorporate the listing vehicle as a public limited company (PLC)
• Transfer contractual rights, licences, and assets to the listing group
• Identify which business units to be excluded from the listing group

Initial Strategy Session:

A meeting with all key figures sets the IPO process in motion:

• Agree on a timetable with concrete milestones
• Discuss offering details, size, and proceeds distribution
• Identify potential issues and their implications
• Company management presents the business, industry, financials, and growth plan

Comprehensive Review:

Sponsors, the issuer, and legal teams conduct an extensive review of:

• Legal aspects
• Business operations
• Financial status
• Personality and qualifications of directors and senior management

Listing Document Creation:

Key figures collaborate to prepare the listing prospectus:

• Content is regulated by Listing Rules
• Accuracy is crucial, as inaccuracies may lead to civil and/or criminal liability
• Serves as the main document for listing and marketing purposes

Formal Application:

• Form A1 (Main Board) or Form 5A (GEM) submitted at least 80 days before listing
• Contains a detailed draft of the prospectus
• Represents the official listing request to the HKEX

Stage 2: Regulatory Review

• Timeline: 4-8 weeks post-application submission
• Summary: HKEX examines application, provides feedback, and conducts approval hearing

Application Scrutiny:

• HKEX performs a 3-day initial check
• Verifies submission completeness
• Incomplete applications face rejection; resubmission permitted after 8 weeks
• HKEX offers feedback within 4 weeks of acceptance
• Company revises prospectus and submits additional information as needed
• Swift response to HKEX queries is crucial for meeting timeline and avoiding additional costs

Approval Discussion:

• Scheduled once HKEX queries are addressed
• Typically occurs 20 days pre-listing
• Application and key unresolved matters reviewed with HKEX
• HKEX determines approval or sets further requirements

Stage 3: Marketing and Offering

• Timeline: During and after regulatory approval
• Summary: Finalise offering details and execute public sale

Post-Approval Actions:

• HKEX decides whether to approve the application or set additional conditions
• Company’s board of directors holds meeting to approve the listing and all other related documents, structures, policies, etc.
• Publish post-hearing decision and prospectus on HKEX website

Marketing Activities:

• Conduct roadshows to identify demand
• Establish initial offering price of shares

Public Offering Process:

• Register prospectus with Hong Kong Companies Registry
• Open public offering for approximately three and a half days
• Conclude with book-building process

Final Steps:

• Set initial offering price
• Sign underwriting agreement
• Commence public offering

This stage represents the final phase of the IPO process, culminating in the company’s shares being offered to the public on the HKEX.

Overcoming IPO Hurdles with Professional Assistance

Preparing for an HKEX listing involves multiple challenges that can test even well-prepared companies. The process requires extensive data compilation, staff resources, technology upgrades, and strict regulatory adherence. These demands often strain a company’s time, skills, and finances.

However, these obstacles shouldn’t discourage companies from pursuing an HKEX listing. Collaborating with an experienced local service provider can significantly improve the IPO preparation process and reduce potential hurdles and risks.

A proficient partner like InCorp offers valuable support across various aspects of listing preparation:

• Detailed, on-the-ground understanding of HKEX rules and listing criteria
• Support for financial data preparation and standardisation
• Advice on market timing and valuation approaches
• Legal, accounting, and technology experts
• Assistance with public communications and stakeholder relations

By working with a local service provider like InCorp, companies can maintain their operational momentum while ensuring thorough IPO preparation. This collaborative method increases the chances of a successful listing and sets the foundation for sustained success as a public entity.

Where to Next?

A successful HKEX listing is within reach, even with the complexities involved. Whether you’re aiming for the Main Board or GEM, InCorp can guide you through the process, offering local expertise and comprehensive support. We’ll help ensure a seamless transition to a public entity, setting the stage for future growth. Contact InCorp today to turn your IPO aspirations into reality.