Implications and disclosure
Stock Exchange’s consideration
|Deteriorating financial performance
||If the listing applicant recorded deteriorating revenue and profit, or material loss during or after the trading period, this will cast doubt on the listing applicant’s financial performance and the suitability for listing.
- How susceptible the listing applicant’s financial performance is to changes beyond its control.
- The underlying causes of the deteriorating financial performance and whether such downward trend is expected to continue, or whether it is cyclical nature of the industry.
- Whether the listing applicant had demonstrated that it is able to effectively mitigate its exposure to the relevant risks or to turnaround the business.
|Material reliance on various parties
Such various parties may include customer, supplier, distributors and controlling shareholder (including its close associates) (a “Relevant Counterparty”).
Set out below are examples of material reliance:
- high customer or supplier concentration, or both;
- dependence on a limited number of distribution channels; or
- dependence on controlling shareholders or another party for critical functions such as sales, distribution or procurement.
The listing applicant’s material reliance on a Relevant Counter-party is a matter of disclosure if, absent red-flags to indicate otherwise, (i) the relationship with the Relevant Counterparty is unlikely to materially adversely change or terminate; or (ii) the listing applicant is/ will be able to effectively mitigate its exposure to any material adverse changes to or termination of its relationship with the Relevant Counterparty. The disclosure in the listing document should also include:
- the background of the Relevant Counterparty;
- the business relationship, the nature of reliance and details of the arrangements between the listing applicant and the Relevant Counterparty;
- basis that the likelihood of the relationship with the Relevant Counterparty will materially adversely change/terminate is low; or
- basis that the listing applicant is/ will be able to effectively mitigate its exposure to any material adverse changes to or termination of the relationship with the Relevant Counterparty.
- Whether the Relevant Counterparty is also mutually dependent on the listing applicant.
- Whether the listing applicant has an established relationship/ long-term agreement with the Relevant Counterparty.
- If the Relevant Counterparties dominate the industries and it is unlikely that the listing applicant could reduce its reliance on the Counterparties, the Stock Exchange will also investigate whether there are any red flags indicating that the relationships between the parties would be terminated or materially adversely change.
|Financial assistance from its Controlling Shareholder Group
||It is quite common that a listing applicant would have received financial assistance (e.g. loans, guarantees and other forms of collateral) (the “Financial Support”) from its controlling shareholder (and/or its close associates). However, given that it is particularly difficult in assessing to what extent the controlling shareholders’ incentive to provide the Financial Support will be reduced after listing, the Stock Exchange will presume that such Financial Support will be withdrawn in assessing the sustainability of the listing applicant.
To assess whether the business will be sustainable without Financial Support, the following factors will be considered:
- whether the listing applicant can obtain independent financing on comparable terms; or
- whether the listing applicant has enough liquid assets on hand to meet its financial needs.
|Material changes that may adversely affect the company's prospect
Concerns may arise as to the listing applicant’s sustainability of business if it faces changes which imminently threatens its operations, which include:
- changes in regulatory requirements which may result in the listing applicant being unable to continue to operate its business in its current form or at its current profitability level; or
- development of new technology which render its business obsolete.
|To address the relevant concerns, the Stock Exchange expects the listing applicant to affirmatively demonstrate that such changes are unlikely to materialise or will not affect the sustainability of the listing applicant’s business.
|Substantial reliance by property companies on fair value gains on investment properties
||Fair value gains may be included in profit calculations of a property company for the purposes of satisfying the minimum profit requirement under the Rule 8.05(1)(a) of the MB Listing Rules (the “Profit Test”). Concerns would also arise when a substantial portion of a listing applicant’s profit is derived from fair value gains arising from its investment properties, since this will cast doubt on the practical sustainability of such listing applicant. In furtherance, if there is significant market turndown, the properties would incur fair value losses which render loss making of the listing applicant.
The Stock Exchange, in assessing whether the business of a listing applicant in the property business is unsustainable/not suitable for listing, will consider the following:
- the listing applicant’s fair value gains. If the listing applicant’s fair value gains cannot satisfy the Profit Test after excluding unrealized gains of its investment properties ; then it might not be suitable for listing; and
- if the listing applicant did not have any substantial business during its trading record period (such as sales of properties and recurring rental income), this would also render the listing applicant’s business unsustainable.
Apart from the aforementioned factors, the Stock Exchange will also closely monitor the listing applicant’s profit and cash flow forecasts, applicable sensitivity or breakeven analysis, and any inconsistent growth with the industry. Sponsors are also expected to provide the due diligence work they had done in order to substantiate their underlying assumptions that the listing applicant is suitable for listing.