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Listing reform to supercharge fortunes of Hong Kong’s main stock market, while GEM grapples with uncertainty

Changes to the listing rules affecting both Hong Kong’s main stock board and GEM are to be phased in starting from February 15

PUBLISHED : Monday, 29 January, 2018, 1:46pm
UPDATED : Monday, 29 January, 2018, 8:43pm

The Hong Kong stock exchange’s listing reform plan is likely to turn the local market into a hub for technology companies, but there will be little help to the second board – the Growth Enterprise Market (GEM).

In fact, the new rules are likely to make it harder for GEM to attract quality listings.

The main board reforms, announced in December, will amount to the largest change to the listing criteria in three decades by effectively welcoming the listing of large biotech companies without a revenue or a profit history, as well as tech companies with multiple classes of shares. These reforms are set to kick in from June.

Moreover, starting on February 15, the minimum listing requirement for both the main board and GEM will be tightened.

Under the new rules, companies seeking a main board listing must have a minimum market capitalisation of HK$500 million (US$64 million), up from the current threshold of HK$200 million. The minimum public float value has also been increased to HK$125 million from HK$50 million.

This is not much a problem for the main board, which is tailor-made for larger companies that can demonstrate a profit of HK$50 million in three years leading to the year of listing. The main board will also enjoy momentum as large biotech and companies multiple classes share join the listing queue.

However, it is a different story for the GEM. Once the reform kicks in, applicants will need to have a minimum market capitalisation of HK$150 million, compared with HK$100 million currently, while the minimum public float will be HK$45 million, compared to HK$30 million.

The minimum annual cash-flow requirement of GEM applicants will rise to HK$30 million from HK$20 million.

One positive outcome is that larger and probably better quality companies will be attracted to the GEM, resolving the issue of problematic company listings seen previously.

But the new requirement will also make it harder for smaller companies to get aboard. Building up an annual cash flow of HK$30 million will take some time, and many may opt to wait it out a little bit longer in a bid to qualify for a main board listing.

When GEM was set up in 1999, its initial mission was to act as the Hong Kong’s version of Nasdaq, but almost two decades on the mission has proven a failure, judging by the number of tech companies listed.

Indeed, companies such as SuneVision Holdings, the technology arm of Sun Hung Kai Properties, last week shifted its listing to the main board.

When the June reforms kick in, the main board instead of the GEM is likely to become the preferred listing venue for many tech giants.

Among other changes, GEM is no longer to be a pathway to a main board listing. After February 15, companies listed on GEM who want to jump to the main board, will be treated the same as a new listing applicant. Under the current practise, GEM companies can follow relatively straightforward procedures to upgrade to the main board. As a result, from the middle of next month companies aspiring to the main board will have look beyond the GEM as a pathway.

Who left to list on the GEM? Unfortunately, the second board seems to few carrots to attract listing hopefuls.

Recently, we have seen a rush of companies seeking to complete a GEM listing before the February 15 deadline. After that deadline passes, expect a long period of minimal listing activity on GEM.

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