IPO in Honggg Kong – from the reporting accountants

IPO in Hong Kong –g gfrom the reporting accountants

tiperspective

Agenda

IPO general

Listing requirements

Listing application process and related reports/letters issued by the Reporting Accountants

Commonly encountered issues for IPOs in Hong Kong

Continuing obligation upon listing

Recent market trends

IPO general

Professional team involved in the IPO process

Regulatory framework in Hong Kong

Methods of listing

P IPO I t tPre-IPO Investments

Companies getting prepared for IPOCompanies getting prepared for IPO

Role of the Reporting Accountants

3

Professional team involved in the IPO process

Listing applicant

Sponsors / Investment Banks

Reporting Accountants

Company’s legal

advisers

Investment bank’s legal

advisersValuers

Other i li t

advisers advisers

specialist or advisers (as appropriate)

Financial PR Registrars Printers

4

Regulatory framework in Hong Kong

•Principal regulator of Hong Kong’s securities and futures markets; an independent statutory body

• Leading role in regulating companies seeking admission to the Hong Kong markets and

Securities and Futures Commission (SFC) The Stock Exchange of Hong Kong Limited (“the Exchange “or” HKEX”)

p y ycreated by the Securities and Futures Commissions Ordinance

•Statutory powers to investigate and enforce action in cases of corporate misconductS

g gsupervising those companies once they are listed

• Setting and developing proposals for changes to the Listing Rules

•Statutory duty with respect to the listing:- supervise and monitor the Exchange’s performance in its listing-related functions and responsibilities

- conduct periodic audit on the Exchange on listed-

• Administers the listing approval process and passes copies of listing application materials to SFC

• Establishes and administers Listing Rules related matters

- approve all changes proposed to the Listing Rules and policy decisions with general application

- may object to a listing if the SFC determines that

applicable to sponsors and IFAs

y j gthe prospectus contains false or misleading information

•Statutory regulator for assessing eligibility, on-going supervision and discipline and enforcement in

t f d i d d t fi i l

5

respect of sponsors and independent financial advisers (IFAs)

Methods of listing (Chapter 7 of MB Rules)

Methods Offer for subscription

Offer for sale Placing Introduction Transfer from GEM

Definition Offer to the public for

Offer to the public of

Offer for subscriptions or

Listing of securities already in issue where

Transfer listing from GEM topublic for

subscription of company’s securities

public of securities already in issue by the holders or allottees

subscriptions or sale of securities to persons selected or approved by the issuer or intermediary

already in issue where no marketing arrangements are required because the securities are already of such an amount and so

id l h ld th t

from GEM to MB

widely held that adequate marketability when listed can be assumed

Listing document

Supported by a listing

Supported by a listing

Placing by a new applicant or

Must be supported by a listing document

Not requireddocument g

documenta listing document

ppsecurities of a class new to listing must be supported by a listing document

listing document

Other Subscription - Exchange may Permitted in exceptional May request for requirements

pmust be fully underwritten

g ynot permit “placing” by new applicant if significant public demand for the securities is

pcircumstances by the Exchange

y qadditional information where relevant information is not already publicly

6

secu t es slikely

pub c yavailable

Pre-IPO investments

Guidance Letter 29-12 (Interim Guidance published by the Listing Committee on 13 October 2010)

• Under the guidance, the Exchange will generally require, except in very exceptional circumstances, that pre-IPO investments must be completed either:

a) at least 28 clear days before the date of the first submission of the first listing application form; or

b) 180 clear days before the first day of trading of the applicant’sb) 180 clear days before the first day of trading of the applicant s securities.

• Pre-IPO investments are considered completed when the funds are irrevocably settled and received by the applicantirrevocably settled and received by the applicant.

• Clear days exclude the day of the pre-IPO investment completion, the day of the submission of the listing application form and the first day of trading of securitiestrading of securities.

7

Companies getting prepared for IPO

Restructuring phase Preparation and approval phase

Continuingobligations

• Legal due diligence• Sponsor’s due diligence• Detailed audit work

Fi li it l t t

• Market strategy• Cost and efficiency focus• Functional architecture

H

• Documentation of strategic plans and projections

• Restructuring of businesses t tt t i t • Finalise capital structure

• Determine time and place of listing

• Evaluate market conditions

• Human resources• Risk management over

credit policies, market risk and operational risk

to attract investors• Segregation of non-core

businesses• Assessing financial impact

and investor appetite• Resolution of different

accounting bases such as IFRS, US GAAP,

• Reputation and brand building

• IT system upgrades and integration

of various restructuring plans

• Asset impairment and valuation

PRC GAAP, HKFRS • Relationship management with investors

• Staff training

• Tax planning and efficiency• Staff training

8

Role of the Reporting Accountants

• Audit of historical financial information• Internal controls review

Pre IPO • Pre-IPO review• Support with other value-enhancing activities

IPO

• Role differs from that of an auditor• A number of interlinking work streams• Accountants’ report on historical and other financial information

• Audit of annual financial statements• Review of interim financial report• Ongoing regulatory compliance

Post IPOO go g egu ato y co p a ce

• Corporate governance assistance• Subsequent debt/equity securities offering• Notifiable and connected transactions

9

Agenda

IPO general







• Financial requirements

• Management continuity for at least the 3 preceding years• Management continuity for at least the 3 preceding years

• Ownership continuity and control for at least the most recent audited financial yearaudited financial year

• Acceptable jurisdictionsPricing the

issue

Formulate listing

strategy and plan

• Avoid competing business

IPO

Marketing to prospective

investors

Appoint advisory

team

Verification

Prospectus

Restructuring

Long form, short form and

working capital reports and

11

reports and other due diligence

Listing requirements for HK Main Board

Financial Requirements

1. Profit Test (MB Rule 8.05(1))

2. Market Cap/ Revenue/ Cashflow Test (MB Rule 8.05(2))

3. Market Cap/ Revenue Test (MB Rule 8.05(3))( ( )) ( ( ))

Profit attributable to shareholders

Profit of HK$50 million in the last 3 years (with HK$20 million in the most recent year and an

N/A N/A

yaggregate of HK$30 million in the two preceding years)

Market Cap At least HK$200 million At least HK$2 billion at the At least HK$4 billion atMarket Cap At least HK$200 million At least HK$2 billion at the time of listing

At least HK$4 billion at the time of listing

Revenue N/A At least HK$500 million for the most recent audited financial year

At least HK$500 million for the most recent audited yfinancial year

Cashflow N/A Positive cashflow from operating activities of HK$100 million in aggregate for the 3

N/A

aggregate for the 3 preceding years

12

Listing requirements for GEM Board

GEM Rule 11.23(6) Market Cap At least HK$100 million

GEM Rule 11 12A Cashflow Positive cashflow from operating activities ofGEM Rule 11.12A Cashflow Positive cashflow from operating activities of at least HK$20 million in aggregate immediately preceding the issue of the listing document.

• Market capitalisation of at least HK$100 million at the time of listing [GEM Rule 11.23(6)]P iti hfl f ti ti iti f t l t HK$20 illi (b f• Positive cashflow from operating activities of at least HK$20 million (before changes in working capital and taxes paid) in aggregate for the two financial years immediately preceding the issue of the listing document [GEM Rule 11.12A]

• Trading record period of at least 2 years [GEM Rule 11.14]• Ownership continuity and control throughout the preceding full year [GEM

Rule 11.12A]• Management continuity throughout the 2 preceding years [GEM Rule 11.12A]

13

g y g p g y [ ]

Profit test (1)

Profits in the Accountants’ Report may not be “profits” under MB Rule 8.05.

What are excluded from “profits”?

• Profits under MB Rule 8.05 exclude results of associates, jointly controlled entities and profits not generated from the listed group’s ordinary and usual course of business. [Rejection Letter 14-06]

• For the purpose of MB Rule 8.05, the three-year results should exclude the results of the entities which do not form part of “revenue generation”. [Listing decision 10-2]

What may be excluded from “profits”?

• Other items, such as: (a) Revaluation differences; (b) Changes in fair value of financial instruments; or (c) unrealised valuation gains arisingvalue of financial instruments; or (c) unrealised valuation gains arising from investment properties.

Should consider whether the “profits” related to the ordinary and usual course of business before assessing whether the profit requirements

14

course of business, before assessing whether the profit requirements can be met. [Listing Decision 66-1]

Profit test (2)

Questions Answers Reference

1) Can compensation income arising from the one-time early termination of a contract related to principal business of the listing applicant be

Yes LD48-2

to principal business of the listing applicant be counted towards satisfaction of the profit requirements of MB Rule 8.05(1)(a)?

2) The listing applicant is engaged in provision of distribution and value-added services. Can its income from lending activities be counted as activities within the ordinary and usual course

No RL3-04

activities within the ordinary and usual course of business of the listing applicant?

15

Management continuity

• Management continuity for − at least the 3 preceding financial years [MB Rule 8.05]− 2 full financial years immediately preceding the issue of the listing2 full financial years immediately preceding the issue of the listing

document and up until the date of listing [GEM Rule 11.12A(3)]

• Applicants must demonstrate that there has been no change in the majority of the board of directors and senior management in respect of its principal

Listing Decision (45-1):

of the board of directors and senior management in respect of its principal operating subsidiaries during the track record period.

HKEx considers the facts and circumstances of each case, taking into account the following factors:-• whether an identifiable group of individuals who are most relevant and

ibl f th t k d i d lt f li ti li t i d iresponsible for the track record period results of a listing applicant remained in positions of responsibility with the applicant under review throughout the relevant period; and

• whether such group of individuals would form the core management of the

16

• whether such group of individuals would form the core management of the applicant at the time of listing and thereafter.

Ownership continuity

• Ownership continuity and control for at least the most recent audited financial year (MB Rule 8.05)

• The HKEx defines “ownership continuity and control” as “the continuous ownership and control of the voting rights attaching to the shares for the latest financial year of the trading record period by a controlling shareholder, or where there is no controlling shareholder the single largest shareholder”or where there is no controlling shareholder, the single largest shareholder (“Frequently Asked Questions”) [Listing Decision 42-4]

• Relationship with the Controlling Shareholders:− The HKEx normally takes into account the following: [Listing Decision 42-1] financial independence; independent access to sources of supplies/raw materials for

production; independence of production/operation capabilities; and independence of access to customers and independent management.

17

p p g

Acceptable jurisdiction

• A listing vehicle that is incorporated in one of the following jurisdictions is generally acceptable to the HKEx:

• Australia• Bermuda• Brazil

• Hong Kong• Isle of Man• Italy

• British Virgin Islands• Canada – Alberta• Canada – British Columbia

y• Japan• Jersey• LuxembourgCanada British Columbia

• Canada – Ontario• Cayman Islands• Cyprus

Luxembourg• People’s Republic of China• Republic of Korea• Singapore• Cyprus

• France• Germany• G

• Singapore• United Kingdom• U.S.A – State of California• U S A St t f D l• Guernsey • U.S.A – State of Delaware

18

Agenda

IPO general







Listing application process

IPO Vetting Process by HKEx

R i b th li ti di i i d h i b th li tiReview by the listing division and hearing by the listing committee

S b i i f F A1Submission of Form A1

Prospectus informationProspectus information

Financial information in respect of a new listing application

20

Listing application process

Before listing application Document Submission Prospectus issued

Restructuring 1) A1 * 3) 4 d *4) Before

bulk printing

Prospectuspreparation

Sponsors’

Road show

Dealings

)submission 2) 15 days* 3) 4 days* bulk-printing

of prospectus

5) After hearing but before 6) After prospectus issuance Spo so sdue diligence prospectus issuance but before dealings

* Number of business days before expected Listing Committee hearing

Details of the documents to be submitted at each point are set out in Chapter 9 of the MB Rules / Chapter 12 of GEM Rules.

21

IPO vetting process by HKEx

• Pre-IPO inquiries

• Filing of A1 (MB) / 5A (GEM) / A2 (CIS)

• Review of listing application

‒ Acceptance for vetting

‒ Internal meeting

‒ First comment letter

S b t t‒ Subsequent comments

‒ Internal clearance meeting

‒ Invitation to hearingInvitation to hearing

‒ Rejection by Listing Division or Recommendation to Listing Committee

Li ti C itt h i

22

• Listing Committee hearing

Review by the listing division and hearing by the listing committee

Application DocumentaryFormal

Application for Listing

Recommendation or Rejection

Hearing Issue of Prospectus Listing

Recommendation/Rejectionby Listing Division

Applicant may appeal toListing Committee

Rejection

Recommendation

by Listing Division Listing Committee

Hearing by ListingCommittee

Applicant may appeal to Listing (Review) Committee

Rejection

Approval

Finalised documents to be submitted

23

Submission of Form A1 (1)

• Initial Form A1 should be submitted to the HKEx not less than 25 clear business days prior to the expected hearing date for

i th li ti li tiapproving the listing application.

• Advanced proof of the prospectus – disclosures required under Chapter 11 of MB Rules/Chapter 14 of GEM Rules substantially completed

• Particulars of the proposed listing included in Form A1:‒ Name of issuer‒ Proposed timetable for the listing ‒ Place and date of incorporation/establishment‒ History and nature of businessy‒ List of proposed directors [N/A for GEM Form 5A]‒ Type of security for which listing is sought‒ Estimated size of offering

24

Estimated size of offering

Submission of Form A1 (2)

‒ Method of listing ‒ Turnover and profit attributable to equity shareholders for the three

preceding years (the HKEx may accept a shorter trading recordpreceding years (the HKEx may accept a shorter trading record period if the issuer meets the requirements under Listing MB Rule 8.05A and 8.05B) [N/A for GEM Form 5A]

‒ Intended use of sales proceeds by the issuer [N/A for GEM Form 5A]‒ In the case of an investment company, the names of the proposed

custodian, management company and investment adviser. [N/A for GEM Form 5A]Proposed a thorised representati es‒ Proposed authorised representatives

• Issuer’s undertaking • Issuer’s authorisation for filing with the Securities and Futures

CommissionCommission

The sponsor is responsible for lodging the formal application including all supporting documents for listing and for dealing with the HKEx on all matters arising in connection with the application [MB Rule 9 02/GEM Rule

25

matters arising in connection with the application. [MB Rule 9.02/GEM Rule 12.06]

Prospectus information

• General information about the issuer, its advisers and the listing document

• Information about the securities for which listing is sought and the terms and conditions of their issue and distribution

Information about the issuer’s capital• Information about the issuer’s capital

• General information about the group’s activities

• Financial information and the prospects of the group• Financial information and the prospects of the group

• Information about the issuer’s management

• Additional information on mineral companies under Chapter 18p p

• Material contracts and documents for inspection

26

Financial information in respect of a new listing application

• Accountants’ Report on Historical Financial Information • Statement of Adjustmentsj• Accountants’ Report on Pro Forma Financial Information • Accountants’ Report on Profit Forecast• Letter on Working Capital Sufficiency• Statement of Indebtedness• Comfort Letters on Financial Information Included in theComfort Letters on Financial Information Included in the

Prospectus• Consent Letter

27

Accountants’ Report on historical financial information (1)• Accountants’ Reports are required to be included in:− IPO prospectus;− Prospectus for offering of securities for public subscription by a listed

issuer; and− Circular in connection with a reverse takeover, a very substantial

acquisition a major transaction very substantial disposal (for a listedacquisition, a major transaction, very substantial disposal (for a listed company).*

[MB Rule 4.01 / GEM Rule 7.01]

• Must comply with the provisions set out in Appendix 16 of the Listing• Must comply with the provisions set out in Appendix 16 of the Listing Rules

• Financial information of the issuer or its group and any business or subsidiary acquired, agreed to be acquired or proposed to be acquired y q , g q p p qsince the date of the latest audited accounts.

* Effective in June 2010, for a very substantial disposal, issuers have the option to include in the circular a statement that the financial information of the disposal target or the issuer with the disposal group have been

28

statement that the financial information of the disposal target or the issuer with the disposal group have been reviewed by the issuer’s auditors or reporting accountants.

Accountants’ Report on historical financial information (2)

• Financial period - the three financial years immediately preceding the issue of the listing document and the relevant stub period if the latest fi i l i d t d d d th 6 th b f th d t ffinancial period reported on ended more than 6 months before the date of the prospectus

• Accounting policies and disclosures generally in accordance with HKFRS / IFRS and additional disclos re req irements nder the HongHKFRS / IFRS; and additional disclosure requirements under the Hong Kong Companies Ordinance and the relevant disclosure provisions of the Listing Rules

China Accounting Standards for Business Enterprises (CASBE) is China Accounting Standards for Business Enterprises (CASBE) is allowed in the case of a PRC issuer – effective 10 December 2010

• Must include a statement of:

− whether or not the accounts for the period reported on have been audited and if so, by whom; and

− whether any audited accounts have been made up since the end of the

29

y plast financial period reported on.


Accountants’ report

Financial information

Relevant rules

Own group Yes 3 years MB Rule 4.04(1),

4.04(3)(a), 4.04(5), 4.04(6) ( ), ( )

Business/subsidiary acquired or proposed to be acquired subsequent to track record period

Yes 3 years MB Rule 4.04(2),

4.04(4)(a)

Material subsidiary/Business acquired during the track record period and such an acquisition would have been classified as a

Yes* From beginning of track record period to date of acquisition

MB Rule 4.05A

major transaction under MB Rule 14.06(3) or a very substantial acquisition under MB Rule 14.06(5)

q

30

* It can be disclosed in the form of a note to the group’s accountants’ report.


• Must express an opinion as to whether or not the relevant information gives a true and fair view of the resultsg

• Accounting implications – qualified opinions

− Qualified opinions on statutory financial statements of entities Q p ycomprising the listed group

− Address the qualified opinions in the preparation of the group’s financial statementsfinancial statements

− Qualified opinion on the accountants’ report is not common. MB Rule 4.18 states “a qualified or modified accountants’ report may not be acceptable where the qualification or modification relates to a matter of significance to investors.”

31


• Must state that it has been prepared in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting g p p gAccountant” issued by the HKICPA

• Financial Information includes:

− Income statement

− Statement of comprehensive income

− Statement of financial position

− Statement of changes in equity

− Cash flow statement

− Footnotes

32


• Preparation of the underlying financial statements:

− The audit report is prepared under Hong Kong Standard onThe audit report is prepared under Hong Kong Standard on Auditing 800 “Special Considerations—Audits of Financial Statements Prepared in accordance with Special Purpose Frameworks”

33

Statement of adjustments (1)

• Common adjustments include:

− Adjustments to ensure that all the financial information in the jAccountants’ Report is prepared based on the current accounting policies

− Adjustments made as a result of group re-organisationAdjustments made as a result of group re-organisation

• To reconcile the figures in the Accountants’ Report with the corresponding figures in the audited financial statements.

• MB Rule 4.14 requires the Reporting Accountants state that all adjustments considered necessary have been made, or (where appropriate) that no adjustments were considered necessary.pp p ) j y

• Directors’ responsibility: preparation of the statement of adjustments.

34

Accountants’ Report on Pro Forma financial information (1)

• Regulatory requirement:

− MB Rule 4 29MB Rule 4.29

− GEM Rule 7.31

• Must be prepared in a manner consistent with both the formatMust be prepared in a manner consistent with both the format and accounting policies adopted by the issuer in its financial statements

• Accounting Guideline 7 “Preparation of Pro Forma Financial• Accounting Guideline 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars”

• Follows HKSIR 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars”

− Director’s responsibility vs Reporting Accountants’ responsibility

35

p y

Accountants’ Report on Pro Forma financial information (2)

• Reporting period: [MB Rule 4.29(4)]

− The current financial period (i.e. stub period if any)

− The most recent completed financial period

− The most recent interim period for which relevant unadjusted information has been or will be published, or is being published in the same document.

36

Accountants’ Report on Pro Forma financial information (3)Illustrative Pro Forma Financial Information normally contained in the IPO prospectus• Unaudited pro forma statement of adjusted net tangible assets:

Consolidated net

Estimated net proceeds from

the global offering

(assuming that Unaudited pro forma adjusted

Unaudited pro forma adjusted

p j g

tangible assets as of [date]

( gthe over-allotment

option is not exercised)

jnet tangible assets of the

Group

jnet tangible

asset per share

Based on offer price of ${xxx} per share $ XXX $ XXX $ XXX $XXXBased on offer price of ${xxx} per share $ XXX $ XXX $ XXX $XXX

Based on offer price of ${xxx} per share $ XXX $ XXX $XXX $XXX

• Unaudited pro forma forecast earnings per share:Unaudited forecast consolidated profit attributable to the equity holders of the company

Not less than $ XXX

Unaudited pro forma forecast earnings per share Not less than $ XXX

• Unaudited pro forma forecast earnings per share:

37

Unaudited pro forma forecast earnings per share Not less than $ XXX

Accountants’ Report on Pro Forma financial information (4)• Pro Forma Financial Information is prepared in the following

circumstances: − IPOIPO A statement of net tangible assets illustrating how the IPO might

have affected the financial information presented in the prospectus. Voluntary disclosure of the forecast earnings per share information Voluntary disclosure of the forecast earnings per share information

for a transaction involving the issue of securities. A new issuer has acquired or proposed to acquire any businesses or

companies which would at the date of application or such later datecompanies, which would at the date of application or such later date of acquisition before listing of the applicant be classified as a major subsidiary, since the date to which the latest audited accounts of the issuer have been drawn up. [MB Rule 4.28]

− Continuing obligations: [MB Rule 4.25-4.27] A major transaction is undertaken by a current listed issuer; A reverse takeover; or

38

A reverse takeover; or A very substantial disposal/acquisition by a current listed issuer

Accountants’ Report on profit forecast memorandum (1)• Typical contents of a profit forecast and working capital forecast

board memorandum include:

B k d th d li ti f th d‒ Background on the proposed listing, purpose of the memorandum, the business activities and the forecast period;

‒ General bases and assumptions;

‒ Accounting policies adopted in the forecast period; and

‒ Details of the available banking facilities.

• The directors are responsible for the preparation of the profit forecast• The directors are responsible for the preparation of the profit forecast and working capital forecast board memorandum.

• The Board Memorandum must be approved by the directors and recorded in the board minutesrecorded in the board minutes.

• Copy of the Board Memorandum is submitted to the Stock Exchange.

‒ 15-day document for a MB listing applicant

39

‒ At time of filing listing application for GEM applicant

Accountants’ Report on profit forecast memorandum (2)• Profit forecast: − Includes assumptions specific to the profit forecast and calculation of

line items in the income statements; andline items in the income statements; and − Includes a sensitivity analysis.

• Working capital forecast:− Covering at least one year from the date of the prospectus (normallyCovering at least one year from the date of the prospectus (normally

overlaps the profit forecast period);− Includes assumptions specific to the working capital forecast and

calculation of line items in the forecast working capital movement; and− Includes a sensitivity analysis.

• The directors are responsible for the statement of working capital sufficiency, the working capital forecast board memorandum and the

d l i tiunderlying assumptions. • Follows AG3.341 – Accountants’ Report on Profit Forecasts.• Inclusion of a profit forecast in a prospectus/offering document is voluntary.

If i l d d i h ld b d b h R i A

40

− If included, it should be reported upon by the Reporting Accountants.

Accountants’ Report on profit forecast (3)

• Regulatory Requirements on Profit Forecasts: − Rule 10 of the Hong Kong Code on Takeovers and Mergers g g g

(Takeover Code)− Chapter 11 of MB Rules and Chapter 14 of GEM Rules− Third Schedule of the Hong Kong Companies Ordinance Part I− Third Schedule of the Hong Kong Companies Ordinance Part I

These require the Reporting Accountants to examine and report q p g pon the accounting policies and calculations used in the profit forecast and whether the accounting policies differ from the policies adopted in the company’s financial statements. [MB Rule 11.17, GEM Rule 14.29, Takeover Code Rule 10.3(b)]

41

Accountants’ Report on profit forecast (5)

• Forecast period

− Coterminous with the issuer’s financial year-end

− For a current (or unexpired) accounting period

− The current and the immediately succeeding accounting i d id d th t ffi i tl i ifi t t f thperiod, provided that a sufficiently significant part of the

current period has already lapsed (at least 10 months of the current period has elapsed) and the company’s operations lend themselves to reasonably accurate forecasting such as inlend themselves to reasonably accurate forecasting such as in the case of a property investment company.

• MB Rule 11.18 allows the profit forecast period to end at a half year-end but the HKEx will require an undertaking from the issuer that the interim report for that half year be audited.

• For any expired accounting period, we generally refer to Profit

42

y p g p , g yEstimate instead of Profit Forecast.

Letter on Working Capital Sufficiency (1)

• Follows AG3.340 – Prospectuses and the Reporting Accountant.

• Regulatory requirements:

− Appendix 1A Paragraph 36 and Appendix 1B Paragraph 30 of MB/GEM R lMB/GEM Rules

− The directors are required to include a statement in the prospectus regarding the sufficiency of the working capital ofprospectus regarding the sufficiency of the working capital of the group for the group’s present requirements, that is for at least the next 12 months from the date of publication of the prospectusprospectus

43

Letter on Working Capital Sufficiency (3)

• Work includes:− Obtaining confirmations from third parties on the extent of theObtaining confirmations from third parties on the extent of the

facilities and resources available to the company− Checking the arithmetical accuracy of the forecasts and that

the forecasts are properly derived from the stated assumptionsthe forecasts are properly derived from the stated assumptions− Reviewing the assumptions

Note: If any assumption appears to be unrealistic, or if any important assumptions have not been stated, the Reporting Accountants should discuss with the company and consider p ydrawing attention to it in the letter. (AG3.340 Para 69)

44

Statement of Indebtedness

• The directors are to prepare a statement of indebtedness as at the latest practicable date in accordance with Appendix 1A P h 32 f th MB Li ti R l d th Thi d S h d l fParagraph 32 of the MB Listing Rules and the Third Schedule of Hong Kong Companies Ordinance.

• The latest practical date is determined by the directors:− normally it is no more than eight weeks before the issuance of

the prospectus.

• The indebtedness statement includes:The indebtedness statement includes:− all borrowings (distinguished between guaranteed,

unguaranteed, secured and unsecured), including bank overdrafts, liabilities under acceptances (other than normal trade bills), acceptance credits and hire purchase commitments;

− mortgages and charges; and

45

− loan capital and contingent liabilities or guarantees.

Comfort Letters on Financial Information Included in the Prospectus• The reporting accountants are normally requested by the

Sponsor and/or other underwriters to issue comfort letters on:

− certain financial information disclosed in the prospectus and/or the international offering circular; and

− comments on changes in selected financial statement items subsequent to the latest period reported on in the accountants’ report.

• Procedures to be performed by the reporting accountants and the content of the letter are to be agreed on by the company, the Sponsor and the reporting accountants.p p g

46

Comfort Letters on Financial Information Included in the Prospectus (2)

• Prepared in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 400 “Comfort Letters and Due Diligence Meetings on Financial and Non-financial Information” issuedDiligence Meetings on Financial and Non-financial Information issued by the HKICPA.

- Revised HKSIR 400 became effective on 1 January 2012.

• Purpose of the letter is to assist the Sponsor in their due diligence process.

• Comfort letter can be addressed to parties other than the sponsorComfort letter can be addressed to parties other than the sponsor (such as the global coordinators, bookrunners, and other managing underwriters) that are parties to the standard arrangement letter.

A l th i i l i HKSRS 4400 “E t t P f A d• Apply the principles in HKSRS 4400 “Engagements to Perform Agreed-upon Procedures Regarding Financial Information”.

• Negative assurance can be provided in the comfort letter.

47

g p


Reporting accountants should report on financial information contained in the Investment Circular only when it has been:

• obtained from the issuer’s historical financial information, financial statements or accounting records that are subject to the issuer’s internal controls policies and procedures; orthe issuer s internal controls, policies and procedures; or

• derived directly from such historical financial information, financial statements or accounting records by analysis orfinancial statements or accounting records by analysis or computation (for example, percentages or financial ratios); or

• the subject of a separate assurance engagement performed in j p g g paccordance with Hong Kong Standards on Assurance Engagements.

48


• Change period comfort is typically requested for:

1. The date/period covered by latest available management accounts; and

2. Cut-off date.

• Comfort can only be provided on financial statement captions if:

1. The captions are readily identifiable in the financial statements of the company (e g sales) Items such as “net debt” areof the company (e.g. sales). Items such as net debt are generally not clearly defined in the financial statements.

2. Management has a basis for making representations to us in respect of such changes This could be difficult for certain itemsrespect of such changes This could be difficult for certain items if the cut-off date falls mid month (e.g. prepaids, accruals). If management is unable to provide such a representation, no comfort should be given.

49

Consent Letter

• As required by Para 9(2) of Appendix 1A/ Para 5(2) of Appendix 1B of MB Rules and GEM Rules, Section 342C of the Hong Kong C i O diCompanies Ordinance

• To be filed with both Registrar of Companies and the HKEx and available for public inspection

• Issue of consent to the inclusion of the Reporting Accountants’ reports and references to the Reporting Accountants name in an offering document / investment circular.offering document / investment circular.

• Date of the letter should be the same date as the prospectus in which the Reporting Accountants’ reports and name are included/referred toincluded/referred to.

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Agenda

IPO general






Commonly encountered issues for IPOs in Hong Kong (1)

Restructuring considerations:

• Carve out of non-core businessCarve out of non core business • Avoid competing business• Connected transactions• Optimal tax structure

Tax matters to consider:

• Tax compliance issueTax compliance issue• Tax planning arrangement• Stock option for employees

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Commonly encountered issues for IPOs in Hong Kong (2)

Accounting:

• Restructuring (accounting for common control transactions)• Restructuring (accounting for common control transactions)• Revenue recognition• Useful lives of fixed assets• Finance and operating leasesFinance and operating leases• Interest expense capitalisation • Government subsidy and grant• Retirement benefits• Share option schemes• IPO costs recognition

53

Agenda

IPO general







Financial disclosures

Notifiable transactions

Connected transactions

Disclosure of price sensitive information

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Financial disclosures (1)

Type Main Board GEM

Preliminary Announcements of Results – Full Financial Year

not later than 3 months after the end of the financial year.


Preliminary Announcements of Results – First Half of The Financial Year

not later than 2 months after the end of the six months period

not later than 45 days after the end of the six months period

Preliminary Announcements of Results – for each of the first 3 and 9 month periods of each financial year

n/a not later than 45 days after the end of the first and the third quarter

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Financial disclosures (2)

Type Main Board GEM

Annual Reports not later than 4 months after the end of the financial year.


Interim reports not later than 3 months after the end of the six months period

not later than 45 days after the end of the six months period

Quarterly reports n/a not later than 45 daysQuarterly reports n/a not later than 45 days after the end of the first and third quarter

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Notifiable transactions (1)

• The thresholds for categorising notifiable transactions under the percentage ratios are summarised as follows:

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Percentage ratios

• Assets ratio — the total assets which are the subject of the transaction di id d b th t t l t f th li t d idivided by the total assets of the listed issuer

• Profits ratio — the profits attributable to the assets which are the subject of the transaction divided by the profits of the listed issuer

• Revenue ratio — the revenue attributable to the assets which are the subject of the transaction divided by the revenue of the listed issuer

• Consideration ratio — the consideration divided by the total market Co s de at o at o t e co s de at o d ded by t e tota a etcapitalisation of the listed issuer. The total market capitalisation is the average closing price of the listed issuer’s securities as stated in the HKEx’s daily quotations sheets for the five business days immediately preceding the date of the transactionpreceding the date of the transaction

• Equity capital ratio — the nominal value of the listed issuer’s equity capital issued as consideration divided by the nominal value of the listed issuer’s issued equity capital immediately before the transaction

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issued equity capital immediately before the transaction


Notification to Announcement Circular to Shareholders’ Accountants’

• The table below summarises the notification, publication and shareholders' approval requirements which will generally apply to each category of notifiable transaction:

HKEx under MB Rule 2.07C

shareholders approval report

Share transaction Yes Yes No No(note 1)

No

Discloseable transaction Yes Yes No No No

Major transaction Yes Yes Yes Yes(note 2)

Yes(note 3)

Very substantial disposal Yes Yes Yes Yes(note 2)

No(note 5)

V b t ti l i iti Y Y Y Y YVery substantial acquisition Yes Yes Yes Yes(note 2)

Yes(note 4)

Reverse takeover Yes Yes Yes Yes(note 2, 6)

Yes(note 4)

1 No shareholder approval is necessary if the consideration shares are issued under a general mandate However if the shares are not issued under a general1 No shareholder approval is necessary if the consideration shares are issued under a general mandate. However, if the shares are not issued under a general mandate, the listed issuer is required, pursuant to MB Rule 13.36(2)(b) or MB Rule 19A.38, to obtain shareholders’ approval in general meeting prior to the issue of the consideration shares.

2 Any shareholder and his associates must abstain from voting if such shareholder has a material interest in the transaction.3 For acquisitions of businesses and/or companies only. The accountants’ report is for the 3 preceding financial years on the business, company or companies being

acquired (see also MB Rule 14.67(6)).4 An accountants’ report for the 3 preceding financial years on any business, company or companies being acquired is required (see also MB Rule 14.69(4)).5 For very substantial disposal circulars, there are now options relating to (i) the issuer’s disclosure of its disposal target’s financial information in abbreviated form, and y p , p g ( ) p g ,

(ii) a review of (as opposed to an accountant's report on) the financial information of the disposal target.6 Approval of the Exchange is necessary.

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Connected transactions (1)

• Connected transactions include:‒ any transaction between a listed issuer and a connected person; or‒ certain other transactions involving the acquisition or disposal of an

interest in a company or the provision of financial assistance as specified under MB Rule 14A.13.

• Some examples of connected person include:‒ a director, chief executive or substantial shareholder of the listed issuer

or any of its subsidiaries;‒ any associate of a person referred to above; etc.

• A connected transaction may also be a reverse takeover, very substantial acquisition, very substantial disposal, major transaction, discloseable q , y p , j ,transaction, or share transaction. Listed issuers should also refer to MB Rules 14 and GEM Rules 19.

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• Listing Rules set out the following de minimis thresholds for connected transactions which are exempt from the requirements of reporting, announcement and/or independent shareholders' approval:

De minimis threshold Based on the percentage ratios used for classifying notifiable transactions

Exempt from reporting A connected transaction on normal commercial terms where each

announcement and/or independent shareholders approval:

Exempt from reporting, announcement and independent shareholders' approval requirements

A connected transaction on normal commercial terms where each or all of the percentage ratios (other than the profits ratio) is/are: a) less than 0.1%; b) less than 1% and the transaction is a connected transaction only because it involves a person who is a connected person of the listed issuer by virtue of its/his relationship with the issuer’s y psubsidiary or subsidiaries; or c) less than 2.5% and the total consideration is less than HK$1 million.[MB Rule 14A.31(2)]

E t f i d d t A connected transaction on normal commercial terms where eachExempt from independent shareholders' approval requirements

A connected transaction on normal commercial terms where each or all of the percentage ratios (other than the profits ratio) is/are: a) less than 5%; or b) less than 25% and the total consideration is less than HK$10 million. [MB Rule 14A.32]

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• MB Rule 14A.33 defines continuing connected transactions exempt from the reporting, annual review, announcement and independent shareholders’ approval requirements. These transactions include:

- consumer goods or consumer services;

- sharing of administrative services; and

- de minimis transactions etc.

• MB Rule 14A.34 defines continuing connected transactions exempt from the independent shareholders’ approval. The exempted transactions are on normal commercial terms where each on all of the percentage (other than the profits ratio) used for classifying notifiable transactions is/are on an annual basis:

- less than 5%; or

- less than 25% and the annual consideration is less than HK$10,000,000

These transactions are only subject to the reporting and announcementThese transactions are only subject to the reporting and announcement requirements.

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• According to MB Rule 14A.37, each year the independent non-executive directors (“INED”) of the listed issuer must review the continuing

t d t ti t f lli d MB R l 14A 33 d ficonnected transactions not falling under MB Rule 14A.33 and confirm in the annual report and financial statements that the transactions have been entered into:

i th di d l f b i f th li t d i‒ in the ordinary and usual course of business of the listed issuer;

‒ either on normal commercial terms or, if there are not sufficient comparable transactions to judge whether they are on normal

i l t t l f bl t th li t d icommercial terms, on terms no less favourable to the listed issuer than terms available to or from (as appropriate) independent third parties; and

i d ith th l t t i th t‒ in accordance with the relevant agreement governing them on terms that are fair and reasonable and in the interests of the shareholders of the listed issuer as a whole.

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• According to MB Rule 14A.38, each year the auditors must provide a letter to the listed issuer’s board of directors (with a copy provided to the HKEx

t l t 10 b i d i t th b lk i ti f th li t d i ’at least 10 business days prior to the bulk printing of the listed issuer’s annual report), confirming that the continuing connected transactions:

‒ have received the approval of the listed issuer’s board of directors;

‒ are in accordance with the pricing policies of the listed issuer if the transactions involve provision of goods or services by the listed issuer;

‒ have been entered into in accordance with the relevant agreementshave been entered into in accordance with the relevant agreements governing the transactions; and

‒ have not exceeded the cap disclosed in previous announcement(s).

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Disclosure of price sensitive information (1)

• MB Rule 13.09

“ an issuer shall keep the HKEx members of the issuer and other…an issuer shall keep the HKEx, members of the issuer and other holders of its listed securities informed as soon as reasonably practicable of any information relating to the group…which:-

a) is necessary to enable them and the public to appraise the position of the group; or

b)is necessary to avoid the establishment of a false market in itsb)is necessary to avoid the establishment of a false market in its securities; or

c) might be reasonably expected materially to affect market activity i d th i f it iti ”in and the price of its securities.”

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• On 25 April 2012, the Legislative Council passed the Securities and Futures (Amendment) Bill 2011 to give statutory backing to price sensitive information (i.e. “inside information”) disclosure requirements (the “Bill”). It was gazetted as a new law on 4 May 2012.

• The new law will come into effect on 1 January 2013

• The Bill:

‒ Requires listed issuers to disclose inside information (ie. price-sensitive information) in a timely manner to the public and impose civil sanctions for breach of the requirement.

‒ Enables Securities and Futures Commission (SFC) to institute Market Misconduct Tribunal (MMT) proceedings direct for market misconduct cases after it has obtained consent from the Secretary of Justice.

‒ Enables SFC to establish a wholly owned subsidiary to facilitate the performance of investor education functions.

‒ Makes certain technical amendments to SFO.

• Officers of the issuer will be liable for failing to disclose the inside information if (i) the g ( )listed issuer is in breach of a disclosure requirement ; and (ii) the officer’s intentional, reckless or negligent conduct in the breach.

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• Key elements of the definition of “inside information”

– Information concerning the listed issuer and its securities;Information concerning the listed issuer and its securities;– Not generally available/known; and– If available/known, would be likely to materially affect the price of the listed

securities

• SFC revises the draft Guidelines on Disclosure of Inside Information (Guidelines) published in 2011 in light of the Bill

• SFC includes in the revised draft Guidelines a list of examples of reasonable measures to be taken by officers to ensure proper safeguards exist to prevent breach of the disclosure requirement

• SFC and the HKEX will work to revise MB Rule 13.09 after passage of the Bill

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Set out below is a non-exhaustive and purely indicative list of examples of events and circumstances which may constitute inside information:

• Changes in performance or the expectation of the performance• Changes in financial position e g cashflow crisis credit crunch• Changes in financial position e.g. cashflow crisis, credit crunch• Takeovers and mergers• Acquisitions or disposals• Share placing, rights issue, other share issues• Changes in value of asset or financial instruments• Petitions or winding up ordersPetitions or winding up orders• Legal disputes and proceedings• Cancellation of credit lines

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• Examples of reasonable measures for internal control procedures:

– Controls for monitoring key business and corporate developmentsg y p p

– Periodic financial reporting procedures to identify key financial and operating data

– Keep a list of sensitive factors to identify potential inside information

– Authorize officer(s) or internal committee to be notified of any material information and to escalate information to the board

– Inside information restricted to employees on a need-to-know basis

Confidentiality agreements with negotiating parties– Confidentiality agreements with negotiating parties

– Designate executives to handle media questions

– Develop procedures for meeting with analysts or the media

Develop procedures to handle rumours leaks and inadvertent disclosures– Develop procedures to handle rumours, leaks and inadvertent disclosures

• Executive officers have a role to monitor implementation and proper functioning of internal control mechanisms

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When the disclosure would constitute a breach against an order made by a Hong Kong court or any provisions of other Hong Kong statutesA

Safe Harbours (s307D)

a Hong Kong court or any provisions of other Hong Kong statutes

When the information concerns incomplete proposals or negotiationsB

When the information is a trade secretC

When the Government’s Exchange Fund or a central bank provides liquidity support to the listed corporationD

When the SFC grants waiver on disclosure prohibited by overseasE When the SFC grants waiver on disclosure prohibited by overseas legislation or restriction ordersE

Except for (A), all others safe harbours are conditional p ( )upon the preservation of confidentiality

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Disclosure of price sensitive information –Guidelines• Disclose to the public “as soon as reasonably practicable” unless it falls

within the “safe harbours”, which exempt a corporation from the requirement to disclose otherwise discloseable inside informationrequirement to disclose otherwise discloseable inside information, provided in the Securities and Futures Ordinance (“SFO”).

72

Agenda

IPO general






Recent market trends (1)

Total capital of HK$90 billion were raised via 64 IPOs in 2012, which was significantly lower than 2011:

Year-to-date statistics 2012 2011 % Change

No. of newly listed companies on the Main Board and the GEM Board 64(2) 101(1) -37%Main Board and the GEM Board 64 101 37%

Fund raised by IPOs (HK$’million) 90,043 259,790 -65%

Average deal size (HK$’million) 2,046 2,678 -24%

Note 1: Included 8 companies listed by introduction and 12 companies transfer from GEM with no funds raised.Note 2: Included 2 companies listed by introduction and 2 companies transfer from GEM with no funds raised.

Source: HKEx

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Recent market trends (2)Up to 31 March 2013, HK$7,986 million were raised via 11 IPOs (2012: HK$9,814 million). Average deal size in 2013 increased despite the number of IPOs reduced.

Year-to-date statisticsMar 2013

YTD Mar 2012

YTD % Change

No. of newly listed companies # 11(1) 18(1) -39%

Total fund raised by IPOs (HK$’million) 8,184 9,814 -17%

Average deal size (HK$’ million) 818 577 42%g ( )

Note 1: Included one company listed by introduction with no funds raised.

Source: HKEx

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Recent market trends (3)Stock code Company name

Date of listing

Funds raised(HK$’million) Sector

Main Board

540Speedy Global Holdings Limited[迅捷环球控股有限公司] 15/01/2013 $123

Textiles, Clothing & Accessories

1232

Golden Wheel Tiandi Holdings Company Limited[金轮天地控股有限公司] 16/01/2013 $760 Properties

1348Quali-Smart Holdings Limited[滉达富控股有限公司] 23/01/2013 $90

Household Goods & Electronics

Chinalco Mining Corporation International[中铝矿业国际] / / $

Diversified Metals & Mi l3668 [中铝矿业国际] 31/01/2013 $3,179 Minerals

2078

PanAsialum Holdings Company Limited[荣阳实业集团有限公司] 05/02/2013 $1,239

Diversified Metals & Minerals

2033Time Watch Investments Limited[时计宝投资有限公司] 05/02/2013 $918

Textiles, Clothing & Accessories

Termbray Petro-king Oilfield Services

2178

y gLimited [添利百勤油田服務有限公司] 06/03/2013 $943 Energy - Oil & Gas

1319

Oi Wah Pawnshop Credit Holdings Limited[靄華押業信貸有限公司] 12/03/2012 $98

Financials - Other Financials

1148Xinchen China Power Holdings Limited[新晨中國動力控股有限公司] 13/03/2013 $774

Consumer Goods -Automobiles1148 [新晨中國動力控股有限公司] 13/03/2013 $774 Automobiles

0864

Wing Lee Property Investments Limited[永利地產發展有限公司] 19/03/2013 By Introduction

Properties & Construction - Properties

GEM

8072Roma Group Limited [罗马集团有限公司] 25/02/2013 $60 Other Financials

Total funds raised from 1 January to 31 March 2013 $8,184

Source: HKEx

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Recent market trends (4)

Stock code Company name Sector

Funds raised(HK$’million)

IPO subscription price (HK$)

Over-subscripti

on rateOffering

price range

Stock price at 12/4/2013

(HK$) % Change

Main Board

540 Speedy Global Holdings LimitedTextiles, Clothing &

Accessories $123 $0.82 426.0x Top $0.68 -17%

1232Golden Wheel Tiandi Holdings Company Limited Properties $760 $1.68 81.4x

Above mid-point $1.31 -22%

1348 Quali-Smart Holdings LimitedHousehold Goods &

Electronics $90 $1.50 721.0x Top $0.83 -45%

3668Chinalco Mining Corporation International

Diversified Metals & Minerals $3,179 $1.75 26.3x


2078PanAsialum Holdings Company Limited

Diversified Metals & Minerals $1,239 $4.13 53.8x


2033 Time Watch Investments LimitedTextiles, Clothing &

Accessories $918 $1 35 651 0x Top $0 96 29%2033 Time Watch Investments Limited Accessories $918 $1.35 651.0x Top $0.96 -29%

2178Termbray Petro-king Oilfield Services Limited Energy - Oil & Gas $943 $3.28 34.3x

Above mid-point $4.50 37%

1319Oi Wah Pawnshop Credit Holdings Limited

Financials - Other Financials $98 $0.98 1086.0x

Above mid-point $1.09 11%

1148Xinchen China Power Holdings Li it d

Consumer Goods -A t bil $774 $2 23 20 4X

Below mid-i t $1 99 11%1148 Limited Automobiles $774 $2.23 20.4X point $1.99 -11%

0864Wing Lee Property Investments Limited

Properties & Construction - Properties By Introduction By Introduction N/A N/A

GEM

8072 Roma Group Limited Other Financials $60 $0.30 N/ABelow mid-

point $0.86 187%

Total funds raised from 1 January to 31 March 2013 $8,184

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Thank you.

Simon LeePartner, AuditKPMGTel: +852 2826 8061Tel: +852 2826 8061Email: [email protected]

www.kpmg.cn

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Documents

IPO in Honggg Kong – from the reporting accountants