Hong Kong – IPO – New Listing Decision LD92-2015 – Rejected Listing Applications.

Industry sector

Reasons for rejection

Rejection due to issues with an applicant's business case

Mining company

The applicant failed to demonstrate a clear path to commercial production. There was a high risk relating to the project payback period, an overly ambitious future funding plan and a high degree of uncertainty in obtaining the necessary mining permits to start commercial production.

Regulated business

The applicant had breached local regulations governing the operation of its business and could not meet the cash flow requirements under the Listing Rules if the non-compliance income was excluded. There was also grave concern as to suitability of its business in the light of its heavy indebtedness and minimal cash at bank, as well as its ability to obtain independent finance. It also had a high concentration of customers which impacted on its bargaining powers with them. There was doubt if the applicant could continue its business on a going concern basis.

Gaming-related business

The applicant relied heavily on one head operator for income and a few business partners to bring in customers. The applicant granted loans to its customers which were partly guaranteed by its business partners. There were concerns over the applicant's credit risk control measures for ascertaining the creditworthiness of its business partners and customers. The applicant's financial performance was also deteriorating.

Manufacturer and seller of consumer goods

There were concerns over the applicant's unpredictable non-recurring sales during the track record period as there had been less than ten sales transactions during that time. Four out of five executive directors did not have relevant experience in the business before joining the applicant less than two years before the listing application.

Property sub-leasing business

The concerns on the applicant's business model included failure to obtain property ownership certificates for its properties and lack of sufficient market comparables. There was also an unusual arrangement whereby the applicant was able to terminate a master lease agreement without penalty during a track record period with no compelling evidence that this was industry norm. There was also extreme competition between the applicant and its controlling shareholder.

Hotel developer

The applicant relied on government discretionary subsidies to maintain sufficient cash to meet the applicant's debt repayments. It also showed a loss-making history and lacked a clear path to profitability for its properties.

Rejection due to non-compliance issues

Money lender

The applicant failed to rectify all its non-compliances with local money lending laws and there was a lack of information on whether its newly implemented

internal control measures were effective to prevent future breaches. There was also concern as to the applicant's reliance on its controlling shareholders for financial assistance and the suitability of its directors given two of the six executive directors had been involved in SFO non-compliances. Five of the six executive directors were also directors of other listed companies and it was questionable whether they could devote sufficient time to the applicant's business.

Software solution provider

The applicant's major subsidiary was involved in tax evasion during the track record period. The amount involved was material (over 25% of the company's net assets). There were also concerns on the suitability of the directors in overseeing the operation.

Property leasing

There were non-compliances with local building safety regulations for the majority of its properties, plus uncertainty over when a number of building orders over its properties would be released before listing, which would have an impact on the applicant's business.

Rejection due to issues as to director's suitability

Goods wholesaler and retailer

A director who was also the controlling shareholder made payments to an ex-government officer who was convicted of receiving bribes. No charges were laid against the director but he failed to demonstrate that he was able to meet the character and integrity standard requirements under the Listing Rules. Even if the director resigned, he would still exert significant influence on the applicant due to a number of family members working at senior management level within the applicant, plus one on the board of directors.

Rejection due to reliance on a major customer

Commodities trader

The single largest customer had a short business relationship with the applicant and the credit period granted to this customer was substantially longer than other customers. There was also no proven record that the applicant could find new customers to reduce reliance on the single largest customer.

Rejection due to sponsor's lack of independence

Regulated business

The applicant's sponsor was not independent under the GEM Rules as the sponsor group had subscribed for pre-IPO convertible bonds. This was not identified until the listing application was submitted.