A guide to listing in Hong Kong

Hong Kong — While competition with the Shanghai Stock Exchange continues, Hong Kong is still home to some of China’s largest mineral companies, with larger companies generally having a secondary listing in Shanghai.

As a more established and more mature listing venue and marketplace, Hong Kong continues to be the anchor market and the desired listing venue for companies with operations in Asia — especially China. Higher corporate governance standard and more stringent and strict listing rules give investors more confidence in the quality of the companies listed on the exchange.

More mineral companies are expected to list on the exchange, to take advantage of opportunities offered by the capital markets and better valuations as investors here understand and recognize the investment potential. As more mineral companies list, Hong Kong will become another natural home to mineral companies globally, especially Canada, Australia and the United Kingdom.

So what do miners need to know about listing in Hong Kong?

For the seven months ending July 31, 2007, the exchange raised HK$226.4 billion (US$29 billion) in equity funds for new listers. The exchange has an average daily turnover of HK$33.9 billion (US$4.35 billion).

Despite the slide since October 2007, share prices of mineral companies listed on the exchange have still significantly outperformed the Hang Seng Index, the BBG World Mining Index and the MSCI Asia ex. Japan index.

Mineral companies listed on the exchange are trading at multiples that are at least comparable, or in many cases, higher than their global counterparts.Companies listed on the exchange trade at such high trading multiples because the exchange looks at P/E as the primary valuation methodology. The EV/EBITDA ratios and other cash flow metrics tend to be much higher as a result. These mineral companies’ P/Es are also benchmarked to other industrial companies listed in Hong Kong, which also generally trade at higher multiples than their global counterparts.

Earnings of mineral companies have been growing tremendously in recent years. Surging natural resources prices partly contributed to the record profitability increase. And analysts on the Street predict a bright future for these companies, thanks to the substantial and rising raw material needs of China, with demand indicators running at almost double-digit growth rates.

However, this does not mean that any company coming to the exchange could command higher multiples. High growth potential (arising from equity connection to China or forecasted better-than-average price for the particular type of natural resource) is a prerequisite.

Companies must fulfill one of three financial criteria in order to list on the Hong Kong exchange. It must either have profits of at least HK$50 million ($6.7 million) in the past three years and a market capitalization of at least HK$200 million ($26.8 million); a market cap of HK$4 billion ($539 million) and revenue of HK$500 million ($67.4 million) for its most recent year audited; or a market cap of HK$2 billion ($270 million), revenue of HK$500 million ($67.4 million) in its most recent financial year and positive cash flow from operations of HK$100 million ($13.5 million) in total for the past three years.

The following is a list of additional requirements for listing on the Hong Kong Stock Exchange:

A new applicant must have been under substantially the same management and ownership during the past three years. In practice, this means that the company has had both management continuity for at least the three preceding years and ownership continuity and control for at least the most recent audited financial year. However, for issuers qualifying under the market capitalization/revenue test, the exchange may accept a shorter trading record period if the new applicant can demonstrate management continuity for the most recent audited financial year and that its directors and management have sufficient and satisfactory experience of at least three years in the same line of business.

The exchange is prepared to accept a shorter trading record period and/or may vary or waive profit or other financial standards requirements in respect of newly formed “project” companies, mineral companies or other cases where the issuer or its group has a trading record of at least two financial years, if it is satisfied that the listing of the issuer is desirable, in the interests of the issuer and investors and that investors have the necessary information available to arrive at an informed judgment concerning the issuer and the securities for which listing is sought;

The applicant must have a minimum public float of 25% of the issuer’s total issued share capital. For issuers with an expected market capitalization of more than HK$10 billion ($1.3 billion), the exchange may accept a lower percentage of between 15% and 25%. The minimum public float must be maintained at all times.

The minimum spread of shareholders is 300 (if qualifying under the profit test or market capitalization/revenue/cash flow test) or 1,000 (if qualifying under the market capitalization/revenue test). Additionally, not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders;

The public tranche must be fully underwritten;

A new applicant must appoint a sponsor to assist it with its listing application and help the sponsor to perform its role;

Competing businesses of directors and controlling shareholders are allowed, provided that full disclosure is made at the time of listing and on an ongoing basis; and

Dual listings are allowed, with different requirements for primary and secondary listings. Listing vehicles incorporated in Hong Kong, Bermuda, the Cayman Islands or China are generally acceptable for primary or secondary listings on the main board. All Australian states and the Canadian province of British Columbia were accepted by the Exchange in 2006. Other jurisdictions may be accepted on a case-by-case basis.

Mining companies

Special requirements apply to issuers whose activities (whether directly or through a subsidiary company) include exploration for or production of natural resources, including metal ores, mineral concentrates, industrial minerals, mineral oils, natural gases or solid fuels, as well as companies engaged in mining, extraction of hydrocarbons, quarrying or similar activities.

An application for listing from a company whose current activities consist solely of exploration will not normally be considered unless the issuer can establish the existence of adequate economically exploitable reserves in a defined area over which the issuer has exploration and exploitation rights, an estimate of the capital cost to bring the property into production and an estimate of the time and working capital required to bring the issuer into a position to earn revenue.

These qualifications for listing are in addition to the basic conditions for listing. However, the financial requirements previously outlined may not apply if the exchange is satisfied that the directors and management of the issuer have sufficient and satisfactory experience of at least three years in mining and/or exploration activities.

An issuer whose activities include or are to include exploration for natural resources to a material degree must have available to it the technical advice of an independent person who has had appropriate experience in the type of exploration activity undertaken or proposed by the issuer.

If important evidence which must remain confidential for legal or other valid reasons has to be excluded from the listing document or circular, or the technical adviser’s report included in them, the issuer must allow an independent consultant, mutually approved, to verify to the exchange in confidence the importance of such evidence.

The listing document

In the case of a new applicant whose activities include to a material extent exploration for natural resources, the listing document mu
st contain the following information:

The full name, address, any professional qualification and relevant experience of the person whose technical advice is available to the issuer in relation to its exploration activities;

A statement of the interests of each promoter or technical adviser in the share capital of the issuer together with the amounts of the holdings in question;

The general nature of the business of the issuer, distinguishing between different activities that are material to the profits or losses, assets employed or any other factor affecting the importance of each activity;

The nature and extent of the issuer’s rights of exploration and exploitation and a description of the properties to which such rights attach, giving particulars of the duration and other principal terms of the concessions;

In the case of proposed exploitation of mineral bodies, the nature and extent of the issuer’s rights and a description of the properties to which such rights attach, again giving particulars of any terms;

A report by the technical adviser with respect to the estimated reserves and the evidence on which the estimate is based;

A statement setting out additional information for proper appraisal of any special factors affecting the exploration business of the issuer, for example, difficulties of access to, or in recovery of, minerals on properties where the issuer has exploitation rights, or special economic, environmental, political or other circumstances that may affect the commercial viability of the project;

In addition to a statement by the directors attesting to the sufficiency of working capital required, the company must provide an estimate of funds required for at least the next two years;

Where the issuer already has income, or expects to receive income during the period covered by this statement, particulars of the estimated cash flow for at least the next two years;

An estimate of the further finance required to enable the issuer to exploit its proven reserves and begin mining on a commercial scale, together with an estimate of the time needed to achieve this;

Full particulars of the nature and extent of the interest, direct or indirect, if any, of every director, technical adviser or promoter named in the listing document or circular, in the promotion of, or in any assets which have been within the last two years, acquired, disposed of by, or leased to, the issuer or any of its subsidiaries;

A statement of any claims in relation to exploration rights made or notified either by third parties against the issuer or, in the absence of such claims, an appropriate negative statement;

A statement of the company’s business activities and financial information, as well as information on its general business trend, financial and trading prospects;

Disclosure of the details of its intended use of proceeds; and

An accountants’ report must cover three financial years except for exempted companies. It can be prepared in accordance with either Hong Kong Financial Reporting Standards or International Financial Reporting Standards for primary listings on the Exchange. It may be prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) or other acceptable accounting standards acceptable to the Exchange under certain circumstances.

Other details

The exchange imposes certain restrictions on the disposal of shares by controlling shareholders following a company’s new listing. A controlling shareholder is any person or group of persons entitled that control 30% or more of the issuer’s shares or are in a position to control the composition of a majority of the board of directors.

Essentially, there is a six-month hold period for controlling shareholders after listing, among other restrictions. They also face disclosure requirements.There are specific restrictions on the basis of allocation within the public subscription tranche and the claw back mechanism between the placing tranche and the public subscription tranche in the event of oversubscription. The new applicant may not list by way of placing only if there is likely to be significant public demand for its securities.

The exchange pre-vets prospectuses for the purpose of authorizing registration. It also reserves the right to reject and raise queries on any listing application.

The exchange actively polices the market and undertakes enforcement actions when listing rules are breached. It also pre-vets announcements, circulars and listing documents for compliance with the listing rules, and reserves the power to request clarification announcements.

— The author is a lawyer in the Hong Kong office of Dorsey & Whitney who has over 20 years of experience in corporate finance in Hong Kong. He sits on a number of securities regulatory committees in Hong Kong and has advised mining companies such as Sino Gold Mining and Zijin Mining on listing on the Hong Kong Stock Exchange. He can be reached at richardson.david@dorsey.com .

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