New listing landscape holds opportunity for well-prepared firm

By Gao Wei, Haiwen & Partners
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A convoluted, unenviable economic landscape awaits Chinese companies planning to go public this year, between recurring covid-19 outbreaks, Russia’s war in Ukraine, rising interest rates amid soaring US inflation, and pressure from China’s own economic downturn. Likewise, much has changed in the regulatory environment for securities issuance.

OVERSEAS AND DOMESTIC

New listing landscape holds opportunity for well-prepared firm
Gao Wei
Partner
Haiwen & Partners
Tel: +86 10 8560 6863
E-mail: gaowei@haiwen-law.com

For overseas listings, aside from the progress of Sino-US negotiations over access to audit reports of Chinese companies listed in America, and the formal launch of the Holding Foreign Companies Accountable Act and its rules of implementation, prospective issuers should keep an eye on China’s new regulatory requirements (and drafts for comments) for domestic companies planning to lists overseas in terms of filing, confidentiality and archive management, cybersecurity, data security and protection of personal information.

For domestic listings, the addition of the Beijing Stock Exchange (BSE) greatly broadened the channel of direct financing for innovative small and medium-sized enterprises (SMEs). The Star Market of the Shanghai Stock Exchange further clarified that medical device companies not yet generating a certain level of income may nevertheless apply under its fifth set of listing standards. Meanwhile, the reform of the registration system for the Main Board presses on at a steady pace. Given the shifting situation, companies should carefully examine their individual situation before choosing between overseas or domestic listings.

LOOK BEFORE LEAPING

For companies planning a domestic listing, the choice of board must first and foremost be based on their industry and phase of development. Under the current multi-layered capital market reforms, the positioning, targets and regulatory review standards for the Main Board, Star Market, ChiNext and BSE have been made abundantly clear.

In particular, the Main Board, catering to companies that are sufficiently profitable or have a history of stable development, makes no special demand of the applicant’s type of business, but does have strict rules over its asset quality, profitability, revenue and cash flow.

The Star Market, with an emphasis on “hard technology”, mainly supports technologically innovative companies that are in line with national strategies, have made breakthroughs in core technologies, and enjoy high market recognition. It caters to a specific set of professional fields, commonly referred to as the “seven industries”, including new-generation information technology, high-end equipment, new materials, new energy, energy conservation and environmental protection, as well as biopharmaceuticals.

ChiNext, focusing on the upgrading of traditional industries, chiefly makes room for growth-inclined innovative startups and fosters the deep infiltration of new technologies, new industries, new business forms and new models into traditional industries. The BSE provides services mainly to innovative SMEs, particularly manufacturing-based “specialised, refined, characteristic and novel” SMEs, with a penchant for players in advanced manufacturing and modern services.

It is worth noting that prospective issuers should also evaluate their own status with reference to the varying listing standards. Taking the Star Market as an example, an applicant does not get automatic approval because it operates in one of the “seven industries”, but must also satisfy the tech and innovative criteria of “four regular indicators and five exemptions”, and possess certain levels of technological, innovative and R&D capacity. This year, there have been a number of rejected or withdrawn listing applications due to their unsuitability to the nature of the board.

In terms of specific listing conditions, unlike the Main Board’s requirement of continual profitability for three consecutive years, the Star Market, ChiNext and BSE have set up multiple core listing standards centring on market value, taking into consideration net revenue, operating income, cash flow, R&D investment, or technological superiority. Their listing requirements for horizontal competition and related party transactions are likewise more lax and flexible.

As the BSE caters to a younger, smaller and more innovative crowd, it imposes laxer requirements on financial indicators, standardised operation and past securities non-compliance (including those of affiliates). In addition, with the implementation of relevant rules in March, BSE-listed companies may, if qualified, switch to the Star Market or ChiNext.

Prospective issuers and stakeholders should further consider the price to earnings (P/E) ratio, liquidity, the lock-up period, shareholding reduction policies and other factors when selecting a board for listing. The Main Board remains, in principle, subject to a P/E ratio cap of 23 times, while the Star Market, ChiNext and the BSE adopt a more market-oriented approach to the offering’s P/E ratio.

In terms of P/E ratio in the secondary market, the Star Market wields a higher average ratio than ChiNext, and significantly higher than the BSE and Main Board. In terms of liquidity, the BSE and Star Market impose an investment threshold demanding daily average of securities assets of not less than RMB500,000 (USD74,000) and two years of experience in securities investment, higher than that of the Main Board and ChiNext. In terms of the lock-up period, the BSE has the obvious advantage by reducing the 36-month lock-up period for actual controllers to 12 months, and imposing no such restriction on investors holding less than 10% of the stock.

In summary, in the context of a somewhat complicated market environment, making a wise choice on the listing place and time, keeping in touch with the company’s own industry, and determining the nature of business and the stage of development can be the key to a successful listing.