China's decision to raise the profit requirements for IPO candidates on some of its bourses is expected to hit the main board of the Shenzhen Stock Exchange the hardest, while aspirants on Shanghai's main board and Shenzhen's ChiNext will be largely unaffected, according to data compiled by IFR.
As part of a bigger plan to improve the quality of listed companies, the Shanghai and Shenzhen exchanges on April 12 proposed to raise the net profit requirement for listing candidates to at least Rmb100m (US$13.8m) for the latest financial year, from Rmb60m. Accumulated net profits and revenues for the most recent three years have to reach Rmb200m and Rmb1.5bn respectively, instead of Rmb150m and Rmb1bn.
For Shenzhen's ChiNext board, listing candidates need an accumulated net profit of at least Rmb100m for the past two years, up from Rmb50m. The regulator also added a requirement of a net profit of at least Rmb60m in the latest financial year.
The alternative thresholds for listing on the main boards (net cashflow and expected market capitalisation) will also be raised.
According to IFR's calculations, nearly one-third of the 74 companies that are lining up for a main board listing on Shenzhen Stock Exchange do not meet the proposed net profit requirements, based on their 2022 financial numbers. Most of these companies have not yet updated their IPO filings with their 2023 financial results.
For those looking at the Shanghai main board and ChiNext, 90% of them meet the tougher profit requirements.
“Among the companies in our portfolio that have already applied for or are waiting to apply for IPOs, they seem to be less affected by the new thresholds," said a Beijing-based investor at a private equity firm. "This may be because we invest in leading companies in various industries and very few of them do not meet the latest requirements.”
Elton Shang, a partner at law firm Lifeng Partners, said some companies that had planned to file for IPOs that are "stepping on" the current listing thresholds may stay on the sidelines, while others in a similar financial condition that have already applied will have to decide whether to withdraw their applications or transfer the listing to another board.
For companies that do not meet the new listing criteria, there are not many options.
“Some companies may list on the Beijing Stock Exchange or in Hong Kong instead," a Beijing-based banker said. "If they are loss-making but do not meet the hard-and-core technology requirements of the Star market, and their current cashflow cannot keep them alive for three to five years before the IPO, it may be a rational choice to be acquired by listed companies.”
Market consultation on the proposed profit rules ended on April 19 but the final rules have not been announced yet.
Tech support
Chinese technology companies may have a better chance to list now thanks to more supportive measures for the sector.
The China Securities Regulatory Commission on April 19 released new rules that back technology companies, even unprofitable ones, which have made a breakthrough in core technology to list domestically and overseas. The regulator has also encouraged them to pursue mergers and acquisitions and bond issuance.
The CSRC will impose caps on fundraising for the Star and ChiNext boards. Tech companies that want to raise more than that amount will need to list elsewhere. It will also design more financing options for tech companies on the Star market, while Beijing-listed companies can also issue convertible bonds.
“Technology companies [including high-quality unprofitable technology companies] have a market window for IPOs, but the market still needs to wait for the corresponding supporting rules,” Shang said.
A Hong Kong-based banker also said those companies that cannot list in the A-share market under the new profit requirements could consider a US listing, given the channel is open now.
Last week, the CSRC approved Chinese autonomous driving start-up Pony.ai’s US IPO plan, which some took as a positive sign for China-to-US listings.
Chinese listings have become rare in the US since ride-hailing provider Didi Global upset Chinese regulators with its US$4.4bn US IPO in June 2021.