Three interesting developments from the Hong Kong Exchange

[1] The SFC has published its conclusions on proposals concerning initial public offering (IPO) sponsors. The announcement on the SFC's website can be found here, the full article here.

"The changes, along with a streamlined regulatory process, will incentivise sponsors to raise standards, pick the right deals and manage them well which should in turn reduce risks for investors and all those involved in IPOs," said SFC Chief Executive Officer Mr Ashley Alder.  "Although we are now experiencing lower IPO volumes these reforms will underpin market confidence during all market cycles."

Mr Alder further noted that "a high-quality application should mean that the regulatory commenting process is shorter and less intensive." The SFC and the Stock Exchange of Hong Kong Ltd (SEHK) will work on measures to streamline this process so that companies can be listed more efficiently.

The proposals are intended to enable and incentivise sponsors to take a responsible, proactive and constructive role when leading IPOs and, overall, maintain investor confidence in Hong Kong’s IPO market.

Malaysia has long time suffered from bad quality IPO's. I used to subscribe to the SPG (Stock Performance Guide) from Dynaquest, every six months I would go through the just published book searching for counters I might have overlooked. The end result was always the same, I was hugely depressed by the hundreds and hundreds of Malaysian listed companies whose long term ROE (Return On Equity) was way below the return on a simple Fixed Deposit. Malaysia therefore could have benefitted from a much tougher regime, for instance regarding sponsors.

Luckily, things seem to have improved, and the average quality of recent IPO's has risen. Unfortunately, the Bursa Malaysia is still swamped with those old companies of low quality, many of which hardly trade at all.


[2] HKEx published a Guidance Letter (GL46-12) on unrealised fair value gains on valuation of biological assets for the purpose of trading record and profit requirements under Rule 8.05(1)(a); disclosure requirements for IPO applicants with biological assets and due diligence work expected to be performed by sponsor and other professional advisers on biological assets.  It also supersedes paragraphs 17 and 18 of Listing Decision HKEx-LD66-1. The letter can be found here.

"Our treatment described below is unique to applicants engaging in agricultural activities in view of the nature and inherent risks relating to the biological assets and their valuation. It is not appropriate to apply this treatment to all applicants who recognise unrealised fair value gains of their trading/ principal assets under the applicable accounting standards, e.g. investment properties and investments in securities. We consider that the risks in biological assets are higher as they are perishable and their valuation is usually subject to higher uncertainty due to the complex and not easily verifiable assumptions adopted."

As David Webb described it on his website: "In other words, "money doesn't grow on trees". Next up: for inventory purposes, poultry-breeders will not be allowed to count their chickens until they are hatched."

Valuation of biological assets was one of the points raised by Muddy Waters in their report on Olam.

[3] The HK Exchange Published Consultation Conclusions on Board Diversity. The link can be found here.

"We note the overwhelming market support for the Exchange to promote board diversity and to introduce measures in the Code. The amendments are not intended to prescribe particular corporate structures or to require compliance with hard and fast rules. The disclosure, or the explanation, is aimed at securing sufficient information so that investors and stakeholders can understand the company’s performance and governance practices, and act accordingly," said Mark Dickens, HKEx's Head of Listing.