A company wanting to list on the Main Board will make an announcement about its IPO through local newspapers or on the website of the Hong Kong Exchanges and Clearing Limited (HKEx), parent company of the SEHK. If a company applies for listing on Growth Enterprise Market (GEM), it shall publish such announcement on the GEM website. The announcements usually outline key information about the IPO including timetable and where to obtain application forms and prospectuses.
How to Read a Prospectus?
A prospectus in both English and Chinese, must be made available to potential investors in an IPO. You should assess the basic fundamentals of the company by reading the information in the prospectus to make an informed decision about whether to invest.
- Summary - You may find it easier to start with the "Summary" section which provides a broad view of the company's business and futures prospects, as well as a rundown of the IPO process before proceeding to other sections for a more thorough understanding of the company.
- Timetable - Lists the important dates, such as deadline of application submission, date of the despatch of share certificates and refund cheques, etc. of the shares offering in Hong Kong.
- General Information - Gives the company's place of incorporation, names of principal bankers, auditors, sponsors, share registrar, etc.
- Overview of the Industry - Briefly explains the characteristics, operations and prospects of the industry of the company.
- Business - Introduces the company's business in details, such as its history, principal activities, services and products offered, analysis of the current operating conditions and performance, its subsidiaries and associated entities, discussion on its corporate earnings, profits and dividends, etc.
- Future Plans and Prospects - Presents an analysis of the business strategies adopted by the company. If the company is to undergo a drastic shift in its core business after listing, you should consider carefully its potential in the new business.
- Management Details - The quality of a company's management is crucial to its performance. This section gives the background, history and qualifications of the directors and senior executives of the company. Look for experienced personnel who have the right credentials to run the company.
- Risk Factors - This section is of great importance as it describes the possible risks associated with the company's business operation, and the risks imposed by the market or the political and economic conditions. You must not overlook any ongoing or pending litigation if there is any.
- Financial Information - Tells the overall financial health of the company. To assess its past performance as to its profitability, you may want to analyse the trend of its revenue and profit margin. Note any accountants' remarks and reservations to the financial statements from the "Accountants' Report".
Financial ratios such as "Price Earning Ratio" ("P/E ratio") and "Earnings Per Share" are also helpful for considering the attractiveness of the issue price. You may also compare the P/E ratio of the IPO company with those of listed companies in the same industry.
- Use of Proceeds - Find out how the company plans to use its capital raised. Some may use the proceeds for business development while some may use them purely for repayment of debts, etc.
Are there profit forecasts in a prospectus?
Under the existing Listing Rules, a listing document must not contain any reference to future profits unless supported by a formal profit forecast. A formal profit forecast must state the specific information relating to all the principal assumptions so as to draw the investors' attention to the uncertainties which may materially disturb the ultimate achievement of the forecast. Moreover, as far as practicable, the perceived impacts are to be set out by way of calculations. The accounting policies and calculations for the forecast must be reviewed by the reporting accountant or the auditor, and the sponsors or financial advisers must make a report indicating whether they have been satisfied with the forecast.
While a company seeking listing on the GEM is not required to publish any profit forecasts in the listing document, the document must include a statement of business objectives setting out the market potential for its active business pursuits over the two financial years after listing. Clear explanations about the assumptions and bases supporting the relevant assessment must also be given.
During the two years after listing, the company must also report on a half-yearly basis its post-listing business progress in comparison with the above business objectives to enable investors to understand its business progress during the initial post-listing period.
Notwithstanding the absence of penalty clauses for unsound profit forecasts, should there be material discrepancies between the results for the relevant period as revealed by the company accounts and those published under the forecasts, the company is still obliged to account for the disparities in the directors' report and the company's accounts and make relevant disclosures to the shareholders.