Chapter 8

Due Diligence Guidelines –

Business Model

4. Sustainability

4.1 Guidance

4.1.1 Sustainability of the listing applicant’s business model is not a matter on which the sponsor is expressly required by Hong Kong rules and regulations to provide positive assurance. However, the regulators routinely consider this as a key factor in the listing applicant’s suitability for listing and a matter on which clear disclosure may be required in the listing document.26

4.1.2 Whether a business will prove to be sustainable depends on a variety of factors. The sponsor should, based on due diligence carried out on different aspects of the listing applicant’s business and taking into account circumstances internal (e.g., historical performance, business strategies and asset base) and external (e.g., operating environment and competition), come to a balanced view as to whether any weaknesses or exposures exist that may, or are likely to, render the listing applicant’s business model unsustainable.

4.1.3 The primary focus of sustainability due diligence is financial. Technological, strategic or other types of unsustainability are likely to come into play only if they have an impact on financial sustainability. A financially unsustainable business model may therefore manifest itself before or after listing in ways such as illiquidity, serious cash strains, insolvency and reliance on parent or connected persons for financial support.

4.1.4 As part of its enquiry into sustainability, the sponsor should pay attention to facts and circumstances showing significant reliance by the listing applicant on any individual parties. See section 5 for guidance on this aspect.

4.1.5 The issue of sustainability is closely associated with that of reliance on shareholders and other connected parties, and the regulators often consider one in tandem with the other. When conducting due diligence on the sustainability of the listing applicant’s business, the sponsor should also bear in mind the matters discussed in section 5 below.

4.2 Recommended Steps

To formulate relevant due diligence enquiries, the sponsor may have regard to the questions set out in Appendix I to this chapter. The sponsor should apply these questions with a critical mind and if required, tailor the enquiries to individual circumstances.

Endnotes

26. See, for example, SFC Dual Filing Update of July 2012 where the SFC states, “Investors would reasonably expect listing documents to provide information on how a listing applicant can sustain its business if it is facing significant risks of business discontinuation” and “liquidity problems or insolvency poses significant risks to the sustainability of a listing applicant”; Exchange Listing Decision LD37-2012 where a listing application was rejected due to concerns over the listing applicant’s sustainability; and Exchange Listing Decision LD30-2012 where the Stock Exchange questioned a company’s suitability for listing given that the company had significant reliance on the parent company which “raised the issue of the sustainability of [its] business”.