Chapter 8

Due Diligence Guidelines –

Business Model

3. Due Diligence on a Listing Applicant’s Industry

3.1 Standard

[A sponsor should] gain a sufficient understanding of the industry in which the listing applicant operates, including reviewing key characteristics of the industry and data about competitors. [Paragraph 17.6(d)(iii) of the Code of Conduct]

3.2 Guidance

3.2.1 One key aspect of the sponsor’s due diligence should be to assess the industry and target markets in which the listing applicant’s business has principally operated and is intended to operate principally. For guidance on the sponsor’s due diligence on two specific industries (Mineral companies and biological assets), please refer to Chapter 23 “Due Diligence Guidelines – Mineral Companies” and Chapter 24 “Due Diligence Guidelines – Biological Assets”.

3.2.2 The Stock Exchange states20 that a listing applicant must follow its guidance when preparing its listing application, which aims to ensure that the “Industry Overview” section of the listing application is easy to understand, and provides investors with a fair and balanced disclosure of the overall industry information relevant to the listing applicant’s business. Failure to do so may result in the listing application being considered not substantially complete as required under the Listing Rules.

3.2.3 As part of the listing application, a comparison of the listing applicant’s performance with industry averages or comparable companies in similar industries in terms of gross profit margins, net profit margins, turnover growth, return on equity, gearing ratio, debt to equity ratio, credit policy, productivity, and an analysis of the variations, must be submitted to the Stock Exchange for vetting.21

3.2.4 If the listing applicant’s performance is significantly different from industry averages or comparable companies in similar industries, the sponsor should conduct sufficient independent due diligence to be satisfied that the explanations provided by the listing applicant are valid and reasonable and that accurate and complete disclosure is made in the listing document.22

3.3 Recommended Steps

3.3.1 In order to have a sound understanding of the industry in which the listing applicant principally engages and/or is intended to engage, the sponsor should undertake the following due diligence steps:

(a) obtaining and reviewing relevant pre-existing research or industry reports, if any, of the listing applicant issued or prepared during the track record period applicable to the listing applicant;

(b) to the extent that the information is publicly available, reviewing and comparing the business model and details regarding the listing applicant’s competitors;

(c) checking for information regarding the industry published by a relevant body, or public official documents or statements to verify the data provided by the listing applicant (e.g., the market ranking);

(d) conducting interviews with the listing applicant and its industry expert, if any, regarding the market information and data of the industry applicable to the listing applicant’s business with a view to adequately understanding the industry and any specific information or factors that would affect the listing applicant’s business model (including its market position, share and ranking in the whole industry, the competitive landscape of the listing applicant and its major products/services, historical price trends of raw materials and final products/services involved in the listing applicant’s business);

(e) where a research or industry report is commissioned by the listing applicant, assessing the independence and objectivity of the information contained in such report; for guidance on the standard for review of expert and third party reports, please refer to Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers”;

(f) checking the most up-to-date available market information23 that reflects the current economic situation, including, the industry maturity and size, and key customers and suppliers, and how they are relevant to the listing applicant’s business; and

(g) where there is a commissioned research or industry report, as part of bring-down due diligence, confirming with the writer of the report that there is no material adverse change to the information in the relevant report.

3.3.2 The sponsor should review the industry information relevant to the listing applicant’s business disclosed in the “Industry Overview”, “Business – Strengths and Strategies” and “Business – Competition” sections of the listing document and ascertain that it is consistent with the information disclosed elsewhere in the listing document and with the information known to the sponsor.

3.3.3 The sponsor is expected to independently verify the accuracy, reliability, and/or completeness of information disclosed in a listing document, which is sourced from commissioned/non-commissioned research reports.24 However, if, having made reasonable enquiries, the sponsor still encounters practical difficulties concerning verification, the Stock Exchange would allow the listing applicant to include certain appropriate cautionary language to alert investors that the relevant information from commissioned /non-commissioned research reports is not independently verified.25 This, however, would not take away responsibilities of the listing applicant as well as the sponsor for disclosure in a listing document under the applicable laws.


20. Exchange Guidance Letter GL48-13.

21. See Form M104 Main Board: IPO – Additional information to be submitted together with the Form A1 and Form M111 Main Board : IPO – Market comparable analysis. The SFC in SFC Dual Filing Update of January 2011 identified three cases in which the listing applicants enjoyed significantly higher gross profit margins than their industry peers during the track record period. The explanations provided initially were either unspecific or unsubstantiated.

22. See SFC Dual Filing Update of January 2011.

23. The Stock Exchange expects that the market information disclosed in a listing document should be at least updated to the latest financial year immediately preceding its issue (paragraph 3.8 of Exchange Guidance Letter GL48-13).

24. In SFC Dual Filing Update of June 2009, the SFC was critical of a case where the listing applicant claimed to be a leader in the market, but was found to be a leader only in relation to a segment of the market. In a similar case, the statements in relation to the competitive strengths of the listing applicant were neither supported by facts nor relevant to its business at all.

25. Please refer to Exchange Guidance Letter GL8-09. The Stock Exchange expects any cautionary language to be along the following lines: “We believe that the source[s] of this information [is an/are] appropriate source[s] for such information and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. The information has not been independently verified by us, the Sponsor, the Underwriters or any other party involved in the Global Offering and no representation is given as to its accuracy.”


HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.

Information Disclosed in Listing Document

Listing Applicant Industry

Due Diligence on Listing Applicant Industry

Industry Overview Section of Listing Application

Comparison of the Listing Applicant’s Performance with Industry Averages

Market Ranking Due Diligence Process

Research or Industry Report Due Diligence Procedures

Business Strengths and Strategies

Business Competition

Hong Kong Stock Exchange IPO

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