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Cutting the risks on Hong Kong IPOs

Henry Fu
Henry Fu
Proposition Sales Specialist

Sponsors of Hong Kong IPOs are stepping up their pre-listing vigilance to reflect closer regulatory scrutiny and a wider range of risks, including from within supply chains. What level of detail is needed to achieve best practice on Enhanced Due Diligence reports?


  1. The financial and reputational risks on Hong Kong IPOs were highlighted by regulatory fines against IPO sponsors totaling HK$727 million in 2019.
  2. Regulators are paying closer attention to the undisclosed cross-holding of shares, particularly between suppliers, customers and the listing company.
  3. Refinitiv sets the bar for industry best practice on Enhanced Due Diligence reports, with two decades’ experience in emerging and frontier markets.

Hong Kong’s ever more stringent regulatory backdrop and tighter due diligence requirements have prompted IPO sponsors to seek deep business intelligence and a holistic view of risk around each potential IPO candidate.

Most sponsors are outsourcing their Enhanced Due Diligence (EDD) needs, but the quality of the reports varies greatly.

In 2013, the Securities and Futures Commission of Hong Kong (SFC) raised the bar in terms of what is expected as part of pre-IPO preparations in Hong Kong.

With Hong Kong attracting a high number of new listings over the past year, there has again been an increased emphasis on implementing higher standards of IPO due diligence for Hong Kong equity listings.

Global coverage and research capability play a key role in providing best-in-class EDD reports.

In addition to examining the candidate on financial, tax, legal, commercial, IT, operational, environmental, and human resource aspects, sponsors are increasingly requiring scrutiny of supply chains and the financial relationships between customers, suppliers, factories, and individual business associates.

Closer scrutiny on Hong Kong IPOs

Sponsors face real financial and reputational risks. In 2019, the SFC fined UBS HK$375 million (US$48 million), Morgan Stanley HK$224 million and Merrill Lynch HK$128 million for “failures when sponsoring, or leading, IPOs.”

EDD reports provide a greater level of scrutiny of potential business associates and highlight risk that cannot be detected by geopolitical analysis or batch screening levels. They provide an audit trail of due diligence and help meet legal obligations.

Regulators are also paying closer attention to undisclosed cross-holding of shares, particularly between suppliers, customers and the listing company. A good EDD report will identify cross-holding of shares, even when the parties involved try to hide such arrangements.

Cross-holding of shares may be hidden by asking a business contact, friend or family member to hold shares on behalf of others, and discovering this relationship through public information sources can be extremely difficult.

Only on-the-ground research using deep industry sources can identify the true asset owners.

Exploring the supply chain

Best practice also requires EDD providers to follow the supply chain beyond the wholesalers all the way to the end customer.

Going two or more layers below the listing company can reveal improper relationships and dealings with the controlling shareholder, which could present an investment risk and a reputational risk to the sponsor.

Once the end customer has been identified, it is important to establish whether the customer does in fact sell product to the retail market.

For example, if the factory sells to a wholesaler in another country, and that wholesaler sells to small shops, best practice requires on-the-ground checks of the ownership and operation of those shops.

In some cases, it has been found that a manufacturer in fact owns the small shops, allowing it to produce false sales data.

Icarus Ng, Director of Advent Capital and a Refinitiv client, said: “Identifying whether or not a customer or supplier is related to the controlling shareholder is an area of utmost concern for us as a sponsor, because it creates an opportunity for the company to fake their financials.

“We had a case where there was an individual who we suspected was a close associate with the controlling shareholder, and they shared a family name.

“The company denied that this was the case, but Refinitiv came up with a tailor-made solution, and did the investigation. It turned out that our suspicions were correct.”

Best approach to due diligence

With more than two decades of experience in emerging and frontier markets and a large global in-house EDD analyst team, Refinitiv sets the bar for industry best practice.

Mabel Lam Quote. Cutting the risks on Hong Kong IPOs

We gather intelligence from industry observers and insiders to create a complete picture of a company, its owners, and operating and litigation history, as well as key management and decision makers, providing insight on their backgrounds, track records, competencies, potential conflicts of interest, and political and criminal links.

Mabel Lam, MD of SPDB International, a Refinitiv EDD client, said: “Refinitiv’s EDD services gave us comfort because we knew that compared to the smaller providers of such reports, we were getting background from the most reliable source, with a presence in all the jurisdictions around the globe, and that saved us a lot of effort.”

In today’s increasingly stringent regulatory environment, our EDD reports protect IPO sponsors from the risks associated with links to unfair labor practices, breaches of environmental ethics, bribery and corruption, money laundering or cyber crime.”

Enhanced Due Diligence enables you to help safeguard your reputation and comply with your regulatory requirements