SFC fines Changjiang Corporate Finance (HK) Ltd HK$20m, suspends its licence for serious and extensive sponsor failures
SFC fines Changjiang Corporate Finance (HK) Limited $20 million and suspends its licence for serious and extensive sponsor failures
Issue date: 2023-08-21 16:55:52
The Securities and Futures Commission (SFC) has reprimanded and fined Changjiang Corporate Finance (HK) Limited (CJCF) $20 million for serious and extensive failures in discharging its duties as the sponsor in six listing applications (Note 1).
The six listing applications, submitted by CJCF between September 2015 and December 2017, are: Pacific Infinity Resources Holdings Limited (Pacific Infinity); AsiaPac Net Media Holdings Limited (AsiaPac); Perpetual Power Holdings Limited (Perpetual Power); Van Chuam International (Cayman) Limited (Van Chuam); Rising Sun Construction Holdings Limited (Rising Sun); and Byleasing Holdings Limited (Byleasing) (Notes 2 & 3).
The SFC has also partially suspended CJCF’s licence to the extent that the firm shall not act as a sponsor for listing applications on the SEHK of any securities, for one year from 18 August 2023 or until the SFC is satisfied that the controls and procedures of CJCF’s sponsor-related business are adequate for ensuring compliance with the relevant legal and regulatory requirements, whichever is later.
The disciplinary action followed the SFC’s investigation, which found that CJCF had failed to:
- perform all reasonable due diligence in the listing applications of Pacific Infinity, Van Chuam and Rising Sun;
- properly advise and guide Pacific Infinity, Perpetual Power and Byleasing in complying with all relevant listing qualifications;
- ensure disclosure of all material information in the Application Proof prospectuses of Pacific Infinity, AsiaPac and Van Chuam; and
- maintain proper records of the due diligence work it claimed to have done in relation to all six listing applications.
Sponsor failings in Pacific Infinity’s listing application
Pacific Infinity’s core business was the export trading of unprocessed nickel ore from the Philippines to Mainland China, which accounted for 91.1% to 98.4% of its revenue during its track record period.
A legislative bill (Bill) was introduced in the Philippines to ban the export of all unprocessed mineral ore, which, if enacted, would prohibit Pacific Infinity’s core business. The Philippine government also released a white paper (White Paper) which fast tracked the legislative process of enacting the Bill. The Bill and the White Paper were red flags, indicating the viability of Pacific Infinity’s business might be adversely affected in material respects.
The SFC found that CJCF effectively performed no due diligence on the Bill or the White Paper before submitting Pacific Infinity’s listing application. Without adequate due diligence on the Bill and the White Paper, CJCF could not have had a proper basis to come to a reasonable opinion on the risks posed by the Bill and the White Paper, and hence Pacific Infinity’s suitability for listing.
The SFC also found that CJCF had failed to ensure disclosure of all material information (including the likelihood of the Bill being enacted, Pacific Infinity’s contingency arrangements in response to the Bill and their impact on its business, and the existence of the White Paper) in Pacific Infinity’s Application Proof prospectus.
Sponsor failings in AsiaPac’s listing application
AsiaPac was primarily engaged in providing digital marketing service. It advised advertisers (ie, its customers) on marketing campaigns launched via digital marketing platforms (ie, its suppliers – such as search engines).
AsiaPac’s profitability relied heavily on receiving supplier discounts, which were set as a certain percentage of the total procurement costs payable by AsiaPac to its suppliers (Note 4). ln order to receive more supplier discounts, AsiaPac would waive service fees for its top fixed-rate contract customers which had substantial marketing budgets with a view to boosting its sales volume and therefore procurement costs (True Pricing Strategy) (Note 5).
The amount of supplier discounts AsiaPac received, the True Pricing Strategy, and the proportion of fixed-rate contracts for which services fees were waived were all material relevant information that would have enabled the SEHK and investors to understand the materiality of the supplier discounts and the True Pricing Strategy to AsiaPac’s profitability. The SFC, however, found that CJCF had failed to advise AsiaPac to make sufficient disclosure of such information in its Application Proof prospectus.
Sponsor failings in Perpetual Power’s listing application
Perpetual Power was an infrastructure company principally engaged in the development, operation and management of hydropower plants in Guangxi Province, Mainland China. It operated three hydropower plants during the track record period.
In order for listing approval to be granted, the GEM Listing Rules required infrastructure companies to obtain land title certificates and building ownership certificates (Title Certificates) for all properties in Mainland China used in infrastructure projects (Note 6). As of the relevant latest practicable date, Perpetual Power lacked Title Certificates to own two of the three hydropower plants that it operated.
Despite the fact that Perpetual Power was not eligible for listing in view of the outstanding Title Certificates, CJCF advised it to submit its listing application. CJCF attempted to justify its advice by claiming, on the one hand, that Perpetual Power was an infrastructure company and an exemption under the GEM Listing Rules applied such that it was not required to obtain the Title Certificates, and on the other hand, that Perpetual Power was not an infrastructure company and hence the requirement was inapplicable. These purported justifications by CJCF, which were based upon a misinterpretation of the relevant GEM Listing Rules, were self-contradictory and unacceptable.
Sponsor failings in Van Chuam’s listing application
Van Chuam was a property developer primarily engaged in the development and sale of properties in an integrated residential project (Project) in Anhui Province, Mainland China. It relied heavily on borrowings to finance its land acquisition and construction for the Project.
During its track record period, about 87.1% to 100% of such borrowings consisted of debt restructuring arrangements (Debt Restructuring Arrangements) with an asset management company (Asset Management Company). Pursuant to the Debt Restructuring Arrangements, Van Chuam’s main operating subsidiary obtained loans from its related parties. These underlying loans were then restructured and transferred to the Asset Management Company, which assumed the rights as lender under the loans. Van Chuam’s subsidiary would repay the loans to the Asset Management Company.
The SFC found that CJCF had failed to conduct proper due diligence on two core aspects of the Debt Restructuring Arrangements, namely, the existence of the underlying loans and the qualification of the underlying loans as distressed assets. This was the case even though CJCF was aware from its due diligence that the Asset Management Company could only provide financing to its clients through re-structuring “non-performing debts” or “distressed assets”.
Furthermore, although Van Chuam’s Application Proof prospectus stated that the Debt Restructuring Arrangements were commercially beneficial to Van Chuam, potential investors had no or little basis to make an informed assessment on this statement. This was because CJCF had failed to ensure disclosure in the Application Proof prospectus of all material information pertaining to the Debt Restructuring Arrangements, including:
- the salient terms of various agreements under the Debt Restructuring Arrangements;
- the basis for qualifying the underlying loans from Van Chuam’s related parties as “distressed assets”; and
- the fund flows and total financing costs of the Debt Restructuring Arrangements.
Sponsor failings in Rising Sun’s listing application
Rising Sun was engaged in property construction business in Mainland China which was capital intensive. It often had to commit significant working capital upfront before receiving payment of the bulk of the contract value of the construction projects from its customers.
The Application Proof prospectus of Rising Sun stated that its directors were of the view, and CJCF concurred, that it had sufficient working capital for at least the next 12 months. At the same time, the Application Proof prospectus also disclosed as a risk factor that Rising Sun might not be able to meet significant working capital requirements if it experienced significant delays or defaults in, among others, its trade receivables.
CJCF was aware that, during the track record period, the turnover period of Rising Sun’s trade receivables was significantly longer than the credit period granted to its customers (Prolonged Credit Period). The Prolonged Credit Period had led to negative operating cash flows, and Rising Sun’s working capital needs had to be met by borrowings and/or cash on hand.
However, the SFC found that CJCF had failed to conduct reasonable due diligence to verify the underlying reasons for the Prolonged Credit Period, by accepting at face value without performing appropriate verification the statements and representations made and documents produced by Rising Sun.
Rising Sun’s Application Proof prospectus also stated that 96.7% of its trade receivables as of the end of its track record period (amounting to RMB 1.02 billion) were settled by its customers in the three months following the end of the track record period and before the submission of its listing application (Subsequent Settlement).
Again, the SFC found that CJCF had accepted at face value without performing appropriate verification the statements and representations made and documents produced by Rising Sun with respect to the Subsequent Settlement.
Sponsor failings in Byleasing’s listing application
The SFC found that CJCF had failed to properly advise Byleasing on the selection of track record period and the timing of submission of listing application in accordance with the GEM Listing Rules and related SEHK guidance, resulting in the return of the listing application by the SEHK.
Failure to maintain proper records of due diligence work
The SFC’s investigation into CJCF’s conduct in the six listing applications also revealed systemic record keeping failures. For example:
- there was no audit trail for some of the due diligence which CJCF claimed to have performed (Note 7);
- CJCF did not retain a substantial portion of verification notes and their supporting materials; and
- CJCF also did not document work done, analyses and conclusions against a substantial number of steps in the due diligence plans.
Without proper records of due diligence, CJCF failed to demonstrate it had exercised professional scepticism by querying the reliability of information provided by the listing applicants and their experts, and verifying the statements disclosed in their respective Application Proof prospectuses.
The SFC is of the view that CJCF’s conduct fell substantially below the standards expected of it as a sponsor and breached the requirements under Chapter 17 of the Code of Conduct and other regulatory requirements (Notes 8 & 9).
In deciding the sanctions, the SFC has taken into account all relevant circumstances, including:
- CJCF’s sponsor failings concerned six listing applications submitted within a span of two years and three months;
- CJCF’s deficiencies as a sponsor were extensive and serious:
- CJCF had failed to properly examine and verify material listing issues relating to the core aspects of the businesses of Pacific Infinity, Van Chuam and Rising Sun before submitting their listing applications;
- CJCF had failed to ensure the disclosure of the White Paper in Pacific Infinity’s Application Proof prospectus, even though it was a clear red flag pointing towards an increased likelihood of the passing of the Bill which might jeopardize the viability of the company’s core business;
- CJCF advised Perpetual Power to proceed with its listing application notwithstanding that the lack of Title Certificates rendered the company ineligible for listing;
- The need to send a strong deterrent message to the industry and market that the SFC does not tolerate sponsor failures;
- CJCF’s financial situation (Note 10);
- CJCF’s cooperation in resolving the SFC’s concerns, including its agreement to engage an independent reviewer to review its policies, procedures and practices in relation to the conduct of its sponsor business; and
- CJCF has an otherwise clean disciplinary record.
- CJCF is licensed under the Securities and Futures Ordinance to carry on Type 6 (advising on corporate finance) regulated activity.
- CJCF was the sole sponsor in the applications of Pacific Infinity, Van Chuam and Rising Sun to list on the Main Board of The Stock Exchange of Hong Kong Limited (SEHK) and in the applications of AsiaPac, Perpetual Power and Byleasing to list on the Growth Enterprise Market (GEM) of the SEHK.
- The SEHK rejected Pacific Infinity’s application and returned AsiaPac’s and Byleasing’s applications. The applications of Perpetual Power, Van Chuam and Rising Sun lapsed six months after their respective submissions.
- CJCF’s due diligence on AsiaPac found that the supplier discounts received represented 27.4% to 34.6% of AsiaPac’s gross profits during the track record period.
- AsiaPac and its fixed-rate contracts customers would agree on a marketing budget, which consisted of the procurement cost payable to the suppliers, and a service fee charged by AsiaPac at a fixed rate of the procurement costs. During its two-year track record period, AsiaPac generated 46.6% and 28.4% of its total revenue from its top three fixed-rate contract customers without charging them any service fees. These top customers represented 73.6% and 49.4% of AsiaPac’s fixed-rate contracts in terms of revenue.
- Rules Governing the Listing of Securities on the GEM of the SEHK.
- The due diligence CJCF claimed to have performed included discussing various matters with legal advisors, industry consultants, accountants, etc. and reviewing debt agreements, contracts with customers, audit reports, etc.
- Code of Conduct for Persons Licensed by or Registered with the SFC.
- Please refer to the Statement of Disciplinary Action for the relevant regulatory requirements.
- But for the firm’s financial position, the SFC would have imposed a heavier fine against it.
- AsiaPac Net Media Holdings Limited 亞太網絡資訊控股有限公司
- Baiying Holdings Group Limited 百應控股集團有限公司
- Changjiang Corporate Finance (HK) Limited 長江證券融資(香港)有限公司
- Pacific Infinity Resources Holdings Limited 太平洋礦產控股有限公司
- Perpetual Power Holdings Limited 恆電控股有限公司
- Rising Sun Construction Holdings Limited 恒昇昌建設控股有限公司
- Van Chuam International (China) Limited 萬創國際(中國)有限公司