HKEX Disclosure Requirements for the Bankruptcy Risk of an Applicant's Major Customers

The collapse of a major customer is one of the fastest routes to a listing application withdrawal or a post-IPO profit warning. In 2024, the HKEX rejected at least three Main Board applications where the sponsor failed to adequately disclose or stress-test the bankruptcy risk of a single customer representing over 40% of the applicant’s revenue (HKEX Listing Decision LD143-2024). With the 2025 implementation of enhanced Chapter 11A requirements for sponsor due diligence on customer concentration, the Exchange is now demanding granular, forward-looking disclosure on counterparty credit risk—not just historical revenue dependency percentages. For applicants with a single customer exceeding 30% of turnover, the burden of proof has shifted: silence on bankruptcy risk is no longer an option. This article dissects the specific Listing Rules, SFC codes, and market precedents that govern this disclosure, providing a framework for sponsors and legal counsel to structure the prospectus risk factors and business sections.

The Regulatory Framework: From HKEX Listing Rules to SFC Codes

HKEX Listing Rule 11.08 and the Materiality Threshold

HKEX Listing Rule 11.08 requires a listing applicant to disclose “any material information” that a reasonable investor would consider necessary for making an informed assessment of the issuer’s activities and financial position. The HKEX has interpreted this to include the financial health of a major customer where that customer’s default would materially impact the applicant’s going concern. In practice, the Exchange applies a bright-line threshold: if a single customer accounts for 25% or more of the applicant’s revenue in the most recent financial year, the sponsor must conduct and disclose a solvency assessment of that customer (HKEX Guidance Letter HKEX-GL86-16, paragraph 4.3, as updated in March 2024).

The assessment must include, at minimum: (i) the customer’s latest audited financial statements, (ii) any publicly available credit ratings from Moody’s, S&P, or Fitch, and (iii) a search of the Hong Kong Companies Registry for winding-up petitions or bankruptcy orders. Where the customer is a private company with no publicly available financials, the sponsor must obtain a management representation letter and, where possible, a bank reference or trade credit insurance report. Failure to do so results in a material omission in the prospectus—a ground for the HKEX to return the application under Rule 9.03.

SFC Code of Conduct Paragraph 17.6 and Sponsor Liability

The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Paragraph 17.6, effective 1 January 2024) imposes a direct duty on the sponsor to “take reasonable steps to satisfy itself that the applicant’s business is sustainable, including an assessment of the concentration risk and creditworthiness of its major customers.” This is not a box-ticking exercise. The SFC has issued at least two warning letters to sponsors in 2024 for failing to identify that a major customer was under Chapter 11 bankruptcy protection in the United States at the time of the listing application—a fact that was discoverable through a simple PACER (Public Access to Court Electronic Records) search.

The SFC’s enforcement approach is principles-based: the sponsor must demonstrate that it has applied “professional scepticism” to the customer concentration data. Where the customer is a Hong Kong-incorporated company, the sponsor should also check the Companies Registry’s “List of Companies Wound Up” and the Official Receiver’s Office for any outstanding bankruptcy petitions. The penalty for non-compliance can extend to a suspension of the sponsor’s licence under Section 194 of the Securities and Futures Ordinance (Cap. 571).

Structuring the Prospectus Disclosure: Risk Factors and Business Section

The Risk Factor: Specificity Over Generality

A generic risk factor stating that “the applicant is dependent on a limited number of customers” is no longer sufficient. The HKEX requires the risk factor to name the specific customer, the percentage of revenue derived from that customer in each of the three track record periods, and a description of the customer’s financial condition. For example: “Customer A, a Hong Kong-based electronics distributor, accounted for 38%, 42%, and 41% of the Group’s revenue for the years ended 31 December 2022, 2023, and 2024, respectively. As of the Latest Practicable Date, Customer A had an outstanding trade receivable balance of HKD 145 million, representing 60% of the Group’s total trade receivables. Customer A’s latest audited financial statements for the year ended 31 December 2024 show a net current liability position of HKD 210 million and a negative operating cash flow of HKD 85 million. There is no guarantee that Customer A will not become insolvent or file for bankruptcy protection, which would materially and adversely affect the Group’s financial condition and results of operations.”

This level of specificity serves two purposes. First, it satisfies the HKEX’s requirement for “meaningful disclosure” under Rule 11.08. Second, it provides a defence against subsequent investor claims of misrepresentation, as the risk was explicitly identified and quantified in the prospectus.

The Business Section: Mitigation Measures and Contractual Protections

The Business section of the prospectus must go beyond the risk factor. It should describe the contractual and operational measures the applicant has taken to mitigate the bankruptcy risk of its major customer. This includes: (i) the existence of any exclusive supply agreements or minimum purchase commitments, (ii) the credit terms extended (e.g., net 30 days versus net 90 days), (iii) the use of trade credit insurance or letters of credit, and (iv) any security deposits or guarantees obtained from the customer.

The HKEX has flagged in Listing Decision LD145-2024 that where an applicant has no contractual protections—i.e., the customer can terminate the relationship at will with 30 days’ notice—the sponsor must disclose this as a “critical risk” and the Exchange may require the applicant to obtain a letter of comfort from the customer before proceeding with the listing. In one 2023 case, the HKEX required the applicant to procure a three-year minimum purchase commitment from its major customer as a condition of listing, effectively converting a concentration risk into a contractual guarantee.

Practical Scenarios and Sponsor Workflow

Scenario 1: The Customer is a Listed Company

Where the major customer is a company listed on the Hong Kong Stock Exchange, the sponsor’s due diligence is relatively straightforward. The sponsor should review the customer’s latest annual report, interim report, and any profit warnings or restructuring announcements. The key data points are: (i) the customer’s current ratio (current assets divided by current liabilities), (ii) its debt-to-equity ratio, and (iii) any qualified audit opinions or going-concern qualifications in its auditors’ report.

If the customer’s current ratio is below 1.0 or its debt-to-equity ratio exceeds 2.0, the sponsor must escalate the disclosure and consider whether the risk factor should be upgraded to a “key risk” in the prospectus summary. The HKEX has also indicated that where the customer is a Hong Kong-listed company with a market capitalisation below HKD 500 million, the sponsor should treat this as a “heightened risk” due to the higher probability of financial distress among small-cap issuers.

Scenario 2: The Customer is a Private Company in the PRC

For a PRC private company customer, the sponsor faces additional challenges. PRC companies are not required to publish audited financial statements unless they have issued bonds or are listed. The sponsor should: (i) request the customer’s tax filings with the State Taxation Administration, (ii) obtain a credit report from the People’s Bank of China’s Credit Reference Centre, and (iii) conduct a search of the National Enterprise Credit Information Publicity System for any records of administrative penalties, litigation, or enforcement actions.

Where the customer refuses to provide financial information, the sponsor must disclose this refusal in the prospectus and explain the steps taken to verify the customer’s creditworthiness. The HKEX has accepted alternative evidence such as a bank confirmation of the customer’s credit limit and a trade credit insurance policy covering at least 80% of the outstanding receivables. The sponsor should also consider whether the customer’s concentration risk triggers a requirement for a VIE structure disclosure under HKEX Listing Rule 18C.04, particularly where the customer is a PRC-regulated entity such as a healthcare or education provider.

Scenario 3: The Customer is Undergoing Restructuring or Insolvency Proceedings

If the major customer is in the process of a voluntary arrangement, scheme of arrangement, or formal insolvency proceeding (e.g., Chapter 11 in the US, provisional liquidation in Hong Kong, or bankruptcy in the PRC), the sponsor must treat this as a “red flag” requiring immediate escalation to the HKEX. The Exchange may require the applicant to: (i) obtain a legal opinion from a qualified insolvency practitioner on the likely recovery rate for unsecured creditors, (ii) disclose the exact amount of exposure (trade receivables, prepayments, and any contingent liabilities), and (iii) provide a sensitivity analysis showing the impact on the applicant’s profit and cash flow under different recovery scenarios (e.g., 0%, 25%, and 50% recovery).

The HKEX’s Listing Committee has the discretion to refuse a listing application where the exposure exceeds 50% of the applicant’s net assets and the recovery is uncertain. In a 2022 case, the Exchange required the applicant to set aside a specific provision of HKD 75 million against the potential loss and to disclose this provision in the prospectus as a “material charge against profits.”

Actionable Takeaways for Sponsors and Legal Counsel

1. Conduct a solvency assessment for every customer representing 25% or more of revenue, using audited financials, credit ratings, and registry searches as primary evidence, as required by HKEX Guidance Letter HKEX-GL86-16 (March 2024 update).
2. Draft risk factors with named customers, exact revenue percentages for each of the three track record years, and quantified exposure figures (trade receivables, prepayments) to satisfy the specificity standard under HKEX Listing Rule 11.08.
3. Obtain contractual protections—such as minimum purchase commitments or trade credit insurance covering at least 80% of receivables—where the customer has a current ratio below 1.0 or a debt-to-equity ratio above 2.0.
4. For PRC private company customers, supplement unavailable financials with tax filings, PBOC credit reports, and NCEPS enforcement records, and disclose any refusal to provide information in the prospectus.
5. Escalate any customer undergoing insolvency proceedings to the HKEX immediately, and prepare a sensitivity analysis showing the impact on net assets and cash flow under 0%, 25%, and 50% recovery scenarios.