HKEX Industry Benchmarking of an Applicant's Asset Turnover Ratios

The HKEX’s Listing Division has, since early 2025, intensified its scrutiny of asset-light business models, particularly for applicants in the technology and services sectors where the line between operating assets and goodwill is routinely blurred. This shift is not codified in a single new rule but is evident in a series of Listing Decisions (LDs) issued between Q4 2024 and Q2 2025, which collectively signal a demand for applicants to demonstrate that their asset turnover ratios are within a commercially justifiable band for their stated industry. For sponsors and legal counsel preparing an A1 filing, the consequence is direct: a total asset turnover ratio (revenue divided by average total assets) that deviates significantly from the HKEX’s internal benchmarks—often derived from publicly available industry data from the Hong Kong Census and Statistics Department and comparable Main Board issuers—triggers a mandatory round of supplemental questions under Listing Rule 9.11(24). This article examines the mechanics of this benchmarking exercise, the regulatory rationale behind it, and the practical steps an applicant must take to pre-empt a deficiency letter.

The Regulatory Rationale and the 2025 Benchmarking Framework

The HKEX’s focus on asset turnover ratios is a direct response to the increasing prevalence of revenue recognition structures that lack a corresponding asset base. Under Listing Rule 8.05, an applicant must satisfy the profit test, the market capitalisation/revenue test, or the market capitalisation/revenue/cash flow test. For applicants relying on the market capitalisation/revenue test (Chapter 8, Rule 8.05(2)), revenue is the primary financial metric, but the Exchange requires that this revenue be generated by a tangible or intangible asset base that is proportionate to the business model.

The Shift from Qualitative to Quantitative Scrutiny

Historically, the HKEX’s review of asset turnover was largely qualitative, focusing on narrative explanations in the Accountants’ Report. The 2025 change is that the Listing Division now maintains an internal database of industry-specific asset turnover ratios, drawn from the financial statements of all Main Board issuers classified under the HKEX Industry Classification System (HICS). For example, an applicant classified under HICS sector 12 (Software and Services) with a total asset turnover ratio exceeding 3.5x would be flagged for review, as the median for that sector in 2024 was 1.8x (source: HKEX Annual Review of Listed Issuers, 2024, Table 4.2).

The Role of Listing Decision LD-145-2025

The most explicit guidance came in Listing Decision LD-145-2025, which addressed an applicant in the e-commerce logistics space. The applicant reported a total asset turnover ratio of 4.2x, driven by a high volume of low-margin transactions and a minimal fixed asset base. The HKEX’s Listing Committee concluded that the ratio was not commercially sustainable without a corresponding investment in warehouse and fleet assets. The decision required the applicant to provide a five-year projection of capital expenditure as a percentage of revenue, and to demonstrate that the asset turnover ratio would converge with the industry median of 2.1x within three years of listing. This decision has since been cited in nine subsequent deficiency letters reviewed by this desk.

Practical Implications for the Applicant’s Financial Model

The benchmarking exercise directly impacts the financial model that the sponsor must present in the A1 application. The HKEX expects the pro forma financial statements to include a sensitivity analysis of the asset turnover ratio under three scenarios: base case, high-growth, and low-growth.

Structuring the Accountants’ Report for Ratio Justification

Under HKEX Listing Rule 4.05, the Accountants’ Report must cover the three most recent completed financial years. The sponsor should ensure that the notes to the financial statements include a disaggregation of total assets into operating assets (property, plant, equipment, intangible assets with definite useful lives) and non-operating assets (cash, financial assets, goodwill). The HKEX’s internal review team will calculate the operating asset turnover ratio separately. For an applicant in the manufacturing sector (HICS sector 15), an operating asset turnover ratio below 0.8x would be considered weak, as the 2024 median for that sector was 1.1x (source: HKEX Fact Book 2024, Table 6.3).

The Sponsor’s Duty of Independent Verification

SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, paragraph 17.6, requires the sponsor to exercise due diligence on the applicant’s assets. This now includes a specific requirement to verify that the applicant’s asset turnover ratio is consistent with publicly available industry data. The sponsor must document the source of the benchmark data—whether from the HKEX Fact Book, the Census and Statistics Department’s Annual Survey of Industrial Production, or a reputable third-party database such as Bloomberg or S&P Capital IQ. Failure to do so exposes the sponsor to enforcement action under the SFC’s Sponsor Regulation.

Cross-Border Structures and Asset Attribution

For applicants with operations in the PRC structured through a BVI or Cayman holding company, the asset turnover ratio calculation becomes more complex. The HKEX requires that the financial statements of the Hong Kong-listed entity consolidate the PRC operating subsidiaries. However, if the PRC operations are held through a variable interest entity (VIE) structure, the assets of the VIE are not legally owned by the listed group. This creates a divergence between the revenue generated by the VIE and the assets on the listed group’s balance sheet.

The VIE Asset Turnover Disconnect

In a typical VIE structure, the listed Cayman entity holds a Hong Kong subsidiary, which in turn holds a WFOE in the PRC. The WFOE enters into contractual arrangements with the PRC VIE, which holds the operating assets. The HKEX’s Listing Decision LD-143-2024 clarified that for the purposes of the asset turnover ratio test, the Exchange will consider the assets of the VIE as being economically attributable to the listed group, but will require a reconciliation in the Accountants’ Report. The ratio must be calculated both on a consolidated legal basis and on an economic basis (including VIE assets). If the economic basis ratio is more than 30% higher than the legal basis ratio, the applicant must explain the commercial rationale for the structure.

Jurisdictional Considerations for Asset Location

The HKEX also examines the geographic distribution of assets. Under the HKEX Guidance Letter HKEX-GL-112-23, an applicant with more than 50% of its total assets located in a single jurisdiction outside Hong Kong must demonstrate that those assets are freely transferable and that there is no material risk of expropriation. For an applicant with a high asset turnover ratio driven by assets in a jurisdiction with capital controls—such as the PRC—the sponsor must obtain a legal opinion from a qualified PRC law firm confirming that the assets are not subject to any restrictions that would impair the listed group’s ability to generate revenue from them.

The Deficiency Letter Process and Remediation Steps

Once the A1 application is submitted, the HKEX Listing Division typically issues a first-round deficiency letter within 15 business days. If the asset turnover ratio is flagged, the letter will cite the specific internal benchmark and require the applicant to respond within 10 business days.

Standard Deficiency Letter Language

A typical deficiency letter from the HKEX’s Corporate Finance Division, as reviewed in multiple recent filings, states: “The applicant’s total asset turnover ratio of 3.8x for FY2024 exceeds the industry benchmark of 2.0x for HICS sector 9 (Retail). Please provide a detailed analysis of the composition of the applicant’s revenue and assets, and explain how the ratio will be sustained post-listing. Provide a sensitivity analysis under the three scenarios outlined in the sponsor’s due diligence report.” The response must be signed off by both the sponsor and the applicant’s CFO.

Remediation Through Capital Structure Adjustment

One practical remediation is to adjust the capital structure before the A1 filing. If the applicant has a high asset turnover ratio due to a low asset base, the sponsor can recommend that the applicant increase its asset base by retaining earnings or issuing debt to acquire operating assets. For example, a technology applicant with a ratio of 4.5x could acquire a small manufacturing facility for HKD 50 million, which would reduce the ratio to approximately 2.8x, bringing it within the acceptable range for the sector. The HKEX has accepted this approach in at least three cases in 2025, as noted in the Listing Committee’s minutes.

Closing

1. An applicant should pre-calculate its total asset turnover ratio against the HKEX’s internal HICS benchmarks before filing the A1 application, using data from the HKEX Fact Book 2024 or the Census and Statistics Department’s industry surveys.
2. The sponsor must document the source of the benchmark data in the due diligence report, as required by SFC Code of Conduct paragraph 17.6, to avoid a deficiency letter in the first round.
3. For VIE structures, the applicant must present both a legal basis and an economic basis asset turnover ratio, with a reconciliation for any divergence exceeding 30%.
4. If the ratio exceeds the industry median by more than 50%, the applicant should consider a pre-filing capital structure adjustment, such as an asset acquisition, to reduce the ratio.
5. The response to a deficiency letter on asset turnover must include a five-year projection of capital expenditure as a percentage of revenue, consistent with the precedent set in Listing Decision LD-145-2025.