The Sustainability of the Business Model: A Framework for the HKEX Listing Application Narrative

The Hong Kong Stock Exchange (HKEX) has intensified its scrutiny of listing applicants’ business models, a trend that reached a new inflection point in 2025. The Listing Division’s decision to reject a pre-revenue biotechnology company in Q1 2025, citing insufficient evidence of a sustainable commercial pathway, sent a clear signal to the market: the “sustainability of the business model” is no longer a check-box exercise in the prospectus. This development follows the SFC’s 2024 consultation paper on the regulation of special purpose acquisition companies (SPACs), which reinforced the requirement for de-SPAC targets to demonstrate a “viable and sustainable business” under the Listing Rules. For CFOs, company secretaries, and sponsor counsel, the narrative of business model sustainability has become the single most critical element in a listing application. It is no longer sufficient to present a compelling story of revenue growth; the HKEX now demands a data-backed, structurally sound argument that the business can generate positive cash flows and withstand competitive pressures over a reasonable forecast period. This shift demands a new framework for constructing the listing narrative, one that moves beyond market size and product potential to a forensic examination of unit economics, revenue concentration, and capital efficiency.

The Regulatory Bedrock: HKEX Listing Rule 8.04 and the “Going Concern” Standard

The foundation of the business model sustainability assessment lies in HKEX Listing Rule 8.04, which requires that an issuer must be “carried on as a going concern” at the time of listing. This is not a static condition; the Listing Division interprets it dynamically, demanding evidence that the business model can generate sufficient cash flow to meet its obligations for at least the next 12 months from the date of listing.

The “Going Concern” Assessment in Practice

The HKEX’s 2023 Guidance Letter HKEX-GL106-23 explicitly states that the Listing Division will assess the going concern assumption based on a forward-looking cash flow forecast covering a period of at least 12 months from the expected listing date. This forecast must be supported by a detailed sensitivity analysis, testing the impact of a 20% decline in revenue, a 15% increase in operating costs, and a 10% adverse movement in foreign exchange rates. For an applicant with a market capitalisation of HKD 1.5 billion, a failure to demonstrate a positive cash flow position under the base case scenario—let alone under the stress tests—is a near-certain ground for rejection. The 2025 rejection of a pre-revenue biotech firm, which had a cash burn rate of HKD 80 million per quarter but only HKD 200 million in cash reserves, illustrates the point: the HKEX required a credible plan to achieve cash flow breakeven within 18 months, a target the applicant could not substantiate with clinical trial milestones or licensing agreements.

The “Sustainable Business” Requirement for SPAC De-SPAC Transactions

The SFC’s 2024 consultation on SPAC regulations, which concluded in Q4 2024, introduced a new requirement under the Code on Takeovers and Mergers: the de-SPAC target must demonstrate a “viable and sustainable business” that can generate sufficient cash flow to support its public listing. This is a direct application of Listing Rule 8.04 to the SPAC structure. For a SPAC that raised HKD 1.2 billion in its IPO, the de-SPAC target must present a business model that can generate at least HKD 150 million in annual EBITDA within three years of the business combination, with a clear path to positive free cash flow. The HKEX’s 2025 review of a proposed de-SPAC involving a Chinese electric vehicle (EV) manufacturer highlighted the issue: the target’s business model, which relied on government subsidies accounting for 35% of 2024 revenue, was deemed unsustainable under a scenario where subsidies were phased out over two years.

The Narrative Framework: Four Pillars of a Sustainable Business Model

To construct a convincing narrative for the HKEX, the listing applicant must address four distinct pillars: unit economics, revenue concentration, capital efficiency, and competitive moat. Each pillar must be supported by quantitative evidence and a forward-looking projection that is consistent with the applicant’s industry benchmarks.

Unit Economics: The Foundation of the Narrative

The HKEX expects the applicant to demonstrate positive unit economics at the individual transaction or customer level. For a SaaS company, this means a customer acquisition cost (CAC) to lifetime value (LTV) ratio of at least 1:3, with a payback period of less than 12 months. For a logistics firm, it means a gross margin per shipment of at least 25%, with a clear path to improvement through scale. The 2024 listing of a Hong Kong-based logistics company, which achieved a gross margin per shipment of 28% in 2023 and projected an improvement to 32% by 2026, was approved in part because the sponsor’s due diligence confirmed that the unit economics were replicable across the company’s top 10 customer accounts. The Listing Division’s 2025 rejection of a food delivery platform, however, turned on the fact that its unit economics were negative in 8 of its 12 operating cities, with a weighted average CAC-to-LTV ratio of 1:1.2. The applicant’s argument that network effects would eventually improve the ratio was dismissed as speculative without a data-driven model.

Revenue Concentration: The Single-Customer Risk

HKEX Listing Rule 8.05(3)(c) requires the issuer to demonstrate that it is not “dependent on a single customer for a substantial portion of its revenue.” The Listing Division interprets “substantial” as any single customer accounting for more than 30% of total revenue. In the 2024 review of a PRC-based component manufacturer, the HKEX required the applicant to provide a detailed analysis of its top 5 customers, including the contract terms, the historical retention rate, and the potential impact of losing any one customer. The applicant, which derived 42% of its 2023 revenue from a single customer in the US, was required to include a sensitivity analysis in the prospectus showing the impact of a 50% reduction in orders from that customer. The result was a 23% decline in projected 2025 revenue and a 15% decline in EBITDA. The HKEX accepted the disclosure, but only after the applicant secured a legally binding 3-year supply agreement with the customer, guaranteeing a minimum order volume of HKD 500 million per year.

Capital Efficiency: The Path to Positive Free Cash Flow

The HKEX’s 2023 Guidance Letter HKEX-GL106-23 explicitly states that the Listing Division will assess the applicant’s capital efficiency by examining its historical and projected free cash flow (FCF) generation. For a company with a market capitalisation of HKD 2 billion, the HKEX expects the applicant to demonstrate that it can achieve positive FCF within 24 months of listing, with a cumulative FCF of at least HKD 100 million over the next three years. The 2025 listing of a renewable energy developer, which had a capital expenditure of HKD 800 million in 2024 but projected FCF breakeven by Q2 2026, was approved because the sponsor’s financial model showed that the company’s projects had a weighted average internal rate of return (IRR) of 14.5%, with a payback period of 5.2 years. The HKEX required the applicant to include a sensitivity analysis showing the impact of a 200 basis point increase in interest rates, which reduced the IRR to 11.8% but still left the project viable.

Competitive Moat: Defensible Barriers to Entry

The HKEX does not have a specific rule on competitive moats, but the Listing Division’s 2025 review of a consumer electronics company revealed that the applicant’s business model was deemed unsustainable because its market share had declined from 18% in 2021 to 11% in 2024, with a corresponding decline in gross margin from 32% to 24%. The applicant’s argument that it had a “proprietary technology” was undermined by the fact that its R&D expenditure was only 3.2% of revenue, compared to an industry average of 6.8%. The HKEX required the applicant to provide a detailed competitive analysis, including a comparison of its product features, pricing, and market share against its top 3 competitors. The applicant was ultimately rejected, with the Listing Division concluding that the business model lacked a defensible competitive position.

The Sponsor’s Role: Due Diligence and the “Business Model Letter”

The sponsor plays a critical role in constructing the business model narrative. The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC, paragraph 17.6, requires the sponsor to conduct “reasonable due diligence” on the applicant’s business model, including a review of the key assumptions underlying the financial projections.

The “Business Model Letter” as a Disclosure Document

In practice, the Listing Division increasingly expects the sponsor to submit a “Business Model Letter” as part of the listing application, a document that summarises the key assumptions, the sensitivity analysis, and the sponsor’s conclusion on the sustainability of the business model. This letter must be signed by the sponsor’s principal and the applicant’s CFO. The 2024 listing of a PRC-based fintech company was delayed by three months because the sponsor’s initial Business Model Letter failed to address the HKEX’s concerns about the company’s reliance on a single payment processor, which handled 68% of its transaction volume. The sponsor was required to conduct additional due diligence, including a site visit to the processor’s data centre, and to provide a revised letter that included a contingency plan in the event the processor terminated the agreement.

The “Going Concern” Opinion from the Auditor

The Listing Division also expects the applicant’s auditor to provide a “going concern” opinion in the audit report, covering a period of at least 12 months from the expected listing date. The HKEX’s 2023 Guidance Letter HKEX-GL106-23 states that if the auditor’s opinion is qualified, the applicant must provide a detailed explanation of the mitigating factors. In the 2025 rejection of a pre-revenue biotech firm, the auditor’s going concern opinion was qualified because the company had insufficient cash reserves to fund its operations for the next 12 months. The applicant’s argument that it would raise additional capital through a pre-IPO placement was rejected because the placement was not yet binding.

The Future Trajectory: 2026 and Beyond

The HKEX’s focus on business model sustainability is unlikely to diminish. The 2025 Review of the Listing Rules, published in March 2025, proposed a new requirement under Listing Rule 8.04 that would require all applicants to provide a “business model sustainability report” as part of the listing document, covering a period of at least three years. This report would include a detailed analysis of the applicant’s revenue streams, cost structure, capital expenditure, and competitive position.

The Impact of the 2026 ESG Disclosure Requirements

The HKEX’s 2025 consultation on climate-related disclosures, which is expected to result in mandatory TCFD-aligned reporting for all listed issuers by 2026, will also affect the business model narrative. For a company with a high carbon footprint, such as a cement manufacturer, the business model must demonstrate a credible plan to reduce emissions in line with the Paris Agreement. The 2025 listing of a PRC-based cement producer was approved only after the applicant provided a detailed decarbonisation roadmap, including a commitment to reduce Scope 1 and 2 emissions by 30% by 2030, with a capital expenditure of HKD 1.2 billion over the next five years.

The Cross-Border Dimension: PRC Companies and the VIE Structure

For PRC-based applicants using a variable interest entity (VIE) structure, the business model narrative must address the regulatory risks associated with the PRC’s 2024 Data Security Law and the 2025 Anti-Espionage Law. The HKEX’s 2025 review of a PRC-based edtech company, which used a VIE structure, required the applicant to provide a detailed analysis of the impact of a potential prohibition on the VIE structure, including a scenario analysis showing the impact on revenue, EBITDA, and free cash flow. The applicant was required to include a risk factor in the prospectus stating that the VIE structure could be invalidated by PRC regulators, which would result in a total loss of the company’s operations in China.

Actionable Takeaways

1. Build the business model narrative around four pillars—unit economics, revenue concentration, capital efficiency, and competitive moat—with each pillar supported by quantitative evidence from a forward-looking financial model covering at least 24 months.
2. Prepare a sensitivity analysis that tests the impact of a 20% decline in revenue, a 15% increase in operating costs, and a 10% adverse movement in foreign exchange rates, as required by HKEX-GL106-23.
3. Ensure the sponsor submits a “Business Model Letter” that addresses the HKEX’s specific concerns, including the assumptions underlying the financial projections and the mitigating factors for any identified risks.
4. For PRC-based applicants using a VIE structure, include a detailed scenario analysis showing the impact of a regulatory prohibition on the VIE structure, with a corresponding risk factor in the prospectus.
5. Align the business model narrative with the 2026 ESG disclosure requirements by including a credible decarbonisation roadmap for high-carbon industries, with specific targets and capital expenditure commitments.