2023 SPONSOR TRAINING

2023 SPONSOR TRAINING. VBG CAPITAL LIMITED.

Contents. Fundamental Principles Due Diligence Financial Information Business Model Legality and Compliance of Business Operation Directors and Key Senior Management Controlling Shareholders Connected Persons and Connected Transactions Sponsor’s Liability Dependence on Third Parties Experts Non-experts Interviews Proper Records Verification.

Fundamental Principles. Standard A sponsor should conduct thorough due diligence to ensure that the listing document contains adequate details and information, and that such information is substantially comprehensive, allowing a reasonable individual to form a valid and justified assessment of the shares, as well as the financial condition and profitability of the listing applicant. This is to ensure that the information in the non-expert sections of the listing document is true, accurate and complete in all material respects and not misleading, deceptive or omitting information in any material respect. (Para 17.4(a) and (b); para 17.2(b) and (c) of the Code of Conduct) If the sponsor becomes aware of circumstances that raise doubts about the provided information or indicate potential problems or risks, the sponsor must conduct further due diligence to verify the accuracy and completeness of the relevant matter and information. Over-reliance on management’s representations or confirmations for the purposes of verifying information received from a listing applicant cannot be regarded as reasonable due diligence. （Para 17.6(c) of the Code of Conduct） Additionally, the sponsor must verify that the listing applicant has adhered to all applicable Listing Rules, HKEX guidance, and SFC provisions to ensure the completeness of the listing document..

Fundamental Principles (cont’d). Approach Due diligence procedures are not exhaustive assessments of all aspects of a listing applicant's affairs, and regulatory bodies do not anticipate sponsors to uncover every attempt by the applicant to conceal information to deceive others. However, sponsor should examine with professional skepticism the accuracy and completeness of statements and representations made, or other information provided by the listing applicant, its directors or any experts (Para 17.6(b) of the Code of Conduct). The sponsor is required to conduct updates to the due diligence process if there are subsequent changes following the submission of the listing application, unless they determine that all reasonable due diligence has already been completed. However, certain information cannot be addressed prior to submission, such as:- Modifications in the financial position subsequent to the latest reporting period cannot be addressed beforehand. Events that occur after the submission of the application cannot be addressed in advance..

Fundamental Principles (cont’d). Main Provisions on Due Diligence requirements in HK Securities and Futures Ordinance SFC - Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”) SFC - Corporate Finance Adviser Code of Conduct HKEX Guidance Letters HKEX Listing Rules (“LR”) including Practice Note 21 to the LR Practice Note 21 and Due Diligence Plan According to Paragraph 4 of Practice Note 21 to the Listing Rules, sponsors are expected by the Stock Exchange to document their due diligence planning as well as any noteworthy deviations from their original plans. In each specific case, a sponsor should exercise reasonable judgment regarding the nature and scope of due diligence work required, and if necessary, seek assistance from professional parties..

Due Diligence – Financial Information. General Approach In the preparation of a listing document, it is the responsibility of the sponsor to evaluate the business performance, financial condition, development, prospects, as well as any financial projection or profit forecast of the listing applicant. The sponsor should also scrutinize and assess the accuracy and reliability of the financial information, which includes reviewing the financial statements of the listing applicant and its significant subsidiaries, internal financial records, tax certificates, regulatory filings, and other relevant documents. To ensure the accurate extraction of financial information (excluding information previously reviewed by a reporting accountant), written confirmation should be obtained from the new applicant and its directors. This confirmation serves the purpose of verifying that the financial information has been appropriately derived from the relevant underlying accounting records. The sponsor is responsible for conducting physical inspections of significant assets, whether owned or leased, including property, plant, and other assets utilized or intended to be used in relation to the new applicant's business. Site visits serve as initial verification of the physical presence of the listing applicant's operations and operating assets. As part of the preliminary financial review, it is customary for the sponsor to request copies of various documents, including but not limited to: - A detailed group structure chart for the listing applicant - As part of the sponsor's preliminary financial review, it is typically expected to request copies of the financial statements of the listing applicant, its subsidiaries, and any other entities that hold material significance to the listing applicant..

Due Diligence – Financial Information (cont’d). The sponsor typically requests various Categories of Financial Information, including but not limited to: “Core Financial Content”, comprising: The sponsor commonly requests both audited financial statements, which include an accountants' report, and unaudited interim financial statements; When relevant, the sponsor also seeks any significant pro-forma information pertaining to the track record period. If a profit forecast is included in the listing document, the sponsor also examines and reviews the accuracy and reliability of the forecasted financial information. Review of assumptions The historical reliability of internal budgeting and forecasting processes. Engages in discussions with the reporting accountant regarding forecasts, projections, and cash-flow memorandums, among other relevant matters. Management Discussion and Analysis (“MD&A”), including: Provides commentary on the liquidity and financial resources of the listing applicant. They also include relevant financial and operating data in their analysis. Moreover, the sponsor conducts an in-depth examination of significant fluctuations in financial items, offering detailed explanations supported by specific and substantive reasons. discusses material factors that are expected to influence future financial performance. They also identify and discuss, from an investor's perspective, any exceptional items or unusual accounting treatments that warrant additional inquiries or disclosures..

Due Diligence – Financial Information (cont’d). “Technical Content”, comprising: The sponsor prepares a statement on sufficient working capital, as well as a formal statement on indebtedness. They also provide a "no material change" statement, indicating any significant changes since the last financial statement. Additionally, the sponsor includes pro forma financial statistics, typically encompassing net tangible assets and earnings per share..

Due Diligence – Financial Information (cont’d). Here is a Summary of Key Due Diligence steps typically undertaken: Enquiries to obtain materials and input for the preliminary financial review, which may include an information request list. Reviewing the listing applicant in comparison to peers and competitors. Conducting management presentations, including their response to the sponsor's information request list and questionnaire. Finalizing the core financial content of the listing document. Engaging in "line-item" discussions with the listing applicant's management regarding specific financial details. Evaluating the listing applicant's accounting policies. Reviewing and discussing any unaudited interim financial statements and evaluating their content. Discussing and evaluating the financial information for the post-track record period. Conducting interviews with the accountants involved in the process. It's important to note that these steps may vary depending on the specific circumstances and requirements of each listing applicant..

Due Diligence – Financial Information (cont’d). Tax The primary focus of the sponsor's due diligence enquiries is to determine the following issues: - Whether all significant tax liabilities of the listing applicant have been appropriately identified and addressed. - Whether taxes that are due for payment have been duly settled. - Whether appropriate provisions or reserves have been made for future and deferred tax payments. Sponsors are advised to request copies of the following documents for the listing applicant and each group entity: - All submitted tax returns, tax filing documents, tax audit reports, and investment reports (if applicable) for the past three financial years. - Documentation related to tax reductions or exemptions obtained for the latest three financial years. - A comprehensive list outlining any ongoing or resolved disputes and sanctions imposed by relevant taxation authorities within the past three financial years..

Due Diligence – Financial Information (cont’d). Engagements with reporting accountants typically involve the following interactions: If a sponsor is aware of any matters which raise concerns relating to the information underlying the accountants’ report or any other information in the prospectus, the sponsor should conduct further enquiries/ additional due diligence necessary to satisfy itself that these concerns are addressed and the information concerned is true, accurate and complete. (Note 1 to Para 17.7(b) of the Code of Conduct) These enquiries may involve obtaining relevant supporting information and documents. In addition, the sponsor should arrange interviews with the accounting staff of the applicant, as well as with its internal and external auditors and reporting accountants. When applicable, the sponsor should seek assurance from the external auditors or reporting accountants based on agreed-upon procedures. Furthermore, the sponsor should conduct a series of targeted discussions with the management of the listing applicant. This allows for a comprehensive understanding of the company's financial operations and practices. The sponsor should also review the accounting policies of the listing applicant and identify any instances where there may be deviations from the relevant accounting standards. This ensures compliance and transparency in the financial reporting process..

Due Diligence – Financial Information (cont’d). The sponsor's comprehensive financial due diligence consists of three interdependent streams, which are: (i) reporting accountant “comfort”, (ii) reporting accountant diligence interviews and (iii) the internal controls review..

Due Diligence – Financial Information (cont’d). Changes Subsequent to Latest Balance Sheet Date A sponsor should evaluate whether any significant changes have occurred since the date of the last audited balance sheet that could impact the listing applicant's business model, performance, prospects, or financial condition. The steps involved in assessing the "no material change" statement typically include: Reviewing unaudited interim financial statements or other relevant information provided in the listing document and engaging in discussions with the management of the listing applicant. Whenever feasible, involving the reporting accountant to conduct procedures that provide assurance on the listing applicant's financial condition and performance during the "change period" following the date of the latest audited financial statements. By undertaking these steps, the sponsor aims to ensure that any material changes subsequent to the latest balance sheet date are appropriately considered and disclosed in the listing document, providing investors with an accurate and up-to-date assessment of the listing applicant's financial position..

Due Diligence – Business Model. General approach Business model due diligence calls for an examination of a wide range of factors including the listing applicant’s business plans, sources of earnings and fixed and variable costs of the business, the maintenance and expansion capital expenditure required, production methods, management of the business, stage of development, as well as market positioning. (Para 13 of Practice Note 21 to the LR) Furthermore, the sponsor should arrange interviews and conference calls with key individuals from the listing applicant's senior management team as well as middle management representatives, such as heads of risk control, sales, and production manufacturing. These interactions aim to provide the sponsor with deeper insights into the listing applicant's business model. By engaging with relevant stakeholders, the sponsor can gain a better understanding of the operational aspects, strategic direction, and risk management practices of the listing applicant. This helps to enhance the sponsor's overall assessment of the listing applicant's business and strengthens the due diligence process..

Due Diligence – Business Model. Operating Environment The sponsor should gain an understanding of the industry in which the listing applicant operates (Para 17.6(d)(iii) of the Code of Conduct), including: the external environment; the industry; the main competitors, market shares, major products and the nature of competition, entry barriers, future opportunities, threats and/ or challenges to the markets; the bargaining power of customers and suppliers, and customary credit and payment terms in the industry; and Key risks and uncertainties The sponsor should conduct interviews with the listing applicant's senior management and perform research on the company and its operating environment. This includes reviewing publicly available information, verifying its reliability, checking news sources, and potentially commissioning industry reports. The sponsor should ensure fair and balanced disclosure, assess the soundness of the business model, and inquire about the sources, basis, and substantiation of information provided by the listing applicant, particularly regarding industry, competition, and competitive advantages..

Due Diligence – Business Model. Comparable companies To conduct thorough due diligence, the sponsor should assess the industry and target markets where the listing applicant operates or intends to operate. They should compare the applicant's financial performance with other similar companies, which must be submitted to HKEX. The following steps should be taken: Obtain and review industry reports: Evaluate the reliability, completeness, and any material adverse changes in industry reports since their publication. Review public information: Analyze publicly available information on the applicant's and competitors' business models to understand their positioning and potential advantages. Conduct interviews: Engage in interviews with the listing applicant's management team and industry experts to gain insights into the industry landscape and market opportunities. Check current market conditions: Assess the most up-to-date market information to understand the economic situation and its potential impact on the listing applicant's business. By following these steps, the sponsor ensures a comprehensive evaluation of the industry, target markets, and the applicant's competitive standing, facilitating accurate and informed disclosures to HKEX and potential investors..

Due Diligence – Business Model. Sustainability The sponsor should conduct due diligence and consider both internal factors (such as historical performance, business strategies, and assets) and external factors (such as the operating environment and competition) to form a balanced view on whether any weaknesses or exposures exist that could render the listing applicant's business model unsustainable. Regulators have historically raised questions to assess business sustainability, such as: Is the listing applicant's optimistic view of its business viability grounded in realistic factors supported by its historical performance? If the listing applicant has achieved significantly higher financial success compared to industry peers, are there specific and well-substantiated reasons behind this exceptional performance? By addressing these questions, the sponsor can evaluate the listing applicant's business model and determine if it is sustainable in the long run. This analysis helps ensure a comprehensive assessment of the applicant's prospects and provides a basis for making informed decisions..

Due Diligence – Business Model. Reliance on major supplier, customers, controlling shareholders, connected persons or any other third party stakeholders The sponsor should perform due diligence to assess the listing applicant's ability to operate independently from its controlling shareholder(s), connected persons, or other third-party stakeholders. The degree of reliance should be evaluated considering factors such as the stakeholders' materiality, their business activities, the nature of transactions, related revenue, fairness of commercial terms, and whether the listing applicant can replicate centralized functions. Follow-up due diligence should be conducted to facilitate the disclosure of relevant facts and determine the applicant's capacity to mitigate the adverse impact of such reliance. This includes assessing whether the listing applicant has taken steps to reduce reliance, evaluating the likelihood of future increases or decreases in reliance, and determining if the reliance is mutually beneficial and complementary. By conducting this thorough due diligence, the sponsor ensures a comprehensive understanding of the listing applicant's independence from key stakeholders and enables the disclosure of relevant information regarding the potential impact of such reliance on the applicant's operations and future prospects..

Due Diligence – Business Model (cont’d). There are a number of factors which the HKEX will consider to assess the impact of the reliance on the listing applicant, the likelihood that the relationship with the relevant party will materially change/ terminate and the impact of such termination, such as: Whether the relevant party is mutually dependent on the new applicant; Whether the new applicant has an established relationship or long-term agreement with the relevant party; Whether such reliance is an industry norm or regulatory restrictions and assess the potential problems of any red flags associated with the reliance; and Whether the listing applicant can demonstrate that any change in the relationship will not have a material adverse impact on its business as it is/ will be able to effectively mitigate its exposure (e.g. procure materials from a different supplier at a similar price). (Para 3.12-3.14 of Exchange Guidance Letter GL68-13) A material reliance of a new applicant on a relevant party (e.g. customers, substantial shareholders or suppliers) can only be sufficiently addressed by disclosure alone if: the relationship with the relevant party is unlikely to materially adversely change or terminate; or the new applicant is/ will be able to effectively mitigate the exposure to any material adverse changes to or termination of the relationship with the relevant party. (Para 3.15 of Exchange Guidance Letter GL68-13).

Due Diligence – Business Model (cont’d). Trade and Patterns By considering these factors, the sponsor can gain insights into the listing applicant's market positioning and make informed decisions regarding its business prospects. Historical performance of the industry: Analyze market capacity, growth patterns, and past performance to understand the industry's historical trends. Characteristics of the industry: Evaluate seasonality, regulatory dynamics, and market trends specific to the industry in which the applicant operates; and Structure of competition and industry performance: Assess the competitive landscape and performance of industry players to determine the applicant's position relative to competitors; and Bargaining positions: Evaluate the stability of key suppliers, users, and distributors, as well as the potential for product or service substitution, to gauge the applicant's bargaining power in the market. Changes affecting the business Changes to the listing applicant's business model, whether past or potential, are important due diligence considerations. This includes assessing the impact of government policies, corporate events (such as mergers or acquisitions), and external factors that may affect the business focus. Evaluating these factors helps understand the applicant's current and future prospects..

Due Diligence – Legality, Compliance and Legal Proceedings.

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Legality, Compliance and Legal Proceedings (cont’d).

Due Diligence – Directors and Key Senior Management.

Due Diligence – Directors and Key Senior Management (cont’d).

Due Diligence – Directors and Key Senior Management (cont’d).

Due Diligence – Controlling Shareholders. A controlling shareholder is defined under the Listing Rules as a person or group of persons who is entitled to control the exercise of 30% or more of the voting power at general meetings of the listing applicant or in a position to control the composition of the majority of its board of directors. (LR 1.01) Due diligence procedures The sponsor has the responsibility to examine the register of members of the listing applicant and conduct inquiries with the listing applicant to identify any controlling shareholder or group of controlling shareholders. The sponsor is also required to request information directly from the listing applicant or the controlling shareholder(s) regarding their personal/family and business background. This includes investigating: Transfers of equity interests to family members or other individuals, including details on the basis of consideration and any disputes related to these equity interests. Any past or ongoing entrustment arrangements between a controlling shareholder and other parties. After conducting background checks on the controlling shareholders, the sponsor should engage in comprehensive discussions with them. These discussions aim to gather information about the listing applicant, the business activities of the controlling shareholders, and the relationship between the applicant and the controlling shareholders..

Due Diligence – Controlling Shareholders (cont’d).

Due Diligence – Controlling Shareholders (cont’d).

Due Diligence – Connected Persons and Connected Transactions.

Due Diligence – Connected Persons and Connected Transactions (cont’d).

Due Diligence – Connected Persons and Connected Transactions (cont’d).

Due Diligence – Connected Persons and Connected Transactions (cont’d).

Due Diligence – Connected Persons and Connected Transactions (cont’d).

Due Diligence – Connected Persons and Connected Transactions (cont’d).

Sponsor’s liabilities. Criminal liability for misstatement in prospectus Section 40A (or Section 342F for overseas companies) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance ("CWUMPO") stipulates that individuals who authorize the issuance of a prospectus containing false information (misleading statements or material omissions) may face imprisonment and monetary penalties. The maximum penalties under Sections 40 and 342F include up to 3 years' imprisonment and a fine of HK$700,000. The main defenses include demonstrating reasonable grounds to believe the truth of the statement (known as the due diligence defense) and, in the case of expert opinions, establishing the expert's competence to provide the opinion and obtaining their consent. Civil liability for misstatement in prospectus According to Section 40 of the CWUMPO, the following individuals are liable to compensate investors who suffer losses due to relying on an untrue statement in a prospectus: Directors of the company at the time of the prospectus issuance. Individuals named in the prospectus as directors or future directors. Promoters of the company. Those who authorized the issuance of the prospectus. These individuals are obligated to compensate investors for their losses resulting from the untrue statement in the prospectus..

Sponsor’s liabilities. There has been uncertainty regarding whether "a person who has authorized the issue of the prospectus" includes sponsors, leading the Securities and Futures Commission (SFC) to consider explicitly including them through amendments to the CWUMPO. However, the SFC's "Supplemental Consultation Conclusions on the Regulation of IPO Sponsors - Prospectus Liability," published on August 22, 2014, clarified that sponsors are indeed encompassed within the existing category of "persons who authorize the issue of a prospectus" and are therefore liable for inaccuracies in the prospectus under the CWUMPO. The SFC emphasized its readiness to rely on the existing criminal liability provisions in the CWUMPO when appropriate cases arise. Defenses Civil liability (Section 40) The main defenses against liability involve demonstrating reasonable grounds to believe in the truthfulness of the statement (due diligence defense) and ensuring that experts providing opinions were competent and had given their consent. Criminal liability (Section 40A) As the sponsor’s knowledge of the untrue statement or recklessness are required for any convictions under this offence, the SFC has stated that a due diligence failure is not of itself intended to involve criminal liability. If a sponsor has complied with the new Code of Conduct provisions, the SFC believes it is highly unlikely that the prosecution would be able to establish knowledge or recklessness. (Para 281 of SFC Consultation Conclusions on the regulation of IPO sponsors).

Dependence on third parties. Experts Sponsors should proactively assess expert reports and consider: (Para 17.7 of the Code of Conduct) the expert’s qualification, experience and independence the expert’s scope of work the bases and assumptions underlying the report; and the reasonableness of the expert’s opinion together with the rest of the information and against the totality of all other information known to the sponsor. The sponsor must not blindly accept statements or documents from the listing applicant without scrutiny, even if the sponsor lacks the specific expertise, competence, or qualifications to conduct certain due diligence tasks. The sponsor should be able to justify their reliance on experts or expert reports, demonstrating that such reliance is reasonable. - A third party’s work, in itself, would not be sufficient evidence that a sponsor has discharged its obligations to conduct reasonable due diligence. A sponsor cannot abrogate responsibility for due diligence. Thus, additional due diligence should be taken if a sponsor becomes aware of any discrepancies, irregularities or inconsistencies with other information known to the sponsor from its due diligence work or circumstances which indicate a potential problem or risk. (i.e. red flags). (Para 17.6(g) of the Code of Conduct)..

Dependence on third parties (cont’d). At the time of issue of a listing document, a sponsor should have no reasonable grounds to believe and should not believe that the information in the expert reports is untrue, misleading or contains any material omissions. (Para 17.5(c) of the Code of Conduct).

Reliance on third parties (cont’d). Non-experts At the time of issue of a listing document, a sponsor, should have reasonable grounds to believe and should believe that: the information in the non-expert sections of the listing document is true, accurate and complete in all material respects and not misleading or deceptive in any material respect; and there are no matters or facts the omission of which would make any information in the non-expert sections of a listing document or any other part of the listing document misleading in a material respect. (Para 17.5(b) of the Code of Conduct).

Interviews. General approach The sponsor should carry out the interview directly with the person or entity selected for interview with minimal involvement of the listing applicant in order to enhance the quality and reliability of the information obtained in order for the sponsor (and in turn, the investors) to properly assess the listing applicant’s financial condition. (Para 17.6(f)(ii) of the Code of Conduct) Selection of Interviews The sponsor should exercise independent judgment when selecting individuals to be interviewed, using objective and proportionate criteria. These criteria may include: Parties involved in high-value or long-term material transactions with the listing applicant. Entities lacking independence. Entities with special characteristics, such as transactions that are one-off in nature, inadequately documented, or inconsistent with market practices. To facilitate this process, the sponsor should request the listing applicant to provide: Names and contact details of its business stakeholders during the track record period and up to the date of the listing document. A history of the listing applicant's relationship with its major business stakeholders. Copies of contracts entered into with its major business stakeholders, as requested by the sponsor..

Interviews (cont’d). Interview timing Third-party due diligence interviews should be conducted with ample time before the listing application is filed, allowing sufficient time for follow-up work prior to the filing. In cases where there is a considerable delay in publishing the listing document (more than 12 months after filing the Application Proof), the sponsor should arrange new interviews with the relevant business stakeholders..

Interviews (cont’d). Manner to conduct the interviews The sponsor has the flexibility to conduct interviews with major business stakeholders through various means such as face-to-face meetings, telephone or video conferences, or written interview questionnaires. In conducting these interviews, the sponsor should: Independently select major business stakeholders based on objective criteria. Carry out the interviews directly, with minimal involvement from the listing applicant. The presence of the listing applicant's representatives is not typically expected, unless they attend as passive observers. Verify the credentials of interviewees to ensure they possess the necessary authority and knowledge for the interview. The sponsor should independently verify the identity and position of the interviewee. Engage in a comprehensive discussion with the objective of obtaining sufficient and satisfactory responses to all questions, and diligently follow up on any incomplete, unsatisfactory, or outstanding responses or matters..