Bringing Sustainable Success to the Hong Kong Primary Market China IPOs Conference 2005 Paul Chow...

Bringing Sustainable Success to the Hong Kong Primary Market

China IPOs Conference 2005

Paul ChowChief Executive, HKEx

28 September 2005

2

Agenda

Highlight of Hong Kong Securities Market

Mainland China Dimension

HKEx’s Major Initiatives in Primary Market

Conclusion

3

13,332

3,599 3,4672,920

2,527

1,315 1,162 971 939 846 754 754 740 554 459 457 278 255 1090

2000

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HKEx ranks 9th among global exchanges by market capitalisation

Jul 2005 market capitalisation, US$bn

US$ 939 bn as of Jul 2005

US$ 956 bn (HK$ 7.5 tr) as of 20 Sep 2005

US$ 939 bn as of Jul 2005


4

7,935

5,895

3,226

1,9421,690

1,062 973772

583 581 536 469 377 341 322 261 164 122 79 650

1000

2000

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HKEx ranks 16th among global exchanges by equity turnover

YTM Jul 2005 turnover, US$bn

US$ 261 bn as of YTM Jul 2005


US$ 261 bn as of YTM Jul 2005


5

64.1

26.0 25.0

17.315.1

13.09.8 9.4

7.3 6.8 6.0 5.2 4.9 4.3 4.2 3.6 3.5 3.4 2.70.4

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HKEx ranks 4th among global exchanges by equity fund raised

YTM Jul 2005 equity fund raised, US$bn

US$ 17.3 bn as of YTM Jul 2005

US$ 19.6 bn (HK$ 153 bn) as of YTM Aug 2005

US$ 17.3 bn as of YTM Jul 2005

US$ 19.6 bn (HK$ 153 bn) as of YTM Aug 2005

6

Unit YTM Aug 2005 2004

Total turnover HK$bn 2,978 3,974

Average daily turnover HK$bn 18.2 16.0

Total # of derivatives contracts Number 16,116,157 19,629,692

Average daily # of derivatives contracts Number 98,269 80,533

# of listed companies - equity Number 1,108 1,096

# of new listings – equity Number 30 70

Fund raised by IPOs HK$bn 68.7 97.2

Fund raised in secondary market HK$bn 84.1 184.6

Total fund raised HK$bn 153.0 281.8

HKEx key market statistics

7

Agenda



HKEx’s Initiatives in Primary Market

Conclusion

8

Since the 1980s, Hong Kong has played a key role in bridging between Mainland China and the world

Since 1993, over HK$1 trillion (as of 20 Sept 2005) of

equity funds were raised by Mainland China

enterprises, representing 50% of market total

Since 1993, over HK$1 trillion (as of 20 Sept 2005) of

equity funds were raised by Mainland China

enterprises, representing 50% of market total

2005

Promote listing of foreign-controlled companies with Mainland operations

1980 1993 2003

Many HK listed companies had manufacture operations in Pearl River Delta

HK- or foreign-incorporated Mainland enterprises listed in HK as Red Chips

H-shares market developed

Some H-share & Red-Chip companies dual listed on HK & overseas markets

H-shares Index Futures launched

2004

H-shares Index Options launched

iShares FTSE/Xinhua A50 China Tracker launched

Stock options, futures & warrants for individual Mainland enterprises developed

19941960-80

Mostly British hongs, utility companies& property companies

9

1962

Hongkong Bank

Whampoa Dock

HK Land

China Light

KM Bus (1933)

HK Electric

HK Telephone

Yaumati Ferry

HK Tram

Wheelock

Jardine

Swire

Lane Crawford

Kwong Sang Hong

GI Cement

1973

Hongkong Bank

HK Land

Jardine Matheson

Hutchison Intern’l

E.A. Navigation

New World Dev.

Wharf

China Light

Wheelock Marden

Taikoo Swire

HK Telephone

HK Electric

Hang Seng Bank

Whampoa Dock

HK & Shanghai Hotels

1983

Hongkong Bank

Hang Seng Bank

China Light

Hutchison

HK Electric

HK Land

Wharf & Godown

Swire Pacific

Jardine Matheson

General Oriental

HK Telephone

Swire Properties

Cheung Kong

SHK Properties

New World Dev.

1993

HSBC

HK Telecom

SHK Properties

Hang Seng Bank

Hutchison

China Light

Cheung Kong

Swire Pacific

Henderson Land

Wharf

HK Land

HK Electric

New World Dev.

Jardine Matheson

CITIC

Aug 2005

HSBC

China Mobile

Hutchison Whampoa

CNOOC

Standard Chartered

Hang Seng Bank

Cheung Kong

SHK Properties

Bank of China

Swire Pacific

PetroChina

CLP Holdings

HK & China Gas

China Netcom

MTR

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Largest companies since 1962 in term of market cap. Other largest companies in 1973/1983/1993 in term of market cap. New largest companies in Aug 2005 in term of market cap. Mainland enterprises

Of the 15 largest companies in 2005, 5 of them are Mainland enterprises

10

YTM Aug 2005

Definition

No. of Listed Issuers

Main Board GEM Total

H shares Enterprises incorporated in the Mainland which are either controlled by Mainland Government entities or individuals

76 38 114

Red chips Enterprises incorporated outside of Mainland and controlled by Mainland Government entities

85 3 88

Non-H shares Mainland Private Enterprises

Enterprises incorporated outside of Mainland and controlled by Mainland individuals

84 30 114

Sub-total 245 71 316

Mainland operating enterprises

Other enterprises listed in Hong Kong that have substantial operations in the Mainland

204 47 251

TOTAL 449 118 567

Definitions of Mainland enterprises

11

Mainland China enterprises contribute significantly to the Hong Kong securities market

YTM Aug 2005 Unit TotalMainland

enterprises % of total

# of listed issuers Number 1,108 316 29%

# of new listings – equity Number 30 15 50%

Market capitalisation HK$bn 7,360 2,420 33%

Average daily turnover - equity HK$bn 14.8 6.6 45%

Funds raised by IPOs HK$bn 68.7 61.7 90%

Fund raised in secondary market HK$bn 84.1 12.0 14%

Total fund raised HK$bn 153.0 73.9 48%

12

Top 10 IPOs since 1986 are all by Mainland enterprises

Rank Company Listing date Type Fund raised (HK$mn)

1 China Unicom 22 Jun 2000 Red Chip 43,608

2 China Mobile 23 Oct 1997 Red Chip 32,665

3 China Life 18 Dec 2003 H shares 26,714

4 China Petro. & Chemical 19 Oct 2000 H shares 26,681

5 China Shenhua 15 Jun 2005 H shares 22,976

6 PetroChina 7 Apr 2000 H shares 22,330

7 BOC Hong Kong 25 Jul 2002 Red Chip 20,516

8 Bank of Communications 23 Jun 2005 H shares 16,835

9 Ping An Insurance 24 Jun 2004 Red Chip 14,337

10 SMIC 18 Mar 2004 Pvt. enterprise 13,858

13

7 of the top 10 IPOs in 2005 are by Mainland enterprises

Rank Company Listing date Type Fund raised (HK$mn)

1 China Shenhua Energy 15 Jun 2005 H shares 22,976

2 Bank of Communications 23 Jun 2005 H shares 16,835

3 China COSCO 30 Jun 2005 H shares 9,537

4 Shanghai Electric Group 28 Apr 2005 H shares 5,054

5 Foxconn 3 Feb 2005 Hong Kong 3,711

6 Guangzhou R&F Properties 14 Jul 2005 H shares 2,284

7 AAC Acoustic Tech. 9 Aug 2005 Pvt. enterprise 980

8 Xinyi Glass 3 Feb 2005 Hong Kong 836

9 Dynasty Fine Wines 26 Jan 2005 Red Chip 776

10 I.T. 4 Mar 2005 Hong Kong 667

14

% of market capitalisation and equity turnover contributed by Mainland enterprises increase significantly over time

% of market capitalisation % of equity turnover no. of Mainland enterprises

5% 5% 5%

9%

16%

14%

21%

27% 27% 27%

30% 30%

33%

12%

9%9%

12%

38%

28%26%

29%

42%

33%

46%

49%

45%

3850 53

64

90101

111

127

152

198

242

300

316

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Aug

2005

0

50

100

150

200

250

300

350

15

Mainland enterprises listed in Hong Kong cover a diversified range of industries

Industry No. %

Technology (telecommunications, IT and electrical & electronic components) 72 23

Real estate 24 8

Raw materials and chemicals 23 7

Energy and power 23 7

Conglomerate 22 7

Pharmaceutical 18 6

Transportation 15 5

Financial services (banks, insurance companies and investment companies) 14 4

Food 11 3

Automobile 10 3

Miscellaneous 84 27

Total 316 100

As of Aug 2005

16

Region No. %

Pan Pearl River Delta (Guangdong, Fujian, Guizhou, Hainan, Hunan, Jiangxi, Sichuan and Yunnan)

83 26

Bohai Gulf (Beijing, Hebei, Shandong and Tianjin) 56 18

Yangtze River Delta (Jiangsu, Shanghai and Zhejiang)

50 16

Nationwide SOE (with businesses all over the Mainland e.g. China Mobile, PetroChina)

42 13

Hong Kong (Mainland companies with major businesses conducted in HK e.g. BOC Hong Kong, Shenyin Wanguo)

29 9

Multi-regions (with businesses in more than one province e.g. GOME Electrical, China Gas)

24 8

Northeast (Heilongjiang, Jilin and Liaoning) 14 4

Others (Anhui, Chongqing, Gansu & Qinghai, Henan, Hubei, Inner Mongolia, Ningxia, Shaanxi, Shanxi, Tibet and Xinjiang)

18 6

Total 316 100

Mainland enterprises listed in Hong Kong cover many different regions

As of Aug 2005

22 provinces

5 autonomous region (Guangxi, Inner Mongolia, Ningxia, Tibet and Xinjiang)

4 municipalities directly under the Central Government (Beijing, Chongqing, Shanghai and Tianjin)

22 provinces

5 autonomous region (Guangxi, Inner Mongolia, Ningxia, Tibet and Xinjiang)

4 municipalities directly under the Central Government (Beijing, Chongqing, Shanghai and Tianjin)

17

Agenda




Conclusion

18

Challenges to HKEx in relation to Mainland China enterprises

Solutions

Principles HKEx’s initiatives

IPO activities • Continuous supply of IPO applications

• Increasing complexity of IPO transactions

• Enhance listing decision making efficiency

• Enhance operational efficiency

• Review of new structure of listing decision-making

• Enhancement of internal operations & processes of Listing Division

Fund raising platform

• Diversified fund raising needs for different Mainland enterprises

• Offer robust and flexible fund raising platforms to meet market needs

• Promote HK as a premier capital formation centre for Mainland enterprises

• Review of GEM• Mainland liaison and

promotional activities

HKEx’s initiatives related to primary markets are parts and parcels to the success of Hong Kong as a premier capital formation centre for Mainland enterprises

19

Challenges to HKEx in relation to Mainland China enterprises

Solutions

Principles HKEx’s initiatives

Market quality assurance

• Limitations on cross-border enforcement of non-Hong-Kong-based Mainland issuers

• Concentrated ownership on state and individual levels

• Enhance cross-border enforcement

• Continue to uphold and enhance disclosure based regulatory regime based on international standards

• Closer cooperation with SFC, CSRC, 2 Mainland exchanges and other enforcement authorities

• Statutory backing of certain provisions of the Listing Rules

• Continual promotion and education of corporate governance

• Enhancement of dissemination of listed issuers’ disclosures

HKEx’s initiatives related to primary markets are parts and parcels to the success of Hong Kong as a premier capital formation centre for Mainland enterprises (cont’d)

20

Main Board GEM Total

New applications accepted

YTM Aug 2005

2004

66

96

14

34

80

130

Approvals in principle granted by the Listing Committee

YTM Aug 2005

2004

44

59

7

23

51

82

No. of newly listed companies YTM Aug 2005 27 3 30

No. of newly listed companies in 2004 49 21 70

Continuous supply of IPO applications in the pipeline

21

HKEx’s initiatives in primary market: IPO activities

Next StepsCurrent progress

• Published consultation paper in Feb 2005 on:

Composition and operation of Listing Committees

Proposals for a more efficient framework for decision-making in matters such as listing applications and suspected breaches of Listing Rules

Appointment of an adjudicator as first instance disciplinary decision-maker and aspects of the adjudicator’s procedures

• Received 18 submissions including 7 from industry associations

• Responses are published on HKEx website in May 2005

• Finalise conclusions and Listing Rule amendments with the SFC, HKEx Listing Committee and HKEx Board

• Issue consultation conclusions by end of 2005

Review of new structure of listing decision making

Review of new structure of listing decision making

22

HKEx’s initiatives in primary market: IPO activities


• Set up an enhanced case database to capture corporate information of listed issuers and directors

• Organised professional training programmes for Listing Division (e.g. HKAS/IFRS)

• Review operational procedures in key listing areas to further improve process automation and response efficiency

• Further strengthen senior management team of Listing Division

Mainland China liaison

Legal and accounting

Enforcement

Enhancement of internal operations of Listing Division

Enhancement of internal operations of Listing Division

23

HKEx’s initiatives in primary market: Fund raising platform


• Established an internal working group to develop proposals for the comprehensive review of GEM

• Completed internal research on historical performance of GEM

• Prepared comparisons of overseas second board designs

• Seek informal views from members of HKEx Listing Committees, members of HKEx Board, professional bodies and market participants

• Issue public consultation via a formal consultation paper by end of 2005 or early 2006 to:

Outline possible strategies to strengthen liquidity and corporate governance of GEM

Outline options to improve the robustness of the GEM platform to meet issuers’ capital-raising needs

Review of GEMReview of GEM

24

HKEx’s initiatives in primary market: Fund raising platform


• Regular communications with Mainland authorities to exchange views on regulations and market developments

• Organised and participated in over 100 conferences with over 6,600 participants including Mainland enterprises and intermediaries

• Continue to leverage HKEx BJO and special branch representatives in Shanghai & Guangzhou to undertake Mainland liaison activities

• Continue to organise major conferences to promote Hong Kong securities market:

Conference in Fuzhou in Sep 05

Conference in Wuhan in Dec 05

Mainland liaison and promotional activities

Mainland liaison and promotional activities

25

HKEx’s initiatives in primary market: Market quality assurance


• SFC issued proposed Securities and Futures (Stock Market Listing) Rules and guidelines (SMLR) in Jan 2005

• FSTB issued Consultation Paper on Proposed Amendments to the SFO in Jan 2005

• HKEx submitted combined response to SFC and FSTB in Mar 2005

• Prepare a comparison of regulatory regimes in UK, US, Australia and under IOSCO principles on financial reporting, connected transaction and price sensitive information

• Continue discussions with FSTB and the SFC on the draft SMLR, and solicit inputs from market practitioners

• Propose to enshrine the following provisions in statute:

Regular financial reporting obligations

Disclosure obligations of corporate transactions that require prior independent shareholder approval (e.g. connected transactions)

Obligation to disclose price-sensitive information

Statutory backing of certain provisions of the Listing Rules

Statutory backing of certain provisions of the Listing Rules

26



• Implemented revised Code on CG Practices and CG Report in Jan 2005

• Implemented revised listing rules on CG in Mar 2004

• Implemented revised Code Provision on internal controls and the relevant disclosure requirements in the CG Report in Jul 2005

• Conducted training programmes for 124 finance, accounting executives and board secretaries of H-share companies

Continual promotion and education of corporate governance

Continual promotion and education of corporate governance

• Allow time for listed issuers to adapt to new CG provisions

• Analyse responses from issuers on questionnaire sent out in Jul 2005 regarding market readiness to comply with the recent changes

• Continue to promote a compliance culture through issuer and investor education

27



• Proposals on total abolition of paid advertisements and mandatory use of eSubmission system (currently account for 24% of submissions) endorsed by HKEx Listing Committee in Jul 2005

• Implemented a Disaster Recovery Site for HKEx website in Sep 2005 to enhance its resilience as a central dissemination platform for issuer disclosures in the future

• Establish an enhanced dissemination infrastructure of listed issuer information

• Enhance security features and user-friendliness of the eSubmission system

• Publish Exposure Paper by end of 2005 to seek public views on:

Transitional arrangements (e.g. summary announcement vs. notifications)

Proposed rule changes

Requirement of listed issuers to establish their own websites and/or use of third party websites

Enhancement of dissemination of listed issuers’ disclosures

Enhancement of dissemination of listed issuers’ disclosures

28

Agenda




Conclusion

29

Hong Kong competitive advantages

• China’s growth & development presents tremendous business opportunities

• Hong Kong is in a unique & favourable position to capture these opportunities

- No foreign exchange controls & withholding tax

- No capital gain tax, and no controls on foreign investment and investors

- Freely convertible currency

- Proximity to Mainland China

- Active retail & institutional participation

- A free, transparent and fair securities marketplace

- Rule of Law

- International accounting standards and management best practices

- Abundant of professional expertise (investment bankers, accountants, lawyers, valuers)

• HKEx is committed to build on its historic success and further strengthen its role as a premier capital formation centre for China enterprises as well as an international financial centre

30

HKEx’s strategic focus

Focus on core market operations:

• Listing• Cash & Derivatives

Trading• Clearing• Information Services• Market systems

Focus on Hong Kong and Mainland China

Operate a quality market through enhancing regulation and market infrastructureGoal

Geographical focus

Business focus

31

HKEx’s mission statement

The mission of HKEx is to operate a world-class marketplace for

Hong Kong and Mainland China securities and derivatives products.

By offering issuers access to international capital markets and maintaining an

open, secure, fair, orderly, efficient and transparent

marketplace, HKEx contributes to Hong Kong’s status as an international

financial centre and the premier capital market for Mainland China.

By servicing China’s substantial long-term demand for capital and exchange

services in accordance with international standards and practices, HKEx has

the potential to become one of the world’s pre-eminent exchanges.

The mission of HKEx is to operate a world-class marketplace for

Hong Kong and Mainland China securities and derivatives products.

By offering issuers access to international capital markets and maintaining an

open, secure, fair, orderly, efficient and transparent

marketplace, HKEx contributes to Hong Kong’s status as an international

financial centre and the premier capital market for Mainland China.

By servicing China’s substantial long-term demand for capital and exchange

services in accordance with international standards and practices, HKEx has

the potential to become one of the world’s pre-eminent exchanges.

. .

32

Thank you

www.hkex.com.hk

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