INDUSTRY OVERVIEW THE HONG KONG SECURITIES MARKET. History

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1 Certain information provided in this section is derived from various public official or government sources. The Company and the Sponsor have exercised reasonable care in reproducing such information from the sources referred to in this document. Such information, however, has not been prepared or independently verified by the Company, the Sponsor, the Lead Manager, the Underwriters or their respective directors or advisers. The Company, the Sponsor, the Lead Manager, the Underwriters, their respective directors and advisers or any other parties involved in the [REDACTED] make no representation as to the accuracy or completeness of this information, which may not be consistent with information compiled from other sources, and accordingly such information contained in this section may not be accurate and should not be unduly relied upon. THE HONG KONG SECURITIES MARKET History The first formal stock exchange in Hong Kong was formed in 1891, namely The Association of Stockbrokers in Hong Kong. The four stock exchanges ceased trading in March 1986, the current Stock Exchange commenced trading in April and became a full member of the Federation Internationale des Bourses de Valeurs in the same year. The SFC was formally established in May 1989 as the primary statutory securities market regulator to regulate the securities and futures markets in Hong Kong. The introduction of CCASS in 1992 and the AMS in 1993 brought further improvement to the securities market infrastructure. In November 1999, the Stock Exchange set up GEM in providing a platform for fund-raising of companies with all sizes from all industries with growth potentials. On 6 March 2000, the Stock Exchange, the Futures Exchange and HKSCC became wholly-owned subsidiaries of. subsequently listed its shares by introduction on the Main Board on 27 June As at 31 July 2015, the total market capitalisation of listed securities in Hong Kong was approximately HK$26,710.2 billion while the total fund raised from the Hong Kong securities market were approximately HK$786.1 billion. For the seven months ended 31 July 2015, the average daily turnover of the Hong Kong securities market amounted to HK$125.4 billion. Stock Exchange Participants A Stock Exchange Participant is entitled to trade securities products through the trading facilities of the Stock Exchange. A Stock Exchange Participant must be a company limited by shares incorporated in Hong Kong and be a licensed corporation under the SFO to carry on Type 1 (dealing in securities) regulated activity under the SFO. Being a holder of Stock Exchange Trading Right, a Stock Exchange Participant must also be with good financial standing and integrity and be able to comply with the minimum capital requirement, liquid capital requirement and other financial resources requirements as specified by FRR and the Stock Exchange. 46

2 Generally speaking, Stock Exchange Participants must have a minimum liquid capital requirement of no less than HK$3 million and a minimum paid-up share capital of (i) HK$5 million; or (ii) HK$10 million, if the Stock Exchange Participants also provide securities margin financing. As at 30 June 2015, there were a total of 553 Stock Exchange Trading Right holders, of which 537 were Stock Exchange Participants and 16 were non-stock Exchange Participants. Securities products on the Stock Exchange Securities listed on the Stock Exchange include equity securities, debt securities, structured products, stapled securities, depositary receipts, unit trusts and mutual funds. The Stock Exchange has sought to expand its business through broadening its range of products and services. Securities Trading in Hong Kong The Stock Exchange operates the Main Board and GEM for securities trading. The following chart sets forth its market capitalisation for the period indicated: Market Capitalisation of the Stock Exchange (including the Main Board and GEM) As at the end of 2014, the market capitalisation of the Stock Exchange (including the Main Board and GEM) was approximately HK$25,072 billion. The market capitalisation of the Stock Exchange increased from approximately HK$3,611 billion in 2002 to approximately HK$25,072 billion in 2014, representing a CAGR of approximately 17.5% from 2002 to

3 The following table sets forth the market capitalisation of the leading stock exchanges in the world as at 31 December 2013 and 2014 respectively: Market Capitalisation as at 31 December (US$ in billion) NYSE Euronext (US) 17,950 19,351 NASDAQ OMX 6,085 6,979 Tokyo Stock Exchange Group 4,543 4,378 London Stock Exchange Group 4,429 4,013 NYSE Euronext (Europe) 3,584 3,319 Shanghai Stock Exchange 2,497 3,933 Hong Kong Stock Exchange 3,101 3,233 TMX Group (Canada) 2,114 2,094 BM&F BOVESPA (Brazil) 1, Australian Stock Exchange 1,366 1,289 The World Federation of Exchanges The market capitalisation of the Stock Exchange increased by 4.3% from US$3,101 billion as at the end of December 2013 to US$3,233 billion as at the end of December 2014, ranked the seventhlargeststockmarketintheworldintermsof market capitalisation of listed companies and the third largest stock market in Asia in The following chart sets forth the annual trading value of securities for the period indicated: Annual Trading Value of Securities (including the Main Board and GEM) 48

4 The annual trading value of securities (including Main Board and GEM) increased from approximately HK$8,377 billion in 2006 to approximately HK$21,666 billion in 2007, and decreased to approximately HK$17,156 billion in 2014, representing a CAGR of approximately 21.6% from 2002 to The annual trading value of securities in terms of monetary amount reached its high in The outbreak of the financial tsunami in 2008 dragged on the trading volume of the Stock Exchange of that year as well as the subsequent year. The following chart sets forth the annual trading volume of securities for the period indicated: Annual Trading Volume of Securities (including the Main Board and GEM) The annual trading volume of securities (including Main Board and GEM) increased from approximately 1,612 billion shares in 2002 to approximately 33,969 billion shares in 2014, representing a CAGR of approximately 28.9% from 2002 to

5 The following chart sets forth the number of listed companies for the period indicated: Number of Listed Companies (including the Main Board and GEM) The number of companies listed on the Stock Exchange increased from 978 in 2002 to 1,752 in 2014, representing a CAGR of approximately 5.0% from 2002 to The following chart sets forth the number of new listings for the period indicated: New Listing (including the Main Board and GEM) Newly listed companies included listed through IPO, by introduction or transfer from GEM; but excluded listed securities other than equities such as real estate investment trusts (REITs) and government bonds. While there were only 64 newly listed companies in 2012, the number of newly listed companies increased to 122 in

6 Trading and settlement AMS is a stock trading system implemented by the Stock Exchange, and the third generation AMS was launched in October Stock Exchange Participants can either subscribe a trading terminal or an open gateway to conduct trading. The Stock Exchange provides standalone trading terminals and transaction throughput is confined by the rate of data input. The Stock Exchange also provides open gateway as a windows-based device installed at Stock Exchange Participants office to facilitate electronic interface of AMS/3 with BSS operated by Stock Exchange Participants. The input rate of orders that could be submitted via the open gateway is governed by a throttle mechanism and Stock Exchange Participants can subscribe necessary quantity of throttles from the Stock Exchange in accordance with their order flow demand. CCASS is a computerised book-entry system that clears and settles transactions in eligible securities listed and/or traded on the Stock Exchange. CCASS is operated by HKSCC, which is a wholly-owned subsidiary of. Ordinary shares, preference shares, registered warrants, provisional allotment letters representing nil-paid rights, unit trusts, fund (Exchange Traded Funds), debt securities, structured products listed and/or traded on the Stock Exchange are eligible for admission into CCASS. THE HONG KONG DERIVATIVES MARKET History Established in 1976, the Futures Exchange commenced the trading of its first financial product, HSI Futures, on 6 May On 6 March 2000, the Stock Exchange, the Futures Exchange and HKSCC became wholly-owned subsidiaries of. Futures Exchange Participants A Futures Exchange Participant is entitled to trade all futures contracts and/or options contracts, with the exception of stock options, through the trading facilities of the Futures Exchange. A Futures Exchange Participant must be a company limited by shares incorporated in Hong Kong and be a licensed corporation under the SFO to carry on Type 2 (dealing in futures contracts) regulated activity under the SFO. Being a holder of Futures Exchange Trading Right, a Futures Exchange Participant also must be with good financial standing and integrity and be able to comply with the minimum capital requirement, liquid capital requirement and other financial resources requirements as specified by FRR and the Stock Exchange. Generally speaking, Futures Exchange Participants must have a minimum liquid capital requirement of no less than HK$3 million and a minimum paid-up share capital of HK$5 million. As at 30 June 2015, there were a total of 230 Futures Exchange Trading Right holders, of which 177 were Futures Exchange Participants and 53 were non-futures Exchange Participants. 51

7 Futures and Options on the Futures Exchange According to the Derivatives Market Transaction Survey ( DMTS ) conducted by the covering the period from July 2009 to June 2014 in relation to the derivatives market, the major products in terms of trading volume are stock options, HSI futures and options, Mini-HHI futures, HHI futures and options, Mini-HSI futures and options. Among the products of the derivatives market, stock options were the most popular products which can be shown in the chart below. Futures Trading in Hong Kong The notional turnover of the Futures Exchange was US$5,598.9 billion, ranked the seventh largest derivatives market in the world in terms of notional turnover for the year ended 30 November The following chart sets forth the trading volume by product under study for the period indicated: Contract Volume and Percentage of Total Market Turnover by Product under Study (2009/10 to 2013/14*) * denotes period covering July 2009 to June 2014 Note: Numbers may not add up to 100% due to rounding. 52

8 According to DMTS, the trading volume of the derivatives market increased from approximately 99.5 million contracts in 2009/10 to million contracts in 2013/14, representing a CAGR of approximately 6.2% from 2009/10 to 2013/14. The following chart sets forth the total number of futures and option contracts traded on the Futures Exchange for the period indicated: Total Futures and Options Contracts traded on the Futures Exchange (2002 to 2014) The number of futures and options contracts traded on the Future Exchange increased from approximately 11.0 million in 2002 to approximately million in 2014, representing a CAGR of approximately 23.8% from 2002 to Trading and Settlement All futures and options are traded electronically through HKATS, a transaction based network system. Trading on HKATS is conducted through HKATS workstations or self-developed systems located at the premises of Futures Exchange Participants. The system displays current market information and automatically matches buy/sell orders based on price/time priority. All futures and options (excluding stock options) traded on the Futures Exchange are cleared through HKFECC while stock options traded on the Stock Exchange are cleared through SEOCH. DCASS is the clearing and settlement system for the derivatives products of. DCASS is a fully electronic and automated clearing and settlement system capable of supporting different types of derivatives products, including futures and/or options on stock indices, stocks, interest rate, fixed income and commodities. It provides a common clearing platform and operational procedures for all derivatives products. 53

9 RETAIL ONLINE TRADING IN HONG KONG Retail online trading refers to trading originating from orders entered directly by individual/ retail investors and channeled to the brokers via electronic media. The Hong Kong Securities Market According to Cash Market Transaction Survey 2013/14 ( CMTS ) which covers the period from October 2013 to September 2014, Stock Exchange Participants reporting themselves as online brokers were 247, equivalent to approximately 57% of all responding Stock Exchange Participants in 2013/14, compared to 126 online brokers, equivalent to approximately 33% of all responding Stock Exchange Participants in 2006/07 which covers the period from October 2006 to September 2007, representing a CAGR of approximately 10.1% from 2006/07 to 2013/14. The below chart set forth the percentage share of retail online trading value in cash market (2004/05 to 2013/14): Percentage Share of Retail Online Trading Value in Cash Market (2004/05 to 2013/14*) Note: One Stock Exchange Participant which had a significant proportion of its total turnover as retail agency trading and reported high percentage share of retail online trading prior to 2010/11 did not provide the percentage share of its retail online trading since 2010/11. This Stock Exchange Participant was excluded from the responded sample in calculating retail online trading in percentage and value terms since then. * denotes period covering October 2004 to September

10 According to CMTS, retail online trading in the securities market accounted for approximately 38.2% of total retail investor trading in the securities market in 2013/14, compared to approximately 39.2% in 2012/13 and accounted for approximately 9.3% of the total market turnover in the securities market in 2013/14. In terms of total implied trading value, retail online trading in the securities market increased by approximately 18.6% from approximately HK$1,235.4 billion in 2012/13 to approximately HK$1,465.2 billion in 2013/14 according to CMTS. The Hong Kong Derivatives Market According to DMTS, the number of online brokers in the derivatives market increased significantly from 78 in 2009/10 to 122 in 2013/14. The following chart set forth the retail online trading to retail turnover volume and total derivatives market volume (2004/05 to 2013/14): Retail Online Trading to Retail Turnover Volume (2004/05 to 2013/14*) * denotes period covering July 2004 to June 2014 Retail Online Trading to Total Derivatives Market Volume (2004/05 to 2013/14*) * denotes period covering July 2004 to June

11 According to DMTS, retail online trading of all products as a percentage to its retail turnover volume increased significantly from approximately 26% in 2004/05 to approximately 80% in 2013/ 14. Its contribution to the total derivatives market volume increased from approximately 9% in 2004/05 to approximately 16% in 2013/14. SHARE MARGIN FINANCING Share margin financing, in relation to a lending authorised institution ( AI ), means the provision of credit facilities by the AI to its clients, who may be investors or stockbrokers, whereby the facilities provided are: i. used for financing their investments in the stock market or their business operations (in the case of stockbrokers in respect of their business of securities margin financing); ii. iii. collateralised by shares listed on a stock exchange (which may be located in or outside Hong Kong); and subject to margin requirements prescribed by the AI. The facility limit is normally expressed as a prescribed percentage of the market value of shares pledged with the lending AI. If the required margin cannot be met due to a decline in the market value of the share collateral, the borrower will be obliged to top up the margin immediately. According to the latest version of Supervisory Policy Manual published by HKMA in 2007, there are minimum business and control standards expected of AI which are engaged in IPO-related or share margin financing activities, including (i) financing their clients subscription for new shares in an IPO, (ii) performing the role of a receiving bank in an IPO, and (iii) providing share margin financing to their clients (including stockbrokers and investors). In addition, there are some new requirements on share margin financing, including the requirements for lending AIs to observe (i) relevant SFC requirements to enhance the disclosure of account information to share margin financing clients and (ii) some precautionary measures on lending to stockbrokers to mitigate the risk of unauthorised pledging of shares associated with such lending. 56

12 Below set forth is certain market data in relation to securities margin financing: As at 31 December Number of active margin clients 139, , ,593 Amounts of receivables from margin clients HK$58,812 million HK$85,794 million HK$111,549 million Average collateral coverage 4.2 times 3.9 times 4.2 times SFC annual report Note: The number of times the aggregate market value of securities collateral deposited by clients over the total amounts of margin loan due from these margin clients on a given date on an industry-wide basis. COMPETITIVE LANDSCAPE Any broker-dealer that intends to operate a brokerage business for products available on, using the trading facilities of the Stock Exchange and/or Futures Exchange, must be admitted and registered as a Stock Exchange Participant and/or a Futures Exchange Participant. A Stock Exchange Participant is required to maintain good financial standing and comply with the FRR and the rules of the Stock Exchange. Stock Exchange Participants are classified into three constituencies:. Constituency A the 14 largest firms by market turnover;. Constituency B the 15th to 65th largest firms by market turnover; and. Constituency C other stockbrokers in the market. Prior to applying to become a Stock Exchange Participant and/or a Futures Exchange Participant, broker-dealers have to be registered with the SFC as a licensed corporation. Unless exempted, any broker-dealer intending to offer brokerage services for securities products (including stock options) or derivatives products available on has to be licensed by the SFC as a licensedcorporation,enablingittocarryouttype1(dealinginsecurities)ortype2(dealingin futures contracts) regulated activities. 57

13 The below table set forth the regulated activities under the SFO: Type Regulated Activity 1 Dealing in securities 2 Dealing in futures contracts 3 Leveraged foreign exchange trading 4 Advising on securities 5 Advising on futures contracts 6 Advising on corporate finance 7 Providing automated trading services 8 Securities margin financing 9 Asset management 10 Providing credit rating services Summary of the licensing requirements: Entity Criteria Licensed corporation. A corporate body. At least two Responsible Officers for each regulated activity under the SFO. Remain fit and proper. Able to comply with the financial resources requirements. Adequately insured against prescribed risks for certain regulated activities under the SFO Licensed representative. Remain fit and proper. Comply with all competence requirements. Responsible Officers must have sufficient authority within the licensed corporation The main entry barrier in Hong Kong s brokerage business comes from the paid-up share capital, liquid capital and licensing requirements of the SFC. Securities dealing and futures dealing are the regulated activities under the SFO and are governed by the relevant rules and regulations. New entrants who wish to carry on such regulated activities must be licensed by the SFC to become a licensed corporation. Each licensed corporation must have not less than two Responsible Officers to directly supervise the conduct of each regulated activity. Depending on the type(s) of regulated 58

14 activity/activities, licensed corporations have to at all times maintain the paid-up share capital and liquid capital of not less than the specified amounts according to the FRR. Please also refer to the section headed Regulatory and licensing requirements in this document for details. The rapid increase in the transaction size and the transaction value of the stock market in Hong Kong has created a growing attraction and strong demand to the local brokerage industry and has led to fierce competition in the local brokerage industry during these years. Local banks and multinational financial institutions including banks and investment banks with global network and a local presence in Hong Kong compete for both traditional telephone and online based clients within Hong Kong. As at 30 June 2015, there were 537 Stock Exchange Participants and 177 Futures Exchange Participants. Below is the distribution of Stock Exchange Participants market shares from 2010 to 2014: Year Constituency A (Position 1 to 14) Constituency B (Position 15 to 65) Constituency C (Position > 65) % 36.15% 12.77% % 35.00% 11.37% % 31.83% 10.45% % 32.54% 11.49% % 34.16% 11.61% fact book 2014 Note: The table includes all Stock Exchange Participant firms that had paid transaction levy, investor compensation levy (if applicable) and trading fee to the Stock Exchange. As illustrated above, the brokerage business in Hong Kong is dominated by certain large firms, in particular those in Constituency A, the top 14 firms accounted for more than 50% of the market turnover in the past few years. Competition for firms in Constituency C is extremely intensive. According to the information from the Stock Exchange, Fordjoy HK was ranked 178 (Constituency C) out of 492 Stock Exchange Participants (including Constituencies A, B and C) who traded during 2014 and 207 (Constituency C) out of 491 Stock Exchange Participants (including Constituencies A, B and C) who traded in the six months ended 30 June Based on the trading fee and levy collected by Fordjoy HK, the market share of Fordjoy HK was approximately % and % for the year ended 31 December 2014 and the six months ended 30 June 2015 respectively. 59