INDUSTRY OVERVIEW SOURCE OF INFORMATION. Report prepared by Euromonitor

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1 The information that appears in this Industry Overview has been prepared by Euromonitor International Limited and reflects estimates of market conditions based on publicly available sources and trade opinion surveys, and is prepared primarily as a market research tool. References to Euromonitor International Limited should not be considered as the opinion of Euromonitor International Limited as to the value of any security or the advisability of investing in our Group. Our Directors believe that the sources of information contained in this Industry Overview are appropriate sources for such information and have taken reasonable care in reproducing such information. Our Directors have no reason to believe that such information is false or misleading or that any material fact has been omitted that would render such information false or misleading. The information prepared by Euromonitor International Limited and set out in this Industry Overview has not been independently verified by our Group, the Sponsor, the Lead Manager, the Underwriters or any other party involved in the [REDACTED] and none of them gives any representations as to its accuracy and the information should not be relied upon in making, or refraining from making, any investment decision. SOURCE OF INFORMATION Report prepared by Euromonitor Euromonitor was commissioned by our Group to prepare the Euromonitor Report in respect of the financial printing service industry in Hong Kong. A total fee of US$40,000 (approximately HK$312,000) was paid to Euromonitor for the preparation of the Euromonitor Report. The Euromonitor Report has been prepared by Euromonitor independent of our Group s influence, and such fee was not conditional on our Group s successful [REDACTED] or on the results of the Euromonitor Report. Information disclosed in this document which is attributable to Euromonitor has been extracted from the Euromonitor Report, which was published with the consent of Euromonitor. Euromonitor is an independent market research company with global operations and is experienced in providing industry research for companies seeking listing in Hong Kong. The information contained in the Euromonitor Report, which has been extracted and placed in this document, was derived by various information collection methodologies including (i) primary research, which involved interviews with a sample of leading industry participants and experts for the latest data and insights on future trends to verify and cross check the consistency of data and research estimates; and (ii) secondary research, which involved reviewing published sources including the Census and Statistics Department of Hong Kong, publications from the Stock Exchange, company reports including audited financial statements where available and independent research reports. All statistics are based on information available as at the date of this report. Projected data in the Euromonitor Report was obtained from historical data analysis plotted against macroeconomic data with reference to specific industry-related drivers. The information collected will be reviewed and cross-checked against all sources for consistency and accuracy and an independent analysis will be conducted to build all final estimates of the market in the preparation of the Euromonitor Report. 42

2 In relation to the forecasted or estimated information presented in the Euromonitor Report, Euromonitor assumed (i) the Hong Kong economy to maintain steady growth over the forecast period; (ii) the Hong Kong social, economic and political environments to remain stable during the forecast period; and (iii) key market drivers such as the performance and market sentiment of the Hong Kong economy are expected to boost the development and drive the future growth of the Hong Kong s financial printing services market. Our Directors confirm that, after taking reasonable care, there is no adverse change in the market information since the date of the Euromonitor Report which may qualify, contradict or have a material impact on the information provided in this section of this document. OVERVIEW OF THE HONG KONG FINANCIAL PRINTING MARKET In Hong Kong, the typical business model for financial printing companies is to offer full financial printing service packages i.e. to be a one-stop financial printing service provider. The services offered range from typesetting, design, translation, printing, to final delivery. Financial printing companies cater to a wide range of corporate reports and communications, such as financial and annual reports, corporate announcements, shareholders circulars, debt offering circulars, IPO prospectuses, and fund documents, etc. In addition to the core services offered by financial printing companies in Hong Kong, it is also common for these companies to provide value-added services. Digital printing (i.e. the development of traditionally printed financial reports in electronic format) has become increasingly common. Other value-added services include online Data Room which enables authorised individuals to access confidential information from any location, translation services, and the provision of conference rooms and other business services to the working group during the drafting process of a project. The tight deadlines and frequent meetings demanded by some of these projects have led some industry players to suggest that the location of the financial printing company is a factor determining the suitability of the company for clients. For example, the top 10 players in Hong Kong s financial printing industry all had offices located within Hong Kong s central business district (Central), and in close proximity to large investment banks, consultancies, and audit companies. Listed companies would typically engage financial printing companies for the printing of financial and annual reports, company announcements, and shareholders circulars. Companies seeking to raise funds by way of listing on the Stock Exchange are required to publish IPO prospectuses, while companies seeking to raise funds by way of issuing debt securities on the Stock Exchange are required to publish debt offering circulars. For the printing of listing documents, financial printing companies usually work closely with financial institutions such as investment banks. Other clients of financial printing companies would include fund houses, insurance companies, brokers for the printing of fund offering documents, and product brochures, etc. 43

3 Most financial printing companies in Hong Kong rely on having a strong sales team to maintain and expand the client base, and would usually have an account management team as a dedicated point of contact at any time during a project. In order to maintain greater flexibility in the utilisation of manpower resources, and to minimise capital commitment, it is also common for financial printing companies to work with partners or subcontractors for various aspects of a financial printing project. For example, some companies outsource printing (capital intensive) and translation (resource intensive), focusing instead on sales and marketing, typesetting, and proofreading and design. FACTORS AFFECTING THE DEMAND FOR FINANCIAL PRINTING SERVICES Number of companies listed on the Stock Exchange As financial printing service providers mainly offer services to the clients in relation to the publication of listing documents, annual reports, and circulars for their compliance to the application rules and regulations, movements in the number of listed companies and newly listed companies directly affects the financial printing market. The number of companies listed on the Stock Exchange is in turn related to the Hong Kong economy, which has expanded moderately at a CAGR of 5.6% during the historic period to reach HK$2,402.5 billion in nominal GDP in Between 2011 and 2015, the number of companies listed on the Stock Exchange grew from 1,496 to 1,866 with a CAGR of 5.7%. Over the historic period, the number of companies newly listed on the Stock Exchange varied between 60 to more than 100 each year, with 2015 recording the highest number of 138 companies newly listed on the Stock Exchange throughout this period. One of the drivers fuelling the increasing numbers of companies newly listed on the Stock Exchange is the growing economic connection between Hong Kong and mainland China. In particular, Hong Kong is a preferred listing destination for Chinese companies as mainland Chinese companies can access international capital from investors all over the world. In 2015, the top five companies by IPO funds raised in Hong Kong were mainland China companies. Table 1 Companies listed on the Stock Exchange; Historic: ( ) 000 2,000 1,500 1,496 1,547 1,643 1,752 1,866 CAGR % 8.1% 1, number of listed companies on the Stock Exchange number of newly listed companies on the Stock Exchange Census and Statistics Department of Hong Kong, and the Hong Kong Stock Exchange 44

4 Economic performance and market sentiment Performance and market sentiment of the Hong Kong economy are two of the key factors affecting activities in the equity and debt markets of Hong Kong. In particular, growth in such markets would in turn create more business opportunities for players in the financial printing market as fund raising activities, be it debt or equity, enhance demand for financial printing services. Total market capitalisation of the Stock Exchange grew significantly during the historic period with a CAGR of 8.9% to reach HK$24,684 billion in During the historic period, despite a decline in the total market capitalisation by 1.5% in 2015 compared to the previous year due to stock market turmoil, and a crash of the Chinese stock market in the middle of 2015, the overall trend for the historic period is upward, reflecting the business expansion of companies listed on the Stock Exchange, as well as injection of market capitalisation from a steady stream of companies newly listed on the Stock Exchange. During the historic period, the value of equity funds raised registered strong growth, with a CAGR of 22.8%. However, the value of equity funds raised is relatively volatile, with sharp fall in 2012 by 37.7% and a surge in 2014 by 148.8%. The fall in 2012 could be attributed to weak stock market sentiment and a reduction in the number of companies newly listed on the Stock Exchange to 64 companies, while the surge in 2014 was mainly due to stable economic performance and a rise in investor confidence, which saw 122 newly listings. Table 2 Total market capitalisation, and equity funds raised; Historic: ( ) HK$ billion 25,000 20,000 17,537 21,950 24,043 25,072 24,684 CAGR % 22.8% 15,000 10,000 5,000 0, , Total market capitalisation on the Stock Exchange Equity funds raised Census and Statistics Department of Hong Kong, and the Hong Kong Stock Exchange 45

5 Changes in financial market regulations Although the financial printing service industry in Hong Kong is not directly governed by a specific regulatory regime (with the exception that translators should be able to issue certified translations), it is impacted by those governing their main clients (e.g. companies listed on the Stock Exchange, fund houses, insurance companies, and investment companies). In Hong Kong, companies listed on the Stock Exchange are regulated by the Stock Exchange which issues requirements for listed issuers and administers listing, trading, and clearing rules. The compliance requirements for the publication of various corporate communications (e.g. periodical results announcements, financial reports, shareholders circulars), and the submission of listing documents will directly impact the amount of printing required, and the type of financial printing services required by companies listed on the Stock Exchange. COMPETITIVE LANDSCAPE Barriers to entry Capital requirement is an important barrier to entry for Hong Kong s financial printing service industry. A new entrant will typically incur high fixed costs in the investments required for printing software and equipment. To provide high quality printing, a financial printing company would also need to be equipped with up to date software for design, typesetting, document management, etc. and would need to own the necessary hardware such as printing machinery. New entrants must also have sufficient cash reserves to cover their rent, especially if it takes time to secure new clients. Industry players have suggested that location is important for financial printers, as bankers, lawyers, and other clients would typically use the conference rooms at financial printing companies for project meetings (e.g. drafting, kick-off meetings). It is therefore common for financial printers to set up their offices in the Hong Kong s Central district where the rent is very high. Other barriers to entry also include the costs associated with the recruitment, training, and development of experienced employees (e.g. sales, marketing, and design teams), which are important for winning contracts. New entrants may also be disadvantaged by a lack of track record, and relationship with companies listed in the Stock Exchange, investment banks or other professional advisers in the market. Clients are more likely to trust financial printing companies with which they had worked with previously, or those who have a track record of high quality work. New entrants without prior experience or an established network may find it difficult to win projects initially. Number of financial printing service providers The number of financial printing companies in Hong Kong has increased gradually over the historic period from 17 companies in 2011, to 22 companies in This increase in the number of new financial printing companies in Hong Kong have been due to the sufficient demand for their services, driven by the rising number of companies listed on the Stock Exchange. On the other hand, the number of players in Hong Kong s financial printing service industry has remained small due to the constraints of a competitive market and high barriers to entry which include capital requirements, a skilled labour force, and well developed relationships with companies listed on the Stock Exchange and financial institutions. 46

6 Table 3 Number of financial printing service providers in Hong Kong; Historic: ( ) Number of financial printing service providers in Hong Kong Euromonitor estimates from desk research and trade interviews Hong Kong s financial printing industry is a concentrated market with a small number of players. In 2015, the top three players by revenue receipts generated by the provision of printing services in Hong Kong were all multinational companies. International players benefit from strong reputation and brand name, large economies of scale and established global contacts and partnerships with international clients. IPO prospectus printing is an important source of revenue for industry players because these projects generate larger revenues and relatively higher profit margins than other types of financial printing. Revenue for an IPO prospectus project can range from HK$1.0 million to HK$3.0 million or even higher, depending on the size of the IPO deals. IPO printing projects tend to be dominated by a few large players because to win IPO prospectus projects, financial printers must have significant resources including premium facilities to host meetings and drafting sessions with clients, bankers and lawyers; manpower resources; investments in marketing; and strong network relationships with potential clients. Smaller companies tend to do only a few IPO prospectus projects per year due to capacity constraints with office space and manpower. Some local players specialise in other types of financial printing (e.g. annual reports, circulars) and compete on pricing. Table 4 Ranking of leading financial printing service providers in terms of number of successful IPO transactions in Hong Kong; Historic: (2015) Ranking Name Number of successful IPO transactions in Competitor A 31 2 Competitor B 17 3 Competitor C 16 3 Competitor D 16 5 Competitor E 15 6 Competitor F 7 7 Competitor G 6 8 GenNex Financial 4 9 Competitor H 3 10 Competitor I 2 Euromonitor estimates from desk research and trade interviews: 47

7 The market has become more fragmented during the historic period in terms of the number of players. Between 2011 and 2015, there was a slight increase in the number of financial printing service providers from 17 to 22, due to new local players entering the industry. International players entered the market mainly through acquisition. However, the industry also has a history of consolidation, although it has not been very common. Consolidation allows bigger companies to expand their client base and acquire knowledge of specific industries quickly. Nonetheless, consolidation is not a frequent occurrence in the industry because most of the players have their own typeset printing facilities and the merger of two companies does not create significant synergy in terms of resource acquisition. Table 5 Ranking of leading financial printing service providers in terms of revenue receipts in Hong Kong, Historic (2015) Ranking (Note 1) Leading service providers, in terms of revenue receipts generated from the provision of financial printing services Listed/private 1 Competitor A Private 2 Competitor B Listed (Note 2) 3 Competitor C Listed (Note 2) 4 Competitor D Listed (Note 2) 5 Competitor E Listed (Note 2) 6 Competitor F Private 7 Competitor G Private 8 Competitor H Listed (Note 2) 9 GenNex Financial Private 10 Competitor I Listed (Note 2) Euromonitor estimates from desk research and trade interviews Notes: 1. While audited data was available for some of the companies, they typically do not break the revenue numbers into the relevant categories which were covered in this study. For these companies as well as those companies that are included in the market shares but are not publicly listed, the market shares were estimated based on estimates provided by various trade sources (i.e. not just the companies themselves) and seeking a consensus on these estimates as much as possible. 2. Companies listed under their own name or under a parent company on the Stock Exchange or elsewhere. FUTURE OPPORTUNITIES AND THREATS TO THE FINANCIAL PRINTING INDUSTRY Future growth of financial printing industry may be affected by toughened regulations Hong Kong s financial printing industry is forecasted to expand at a relatively slower rate over the forecast period ( ) at a CAGR of 5.7% to reach HK$2,305 million by Growth is also expected to be faster in the immediate short term (7.5% in 2016 and 6.0% in 2017), slowing down towards the end of the forecast period (5.5% in 2020). Key factors driving this trend of client value spend on financial printing services are likely to be regulatory changes and market conditions in both Hong Kong and China. 48

8 For example, the Hong Kong Government is committed to strengthening Hong Kong s status as an international financial centre, and is expected to improve the regulatory environment and market infrastructure to make Hong Kong a more attractive listing location. The proposed Shanghai-Hong Kong IPO Connect will enable mainland Chinese investors to subscribe to IPOs in Hong Kong, and Hong Kong investors as well as international investors to subscribe to IPOs in Shanghai. This will drive an increase in the number of IPOs and generate more financial printing revenue for financial printing companies. The number of mainland Chinese companies seeking listing on the Stock Exchange is also expected to continue growing in the short to medium term despite announcements by the China Securities Regulatory Commission that the restructuring of mainland China s IPO system is expected to take place by Industry experts however believe that the current backlog of prospective IPOs from China is unlikely to disappear and mainland Chinese companies will continue to turn to Hong Kong for fund raising. As initial drafts of IPO prospectuses are typically in English, an expected increase in mainland Chinese clients also suggests that demand for translation services will continue to grow. Regulatory changes are also expected to provide opportunities and challenges for the industry. For example, from January 2016 onwards, the Stock Exchange will require all listed companies to comply with the ESG Reporting Guide for their annual reports, thereby raising current voluntary disclosure levels to a standard of comply or explain. In the long-term, the regulator is expected to move towards some form of integrated reporting binding together all financials and non-financials of a company to reflect its true value. Industry experts have therefore suggested that these and other increasingly stringent rules and regulations, set by the Stock Exchange (such as stricter requirements on the buying and selling of listed companies to prevent backdoor listings ; eligibility requirements for listing; and rules concerning companies seeking to shift their listing from the GEM to the Main Board), could result in a surge of companies seeking to get listed in the immediate short term. Table 6 Financial Printing Industry in Hong Kong, Forecast ( ) million 2,500 2,000 1,845 1,956 2,069 2,185 2,305 CAGR % 1,500 1, Client value spend on financial printing services in Hong Kong Euromonitor estimates from desk research and trade interviews 49

9 Digitisation The Stock Exchange has been in support of the use of electronic listing documents. Under the Exemption Notice, which came into effect in February 2011, companies seeking to list shares and debentures on the Stock Exchange by public offers are allowed to distribute paper application forms without physical distribution of the equivalent amount of prospectuses as long as the prospectus is available on the Internet instead of having a printed version, subject to certain conditions. The Stock Exchange also encourages listing applicants to produce shorter and more concise prospectuses. For example, in the Guidance Letter Stock Exchange-GL86-16 (dated February 2016), the Stock Exchange recommends that the Summary and highlights section of listing documents should be concise and generally no more than 10 pages. The requirements for companies to submit both English and Chinese versions of their listing documents when submitting the listing applications has also boosted the demand for translation services and increased the volume of financial printing services required. Our Directors are of the view that digitisation is likely to benefit our growth as a financial media service provider. Our Group has launched our digital solutions in For further information, please refer to the paragraph headed Digital solutions under the section headed Business of this document. OUTLOOK OF OUR GROUP We commenced business in 2012, completing our first IPO prospectus project in 2013 and have since been recognised by the industry, receiving various accolades such as the ARC awards for annual reports, ASTRID awards for design, GALAXY awards for product and service marketing, and the LACP Vision awards, etc. Catering to companies listed on the Stock Exchange, or seeking to list thereon, our range of services includes both traditional financial printing services and digital solutions that cover the development and maintenance of corporate websites, and mobile applications. Whilst our product offerings remain focused on the provision of traditional financial printing services, our Company s solutions packaging is geared towards addressing future industry developments. Grouped under the respective offerings compliance solutions, digital solutions, and ESG solutions, each seeks to undertake either regulatory concerns, or recent trends in the financial printing industry. For example, our digital solutions offering aims to capture business opportunities that arise from the digitisation of traditional financial printing products. Put against industry trends that increasingly seek to move the publication of products onto online platforms, these service offerings put us in good stead to capture such business opportunities. 50