The information presented in this section has been derived from various official Government and industry sources. We believe that the sources of this information are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. We and the Sponsor have no reason to believe that such information is false or misleading in any material respects or that any fact has been omitted that would render such information false or misleading in any material respects. The information has not been independently verified by us, the Sponsor, the Sole Underwriter, their respective advisers or affiliates or any other party involved in the Placing and no representation is given as to its accuracy, and accordingly, the information contained herein should not be unduly relied upon. SOURCES OF INFORMATION Certain information provided in this section is derived from various official or publicly available sources including the following: Bloomberg Terminal Bloomberg Terminal is a computer system provided by Bloomberg L.P. which provides services which allow users to monitor and analyse real-time financial market data and place trades on the electronic trading platform. Census and Statistics Department, Hong Kong The Census and Statistics Department (the C&SD ) provides statistics covering various social and economic aspects of Hong Kong. The information presented in this prospectus from C&SD is freely accessible by the public. London Bullion Market Association LBMA is an international trade association that represents the market for gold and silver bullion, which is centred in London. The information presented in this prospectus as obtained from LBMA is freely accessible by the public. Silver Institute The Silver Institute is a non-profit international association who collects and publishes statistics and other information about production, distribution, marketing, consumption and the uses of silver and silver products. Each year, the Silver Institute works with Thomson Reuters GFMS, a precious metals consultancy specializing in global gold, silver, platinum and palladium market research, to prepare and publish a comprehensive report on silver supply and demand trends, with special emphases on key markets and regions. The information presented in this prospectus as obtained from the Silver Institute is freely accessible by the public. US Geological Survey, US Department of the Interior The US Geological Survey (the USGS ) is the US s largest water, earth, and biological science and civilian mapping agency. The USGS collects, monitors, analyses, and provides scientific understanding about natural resource conditions, issues and problems. The information presented in this prospectus as obtained from the USGS is freely accessible by the public. 41
METAL TRADING INDUSTRY Silver is usually found in native form, as an alloy with other metals, and in minerals such as argentite and chlorargyrite. Pure silver is a soft, white and lustrous metal. Pure silver is malleable and ductile, with the highest electrical and thermal conductivity among all metals. According to the Mineral Commodity Summaries 2014 published by the USGS, the world s silver reserves are estimated to be approximately 520,000 tonnes in 2013. Silver reserves are geographically concentrated. According to the statistics in 2013, the top five countries ranked by silver reserves accounted for approximately 73% of the world s total silver reserves. % of Silver reserves in 2013 (tonnes) 2013 reserves world total (tonnes) % Country Australia 88,000 16.9 Peru 87,000 16.7 Poland 85,000 16.3 Chile 77,000 14.8 China 43,000 8.3 Mexico 37,000 7.1 United States 25,000 4.8 Bolivia 22,000 4.2 Canada 7,000 1.3 All other countries and regions 50,000 9.6 Total (approximately) 520,000 100.0 Source: Mineral Commodity Summaries 2014, USGS According to the findings in the Mineral Commodity Summaries 2014, silver was typically obtained as a by-product from the production of other base metals such as copper, lead-zinc alloy as well as gold. The silver recoverable poly-metallic ore accounts for more than two-thirds of the world s resources of silver. Despite the fact that most recent silver discoveries have been associated with gold occurrences, by-products from copper and lead-zinc mines will continue to account for a significant share of future reserves and resources of silver. Silver s traditional uses include coins and medals, electrical and electronics, jewellery and silverware, and photography. The demand for silver in other applications includes bandages for wound care, batteries, brazing and soldering, in catalytic converters in automobiles, in cell phone covers to reduce the spread of bacteria, in clothing to minimize odour, hardening bearings, inks, mirrors, solar cells, water purification, and wood treatment to resist mould. According to the Mineral Commodity Summaries 2014, silver is also used for miniature antennas in radio frequency identification devices used in casino chips, freeway toll transponders, gasoline speed purchase devices, passports, and on packages to keep track of inventory shipments. 42
COMPETITIVE LANDSCAPE AND ENTRY BARRIERS There is a large number of traders and brokers of different scales of operations in the metals trading industry in Hong Kong and the competition in the market is intense. However, to the best of the knowledge of our Directors, there are not many metal traders in Hong Kong (such as our Group), whose metal trading businesses are fully integrated with their own metal processing facilities. We compete with other metal traders in Hong Kong mainly on (i) capital commitment; (ii) product quality and timely delivery; (iii) price competitiveness; (iv) customer base; and (v) sustainable supply of adequate metals. Apart from the relatively high capital commitment to operate in this industry, metal traders in Hong Kong have to build reputation in the market to maintain customers confidence. They also need an efficient processing operation with reliability and high quality. Potential competitors will also have to face challenges such as increasing labour costs and volatility in metal prices which can be affected by economic factors such as macro-economic trend, investment demand, interest rate and inflation rate. All of the above factors create relatively high entry barriers for our potential competitors. Our Directors consider that our primary competitors are those metal traders in Hong Kong who sell similar metal products as our Group and have their own processing facilities. To the best knowledge of our Directors, an unlisted financial group based in Hong Kong which is principally engaged in the provision of bullion, securities, futures, bonds and forex services is our major competitor. Such competitor is a member of CGSE and one of the Hong Kong accredited gold refineries. It has also been appointed as a liquidity provider of Loco London Gold Market by CGSE. Such competitor is neither a customer nor a supplier of our Group. To the best knowledge of our Directors, due to the lack of official and public statistics and information on the metal traders in Hong Kong, it is difficult to accurately estimate our market share and market position. For our market share in the silver export market in Hong Kong, please refer to the paragraphs headed Hong Kong s market for silver below in this section. FUTURE OPPORTUNITIES AND CHALLENGES Our Directors consider that the future opportunities and challenges which we face will be affected by the development of the silver industry in Hong Kong as well as factors affecting the price of silver which is determined by the available supply against its demand. Fabrication demand has outpaced mine production in recent years, forcing market participants to use existing stocks to meet demand. On the supply side, new technologies, new mining projects, and import and export policies will influence silver production. However, since silver is a tangible asset and is recognised as a store of value as well as a hedge against risk, its price can also be affected by other major factors such as macro-economic trend, investment demand, interest rate and inflation rate. With our experienced management team and reputation in the market, our Directors consider that we are well-positioned to compete favourably against our competitors under such future challenges that are commonly faced by all competitors. Set out below is an analysis of the opportunities and challenges faced by the industry. 43
Silver supply During the period from 2007 to 2013, the world s total silver supply increased from approximately 27,598 tonnes to approximately 30,422 tonnes, at CAGR of approximately 1.6%. The chart below shows the global silver supply including silver mine production and silver scrap production for the period from 2007 to 2013. Source: The Silver Institute The composition of the world s silver mine production has been changing from 2008 to 2013. Despite the decrease in silver mine production volume in Chile, Canada and the United States during the period, the significant increase in supply from Mexico and China maintained the world s silver mine production on a rising trend. The graph below shows the silver mine production by some major countries for the period from 2008 to 2013. Source: Mineral Commodity Summaries 2014, USGS 44
According to Mineral Commodity Summaries 2014, Mexico was estimated to have produced approximately 5,400 tonnes of silver in 2013, accounting for 20.8% of the total silver mine production volume in the world, as compared to approximately 3,240 tonnes in 2008 (15.2% of world mine production). China was estimated to be the world s second largest silver mine production country in 2013 producing approximately 4,000 tonnes of silver in 2013, accounting for 15.4% of the total silver mine production volume in the world, as compared to approximately 2,800 tonnes in 2008 (13.1% of world mine production). The chart shows the silver mine supply by countries for 2013. Source: Mineral Commodity Summaries 2014, USGS Silver demand and key drivers of the industry According to statistics published by Silver Institute, the world s total consumption of silver in 2012 was approximately 32,606 tonnes. Silver demand consists of both fabrication demand and investment demand. Global demand for silver is dominated by fabrication demand which accounts for approximately 81% of the total global demand, and purchases by banks and investors account for the remaining in 2012. The world s total physical demand (industrial fabrication, jewelry, silverware, coins and bars) increased at a CAGR of approximately 2.1% during the period from 2007 to 2013. It was mainly driven by the increase in demand for coins and bars and jewelry. Industrial fabrication has been the largest end-user of silver during the period, accounting for more than half of the physical demand every year. Investment demand has been decreasing during the period from 2007 to 2013, at a CAGR of approximately -28.3%. 45
The table below sets forth the historical world silver demand by end-user for the period from 2007 to 2013. World silver demand by end-user, 2007-2013 (tonnes) 2007 2008 2009 2010 2011 2012 2013 CAGR Jewelry 5,698.2 5,542.6 5,514.6 5,928.3 5,704.4 5,642.2 6,183.4 1.37% Coins & Bars 1,592.5 5,838.1 2,734.0 4,544.2 6,612.6 4,332.7 7,639.0 29.87% Silverware 1,906.6 1,850.7 1,685.8 1,636.0 1,496.1 1,387.2 1,555.2-3.34% Industrial Fabrication 20,425.7 20,257.7 16,802.1 20,005.8 19,433.5 18,323.1 18,245.3-1.86% Total physical demand 29,623.0 33,489.1 26,736.5 32,114.3 33,246.5 29,685.2 33,622.9 2.13% Total investment demand 2,373.20 2,929.95 4,307.83 3,894.16-367.02 3,648.44 323.48-28.26% Total demand 31,996.1 36,419.1 31,044.4 36,008.5 32,879.5 33,333.6 33,946.3 0.99% Source: The Silver Institute Physical demand, investment demand and the export level of silver are the key drivers for the growth of the Hong Kong silver industry. Hong Kong s market for silver Silver export According to the statistics published by the C&SD, Hong Kong s export (inclusive of re-export) of silver has increased from approximately 2,300 tonnes in 2008 to approximately 2,980 tonnes in 2013, representing a CAGR of approximately 5.0%. During the period from 2008 to 2013, the majority of silver was exported to the United Kingdom, India, Taiwan and Thailand. The chart shows Hong Kong s major export markets for the period from 2008 to 2013. Source: C&SD 46
Silver exports to India and Taiwan contributed 43.8% and 27.9% respectively to the total domestic exports and re-exports of silver from Hong Kong (approximately 2,980 tonnes) in 2013. According to C&SD, Hong Kong Silver Exports and Re-exports Volume was approximately 2,980 tonnes in 2013. Our sales of silver to customers outside of Hong Kong of approximately 110 tonnes for the year ended 31 December 2013 represented approximately 3.7% of the Hong Kong Silver Exports and Re-exports Volume in the year. The chart shows Hong Kong s major export of silver for the year 2013: Source: C&SD CGSE CGSE operates in Hong Kong as a registered society. Its main function is to provide a trading platform, facilities and related services to its members for gold and silver. CPM has been a processor of 15 kg silver ingots with a fineness of 999.9 for two accredited refiners of CGSE since June 2013 and February 2014, respectively. 47
Silver market pricing Silver price is determined by its supply and demand. The LBMA publishes the London Fixing Price which enables silver to be sold and bought at a single price. The London bullion market is a wholesale over-the-counter ( OTC ) market for the trading of gold and silver. Trading is conducted among LBMA members, most of which are central banks, producers, refiners, fabricators and other traders throughout the world. LBMA is one of the largest global trading platforms for gold and silver OTC transactions. According to the statistics published by the LBMA, approximately 1,614.1 million oz of silver were cleared on LBMA for the year ended 31 December 2012. Over 140 companies in 30 countries have been admitted as either LBMA members or associates. The London Fixing Price is declared on every London business day and is used in many countries as a reference to determine the price for physical deliveries. After the silver fixing meeting between certain LBMA members, a fixing price will be arrived at when buying and selling orders are matched. The London Fixing Price serves as one of the references when we price our sales and purchases. Source: LBMA The London Fixing Price will cease with effect from the close of business on 14 August 2014. 48
The Market Spot Price serves as another reference when we price our sales and purchases. The chart below illustrates the movement of Market Spot Price for silver during the period from January 2009 to May 2014: Source: Bloomberg Terminal In practice, market price for silver can also be affected by other major factors such as macroeconomic trend, investment demand, interest rate and inflation rate. In an economic boom, increase in industry demand will push silver prices up. During an economic recession, like gold, although not to the same extent, silver prices are more resistant to price drop than that experienced by some other commodities, due to the fact that silver is recognised as a mean to store value. Currently, many currencies of major countries are under pressure because of their government deficits. Moreover, in order to tackle economic slowdown, many countries have adopted relatively loose monetary policies. As more capital is injected into these economies, their currencies become less valuable. In such cases, possession of physical silver bullion becomes more attractive. The demand from the coins and medals sector for silver has increased at CAGR of approximately 18.5% during the period from 2007 to 2012. Although silver is becoming more popular as a hedging asset against risk, the fabrication industry still remains the main driver for silver demand. 49
Gold market pricing Source: LBMA The gold market is relatively liquid compared to many other commodity markets. Physical demand for gold is primarily for fabrication purposes, including jewellery, electronics, dentistry, decorations, medals and official coins. In addition, central banks, financial institutions and private individuals buy, sell and hold gold bullion as an investment and as a store of value. The price of gold fix presented an upward trend from January 2009 to September 2011. In 2013, the sharp fall in the gold price had put the gold market under great pressure than it has ever faced in a decade. 50
Tin market pricing Source: LME The tin market is now free from inter-governmental controls. The pricing of tin is mainly dependent on the level of demand for tin and its availability, which may likely be affected by: (i) the supply from Indonesia which accounts for a large portion of global production; (ii) the global economic environment; and (iii) consumers restock and destock into price swings. The chart above sets forth historical tin prices from January 2009 to May 2014. The tin price illustrated in the chart demonstrates a strong upward trend during the period from 2009 to 2011. However, the rise in tin prices halted during the first half of 2012, when tin prices dropped with lower demand from end-user and weakened investor s confidence. 51