Industry overview. CIC Report

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1 Unless otherwise indicated, the information presented in this section is derived from the CIC Report prepared by CIC, which was commissioned by us and is prepared primarily as a market research tool. References to CIC should not be considered as its opinion as to the value of any security or the advisability of investing in our Group. Our Directors believe that the sources of information and statistics are appropriate sources for such information and statistics and have taken reasonable care in extracting, compiling and reproducing such information and statistics. 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 and statistics false or misleading in any material respect. The relevant information prepared by CIC and set out in this Industry Overview has not been independently verified by our Group, the Sole Sponsor, the Joint Bookrunners, the Joint Lead Managers, the Underwriters or any of their respective directors, officers, advisers and agents, and therefore may not be accurate, complete or updated. We make no representation as to the accuracy, completeness or fairness of such information and accordingly the information contained herein should not be unduly relied upon. In respect of the information which has been directly or indirectly derived from the Stock Exchange s documents, the Stock Exchange and its subsidiaries do not guarantee the accuracy or reliability (whether in tort, contract or otherwise) for any loss or damage arising from any inaccuracy or omission of the information; or any decision, action or non-action based on or in reliance upon any information by any person. SOURCE OF INFORMATION We commissioned CIC, an independent market research and consulting company, to analyse and prepare a report on the PRC and Hong Kong s financial service industries. A commission fee of HK$614,500 was paid to CIC pursuant to a service agreement reached by arm s length negotiation. Our Directors consider such fee reflect market rates. CIC, an investment and financing consultancy, provides professional industry consulting services for customers who seek to raise money through public stock offerings. Our Directors are of the view that the information set forth in this section is reliable and not misleading, as the information was extracted from the CIC Report and the CIC is an independent professional market research company with extensive experience in their profession. The information and data collected by CIC have been analysed, assessed and validated using CIC s in-house analysis models and techniques. The methodology used by CIC is based on information gathered from multiple levels and allows such information to be cross-referenced for reliability and accuracy. On this basis, we consider the data and statistics to be reliable. CIC Report In preparing the report, CIC conducted both primary and secondary research and relied on various sources. Primary research was conducted via interviews with key industry experts and leading industry participants. Secondary research involved the analysis of market data obtained from several publicly available data sources, such as the Hong Kong Census and Statistics Department, the SFC and the Stock Exchange. 53

2 The CIC report contains a variety of market projections which were produced with the following key assumptions: (i) the global and Hong Kong s economy and financial industry are likely to maintain a sustainable growth in the next decade; (ii) relevant industry factors such as the established legal system, the high degree of market autonomy, the internationalisation of the RMB, initiatives to ease access to capital markets including the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and technological advancements, are likely to remain advantageous to the Hong Kong financial service market in the report period; and (iii) there being no industry regulation which may affect the market substantially. The reliability of the CIC Report may be affected by the accuracy of the foregoing assumptions and factors. Analyses in the CIC Report have taken into account, among others, the following parameters of the relevant markets in the Greater China, PRC and Hong Kong: equity fundraising on the Stock Exchange, the Main Board and GEM; size of M&A deals in Greater China and Hong Kong; size of private equity deals in PRC and Hong Kong; and size of the management consulting market in PRC. The CIC report mainly focuses on the three regions where corporate finance houses, financial advisory firms and financial service customers are generally located in, namely Greater China, the PRC, and Hong Kong. In the context of the CIC Report, Greater China refers to the PRC, Taiwan, Hong Kong and Macau. Our Directors confirm that, to the best of their knowledge, after taking reasonable care, there has been no material adverse change in the market information since the date of the relevant data contained in the CIC Report which may qualify, contradict or have an impact on the information in this section. OVERVIEW OF THE HONG KONG CAPITAL MARKETS Annual turnover value of the Main Board and GEM in Hong Kong Annual turnover value, Hong Kong, Main Board (HK$ billion) 17, , , , , ,280.0 GEM (HK$ billion) Source: the Stock Exchange 54

3 According to the Stock Exchange, the Main Board has an annual turnover value of HK$16,280 billion in 2016, with a CAGR of about -1.9% from 2011 to Influenced by the global trend, high-tech enterprises have received more attention in recent years. A certain number of investors have shifted their attention from the Main Board to GEM because companies listed on GEM are largely from high-tech industries, which are considered to have a greater potential compared to companies listed on the Main Board. In 2016, there were 45 new listed companies on GEM, 9 of which had high-tech being its core business, representing a share of 20%. The market focus shift has greatly boosted GEM s annual turnover, volume and number of trades between 2011 and World ranking of the Hong Kong stock market The following table sets out the market capitalisation and ranking of the world s top 10 stock exchanges as at 2016: Market capitalisation and ranking of the world s top 10 stock exchanges as at 2016 Worldwide Rank Ranking in Asia Stock Exchanges Capitalisation (6) (US$ billion) 1 New York Stock Exchange (NYSE) 19, NASDAQ OMX 7, Japan Exchange Group (Tokyo) (1) 5, Shanghai Stock Exchange 4, London Stock Exchange Group (2) 3, Euronext Europe (3) 3, Shenzhen Stock Exchange 3, Hong Kong Stock Exchanges (4) 3, Toronto Stock Exchange (5) 2, Deutsche Börse 1,732.3 Source: SFC Notes: 1. Japan Exchange Group (Tokyo) comprises Tokyo Stock Exchange and Osaka Securities Exchange; 2. London Stock Exchange Group comprises London Stock Exchange and Borsa Italiana; 3. Euronext Europe comprises Euronext Amsterdam, Euronext Brussels, Euronext Lisbon and Euronext Paris; 4. The Stock Exchanges includes GEM; 5. Toronto Stock Exchange includes TSX Venture 6. Ranking is based on market capitalisation. Market capitalisation excludes investment funds. As at 2016, the Stock Exchange was ranked the eighth largest stock market in the world by market capitalisation of its listed companies which amounted to US$3,193.2 billion. Influenced by the amid worries and uncertainties about the economic outlook and a weakening of the RMB, the PRC s stock market in 2016 experienced fluctuation but still much steadier compared with the previous year. Nevertheless, the Shanghai Stock Exchange and Shenzhen Stock Exchange still manage to achieve a substantial growth in market capitalisation, which eventually led to the exchanges being globally ranked 4th and 7th respectively in terms of market capitalisation. 55

4 Hong Kong s capital market has developed steadily with unique competitive edges The competitive edge of the Hong Kong capital market is unique. The Stock Exchange and SFC have strong reputations for their stringent standards and regulatory scheme. Hong Kong has a competitive position in comparison to other stock exchanges in the Asia-Pacific region due to its role as a bridge to the PRC and as the largest offshore RMB centre, free movement of capital and information; and a simple tax system with low tax rate. Number of companies listed and market capitalisation on the Stock Exchange, Hong Kong, Number of companies listed in the Stock Exchange 1,173 1,241 1,261 1,9 1,413 1,496 1,547 1,643 1,752 1,866 1,973 Market capitalisation of companies listed in the Stock Exchange (HK$ billion) 13, , , , , , , , , , ,761.3 Source: the Stock Exchange As of, 2016, market capitalisation of the Stock Exchange listed companies amounted to HK$24.8 trillion, with a CAGR of about 6.4% since About 99% of total market capitalisation fell to the Main Board. The number of listed companies on the Stock Exchange rose from 1,173 in 2006 to 1,973 in 2016, with a CAGR of approximately 5.3%, of which about 87% was listed on the Main Board. Drivers of Hong Kong s capital market Key drivers of Hong Kong s capital markets are as follows: Independent legal system and high market freedom. Under the influence of the international common law system, Hong Kong capital market s regulatory system has been accepted widely in the world. Meanwhile, the constantly improving transparency of the system and market make Hong Kong more attractive to global participants. The high degree of openness and fully mature market operation rules of diversified operating tools available on the market ensure the capital market dynamics. 56

5 RMB internationalization. Demographic and economic trends underpin long-term wealth creation in Asia especially in PRC. Mainland capital market development cannot fulfill the demand of investment and the real economy. With the acceleration of RMB internationalisation, Hong Kong would become the global offshore RMB center, thus Hong Kong s capital market presents great attractiveness worldwide. Cross-border M&A activity in Hong Kong has also been booming in recent years, mainly due in large part to numerous offshore transactions involving PRC enterprises. Mutual market access. Launched on 17 November 2014 and , Shanghai- Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect are the controllable and expandable channel for mutual market access between the Mainland and Hong Kong by a broad range of investors. Hong Kong may benefit from mainland Chinese investors injecting liquidity and investment in its capital market. Due to the connectivity of the Hong Kong market and other potential markets, Hong Kong s capital market is highly attractive to enterprises from various countries in the world. DEVELOPMENT OF the STOCK EXCHANGE Main Board is the preferred listing path which provides a wide range of benefits The majority of newly listed companies are on the Main Board but the total number has fluctuated in past ten years. In 2016, there were 81 newly listed companies on the Main Board, including 6 transfers from the GEM to the Main Board, with a CAGR of about 3.8% since Companies listed on the Main Board range from conglomerates and banks to utilities and property developers. A listing on the Main Board can offer a company the following benefits: i. Better access to capital for growth with opportunities to raise funds both at the time of listing and at later stages; ii. iii. iv. Higher profile and visibility in the market may result in increased business, greater assurance among the company s customers and suppliers, and an improved corporate image; Increased corporate transparency to gain recognition from institutional funds and the investing public; Improved corporate governance as a result of listing requirements will help improve management efficiency and information flow; and v. Greater employee commitment resulting from the grant of employee share options as part of the compensation package to encourage the senior management to grow with the company. Increasing importance of the GEM as a fund-raising platform for small to medium-sized enterprises The GEM was established as an alternative market to the Main Board in November 1999 to provide capital formation opportunities for growth companies. Amendments to the GEM Listing Rules which took effect on July 2008, introduced a streamlined process for GEM listed companies to transfer listing to the Main Board, thus repositioning GEM as a stepping stone to the Main 57

6 Board. Compared to the Main Board, the GEM tends to be much smaller in both the number of listed companies and market capitalisation. The convenient board transformation system helps small enterprises to grow mature and obtain financing again in the Main Board once they fulfill the relevant requirements. Number of companies newly listed on GEM and transfer from GEM to the Main Board, Hong Kong, Number of new listing on GEM Number of transfer of listing from GEM to the Main Board Source: the Stock Exchange Under the influence of the international economic cycle, the total number of new listings on the GEM exhibited corresponding volatility. In 2013, the number of newly listed enterprises reached 23, almost doubled as compared to 12 in 2012, as the global economy recovered from the European debt crisis. A total of 45 companies opted for a GEM listing in 2016, with a CAGR of approximately 28.2% since This set a record for the highest number of GEM IPOs in Hong Kong per year for the past decade and reflected that the GEM is an effective fund-raising platform for growth companies. Companies from the retail, consumer goods and services sector reached 17 in 2016, which represented the majority of new listings, followed by 9 companies from the TMT (Technology, Media, Telecom) industries and 7 companies from the industrial sector. From 2011 to 2016, the total amount of transfer listing reached 49. The transfer of listing is anticipated to enhance the trading liquidity of the company and promote the corporate image to public investors, and also will benefit the company s future growth and its ability to raise funds for further expansion. 58

7 The Stock Exchange is attractive worldwide in terms of IPO and post-ipo fund-raising activities The total number of newly listed companies in the Stock Exchange reached 126 in 2016, with a CAGR of 4.5% since The total new listing of red chips and H-shares in the Stock Exchange reached 18 in 2016, with a CAGR of approximately 6.7% since The PRC has become the key driver of the development of Hong Kong s capital markets. The Stock Exchange has become one of the preferred listing venues for PRC-based companies. Besides the PRC, the Stock Exchange is committed to attract new listings from the Greater China and other important markets, such as the Southeast Asia, Japan and Korea. Equity fund raised on the Main Board, Hong Kong, Others (HK$ billion) Rights issue (HK$ billion) Placing (HK$ billion) IPO (HK$ billion) Equity fund raised on GEM, Hong Kong, Others (HK$ million) Rights issue (HK$ million) Placing (HK$ million) IPO (HK$ million) ,656 1,463 4,429 2,886 4,753 12,2 2,308 1,485 2,4 67 6, ,616 3,483 4,920 2, ,833 3,183 1,334 1,126 2,160 2,741 4,590 Source: the Stock Exchange Note: rights issue refers to an issue of rights to a company s existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period; placing refers to the sale of securities to a small number of private investors instead of to the general investing public; IPO refers to the first sale of stock by a private company to the public; others include open offer, consideration issue, warrants exercised and share option scheme. In 2015, the Stock Exchange was on track to beat New York Stock Exchange to return as the top IPO market this year for the first time since In 2016, HKEx remained number one in the world in terms of capital raised from initial public offerings, and the aggregated IPO fundraising on the Main Board and GEM was approximately HK$195.3 billion. The total equity funds raised in 2016 was around HK$490.1 billion (HK$195.3 billion from IPOs and HK$294.7 billion from post-ipo fundraising). There were 10 sizable deals raising over HK$5 billion each primarily from the financial services sector, including banks, securities brokerages, leasing and micro financing. Although only 15 out of 126 new listing companies were from financial services sector, these deals contributed more than 65% of total IPO funds raised. 59

8 Segmentations of IPOs in Hong Kong capital market Number of IPOs segmentations, Hong Kong, Number of small to medium size IPOs Number of large size IPOs Equity fund raised of IPOs segmentations, Hong Kong, Equity fund raised of small to medium size IPOs Equity fund raised of large IPOs Source: the Stock Exchange Note: large size IPOs refer to IPOs with fundraising exceeding HK$1 billion; small to medium size IPOs refer to IPOs with fundraising less than or equal to HK$1 billion. Transfers of listing from GEM to the Main Board are excluded as there is no fundraising activity in the transfer of listing. In 2016, small to medium size IPOs reached 92 deals with a CAGR of about 10.0% since 2011, while the large size IPOs dropped to 25 from 30 in A high-speed growth of small to medium size IPOs over the years indicates the constant growth of SME s financing demand. The fundraising market is dominated by large size IPOs which take 91.6% of total fundraising amount. The average deal size of large size IPOs reached HK$7.2 billion, while the small to medium size IPOs deal size was HK$0.2 billion. However, small to medium size IPOs market steadily fell back to HK$16.4 billion in 2016, with a CAGR of around 4.5% since Small to medium size IPOs take account in 8.4% of total fundraising amount in 2016, compared to 5.0% of total fundraising amount in Competitive landscape of the Stock Exchange IPO sponsors As of 2016, there were around 100 corporate finance houses in Hong Kong with sponsorship licenses, accounted for approximately 34.4% of 288 licensed corporations. Among them, there are 3 typical groups of companies, namely, foreign corporate finance houses, subsidiaries of Chinese corporate finance houses and local Hong Kong corporate finance houses. In 2016, total IPO fund raising reached approximately HK$195.3 billion. The Hong Kong IPO market is highly concentrated. The top 5 corporate finance houses took up approximately 68.7% of the total IPO fundraising amount. Our Group ranked 25th among all corporate finance houses in Hong Kong in terms of IPO fund raising in However, in terms of number of deals, our Group completed 2 deals in 2016 and ranked 22nd, which is tied with other 15 corporate finance houses. 60

9 Ranking of corporate finance houses in terms of IPO fund raising in Hong Kong, 2016 Rank Name Amount Market Share (HK$ mil) 1 Company A 62, % 2 Company B 24, % 3 Company C 18, % 4 Company D 17, % 5 Company E 11, % Source: Derived by CIC from public information of the Stock Exchange In 2016, total IPO fund raising sponsored by the local Hong Kong corporate finance houses reached HK$4,736 million with around 48 IPO deals, took up approximately 2.4% of the total IPO fund-raising amount. There were 42 local Hong Kong corporate finance houses in 2016, the top 5 participants took up more than half of total IPO fund raising sponsored by local Hong Kong corporate finance houses. Our Group ranked fifth among all Hong Kong-based corporate finance houses in terms of IPO fund raising in Hong Kong in Ranking of local Hong Kong corporate finance houses in terms of IPO fund raising in Hong Kong, 2016 Ranking Company Market Share of IPO fund raising 1 Company W 13.0% 2 Company X 10.6% 3 Alliance Capital Partners Limited 9.0% 4 Company Z 7.4% 5 Our Company 7.0% Source: Derived by CIC from public information of the Stock Exchange Note: Local Hong Kong corporate finance houses refer to corporate finance houses that initiated their business in Hong Kong, which are different from foreign corporate finance houses (such as Goldman Sachs (Asia) L.L.C., Citigroup Global Market Asia Limited, Morgan Stanley Asia Limited, UBS Securities Hong Kong Limited, etc.) and Chinese corporate finance house subsidiaries (such as BOCI Asia Limited, CCB International Capital Limited, Guotai Junan Capital Limited, Haitong International Capital Limited). 61

10 CORPORATE FINANCE ADVISORY IN GREATER CHINA REGION Public M&A activity robust in 2016 Number of Takeovers & Mergers, Hong Kong, M&A Deals, Greater China, Main Board GEM Non-public Closed deal volume Closed deal value (US$ billion) , , , ,358 4,371 4,627 Source: the Stock Exchange, SFC, China Venture, CIC According to the Stock Exchange Fact Books and the SFC Takeovers & Mergers Announcement, there were 55 takeover and merger deals closed in 2016 in respect of companies in Hong Kong (compared to 50 in 2015). Listed companies that were targeted with offers in 2016 covered a broad range of industries, including consumer goods/services, financials, properties and construction. From 2011 to 2016, M&A activities in the Greater China involved local and international acquirers, attracting a lot of RMB fund capital and high inbound investment from outside the Asia-Pacific region. The total volume of M&A activities in the Greater China region reached US$326.3 billion in 2016 representing a CAGR of about 13.5% since The number of M&A deals in the Greater China region reached 4,627 in The top industry sectors for M&A targets were manufacturing, energy, mining, consumer, and high-technology and Internet sectors. China Outbound M&A activities set a record in 2016 Outbound M&A deal amount and value, China, Outbound M&A deal amount Outbound M&A deal value (in US$ billion) Source: PricewaterhouseCoopers China China outbound M&A activities recorded approximately 142% increase in deal amount and approximately 246% increase in deal value, which set a new record high in China s outbound M&A tends to pursue high-technologies (202 deals of industrials companies and 161 deals of high-tech companies in 2016) and bring back to the domestic market. 62

11 Accordingly, developed economies, such as Europe (300 deals in 2016) and North America (265 deals in 2016), are favoured destinations; buyers have also focused on Asian opportunities, in part in response to the Belt and Road Initiative. As there is a group of experienced mainland Chinese acquirers and strategic investors that fully engaged in overseas assets acquisition and management, they will remain active. Over time, outbound M&A will grow very strongly to support the emergence of Chinese MNCs. Strategic opportunities under Made in China 2025 and the Belt and Road Initiative Made in China 2025 is the PRC s most comprehensive and ambitious industrial plan by far to remedy the PRC s manufacturing problems with a comprehensive upgrading of the sector. The plan draws inspiration from Germany s Industrie 4.0 as the PRC aims to make use of technologies likes the Internet of Things, cloud computing and big data to upgrade its manufacturing. The initiative spans the entire manufacturing industry, including processes, standards, intellectual property rights and human capital, and has as strong focus on integrating production chains and factories. According to the Chinese government s action plan, the PRC will aim for a big leap in innovation as well as in manufacturing efficiency, and as a result will realize basic industrialization by 2025; be able to compete with developed manufacturing powers by 2035; and lead the world s manufacturing by the 100th birthday (2049) of the New China. The plan will increase the focus on high-tech industries such as Information Technology, Robotics, Aerospace and New Materials. Under Made in China 2025, domestic enterprises are encouraged to acquire foreign advanced technologies, business channels, R&D institutions and talents through overseas M&A. Hong Kong s financial intermediation platform and specialised financial services will also be greatly needed to support a large number of potential M&A activities. The Belt and Road Initiative is a significant development strategy launched by the Chinese government with the intention of promoting economic co-operation among countries along the proposed routes. The Initiative has been designed to enhance the orderly free flow of economic factors and the efficient allocation of resources. It is also intended to further market integration and create a regional economic co-operation framework of benefit to all. Chinese state banks have already invested more than USD250 billion in new initiative-designated projects such as railways and power plants. In 2016, Chinese companies signed 8,158 project contracts worth USD126.0 billion under the initiative. At maturity, investment in the Belt and Road is expected to reach USD4 trillion, equivalent to the PRC s 2015 foreign currency reserves. Under the Belt and Road Initiative, Hong Kong s independent legal system, low and simple tax structure, liberal trade and investment regimes, strong international networks, and free flow of information, capital and talent will aid it in becoming the business and trade center of Association of Southeast Asian Nations countries. Therefore, Hong Kong s prominent sectors, including financial, professional and infrastructure development, will be greatly boosted by plenty of opportunities and foreign capital. 63

12 Consulting Service Market in the PRC and Hong Kong PRC s consulting service market has emerged as the most attractive market globally 85 Management consulting market in the PRC, Revenue (RMB billion) Source: CIC The PRC has emerged as one of the most attractive markets for global consulting firms over the last decade. The average annual growth of PRC s consulting services market is estimated to have been 8.4% from 2011 to 2016, compared to 2% of the global market over the same period. Manufacturing, infrastructure, energy & resources and financial services are the largest sectors for consulting, while demand from the pharmaceutical and biotech sectors has grown fast in recent years. One of the strongest consulting services in the PRC is operational improvement as Chinese businesses face diminishing cost advantages, particularly in the manufacturing sector. Technology, strategy and marketing are other strong consulting service segments in the PRC. The continued privatisation of Chinese state-owned enterprises and the internationalisation of Chinese small to medium enterprises have created a huge demand for professional services in the fields of corporate governance and restructuring, business strategy as well as human resource management. Hong Kong is a leading management consulting centre in Asia-Pacific region, attracting most internationally renowned consulting firms to build their presence 3.6 Business and management consulting, and public relations services market in Hong Kong, Revenue (US$ billion) Source: Hong Kong Census and Statistics Department, Hong Kong Trade Development Council, CIC Note: The total revenue above depicts the export value according to Hong Kong Census and Statistics Department. 64

13 Currently, Hong Kong plays a key role in the internationalization of Chinese enterprises. Many Chinese enterprises have a demand for consulting services from Hong Kong. With our Group s strong global network and the consulting arm VBG Asia, our Group is well positioned to provide wide range of consulting services to Chinese enterprises. The consulting industry in Hong Kong is renowned for its leading position in the Asia- Pacific region, particularly in the areas of logistics, telecommunication strategy, privatisation, mobile strategy, service quality and governance. Most of the world s leading consulting firms have established their presence in Hong Kong, attracted by the pool of experienced professionals, easy access to technology and a rich client base. As of June 2016, Hong Kong was home to 1,379 regional headquarters and 2,352 regional offices representing their parent companies located outside the city. Many of the management consulting companies have served beyond Hong Kong s boundaries, mainly in the PRC and the rest of the APAC region. Many of the companies have their headquarters established in Hong Kong. Exports of business and management consultancy, and public relations services amounted to US$5.2 billion in Competitive landscape of management consulting in PRC and Hong Kong The management consulting market in China is highly fragmented. As at 2016, there were more than 30,000 management consulting players in the market, none of which could have more than 1% of total market share. The management consulting market in Hong Kong is fragmented as well with more than 4,000 players competing in the city as at Due to its geopolitical influence which enables the market players to export their service outside of Hong Kong such as to China and the Southeast Asia markets, Hong Kong is attractive to international players to establish their regional offices, representing 60% of total players in Hong Kong. 65