Basics of Personal Financial Management – Stock Trading as an Investment Lesson 1: Stock Trading in Hong Kong and Stock Price (Part I) 1

2 Why trading stocks? From Investor’s Perspective:- –Accumulation of wealth –Receiving dividend income –Asset allocation From Company’s Perspective:- –Raise funds

3 Stocks Represent the share of ownership of a company and a claim on its assets and earnings Holders of stocks are called stockholders

Activity 1-Disadvantage of buying stock What are the disadvantages of buying stock instead of putting your money into savings accounts. 4

5 HKEx HKSCC Investors Placing order via phone or internet Order confirmation & settlement Order execution Trade data Custody, clearing & settlement Stock brokers (Exchange Participants) Flow of stock trading and settlement Investor Participant A/C (Optional)

6 The stock trading system The Hong Kong Stock Exchange operates electronic stock trading system A matching system automatically matches bids (intended buyers of shares) with asks (intended sellers of shares) at the best possible prices (AMS/3) If the market works properly, the bid and ask price on a particular transaction will be as close to each other as possible

7 The stock settlement system Clearing and settlement via Central Clearing And Settlement System (“CCASS”) operated by Hong Kong Securities Clearing Company Limited Settlement cycle : T+2 (within 2 working days from the trading day) Company Account or Investor Participant Account (optional)

Hang Seng Index The Hang Seng Index ("HSI") is one of the earliest stock market indexes in Hong Kong. Publicly launched on 24 November 1969, the HSI has become the most widely quoted indicator of the performance of the Hong Kong stock market The base of HSI points was set equivalent to the stocks' total value as of the market close on 31 July, 1964, when HSI was first published 8

Activity 2-The Ups and Downs of Hang Seng Index The following chart shows the Hang Seng Index from 1 Jan 1993 to 9 Dec Do you know what makes the ups and downs of Hang Seng Index as shown on the chart ? 1- HSI downs from 1997 to HSI downs from 2000 to HSI ups from 2003 to HSI downs from 2007 to 2008 (Hint: Think about the major events occurred in Hong Kong during the above period) 9

10 Hang Seng Index from Jan to Dec

Importance of Hang Seng Index A general reflection of the performance of stock market A measure of the overall health of a sector A benchmark to compare a specific stock A basis for investment returns 11

Stock Price Stock price is determined by the price which buyers are willing to pay and sellers are willing to sell – Buyers based on new market information to buy the stock – Sellers based on new market information to sell the stock 12

13 Major factors affecting stock prices The following are major factors which affects stock prices –General economic condition –Political factors –Interest rates –Industry prospect –Company performance –Dividend policy –Speculation

General economic condition General economic condition is usually measured by Gross Domestic Product (GDP) GDP growth is an indicator of stock market prospects A strong (poor) growth in GDP indicates a strong (weak) stock market 14

Example – Hong Kong GDP Vs. HSI 15 GDP -2.8% GDP +9.8% HSI from to

16 Example – Hong Kong GDP Vs. HSI 1.Strong economic growth rate -The HK GDP growth rate was 9.8% in 2007* => Hang Seng Index went up 2.Weak economic growth rate - The GDP growth rate was -2.8% in 2009* => Hang Seng Index went down * source: Hong Kong Annual Digest of Statistics

General economic condition Examples of factors affecting general economic conditions:- –Employment rate –Statutory minimum wage –Consumption / consumers’ confidence –Investment in infrastructure 17

Political factors Stock price can also be affected by the following political factors: – War –Terrorist activity –Election The above would pose high risk to the stock market, and the stock market index may fluctuate substantially 18

Conclusion Reasons for stock trading Stock trading and settlement system in Hong Kong The importance of Hang Seng Index Major factors affecting stock prices General economic condition Vs. stock price Political factors Vs. stock price 19

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Basics of Personal Financial Management – Stock Trading as an Investment Lesson 2: Stock Price (Part II) 21

Interest rates Generally speaking: −Lowering interest rate could stimulate the economy and hence the stock market −Raising interest rate could dampen the economy and hence has negative impact on the stock market 22

Interest rates Government intervention affects interest rates 23

Activity 3-Interest rate and stock price The U.S. government has started to print money to buy government securities from banks since What would be the impact on the interest rate, and the stock market? 24

Industry prospect If prospect for a particular business sector is good, the stock price of this type of shares will rise If the prospect for a particular business sector is poor, the price of this type of shares will drop 25

26 Industry prospect The prospect of the industry depends on its Industrial cycle: 1.Early stage 2.Growth stage 3.Mature stage 4.Decline stage Usually, when there is new technology/products developed or new lifestyle/trends formed, its related industries will experience high growth rate

27 Example – Tencent (stock code 700) Background information: Nature of business: Provision of Internet value-added services, mobile and telecommunication value-added services and online advertising services in the PRC etc. Field of industry: information technology- software & services Listing date : 16 June 2004 Share prices in recent years: In June 2004: $3.7 In July 2009: $100 In January 2011: $200 In September 2013: $400

28 Company performance Company performance: –Earnings –Management

29 Company performance- Earnings Higher earning growth will drive up a stock price The stock market is forward looking. That is, stock prices are established based on the expectations that prospective investors have in the future earning power of a company

Company performance- Earnings The Price-earning ratio (P/E) is usually used by investors to measure the performance of a company It is obtained by dividing the current stock price by the earning per share of a company For example, if a stock has a price-earnings ratio of 25, it means that investors are paying $25 for each $1 of earnings 30

31 Company performance- Management Competency and quality of Management Appropriate management strategies can improve profitability and operating efficiency by:- –Increasing sales –Reducing costs

32 Dividend policy Dividend policy is the policy used by a company to decide on how much it will pay out to shareholders as dividends Companies tend to maintain stable dividend policy Stock price may be affected by the unexpected change in dividend policy

Dividend policy Dividend payout ratio represents percentage of profit distributed as dividend Example: Hang Seng Bank distributed a HK$5.30 dividend per share in 2012 and the earnings per share was HK$10.16 in 2012 The dividend payout ratio is $5.3/$10.16 X 100% = 52% 33

34 Example: SmarTone (Stock code 315) Background information: –Nature of business: Provision of telecommunication services in Hong Kong –Listing date : 31 Oct 1996 Smartone used to adopt a high dividend policy by paying 100% of its earnings to shareholders in the form of cash dividends On 12 Sept 2013, the management announced to cut its dividend payout ratio from 100% to 60% Its share price dropped by about 13% on 12 Sept 2013

Activity 4-Computation of payout ratio and P/E of HSBC You are provided with the following information related to HSBC in 2012 (stock code 5):- –HK$3.488 dividend per share –Share price was $82.65 –Earnings per share was HK$

36 Activity 4 Based on the above information: 1) Compute the P/E ratio of HSBC ; and 2) Compute the dividend paidout ratio of HSBC.

Speculation A speculator is willing to take high risks in view of making large amount of profits in a short period of time A speculator may ride on stock market sentiment to trade stock (bet a stock price trend to continue or reverse) and make stock prices volatile 37

Learn more about stock price changes……unpredictable. Stock price will change in response to new information Since information arrives in a random fashion, stock prices react unpredictably There is an equal probability that the next price will move up, down or remain unchanged Therefore, from academic point of view, share price cannot be predicted 38

Conclusion The following are factors affecting stock prices – Interest rates – Industry prospect – Company performance – Dividend policy – Speculation 39

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Basics of Personal Financial Management – Stock Trading as an Investment Lesson 3: Main Board (MB) and Growth Enterprises Market (GEM) 41

How many stock exchange(s) is/are there in Hong Kong? 42

Hong Kong Exchanges and Clearing Limited (HKEx) Leading global operator of exchanges and clearing houses based in Hong Kong One of the world’s largest exchange groups by market capitalisation. 43 Source: HKEx’s website

Roles of HKEx Frontline regulator of central securities and derivatives Ensure orderly and fair securities and derivatives markets 44 Source: HKEx’s website

Functions of HKEx To investors – Make investment – Gain protection – Receive information To listed companies – Raise capital – Gain credibility – Get valuation 45

10 stock exchanges with largest market capitalisations at year-end 2011 and 2012 Exchange 2012 US $ Billion 2011 US $ Billion Increase % of total market capitalisation NYSE Euronext (US)14,08611, %25.8%24.9% 2NASDAQ OMX (US)4,5823, %8.4%8.1% 3Tokyo Stock Exchange3,4793,3254.6%6.4%7.0% 4London Stock Exchange3,3973,2664.0%6.2%6.9% 5NYSE Euronext (Europe)2,8322, %5.2% 6Hong Kong Stock Exchange2,8322, %5.2%4.8% 7Shanghai Stock Exchange2,5472,3578.1%4.7%5.0% 8TMX Group (Toronto)2,0591,9127.7%3.8%4% 9Deutsche Borse (Germany)1,4861, %2.7%2.5% 10Australian Securities Exchange1,3871, %2.5% 46 Source: World Federation of Exchange 2012 Market highlights published on 22 January 2013

Two separate boards 47 Main Board (MB) Growth Enterprise Market (GEM) HKEx Operates

Number of listed companies in MB At the end of 2012, there was 1,368* companies listed on the MB 48 *source: FACT Book 2012, HKEx

Characteristic of MB The MB is a market for more established business with the fulfillment of profits requirement of the Stock Exchange of Hong Kong 49

Characteristic of MB Most outstanding and famous Hong Kong and Chinese companies’ stocks are traded through the MB As required by the MB Listing Rules, financial statements of listed companies are to be published on a half-yearly basis (i.e. two times per year) 50

51 Source: Fact Book 2012, HKEx Market Capitalisation of MB from 1986 to 2012

10 leading companies in market capitalisation at 31 Dec 2012 (MB) RankingStock Code CompanyMarket capitalisation (HK$ million) 1941China Mobile Limited1,814, HSBC Holdings PLC1,501, China Construction Bank Corporation – H shares 1,495, CNOOC Limited749, Industrial and Commercial Bank of China Ltd – H shares 477, Standard Chartered PLC472, Tencent Holdings Ltd461, AIA Group Ltd364, Hutchison Wampoa Limited344,906, Sun Hung Kai Properties Limited308, Source: Fact Book 2012, HKEx

Number of listed companies in GEM At the end of 2012, there was 179* companies listed on the GEM Source: Fact Book 2012, HKEx 53

Characteristic of GEM The GEM was established in November 2009 GEM is for growth companies that do not meet the requirement of profitability or track record for Main Board Stocks traded in GEM are considered relatively riskier than Main Board due to its larger volatility in share prices 54

Characteristic of GEM GEM operates on the philosophy of “buyers beware” and “let the market decide” based on a strong disclosure regime. Therefore, more frequent and timely disclosure is required As required by GEM Listing Rule, financial statements of listed companies are to be published on a quarterly basis (i.e. four times per year) 55

Characteristic of GEM In GEM, the future performance of growth companies is susceptible to great uncertainty. Because of the higher risks involved, GEM is designed for professional and informed investors 56 Source: HKEX website

Market capitalisation of GEM from 1986 to Source: Fact Book 2012, HKEx

10 leading companies in market capitalisation as at 31 Dec 2012 (GEM) RankingStock Code CompanyMarket capitalisation (HK$ million) 18137Honbridge Holdings Limited5, Sunevision Holdings Limited3, Life Tech Scientific Corporation3, ePRO Limited2, Binhai Investment Limited2, Viva China Holdings Limited2, Neo Telemedia Limited1, HC International, Inc.1, Phoenitron Holdings Limited1, China Assurance Finance Group Limited1, Source: Fact Book 2012, HKEx

Activities 5 - Invest in MB or GEM? Gary is planning to invest his money in stock market in Hong Kong. He does not know whether he should invest his money in the Main Board or Growth Enterprise Market. He does not have any prior experience investing in the stock market. He also does not have much money and prefers less risk. As an investment consultant, advise Gary on his investment choices. 59

Activities 5 - Invest in MB or GEM? a) Complete the following table :- 60 ItemsMBGEM No. of listed companies as at 31/12/2012 Market capitalization as at 21/12/2012 Financial reporting Requirement Types of listed companies Types of investors

Activities 5 - Invest in MB or GEM? b) Which market should Gary invest in? Justify your advice 61

Conclusion Functions and roles of the HKEx Differences between the MB and GEM – Numbers of companies – Characteristic – Market capitalisation 62

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Basics of Personal Financial Management – Stock Trading as an Investment Lesson 4: Listing requirements of MB and GEM 64

65 Mr. Leung, the sole shareholder of ABC manufacturing company Ltd., is considering to raise funds to finance the expansion of his business.

Go Public When a company goes public for funds, its shares are listed and traded on the stock exchange such as HKEx There are two boards in the HKEx for stock trading, namely the Main Board (MB) and the Growth Enterprise Market (GEM) Private limited companies are not allowed to sell their shares on the two boards unless they meet certain listing requirements 66

Basic listing requirements - MB Operating history and management Financial requirements 67

Operating history and management (MB) Must have a trading record period of at least 3 financial years with: – Management continuity for at least the 3 preceding financial years; and – Ownership continuity and control for at least the most recent audited financial year 68

Financial requirements (MB) Must satisfy one of the following three tests: – profit test; or – market capitalisation/revenue/cash flow test; or – market capitalisation/revenue test 69

Not less than HK$30 Million Net Profits Year Profit test (MB) Not less than HK$20 Million Profits of HK$20 million for most recent year and of aggregate of HK$30 million for the first two years 70

Market capitalisation/revenue/cash flow test (MB) Revenue – At least HK$500 million for the most recent audited financial year Cash flow – Positive cash flow from operating activities of at least HK$100 million in aggregate for the three preceding financial years Minimum market capitalisation – At least HK$2 billion at the time of listing 71

Market capitalisation/revenue test (MB) Revenue – At least HK$500 million for the most recent audited financial year Minimum market capitalisation – At least HK$4 billion at the time of listing 72

Number of newly-listed companies on the MB of HKEx 73 Year Number of New Companies Source: Fact Book 2012, HKEx

Size of funds raised from newly-listed companies on the MB 74 Year HK$ Billion Source: Fact Book 2012, HKEx

Basic listing requirements -GEM Operating history and management Financial requirement 75

Operating history and management (GEM) Must have a trading record of at least 2 full financial years with: – Substantially the same management throughout the 2 full financial years; and – A continuity of ownership and control throughout the full financial year immediately preceding the issue of the listing document 76

Financial requirement (GEM) Must satisfy the cash flow test 77

Not less than HK$20 Million Positive Cash flow from operating activities Year Cash flow test (GEM) Cash flow from operating activities must be of at least HK$20,000,000 in aggregate for two financial years 78

Number of newly-listed companies on the GEM of HKEx 79 Number of New Companies Year Source: Fact Book 2012, HKEx

Size of funds raised from newly-listed companies on the GEM HK$ Million 80 Year Source: Fact Book 2012, HKEx

Activities 6 - Differences in the Listing Requirements of MB and GEM Divide students into groups of four or five to discuss the differences in listing requirements of MB and GEM. Fill in the table on the students worksheet. 81

Conclusion Fund raising through listing Listing requirements of MB and GEM 82

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