Stock Code: 6837
Joint Sponsors
Joint Global Coordinators and Joint Bookrunners
Joint Bookrunners
For identification purpose only
IMPORTANT
If you are in any doubt about any of the contents of this prospectus, you should obtain independent professional advice.
(A joint stock limited company incorporated in the People’s Republic of China with limited liability)
GLOBAL OFFERING
Number of Offer Shares under : 1,229,400,000 H Shares (subject to the
the Global Offering Over-allotment Option)
Number of Hong Kong Offer Shares : 61,470,000 H Shares (subject to
adjustment)
Number of International Offer Shares : 1,167,930,000 H Shares (subject to
adjustment and the Over-allotment
Option)
Maximum Offer Price : HK$11.18 per H Share (payable in full on
application in Hong Kong dollars and
subject to refund on final pricing), plus
brokerage of 1%, SFC transaction levy of
0.003% and Hong Kong Stock Exchange
trading fee of 0.005%
Nominal value : RMB1.00 per H Share
Stock code : 6837
Joint Sponsors
Joint Global Coordinators and Joint Bookrunners
Joint Bookrunners
Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this
prospectus, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part
of the contents of this prospectus.
A copy of this prospectus, having attached thereto the documents specified in “Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection” in Appendix VII
to this prospectus, has been registered by the Registrar of Companies in Hong Kong as required by Section 342C of the Hong Kong Companies Ordinance, Chapter 32 of the Laws of Hong Kong.
The SFC and the Registrar of Companies in Hong Kong take no responsibility as to the contents of this prospectus or any other documents referred to above.
The Offer Price is expected to be determined by agreement between our Company and the Joint Global Coordinators (on behalf of the Underwriters) on the Price Determination Date or
such later date as may be agreed by our Company and the Joint Global Coordinators (on behalf of the Underwriters) but in any event no later than Tuesday, April 24, 2012. The Offer
Price will be not more than HK$11.18 per Offer Share and is expected to be not less than HK$10.48 per Offer Share. Applicants for Hong Kong Offer Shares are required to pay, on
application, the maximum Offer Price of HK$11.18 for each Hong Kong Offer Share together with brokerage of 1%, SFC transaction levy of 0.003% and Hong Kong Stock Exchange trading
fee of 0.005%, subject to refund if the Offer Price should be lower than HK$11.18. The Joint Global Coordinators (on behalf of the Underwriters) with our Company’s consent may reduce
the number of Hong Kong Offer Shares being offered under the Global Offering and/or the indicative Offer Price range stated in this prospectus at any time prior to the morning of the
last day for lodging applications under the Hong Kong Public Offering. In such a case, a notice of the reduction of the number of Hong Kong Offer Shares and/or the indicative Offer Price
range will be published in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese) not later than the morning of the last day for lodging applications
under the Hong Kong Public Offering. Such notices will also be available at the website of the Hong Kong Stock Exchange at www.hkexnews.hk and our Company’s website at
www.htsec.com. If applications for Hong Kong Offer Shares have been submitted prior to the day which is the last day for lodging applications under the Hong Kong Public Offering, in
the event that the number of Offer Shares and/or the indicative Offer Price range is so reduced, such applications can subsequently be withdrawn. Details of the arrangement will then
be announced by our Company as soon as practicable. Further details are set out in the sections headed “Structure of the Global Offering” and “How to Apply for the Hong Kong Offer
Shares” in this prospectus.
If, for any reason, the Offer Price is not agreed between our Company and the Joint Global Coordinators (on behalf of the Underwriters) on or before Tuesday, April 24, 2012, the Global Offering
(including the Hong Kong Public Offering) will not proceed and will lapse.
We are incorporated, and substantially all of our businesses are located, in the PRC. Potential investors should be aware of the differences in legal, economic and financial systems between the PRC
and Hong Kong and that there are different risk factors relating to investments in PRC-incorporated companies. Potential investors should also be aware that the regulatory framework in the PRC
is different from the regulatory framework in Hong Kong and should take into consideration the different market nature of our Shares. Such differences and risk factors are set out in the section
headed “Risk Factors” and in “Appendix IV – Summary of Principal PRC and Hong Kong Legal and Regulatory Provisions” and “Appendix V – Summary of the Articles of Association” in this
prospectus. Prior to making an investment decision, potential investors should consider carefully all of the information set out in this prospectus, including the risk factors set out in the section headed
“Risk Factors.”
Pursuant to the Underwriting Agreements, the Joint Global Coordinators (on behalf of the Underwriters) have the right in certain circumstances to terminate the obligations of the
Underwriters pursuant to the Underwriting Agreements at any time prior to 8:00 a.m. (Hong Kong time) on the Listing Date. Further details of such circumstances are set out in the section
headed “Underwriting – Underwriting Arrangements and Expenses – Hong Kong Public Offering – Hong Kong Underwriting Agreement – Grounds for Termination” in this prospectus.
The Offer Shares have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered, sold, pledged or transferred within the United States
except that Offer Shares may be offered, sold or delivered in the United States to qualified institutional buyers in reliance on Rule 144A or another exemption from registration under the
U.S. Securities Act of 1933, as amended, and outside the United States in offshore transactions in reliance on Regulation S.
* For identification purpose only
April 17, 2012
EXPECTED TIMETABLE
Date (1)
Latest time to complete electronic applications
under White Form eIPO service through
the designated website www.eipo.com.hk(2) . . . . . . . . .11:30 a.m., Friday, April 20, 2012
Application lists open (3) . . . . . . . . . . . . . . . . . . . . . . . . . .11:45 a.m., Friday, April 20, 2012
Latest time for lodging WHITE and
YELLOW Application Forms. . . . . . . . . . . . . . . . . . . .12:00 noon, Friday, April 20, 2012
Latest time to give electronic application
instructions to HKSCC (3 and 4) . . . . . . . . . . . . . . . . . . .12:00 noon, Friday, April 20, 2012
Latest time to complete payment for
White Form eIPO applications by
effecting internet banking transfer(s) or
PPS payment transfer(s) . . . . . . . . . . . . . . . . . . . . . . .12:00 noon, Friday, April 20, 2012
Application lists close . . . . . . . . . . . . . . . . . . . . . . . . . . .12:00 noon, Friday, April 20, 2012
Expected Price Determination Date (5) . . . . . . . . . . . . . . . . . . . . . . . . .Friday, April 20, 2012
(1) Announcement of:
the Offer Price;
the level of applications in the Hong Kong Public Offering;
the level of indications of interest in the International Offering; and
the basis of allotment of the Hong Kong Offer Shares
will be published in the South China Morning Post
(in English) and the Hong Kong Economic Times
(in Chinese) on or before . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, April 26, 2012
(2) Results of allocations in the Hong Kong Public Offering
(with successful applicants’ identification
document numbers, where appropriate) will be
available through a variety of channels as described
in the section headed “How to Apply for
the Hong Kong Offer Shares – Publication of Results”
in this prospectus from . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, April 26, 2012
(3) A full announcement of the Hong Kong Public Offering
containing (1) and (2) above will be published on
the website of the Hong Kong Stock Exchange
at www.hkexnews.hk(6) and our Company’s website
at www.htsec.com(7) from . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, April 26, 2012
–i–
EXPECTED TIMETABLE
Results of allocations in the Hong Kong Public Offering
will be available at www.iporesults.com.hk with
a “search by ID” function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, April 26, 2012
H Share certificates in respect of wholly or partially successful
applications will be dispatched or deposited into
CCASS on or before (8 and 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, April 26, 2012
Refund checks (if applicable) will be dispatched
on or before (9 and 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, April 26, 2012
White Form e-Refund Payment Instructions will be
dispatched on or before (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, April 26, 2012
Dealings in H Shares on the Hong Kong Stock Exchange
will commence on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Friday, April 27, 2012
Notes:
(1) All dates and times refer to Hong Kong local time and dates unless otherwise stated.
(2) You will not be permitted to submit your application to the White Form eIPO Service Provider through the
designated website at www.eipo.com.hk after 11:30 a.m. on the last day for submitting applications. If you
have already submitted your application and obtained an application reference number from the designated
website at or before 11:30 a.m., you will be permitted to continue the application process (by completing
payment of application monies) until 12:00 noon on the last day for submitting applications when the
application lists will close.
(3) If there is a “black” rainstorm warning or a tropical cyclone warning signal number eight or above in force
in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Friday, April 20, 2012, the application lists
will not open on that day. Further information is set out in the section headed “How to Apply for the Hong
Kong Offer Shares – Effects of Bad Weather on the Opening of the Application Lists” in this prospectus. If
the application lists do not open on Friday, April 20, 2012, the dates mentioned above may be affected. Our
Company will make a press announcement in such event.
(4) Applicants who apply for the Hong Kong Offer Shares by giving electronic application instructions to
HKSCC should refer to “How to Apply for the Hong Kong Offer Shares – Applying by Giving Electronic
Application Instructions to HKSCC via CCASS” in this prospectus.
(5) The Price Determination Date, being the date on which the Offer Price is to be determined, is expected to be
on or about Friday, April 20, 2012, and in any event no later than Tuesday, April 24, 2012. If, for any reason,
the Offer Price is not agreed on or before Tuesday, April 24, 2012, the Global Offering (including the Hong
Kong Public Offering) will not proceed and will lapse.
(6) The announcement will be available for viewing on the “Main Board – Results of Allotment” page on the Hong
Kong Stock Exchange’s website at www.hkexnews.hk.
(7) Neither our Company’s website nor any of the information contained on our Company’s website forms part of
this prospectus.
(8) Our Company will not issue any temporary documents of title in respect of the Offer Shares. H Share
certificates will only become valid certificates of title at 8:00 a.m. on Friday, April 27, 2012, provided that (i)
the Global Offering has become unconditional in all respects and (ii) the Underwriting Agreements have not
been terminated in accordance with their respective terms. Investors who trade H Shares on the basis of
publicly available allocation details prior to the receipt of share certificates or prior to the share certificates
becoming valid certificates of title do so entirely at their own risk. If the Global Offering does not become
unconditional or the Underwriting Agreements are terminated in accordance with their terms, the Global
Offering will not proceed. In such a case, our Company will make an announcement as soon as possible
thereafter.
– ii –
EXPECTED TIMETABLE
(9) Applicants who apply on WHITE Application Forms for 1,000,000 H Shares or more under the Hong Kong
Public Offering and have indicated in their Application Forms that they wish to collect any refund checks
(where applicable) and H Share certificates in person may do so from our Company’s H Share Registrar,
Computershare Hong Kong Investor Services Limited at Shop 1712-1716, 17th Floor, Hopewell Centre, 183
Queen’s Road East, Wanchai, Hong Kong from 9:00 a.m. to 1:00 p.m. on Thursday, April 26, 2012.
Identification and (where applicable) authorization documents acceptable to Computershare Hong Kong
Investor Services Limited must be produced at the time of collection.
Applicants who apply on YELLOW Application Forms for 1,000,000 H Shares or more under the Hong Kong
Public Offering and have indicated in their Application Forms that they wish to collect refund checks in person
may collect their refund checks (if any) but may not elect to collect their H Share certificates, which will be
deposited into CCASS for credit to their designated CCASS Participants’ stock accounts or CCASS Investor
Participant stock accounts, as appropriate. The procedures for collection of refund checks for applicants who
apply for H Shares on YELLOW Application Forms is the same as those for WHITE Application Form
applicants.
Applicants who apply for Hong Kong Offer Shares by giving electronic application instructions to HKSCC
should refer to “How to Apply for the Hong Kong Offer Shares – Applying by Giving Electronic Application
Instructions to HKSCC via CCASS” in this prospectus.
Applicants who apply for 1,000,000 Hong Kong Offer Shares or more through the White Form eIPO service
by submitting an electronic application to the White Form eIPO Service Provider through the designated
website at www.eipo.com.hk and whose applications are wholly or partially successful, may collect their H
Share certificates in person from Computershare Hong Kong Investor Services Limited, at Shop 1712-1716,
17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong from 9:00 a.m. to 1:00 p.m. on
Thursday, April 26, 2012. For applicants who apply for less than 1,000,000 Hong Kong Offer Shares, H Share
certificates will be sent to the address specified in their application instructions to the White Form eIPO
Service Provider through the designated website at www.eipo.com.hk on Thursday, April 26, 2012 by ordinary
post and at their own risk.
Applicants being individuals who opt for personal collection must not authorize any person to make collection
on their behalf. Applicants being corporations which opt for personal collection must attend by their authorized
representatives with letters of authorization of their corporations stamped with the corporation’s chops
(bearing the name of the corporations). Both individuals and authorized representatives of corporations (as
applicable) must produce, at the time of collection, evidence of identity and authority (as applicable)
acceptable to our Company’s H Share Registrar.
Uncollected H Share certificates and refund checks will be despatched by ordinary post (at the applicants’ own
risk) to the addresses specified in the relevant Application Forms. Further information is set out in the section
headed “How to Apply for the Hong Kong Offer Shares – Despatch/Collection of H Share Certificates and
Refund Monies” in this prospectus.
(10) e-Refund payment instructions or refund checks will be issued in respect of wholly or partially unsuccessful
applications and in respect of successful applications if the final Offer Price is less than the price payable on
application. Applicants who paid the application monies from a single bank account may have e-Refund
payment instructions, if any, dispatched to the application payment account on Thursday, April 26, 2012.
Applicants who used multi-bank accounts to pay the application monies may have refund checks (if any)
dispatched to them on Thursday, April 26, 2012. Part of your Hong Kong Identity Card number/passport
number, or, if you are joint applicants, part of the Hong Kong Identity Card number/passport number of the
first-named applicant, provided by you may be printed on your refund checks, if any. Such data would also be
transferred to a third party for refund purpose. Your banker may require verification of your Hong Kong
Identity Card number/passport number before cashing of your refund checks. Inaccurate completion of your
Hong Kong Identity Card number/passport number may lead to delay in encashment of or may invalidate your
refund checks.
For details of the structure of the Global Offering, including the conditions of the Hong
Kong Public Offering, and the procedures for application for the Hong Kong Offer Shares, you
should read the sections headed “Structure of the Global Offering” and “How to Apply for the
Hong Kong Offer Shares” in this prospectus.
– iii –
CONTENTS
This prospectus is issued by Haitong Securities Co., Ltd. solely in connection with
the Hong Kong Public Offering and the Hong Kong Offer Shares and does not
constitute an offer to sell or a solicitation of an offer to buy any security other than the
Hong Kong Offer Shares. This prospectus may not be used for the purpose of, and does
not constitute, an offer to sell or a solicitation of an offer to buy in any other
jurisdiction or in any other circumstances. No action has been taken to permit a public
offering of the Offer Shares or the distribution of this prospectus in any jurisdiction
other than Hong Kong. The distribution of this prospectus and the offering and sale of
the Offer Shares in other jurisdictions are subject to restrictions and may not be made
except as permitted under the applicable securities laws of such jurisdictions pursuant
to registration with or authorization by the relevant securities regulatory authorities or
an exemption therefrom. You should rely only on the information contained in this
prospectus and the Application Forms to make your investment decision. We have not
authorized anyone to provide you with information that is different from what is
contained in this prospectus. Any information or representation not included in this
prospectus must not be relied on by you as having been authorized by us, the Joint
Global Coordinators, the Joint Sponsors, the Joint Bookrunners, the Joint Lead
Managers, the Underwriters, any of our or their respective directors or advisors, or any
other person or party involved in the Global Offering. Information contained in our
website, located at www.htsec.com, does not form part of this prospectus.
Page
Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Glossary of Technical Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Waivers and Exemption from Compliance with the Hong Kong
Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information about this Prospectus and the Global Offering . . . . . . . . . . . . . . . . .
Directors, Supervisors and Parties Involved in the Global Offering . . . . . . . . . . .
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
– iv –
CONTENTS
Page
Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
History and Corporate Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Supervisors and Senior Management . . . . . . . . . . . . . . . . . . . . . . . . . .
Share Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
Cornerstone Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future Plans and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
Structure of the Global Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How to Apply for the Hong Kong Offer Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Further Terms and Conditions of the Hong Kong Public Offering . . . . . . . . . . . .
Appendix I – Accountants’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
Appendix II – Unaudited Pro Forma Financial Information . . . . . . . . . . II-1
Appendix III – Taxation and Foreign Exchange . . . . . . . . . . . . . . . . . . . . . III-1
Appendix IV – Summary of Principal PRC and Hong Kong Legal and
Regulatory Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
Appendix V – Summary of the Articles of Association . . . . . . . . . . . . . . . V-1
Appendix VI – Statutory and General Information. . . . . . . . . . . . . . . . . . . VI-1
Appendix VII – Documents Delivered to the Registrar of Companies in
Hong Kong and Available for Inspection. . . . . . . . . . . . . VII-1
–v–
SUMMARY
This summary aims to give you an overview of the information contained in this
prospectus. As this is a summary, it does not contain all the information that may be
important to you and is qualified in its entirety by, and should be read in conjunction
with, the full text of this prospectus. You should read the whole document including the
appendices hereto before you decide to invest in our Offer Shares.
There are risks associated with any investment. Some of the particular risks in
investing in our Offer Shares are set out in the section headed “Risk Factors” in this
prospectus. You should read that section carefully before you decide to invest in our
Offer Shares.
OVERVIEW
We are a leading full-service securities firm in the PRC with an integrated business
platform, extensive branch network and substantial customer base. According to the SAC,
among all securities firms in the PRC, we ranked second in terms of total assets and net assets
as of December 31, 2011 and second in terms of total revenue in 2011(1). We have established
prudent operating strategies and are the only major PRC securities firm founded in the 1980s
that remains in operation under the same brand without receiving government-backed capital
injections or being the target of a successful acquisition. Our A Shares, which have been listed
on the Shanghai Stock Exchange since July 2007, were admitted to the CSI 300 Index, the SSE
180 Index and the SSE 50 Index in July 2007, December 2007 and December 2008,
respectively.
Our integrated business platform comprises a full-service PRC platform and a well-
established overseas platform. As of December 31, 2011, we had 216 securities and futures
brokerage branches located across 27 provinces and 125 cities in the PRC, the fourth largest
branch network among all PRC securities firms, according to data from the Shanghai Stock
Exchange and the China Futures Association. With this strategically located branch network,
we focus on five principal business lines in the PRC, which comprise securities and futures
brokerage (including margin financing and securities lending), investment banking, asset
management, proprietary trading and direct investment. The following table sets forth the main
financial products and services we offer in the PRC:
Business Lines Main Financial Products and Services
Securities and futures Securities brokerage
brokerage Futures brokerage
Margin financing and securities lending
Investment advisory
(1) The 2011 data from the SAC was based on the preliminary results of PRC securities firms.
–1–
SUMMARY
Business Lines Main Financial Products and Services
Investment banking Equity underwriting
Debt underwriting
Financial advisory
Asset management Traditional asset management
Private equity asset management
Proprietary trading Trading of equities, bonds, funds, derivatives and
other financial products for our own account
Direct investment Direct equity investments in private companies
Investing in private equity funds
For a detailed description of our business operations in the PRC, please see “Business –
Our Business and Operations” beginning on page 201 of this prospectus.
In addition to our PRC business operations, we are also actively developing our business
overseas. We conduct our overseas business primarily through our Hong Kong-based
subsidiary, Haitong International Holdings. As of December 31, 2011, we operated 13 branches
in Hong Kong and Macau and provided a comprehensive range of financial products and
services to a broad range of retail customers and institutional clients in Hong Kong and
overseas. In January 2012, the CSRC granted RQFII status to Haitong International Holdings,
which allows it to raise RMB funds in Hong Kong and invest in the domestic securities market.
For a detailed description of our overseas business operations, please see “Business – Our
Business and Operations – Overseas Business” beginning on page 224 of this prospectus.
In addition, our sizeable and stable customer base provides a solid foundation for our
sustainable development and future expansion. As of December 31, 2011, we had over 4.0
million retail customers (including approximately 2.1 million active customers) and over
12,000 institutional and high net worth customers in the PRC. As of the same date,
approximately 76% of our brokerage customers had opened accounts with us for over three
years and approximately 38% had a business relationship of over ten years with us. For our
overseas business, we had over 145,000 brokerage customers as of December 31, 2011.
Market Positions
In recent years, we have received numerous awards and honors in recognition of our
outstanding performance and management capabilities, including, among others, “2011 Best
PRC Securities Firm” and “2011 Best PRC Investment Bank” by Moneyweek.
–2–
SUMMARY
We have gained leading market positions in securities and futures brokerage, investment
banking and other traditional businesses in the PRC. According to data from the SAC, the
Shanghai Stock Exchange, the Shenzhen Stock Exchange and the CSRC, among all PRC
securities firms, we ranked:
second in terms of total assets and net assets as of December 31, 2009, 2010 and
2011 (1);
among the top five in terms of securities brokerage trading volume in 2009, 2010
and 2011;
third in terms of the number of equity securities underwritten in 2011; and
in the top two in terms of the number of major asset restructuring transactions of
domestic listed PRC companies we advised in 2009, 2010 and 2011.
We have also established leading positions in developing new businesses, such as margin
financing and securities lending, stock index futures brokerage and direct investment
businesses. We are frequently designated by the PRC regulatory authorities as one of the first
PRC securities firms to participate in pilot programs for new securities products and services.
According to data from the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the
China Financial Futures Exchange, we ranked:
first among PRC securities firms in terms of margin trading volume in 2011, and in
terms of margin loan balance and market value of securities lent as of December 31,
2011;
first among PRC futures companies in terms of stock index futures brokerage
trading volume in 2011; and
second among PRC securities firms in terms of registered capital of direct
investment subsidiaries as of December 31, 2011.
For a comparison of the market position between us and our major competitors in the PRC
as of December 31, 2010, please see “Industry Overview – The Competitive Landscape in the
PRC Securities Market” beginning on page 126 of this prospectus.
(1) The 2011 data from the SAC was based on the preliminary results of PRC securities firms.
–3–
SUMMARY
Internal Control and Risk Management
Established in 1988, we have navigated through various market and business cycles,
regulatory reforms and industry developments over our 23 years of operating history, including
the Asian financial crisis in 1997 and the global financial crisis in 2008. We have established
prudent corporate governance and effective risk management and internal control systems to
reduce our exposure to various risks in the securities markets. In recognition of our strong
capital position, effective risk management and internal control systems, as well as our proven
track record, we received an “AA” regulatory rating from the CSRC for the past four
consecutive years, the highest rating given to a PRC securities firm to date. In addition, in June
2008, our A Shares became one of the constituent stocks of the SSE Corporate Governance
Index.
For a detailed description of our internal control and risk management, please see
“Business – Internal Control and Risk Management” beginning on page 233 of this prospectus.
Competitive Strengths
We believe the following competitive strengths contribute to our success and distinguish
us from our competitors:
Full-service securities firm in the PRC with leading market positions across multiple
business lines;
Strategically located branch network across the PRC with a substantial and stable
customer base;
A pioneer in the PRC securities industry for offering new businesses;
Well-established international platform to capture growing cross-border business
opportunities;
Prudent corporate governance and effective risk management and internal control
systems; and
Experienced and stable management team with a highly proficient professional
workforce.
–4–
SUMMARY
Business Strategies
We aim to become a domestic top-tier and globally renowned financial group with a
distinct focus on the securities business. Through continuous innovation and leveraging our
international platform, we plan to focus on the PRC market and stay committed to core
financial intermediary services, including our securities and futures brokerage, investment
banking and asset management businesses. Further, we intend to expand and promote our
proprietary trading and direct investment businesses to supplement our core financial
intermediary businesses while generating competitive risk-adjusted returns. In addition, we
plan to strengthen our business infrastructure, including risk management, research
capabilities, IT and human resources, to support our business growth. Our specific strategies
include the following:
Further enhance our leading market position and profitability in the securities and
futures brokerage business;
Maintain the growth momentum of our investment banking business and further
integrate our business platform;
Strategically expand our asset management business to provide comprehensive
product offerings to meet increasing and diversifying customer demands;
Continue to expand and promote new businesses and products with high growth
potential;
Actively pursue our internationalization strategy to capture cross-border
opportunities; and
Strengthen our risk management systems, internal controls, IT capabilities, research
capabilities and human resource management to support our business operations.
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following tables set forth our summary consolidated financial information for the
years ended December 31, 2009, 2010 and 2011, and as of December 31, 2009, 2010 and 2011.
We have derived the summary from our consolidated financial information set forth in the
Accountants’ Report in Appendix I to this prospectus. The following summary should be read
together with, and is qualified in its entirety by reference to, the consolidated financial
information in Appendix I to this prospectus, including the accompanying notes, and the
information set forth in “Financial Information” beginning on page 315 of this prospectus.
–5–
SUMMARY
Summary Consolidated Income Statements
Year ended December 31,
2009 2010
(RMB in millions)
Revenue
Commission and fee income . . . . . . . . . . . . . . . . 8,753.4 8,384.1 6,566.8
Interest income . . . . . . . . . . . . . . . . . . . . . . . . 1,407.0 1,647.0 2,553.2
Net investment gains . . . . . . . . . . . . . . . . . . . . . 888.1 1,077.8 1,506.9
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,048.5 11,108.9 10,626.9
Other income and gains . . . . . . . . . . . . . . . . . . . . 267.3 196.0 233.5
Total revenue and other income . . . . . . . . . . . . . . 11,315.8 11,304.9 10,860.4
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . (5,400.0) (6,393.4) (6,633.1)
Share of results of associates . . . . . . . . . . . . . . . . . 66.0 78.2 72.9
Profit before income tax . . . . . . . . . . . . . . . . . . . 5,981.8 4,989.7 4,300.2
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . (1,320.1) (1,121.5) (1,018.2)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . 4,661.7 3,868.2 3,282.0
Attributable to:
Owners of the Company . . . . . . . . . . . . . . . . . . . 4,548.2 3,686.3 3,103.0
Non-controlling interests . . . . . . . . . . . . . . . . . . 113.5 181.9 179.0
Summary Consolidated Statements of Financial Position
As of December 31,
2009 2010
(RMB in millions)
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . 3,613.5 5,116.6 6,163.0
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 117,116.7 110,296.5 92,814.0
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,730.2 115,413.1 98,977.0
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 75,739.8 69,600.2 52,294.3
Non-current liabilities. . . . . . . . . . . . . . . . . . . . . . 471.8 196.1 72.0
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 76,211.6 69,796.3 52,366.3
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,518.6 45,616.8 46,610.7
Equity attributable to owners of the Company . . . . . 43,414.0 44,467.4 45,042.4
Non-controlling interests . . . . . . . . . . . . . . . . . . 1,104.6 1,149.4 1,568.3
–6–
SUMMARY
The following table sets forth the key measurements of our profitability for the periods
indicated:
Year ended December 31,
2009 2010
(RMB in millions, except percentages)
(1)
Operating profit . . . . . . . . . . . . . . . . . . . . 5,648.5 4,715.5 3,993.8
(2)
Operating margin . . . . . . . . . . . . . . . . . . 51.1% 42.4% 37.6%
Adjusted operating margin (3) . . . . . . . . . . . . 57.6% 48.9% 43.8%
Net profit . . . . . . . . . . . . . . . . . . . . . . . . . 4,661.7 3,868.2 3,282.0
(4)
Net margin . . . . . . . . . . . . . . . . . . . . . 42.2% 34.8% 30.9%
Adjusted net margin (5) . . . . . . . . . . . . . . . . 47.5% 40.1% 36.0%
(1) Operating profit = total revenue – total expenses
(2) Operating margin = (total revenue – total expenses)/total revenue
(3) Adjusted operating margin = (total revenue – total expenses)/(total revenue – commission to account
executives – brokerage transaction fees and other services expenses – interest expenses).
Adjusted operating margin is not a standard measurement under IFRS, but we present it here because we
believe that, after excluding (i) commission to account executives, (ii) brokerage transaction fees and other
services expenses and (iii) interest expenses, such measurement provides a meaningful indicator of our results
of operations. Prospective investors should be aware that adjusted operating margin presented in this
prospectus may not be comparable to other similarly titled measures reported by other comparable companies,
due to different calculation methods or assumptions.
(4) Net margin = profit for the year/total revenue
(5) Adjusted net margin = (net profit for the year)/(total revenue – commission to account executives – brokerage
transaction fees and other services expenses – interest expenses). Adjusted net margin is not a standard
measurement under IFRS, but we present it here because we believe that, after excluding (i) commission to
account executives, (ii) brokerage transaction fees and other services expenses and (iii) interest expenses, such
measurement provides a meaningful indicator of our results of operations. Prospective investors should be
aware that adjusted net margin presented in this prospectus may not be comparable to other similarly titled
measures reported by other comparable companies, due to different calculation methods or assumptions.
–7–
SUMMARY
The following table sets forth the breakdown of our total revenue and other income by
business segments and segment revenue and other income expressed as a percentage of our
total revenue and other income for the periods indicated:
Year ended December 31,
2009 2010
(RMB in (RMB in (RMB in
millions) % millions) % millions) %
PRC business
Securities and futures brokerage 7,284.0 64.4 5,774.8 51.1 4,163.1 38.3
Investment banking . . . . . . . 496.8 4.4 1,091.7 9.7 1,068.6 9.8
Asset management . . . . . . . 878.9 7.8 868.5 7.7 1,092.1 10.1
Proprietary trading . . . . . . . 804.8 7.1 779.8 6.9 1,144.8 10.5
Direct investment . . . . . . . . 52.1 0.5 106.0 0.9 55.0 0.5
Headquarters and others(1) . . . . 1,602.0 14.1 1,779.1 15.7 2,382.3 22.0
Overseas business . . . . . . . . . 197.2 1.7 905.0 8.0 954.5 8.8
Total . . . . . . . . . . . . . . . . 11,315.8 100.0 11,304.9 100.0 10,860.4 100.0
(1) Revenue and other income in headquarters and others mainly includes: (i) interest income from our own bank
deposits and deposits we hold on behalf of our customers; and (ii) dividends and other investment gains as well
as government grants. For more details, please see “Financial Information – Summary Segment Results”
beginning on page 342 and “Appendix I – Accountants’ Report” in this prospectus.
The following table sets forth the key operating data of our PRC business for the periods
indicated:
Year ended December 31,
2009 2010
Trading volume of securities brokerage
(RMB in billions) (1) . . . . . . . . . . . . . . . . . 5,411.5 5,398.7 5,620.4
Trading volume of futures brokerage
(RMB in billions) (2) . . . . . . . . . . . . . . . . . 1,866.8 10,517.5 12,094.8
Amount of equity securities underwritten
(RMB in millions) . . . . . . . . . . . . . . . . . . 7,530.4 49,657.7 15,091.0
Amount of debt securities underwritten
(RMB in millions) . . . . . . . . . . . . . . . . . . 10,640.0 12,320.0 19,158.0
AUM(3) (RMB in millions) . . . . . . . . . . . . . . 61,788.8 74,726.5 67,546.8
(1) The trading volume of our securities brokerage business includes trading volumes of other businesses, such as
proprietary trading and asset management. For a discussion of the trading volume of transaction made on
behalf of customers, please see “Business – Our Business and Operations – Securities and Futures Brokerage
– Brokerage commission and fee income” beginning on page 209 of this prospectus.
(2) The trading volume of the PRC futures market before 2011 included both sides of the trades. Since 2011, the
trading volume of the PRC futures market has only included one side of the trades.
(3) Our AUM represents the total value of assets that are managed by our Company and our subsidiaries including
HFT Investment Management, Haitong-Fortis PE Management, Haitong Jihe Management and Haitong
Chuangxin Management as of the last date of the periods indicated.
–8–
SUMMARY
USE OF PROCEEDS
Assuming an Offer Price of HK$10.83 per H Share (being the mid-point of the stated
range of the Offer Price of between HK$10.48 and HK$11.18 per H Share), we estimate that
we will receive net proceeds of approximately HK$12,776.1 million from the Global Offering
after deducting the underwriting commissions and other estimated expenses if the Over-
allotment Option is not exercised. We intend to use the net proceeds from the Global Offering
for the following purposes:
approximately 35.0%, or HK$4,471.7 million, will be used for strategic acquisitions
of overseas securities firms and/or further expansion of our overseas securities
business. As of the Latest Practicable Date, the Directors confirmed that we have not
identified any overseas acquisition targets;
approximately 20.0%, or HK$2,555.2 million, will be used to expand our margin
financing and securities lending business in order to capture future business
opportunities arising from its rapid growth in the PRC and to strengthen our market
leading position;
approximately 20.0%, or HK$2,555.2 million, will be used to develop our
alternative financial products investment business and other new businesses as
permitted by the PRC regulatory authorities;
approximately 15.0%, or HK$1,916.4 million, will be used for capital contributions
to Haitong Capital Investment and the expansion of our direct investment and
private equity funds management businesses; and
approximately 10.0%, or HK$1,277.6 million, will be used for working capital and
general corporate purposes.
To the extent our net proceeds are either more or less than HK$12,776.1 million, we will
adjust our allocation of the net proceeds for the above purposes on a pro rata basis. In addition,
the possible use of proceeds outlined above may change in light of our evolving business needs
and conditions and management requirements. For further details, please see “Future Plans and
Use of Proceeds – Use of Proceeds” beginning on page 372 of this prospectus.
CAPITAL ADEQUACY AND RISK CONTROL INDICATOR
According to the Risk Control Indicator Measures, we have established a dynamic Net
Capital monitoring mechanism to comply with statutory Net Capital requirements and other
regulatory standards for capital adequacy. In addition, we also need to maintain a minimum
amount of Net Capital to conduct our margin financing and securities lending, asset
management and underwriting businesses. As of December 31, 2009, 2010 and 2011, we were
in compliance with all of our capital adequacy and risk control indicator requirements.
According to the SAC, as of December 31, 2011, our Net Capital amounted to RMB31.3
billion, the second highest among the PRC securities firms (1).
(1) The 2011 data from the SAC was based on the preliminary results of the PRC securities firms.
–9–
SUMMARY
The Risk Control Indicator Measures also require us to comply with requirements in
addition to the risk control indicators mentioned above when we engage in proprietary trading
and margin financing and securities lending businesses. We closely monitor all risk control
indicators when conducting our proprietary trading and margin financing and securities lending
businesses. During the Track Record Period, we did not have any non-compliance with such
risk control indicators nor have we received any warning or penalty from the CSRC.
For further details, please see “Financial Information – Capital Adequacy and Risk
Control Indicator” beginning on page 361 of this prospectus.
REGULATORY NON-COMPLIANCES
We are subject to a number of regulatory requirements and guidelines issued by the
regulatory authorities in the PRC, Hong Kong and Macau (including but not limited to the
CSRC, the Shanghai Stock Exchange, the Hong Kong Stock Exchange, the SFC and their
respective local branches and offices (if applicable)). We or our employees have, from time to
time, been involved in incidents of regulatory non-compliance and received related notices or
warnings from the relevant regulatory authorities.
Our Directors and our PRC legal advisors confirm that the regulatory non-compliance
incidents disclosed in this prospectus are not significant to our business operations and did not
have any material adverse effect on our business, financial condition and results of operations.
Our Directors also confirm that none of our existing Directors nor members of our senior
management were involved in any regulatory non-compliance incidents.
For details of the regulatory non-compliance incidents committed by us and our
employees during the Track Record Period and up to the Latest Practicable Date, and the
primary remedial measures we adopted, please see “Business – Legal and Regulatory –
Regulatory non-compliances” beginning on page 253 of this prospectus.
OFFERING STATISTICS
All statistics in this table are based on the assumptions that the Over-allotment Option is
not exercised.
Based on an Offer Based on an Offer
Price of HK$10.48 Price of HK$11.18
Market capitalization of the H Shares (1) . . . . . . . . . . HK$14,172.5 million HK$15,119.2 million
Historical price/earnings multiple
(a) pro forma basis (2) . . . . . . . . . . . . . . . . . . . . 25.9 times 27.7 times
(b) weighted average basis (3) . . . . . . . . . . . . . . . 24.8 times 26.5 times
Unaudited pro forma adjusted net tangible asset value
per Share (4). . . . . . . . . . . . . . . . . . . . . . . . . . . HK$7.06 HK$7.15
(1) The calculation of market capitalization is based on 1,352,340,000 H Shares (including 1,229,400,000 H
Shares to be issued in the Global Offering and 122,940,000 H Shares to be converted from A Shares and
transferred to the NSSF) that are expected to be outstanding immediately following the completion of the
Global Offering.
– 10 –
SUMMARY
(2) The calculation of historical price/earnings multiple is based on the earnings per Share for the year ending
December 31, 2011, on a pro forma basis at the respective Offer Prices of HK$10.48 and HK$11.18 per H
Share, assuming a weighted average of 9,457,221,180 Shares issued and outstanding during the year ending
December 31, 2012. The weighted average of 9,457,221,180 Shares is calculated based on the 8,227,821,180
Shares issued and outstanding as of December 31, 2011 and the 1,229,400,000 H Shares to be issued pursuant
to the Global Offering on the assumption that the Global Offering had been completed on December 31, 2011.
(3) The calculation of historical price/earnings multiple is based on the earnings per Share for the year ending
December 31, 2011, on a weighted average basis at the respective Offer Prices of HK$10.48 and HK$11.18
per H Share, assuming a weighted average of 9,064,216,262 Shares issued and outstanding during the year
ending December 31, 2012. The weighted average of 9,064,216,262 Shares is calculated based on the
8,227,821,180 Shares issued and outstanding as of December 31, 2011, and the 1,229,400,000 H Shares to be
issued pursuant to the Global Offering on the assumption that the Global Offering is completed on April 27,
2012.
(4) The unaudited pro forma adjusted net tangible asset value per Share is calculated after making the adjustments
referred to in Appendix II to this prospectus and based on the 9,457,221,180 Shares expected to be in issue
immediately following the completion of the Global Offering. In particular, our unaudited pro forma adjusted
consolidated net tangible assets has not taken into account the dividend of RMB0.15 per share to our existing
Shareholders as at December 31, 2011, equivalent to approximately RMB1,234.2 million, proposed by our
directors on March 14, 2012. Had the effect been given to the distribution of dividend, our unaudited pro forma
adjusted consolidated net tangible assets attributable to the owners of the Company per share would have been
HK$6.90 or RMB5.60 based on the offer price of HK$10.48 per share and HK$6.99 or RMB5.67 based on the
offer price of HK$11.18 per share.
DIVIDEND POLICY
After the Global Offering, we may distribute dividends in the form of cash or by other
means that we consider appropriate. Our Articles of Association stipulates that we shall
distribute not less than 30% of our average annual distributable profits as cash dividends in any
three consecutive fiscal years.
In 2009 and 2010, we declared cash dividends of RMB1,645.6 million and RMB1,234.2
million, respectively, representing a dividend of RMB0.20 and RMB0.15 per share,
respectively. With respect to cash dividends for 2011, our Board has proposed, pending
Shareholders’ approval at the forthcoming annual general meeting, that a cash dividend of
RMB0.15 per share, or a total of RMB1,234.2 million based on the number of our A Shares in
issue as of December 31, 2011, be distributed to holders of our A Shares, but not to the holders
of our H Shares. Any unpaid 2011 distributable profits shall be accrued as part of our
distributable profits to be considered for the next distribution to our Shareholders. For further
details, please see “Financial Information – Dividend Policy” beginning on page 369 of this
prospectus.
IMPACT FROM CURRENT MARKET CONDITIONS
Our financial performance is dependent on a number of factors, including the general
economic and market conditions associated with PRC and overseas securities markets, such as
market volatility and fluctuations in the trading volume of securities. These factors impact
several of our businesses, including our securities and futures brokerage business, which
heavily depends on trading volume, and our proprietary trading business, which involves
investing and trading positions that are mark-to-market. For example, during the second half
of 2011, due to the tightening monetary policy and high inflation in the PRC, global economic
– 11 –
SUMMARY
uncertainties and the euro zone sovereign debt crisis, the CSI 300 Index decreased from
3,044.1 as of June 30, 2011 to 2,345.7 as of December 31, 2011, and average daily stocks
trading volume in the PRC declined from RMB182.6 billion for the second quarter of 2011 to
RMB156.1 billion for the third quarter of 2011, and further to RMB122.0 billion for the fourth
quarter of 2011. As a result, (i) our stocks and funds brokerage trading volume declined by
21.8% in 2011 compared to 2010, which, in turn, reduced our brokerage commission and fee
income; (ii) we recorded a lower investment gain in our proprietary trading business during the
second half of 2011 compared with the first half of 2011; and (iii) we recognized an impairment
loss of RMB540.4 million on our available-for-sale investments in 2011.
As the general economic and market conditions improved during the first quarter of 2012,
the CSI 300 Index reached 2,454.9 as of March 31, 2012 and the average daily stocks trading
volume in the PRC reached RMB153.3 billion for the first quarter of 2012. Although the
recovery of the market conditions in the first quarter of 2012 had a positive impact on the
financial performance of our securities brokerage and proprietary trading businesses as
compared to the last quarter of 2011, market conditions have led to a substantial decline in the
financial performance of our securities brokerage and proprietary trading businesses for the
first quarter of 2012 as compared to the first quarter of 2011 where the CSI 300 Index was
3,223.3 as of March 31, 2011 and average daily stocks trading volume in the PRC was
RMB233.7 billion for the first quarter of 2011. We cannot assure you that the market conditions
will continue to improve for the remainder of 2012 or beyond.
The Directors confirm that, up to the date of this prospectus, there has been no material
adverse change in our financial or trading position since December 31, 2011, being the date of
our latest audited consolidated financial results.
SUMMARY RISK FACTORS
Our business is subject to numerous risks described in the section entitled “Risk Factors”
beginning on page 34 of this prospectus. As different investors may have different
interpretations and standards for determining materiality of a risk, you are cautioned
that you should read the whole section entitled “Risk Factors” of this prospectus carefully
before you decide to invest in the Offer Shares. Some of the major risks we face include:
General economic and market conditions could materially and adversely affect our
business;
We face intense competition and our business could be materially and adversely
affected if we are unable to compete effectively;
Our securities and futures brokerage business is subject to various risks and we
cannot assure you that our brokerage commission and fee income can be sustained;
Our investment banking business is subject to various risks in the underwriting and
sponsorship of securities and we cannot assure you that our underwriting and
sponsors fees can be sustained;
A significant decline in the size of our AUM or poor management performance may
materially and adversely affect our asset management business;
– 12 –
SUMMARY
Our proprietary trading business is subject to market volatility and our investment
decisions;
Our direct investment business is subject to our investment decisions and market
volatility;
Any significant disruption in the operations of Haitong International Securities in
Hong Kong or our other overseas operations could have a material adverse effect on
our overseas business; and
We are subject to extensive regulatory requirements, the non-compliance with which
could cause us to incur penalties.
– 13 –
DEFINITIONS
In this prospectus, unless the context otherwise requires, the following terms and
expressions have the meanings set forth below.
“21st Century Business Herald” the 21st Century Business Herald (21N } } X1\ )
“A Share(s)” domestic shares of our Company, with a nominal value of
RMB1.00 each, which are subscribed for or credited as
paid up in Renminbi and are listed for trading on the
Shanghai Stock Exchange
“Application Form(s)” WHITE Application Form(s), YELLOW Application
Form(s) and GREEN Application Form(s), or where the
context so requires, any of them, relating to the Hong
Kong Public Offering
“Articles of Association” the articles of association of our Company, as amended,
or “Articles” which shall become effective on the Listing Date, a
summary of which is set out in Appendix V to this
prospectus
“associate(s)” has the meaning ascribed to it under the Listing Rules
“BNP BE Group” BNPP IP BE Holding and its associates
“BNPP IP BE Holding” BNP Paribas Investment Partners BE Holding SA, a
Connected Person of our Company
“Board” or “Board of Directors” the board of Directors of the Company
“Bohai Rim” the region comprising Beijing, Tianjin, and Hebei,
Liaoning and Shandong provinces
“Business Day” a day on which banks in Hong Kong are generally open
for normal business to the public and which is not a
Saturday, Sunday or public holiday in Hong Kong
“CCASS” the Central Clearing and Settlement System established
and operated by HKSCC
“CCASS Clearing Participant” a person admitted to participate in CCASS as a direct
clearing participant or general clearing participant
– 14 –
DEFINITIONS
“CCASS Custodian Participant” a person admitted to participate in CCASS as a custodian
participant
“CCASS Investor Participant” a person admitted to participate in CCASS as an investor
participant who may be an individual or joint individuals
or a corporation
“CCASS Participant” a CCASS Clearing Participant, a CCASS Custodian
Participant or a CCASS Investor Participant
“central and western region” the region comprising the following provinces, namely
Gansu, Shaanxi, Shanxi, Jiangxi, Anhui, Hubei, Yunnan,
Henan, Guizhou, Sichuan, Hunan, Chongqing, Guangxi
and Xinjiang
“China” or “PRC” the People’s Republic of China excluding, for the purpose
of this prospectus, Hong Kong, Macau and Taiwan
“China Financial Futures the China Financial Futures Exchange (N-W ‘ ¤
Exchange” f b@ )
“China Futures Association” the China Futures Association (N-W g mSTg )
“China-Belgium Fund” China-Belgium Direct Equity Investment Fund (N-W
kR)fBvck bWú‘ ) for which Haitong-Fortis PE
Management acts as the manager
“Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of
Hong Kong) as amended, supplemented or otherwise
modified from time to time
“Company,” “our Company” Haitong Securities Co., Ltd. (mw R8Ng – QlS ), a
or “Haitong Securities” company incorporated as an enterprise owned by the
whole people on August 30, 1988 and converted into a
joint-stock limited company under the laws of the PRC
on January 28, 2002, the A Shares of which are listed on
the Shanghai Stock Exchange in the PRC, the H Shares of
which are being applied for listing on the Main Board of
the Hong Kong Stock Exchange
“Company Law” the Company Law of the People’s Republic of China (N-
N”l QqTW QlSl )
“Connected Person(s)” has the meaning ascribed to it under the Listing Rules
– 15 –
DEFINITIONS
“CSDCC” China Securities Depositary and Clearing Corporation
Limited (N-W 8v{ } { – QlS )
“CSRC” the China Securities Regulatory Commission (N-W 8
vwc{t YTág )
“Director(s)” director(s) of our Company
“EIT” enterprise income tax of the PRC
“EIT Law” Enterprise Income Tax Law of the PRC (N-N”l QqTW
O imb@z l )
“Exchange Participant” a person: (a) who, in accordance with the Rules of the
Exchange, may trade on or through the Hong Kong Stock
Exchange; and (b) whose name is entered in a list,
register or roll kept by the Hong Kong Stock Exchange as
a person who may trade on or through the Hong Kong
Stock Exchange
“Fullgoal Fund Management” Fullgoal Fund Management Co., Ltd. ([W Wú‘t g –
QlS ), a limited liability company incorporated in the
PRC, in which we owned an equity interest of 27.775% as
of the Latest Practicable Date
“GDP” gross domestic product
“GEM” the Growth Enterprise Market of the Hong Kong Stock
Exchange
“Global Offering” the Hong Kong Public Offering and the International
Offering
“Green Application Form(s)” the application form(s) to be completed by the White
Form eIPO Service Provider, Computershare Hong
Kong Investor Services Limited
“Group,” “our Group,” our Company and our subsidiaries (or our Company and
“we” or “us” any one or more of our subsidiaries, as the context may
require)
“H Share Registrar” Computershare Hong Kong Investor Services Limited
– 16 –
DEFINITIONS
“H Share(s)” ordinary shares in the share capital of our Company with
nominal value of RMB1.00 each, which are to be
subscribed for and traded in HK dollars and are to be
listed on the Hong Kong Stock Exchange
“Haitong Capital Investment” Haitong Capital Investment Co., Ltd. (mw Cbg –
QlS ), a limited liability company incorporated in the
PRC, a wholly-owned subsidiary of our Company
“Haitong Chuangxin Haitong Chuangxin Capital Management Company
Management” Limited (mw Rue°g,{t g – QlS ), a limited liability
company incorporated in the PRC, in which we owned a
51.00% equity interest through our wholly-owned
subsidiary, Haitong Capital Investment as of the Latest
Practicable Date
“Haitong Futures” Haitong Futures Co., Ltd. (mw g – QlS ), a limited
liability company incorporated in the PRC, in which we
owned a 66.67% equity interest as of the Latest
Practicable Date
“Haitong International Holdings” Haitong International Holdings Limited (mw W – §
– QlS ), our wholly-owned subsidiary incorporated in
Hong Kong
“Haitong International Securities” Haitong International Securities Group Limited (mw W
– R8–W g – QlS ), previously known as Taifook
Securities, a company listed on the Hong Kong Stock
Exchange under stock code 00665, in which we owned a
69.74% equity interest through our wholly-owned
subsidiary, Haitong International Holdings as of the
Latest Practicable Date
“Haitong Jihe Management” Haitong Jihe Private Equity Investment Fund
Management Company Limited (mw T yk bWú‘
{ g – QlS ), a limited liability company
incorporated in the PRC, in which we owned a 51.00%
equity interest through our wholly-owned subsidiary,
Haitong Capital Investment as of the Latest Practicable
Date
– 17 –
DEFINITIONS
“Haitong-Fortis PE Management” Haitong-Fortis Private Equity Fund Management Co.,
Ltd. (mw[u\"imbWú‘t g – QlS ), a limited
liability company incorporated in the PRC, in which we
owned a 67.00% equity interest as of the Latest
Practicable Date
“HFT Investment Management” HFT Investment Management Co., Ltd. (mw[ Wú‘t
g – QlS ), a limited liability company incorporated in
the PRC, in which we owned a 51.00% equity interest as
of the Latest Practicable Date
“HK$” or “HK dollars” Hong Kong dollars, the lawful currency of Hong Kong
“HKFRS” Hong Kong Financial Reporting Standards
“HKSCC” Hong Kong Securities Clearing Company Limited
“HKSCC Nominees” HKSCC Nominees Limited, a wholly-owned subsidiary
of HKSCC, which is a wholly-owned subsidiary of Hong
Kong Exchanges and Clearing Limited
“HKSE Corporate Governance Code on Corporate Governance Practices as set out in
Code” Appendix 14 to the Hong Kong Listing Rules
“Hong Kong” or “HK” the Hong Kong Special Administrative Region of the
PRC
“Hong Kong Offer Shares” the H Shares offered by us for subscription pursuant to
the Hong Kong Public Offering
“Hong Kong Public Offering” the offering by our Company of initially 61,470,000 H
Shares for subscription by the public in Hong Kong
(subject to adjustment as described in the section headed
“Structure of the Global Offering” in this prospectus) for
cash at the Offer Price (plus brokerage, SFC transaction
levies and Hong Kong Stock Exchange trading fees), on
and subject to the terms and conditions described in this
prospectus and the Application Forms as further
described in the section headed “Structure of the Global
Offering – The Hong Kong Public Offering” in this
prospectus
– 18 –
DEFINITIONS
“Hong Kong Stock Exchange” The Stock Exchange of Hong Kong Limited, a wholly-
owned subsidiary of Hong Kong Exchanges and Clearing
Limited
“Hong Kong Underwriters” the underwriters listed in the paragraph headed “Hong
Kong Underwriters” under the section headed
“Underwriting” of this prospectus, being the underwriters
of the Hong Kong Public Offering
“Hong Kong Underwriting the underwriting agreement dated April 16, 2012 relating
Agreement” to the Hong Kong Public Offering and entered into by the
Hong Kong Underwriters and our Company, as further
described in the paragraph headed “Underwriting
arrangements and expenses” under the section headed
“Underwriting” of this prospectus
“IFRS” the International Financial Reporting Standards, which
include standards, amendments and interpretations
promulgated by the International Accounting Standards
Board (IASB) and the International Accounting
Standards (IAS) and interpretation issued by the
International Accounting Standards Committee (IASC)
“independent third party(ies)” party(ies) not connected with our Company and our
connected persons (as defined in the Listing Rules)
“International Offer Shares” the H Shares offered pursuant to the International
Offering
“International Offering” the offer for subscription of initially 1,167,930,000 H
Shares to institutional professional, corporate and other
investors, subject to adjustment and the Over-allotment
Option, as further described in the section headed
“Structure of the Global Offering” in this prospectus
“International Underwriters” the group of international underwriters who are expected
to enter into the International Underwriting Agreement to
underwrite the International Offering
– 19 –
DEFINITIONS
“International Underwriting the underwriting agreement relating to the International
Agreement” Offering to be entered into on or about April 20, 2012 by
the International Underwriters and our Company, as
further described in the paragraph headed “International
Offering” under the section headed “Underwriting” in
this prospectus
“Joint Bookrunners” in respect of the Hong Kong Public Offering, Haitong
International Securities Company Limited, J.P. Morgan
Securities (Asia Pacific) Limited, Credit Suisse (Hong
Kong) Limited, Deutsche Bank AG, Hong Kong Branch,
Citigroup Global Markets Asia Limited, UBS AG, Hong
Kong Branch, The Hongkong and Shanghai Banking
Corporation Limited, Nomura International (Hong Kong)
Limited, Standard Chartered Securities (Hong Kong)
Limited and BOCOM International Securities Limited
and, in respect of the International Offering, Haitong
International Securities Company Limited, J.P. Morgan
Securities Ltd., Credit Suisse (Hong Kong) Limited,
Deutsche Bank AG, Hong Kong Branch, Citigroup
Global Markets Limited, UBS AG, Hong Kong Branch,
The Hongkong and Shanghai Banking Corporation
Limited, Nomura International (Hong Kong) Limited,
Standard Chartered Securities (Hong Kong) Limited and
BOCOM International Securities Limited
“Joint Global Coordinators” Haitong International Securities Company Limited, J.P.
Morgan Securities (Asia Pacific) Limited, Credit Suisse
(Hong Kong) Limited, Deutsche Bank AG, Hong Kong
Branch, Citigroup Global Markets Asia Limited and UBS
AG, Hong Kong Branch
– 20 –
DEFINITIONS
“Joint Lead Managers” in respect of the Hong Kong Public Offering, Haitong
International Securities Company Limited, J.P. Morgan
Securities (Asia Pacific) Limited, Credit Suisse (Hong
Kong) Limited, Deutsche Bank AG, Hong Kong Branch,
Citigroup Global Markets Asia Limited, UBS AG, Hong
Kong Branch, The Hongkong and Shanghai Banking
Corporation Limited, Nomura International (Hong Kong)
Limited, Standard Chartered Securities (Hong Kong)
Limited, BOCOM International Securities Limited, BNP
Paribas Capital (Asia Pacific) Limited, BOCI Asia
Limited, CCB International Capital Limited, China
Everbright Securities (HK) Limited and Samsung
Securities (Asia) Limited and, in respect of the
International Offering, Haitong International Securities
Company Limited, J.P. Morgan Securities Ltd., Credit
Suisse (Hong Kong) Limited, Deutsche Bank AG, Hong
Kong Branch, Citigroup Global Markets Limited, UBS
AG, Hong Kong Branch, The Hongkong and Shanghai
Banking Corporation Limited, Nomura International
(Hong Kong) Limited, Standard Chartered Securities
(Hong Kong) Limited, BOCOM International Securities
Limited, BNP Paribas Capital (Asia Pacific) Limited,
BOCI Asia Limited, CCB International Capital Limited,
China Everbright Securities (HK) Limited and Samsung
Securities (Asia) Limited
“Joint Sponsors” Haitong International Capital Limited and J.P. Morgan
Securities (Asia Pacific) Limited
“Latest Practicable Date” April 9, 2012, being the latest practicable date for the
purpose of ascertaining certain information contained in
this prospectus prior to its publication
“Listing” listing of the H Shares on the Main Board of the Hong
Kong Stock Exchange
“Listing Date” the date, expected to be on or about Friday, April 27,
2012, on which our H Shares are listed and from which
dealings therein are permitted to take place on the Hong
Kong Stock Exchange
“Listing Rules” or “Hong Kong the Rules Governing the Listing of Securities on the
Listing Rules” Hong Kong Stock Exchange (as amended from time to
time)
– 21 –
DEFINITIONS
“Macau” the Macau Special Administrative Region of the PRC
“Main Board” the stock exchange (excluding the option market)
operated by the Hong Kong Stock Exchange which is
independent from and operated in parallel with GEM
“Mandatory Provisions” the “Mandatory Provisions for Articles of Association of
Companies to be Listed Overseas” (R0XY N ^ QlSzàz
_ Phk ), as amended, supplemented or otherwise
modified from time to time, for inclusion in the articles of
association of companies incorporated in the PRC to be
listed overseas (including Hong Kong), which were
promulgated by the former Securities Commission of the
State Council and the former State Commission for
Restructuring the Economic Systems on September 29,
“Ministry of Finance” the Ministry of Finance of the PRC (N-N”l QqTW ?
)
“Moneyweek” Moneyweek magazine (t X )
“NBSC” National Bureau of Statistics of China (N-W W [ \ )
“NDRC” National Development and Reform Commission of the
PRC (N-N”l QqTW W [ | Te9—iYTág )
“New Fortune” the New Fortune magazine (e° )
“northeastern region” the region comprising Heilongjiang and Jilin provinces
“NSSF” the National Council for Social Security Fund of the PRC
(N-N”l QqTW QhW y>g O–Wú‘t Ng )
“OECD” Organization for Economic Co-operation and
Development
“Offer Price” the final offer price per H Share (exclusive of brokerage
fee of 1%, SFC transaction levy of 0.003% and Hong
Kong Stock Exchange trading fee of 0.005%) at which
the Offer Shares are to be subscribed for and issued, or
purchased and sold pursuant to the Global Offering as
described in the section headed “Structure of the Global
Offering – Pricing and Allocation” of this prospectus
– 22 –
DEFINITIONS
“Offer Shares” the Hong Kong Offer Shares and the International Offer
Shares, with any additional H Shares to be issued
pursuant to the exercise of the Over-allotment Option
“Over-allotment Option” the option granted by us to the International
Underwriters, exercisable by the Joint Global
Coordinators (on behalf of the International
Underwriters) pursuant to the International Underwriting
Agreement, to require our Company to issue up to an
aggregate of 184,410,000 additional H Shares at the Offer
Price, representing 15% of the offer shares initially
available under the Global Offering, to cover, among
others, over-allocations in the International Offering, if
any, exercisable at any time from the date of the
International Underwriting Agreement up to (and
including) the date which is the 30th day from the last
day for lodging of applications under the Hong Kong
Public Offering
“PBOC” the People’s Bank of China (N-W N”l ’ ), the central
bank of the PRC
“Pearl River Delta” the region comprising Guangzhou, Shenzhen, Zhuhai,
Foshan, Dongguan, Zhongshan, Huizhou, Jiangmen,
Zhaoqing, Shaoguan and Shantou, all located in
Guangdong province
“PRC GAAP” generally accepted accounting principles in the PRC
“Price Determination Date” the date, expected to be on or around Friday, April 20,
2012 (Hong Kong time) on which the Offer Price is
determined, or such later time as our Company and the
Joint Global Coordinators (on behalf of the Underwriters)
may agree, but in any event not later than Tuesday, April
24, 2012
“prospectus” this prospectus being issued in connection with the Hong
Kong Public Offering
“province” each being a province or, where the context requires, a
provincial level autonomous region or municipality under
the direct supervision of the central government of the
PRC
“QIBs” qualified institutional buyers within the meaning of Rule
144A under the U.S. Securities Act
– 23 –
DEFINITIONS
“Regulation S” Regulation S under the U.S. Securities Act
“Risk Control Indicator Administrative Measures for the Risk Control Indicators
Measures” of Securities Companies in the PRC (IR8QlS“c§R6
cj{ )
“RMB” or “Renminbi” Renminbi, the lawful currency of the PRC
“Rule 144A” Rule 144A under the U.S. Securities Act
“SAC” the Securities Association of China (N-W R8imSTg )
“SAFE” State Administration of Foreign Exchange of the PRC (N-
N”l QqTW W [ S/{t \ )
“SASAC” State-owned Assets Supervision and Administration
Commission of the State Council (W R–bW g u\"vwc
{ YTág )
“SAT” State Administration of Taxation of the PRC (W [ R~
\ )
“Securities and Futures the Securities and Futures Ordinance (Chapter 571 of the
Ordinance” or “SFO” Laws of Hong Kong) as amended, supplemented or
otherwise modified from time to time
“Securities Finance Company” China Securities Finance Co., Ltd. (N-W R8‘Ng
– QlS ), a non-profit joint stock company established
under the direction of the State Council to provide,
among other functions, funding and securities
refinancing services to support the margin financing and
securities lending businesses of PRC securities firms
“Securities Law” the Securities Law of the People’s Republic of China (N-
N”l QqTW R8l )
“Securities Times” Securities Times Newspaper (R8fBX1 )
“SFC” the Securities and Futures Commission of Hong Kong
“Shanghai Listing Rules” the rules governing the listing of securities on the
Shanghai Stock Exchange
– 24 –
DEFINITIONS
“Shanghai Shangshi” SIIC Shanghai (Holding) Co., Ltd. (N mwN [ (–W )g –
QlS ), one of the shareholders of our Company having
2.94% shareholding in our Company as of the Latest
Practicable Date
“Shanghai Stock Exchange” the Shanghai Stock Exchange (N mwIR8N¤f b@ )
“Shareholder(s)” holder(s) of the Share(s)
“Share(s)” collectively, A Share(s) and H Share(s), or where the
context requires, either of them
“Shenzhen Stock Exchange” the Shenzhen Stock Exchange (mW3IR8N¤f b@ )
“SIIC” Shanghai Industrial Investment (Holdings) Co., Ltd. (N
mw[im (–W )g – QlS ), which is the de facto controlling
shareholder of Shanghai Shangshi
“Sino-foreign joint venture (i) securities firm(s) established jointly by foreign
securities firm(s)” shareholders and PRC shareholders through equity
contributions in accordance with applicable PRC law;
and (ii) securities firm(s) formed as a result of foreign
investors being assigned with, or subscribing for, equity
interests in PRC security firm in accordance with
applicable PRC law. In each case, foreign shareholders
shall not in the aggregate hold, directly or indirectly,
more than one-third of the shares or equity interests in
such securities firm
“SMEs” small and medium enterprises
“SOE(s)” state-owned enterprise(s)
“Special Regulations” the Special Regulations of the State Council on the
Overseas Offering and Listing of Shares by Joint Stock
Limited Companies (W R–beNg – QlSXY R–
SN ^ vryR%‰ ), promulgated by the State
Council on August 4, 1994, as amended
“Stabilizing Manager” Haitong International Securities Company Limited
“State Council” State Council of the PRC (N-N”l QqTW W R–b )
– 25 –
DEFINITIONS
“SUABC” Shanghai Urban Agro-Business Co., Ltd. (N mw^ ^
UFy>Ng – QlS ), through the reverse takeover of
which our Company became listed on the Shanghai Stock
Exchange in July 2007 with the stock code of 600837
“subsidiary(ies)” has the meaning ascribed to it in section 2 of the
Companies Ordinance
“Supervisor(s)” member(s) of the Supervisory Committee
“Supervisory Committee” the supervisory committee of our Company
“Taifook Securities” Taifook Securities Group Limited (Y’yIR8–W g – Ql
S ), renamed as Haitong International Securities Group
Limited in November 2010
“Takeovers Code” the Codes on Takeovers and Mergers and Share
Repurchases issued by the SFC, as amended,
supplemented or otherwise modified from time to time
“Track Record Period” the three years ended December 31, 2009, 2010 and 2011
“Twelfth Five-Year Plan” The Twelfth Five-Year Plan Guidelines for National
Economic and Social Development of the PRC (0 N-N”
l QqTW W l } Tyg v|U,SANP N”tR–0 )
“Underwriters” the Hong Kong Underwriters and the International
Underwriters
“Underwriting Agreements” the Hong Kong Underwriting Agreement and the
International Underwriting Agreement
“U.S.” or “United States” the United States of America, its territories, its
possessions and all areas subject to its jurisdiction
“U.S. Securities Act” the United States Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder
“US$” or “U.S. dollars” United States dollars, the lawful currency of the United
or “USD” States
– 26 –
DEFINITIONS
“WFE” World Federation of Exchanges, a trade association of
over 50 publicly regulated stock, futures and options
exchanges, which not only provides references for the
securities industry and member exchanges, but also
dedicates in promoting regulated exchanges and
providing guidance on business strategies and corporate
governance for member exchanges
“White Form eIPO” the application for Hong Kong Offer Shares to be issued
in the applicant’s own name by submitting applications
online through the designated website of White Form
eIPO www.eipo.com.hk
“White Form eIPO Service Computershare Hong Kong Investor Services Limited
Provider”
“Wind Info” Wind Information Co., Ltd., a company with limited
liability incorporated in the PRC in 1994 and an
integrated service provider of financial data, information
and software
“Yangtze River Delta” the region comprising Shanghai, Jiangsu and Zhejiang
provinces
In this prospectus, the terms “associate,” “connected person,” “connected transaction,”
“controlling shareholder,” “subsidiary” and “substantial shareholder” shall have the
meanings given to such terms in the Listing Rules, unless the context otherwise requires.
For ease of reference, the names of the PRC established companies or entities, laws or
regulations have been included in the prospectus in both the Chinese and English languages
and in the event of any inconsistency, the Chinese versions shall prevail. The provision of
English translation of company names in Chinese language which are marked with “*” is for
identification purposes only.
– 27 –
GLOSSARY OF TECHNICAL TERMS
This glossary of technical terms contains explanations of certain technical terms
used in this prospectus in connection with our Group and our business. These terms
and their meanings may not correspond to standard industry meanings or usage of
these terms.
“A shares” the shares that are traded on the Shanghai Stock
Exchange or the Shenzhen Stock Exchange in Renminbi
“active customer(s)” our customer(s) who conducted at least one trade with us
in the last 36 months
“AUM” assets under management
“average securities brokerage equals the commission income from our trading of stocks
commission rate” and funds on behalf of clients as divided by our
brokerage trading volume for stocks and funds
“B shares” shares denominated in Renminbi, subscribed for and
traded in foreign currency on the Shanghai Stock
Exchange or the Shenzhen Stock Exchange
“CAGR” compound annual growth rate
“ChiNext Board” the growth enterprise board launched by the Shenzhen
Stock Exchange
“collective asset management a type of mutual fund managed by PRC securities firms in
scheme(s)” the PRC for retail customers
“CSI 300 Index” a capitalization-weighted stock market index designed to
replicate the performance of 300 stocks traded on the
Shanghai Stock Exchange and the Shenzhen Stock
Exchange, which is compiled by the China Securities
Index Company, Ltd. (N-Ic exg – QlS )
“dim sum bonds” RMB-denominated bonds issued in Hong Kong
“enterprise annuity” the supplementary pension insurance scheme established
voluntarily by enterprises and their employees in addition
to the basic pension insurance in which they participate
in accordance with the law
– 28 –
GLOSSARY OF TECHNICAL TERMS
“first-tier cities” the metropolises which play a significant role in national
politics, economics and other social activities, including
Beijing, Shanghai, Guangzhou and Shenzhen
“FOF” Fund of Funds
“futures IB business” the business activities in which securities firms, as
commissioned by futures companies, introduce customers
to futures companies to provide futures brokerage and
other related services
“high net worth customer(s)” our individual customer(s) whose account(s) with us have
a minimum balance of RMB10.0 million in investment
assets
“high net worth individual(s)” individual(s) having total investable assets of at least
RMB10.0 million
“International Board” a board to be established on the Shanghai Stock
Exchange where foreign companies can list their shares
“IPO” initial public offering
“M&A” mergers and acquisitions
“margin and securities a business in which securities firms can act as
refinancing” intermediaries to borrow funds or securities from the
Securities Finance Company and other financial
institutions, including banks, fund management
companies and insurance companies and lend such funds
and securities to their customers
“Net Capital” equals net assets minus risk-adjusted financial assets
minus other risk-adjusted assets and contingent liability
plus/minus other adjustments recognized or approved by
the CSRC
“New OTC Board” an OTC board to be established for high-growth
enterprises in the PRC
“OTC” over-the-counter
– 29 –
GLOSSARY OF TECHNICAL TERMS
“OTCBB” OTC Bulletin Board, which is an inter-dealer electronic
quotation system in the U.S. that displays real-time
quotes, last-sale prices and volume information for many
OTC equity securities that are not listed on a national
securities exchange in the U.S.
“Pink Sheets” formally known as the OTC Markets Group, Inc., which
is a private company that provides services to the U.S.
OTC securities market, including electronic quotations,
trading, messaging and information platforms
“QDII” Qualified Domestic Institutional Investor (T h
“QFII” Qualified Foreign Institutional Investor (T h
“RQFII” Renminbi Qualified Foreign Institutional Investor (N”l
^ T h
companies and fund houses to facilitate investments of
offshore Renminbi into domestic securities market
“second and third-tier cities” cities and municipalities in fast growing provinces in the
PRC that are not first-tier cities
“Shibor” Shanghai Interbank Offered Rate
“SIFMA” Securities Industry and Financial Markets Association in
the U.S.
“SME Board” the Small and Medium Enterprises Board of the Shenzhen
Stock Exchange
“sponsor representative” professional representative qualified in the PRC to
sponsor and execute the offerings and listings of
securities pursuant to the Measures for the
Administration of the Sponsorship of the Offering and
Listing of Securities of the PRC
“SSE 50 Index” an index of 50 representative stocks that are traded on the
Shanghai Stock Exchange
– 30 –
GLOSSARY OF TECHNICAL TERMS
“SSE Corporate Governance an index comprising all the stocks from the SSE
Index” Corporate Governance Board, which is intended to
encourage other listed companies on the Shanghai Stock
Exchange to strengthen their corporate governance and
internal controls
“stock index futures” cash-settled standardized futures contracts on the value
of a particular stock market index
“SZSE Component Index” an index of 40 representative stocks that are traded on the
Shenzhen Stock Exchange
“targeted asset management a type of special vehicle managed by PRC securities
scheme(s)” firms for annuity plans, other institutional investors and
individual investors with large amount of investment
assets
– 31 –
FORWARD LOOKING STATEMENTS
This prospectus includes forward-looking statements. All statements other than
statements of historical facts contained in this prospectus, including, without limitation, those
regarding our future financial position, our strategies, plans, objectives, goals, targets and
future developments in the markets where we participate or are seeking to participate, and any
statements preceded by, followed by or that include the words “believe,” “expect,” “estimate,”
“predict,” “aim,” “intend,” “will,” “may,” “plan,” “consider,” “anticipate,” “seek,” “should,”
“could,” “would,” “continue,” or similar expressions or the negative thereof, are forward-
looking statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors, some of which are beyond our control, which may cause our
actual results, performance or achievements, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by the forward-looking
statements. These forward-looking statements are based on numerous assumptions regarding
our present and future business strategies and the environment in which we will operate in the
future. Important factors that could cause our actual performance or achievements to differ
materially from those in the forward-looking statements include, among other things, the
following:
our ability to successfully implement our business plans and strategies;
future developments, trends and conditions in the industry and markets in which we
operate;
our business prospects;
our capital expenditure plans;
the actions and developments of our competitors;
our financial condition and performance;
capital market developments;
our dividend policy;
any changes in the laws, rules and regulations of the central and local governments
in the PRC and other relevant jurisdictions and the rules, regulations and policies of
the relevant governmental authorities relating to all aspects of our business;
general political and economic conditions, including those related to the PRC;
changes or volatility in interest rates, foreign exchange rates, equity prices or other
rates or prices, including those pertaining to the PRC and the industry and markets
in which we operate;
various business opportunities that we may pursue; and
– 32 –
FORWARD LOOKING STATEMENTS
macroeconomic measures taken by the PRC government to manage economic
growth.
Additional factors that could cause actual performance or achievements to differ
materially include, but are not limited to, those discussed under the section headed “Risk
Factors” and elsewhere in this prospectus. We caution you not to place undue reliance on these
forward-looking statements, which reflect our management’s view only as of the date of this
prospectus. We undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this prospectus might
not occur. All forward-looking statements contained in this prospectus are qualified by
reference to the cautionary statements set out in this section.
– 33 –
RISK FACTORS
You should carefully consider all of the information in this prospectus, including
the risks and uncertainties described below, before making an investment in our H
Shares. These risks could materially and adversely affect our business, financial
condition and results of operations. The trading price of our H Shares could
significantly decrease due to any of these risks, and you may lose all or part of your
investment. You should pay particular attention to the fact that we are a company
incorporated in the PRC and most of our operations are conducted in the PRC which
is governed by a legal and regulatory environment that may differ significantly from
that of other countries. For more information concerning the PRC and certain related
matters discussed below, please see “Regulatory Environment,” “Appendix IV –
Summary of Principal PRC and Hong Kong Legal and Regulatory Provisions” and
“Appendix V – Summary of the Articles of Association.”
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
General economic and market conditions could materially and adversely affect our business.
Substantially all of our revenue is derived from the securities markets. Like other
businesses operating in the same industry, our business is directly affected by the inherent risks
associated with the securities markets, such as market volatility, fluctuations in the trading
volume and the credit capacity or perceived credit worthiness of the securities industry in the
marketplace. Our business is also subject to general economic and political conditions, such as
macroeconomic and monetary policies, legislation and regulations affecting the financial and
securities industries, upward and downward trends in the business and financial sectors,
inflation, currency fluctuations, availability of short-term and long-term market funding
sources, cost of funding and the level and volatility of interest rates. For example, due largely
to the global financial crisis in 2008, securities markets in the PRC and overseas (including
Hong Kong) experienced substantial losses and the overall business environment was
extremely adverse, which had a material adverse effect on our principal business lines in 2008.
In 2010 and 2011, the PRC securities industry and our financial condition and results of
operations were adversely affected by the tightening of monetary policies and high inflation in
the PRC and the volatility in the PRC A share markets, as well as the financial instability in
the U.S. and euro zone economies. During the second half of 2011, the tightening monetary
policies and high inflation in the PRC, global economic uncertainties and the euro zone
sovereign debt crisis have resulted in adverse market conditions and increased volatility in the
PRC and overseas securities markets. For example, the CSI 300 Index and the Hang Seng Index
decreased from 3,044.1 and 22,398.1 as of June 30, 2011, respectively, to 2,345.7 and 18,434.4
as of December 31, 2011, respectively, representing a decline of approximately 22.9% and
17.7%, respectively. As a result, (i) our stocks and funds brokerage trading volume declined by
21.8% in 2011 compared to 2010, which, in turn, has reduced our brokerage commission and
fee income; (ii) we recorded a net investment gain of RMB342.1 million in our proprietary
trading business in the PRC during the second half of 2011 compared to a net investment gain
of RMB802.7 million during the first half of 2011; and (iii) we recognized an impairment loss
of RMB540.4 million on our available-for-sale investments in 2011. In addition, while the CSI
300 Index and the average daily stocks trading volume in the PRC recovered during the first
quarter of 2012 compared to the fourth quarter of 2011, which had a positive impact on our
securities and futures brokerage and proprietary trading businesses, they still represented
– 34 –
RISK FACTORS
substantial declines from the CSI 300 Index of 3,223.3 as of March 31, 2011 and the average
daily stocks trading volume in the PRC of RMB233.7 billion for the first quarter of 2011. We
cannot assure you that the market conditions will continue to improve for the remainder of
2012 or beyond.
Turmoil in the financial markets, a downturn in general economic conditions or other
risks associated with our business and the securities industry in general could reduce securities
trading and corporate finance activities and affect the value of certain financial assets, which
may consequently have a material adverse effect on our commission and fees from brokerage,
investment banking and asset management businesses, as well as our returns on financial assets
and investments. A reduction in our income or a loss resulting from our underwriting,
investments or trading activities could have a material adverse effect on our business, results
of operations and financial condition. As a result of these risks, our income and operating
results may be subject to significant fluctuations.
We face intense competition and our business could be materially and adversely affected if
we are unable to compete effectively.
The PRC securities industry is highly competitive and we face intense competition in
most of our business lines:
For our securities brokerage business, we compete primarily with other PRC
securities firms in terms of pricing and the range of products and services offered.
Currently, there are more than 100 registered securities firms in the PRC and intense
price competition in recent years has lowered commission rates for our securities
brokerage business. For the years ended December 31, 2009, 2010 and 2011, our
average securities brokerage commission rate was 0.147%, 0.118% and 0.100%,
respectively, which adversely affected our brokerage commission and fee income.
Please see “– Our securities and futures brokerage business is subject to various
risks and we cannot assure you that our brokerage commission and fee income can
be sustained.”
For our investment banking business, we compete primarily with other PRC and
Sino-foreign joint venture securities firms as well as PRC commercial banks in
terms of brand recognition, marketing and distribution capability, service quality,
financial strength and pricing. Intense competition may result in lower underwriting
and advisory fees for our investment banking business. Please see “– Our investment
banking business is subject to various risks in the underwriting and sponsorship of
securities and we cannot assure you that our underwriting and sponsors fees can be
sustained.”
For our asset management business, we compete primarily with fund management
companies, banks, insurance companies and other financial institutions in the PRC
in terms of the range of products and services offered, pricing and quality of
customer service.
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RISK FACTORS
For our direct investment business, we compete primarily with other PRC securities
firms that are qualified to conduct direct investment business and private equity
firms in the PRC.
Some of our competitors may have certain competitive advantages over us, including
greater financial resources, stronger brand recognition, broader product and service offerings,
more advanced IT systems and a branch network with wider geographic coverage. They may
also have more experience with a broader range of services and more complex financial
products than we do.
In addition, with regulatory changes and other factors that contribute to the gradual
relaxation of the PRC securities regulations, more competitors are seeking to enter or expand
in our industry. We believe that the PRC securities industry is becoming increasingly
competitive. Our failure to remain competitive will have a material and adverse effect on our
business, financial condition, results of operations and prospects.
Our securities and futures brokerage business is subject to various risks and we cannot
assure you that our brokerage commission and fee income can be sustained.
Brokerage commission and fee income represent a significant portion of our revenue. For
the years ended December 31, 2009, 2010 and 2011, segment revenue and other income from
our securities and futures brokerage business in the PRC amounted to RMB7,284.0 million,
RMB5,774.8 million and RMB4,163.1 million, respectively, representing 64.4%, 51.1% and
38.3% of our total revenue and other income, respectively.
Our securities and futures brokerage business is affected by external factors such as
general economic conditions, macroeconomic and monetary policies, market conditions and
fluctuations in interest rates, all of which are beyond our control. For example, the CSI 300
Index decreased by 26.5% in 2011 as a result of increased inflation, tightened monetary
policies and rising concerns over the PRC domestic economy. Such unfavorable market
conditions caused our stocks and funds brokerage trading volume decline by 21.8% in 2011
compared to 2010, which, in turn, has reduced our brokerage commission and fee income.
While the CSI 300 Index and the average daily stocks trading volume in the PRC recovered
during the first quarter of 2012 compared to the fourth quarter of 2011, which had a positive
impact on our securities and futures brokerage business, they still represented substantial
declines from the CSI 300 Index of 3,223.3 as of March 31, 2011 and the average daily stocks
trading volume in the PRC of RMB233.7 billion for the first quarter of 2011.
In addition, market competition is another key factor affecting our securities and futures
brokerage business. We monitor our product pricing in relation to competitors and adjust
commission rates and other fee structures to enhance our competitiveness. For the years ended
December 31, 2009, 2010 and 2011, our average securities brokerage commission rate was
0.147%, 0.118% and 0.100%, respectively. Our commission and fee income on securities
brokerage decreased by 18.2% in 2010 compared to 2009 mainly due to a decline in our
average securities brokerage commission rate in 2010. In addition, our commission and fee
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RISK FACTORS
income on securities brokerage further decreased by 33.8% in 2011 compared to 2010 due
primarily to a decrease in our stocks and funds brokerage trading volume and a further decline
in our average securities brokerage commission rate in 2011.
With the gradual relaxation of the PRC securities regulations, we believe that the PRC
securities industry will become increasingly competitive. If the PRC regulatory authorities
further relax the restrictions on the opening of brokerage branches, competition may increase
and we cannot assure you that we would not further lower our brokerage commission rates in
order to stay competitive. As a result, we cannot assure you that our brokerage commission and
fee income can be sustained at current levels.
Our investment banking business is subject to various risks in the underwriting and
sponsorship of securities and we cannot assure you that our underwriting and sponsors fees
can be sustained.
For the years ended December 31, 2009, 2010 and 2011, segment revenue and other
income from our investment banking business in the PRC amounted to RMB496.8 million,
RMB1,091.7 million and RMB1,068.6 million, respectively, representing 4.4%, 9.7% and 9.8%
of our total revenue and other income, respectively. Although our investment banking business
has had a rapid growth in revenue and profit in recent years, we cannot assure you that such
growth rate will be sustained due to the risks associated with our investment banking business
as discussed below.
Our investment banking business is subject to certain risks that are primarily related to
the underwriting of securities. The primary offering of securities in the PRC, especially an IPO,
is subject to a merit-based review and approval process conducted by various regulatory
authorities. The result and timing of these reviews are beyond our control and may cause
substantial delays to or the termination of securities offerings underwritten and sponsored by
us. We cannot assure you that such approvals will be granted in a timely manner or at all in
the future. A significant decline in the approval rate of the securities offerings we sponsor could
harm our reputation, erode client confidence and reduce our underwriting and sponsors fee
income, because we receive most of our fees only after the successful completion of a
securities offering. In addition, the performance of our investment banking business also
depends on market conditions. Adverse market conditions and capital market volatility may
also cause delays to or the termination of securities offerings underwritten and sponsored by
us.
In addition, substantial capital market volatility may cause the securities underwritten by
us to be undersubscribed. Since we may underwrite securities offerings on a firm commitment
basis, we would then be required to purchase some or all of the unsubscribed portion for our
own account, which would materially and adversely affect our liquidity. After trading begins,
if we sell the securities on our account to investors below the offer price at which we were
committed to purchase, we would incur losses on the sales of those securities.
Intensifying price competition in investment banking business from other PRC or
Sino-foreign joint venture securities firms may force us to charge a lower underwriting fee rate
to stay competitive. This could cause our underwriting and sponsors fees to be reduced, which
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RISK FACTORS
could adversely affect our business, financial condition and results of operations. As a result,
we cannot assure you that our underwriting and sponsors fees can be sustained at current levels.
Furthermore, when acting as a sponsor in the underwriting of securities, we may be
subject to regulatory sanctions, fines, penalties or other disciplinary actions in the PRC for
conducting inadequate due diligence in connection with an offering, fraud or misconduct
committed by issuers, their agents, other sponsors or ourselves, misstatements and omissions
in disclosure documents, or other illegal or improper activities that occur during the course of
the underwriting process.
A significant decline in the size of our AUM or poor management performance may
materially and adversely affect our asset management business.
For the years ended December 31, 2009, 2010 and 2011, segment revenue and other
income from our asset management business in the PRC amounted to RMB878.9 million,
RMB868.5 million and RMB1,092.1 million, respectively, representing 7.8%, 7.7% and 10.1%
of our total revenue and other income, respectively.
We receive asset management fees based on the value of our customer portfolios or
investment in funds managed by us. In addition, we also provide private equity fund
management, collective asset management and targeted asset management schemes in which
we may also earn performance fees. Market volatility, adverse economic conditions or the
failure to outperform our competitors or the market may reduce our AUM or affect the
performance of the assets or funds we manage, which could adversely affect the amount of
management fees or performance fees we receive.
Our proprietary trading business is subject to market volatility and our investment decisions.
For the years ended December 31, 2009, 2010 and 2011, segment revenue and other
income from our proprietary trading business in the PRC amounted to RMB804.8 million,
RMB779.8 million and RMB1,144.8 million, respectively, representing 7.1%, 6.9% and 10.5%
of our total revenue and other income, respectively.
We trade equity and fixed income securities as well as derivative products for our own
account. Our equity and fixed income securities are subject to market volatility and, therefore,
the results of our securities trading activities generally correlate with the performance of the
PRC securities markets. We also engage in derivative transactions involving ETFs and stock
index futures. We use derivative instruments to reduce the impact of price volatility on our
investment portfolio. However, the PRC derivatives market currently does not provide
sufficient means for us to hedge against volatile trading markets, which may make it difficult
for us to reduce our exposure to fluctuations in price volatility on our investment portfolio, and
the derivatives we use may not be as effective as we expect. In addition, derivatives contracts
we enter into expose us to the risks associated with these instruments and their underlying
assets, which could result in substantial losses. The secondary market for derivatives is volatile
and we may be inexperienced in managing new products or trading derivative products. As a
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RISK FACTORS
result of the volatility in the PRC securities market, we recorded a net investment gain of
RMB342.1 million in our proprietary trading business in the PRC during the second half of
2011 compared to a net investment gain of RMB802.7 million during the first half of 2011.
While the CSI 300 Index recovered during the first quarter of 2012 compared to the fourth
quarter of 2011, which had a positive impact on our proprietary trading business, it still
represented a substantial decline from the CSI 300 Index of 3,223.3 as of March 31, 2011.
The performance of our proprietary trading business is determined by our investment
decisions and judgments based on our assessment of existing and future market conditions. We
closely monitor the market value and financial performance of our proprietary trading
portfolio, and actively adjust such portfolio and allocate assets based on market conditions and
internal risk management guidelines. However, our investment decisions are a matter of
judgment, which involves management discretion and assumptions. If our decision-making
process fails to effectively minimize losses while capturing gains, or our forecasts do not
conform to actual changes in market conditions, our proprietary trading business may not
achieve the investment returns we anticipate, and we could even suffer material losses, any of
which would materially and adversely affect our business, financial condition and results of
operations.
In addition, certain classes of our assets, such as our available-for-sale securities, are
marked to market. A decline in the value of our available-for-sale securities can result in the
recognition of impairment losses if management determines that such a decline in value is not
temporary. This evaluation is a matter of judgment, which includes the assessment of several
factors. Please see “Financial Information – Significant Accounting Policies and Estimates.” If
our management determines that an asset is impaired, the book value of the asset is adjusted
and a corresponding loss is recognized in current earnings. A deterioration in the market value
of available-for-sale securities could result in the recognition of impairment loss. For the year
ended December 31, 2011, we recognized an impairment loss of RMB540.4 million on our
available-for-sale investments.
Our direct investment business is subject to our investment decisions and market volatility.
For the years ended December 31, 2009, 2010 and 2011, segment revenue and other
income from our direct investment business in the PRC amounted to RMB52.1 million,
RMB106.0 million and RMB55.0 million, respectively, representing 0.5%, 0.9% and 0.5% of
our total revenue and other income, respectively. Although we had one private equity
investment exit in 2010, we cannot assure you that we will be able to continue to exit from
private equity investments in each year thereafter and the timing for such exits is subject to our
investment decisions and market volatility.
Our direct investment business generally involves direct equity investments in private
companies and investment in private equity funds with our own capital. We earn investment
returns from dividends paid by our portfolio companies and generate capital gains from exits
through an IPO or share sale by our portfolio company. To make a sound investment decision,
we need to carefully identify and select a target business based on its business model and the
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RISK FACTORS
industry in which it operates. In general, this selection process involves a systematic analysis
and forecast of the target’s profitability and sustainability. However, we may make unsound
investment decisions, and our portfolio companies may take longer than expected to mature to
a stage suitable for IPOs. As such, our investment period would be longer than we anticipated
which could reduce our returns on investment. In addition, our ability to exit a private equity
investment is also subject to market conditions in the PRC. Due to volatile equity capital
markets, we may be forced to sell our investments at undesirable prices or defer sales for a
considerable period of time or may not be able to sell at all. If we cannot sell our private equity
investments during the planned disposition period, our investment returns will continue to be
exposed to markets risks. Furthermore, if the target company does not reach the profitability
we anticipated, our ability to exit from, or receive dividends on, such investments could be
severely constrained. As a result, our business, financial condition and results of operations
could be materially and adversely affected.
Any significant disruption in the operations of Haitong International Securities in Hong
Kong or our other overseas operations could have a material adverse effect on our overseas
business.
For the years ended December 31, 2009, 2010 and 2011, segment revenue and other
income from our overseas business amounted to RMB197.2 million, RMB905.0 million and
RMB954.5 million, representing 1.7%, 8.0% and 8.8% of our total revenue and other income,
respectively.
As we generate most of the revenue and other income in our overseas business from our
operations in Hong Kong, our overseas business depends on, to a large extent, the results of
operations of Haitong International Securities and our other subsidiaries incorporated in Hong
Kong. However, we cannot assure you that Haitong International Securities and our other Hong
Kong operations may continue to experience the same level of growth or profitability. A variety
of external factors that could significantly affect our operations in Hong Kong include, but are
not limited to, changes in the general economic and market conditions in Hong Kong and
compliance with various regulatory and legal requirements in Hong Kong. For example, the
Hong Kong economy has experienced significant downturns in the past, including in
connection with the outbreak of SARS in 2003, the global financial crisis in 2008 and the
market volatility in the second half of 2011. These economic downturns resulted in substantial
losses in the securities markets, significant deterioration in customers’ asset quality and
increases in the cost of funding in the overseas markets. Any significant disruption in the
operations of Haitong International Securities or our other overseas operations could have a
material adverse effect on our business, financial condition, results of operations and
prospects.
Our business is subject to concentration risks due to significant holdings of financial assets
or significant capital commitments.
Certain of our business lines are capital-intensive, such as our investment banking,
proprietary trading, direct investment and margin financing and securities lending businesses,
and may result in us having significant holdings of selected asset classes. Such capital
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RISK FACTORS
commitments expose us to concentration risks, including market risk, in the case of our
holdings of concentrated or illiquid positions in a particular asset class as part of our
proprietary trading and direct investment activities, as well as credit risk, in the case of our
margin financing and securities lending business. Any decline in the value of our asset holdings
may reduce our income or result in losses.
A significant decrease in our liquidity could negatively affect our business and reduce
customer confidence in us.
Maintaining adequate liquidity is crucial to our business operations as we continue to
expand our margin financing and securities lending, investment banking, proprietary trading,
and other business activities with substantial cash requirements. We meet our liquidity needs
primarily through cash generated by operating activities and, to a lesser extent, cash provided
by external financing. A reduction in our liquidity could reduce the confidence of our
customers or counterparties in us, which may result in the loss of business and customer
accounts. In addition, according to the CSRC’s requirements, the ratio between our Net Capital
and net assets cannot fall below 40%, the ratio between our Net Capital and total liabilities
cannot fall below 8% and the ratio between our net assets and total liabilities cannot fall below
20%. If we fail to meet regulatory capital requirements in the PRC, regulatory authorities may
impose penalties on us or limit the scope of our business, which could, in turn, have a material
and adverse effect on our financial condition and results of operations.
Factors that may adversely affect our liquidity position include a significant increase in
our margin financing activities, increased regulatory capital requirements, substantial
investments, other regulatory changes or a loss of market or customer confidence. When cash
generated from our operating activities is not sufficient to meet our liquidity or regulatory
capital needs, we must seek external financing. During periods of disruptions in the credit and
capital markets, potential sources of external financing could be limited and our borrowing
costs could increase. Although our management believes that we maintain sufficient credit
lines and banking facilities, external financing may not be available on acceptable terms or at
all due to unfavorable market conditions and disruptions in the credit and capital markets.
We are subject to extensive regulatory requirements, the non-compliance with which could
cause us to incur penalties.
As a participant in the securities and financial services industries, we are subject to
extensive PRC and overseas (including Hong Kong) regulatory requirements, which are
designed to ensure the integrity of the financial markets, the soundness of securities firms and
other financial institutions and the protection of investors. These regulations often serve to
limit our activities by, among other things, imposing capital requirements, limiting the types
of products and services we may offer, restricting the types of securities in which we may
invest and limiting the number and location of branches we may establish. Please see
“Regulatory Environment.” The PRC and overseas (including Hong Kong) regulatory
authorities conduct periodic or ad hoc inspections, examinations and inquiries in respect of our
compliance with such requirements. For example, the CSRC assigns a regulatory rating to each
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RISK FACTORS
securities firm according to the sufficiency of its internal control policies, risk management
capabilities, compliance with regulatory requirements and overall market position. For the past
four consecutive years, we received an “AA” regulatory rating from the CSRC.
Despite our efforts to comply with applicable regulations, there are a number of
associated risks, particularly in areas where applicable regulations may be unclear or where
regulators subsequently revise their previous guidance. On occasion, we have failed to meet
certain requirements and guidelines set by the PRC regulatory authorities. From time to time,
we or our employees have been involved in incidents of regulatory non-compliance and
received related notices or warnings from the relevant regulatory authorities. Based on the
nature of the cases, we classify the incidents of regulatory non-compliance committed by us
and our employees into the following three categories: (i) non-compliance incidents that led to
administrative penalties; (ii) non-compliance incidents that led to regulatory measures and the
deduction of regulatory points; and (iii) employee non-compliance incidents. These incidents
of non-compliance include, among other things, the liquidation of customers’ securities
without their prior consent and the failure of our sponsor representatives to perform adequate
due diligence on the issuer’s financial and accounting matters. Please see “Business – Legal
and Regulatory – Regulatory non-compliances.” Material incidents of non-compliance may
subject us to penalties or restrictions on our business activities, which could have a material
adverse effect on our business, results of operations or financial conditions.
We cannot assure you that we will be able to meet all the applicable regulatory
requirements, or comply with all the applicable regulations and guidelines at all times. Failure
to do so could result in sanctions, fines, penalties or other disciplinary actions, including,
among other things, a downgrade of our regulatory rating and limitations or prohibitions on our
future business activities, which may limit our ability to conduct pilot programs and launch
new businesses and harm our reputation, and consequently materially and adversely affect our
financial condition and results of operations.
New legislation or changes in the PRC regulatory requirements may affect our business
operations and prospects.
The PRC securities industry is a highly regulated industry and relevant rules and
regulations could be changed from time to time based on the development of the securities
markets. New rules and regulations, changes in the interpretation or enforcement of currently
existing rules and regulations may directly impact our business strategies and prospects. In
addition, changes in the rules and regulations could result in limitations on the business lines
we may conduct, modifications to our business practices or additional costs.
In particular, we have been selected by PRC regulators as one of the first securities firms
to develop new businesses in the PRC securities industry, such as stock index futures and
margin financing and securities lending businesses. However, as the PRC securities industry is
still evolving, most of the newly introduced businesses require further development and
improvement and there are some uncertainties regarding the enforcement of existing rules and
regulations in relation to these new businesses. Changes in the interpretation or enforcement
of rules and regulations for these new businesses may result in changes in, or the suspension
of, certain of our new businesses, which could have a material adverse effect on our business
and prospects.
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RISK FACTORS
Our risk management policies and procedures and internal controls, as well as the risk
management tools available to us, may not fully protect us against various risks inherent in
our business.
Currently, we follow our internal risk management framework and procedures to manage
our risk exposures, primarily including market risk, credit risk, liquidity risk and operational
risk. Our risk management policies, procedures and internal controls may not be adequate or
effective in mitigating our risk exposures or protecting us against unidentified or unanticipated
risks. In particular, some methods of managing risks are based upon observed historical market
behavior and our experience in the securities industry. These methods may fail to predict future
risk exposures, which could be significantly greater than those indicated by our historical
measures. Other risk management methods depend upon an evaluation of available information
regarding operating and market conditions and other matters, which may not be accurate,
complete, up-to-date or properly evaluated. In addition, in markets that are rapidly developing,
the information and experience data that we rely on for our risk management methods may
become quickly outdated as markets and regulations continue to evolve.
Management of operational, legal and regulatory risks requires, among other things,
policies and procedures to properly record and verify a large number of transactions and
business activities, as well as appropriate and consistent application of internal control
systems. These policies, procedures and internal controls may not be adequate or effective and
our business, financial condition and results of operations could be materially and adversely
affected by the corresponding increase in our risk exposures and actual losses as a result of
failures of our risk management policies, procedures and internal controls. The risk mitigation
strategies and techniques that we adopt may not be fully effective and may leave us exposed
to unidentified and unanticipated risks.
Furthermore, our risk management procedures and asset allocation decisions govern our
proprietary trading and investment portfolio. We may not have adequate risk management
tools, policies and procedures, and may not have sufficient access to resources and trading
counterparties to effectively implement our trading and investment risk mitigation strategies
and techniques related to our proprietary trading and investment portfolio. If our decision-
making process fails to effectively minimize losses while capturing gains, we may experience
significant financial losses that could materially and adversely affect our business, financial
condition and results of operations.
We may suffer significant losses from our credit exposures.
Our businesses are subject to risks that a customer or counterparty may fail to perform its
contractual obligations or that the value of collateral held to secure the obligations might be
inadequate. While we have internal policies and procedures designed to manage such risks,
these policies and procedures may not be fully effective. Please see “– Our risk management
policies and procedures and internal controls, as well as the risk management tools available
to us, may not fully protect us against various risks inherent in our business.” Our credit
exposure mainly results from our margin financing and securities lending business and our role
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RISK FACTORS
as a counterparty in financial and derivative contracts. Any material non-payment or
non-performance by a customer or counterparty could adversely affect our financial position,
results of operations and cash flows.
In addition, we have exposure to credit risk associated with our available-for-sale
investments and held-to-maturity financial assets. These investments may also be subject to
price fluctuations as a result of changes in the financial market’s assessment of the issuer’s
credit worthiness, delinquency and default rates and other factors, which could adversely affect
our financial condition and results of operations.
We face additional risks as we expand our product and service offerings.
We are committed to providing new products and services in order to strengthen our
leading market position in the PRC securities industry. We have recently expanded our business
to include, among others, margin financing and securities lending, stock index futures
brokerage and direct investment. These new businesses expose us to additional risks. For
example, although we have established a margin call risk control mechanism through which we
monitor the value of our customers’ collateral on a real-time basis, we may be subject to
substantial risks if borrowers of margin loans default on payments or if the value of the
collateral for the loans is insufficient to cover the margin loans due to significant market
volatility. We may also suffer losses on stock index futures contracts we enter into if stock
indices move unfavorably.
We will continue to expand our product and service offerings as permitted by the PRC
regulatory authorities, transact with new customers not in our traditional customer base and
enter into new markets. These activities expose us to new and potentially increasingly
challenging risks, including, but not limited to:
we may have insufficient experience or expertise in offering new products and
services and dealing with new counterparties and customers;
we may be subject to greater regulatory scrutiny, increased credit risks, market risks
and operational risks;
we may suffer from reputational concerns arising from dealing with less
sophisticated counterparties and customers;
we may be unable to provide customers with adequate levels of service for our new
products and services;
we may be unable to hire additional qualified personnel to support the offering of
a broader range of products and services;
our new products and services may not be accepted by our customers or meet our
profitability expectations;
we may be unable to obtain sufficient financing from internal and external sources
to support our business expansion; and
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RISK FACTORS
we may not be successful in enhancing our risk management capabilities and IT
systems to identify and mitigate all the risks associated with these new products and
services, new customers and new markets.
If we are unable to achieve the intended commercial results with respect to our offering
of new products and services, our business, financial condition, results of operations and
prospects could be materially and adversely affected.
Significant interest rate fluctuations could affect our financial condition and results of
operations.
Our exposure to interest rate risk is primarily associated with our interest income, interest
expenses and fixed income securities.
We earn interest income from bank deposits (including our own deposits and customer
deposits), margin financing and securities lending business and financial assets held under
resale agreements. Interest income from these sources are directly linked to the prevailing
market interest rates. During periods of declining interest rates, our interest income would
generally decrease.
We also make interest payments on deposits we hold on behalf of our customers, our
short-term borrowings and repurchase transactions. These interest expenses are directly linked
to the prevailing market interest rates. During periods of rising interest rates, our interest
expenses and financing costs would generally increase.
In addition, we hold fixed income securities. During periods of rising interest rates,
market prices and our investment returns on fixed income securities will generally decrease.
Significant interest rate fluctuations could reduce our interest income or returns on fixed
income investments, or increase our interest expenses, any of which could adversely affect our
financial condition and results of operations.
Our operations depend on key management and professional staff and our business may
suffer if we are unable to retain or replace them.
The success of our business is dependent to a large extent on our ability to attract and
retain key personnel who possess in-depth knowledge and understanding of the securities and
financial markets. These key personnel include members of our senior management, licensed
sponsor representatives, experienced investment managers and industry analysts, IT
specialists, sales staff and other personnel. Therefore, we devote considerable resources to
recruiting and retaining these personnel. However, the market for quality professionals is
highly competitive and we face increasing competition in recruiting and retaining these
individuals as other securities firms and financial institutions are competing for the same pool
of talent. Intense competition may require us to offer higher compensation and other benefits
in order to attract and retain qualified professionals, which could materially and adversely
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RISK FACTORS
affect our financial condition and results of operations. As a result, we may be unable to attract
or retain these personnel to achieve our business objectives and the failure to do so could
severely disrupt our business and prospects.
Some of our key employees are subject to non-compete arrangements. However, we
cannot assure you that such arrangements can be fully and legally enforced. If any of our senior
management or other key personnel joins or establishes a competing business, we may lose
some of our customers, which may have a material adverse effect on our business.
Future acquisitions and overseas expansions may not be successful.
In addition to organic growth, our current strategy involves growth through acquisitions
of complementary businesses and entry into strategic alliances. This strategy entails potential
risks that could have a material adverse effect on our business, financial condition, results of
operations and prospects, including:
unidentified or unanticipated liabilities or risks in the assets or businesses which we
may acquire;
inability to successfully integrate the products, services and personnel of the
businesses which we may acquire into our operations or to realize any expected cost
savings or other synergies from the acquisitions;
the need to incur additional indebtedness, which may reduce our cash available for
operations and other uses due to increased debt repayment obligations;
inability to retain employees and customer relationships;
customer overlap or loss of customers; and
diversion of management attention and other resources.
We may not be able to identify attractive acquisition opportunities, or make acquisitions
on attractive terms or obtain financing necessary to complete and support such acquisitions. In
addition, the anticipated future expansion of our operations through acquisitions will place a
significant strain on our management, internal controls and IT systems and resources, and
could also result in additional expenditure. In addition to training, managing and integrating
our workforce, we will need to continue to develop and improve our management and financial
controls. We cannot assure you that any of such acquisitions will result in long-term benefits
to us or that we will be able to effectively manage the integration and growth of our operations.
Failure to do so may materially and adversely affect our business, financial condition, results
of operations and prospects.
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RISK FACTORS
In addition, our overseas acquisitions (including acquisitions in Hong Kong) may expose
us to additional risks, including, among others:
difficulties with managing overseas (including Hong Kong) operations, including
complying with the various regulatory and legal requirements of different
jurisdictions;
different approval or license requirements;
challenges in providing products, services and support in these overseas (including
Hong Kong) markets;
challenges in managing our sales channels and overseas (including Hong Kong)
distribution network effectively;
differences in accounting treatment in different jurisdictions;
potential adverse tax consequences;
foreign exchange losses;
limited protection for intellectual property rights;
inability to effectively enforce contractual or legal rights;
changes in local government laws, regulations and policies; and
local political and economic instability or civil unrest.
If we are unable to effectively avoid or mitigate these risks, our ability to expand our
business overseas (including Hong Kong) will be impaired, which could have a material and
adverse effect on our business, financial condition, results of operations and prospects.
We or our landlords do not possess the relevant land use rights certificates or building
ownership certificates for some of the properties owned or leased by us.
Properties owned or leased by us primarily consist of offices, residential and ancillary
buildings. For some of the properties we occupy in the PRC, we or our landlords have not yet
obtained land use rights certificates and/or building ownership certificates that allow us to use,
transfer or mortgage the properties freely. As of December 31, 2011, among the 92 properties
in the PRC and two properties in Hong Kong that we owned, (i) nine properties had the relevant
building ownership certificates and administrative allocated land use rights certificates, with a
gross floor area of approximately 7,221 square meters, representing 5.3% of the aggregate
gross floor area of the properties we owned; (ii) 16 properties had building ownership
certificates but not the relevant land use rights certificates, with a gross floor area of
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RISK FACTORS
approximately 18,642 square meters, representing 13.7% of the aggregate gross floor area of
the properties we owned; and (iii) four properties were without proper building ownership
certificates and land use rights certificates, with a gross floor area of approximately 6,942
square meters, representing 5.1% of the aggregate gross floor area of the properties we owned.
As of December 31, 2011, for our leased properties, our landlords had not obtained proper title
certificates for 34 buildings with a gross floor area of approximately 33,509 square meters,
accounting for approximately 13.3% of the total gross floor area of the buildings we occupy.
Of these 34 buildings, our landlords of 11 buildings, accounting for approximately 3.0% of the
total gross floor area of the buildings we occupy, had not agreed to indemnify us for any
potential liabilities we would incur as a result of the title defects. Please see “Business –
Properties.”
We are in the process of applying for the remaining building ownership certificates and/or
the land use rights certificates for our owned properties and working with our landlords to cure
title defects, but the timing for obtaining such relevant certificates is beyond our control.
Before we or our landlords obtain the proper building ownership certificates and/or the land
use rights certificates for such properties, our rights in relation to such properties might not be
entirely protected. Any dispute or claim related to the title of the properties owned or leased
by us may result in us relocating our offices.
We cannot assure you that our use and occupation of the relevant land and buildings will
not be challenged, and there is no assurance that we will be able to secure alternative properties
for our business if we are required to relocate. If we or our landlords cannot obtain the relevant
certificates in a timely manner and our legal right to use or occupy the relevant properties is
challenged, we may incur additional relocation costs, have to pay government fines, or our
business operations may be disrupted, any of which may have a material adverse effect on our
business, financial condition, results of operations and prospects.
We may not be able to detect and prevent fraud or other misconduct committed by our
employees, representatives, agents, customers or other third parties.
We may be exposed to fraud or other misconduct committed by our employees,
representatives, agents, customers or other third parties that could subject us to financial losses
and sanctions imposed by governmental authorities, as well as adversely affect our reputation.
Our internal control procedures are designed to monitor our operations and ensure overall
compliance. During the Track Record Period, we did not experience any unauthorized trades
or serious trade errors committed by our employees or other misconduct committed by our
representatives, agents and customers that had a material adverse effect on our business,
financial condition and results of operations. However, our internal control procedures may be
unable to identify all incidents of non-compliance or suspicious transactions in a timely manner
or at all. Furthermore, it is not always possible to detect and prevent fraud and other
misconduct, and the precautions we take to prevent and detect such activities may not be
effective. We cannot assure you that fraud or other misconduct will not occur in the future. If
such fraud or other misconduct does occur, it may cause negative publicity as a result. Our
failure to detect and prevent fraud and other misconduct may have a material adverse effect on
our business reputation, financial condition and results of operations.
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RISK FACTORS
We may not be able to fully detect money laundering and other illegal or improper activities
in our business operations on a timely basis.
We are required to comply with applicable anti-money laundering, anti-terrorism laws and
other regulations in the PRC and overseas (including Hong Kong). The PRC Anti-money
Laundering Law (N-N”l QqTW Sm “ l ) requires financial institutions to establish sound
internal control policies and procedures with respect to anti-money laundering monitoring and
reporting activities. Such policies and procedures require us to, among other things, establish
or designate an independent anti-money laundering department, establish a customer
identification system in accordance with relevant rules, record the details of customer activities
and report suspicious transactions to relevant authorities. Please see “Regulatory Environment
– Regulation on Anti-money Laundering” and “Regulatory Environment – Hong Kong
Regulatory Overview – Anti-Money Laundering and Terrorist Financing.”
While we have adopted policies and procedures aimed at detecting and preventing the use
of our business platforms to facilitate money laundering activities and terrorist acts, such
policies and procedures in some cases have only been recently adopted and may not completely
eliminate instances in which we may be used by other parties to engage in money laundering
and other illegal or improper activities. In the event that we fail to fully comply with applicable
laws and regulations, the relevant government agencies may freeze our assets or impose fines
or other penalties on us. We cannot assure you that there will not be failures in detecting money
laundering or other illegal or improper activities which may adversely affect our business
reputation, financial condition and results of operations.
We rely heavily on IT systems to process and record our transactions and offer online
products and services.
Our operations rely heavily on the ability of our IT systems to accurately process a large
number of transactions across numerous and diverse markets and our broad range of products
in a timely manner. Our system for processing securities transactions is highly automated. A
prolonged disruption to or failure of our information processing or communications systems
would limit our ability to process transactions. This would impair our ability to service our
customers and execute trades on behalf of customers and for our own account, which could
materially and adversely affect our competitiveness, financial condition and results of
operations.
The proper functioning of our financial control, risk management, accounting, customer
service and other data processing systems, together with the communication networks between
our headquarters and branches, are critical to our business and our ability to compete
effectively. We have established back-up centers in Shanghai and Shenzhen to carry on
principal functions in the event of a catastrophe or failure of our systems, including those
caused by human error. However, we cannot assure you that our operations will not be
materially disrupted if any of our systems fail.
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RISK FACTORS
In addition, the securities industry is characterized by rapidly changing technology.
Online securities trading platforms and other new channels such as mobile devices are
becoming increasingly popular among our customers due to their convenience and user-
friendliness. We rely heavily on technology, particularly the Internet, to provide high quality
online services. However, our technology operations are vulnerable to disruptions from human
error, natural disasters, power failure, computer viruses, spam attacks, unauthorized access and
other similar events. Disruptions to or instability of our technology or external technology that
allows our customers to use our online products and services could harm our business and our
reputation.
Our business is susceptible to the operational failure of third parties.
We face the risk of operational failure or termination of any of the exchanges,
depositaries, clearing agents or other financial intermediaries we use to facilitate our securities
transactions. We were not subject to any material operational failure of third parties during the
Track Record Period. However, any future operational failure or termination of the particular
financial intermediaries that we use could adversely affect our ability to execute transactions,
service our customers and manage our exposure to various risks.
In addition, as our interconnectivity with our customers grows, our business also relies
heavily on our customers’ use of their own systems, such as personal computers, mobile
devices and the Internet, and we will increasingly face the risk of operational failure in
connection with our customers’ systems.
We may be subject to litigation and regulatory investigations and proceedings and may not
always be successful in defending ourselves against such claims or proceedings.
The securities industry faces substantial litigation and regulatory risks, including the risk
of lawsuits and other legal actions relating to information disclosure, sales or underwriting
practices, product design, fraud and misconduct, as well as protection of personal and
confidential information of our customers. We may be subject to arbitration claims and lawsuits
in the ordinary course of our business. We may also be subject to inquiries, investigations, and
proceedings by regulatory and other governmental agencies. Actions brought against us may
result in settlements, injunctions, fines, penalties or other results adverse to us that could harm
our reputation. Even if we are successful in defending ourselves against these actions, the costs
of such defense may be significant to us. In market downturns, the number of legal claims and
amount of damages sought in litigation and regulatory proceedings may increase. A significant
judgment or regulatory action against us or a disruption in our business arising from adverse
adjudications in proceedings against our directors, officers or employees would have a material
adverse effect on our liquidity, business, financial condition, results of operations and
prospects.
A failure to appropriately identify and address conflicts of interests could adversely affect
our business.
As we expand the scope of our business and our client base, it is critical for us to be able
to address potential conflicts of interest, including situations where two or more interests
within our business legitimately exist but are in competition or conflict. Please see “Business
– Risk Management and Internal Control Policies and Procedures – Conflicts of Interest.”
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RISK FACTORS
We have extensive internal control and risk management procedures that are designed to
identify and address conflicts of interest. However, appropriately identifying and dealing with
potential conflicts of interest is complex and difficult. Our failure to manage conflicts of
interest could harm our reputation and erode client confidence in us. In addition, potential or
perceived conflicts of interest may also give rise to litigation or regulatory actions. Any of the
foregoing could adversely affect our business, financial condition and results of operations.
We may be subject to liability and regulatory action if we are unable to protect personal and
other confidential information of our customers.
Various laws, regulations and rules require us to protect the personal data and confidential
information of our customers. The relevant authorities may issue sanctions or orders against us
if we fail to protect the personal information of our customers, and we may have to provide
compensation for economic loss arising from our failure to protect the personal information of
our customers in accordance with relevant laws and regulations. During the Track Record
Period, we did not experience any material failure to protect confidential information of our
customers. Incidents of mishandling personal information or failure to protect confidential
information of our customers could create a negative public or customer perception of our
operations or our brand name, which may materially and adversely affect our reputation and
prospects.
RISKS RELATING TO THE PRC
Economic, political and social conditions in the PRC and government policies could affect
our business and prospects.
A substantial majority of our assets are located in the PRC, and a substantial majority of
our revenue is derived from our businesses in the PRC. Accordingly, our financial condition,
results of operations and prospects are, to a material extent, subject to economic, political and
legal developments in the PRC. The PRC economy differs from the economies of developed
countries in many respects, including, among other things, government involvement, level of
economic development, growth rate, foreign exchange controls and resources allocation.
Although the PRC economy has been transitioning from a planned economy to a more
market-oriented economy for more than three decades, a substantial portion of productive
assets in the PRC are still owned by the PRC government. The PRC government also exercises
significant control over the economic growth of the PRC through allocating resources,
controlling payments of foreign currency-denominated obligations, setting monetary policy
and providing preferential treatment to particular industries or companies. In recent years, the
PRC government has implemented measures emphasizing the utilization of market forces in
economic reform, the reduction of state ownership of productive assets and the establishment
of sound corporate governance practices in business enterprises. These economic reform
measures may be adjusted or modified, or applied inconsistently from industry to industry or
across different regions of the country. As a result, we may not benefit from some of these
measures.
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RISK FACTORS
The PRC government has the power to implement macroeconomic measures affecting the
PRC economy. For example, to mitigate the negative impact from the global financial crisis
and economic downturn in 2008, the PRC government implemented a series of macroeconomic
measures and a moderately loose monetary policy between September 2008 to the end of 2009,
which included announcing an RMB4.0 trillion economic stimulus package and reducing
benchmark interest rates. In 2010 and 2011, the PRC government introduced a number of
monetary tightening measures to curb the overheated real estate markets and increasing
inflation in the PRC. The PBOC announced several increases in benchmark interest rates for
general lending and the deposit reserve ratio for commercial banks in the PRC.
In recent years, the PRC has been one of the world’s fastest growing economies as
measured by GDP growth. However, the PRC may not be able to sustain historical growth
rates. For example, the sub-prime mortgage crisis that broke out in the U.S. in 2008 affected
global financial markets and caused significant turmoil in the global financial and credit
markets. From the second half of 2008 to mid-2009, the world’s largest economies, including
the U.S., Europe and Japan fell into severe economic recessions, and economic growth in the
PRC, India and other emerging economies also experienced a slowdown. The GDP growth in
the PRC declined from 14.2% in 2007 to 9.2% in 2009. Future uncertainties in the PRC and
global economy may adversely affect our financial condition and results of operations.
The PRC legal system has inherent uncertainties that could limit the legal protection
available to you.
We are incorporated under the laws of the PRC. The PRC legal system is based on written
statutes. While prior court decisions may be cited for reference, they have limited precedential
value. Since 1979, the PRC government has promulgated laws, rules and regulations dealing
with economic matters, such as foreign investment, corporate organization and governance,
commerce, taxation and trade. However, because these laws, rules and regulations are
relatively new, and because of the relatively limited volume of published cases and their
non-binding nature, interpretation and enforcement of these laws, rules and regulations involve
significant uncertainties.
Our Articles of Association provide that disputes between holders of H Shares and us, our
Directors, Supervisors or senior officers or holders of A Shares, arising out of our Articles of
Association or any rights or obligations conferred or imposed upon us by the Company Law
and related rules and regulations concerning our affairs, are to be resolved through arbitration
rather than by a court of law. A claimant may elect to submit a dispute to either the China
International Economic and Trade Arbitration Commission or the Hong Kong International
Arbitration Center in accordance with its applicable rules. Awards that are made by the PRC
arbitral authorities are recognized under the Arbitration Ordinance of Hong Kong and can be
enforced in Hong Kong. Hong Kong arbitration awards may be recognized and enforced by
PRC courts, subject to the satisfaction of certain PRC legal requirements. However, to our
knowledge, no action has been brought in the PRC by any holder of H shares to enforce an
arbitral award and no assurance can be given as to the outcome of any action brought in the
PRC by any holder of H shares to enforce a Hong Kong arbitral award made in favor of holders
– 52 –
RISK FACTORS
of H shares. Moreover, to our knowledge, there has not been any published report of judicial
enforcement in the PRC by holders of H shares of their rights under the articles of association
of any PRC issuer or the Company Law.
In addition, PRC laws, rules and regulations applicable to companies listed overseas do
not distinguish among minority and controlling shareholders in terms of their rights and
protections and our minority shareholders may not have the same protections afforded to them
by companies incorporated under the laws of the United States and certain other jurisdictions.
You may experience difficulties in effecting service of legal process and enforcing judgments
against us and our management.
We are a company incorporated under the laws of the PRC and a substantial portion of
our assets and our subsidiaries are located in the PRC. In addition, most of our Directors,
Supervisors and executive officers reside within the PRC and the assets of our Directors and
officers may be located within the PRC. As a result, it may not be possible to effect service of
process within the United States or elsewhere outside the PRC upon most of our Directors,
Supervisors and executive officers, including with respect to matters arising under the U.S.
federal securities laws or applicable state securities laws. Moreover, the PRC does not have
treaties providing for the reciprocal enforcement of judgments of courts with the United States,
the United Kingdom, Japan or most other Western countries. In addition, Hong Kong has no
arrangement for the reciprocal enforcement of judgments with the United States. As a result,
recognition and enforcement in the PRC or Hong Kong of judgments of a court in the United
States and any of the other jurisdictions mentioned above in relation to any matter that is not
subject to a binding arbitration provision may be difficult or impossible. In addition, although
we will be subject to the Hong Kong Listing Rules and the Takeovers Code upon the listing
of our H Shares on the Hong Kong Stock Exchange, the holders of H Shares will not be able
to bring actions on the basis of violations of the Hong Kong Listing Rules and must rely on
the Hong Kong Stock Exchange to enforce its rules.
Investments in PRC securities firms are subject to ownership restrictions that may adversely
affect the value of your investment.
Investments in PRC securities firms are subject to ownership restrictions. Prior approval
from the CSRC is required for any person or entity to hold 5% or more of the registered capital
or total issued shares of a PRC securities firm. If a shareholder of a PRC securities firm
increases its shareholding above the 5% threshold without obtaining prior approval from the
CSRC, such shareholder’s voting right is invalid to the extent that it exceeds the 5% threshold
and it could be subject to CSRC sanctions, such as the correction of such misconduct, fines and
confiscation of any related gains. Current ownership restrictions and future changes in
ownership restrictions as imposed by the PRC government may materially and adversely affect
the value of your investment.
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RISK FACTORS
You may be subject to PRC taxation.
Under the applicable PRC tax laws, the dividends we pay to non-PRC resident individual
holders of H shares (“non-resident individual holders”), and gains realized through the sale or
transfer by other means of H shares by such shareholders, are both subject to PRC individual
income tax at a rate of 20%, unless reduced by the applicable tax treaties or arrangements.
Under applicable PRC tax laws, the dividends we pay to, and gains realized through the sale
or transfer by other means of H shares by, non-PRC resident enterprise holders of H shares are
both subject to PRC enterprise income tax at a rate of 10%, unless reduced by applicable tax
treaties or arrangements.
Pursuant to the Circular on Questions Concerning Tax on the Profits Earned by
Foreign Invested Enterprises, Foreign Enterprises and Individual Foreigners from the
Transfer of Shares (Equity Interests) and on Dividend Income (Guo Shui Fa [1993] No.045)
(eY UFbO im0 Y W O imTY | P N”S_yh (k )Ie6vTob@z e6UOLv
w(W z v| [1993]045 )) issued by the SAT, non-resident individual holders were temporarily
exempted from PRC individual income tax for the dividends or bonuses paid by issuers of H
shares. However, such circular was repealed by the Announcement on the List of Fully or
Partially Invalid and Repealed Tax Regulatory Documents (eQlOHQheY1eH^kb0 R hk
Y1eH^kbvz e6‰’eNv“ vQlTJ ) dated January 4, 2011.
Pursuant to the Circular on Questions Concerning the Collection of Individual Income
Tax following the Repeal of Guo Shui Fa [1993] No. 045 (eW z v| [1993]045eN^kb_
g P N”b@z _ OLv w ) dated June 28, 2011 issued by the SAT, dividends paid by H
share companies in the PRC to a non-resident individual holder are subject to PRC individual
income tax at the rates determined in accordance with applicable tax treaties or arrangements
between the PRC and the shareholder’s resident jurisdiction which range from 5% to 20%. The
Circular states that the tax rate which is generally applicable to dividend income as stipulated
in relevant tax treaties or arrangements is 10%. Therefore, we can withhold 10% of the
dividend without seeking prior consent from the PRC tax authorities. Any non-resident
individual holder residing in a jurisdiction where the applicable tax rate for such dividends, as
stipulated in the relevant tax treaties or arrangements, is lower than 10% shall be entitled to
a refund of the excess tax withheld by us. However, such refund shall be subject to the approval
of the PRC tax authority. For a non-resident individual holder residing in a jurisdiction where
the applicable tax rate for such dividends, as stipulated in the relevant tax treaties or
arrangements, is more than 10% but less than 20%, we will withhold the individual income tax
at the applicable tax rate without seeking prior consent from the PRC tax authorities. For a
non-resident individual holder residing in a jurisdiction where the applicable tax rate for such
dividends, as stipulated in the relevant tax treaties or arrangements, is 20% or where there is
no relevant tax treaty or arrangement with the PRC, we can withhold the individual income tax
at the rate of 20%.
Despite the arrangements mentioned above, there are significant uncertainties as to the
interpretation and application of applicable PRC tax laws and rules due to several factors,
including whether the relevant preferential tax treatment will be revoked in the future such that
all non-resident individual holders will be subject to PRC individual income tax at a flat rate
of 20%.
– 54 –
RISK FACTORS
In addition, it is also unclear whether and how the PRC individual income tax and
enterprise income tax on gains realized by non-resident holders of H shares through the sale,
or transfer by other means, of H shares will be collected by the PRC tax authorities in the
future, although such tax has not been collected by the PRC tax authorities in practice.
Considering these uncertainties, non-resident holders of our H Shares should be aware that they
may be obligated to pay PRC income tax on the dividends and gains realized through sale or
transfers of the H Shares. For additional information, please see “Appendix III – Taxation and
Foreign Exchange” to this prospectus.
Government control of currency conversion may adversely affect the value of your
investments.
Most of our revenue is denominated in Renminbi, which is also our reporting currency.
Renminbi is not a freely convertible currency. A portion of our cash may be required to be
converted into other currencies in order to meet our foreign currency needs, including cash
payments on declared dividends, if any, on our H Shares. Under China’s existing foreign
exchange regulations, following the completion of this Global Offering, we will be able to pay
dividends in foreign currencies without prior approval from the SAFE by complying with
various procedural requirements.
However, the PRC government may restrict future access to foreign currencies for current
account transactions at its discretion. If this were to occur, we might not be able to pay
dividends to the holders of our H Shares in foreign currencies. On the other hand, foreign
exchange transactions under capital account in the PRC continue to be not freely convertible
and require the approval of the SAFE. These limitations could affect our ability to obtain
foreign currencies through equity financing, or to obtain foreign currencies for capital
expenditures.
Future fluctuations in the value of the Renminbi could have a material adverse effect on our
financial condition and results of operations.
While we generate most of our revenue in the PRC, we also offer securities products and
services in Hong Kong and Macau to overseas customers. A portion of our revenue, expenses
and bank borrowings are denominated in Hong Kong dollars, U.S. dollars and other foreign
currencies, although our functional currency is the Renminbi. As a result, fluctuations in
exchange rates, particularly between the Renminbi, Hong Kong dollar or U.S. dollar, could
affect our profitability and may result in foreign currency exchange losses of our foreign
currency-denominated assets and liabilities.
The exchange rate of the Renminbi against the U.S. dollar and other currencies fluctuates
and is affected by, among other things, changes in the PRC’s and international political and
economic conditions and the PRC government’s fiscal and currency policies. Since 1994, the
conversion of the Renminbi into foreign currencies, including the Hong Kong dollar and U.S.
dollar, has been based on rates set daily by the PBOC based on the previous business day’s
inter-bank foreign exchange market rates and exchange rates in global financial markets. From
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RISK FACTORS
1994 to July 20, 2005, the official exchange rate for the conversion of the Renminbi to U.S.
dollars was generally stable. On July 21, 2005, the PRC government adopted a more flexible
managed floating exchange rate system to allow the value of the Renminbi to fluctuate within
a regulated band that is based on market supply and demand with reference to a basket of
currencies. From July 21, 2005 to September 30, 2011, the value of the Renminbi appreciated
by approximately 30.2% against the U.S. dollar. On June 19, 2010, the PBOC announced that
the PRC government would reform the Renminbi exchange rate regime and increase the
flexibility of the exchange rate. There remains significant international pressure on the PRC
government to adopt a more flexible currency policy, which could result in further and more
significant appreciation of the Renminbi against the U.S. dollar. We cannot assure you that the
Renminbi will not experience significant appreciation against the U.S. dollar in the future.
Currently, we have not entered into any hedging transactions to mitigate our exposure to
foreign exchange risk. As a result, any significant increase in the value of the Renminbi against
foreign currencies could reduce the value of our foreign currency denominated revenue and
assets. Following the Global Offering, our exposure to risks associated with foreign currency
fluctuations will further increase as the net proceeds from the Global Offering are expected to
be deposited in currencies other than the Renminbi until we obtain the necessary approvals
from relevant PRC regulatory authorities to convert the same into Renminbi.
Any future occurrence of force majeure events, natural disasters or outbreaks of contagious
diseases in the PRC may have a material adverse effect on our business operations, financial
condition and results of operations.
Any future occurrence of force majeure events, natural disasters or outbreaks of
epidemics and contagious diseases, including avian influenza, severe acute respiratory
syndrome, swine influenza caused by the H1N1 virus or H1N1 influenza, may materially and
adversely affect our business and results of operations. In 2009, there were reports of the
occurrence of H1N1 influenza in certain regions of the world, including the PRC and Hong
Kong, where we operate our business. An outbreak of an epidemic or contagious disease could
result in a widespread health crisis and restrict the level of business activities in affected areas,
which may, in turn, adversely affect our business. Moreover, the PRC has experienced natural
disasters like earthquakes, floods and droughts in the past few years. Any future occurrence of
severe natural disasters in the PRC may materially and adversely affect its economy and
therefore our business. We cannot assure you that any future occurrence of natural disasters or
outbreaks of epidemics and contagious diseases, including avian influenza, severe acute
respiratory syndrome, H1N1 influenza or other epidemics, or the measures taken by the PRC
government or other countries in response to such contagious diseases, will not seriously
disrupt our operations or those of our customers, which may have a material and adverse effect
on our business and results of operations.
– 56 –
RISK FACTORS
RISKS RELATING TO THE GLOBAL OFFERING
Our A Shares were listed in China in 2007 and the characteristics of the A share and H share
markets may differ.
Our A Shares were listed on the Shanghai Stock Exchange on July 31, 2007. Following
the Global Offering, our A Shares will continue to be traded on the Shanghai Stock Exchange
and our H Shares will be traded on the Hong Kong Stock Exchange. Under current PRC laws
and regulations, without approval from the relevant regulatory authorities, our H Shares and A
Shares are neither interchangeable nor fungible, and there is no trading or settlement between
the H share and A share markets. With different trading characteristics, the H share and A share
markets have divergent trading volumes, liquidity and investor bases, as well as different levels
of retail and institutional investor participation. As a result, the trading performance of our H
Shares and A Shares may not be comparable. Nonetheless, fluctuations in the price of our A
Shares may adversely affect the price of our H Shares, and vice versa. Due to the different
characteristics of the H share and A share markets, the historical prices of our A Shares may
not be indicative of the performance of our H Shares. You should therefore not place undue
reliance on the prior trading history of our A Shares when evaluating an investment in our H
Shares.
There has been no prior public market for our H Shares and the liquidity and market price
of our H Shares may be volatile.
Prior to the Global Offering, there has been no public market for our H Shares. The initial
issue price range for our H Shares was the result of negotiations between us and the Joint
Global Coordinators on behalf of the Underwriters, and the Offer Price may differ significantly
from the market price for our H Shares following the Global Offering. We have applied for
listing of, and permission to deal in, our H Shares on the Hong Kong Stock Exchange. A listing
on the Hong Kong Stock Exchange, however, does not guarantee that an active and liquid
trading market for our H Shares will develop, or if it does develop, will be sustained following
the Global Offering or that the market price of our H Shares will not decline following the
Global Offering. Furthermore, the price and trading volume of our H Shares may be volatile.
The following factors may affect the volume and price at which our H Shares will trade:
actual or anticipated fluctuations in our revenue and results of operations;
news regarding recruitment or loss of key personnel by us or our competitors;
announcements of competitive developments, acquisitions or strategic alliances in
our industry;
changes in earnings estimates or recommendations by financial analysts;
potential litigation or regulatory investigations;
general market conditions or other developments affecting us or our industry;
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RISK FACTORS
the operating and stock price performance of other companies, other industries and
other events or factors beyond our control; and
the release of lock-up or other transfer restrictions on our outstanding H Shares or
sales or perceived sales of additional H Shares by us or other shareholders.
Moreover, the securities market has from time to time experienced significant price and
volume fluctuations that were unrelated or not directly related to the operating performance of
the underlying companies. These broad market and industry fluctuations may have a material
and adverse effect on the market price and trading volume of our H Shares.
Future sales or perceived sales of substantial amounts of our H Shares in the public market
or the conversion of our A Shares into H Shares could have a material adverse effect on the
prevailing market price of our H Shares and our ability to raise additional capital in the
future.
The market price of our H Shares could decline as a result of substantial future sales of
our H Shares or other securities relating to Shares in the public market. Such a decline could
also occur with the issuance of new Shares or other securities relating to our Shares, or the
perception that such sales or issuances may occur. Future sales, or perceived sales, of
substantial amounts of our Shares could materially and adversely affect the prevailing market
price of our H Shares and our ability to raise future capital at a favorable time and price. Our
shareholders would experience a dilution in their holdings upon the issuance or sale of
additional securities for any purpose.
In addition, according to stipulations made by the CSRC, our A Shares may be transferred
to overseas investors and such transferred shares may be listed or traded on an overseas stock
exchange, provided certain conditions are fulfilled and specific procedures are carried out.
Please see “Share Capital – Share Capital – Transfer of Our Company’s A Shares for Listing
and Trading on the Hong Kong Stock Exchange as H Shares.” Conversion of a substantial
number of our A Shares into H Shares, or the perception that such conversion may occur, could
materially and adversely affect the price of our H Shares. In addition, assuming the
Over-allotment Option is not exercised, 122,940,000 A Shares will be converted into H Shares
and transferred to the NSSF in connection with the Global Offering. The NSSF has not entered
into any lock-up agreement with us or the Underwriters and would be free to sell its H Shares
any time after the Global Offering. This may also materially and adversely affect the prevailing
market price of our H Shares and our ability to raise capital in the future at a time and price
favorable to us.
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RISK FACTORS
As the Offer Price of our H Shares is higher than our net tangible book value per share,
purchasers of our H Shares in the Global Offering may experience immediate dilution upon
such purchases.
As the Offer Price of our H Shares is higher than the net tangible assets per share
immediately prior to the Global Offering, purchasers of our H Shares in the Global Offering
will experience an immediate dilution in pro forma adjusted net tangible assets of HK$3.73 per
H Share (assuming an Offer Price of HK$10.83 per H Share, being the mid-point of the stated
Offer Price range, and assuming the Over-allotment Option for the Global Offering is not
exercised). Our existing Shareholders will receive an increase in the pro forma adjusted
consolidated net tangible asset value per share of their shares. In addition, holders of our H
Shares may experience further dilution of their interest if the Underwriters exercise the
Over-allotment Option or if we issue additional shares in the future to raise additional capital.
Dividends declared in the past may not be indicative of our dividend policy in the future.
In 2009 and 2010, we declared cash dividends of RMB1,645.6 million and RMB1,234.2
million, respectively. With respect to cash dividends for 2011, our Board has proposed, pending
Shareholders’ approval at the forthcoming annual general meeting, that a cash dividend of
RMB0.15 per share, or a total of RMB1,234.2 million based on the number of our A Shares in
issue as of December 31, 2011, be distributed to holders of our A Shares, but not to the holders
of our H Shares. Under the applicable PRC laws, dividends may be paid only out of
distributable profits. Distributable profits means, as determined under PRC GAAP or IFRS,
whichever is lower, the net profits for a period, plus the distributable profits or net of the
accumulated losses, if any, at the beginning of such period, less appropriations to statutory
surplus reserve (determined under PRC GAAP) and discretionary surplus reserve (as approved
by our shareholders’ meeting). As a result, we may not have sufficient profit to enable us to
make future dividend distributions to our shareholders, even if one of our financial statements
prepared in accordance with PRC GAAP or IFRS indicates that our operations have been
profitable.
Certain facts and statistics derived from government and third-party sources contained in
this prospectus may not be reliable.
We have derived certain facts and other statistics in this prospectus, particularly those
relating to the PRC, the PRC economy and the industry in which we operate, from information
provided by the PRC and other government agencies, industry associations, independent
research institutes or other third-party sources. While we have taken reasonable care in the
reproduction of the information, it has not been prepared or independently verified by us, the
underwriters or any of our or their respective affiliates or advisors and, therefore, we cannot
assure you as to the accuracy and reliability of such facts and statistics, which may not be
consistent with other information compiled inside or outside the PRC. The facts and other
statistics include the facts and statistics included in the sections entitled “Risk Factors,”
“Industry Overview” and “Business.” Due to possibly flawed or ineffective collection methods
or discrepancies between published information and market practice and other problems, the
statistics herein may be inaccurate or may not be comparable to statistics produced for other
economies and you should not place undue reliance on them. Furthermore, we cannot assure
you that they are stated or compiled on the same basis, or with the same degree of accuracy,
as similar statistics presented elsewhere. In all cases, you should consider carefully how much
weight or importance you should attach to or place on such facts or statistics.
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RISK FACTORS
You should not place any reliance on any information released by us in connection with the
listing of our A Shares on the Shanghai Stock Exchange or with the listing of the shares of
our subsidiary, Haitong International Securities, on the Hong Kong Stock Exchange or
other media outlets.
Following the listing of our A Shares on the Shanghai Stock Exchange, we have been
subject to periodic reporting and other information disclosure requirements in the PRC. In
addition, shares of our subsidiary, Haitong International Securities, are listed on the Hong
Kong Stock Exchange, which means Haitong International Securities is subject to periodic
reporting and other information disclosure requirements in Hong Kong. As a result, from time
to time we publicly release information relating to (i) us on the Shanghai Stock Exchange or
other media outlets designated by the Shanghai Stock Exchange; and (ii) Haitong International
Securities on the Hong Kong Stock Exchange or other media outlets designated by the Hong
Kong Stock Exchange. However, the information announced by us in connection with our A
Shares or by Haitong International Securities in connection with its shares is based on
regulatory requirements of the securities authorities and market practices in the PRC and Hong
Kong, as applicable, which are different from those applicable to the Global Offering. Such
information does not and will not form a part of this prospectus. As a result, prospective
investors in our H Shares are reminded that, in making their investment decisions as to whether
to purchase our H Shares, they should rely only on the financial, operating and other
information included in this prospectus and the Application Forms. By applying to purchase
our H Shares in the Global Offering, you will be deemed to have agreed that you will not rely
on any information other than that contained in this prospectus, the Application Forms and any
formal announcements made by us in Hong Kong with respect to the Global Offering.
You should read the entire prospectus carefully and we strongly caution you not to place any
reliance on any information contained in press articles or other media regarding us and the
Global Offering.
Prior to the publication of this prospectus, there had been press and media coverage
regarding us and the Global Offering, which contained, among other things, certain financial
information, projections, valuations and other forward-looking information about us and the
Global Offering. We have not authorized the disclosure of any such information in the press
or media and do not accept responsibility for the accuracy or completeness of such press
articles or other media coverage. We make no representation as to the appropriateness,
accuracy, completeness or reliability of any of the projections, valuations or other forward-
looking information about us. To the extent such statements are inconsistent with, or conflict
with, the information contained in this prospectus, we disclaim responsibility for them.
Accordingly, prospective investors are cautioned to make their investment decisions on the
basis of the information contained in this prospectus only and should not rely on any other
information.
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WAIVERS AND EXEMPTION FROM COMPLIANCE
WITH THE HONG KONG LISTING RULES
PUBLIC FLOAT REQUIREMENTS
Rules 8.08(1)(a) and (b) of the Hong Kong Listing Rules require that there must be an
open market in the securities for which listing is sought and for a sufficient public float of an
issuer’s listed securities to be maintained. This normally means that (i) at least 25% of the
issuer’s total issued share capital must at all times be held by the public; and (ii) where an
issuer has more than one class of securities apart from the class of securities for which listing
is sought, the total securities of the issuer held by the public (on all regulated market(s),
including the Hong Kong Stock Exchange) at the time of listing must be at least 25% of the
issuer’s total issued share capital. However, the class of securities for which listing is sought
must not be less than 15% of the issuer’s total issued share capital and must have an expected
market capitalization at the time of listing of not less than HK$50 million.
We have applied to the Hong Kong Stock Exchange for, and the Hong Kong Stock
Exchange has granted us, a waiver from strict compliance with the requirements under Rule
8.08(1) of the Hong Kong Listing Rules to allow a minimum public float for the H shares to
be the higher of (i) 10% of the total issued Shares or (ii) such a percentage of H Shares held
by the public immediately after completion of the Global Offering, as increased by the H
Shares which may be issued upon the exercise of the Over-allotment Option and the transfer
and conversion of the relevant state-owned shares into H Shares pursuant to the PRC
regulations on reduction of state-owned shares.
The above waiver is subject to the condition that we will make appropriate disclosure of
the lower prescribed percentage of public float of H Shares and confirm sufficiency of public
float of H Shares in successive annual reports after Listing. In the event that the public float
percentage falls below the minimum percentage prescribed by the Hong Kong Stock Exchange,
we will take appropriate steps to ensure that the minimum percentage of public float prescribed
by the Hong Kong Stock Exchange is complied with.
MANAGEMENT PRESENCE
According to Rule 8.12 and Rule 19A.15 of the Hong Kong Listing Rules, our Company
must have sufficient management presence in Hong Kong. This usually means that at least two
of our executive Directors must be ordinarily residing in Hong Kong. Our head office and
substantially all of our business operations are based, managed and conducted in the PRC. As
the executive Directors play very important roles in our Company’s business operations, it is
in our best interests for them to be based in or near the places where our Group has significant
operations. As such, our Company does not, and in the foreseeable future, will not, have
executive Directors ordinarily resident in Hong Kong. Currently, both of our executive
Directors, Mr. Wang Kaiguo and Mr. Li Mingshan, are ordinarily resident in the PRC.
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WAIVERS AND EXEMPTION FROM COMPLIANCE
WITH THE HONG KONG LISTING RULES
Accordingly, we have applied to the Hong Kong Stock Exchange for, and the Hong Kong
Stock Exchange has granted us, a waiver from strict compliance with Rule 8.12 and Rule
19A.15 of the Hong Kong Listing Rules. We have made arrangements to maintain effective
communication between the Hong Kong Stock Exchange and us as follows:
we have designated Mr. Jin Xiaobin, one of our joint company secretaries, and Mr.
Wang Kaiguo, one of our Company’s executive Directors, as our authorized
representatives and they will act as our Company’s principal channel of
communication with the Hong Kong Stock Exchange and would be readily
contactable by the Hong Kong Stock Exchange;
both of the authorized representatives of our Company have means of contacting all
Directors (including independent non-executive Directors) promptly at all times and
when the Hong Kong Stock Exchange wishes to contact a Director for any reason;
we have provided the authorized representatives and the Hong Kong Stock
Exchange with the contact details of each Director, including mobile phone
numbers, office phone numbers, e-mail addresses and fax numbers;
each Director who is not ordinarily resident in Hong Kong possesses or can apply
for valid travel documents to visit Hong Kong to meet with the Hong Kong Stock
Exchange within a reasonable period of time pursuant to requests of the Hong Kong
Stock Exchange; and
we have appointed Haitong International Capital Limited and BOCOM International
(Asia) Limited as our joint compliance advisors who will serve as an additional
channel of communication of the Company with the Hong Kong Stock Exchange
from the Listing Date to the date when the Company mails its annual reports to its
shareholders for the first full financial year immediately after the listing of our H
Shares.
APPOINTMENT OF JOINT COMPANY SECRETARIES
Rule 3.28
Pursuant to Rule 3.28 of the Hong Kong Listing Rules, an issuer must appoint as its
company secretary an individual who, by virtue of his academic or professional qualifications
or relevant experience, is, in the opinion of the Hong Kong Stock Exchange, capable of
discharging the functions of company secretary.
Note 1 to Rule 3.28 of the Hong Kong Listing Rules sets out academic or professional
qualifications to be considered acceptable by the Hong Kong Stock Exchange:
(a) a Member of The Hong Kong Institute of Chartered Secretaries;
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WAIVERS AND EXEMPTION FROM COMPLIANCE
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(b) a solicitor or barrister (as defined in the Legal Practitioners Ordinance); and
(c) a certified public accountant (as defined in the Professional Accountants
Ordinance).
Note 2 to Rule 3.28 of the Hong Kong Listing Rules sets out factors the Hong Kong Stock
Exchange considers in assessing an individual’s “relevant experience”:
(a) length of employment with the issuer and other issuers and the roles he played;
(b) familiarity with the Listing Rules and other relevant law and regulations including
the Securities and Futures Ordinance, Companies Ordinance, and the Takeovers
Code;
(c) relevant training taken and/or to be taken in addition to the minimum requirement
under Rule 3.29 of the Hong Kong Listing Rules; and
(d) professional qualifications in other jurisdictions.
Pursuant to Rule 8.17 (as amended effective on January 1, 2012) of the Hong Kong
Listing Rules, an issuer must appoint a company secretary who satisfies Rule 3.28 of the Hong
Kong Listing Rules.
Mr. Jin Xiaobin joined our Company in August 1998, and has 13 years of management
experience in securities industry and profound understanding of our operation. Mr. Jin does not
possess the specified qualifications required by Rule 3.28 of the Hong Kong Listing Rules.
Given the important role of the company secretary in the corporate governance of a listed
issuer, particularly in assisting the listed issuer as well as its directors in complying with the
Hong Kong Listing Rules and other relevant laws and regulations, we have made the following
arrangements:
Mr. Jin will endeavor to attend relevant training courses, including briefing on the
latest changes to the applicable Hong Kong laws and regulations and the Hong Kong
Listing Rules organized by the Company’s Hong Kong legal advisors on an
invitation basis and seminars organized by the Hong Kong Stock Exchange for PRC
issuers from time to time, in addition to the minimum requirement under Rule 3.29
of the Hong Kong Listing Rules;
we have appointed Ms. Mok Mingwai who meets the requirements under Note 1 to
Rule 3.28 of the Hong Kong Listing Rules, as a joint company secretary to work
closely with and provide assistance to Mr. Jin in the discharge of his duties as
company secretary for an initial period of three years commencing from the Listing
Date so as to enable Mr. Jin to acquire the relevant experience (as required under
Note 2 to Rule 3.28 of the Hong Kong Listing Rules) to discharge the duties and
responsibilities as company secretary; and
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WAIVERS AND EXEMPTION FROM COMPLIANCE
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upon expiry of the three-year period, the qualifications and experience of Mr. Jin
will be evaluated. Mr. Jin is expected to demonstrate to the Hong Kong Stock
Exchange’s satisfaction that he, having had the benefit of Ms. Mok’s assistance for
three years, would then have acquired the “relevant experience” within the meaning
of Note 2 to Rule 3.28 of the Hong Kong Listing Rules.
We have applied to the Hong Kong Stock Exchange for, and the Hong Kong Stock
Exchange has granted us, a waiver from strict compliance with the requirements of Rule 3.28
and Rule 8.17 of the Hong Kong Listing Rules. Upon the expiry of the initial three-year period,
the qualifications of Mr. Jin will be re-evaluated to determine whether the requirements as
stipulated in Note 2 to Rule 3.28 of the Hong Kong Listing Rules can be satisfied. In the event
that Mr. Jin has obtained relevant experience under Note 2 to Rule 3.28 of the Hong Kong
Listing Rules at the end of the said initial three-year period, the above joint company
secretaries arrangement would no longer be necessary.
SUBMISSION SEEKING CONSENT FROM THE HONG KONG STOCK EXCHANGE
REGARDING THE REQUIREMENTS UNDER RULE 10.04 AND PARAGRAPH 5(2) OF
APPENDIX 6 OF THE HONG KONG LISTING RULES
Rule 10.04 of the Hong Kong Listing Rules provides that a person who is an existing
shareholder of the issuer may only subscribe for or purchase any securities for which listing
is sought which are being marketed by or on behalf of a new applicant either in his or its own
name or through nominees if the conditions in Rules 10.03(1) and (2) of the Hong Kong Listing
Rules are fulfilled. The conditions in Rules 10.03(1) and (2) of the Hong Kong Listing Rules
are as follows: (i) no securities are offered to the existing shareholders on a preferential basis
and no preferential treatment is given to them in the allocation of the securities; and (ii) the
minimum prescribed percentage of public shareholders required by Rule 8.08(1) of the Hong
Kong Listing Rules is achieved.
Paragraph 5(2) of Appendix 6 to the Hong Kong Listing Rules provides that, unless with
the prior consent of the Hong Kong Stock Exchange, no allocations will be permitted to
directors or existing shareholders of the applicant or their associates, whether in their own
names or through nominees unless the conditions set out in Rules 10.03 and 10.04 of the Hong
Kong Listing Rules are fulfilled.
We have applied to the Hong Kong Stock Exchange for, and the Hong Kong Stock
Exchange has granted us, its consent under Rule 10.04 and Paragraph 5(2) of Appendix 6 of
the Hong Kong Listing Rules so that the Company could allocate H Shares under the placing
tranche of the Global Offering to its existing public holders of A Shares on the grounds that:
1. the Global Offering comprises the Hong Kong Public Offer and the International
Offering, and the International Underwriters will solicit indications of interest from
prospective investors in the book-building phase of the International Offering;
2. we have a wide spread of shareholder base and do not have any controlling
shareholder as defined under the Hong Kong Listing Rules; and
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WAIVERS AND EXEMPTION FROM COMPLIANCE
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3. it is not intended that any Connected Persons of us or any of their associates would
participate in the International Offering, or otherwise subscribe for or purchase any
H Shares of us under the Global Offering.
The Hong Kong Stock Exchange has granted such consent on the condition that:
1. such holders of A Shares would be shareholders who each holds less than 2% of our
issued share capital immediately prior to the Global Offering and has no board
representation in our Company and therefore would not be in a position to exert any
influence over the allocation process in the International Offering;
2. such holders of A Shares are not, and would not be, our Connected Persons or any
of their associates immediately prior to or after the Global Offering;
3. the proposed placing of shares would be at the same price offered in the initial
public offering;
4. such holders of A Shares would be subject to the same book building and allocation
process as other investors in the International Offering, and no preferential treatment
would be given to them in the allocation of H Shares in the International Offering;
5. allocation to these holders of A Shares would not affect our ability to satisfy the
public float requirement under Rule 8.08 of the Hong Kong Listing Rules; and
6. all relevant information in respect of the allocation to the holders of A Shares would
be disclosed in both this prospectus and the allotment results announcement.
CLAWBACK MECHANISM UNDER PARAGRAPH 4.2 OF PRACTICE NOTE 18 OF
THE HONG KONG LISTING RULES
Paragraph 4.2 of Practice Note 18 of the Hong Kong Listing Rules requires a clawback
mechanism to be put in place, which would have the effect of increasing the number of Hong
Kong Offer Shares to certain percentages of the total number of Offer Shares offered in the
Global Offering if certain prescribed total demand levels are reached. We have applied to the
Hong Kong Stock Exchange for, and the Hong Kong Stock Exchange has granted to us, a
waiver from strict compliance with paragraph 4.2 of Practice Note 18 of the Hong Kong Listing
Rules such that, provided the initial allocation of H Shares under the Hong Kong Public
Offering shall not be less than 5% of the Global Offering, in the event of over-subscription, the
Joint Global Coordinators, after consultation with us, shall apply a clawback mechanism
following the closing of the application lists on the following basis:
1. if the number of the H Shares validly applied for under the Hong Kong Public
Offering represents 15 times or more but less than 50 times the number of the Offer
Shares initially available for subscription under the Hong Kong Public Offering,
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WAIVERS AND EXEMPTION FROM COMPLIANCE
WITH THE HONG KONG LISTING RULES
then Offer Shares will be reallocated to the Hong Kong Public Offering from the
International Offering, so that the total number of Offer Shares available under the
Hong Kong Public Offering will be 92,205,000 H Shares, representing
approximately 7.5% of the Offer Shares initially available under the Global
Offering;
2. if the number of the Offer Shares validly applied for under the Hong Kong Public
Offering represents 50 times or more but less than 100 times the number of the Offer
Shares initially available for subscription under the Hong Kong Public Offering,
then the number of Offer Shares to be reallocated to the Hong Kong Public Offering
from the International Offering will be increased so that the total number of the
Offer Shares available under the Hong Kong Public Offering will be 122,940,000 H
Shares, representing 10% of the Offer Shares initially available under the Global
Offering; and
3. if the number of the Offer Shares validly applied for under the Hong Kong Public
Offering represents 100 times or more the number of the Offer Shares initially
available for subscription under the Hong Kong Public Offering, then the number of
Offer Shares to be reallocated to the Hong Kong Public Offering from the
International Offering will be increased, so that the total number of the Offer Shares
available under the Hong Kong Public Offering will be 245,880,000 H Shares,
representing 20% of the Offer Shares initially available under the Global Offering.
In each such case, the number of the Offer Shares allocated to the International
Offering will be correspondingly reduced.
In each case, the additional Offer Shares reallocated to the Hong Kong Public Offering
will be allocated between pool A and pool B and the number of Offer Shares allocated to the
International Offering will be correspondingly reduced in such manner as the Joint Global
Coordinators deem appropriate. In addition, the Joint Global Coordinators may allocate Offer
Shares from the International Offering to the Hong Kong Public Offering to satisfy valid
applications under the Hong Kong Public Offering.
If the Hong Kong Public Offering is not fully subscribed, the Joint Global Coordinators
have the authority to reallocate all or any unsubscribed Hong Kong Offer Shares to the
International Offering, in such proportions as the Joint Global Coordinators deem appropriate.
Please also see “Structure of the Global Offering – The Hong Kong Public Offering –
Reallocation” of this prospectus.
WAIVER FROM THE HONG KONG STOCK EXCHANGE REGARDING THE
REQUIREMENTS UNDER RULE 13.46(2) OF THE HONG KONG LISTING RULES
Pursuant to Rule 13.46(2) of the Listing Rules, an issuer is required to send a copy of its
annual report and accounts or summary financial report to its shareholders within four months
after its financial year-end.
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WAIVERS AND EXEMPTION FROM COMPLIANCE
WITH THE HONG KONG LISTING RULES
As the financial year end of our Company falls on December 31 and the Listing is
expected to commence on April 27, 2012, we would be required to publish our annual report
for the year ended December 31, 2011 by April 30, 2012 pursuant to Rule 13.46(2) of the
Listing Rules. Given that our financial information in respect of the financial year ended
December 31, 2011 and the detailed management discussion on the changes of the financials
in 2011 have been included in the Prospectus and taking into consideration the short time
between the date of this prospectus and the deadline for the issue of the annual report, our
Directors consider that strict compliance with the requirements of Rule 13.46(2) of the Listing
Rules to publish an annual report will not provide our Shareholders with further material
information of our Company that is required to be disclosed in an annual report and would
incur unnecessary administrative cost and be unduly burdensome for us. Our Directors, having
made all reasonable enquiries and taken into account the advice of the legal advisors to our
Company as to PRC law, confirmed that the departure from strict compliance with Rule
13.46(2) of the Listing Rules will not be in breach of the constitutional documents of our
Company or laws and regulations of the PRC or other PRC regulatory requirements regarding
our obligation to distribute annual reports and accounts. A short statement as to whether we
will otherwise comply with the HKSE Corporate Governance Code after the Listing has been
set out in the paragraph headed “Corporate Governance” under the section headed “Directors,
Supervisors and Senior Management” in this prospectus.
On the above basis, we have applied to the Stock Exchange for, and the Stock Exchange
has granted, a waiver from strict compliance with the requirements of Rule 13.46(2) of the
Listing Rules in respect of the issue of an annual report for the financial year ended December
31, 2011.
EXPLANATION REGARDING POTENTIAL DEVIATION FROM CODE PROVISION
A.1.8 OF THE HKSE CORPORATE GOVERNANCE CODE
Our Directors are aware that, effective from April 1, 2012, the recommended best practice
of arranging appropriate insurance cover in respect of legal actions against directors has been
upgraded to a code provision in the HKSE Corporate Governance Code. Our Directors are also
aware that, upon Listing, we are expected to comply with, but may choose to deviate from such
code provision, However, such deviation shall be carefully considered and reasons for such
deviation shall be given in the interim report and the annual report of the relevant period. While
we are committed to achieving high standards of corporate governance and to complying with
the code provisions as set out in the HKSE Corporate Governance Code, we are advised by our
PRC legal advisors, Grandall Law Firm (Shanghai), that insurance cover in respect of legal
actions against directors shall be approved at general meeting under the SSE Corporate
Governance Index. Upon careful consideration, our Directors decided to delay the compliance
with such code provision and submit the relevant insurance plans for our Shareholders’
approval at our next annual general meeting, which is expected to be held by June 2012 for the
following reasons: (i) the deviation from such code provision will be for a short period of time
of less than three months, taking into consideration that our Listing Date is expected to be on
April 27, 2012 and our annual general meeting is expected to be held by June 2012; and (ii)
to convene an extraordinary general meeting approximately two months before our annual
general meeting solely to approve such insurance plans would incur undue administrative cost
on the part of our Company and be unduly burdensome for the Company.
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INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
DIRECTORS’ RESPONSIBILITY FOR THE CONTENTS IN THIS PROSPECTUS
This prospectus, for which the Directors collectively and individually accept full
responsibility, includes particulars given in compliance with the Listing Rules for the purpose
of giving information with regard to our Company. The Directors, having made all reasonable
enquiries, confirm that to the best of their knowledge and belief the information contained in
this prospectus is accurate and complete in all material respects and not misleading or
deceptive, and there are no other matters the omission of which would make any statement
herein or this prospectus misleading.
CSRC APPROVAL
The CSRC issued its approval for the Global Offering and our application to list the H
Shares on the Hong Kong Stock Exchange on November 17, 2011. In granting such approval,
the CSRC accepts no responsibility for our financial soundness nor the accuracy of any of the
statements made or opinions expressed in this prospectus or the Application Forms. No other
approvals are required to be obtained for the listing of the H Shares on the Hong Kong Stock
Exchange.
THE HONG KONG PUBLIC OFFERING AND THIS PROSPECTUS
This prospectus is published solely in connection with the Hong Kong Public Offering,
which forms part of the Global Offering. Neither the delivery of this prospectus nor any
subscription or acquisition made under it shall, under any circumstances, create any
implication that there has been no change in our affairs since the date of this prospectus or that
the information in it is correct as of any subsequent time.
UNDERWRITING
For applicants under the Hong Kong Public Offering, this prospectus and the related
Application Forms contain the terms and conditions of the Hong Kong Public Offering. The
Global Offering comprises the International Offering of initially 1,167,930,000 Offer Shares
and the Hong Kong Public Offering of initially 61,470,000 Offer Shares, each subject to the
re-allocation on the basis as described in the section headed “Structure of the Global Offering”
in this prospectus.
The Listing is sponsored by the Joint Sponsors and the Global Offering is managed by the
Joint Global Coordinators. The Hong Kong Offer Shares are fully underwritten by the Hong
Kong Underwriters pursuant to the Hong Kong Underwriting Agreement. The International
Offer Shares are intended to be fully underwritten by the International Underwriters pursuant
to the International Underwriting Agreement, which is expected to be entered into on or around
April 20, 2012. Further information regarding the Underwriters and the underwriting
arrangements are set out in the section headed “Underwriting” in this prospectus.
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INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
INFORMATION ON THE GLOBAL OFFERING
The Hong Kong Offer Shares are offered solely on the basis of the information contained
and representations made in this prospectus and the related Application Forms and on the terms
and subject to the conditions set out herein and therein. No person is authorized in connection
with the Global Offering to give any information or to make any representation not contained
in this prospectus and the related Application Forms, and any information or representation not
contained herein and therein must not be relied upon as having been authorized by the
Company, the Underwriters and any of their respective directors, officers, employees, agents
or representatives or any other persons involved in the Global Offering.
RESTRICTIONS ON OFFER AND SALE OF THE OFFER SHARES
Each person acquiring the Hong Kong Offer Shares will be required to, or be deemed by
his/her acquisition of the Hong Kong Offer Shares to, confirm that he/she is aware of the
restrictions on offers of the Hong Kong Offer Shares described in this prospectus and the
related Application Forms.
No action has been taken to permit a Hong Kong Public Offering of the Offer Shares or
the general distribution of this prospectus and/or the related Application Forms in any
jurisdiction other than Hong Kong. Accordingly, this prospectus may not be used for the
purpose of, and does not constitute, an offer or invitation in any jurisdiction or in any
circumstances in which such an offer or invitation is not authorized or to any person to whom
it is unlawful to make such an offer or invitation. The distribution of this prospectus and the
offering and sales of the Offer Shares in other jurisdictions are subject to restrictions and may
not be made except as permitted under the applicable securities laws of such jurisdictions
pursuant to registration with or authorization by the relevant securities regulatory authorities
or an exemption therefrom. Each person acquiring the Hong Kong Offer Shares under the Hong
Kong Public Offering will be required to confirm, or be deemed by his acquisition of Hong
Kong Offer Shares to confirm, that he is aware of the restrictions on offers and sales of the
Offer Shares described in this prospectus.
The Offer Shares are offered for subscription solely on the basis of the information
contained and representations made in this prospectus and related Application Forms, and on
the terms and subject to the conditions set out herein and therein. No person is authorized in
connection with the Global Offering to give any information, or to make any representation,
not contained in this prospectus, and any information or representation not contained in this
prospectus must not be relied upon as having been authorized by our Company, the Joint
Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the
Underwriters, any of their respective directors or any other persons or parties involved in the
Global Offering. For further details of the structure of the Global Offering, including its
conditions, and the procedures for applying for Hong Kong Offer Shares, please see “Structure
of the Global Offering” and “How to Apply for the Hong Kong Offer Shares” in this prospectus
and the relevant Application Forms.
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INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
APPLICATION FOR LISTING ON THE HONG KONG STOCK EXCHANGE
We have applied to the Listing Committee for the listing of, and permission to deal in, the
H Shares in issue and to be issued pursuant to (i) the Global Offering (including the additional
H Shares which may be issued pursuant to the exercise of the Over-allotment Option); and (ii)
the H Shares which will be converted from A Shares and transferred to NSSF pursuant to the
relevant PRC regulations relating to reduction of state-owned shares.
Dealings in the H Shares on the Hong Kong Stock Exchange are expected to commence
on Friday, April 27, 2012. Except for the A Shares of the Company that have been listed on the
Shanghai Stock Exchange and our pending application to the Hong Kong Stock Exchange for
the listing of, and permission to deal in the H Shares, no part of the Company’s share capital
is listed or dealt in on the Hong Kong Stock Exchange or any other stock exchange and no such
listing or permission to list is being or is proposed to be sought in the near future. All the Offer
Shares will be registered on the H Share Registrar of our Company in order to enable them to
be traded on the Hong Kong Stock Exchange.
PROFESSIONAL TAX ADVICE RECOMMENDED
Potential investors in the Global Offering are recommended to consult their professional
advisors if they are in any doubt as to the taxation implications of subscribing for, purchasing,
holding or disposal of, and/or dealing in the Offer Shares or exercising any rights attached to
them. Our Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners,
the Joint Lead Managers, the Underwriters, any of their respective directors, officers,
employees, agents or representatives or any other person or party involved in the Global
Offering do not accept responsibility for any tax effects on, or liabilities of, any person
resulting from the subscription, purchase, holding, disposition of, or dealing in, the Offer
Shares or exercising any rights attached to them.
OVER-ALLOTMENT AND STABILIZATION
Details of the arrangement relating to the Over-allotment Option and stabilization are set
out under the section headed “Structure of the Global Offering” in this prospectus.
PROCEDURE FOR APPLICATION FOR HONG KONG OFFER SHARES
The procedures for applying for the Hong Kong Offer Shares are set out in the section
headed “How to Apply for Hong Kong Offer Shares” of this prospectus and on the related
Application Forms.
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
Particulars of the structure of the Global Offering, including its conditions, are set out in
the section of this prospectus headed “Structure of the Global Offering.”
– 70 –
INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
H SHARE REGISTER OF MEMBERS AND HONG KONG STAMP DUTY
All of the H Shares issued pursuant to the Global Offering will be registered on the
Company’s H Share register of members to be maintained in Hong Kong by our H Share
Registrar, Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th
Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong. Our register of
members will also be maintained by us at our legal address in the PRC. Dealings in the H
Shares registered in our Company’s H Share register of members will be subject to Hong Kong
stamp duty.
REGISTRATION OF SUBSCRIPTION, PURCHASE AND TRANSFER OF H SHARES
We have instructed Computershare Hong Kong Investor Services Limited, our H Share
Registrar, and it has agreed, not to register the subscription, purchase or transfer of any H
Shares in the name of any particular holder unless and until the holder delivers a signed form
to our H Share Registrar in respect of those H Shares bearing statements to the effect that the
holder:
(i) agrees with us and each of our Shareholders, and we agree with each Shareholder,
to observe and comply with the Company Law, the Special Regulations, and the
Articles of Association;
(ii) agrees with us, each of our Shareholders, Directors, Supervisors, managers and
officers, and each of us acting for ourselves and for each of our Directors,
Supervisors, managers and officers agrees with each of our Shareholders to refer all
differences and claims arising from the Articles of Association or any rights or
obligations conferred or imposed by the Company Law or other relevant laws and
administrative regulations concerning our affairs to arbitration in accordance with
the Articles of Association, and any reference to arbitration shall be deemed to
authorize the arbitration tribunal to conduct hearings in open session and to publish
its award, which arbitration shall be final and conclusive;
(iii) agrees with us and each of our Shareholders that the H Shares are freely transferable
by the holders thereof; and
(iv) authorizes us to enter into a contract on his behalf with each of our Directors,
Supervisors and officers whereby such Directors, Supervisors and officers undertake
to observe and comply with their obligations to our Shareholders as stipulated in the
Articles of Association.
H SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS
Subject to the granting of listing of, and permission to deal in, the H Shares on the Hong
Kong Stock Exchange and our compliance with the stock admission requirements of HKSCC,
the H Shares will be accepted as eligible securities by HKSCC for deposit, clearance and
– 71 –
INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
settlement in CCASS with effect from the date of commencement of dealings in the H Shares
on the Hong Kong Stock Exchange or any other date as determined by HKSCC. Settlement of
transactions between participants of the Hong Kong Stock Exchange is required to take place
in CCASS on the second Business Day after any trading day. All activities under CCASS are
subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time
to time. All necessary arrangements have been made for the H Shares to be admitted into
CCASS.
COMMENCEMENT OF DEALINGS IN THE H SHARES
Dealings in the H Shares on the Hong Kong Stock Exchange are expected to commence
on Friday, April 27, 2012. H Shares will be traded in board lots of 400 H Shares each.
EXCHANGE RATE CONVERSION
For exchange rate translations throughout this prospectus, unless otherwise specified,
amounts denominated in HK$, US$, RMB have been converted, for the purpose of this
prospectus, based on the rates set out below (for the purpose of illustration only):
US$1.00: HK$7.7659 (the exchange rate set forth in the H.10 weekly statistical release
of the Federal Reserve Board of the United States on April 6, 2012)
RMB1.00: HK$1.2323 (set by the PBOC for foreign exchange transactions prevailing on
April 9, 2012)
We make no representations and none should be construed as being made, that any of the
RMB, HK dollar or U.S. dollar amounts contained in this prospectus could have been or could
be converted into amounts of any other currencies at any particular rate or at all on such date
or any other date.
LANGUAGE
The English names of PRC nationals, entities, departments, facilities, certificates, titles,
laws and regulations and the like are translations of their Chinese names and are included for
identification purposes only. If there is any inconsistency, the Chinese name prevails.
ROUNDING
Any discrepancies in any table between totals and sums of amounts listed thereon are due
to rounding. Certain amounts and percentage figures included in this prospectus have also been
subject to rounding adjustments, or have been rounded to one or two decimal places.
INTER-SEGMENT REVENUE
All discussion of our segment revenue and other income in this prospectus exclude
inter-segment revenue, except for the section entitled “Financial Information – Summary
Segment Results” where we specifically include our inter-segment revenue and inter-segment
expenses in our segment revenue and other income, segment expenses and segment results.
– 72 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
DIRECTORS
Name Address Nationality
Executive Directors
Mr. Wang Kaiguo (sW ) Room 601, No. 18, Lane 11 Honggu Chinese
Road, Shanghai, PRC
Mr. Li Mingshan (gNf \ ) Room 201, No. 2, Lane 6 Wanping Chinese
Road, Xuhui District, Shanghai, PRC
Non-executive Directors
Mr. Qian Shizheng (“\"N e? ) Flat C, 30/F, Li Chit Garden, Chinese
1 Li Chit Street, Wanchai, Hong Kong
Mr. Zhuang Guowei (W … ) Room 801, No. 4, Lane 377 Tiandong Chinese
Road, Shanghai, PRC
Mr. Zhou Donghui (Thgq ) Room 1001, No. 74, Lane 789 Yingkou Chinese
Road, Shanghai, PRC
Mr. He Jianyong (OUPeR No. 25, Liuzhou Street, Heping District, Chinese
Shenyang, Liaoning, PRC
Mr. Zhang Jianwei (_5úPI ) Room 1703, Building 2, No. 5 Panyu Chinese
Road, Shanghai, PRC
Mr. Xu Chao (_on ) No. 149, No. 1111 Jinglian Road, Chinese
Minhang District, Shanghai, PRC
Mr. Wang Hongxiang (s;ye ) Room 401, No. 108, Lane 511 Wuzhong Chinese
Road, Minhang District, Shanghai, PRC
Mr. Li Gewei (gN ) No. 402, Gate 6, Building 1, Chinese
Xinyuancun, Tianjin University,
Nankai District, Tianjin, PRC
Mr. Feng Huang (qL ) Room 302, No 106, Lane 421 Siping Chinese
Road, Hongkou District, Shanghai, PRC
– 73 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address Nationality
Independent Non-executive Directors
Mr. Xia Bin (Y e ) No. 201, Gate 3, Building 17, Chinese
Guoyingyuan District, Xicheng District,
Beijing, PRC
Mr. Chen Qiwei (–st&PI ) Room 1801, No. 2, Lane 1310 Dingxi Chinese
Road, Shanghai, PRC
Mr. Zhang Huiquan (_5àl ) No. 23 Dongxiazhuangshu, Shijingshan Chinese
District, Beijing, PRC
Mr. Zhang Ming (_5 ) Room 502, No. 8, Lane 221 Longcao Chinese
Road, Shanghai, PRC
Mr. Dai Genyou (b4h9g ) Room 602, Gate No. 4, Community Chinese
No.3, Shao Jiu Hu Tong,
Chaoyangmennei North Alley,
Beijing, PRC
Mr. Liu Chee Ming (R‰×eO ) Room A5, No. 10 Bluff Path, The Peak, Singaporean
Hong Kong
Supervisors
Mr. Wang Yimin (svl ) Room 901, No. 4, Lane 1028 Chinese
Changshou Road, Putuo District,
Shanghai, PRC
Mr. Yang Qingzhong (iJav_à ) Room 802, No. 4, Lane 333 Hanzhong Chinese
Road, Shanghai, PRC
Mr. Yuan Lingcai ( bM ) Room 401, No. 20, Lane 118 Quyang Chinese
Road, Shanghai, PRC
Mr. Dong Xiaochun (c f% ) Room 701, No. 2, Lane 163 Puhuitang Chinese
Road, Shanghai, PRC
Mr. Wu Zhilin (T3 ) Room 301, Building E, No. 343 Chinese
Huaihaixi Road, Shanghai, PRC
Ms. Jin Yanping (‘q ) Room 506, No. 6, Lane 20 Fahuazhen Chinese
Road, Shanghai, PRC
– 74 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address Nationality
Mr. Xu Qi (1YG) Room 1301, No. 10, Lane 77 Anshun Chinese
Road, Shanghai, PRC
Mr. Xing Jianhua (ú ) Room 201, No. 1, Lane 235 Xijiangwan Chinese
Road, Shanghai, PRC
Mr. Wang Yugui (ss ) Room 705, Building 3, No. 123 Chinese
Zhongguancun East Road, Beijing, PRC
Ms. Qiu Xiaping (NY ) Room 1504, No. 3, Lane 60 Linpingbei Chinese
Road, Shanghai, PRC
Mr. Du Hongbo (g\ml ) Room 502, No. 2, Lane 200 Boshan Chinese
Road, Pudong New Area,
Shanghai, PRC
– 75 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
PARTIES INVOLVED
Joint Sponsors Haitong International Capital Limited
25th Floor, New World Tower
16-18 Queen’s Road Central
Central
Hong Kong
J.P. Morgan Securities
(Asia Pacific) Limited
28th Floor, Chater House
8 Connaught Road Central
Central
Hong Kong
Joint Global Coordinators Haitong International Securities
Company Limited
25th Floor, New World Tower
16-18 Queen’s Road Central
Central
Hong Kong
J.P. Morgan Securities
(Asia Pacific) Limited
28th Floor, Chater House
8 Connaught Road Central
Central
Hong Kong
Credit Suisse (Hong Kong) Limited
Level 88, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Deutsche Bank AG, Hong Kong Branch
Level 52, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Citigroup Global Markets Asia Limited
50th Floor, Citibank Tower, Citibank Plaza
3 Garden Road
Central
Hong Kong
– 76 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
UBS AG, Hong Kong Branch
52/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
Joint Bookrunners Hong Kong Public Offering
Haitong International Securities
Company Limited
25th Floor, New World Tower
16-18 Queen’s Road Central
Central
Hong Kong
J.P. Morgan Securities
(Asia Pacific) Limited
28th Floor, Chater House
8 Connaught Road Central
Central
Hong Kong
Credit Suisse (Hong Kong) Limited
Level 88, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Deutsche Bank AG, Hong Kong Branch
Level 52, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Citigroup Global Markets Asia Limited
50th Floor, Citibank Tower, Citibank Plaza
3 Garden Road
Central
Hong Kong
UBS AG, Hong Kong Branch
52/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
– 77 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Nomura International
(Hong Kong) Limited
30/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
Standard Chartered Securities
(Hong Kong) Limited
15/F, Two International Finance Centre
8 Finance Street
Central
Hong Kong
BOCOM International Securities Limited
9/F, Man Yee Building
68 Des Voeux Road Central
Hong Kong
International Offering
Haitong International Securities
Company Limited
25th Floor, New World Tower
16-18 Queen’s Road Central
Central
Hong Kong
J.P. Morgan Securities Ltd.
125 London Wall
London EC2Y 5AJ
United Kingdom
– 78 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Credit Suisse (Hong Kong) Limited
Level 88, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Deutsche Bank AG, Hong Kong Branch
Level 52, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Citigroup Global Markets Limited
33 Canada Square
Canary Wharf
London E14 5LB
United Kingdom
UBS AG, Hong Kong Branch
52/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Nomura International
(Hong Kong) Limited
30/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
– 79 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Standard Chartered Securities
(Hong Kong) Limited
15/F, Two International Finance Centre
8 Finance Street
Central
Hong Kong
BOCOM International Securities Limited
9/F, Man Yee Building
68 Des Voeux Road Central
Hong Kong
Joint Lead Managers Hong Kong Public Offering
Haitong International Securities
Company Limited
25th Floor, New World Tower
16-18 Queen’s Road Central
Central
Hong Kong
J.P. Morgan Securities
(Asia Pacific) Limited
28th Floor, Chater House
8 Connaught Road Central
Central
Hong Kong
Credit Suisse (Hong Kong) Limited
Level 88, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Deutsche Bank AG, Hong Kong Branch
Level 52, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Citigroup Global Markets Asia Limited
50th Floor, Citibank Tower, Citibank Plaza
3 Garden Road
Central
Hong Kong
– 80 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
UBS AG, Hong Kong Branch
52/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Nomura International
(Hong Kong) Limited
30/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
Standard Chartered Securities
(Hong Kong) Limited
15/F, Two International Finance Centre
8 Finance Street
Central
Hong Kong
BOCOM International Securities Limited
9/F, Man Yee Building
68 Des Voeux Road Central
Hong Kong
BNP Paribas Capital (Asia Pacific) Limited
59th-63rd Floor
Two International Finance Centre
8 Finance Street
Central
Hong Kong
– 81 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
BOCI Asia Limited
26th Floor, Bank of China Tower
1 Garden Road
Hong Kong
CCB International Capital Limited
34th Floor, Two Pacific Place
88 Queensway
Admiralty
Hong Kong
China Everbright Securities (HK) Limited
17/F, Far East Finance Centre
16 Harcourt Road
Hong Kong
Samsung Securities (Asia) Limited
Suite 4511 Two International Finance Centre
8 Finance Street
Central
Hong Kong
International Offering
Haitong International Securities
Company Limited
25th Floor, New World Tower
16-18 Queen’s Road Central
Central
Hong Kong
J.P. Morgan Securities Ltd.
125 London Wall
London EC2Y 5AJ
United Kingdom
Credit Suisse (Hong Kong) Limited
Level 88, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
Deutsche Bank AG, Hong Kong Branch
Level 52, International Commerce Centre
1 Austin Road West
Kowloon
Hong Kong
– 82 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Citigroup Global Markets Limited
33 Canada Square
Canary Wharf
London E14 5LB
United Kingdom
UBS AG, Hong Kong Branch
52/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Nomura International
(Hong Kong) Limited
30/F Two International Finance Centre
8 Finance Street
Central
Hong Kong
Standard Chartered Securities
(Hong Kong) Limited
15/F, Two International Finance Centre
8 Finance Street
Central
Hong Kong
BOCOM International Securities Limited
9/F, Man Yee Building
68 Des Voeux Road Central
Hong Kong
BNP Paribas Capital
(Asia Pacific) Limited
59th-63rd Floor
Two International Finance Centre
8 Finance Street
Central
Hong Kong
– 83 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
BOCI Asia Limited
26th Floor, Bank of China Tower
1 Garden Road
Hong Kong
CCB International Capital Limited
34th Floor, Two Pacific Place
88 Queensway
Admiralty
Hong Kong
China Everbright Securities (HK) Limited
17/F, Far East Finance Centre
16 Harcourt Road
Hong Kong
Samsung Securities (Asia) Limited
Suite 4511 Two International Finance Centre
8 Finance Street
Central
Hong Kong
Reporting accountants Deloitte Touche Tohmatsu
35/F, One Pacific Place
88 Queensway
Hong Kong
Legal advisors to the Company as to Hong Kong and United States law
Clifford Chance
28/F, Jardine House
One Connaught Place
Central
Hong Kong
as to PRC law
Grandall Law Firm (Shanghai)
45-46/F, Nan Zheng Building
580 West Nanjing Road
Shanghai 200041
PRC
– 84 –
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Legal advisors to the Underwriters as to Hong Kong and United States law
Paul Hastings
21-22/F, Bank of China Tower
1 Garden Road
Hong Kong
as to PRC law
Commerce & Finance Law Offices
12 Jianguomenwai Avenue
Chaoyang District
Beijing 100022
PRC
Receiving bankers The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Standard Chartered Bank (Hong Kong)
Limited
15/F, Standard Chartered Tower
388 Kwun Tong Road
Kwun Tong
Hong Kong
Bank of China (Hong Kong) Limited
1 Garden Road
Hong Kong
China Construction Bank (Asia)
Corporation Limited
Suite 2101, 21/F Devon House
979 King’s Road
Quarry Bay
Hong Kong
Bank of Communications Co., Ltd.
Hong Kong Branch
20 Pedder Street
Central
Hong Kong
The Bank of East Asia, Limited
10 Des Voeux Road Central
Hong Kong
– 85 –
CORPORATE INFORMATION
Registered office No. 98 Central Huaihai Road
Shanghai
PRC
Head office in the PRC Haitong Securities Building
No. 689 Guangdong Road
Shanghai
PRC
Principal place of business in Hong Kong 21st Floor, Li Po Chun Chambers
189 Des Voeux Road Central
Central
Hong Kong
Company’s website www.htsec.com
(information on the website does not form
part of this prospectus)
Joint Company Secretaries Mr. Jin Xiaobin (‘fe )
Ms. Mok Mingwai (f ag )
(fellow member of the Hong Kong Institute
of Chartered Secretaries
fellow member of the Institute of Chartered
Secretaries and Administrators in the United
Kingdom)
Authorized representatives Mr. Wang Kaiguo (sW )
Room 601, No. 18
Lane 11 Honggu Road
Shanghai
PRC
Mr. Jin Xiaobin (‘fe )
Room 1702, Building 6
No. 888, East Daming Road
Hongkou District
Shanghai
PRC
– 86 –
CORPORATE INFORMATION
Audit committee Mr. Zhang Ming (_5 ) (Chairman)
Mr. Zhou Donghui (Thgq )
Mr. Xu Chao (_on )
Mr. Wang Hongxiang (sye )
Mr. Zhang Huiquan (_5àl )
Mr. Dai Genyou (b4h9g )
Mr. Chen Qiwei (–st&PI )
Nomination, remuneration and Mr. Xia Bin (Y e ) (Chairman)
assessment committee Mr. Qian Shizheng (“\"N e? )
Mr. He Jianyong (OUPeR
Mr. Li Gewei (gN )
Mr. Zhang Ming (_5 )
Mr. Liu Chee Ming (R‰×eO )
Mr. Dai Genyou (b4h9g )
Development strategy and investment Mr. Wang Kaiguo (sW ) (Chairman)
management committee Mr. Qian Shizheng (“\"N e? )
Mr. Zhuang Guowei (W … )
Mr. Zhang Jianwei (_5úPI )
Mr. Chen Qiwei (–st&PI )
Compliance and risk control committee Mr. Zhang Huiquan (_5àl ) (Chairman)
Mr. Li Mingshan (gNf \ )
Mr. Zhou Donghui (Thgq )
Mr. Feng Huang (qL )
Mr. Dai Genyou (b4h9g )
Joint compliance advisors Haitong International Capital Limited
BOCOM International (Asia) Limited
H Share Registrar Computershare Hong Kong Investor
Services Limited
Shops 1712-1716, 17th Floor
Hopewell Centre
183 Queen’s Road East
Wanchai
Hong Kong
Principal bankers Bank of Communication
China Construction Bank
China Minsheng Banking Corp., Ltd.
China Guangfa Bank
Industrial and Commercial Bank of China
Industrial Bank Co., Ltd.
– 87 –
INDUSTRY OVERVIEW
This section contains information and statistics on the industry in which we
operate. We have extracted and derived such information and statistics, in part, from
various official or publicly available sources. We believe that the sources of this
information are appropriate sources and have taken reasonable care in extracting and
reproducing such information. We have no reason to believe that such information is
false or misleading or that any fact has been omitted that would render such
information false or misleading. The information has not been independently verified
by us, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners or any
other party involved in the Global Offering and no representation is given as to its
accuracy. Such information may not be consistent with, and may not have been
compiled with the same degree of accuracy or completeness as, other information
complied within or outside the PRC. Accordingly, the official government and other
third party sources contained herein may not be accurate and should not be unduly
relied upon.
OVERVIEW OF THE PRC ECONOMY
The PRC economy has grown significantly over the past three decades and will continue
to grow rapidly and steadily in the foreseeable future
The PRC economy has grown rapidly since 1978 when the PRC began its economic
reform. From 2001 to 2010, the average annual growth rate of real GDP in the PRC reached
10.5%, compared to the average growth rate of 3.6% for the world during the same period. The
nominal GDP of the PRC in 2010 amounted to RMB39.8 trillion, and the PRC economy has
become the world’s second largest economy since the fourth quarter of 2010. The following
table sets out the real GDP growth rates of the PRC and the world for the periods indicated:
Real GDP
growth rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
PRC . . . . . . . . . 8.3% 9.1% 10.0% 10.1% 11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.5% 9.0%
World Average . . . . 2.3% 2.9% 3.6% 4.9% 4.6% 5.3% 5.4% 2.8% -0.7% 5.1% 4.0% 4.0%
Sources: International Monetary Fund and NBSC. The 2011 and 2012 estimates were announced by the
International Monetary Fund in September 2011
– 88 –
INDUSTRY OVERVIEW
We believe the PRC economy will continue to experience rapid and steady growth in the
foreseeable future and that such growth will be driven by the following four major factors:
The less developed central, western and northeastern regions of the PRC have significant
potential for future growth
Certain regions in central, western and northeastern PRC have experienced faster
economic development than the southeastern coastal regions in recent years due to rapid
industrialization in those regions. According to the NBSC, from 2006 to 2010, the GDP of the
central, western and northeastern regions of the PRC grew at a CAGR of 18.3%, while the GDP
of the southeastern coastal regions grew at a CAGR of 15.7% during the same period. The
uneven development of different regions in the PRC and the government’s continued focus on
the development of the central, western and northeastern regions will drive strong economic
growth in these regions in the foreseeable future. We believe growth in these regions will
contribute to the rapid growth of the PRC economy in the long-term.
Industrial structure transformation stimulates further economic growth
The PRC economy has maintained its rapid growth in recent years while undergoing a
structural transformation of its economy. According to the Twelfth Five-Year Plan, improving
the structure of economic sectors will be the primary focus of the economic development of the
PRC in these five years. The government will focus on transforming lower-value and
labor-intensive industries to higher value-added and technology-focused industries. Another
goal set out in the Twelfth Five-Year Plan is to transform the PRC economy from being
export-oriented to being consumption-driven and service-oriented. Among the measures
outlined in the Twelfth Five-Year Plan, the expansion of the financial services industry and the
orderly introduction of new businesses are the key drivers for future economic development
and industrial transformation in the PRC. We believe transforming the structure of the
industrial sector will drive economic growth in the PRC in the foreseeable future and provide
new business opportunities for the various industries that undergo transformation and
transitions pursuant to the Twelfth Five-Year Plan.
The growth of SMEs drives steady and rapid economic development
SMEs have also experienced a period of rapid development in recent years. On January
1, 2003, Law of the People’s Republic of China on the Promotion of Small and Medium-sized
Enterprises (N-N”l QqTW N-\ O imO2l ) was promulgated, providing government
legislative support and creating a favorable policy environment for the development of SMEs.
According to the PRC Ministry of Industry and Information Technology, there were over ten
million SMEs as of December 31, 2010. SMEs accounted for approximately 60% of the
country’s GDP, 65% of the total number of patents and over 80% of the total number of product
innovations. In recent years, the increase in the number and scale of SMEs has significantly
contributed to the growth of the PRC economy. This has led to SMEs playing a more balanced
role relative to large enterprises in the economic development of the PRC.
Further urbanization drives the continuous growth of the PRC economy
Since the economic reform of the PRC in 1978, the PRC government has promoted
urbanization, which created strong momentum for economic development. According to Wind
– 89 –
INDUSTRY OVERVIEW
Info, the urbanization rate in the PRC increased by 33.4% from 1978 to 2011. The pace of
urbanization further accelerated from 2001 to 2011, with the urbanization rate increasing by
12.2%. As a result, the PRC urban population increased from 502 million to 690 million (an
average increase of 19 million per year) during the same period.
Despite the large-scale, rapid urbanization over the past 30 years, the overall urbanization
rate in the PRC is lower than that of several developed countries. The following table sets forth
the urbanization rates of the PRC, Japan, the U.K. and the U.S. in 2010:
PRC Japan U.K. U.S.
(1)
2010 Urbanization Rate . . . . . . . . . . . . . . . . . . 47.0% 67.0% 80.0% 82.0%
(1) Urbanization rate represents the ratio of urban population to total population.
Source: CIA – The World Factbook
As outlined in the Twelfth Five-Year Plan, the urbanization rate of the PRC is set to
exceed 50% by 2015. Based on the estimated urbanization rate for the PRC and its population
of approximately 1.3 billion, we believe the urban population in the PRC is expected to grow
by approximately ten million per year until 2015.
OVERVIEW OF THE PRC CAPITAL MARKET
The PRC capital market is among the largest and the fastest-growing in the world
The PRC capital market has grown substantially over the past 20 years, largely driven by
the significant economic development of the PRC, rapid growth in corporate earnings and
steady increase in financing demand and per capita income.
The total market capitalization of companies listed on the Shanghai Stock Exchange and
the Shenzhen Stock Exchange reached US$3.4 trillion as of December 31, 2011, and their total
trading volume was US$6.5 trillion in 2011. The total market capitalization of listed companies
in the PRC ranked third in the world behind the U.S. and Japan and total trading volume of
such companies ranked second in the world behind the U.S. The following table sets forth the
total market capitalization as of December 31, 2011, and the total trading volume of listed
companies in the U.S., the PRC, Japan and the U.K. in 2011:
U.S. PRC Japan U.K.
(US$ in trillions)
Total trading volume . . . . . . . . . . . . . . . . . . . . 30.8 6.5 4.2 2.8
Total market capitalization . . . . . . . . . . . . . . . . . 15.6 3.4 3.5 3.3
Source: WFE
– 90 –
INDUSTRY OVERVIEW
Over the past several years, the PRC stock market has experienced significant growth in
terms of market capitalization and trading volume. According to WFE, the respective rankings
of the Shanghai Stock Exchange and the Shenzhen Stock Exchange have improved rapidly
among the world’s major stock exchanges, as measured by total market capitalization, trading
volume and total proceeds raised from IPOs. In particular, in 2011, total proceeds raised from
IPOs on the Shanghai Stock Exchange and the Shenzhen Stock Exchange reached US$123.3
billion, representing 19.2% of total IPO proceeds (US$641.8 billion) raised in global capital
markets in the same year and making the PRC the largest IPO market in the world. The
following table sets forth the respective global rankings of the Shanghai Stock Exchange and
the Shenzhen Stock Exchange as of December 31, 2005 and 2011:
2005-2011 2005 Global 2011 Global
2005 2011 CAGR Ranking(1) Ranking(1)
(RMB in billions)
Market capitalization
Shanghai Stock Exchange . . . . . . . . . . . . . . . . . . 2,309.6 14,837.6 36.3% 21
Shenzhen Stock Exchange . . . . . . . . . . . . . . . . . . 933.4 6,638.2 38.7% 32
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,243.0 21,475.8 37.0%
Trading volume
Shanghai Stock Exchange . . . . . . . . . . . . . . . . . . 1,951.6 23,668.1 51.6% 18
Shenzhen Stock Exchange . . . . . . . . . . . . . . . . . . 1,262.1 18,337.9 56.2% 25
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,213.7 42,006.0 53.5%
Total proceeds raised from equity offerings
The Shanghai Stock Exchange . . . . . . . . . . . . . . . . 30.0 320.0 48.4% 24
The Shenzhen Stock Exchange. . . . . . . . . . . . . . . . 3.0 476.9 132.8% 43
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.0 796.9 70.0%
(1) The global ranking encompasses all stock exchanges in the world.
Source: WFE
There has been an increased in the number of PRC companies that are listed on the
Shanghai Stock Exchange and Shenzhen Stock Exchange. The following table sets forth the
number of listed companies in the PRC from 2006 to 2011, which increased from 1,434 in 2006
to 2,342 in 2011, representing a CAGR of 10.3%:
2006-2011
2006 2007 2008 2009 2010 2011 CAGR
Number of listed companies in the PRC . . 1,434 1,550 1,625 1,718 2,063 2,342 10.3%
Sources: CSRC, Shanghai Stock Exchange, Shenzhen Stock Exchange
– 91 –
INDUSTRY OVERVIEW
In addition to the PRC stock market, the PRC bonds, funds and futures markets have also
developed rapidly. According to Wind Info, between 2006 and 2011, the total amount of funds
raised through bond offerings (excluding treasury bonds, municipal bonds and central bank
instruments) in the PRC increased from RMB1.4 trillion to RMB4.7 trillion, representing a
CAGR of 27.5%. The net asset value of PRC mutual funds increased from RMB856.5 billion
in 2006 to RMB2,167.6 billion in 2010, representing a CAGR of 20.4%. Furthermore, the PRC
futures market is one of the largest in the world in terms of total trading volume, which,
according to the CSRC, increased from RMB21 trillion in 2006 to RMB138 trillion in 2011,
representing a CAGR of 45.7%.
Despite the rise in its global ranking, the PRC capital market is still in its early stage of
development and has enormous growth potential
Despite the rapid growth over the past two decades and the rise in its global ranking, the
following aspects of the capital market in the PRC are still in an early stage of development
compared with other mature capital markets in the following aspects:
The ratio of stock market capitalization relative to nominal GDP is relatively low
The ratio of the total market capitalization of the PRC stock market to its nominal GDP
is much lower than the ratios of major developed countries. As of December 31, 2010, the total
market capitalization of the PRC stock market accounted for 66.7% of the nation’s nominal
GDP, which was lower than that of major developed countries, including the U.S. This suggests
that the PRC stock market has further growth potential. The following table sets forth the stock
market capitalization of the U.S., Japan, the U.K. and the PRC relative to their nominal GDP
as of December 31, 2010:
U.S. Japan U.K. PRC
Ratio of stock market capitalization relative to nominal
GDP (%) . . . . . . . . . . . . . . . . . . . . . . . . . 119.0% 69.4% 158.6% 66.7%
Sources: WFE, International Monetary Fund, CSRC, NBSC
– 92 –
INDUSTRY OVERVIEW
The development of the corporate finance market is unbalanced
Currently, indirect financing such as bank lending remains a major source of external
financing for PRC companies. According to the CSRC and the PBOC, bank lending amounted
to approximately 67.5% of the total external financing of PRC companies by way of equity
offerings, bond offerings and bank lending during 2010. Direct financing, such as the issuance
of equity and debt securities, is not as prevalent in the PRC as in certain developed countries
such as the U.S. The following table sets forth the total value of equity offerings, bond
offerings and bank lending in the PRC and the U.S. in 2010:
Equity offerings Bond offerings(1) Bank lending(2)
(US$ in billions)
PRC . . . . . . . . . . . . . . . . . . . . . . . . 136 475 1,269
U.S. . . . . . . . . . . . . . . . . . . . . . . . . 201 1,788
(1) In the above table, bond offerings refer to those related to corporate financing, which include corporate bonds,
enterprise bonds, financial bonds, short-term commercial papers, medium-term notes, asset-backed securities,
convertible bonds and bonds with warrants but exclude treasury bonds, municipal bonds and central bank
instruments. The exchange rate of U.S. dollar and RMB used in the above table are the exchange rates as of
December 31, 2010.
(2) Difference in commercial bank lending outstandings between 2009 and 2010.
Sources: CSRC, PBOC, Bloomberg, China Banking Regulatory Commission, U.S. Federal Reserve Board
The PRC multi-tiered capital market is still developing
The PRC stock market has quickly developed over the past 20 years. In 2011, the PRC
stock market became the world’s second largest stock market in terms of annual trading
volume. However, there are significant structural differences between the PRC stock market
and the stock markets of developed countries such as the U.S. For example, the U.S. stock
market, comprised of the New York Stock Exchange and NASDAQ, is more mature and
diversified in terms of market capitalization, which are supplemented by other stock exchanges
and OTC markets, such as OTCBB and Pink Sheets. The number of companies that trade their
shares on the OTCBB and Pink Sheets is greater than the number of companies that are listed
on the New York Stock Exchange and NASDAQ. Conversely, the number of listed companies
on the main boards of the Shanghai Stock Exchange and the Shenzhen Stock Exchange still
– 93 –
INDUSTRY OVERVIEW
accounts for the majority of the PRC stock markets. In comparison to the stock markets in the
U.S., the SME Board, ChiNext Board and OTC market in the PRC are still developing. The
following table sets forth the structure of the stock markets of the U.S. and the PRC:
Difference in structure between the U.S. stock market (1) and the PRC stock market
(Number of listed companies as of December 31, 2010)
U.S. PRC
NYSE 2,317 Main board 1,379
NASDAQ 2,778 SME Board
OTCBB 3,136 ChiNext 153
Pink Sheet 5,954 OTC 130
(1) The data of OTCBB is the average number for 2010.
Sources: Shanghai Stock Exchange, Shenzhen Stock Exchange, CSRC, Wind Info, WFE, OTC Bulletin Board, OTC
Markets
We believe that as the PRC stock market continues to develop, the size of the SME Board
and the ChiNext Board will continue to expand. Given the expected expansion of the OTC
market, particularly the New OTC Board, the structure of the PRC stock market will become
increasingly more mature across multiple capital raising platforms.
The establishment of the SME Board and the ChiNext Board in 2005 and 2009,
respectively, has transformed the PRC stock market into a multi-tiered market, increasing the
market’s ability to accommodate the various financing needs of companies and diverse risk
profiles of investors. As shown in the table below, there has been significant growth from 2009
to 2011 in terms of the number of listed companies on the SME Board and the ChiNext Board,
total market capitalization, total proceeds raised in equity offerings and total trading value.
CAGR of
2009 2010 2011 2009 to 2011
Number of listed companies
SME Board . . . . . . . . . . . . . . . . . . . . . . . . . 327 531 646 40.6%
ChiNext Board. . . . . . . . . . . . . . . . . . . . . . . . 36 153 281 179.4%
Market capitalization (RMB in billions)
SME Board . . . . . . . . . . . . . . . . . . . . . . . . . 1,687 3,536 2,743 27.5%
ChiNext Board. . . . . . . . . . . . . . . . . . . . . . . . 161 737 743 114.8%
Funds raised in equity offerings (RMB in billions)
SME Board . . . . . . . . . . . . . . . . . . . . . . . . . 58 235 102 32.6%
ChiNext Board. . . . . . . . . . . . . . . . . . . . . . . . 20 96 79 98.7%
Value of share trading (RMB in billions)
SME Board . . . . . . . . . . . . . . . . . . . . . . . . . 4,827 8,583 16,903 87.1%
ChiNext Board. . . . . . . . . . . . . . . . . . . . . . . . 183 1,572 5,940 469.7%
Source: Shenzhen Stock Exchange
– 94 –
INDUSTRY OVERVIEW
In addition, the PRC has announced plans to introduce the International Board and the
New OTC Board. Recognizing the potential investment power of PRC investors, a number of
overseas companies have expressed interest in participating in the fast-growing PRC capital
market. Consequently, the CSRC and the Shanghai Stock Exchange have commenced plans to
introduce an International Board that will target listings of large global enterprises on the
Shanghai Stock Exchange. In addition, the PRC government also intends to establish and
expand a New OTC Board, which will create a highly regulated OTC market in the PRC and
offer a trading platform for the pre-IPO financing of selected SMEs. The OTC market will
focus on SMEs that have been established in science and technology parks in various regions
of the PRC, particularly those engaged in high-growth businesses involving new and advanced
technologies. Furthermore, the New OTC Board will offer a trading platform for companies
that have been delisted from the main board, the SME Board and the ChiNext Board.
The availability of financial products and services in the PRC capital market is limited
With the growth of the PRC economy, the investment needs of increasingly sophisticated
investors and the financing demands of companies in various sectors evolved towards more
sophisticated financial products and services. However, currently, there are limited types of
financial products and services in the PRC capital market. A number of prevalent financial
services and products in the capital markets of the U.S. and other developed countries, such as
margin and securities refinancing, market maker services for shares or share-linked products
and certain other derivatives and structured products, are either restricted or not popular among
retail and professional institutional investors in the PRC.
In addition, there are substantial differences between the product mix of the stock
exchanges in the PRC and the U.S. The PRC equity spot market is still dominated by stocks.
ETFs comprise only 0.9% of the PRC equity spot market compared with 20.5% in the U.S.
With respect to the derivatives market, most of the derivatives in the PRC capital market are
limited to commodity derivatives. Products such as equity derivatives and fixed-income
derivatives are less developed than those in certain mature markets. The range of financial
products has limited the investment options, strategies and investment portfolios of PRC
investors. The following tables set forth the composition of the equity spot market in terms of
turnover (for the six months ended June 30, 2011) and the derivatives market in terms of the
number of transactions (for the year ended December 31, 2010) in the PRC and the U.S.:
Equity spot market (turnover for the six months ended June 30, 2011)
PRC U.S.
(US$ in billions) (%) (US$ in billions) (%)
Stocks . . . . . . . . . . . . . . . . . . 3,770.1 98.6 14,738.5 79.1
Funds . . . . . . . . . . . . . . . . . . 18.1 0.5 70.8 0.4
ETFs. . . . . . . . . . . . . . . . . . . 33.3 0.9 3,807.7 20.5
Total . . . . . . . . . . . . . . . . . . . 3,821.5 100.0 18,616.9 100.0
Source: WFE
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INDUSTRY OVERVIEW
Derivatives market (the number of transactions for the year ended December 31, 2010)
PRC U.S.
(Number of (Number of
transactions in billions) (%) transactions in billions) (%)
Equity derivatives . . . . . . . . . . . . 0.1 3.2% 2.2 46.9%
Fixed-income derivatives . . . . . . . . – – 1.6 34.1%
Commodity derivatives . . . . . . . . . 3.0 96.8% 0.9 19.0%
Total . . . . . . . . . . . . . . . . . . 3.1 100.0% 4.7 100.0%
Sources: WFE, CSRC
In recent years, the PRC regulatory authorities have relaxed restrictions and introduced,
on a trial basis, certain new businesses, such as stock index futures trading and margin
financing and securities lending businesses. On October 26, 2011, the CSRC converted margin
financing and securities lending from a pilot program conducted by CSRC-designated PRC
securities firms to a regular business operation available to all the PRC securities firms that
meet certain requirements. In addition, on the same day, the CSRC promulgated the Trial
Supervision and Management Measures on Margin and Securities Refinancing Business (I
imRvwc{t ) pursuant to which we expect a pilot program for the margin and
securities refinancing to be launched in the PRC. On December 5, 2011, the Shanghai Stock
Exchange and the Shenzhen Stock Exchange further expanded the scope of securities eligible
for the margin financing and securities lending business from 90 stocks to 278 stocks and 7
ETFs. We believe these initiatives will further support the development of margin financing
and securities lending business activities. We expect this trend will continue, and the
introduction of additional new businesses in the near future will stimulate further growth of the
PRC capital market.
A majority of investors in the PRC stock market are individuals
According to the Shanghai Stock Exchange, the average percentage of trading volume
attributed to natural person investors was 84.8% from 2007 to 2010. The following table sets
forth the trading volume of the Shanghai Stock Exchange by investor type between 2007 and
2010:
2007 2008 2009 2010 Average
Natural person investors . . . . . . . . . . . . . . 86.0% 83.2% 85.4% 84.6% 84.8%
General legal persons(1) . . . . . . . . . . . . . . 3.6% 4.0% 3.8% 2.4% 3.5%
Professional institutions . . . . . . . . . . . . . . 10.4% 12.8% 10.8% 13.0% 11.8%
– Investment funds . . . . . . . . . . . . . . . 8.3% 9.9% 8.0% 7.7% 8.5%
(1) General legal persons refer to legal persons other than professional institutions.
Sources: Shanghai Stock Exchange
– 96 –
INDUSTRY OVERVIEW
In terms of the number of investors, according to the CSDCC, as of December 31, 2011,
there were 162.9 million A share accounts in the PRC, of which approximately 162.3 million
were held by individuals, representing 99.63% of all accounts. The following table sets forth
the total number of A share accounts held by individuals in the PRC at the end of the periods
indicated:
2006-2011
As of year end 2006 2007 2008 2009 2010 2011 CAGR
(in millions, except percentages)
A share accounts . . . . . . . 72.8 110.1 120.8 137.3 151.5 162.3 17.4%
Source: CSDCC
We believe the PRC stock market has significant opportunities for optimization and
growth in the future. In addition, the robust economic growth and the substantial increase in
assets available for investment continue to drive the growth of the PRC capital market.
Personal wealth accumulated rapidly and assets available for investment increased
Per capita disposable income has been increasing rapidly in the PRC and has further growth
potential
The rapid economic development in the PRC has accelerated the accumulation of personal
wealth of its residents. According to the NBSC, the per capita disposable income of urban
residents in the PRC nearly doubled during the period between 2006 and 2010 with a CAGR
of 18.5%, which is significantly higher than the growth rate in Japan and the U.S. during the
same period. However, the PRC per capita disposable income of US$1,810 in 2010 is still much
lower than US$36,697 in the U.S. The following table sets forth per capita disposable income
growth rate in the PRC, Japan and the U.S. for the period between 2006 and 2010:
PRC Japan U.S.
18.5% -0.7% 2.6%
Sources: NBSC, Japan Statistics Bureau, U.S. Census Bureau
– 97 –
INDUSTRY OVERVIEW
Financial assets held by PRC residents grew rapidly
Apart from the growth in personal disposable income levels, the total amount of financial
assets held by PRC residents also grew at a fast pace. These assets are held mainly in the forms
of cash, bank savings, securities, securities investment funds, personal guarantee deposits and
insurance policies. The growth rate of the total amount of financial assets held by PRC
residents exceeded the nation’s GDP growth rate in nine of the ten years from 1999 to 2009.
The following chart illustrates the growth rates of the financial assets held by PRC residents
relative to the GDP of the PRC for the periods indicated:
40%
33.3%
30%
23.6%
20.3%
20% 15.9%
17.0% 17.7% 15.9%
14.2% 13.9% 14.2%
11.8%
9.6%
10% 10.1% 11.3% 12.7%
8.4% 9.1% 10.0% 9.2%
7.6% 8.3%
2.2%
0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Growth Rate of Residents’ Financial Assets
GDP Growth Rate
Sources: International Monetary Fund and National Bureau of Statistics of China, Annual Report of Chinese
Residents’ Income Distribution of the National Development and Reform Commission of the PRC
As of December 31, 2004, and December 31, 2009, the total cash and bank savings of
PRC residents increased from RMB1.8 trillion and RMB13.0 trillion to RMB3.2 trillion and
RMB26.9 trillion, respectively, representing a CAGR of 12.4% and 15.7%, respectively. The
amount of equity assets held by PRC residents grew at a fast pace from RMB0.8 trillion as of
December 31, 2004 to RMB4.8 trillion as of December 31, 2009, representing a CAGR of
– 98 –
INDUSTRY OVERVIEW
39.9%. The following table sets forth the breakdown of the types of financial assets held by
PRC residents from 2004 to 2009:
2004-
2004 2005 2006 2007 2008 2009 CAGR
(RMB in 100 millions, except percentages)
Cash (local currencies) . . . . . . . . . . . . . . . . . 17,820 19,945 22,469 25,210 28,622 31,982 12.4%
Bank deposits . . . . . . . . . . . . . . . . . . . . . . 129,575 150,551 171,737 181,876 228,478 268,650 15.7%
Listed securities . . . . . . . . . . . . . . . . . . . . . 15,190 14,399 23,945 58,311 25,139 50,371 27.1%
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . 6,293 6,534 6,944 6,707 4,981 2,623 (16.1%)
Equity . . . . . . . . . . . . . . . . . . . . . . . . . 8,897 7,865 17,001 71,604 20,157 47,748 39.9%
Securities investment funds . . . . . . . . . . . . . . . 1,905 2,449 5,618 29,716 17,011 21,052 61.7%
Personal guarantee deposits . . . . . . . . . . . . . . . 1,339 1,566 3,128 9,904 4,760 5,666 33.4%
Insurance policy benefits . . . . . . . . . . . . . . . . 14,113 18,315 22,680 27,000 37,831 46,226 26.8%
Settlement funds . . . . . . . . . . . . . . . . . . . . . (77) 23 17 – – – –
Other financial assets (net) . . . . . . . . . . . . . . . 504 1,835 2,005 97 1,030 (64) –
Total financial assets . . . . . . . . . . . . . . . . . . 180,369 209,083 251,600 332,114 342,870 423,883 18.6%
Source: Annual Report of Chinese Residents’ Income Distribution of the National Development and Reform
Commission of the PRC
Participation by PRC residents in the PRC capital market is limited
Unlike investors in developed markets, a substantial proportion of the financial assets
held by PRC residents is in the form of cash and bank savings. The proportion of other types
of financial assets, especially securities, is much lower than that of developed markets such as
the U.S. The following charts illustrate the breakdown of financial assets held by PRC
residents and U.S. residents by asset type as of December 31, 2009:
Structure of PRC Residents’ Structure of U.S. Residents’
Financial Assets (2009) Financial Assets (2009)
Insurance Other Cash and
11% Financial Deposit Bonds
Assets 17% 9%
Funds, Other
Stocks and 0%
Financial
Equities Assets
18% 3%
Funds,
Bonds Cash and Insurance Stocks and
1% Deposit 30% Equities
70% 41%
Sources: Annual Report of Chinese Residents’ Income Distribution of the National Development and Reform
Commission of the PRC, Account for the Balance of Capital of the PBOC. To be comparable, the PRC
stocks include securities investment funds and margins paid by securities customers while U.S. stocks
include mutual investment funds.
The uneven holding structure of financial assets provides the opportunity for PRC
residents to improve their allocation of financial assets by participating more actively in the
capital market.
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INDUSTRY OVERVIEW
Rapid growth in the number of high net worth individuals will drive the development and
innovation of financial products and services in the PRC capital market
In recent years, there has been a rapid increase in the number of PRC high net worth
individuals. According to the “2011 China Private Wealth Report” (2011N-W yN”X1TJ )
jointly published by China Merchants Bank and Bain & Company in 2010, assets available for
investment held by PRC high net worth individuals amounted to RMB15.0 trillion in the
aggregate, while assets available for investment held by all PRC individuals amounted to
RMB62.0 trillion in the aggregate. In 2010, there were over 503,000 high net worth individuals
in the PRC, an increase of 92,000 compared to 2009, or 22%.
With the growth in the number of high net worth individuals in the PRC and their
increasing participation in capital markets, the demand for customized financial services will
continue to grow, and new businesses in the PRC capital market are expected to develop.
Enterprise annuities and other institutional investors have great potential to participate
in the PRC capital market in the future
PRC enterprises have experienced rapid growth in corporate earnings and enterprise wealth
With the continued development of the PRC economy, PRC enterprises have experienced
substantial growth in corporate earnings and enterprise wealth. The following table sets forth
the increase in both earnings and wealth for selected PRC enterprises for the periods indicated:
2001-
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CAGR
(RMB in 100 millions, except percentages)
Total profits before tax
of PRC enterprises(1) 4,733 5,784 8,337 11,342 14,803 19,504 27,155 30,562 34,542 53,050 30.8%
Enterprise savings
(RMB only) . . . . . 51,547 60,029 72,487 84,671 96,144 113,216 138,674 157,632 217,110 244,496 18.9%
(1) PRC enterprises are limited to those with annual revenues of RMB5.0 million or more.
Sources: NBSC, PBOC
– 100 –
INDUSTRY OVERVIEW
Enterprise annuities have high growth potential
Despite the rapid development and expansion of the PRC capital market over the past
decade, the overall participation by institutional investors, which mainly comprises mutual
funds, remains insignificant compared with the participation by individual investors. As
enterprise wealth has accumulated rapidly in recent years and the PRC government continues
to promulgate policies to encourage the participation of institutional investors, enterprise
annuities are expected to play a more important role in the PRC capital market. This is
expected to stimulate the long-term development of the PRC capital market. The following
table sets forth the size of enterprise annuities relative to GDP for the PRC and other developed
countries as indicated in 2010:
Average in
OECD
PRC U.S. Australia Switzerland countries
Percentage of the size of enterprise annuities to
GDP (%) . . . . . . . . . . . . . . . . . . . . 1% 68% 82% 101% 68%
Source: Wind Info
OVERVIEW OF THE PRC SECURITIES INDUSTRY
Development history of the securities industry
Period of Exploration and Development (Before 1999): The PRC stock market developed
quickly as PRC stock exchanges were established and securities firms emerged. The structure
was segregated and the operation and regulation of different financial sectors emerged.
Following its introduction, the expanded joint stock ownership pilot program involving
PRC state-owned enterprises resulted in (i) a rapid increase in the number of stock issuances;
(ii) the emergence of a liquid nationwide secondary stock market; and (iii) an increase in stock
trading activities. These results contributed to the establishment of the Shanghai Stock
Exchange and the Shenzhen Stock Exchange. Subsequently, the number of listed companies,
total market capitalization, the amount of proceeds raised from stock equity issuances, the
number of investor accounts and securities trading volume all experienced substantial growth.
Early forms of securities firms emerged along with the establishment of primary and
secondary securities market in the PRC. In the late 1980s and early 1990s, securities firms,
such as Haitong Securities, former Shenzhen Special Economic Zone Securities, former
Wanguo Securities Co., Ltd., former Junan Securities Limited Liability Company, former
China Southern Securities Co., Ltd. and former China Securities Co., Ltd., were established.
In 1996, the number of PRC securities firms reached a record of 553.
In 1997, the PRC adopted a segregated operating structure under which securities,
banking, trust and insurance businesses began to operate independently from each other. In
1998, the CSRC became the sole regulatory authority of the PRC securities and futures
markets, resulting in the effective segregation of the operation and regulation of the PRC
securities industry from other financial sectors.
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INDUSTRY OVERVIEW
Period of Regulated Development (1999 to 2004): As the regulatory regime of the PRC
securities market gradually evolved, many regulatory non-compliance incidents and
deficiencies in internal controls among securities firms were exposed.
The promulgation of the Securities Law in 1999 and the amendments of the Securities
Law and the Company Law in 2005 marked important steps towards the “rule of law” by the
PRC securities market. The CSRC implemented a series of measures to reform the procedures
governing securities issuances in the PRC. It replaced the “examination and approval system”
with the “verification system” in 2001 and subsequently with the “sponsorship system” in
2004. These reforms focused on the quality of the issuers and laid a solid foundation for a
stable capital market. In addition, in 2002, the CSRC introduced a floating-rate commission
mechanism, resulting in a more market and customer oriented business model for PRC
securities firms. All these developments indicated the gradual evolution of the PRC securities
industry.
For the period between 1999 to 2001, earnings of PRC securities firms soared during the
market boom. However, the subsequent decline of the stock market in 2001 unveiled the
inherent risks of the industry as a whole, such as operational non-compliances and
misappropriation of customers’ funds by securities firms.
Period of Rectification and Regulation (2004 to 2008): Industry-wide rectification and
increased regulatory measures were introduced in the PRC securities industry. The lifting of
restrictions on the trading of certain state-owned and non-tradable shares allowed a large
number of non-tradable shares to be gradually converted into freely tradable shares, which
resulted in the expansion of the size of the PRC stock market.
In August 2004, the CSRC launched comprehensive legislative and enforcement measures
governing the operations of PRC securities firms, pursuant to which securities firms that
violated relevant regulations and had high-risk exposure were restructured or nationalized
through capital injections. During this period, the CSRC implemented a risk management and
compliance system that used Net Capital as the key metric to assess the risk exposure of the
securities firms. It also promulgated ratings-based regulations to govern PRC securities firms
and encouraged those with effective risk management to expand their businesses. As a result
of the implementation of risk control measures and the stringent regulation of securities firms,
the PRC securities industry successfully navigated through the global financial crisis in 2008.
In April 2005, the CSRC promulgated the Notice on Issues Regarding the Pilot Reform
of Non-tradable Shares of Listed Companies (eN ^ QlSk R e9—ifg UOLv
w) and implemented the Measures for the Administration of the Reform of Non-tradable
Shares of Listed Companies (N ^ QlSk R e9—it ) in September, which officially
launched the reform of non-tradable shares. Such reform enabled holders of non-tradable
shares to realize the value of their shares in an open market.
Period of Innovation (2009 and beyond): Encouraging a “market-oriented” regulatory
concept and product innovation.
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INDUSTRY OVERVIEW
In 2009, the CSRC began to shift its stringent regulatory approach to a market-oriented
approach. Certain securities firms were designated to participate in pilot programs to develop
new businesses, resulting in the gradual expansion of the business scope of the PRC securities
industry:
in 2009, the CSRC introduced new guidelines for securities firms to engage in direct
investment;
in March 2010, the CSRC issued guidelines on a pilot program for margin financing
and securities lending and stipulated the qualification requirements for securities
firms to participate in the pilot program. The pilot program was officially converted
to a regular business available to all PRC securities firms that meet certain
requirements in October 2011. Please see “Regulatory Environment – Regulation on
the PRC Securities Industry – Regulation on Operations” for details on such
requirements;
in April 2010, the China Financial Futures Exchange launched the first stock index
futures and the CSRC issued guidelines for trading in these futures by securities
firms;
in April 2011, the CSRC introduced the Regulations on Investment Scopes of the
Proprietary Trading Business of Securities Companies and the Relevant Matters (
eIR8QlSIR8êqimRbW Sg N v ) to further expand the
investment scope of the proprietary trading business of securities firms. These
measures granted the proprietary trading divisions of PRC securities firms access to
the OTC market and allowed securities firms to invest in more financial products
through subsidiaries specifically established to conduct such business;
in July 2011, the CSRC promulgated the Guidelines on the Direct Investment
Business of Securities Companies (IR8QlSvcbimRv{c _ ). Pursuant to
such guidelines, subsidiaries of securities firms that engage in direct investment
business may raise funds by way of private placements and utilize such proceeds,
together with their proprietary funds, to make direct investments;
in October 2011, the CSRC promulgated the Trial Supervision and Management
Measures on Margin and Securities Refinancing Business (I imRvwc{t
) pursuant to which the Securities Finance Company will be responsible for,
among others, providing funding and securities refinancing services to support the
margin financing and securities lending business of PRC securities firms,
supervising the margin financing and securities lending activities, monitoring and
analyzing margin financing and securities lending activities in the PRC securities
market, and utilizing market tools to prevent and control risks;
in October 2011, the CSRC promulgated the Guidelines on the Development of New
Business of Securities Companies (IR8QlSimRRue°O\c _ ) in which the CSRC
set out the requirements for securities companies to launch and develop new
business and also introduced a regulatory regime that encourages the launching of
innovative products by PRC securities firms; and
in December 2011, the Shanghai Stock Exchange and the Shenzhen Stock Exchange
further expanded the scope of securities eligible for margin financing and securities
lending business from 90 stocks to 278 stocks and 7 ETFs.
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INDUSTRY OVERVIEW
Major business activities conducted by the PRC securities firms
The PRC securities firms engage in one or more of the following businesses:
Securities and futures brokerage – Securities and futures brokerage business mainly
refers to the execution of trades of stocks, bonds, funds, warrants, futures and other
securities on behalf of customers;
Investment banking – Investment banking services primarily include equity and debt
underwriting, M&A and financial advisory services;
Asset management – Asset management services primarily include mutual fund
management, collective and targeted asset management schemes, alternative asset
management (in particular, private equity asset management) and investment
advisory services;
Direct investment – Direct investment business involves the use of proprietary funds
by securities firms to make direct equity investments in private companies either
directly or through private equity funds;
Proprietary trading – Proprietary trading business relates to the investments in, and
trading of, authorized financial products by securities firms using their own funds
in accordance with the guidelines issued by the CSRC. These authorized financial
products can be divided into three major categories, namely, securities listed on the
domestic stock exchanges, securities traded in the domestic inter-bank market
(including government bonds, RMB-denominated bonds issued by international
development agencies, instruments of central banks, financial bonds, short-term
financing bonds, corporate bonds, medium-term notes and enterprise bonds) and the
securities approved by or filed with the CSRC that are traded over the counter at
domestic financial institutions. In addition, securities firms can also set up
subsidiaries to engage in a broader range of investment activities. The investment
scope of these subsidiaries includes the three major investment categories
mentioned above, as well as other types of investment products, such as financial
products including derivative investment products, trust products and inter-bank
wealth management products;
Overseas and cross-border business – Overseas and cross-border business primarily
includes QFII asset management, QFII brokerage, domestic and overseas
acquisitions, as well as other businesses that may arise in the future such as RQFII
and listings on the International Board.
REGULATORY REGIME AND TRENDS
Segregated operations and regulations of various PRC financial industries
The operations of various PRC financial industries, such as securities, banking, insurance
and trust industries, are segregated from one another, and are regulated by different regulatory
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INDUSTRY OVERVIEW
authorities. The restrictions imposed on the business scope of the financial services industry
create a favorable and independent environment for the development of the PRC securities
industry, and limited financial institutions to engage in cross-industry business activities. We
believe that this segregated structure will continue in the future.
Major regulatory characteristics of the PRC securities industry
The PRC securities industry has experienced a significant transformation over the past 20
years as the industry evolved from being operated in a disorderly manner to being
well-regulated. The main regulatory characteristics of the PRC securities industry are:
A strict market entry system has been established. The PRC securities industry is an
industry subject to stringent license control and many business activities are subject
to the approval and filing requirements of the relevant regulatory authorities (Please
see “Regulatory Environment – Regulation on the PRC Securities Industry – Entry
Requirements”);
The PRC securities industry is subject to a risk management and compliance
regulatory regime that uses Net Capital as the key metric to assess risk. As required
by the PRC regulatory authority, many business activities and the scale of such
activities are subject to specified Net Capital requirements; and
The CSRC imposes different regulatory measures on securities firms based on their
regulatory rating, which is determined according to their respective risk
management capabilities, competitiveness and compliance record. The CSRC gives
securities firms with higher ratings priority to participate in pilot programs of new
financial products. The following chart illustrates the number of PRC securities
firms under each rating category as determined by the CSRC as of September 30,
2011:
CC C AA
CCC 3 2
5
B
A
BB
16 BBB
Source: CSRC, as of September 30, 2011
Please see “Industry Overview – The Competitive Landscape in the PRC Securities
Market” for an explanation of the rating categories.
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INDUSTRY OVERVIEW
Regulatory trends in the PRC securities industry
Currently, the regulatory focus of the PRC securities industry is moving towards a more
market-oriented regime. We believe that this trend will foster the development of the PRC
securities industry, promote industry consolidation and strengthen the overall competitiveness
of securities firms. We believe the regulatory outlook will include: (i) the relaxation of
restrictions on the business scope of securities firms; (ii) the encouragement of product
innovation and diversification of product mix; and (iii) the introduction of leverage to increase
the capital efficiency of securities firms. This trend has also allowed PRC securities firms to
gradually transform from a traditional business model to a capital-based and value-added
business model.
We believe large securities firms will benefit more from these regulatory developments
as they enjoy economies of scale, have effective corporate governance and possess the skills
and resources to develop new businesses.
THE EMERGING SECURITIES INDUSTRY IN THE PRC
The PRC securities industry has experienced rapid growth in terms of asset size, revenue
and net profit and has maintained a relatively high profit margin. The following table sets forth
the total assets, net assets, revenue, net profit and net profit margin of the PRC securities firms
for the periods indicated:
2006-2011
(1)
2006 2007 2008 2009 2010 2011 CAGR
(RMB in 100 million, except percentages)
Total assets . . . . . . . . . . 6,187 17,337 11,909 20,287 19,686 15,728 20.5%
Net assets . . . . . . . . . . . 1,060 3,443 3,594 4,840 5,674 6,303 42.8%
Revenue . . . . . . . . . . . . 626 2,836 1,231 2,053 1,927 1,360 16.8%
Net profit . . . . . . . . . . . 256 1,307 494 934 784 394 9.0%
Net profit margin of the
industry (%) . . . . . . . . . 40.9% 46.1% 40.2% 45.5% 40.7% 29.0% –
(1) The 2011 data from the SAC was based on the preliminary results of PRC securities firms.
Source: SAC
Asset size: Between 2006 and 2010, total assets of the PRC securities firms
increased from RMB618.7 billion to RMB1,968.6 billion, representing a CAGR of
33.6%, and net assets of the PRC securities firms increased from RMB106.0 billion
to RMB567.4 billion, representing a CAGR of 52.1%. Total assets of the PRC
securities firms decreased to RMB1,572.8 billion as of December 31, 2011 due
primarily to decrease in the value of customer deposits as a result of unfavorable
market conditions in the securities market in 2011.
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INDUSTRY OVERVIEW
Revenue: Total revenue of PRC securities firms increased from RMB62.6 billion in
2006 to RMB192.7 billion in 2010, representing a CAGR of 32.5%, which is
substantially higher than the CAGR of -12.6% for U.S. securities firms during the
same period, according to SIFMA. In addition, total net profit increased from
RMB25.6 billion in 2006 to RMB78.4 billion in 2010, representing a CAGR of
32.3%, which was also higher than the CAGR of -2.3% for U.S. securities firms
during the same period, according to SIFMA. Total revenue of PRC securities firms
decreased from RMB192.7 billion in 2010 to RMB136.0 billion in 2011 due
primarily to unfavorable market conditions in the securities market in 2011 and
intense industry competition which further drove down securities brokerage
commission rates.
Profitability: According to the SAC, the net profit margins of PRC securities firms
were maintained at over 40% from 2006 to 2010. In 2010, the return on assets of
PRC securities firms was 3.98%, which was higher than the 0.53% return on assets
of U.S. securities firms during the same period. The net profit margins of PRC
securities firms were decreased from 40.7% in 2010 to 29.0% in 2011 due primarily
to unfavorable market conditions in the securities market in 2011 and intense
industry competition which further drove down securities brokerage commission
rates.
Additionally, the primary business segments in the PRC securities industry experienced
high growth, which has driven the PRC securities industry’s rapid growth.
Brokerage business
As the PRC securities market is still in its early stages of development, brokerage
business remains the core business of PRC securities firms. Driven by economic development,
urbanization and wealth accumulation, the total trading volume of securities brokerage
businesses of securities firms increased substantially. According to the CSRC, the stock trading
volume in the PRC securities market increased from RMB9,046.9 billion in 2006 to
RMB42,164.7 billion in 2011, representing a CAGR of 36.0%. According to the CSDCC, the
number of stock brokerage accounts, including A shares and B shares, in the PRC increased
from approximately 78.5 million at the end of 2006 to approximately 173.2 million at the end
of 2011, representing a CAGR of 17.1%. The following table sets forth the stock trading
volume and the number of stock brokerage accounts in the PRC from 2006 to 2011:
2006-2011
2006 2007 2008 2009 2010 2011 CAGR
Stock trading volume (RMB in
100 million) . . . . . . . . 90,469 460,556 267,113 535,987 545,634 421,647(1) 36.0%
Number of stock brokerage
accounts (in ten thousand) . . 7,854 11,287 12,364 14,028 15,454 17,316 17.1%
Sources: CSRC, SAC, CSDCC
(1) Due to the unfavorable market conditions in the PRC securities market in 2011, stock trading volume decreased
significantly from RMB54,563.4 million in 2010 to RMB42,164.7 million in 2011.
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INDUSTRY OVERVIEW
Investment banking business
The total proceeds raised from equity offerings on the Shanghai Stock Exchange and
Shenzhen Stock Exchange increased from RMB269.7 billion in 2006 to RMB701.7 billion in
2011, representing a CAGR of 21.1%.
2006-2011
2006 2007 2008 2009 2010 2011 CAGR
(RMB in 100 million, except percentages)
Proceeds raised from equity
offerings . . . . . . . . . . 2,697 8,043 3,464 5,150 10,121 7,017 21.1%
Source: Wind Info
According to Wind Info, non-government bond and note offerings in the PRC increased
from RMB1,381.6 billion in 2006 to RMB4,658.5 billion in 2011, representing a CAGR of
27.5%.
The following table shows the information on bonds and notes issued from 2006 to 2011:
2006-2011
2006 2007 2008 2009 2010 2011 CAGR
(RMB in 100 million, except percentages)
Proceeds raised from bond and
note offerings(1) . . . . . . . 13,816 17,562 21,528 30,347 31,293 46,585 27.5%
(1) Issuances of bonds and notes refer to those related to corporate financing, including corporate bonds, financial
bonds, short-term commercial papers, medium-term notes, asset-backed securities, convertible bonds and
warrant bonds but exclude treasury bonds, municipal bonds and central bank instruments.
Source: Wind Info
Corporate M&A activities increased between 2006 and 2011. According to Dealogic Ltd.,
the total value of domestic and overseas M&A transactions involving PRC enterprises
increased from US$124.2 billion in 2006 to US$242.6 billion in 2011, representing a CAGR
of 14.3%.
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INDUSTRY OVERVIEW
The rapid growth of investment banking business contributed to the revenue growth of
PRC securities firms. According to the SAC, net revenue of securities firms from securities
underwriting increased from RMB10.1 billion in 2007 to RMB27.2 billion in 2010,
representing a CAGR of 39.1%. During the same period, revenue from the investment banking
business as a proportion of the total revenue of the securities industry increased from 3.6% to
14.1%. The following table sets forth the net revenue of securities firms from securities
underwriting for the periods indicated:
2007-2010
2007 2008 2009 2010 CAGR
(RMB in 100 million, except percentages)
Net revenue from securities underwriting and
sponsors business . . . . . . . . . . . . . . . . 101 77 152 272 39.1%
Source: SAC
Asset management business
According to the SAC, the asset management industry achieved tremendous growth
between 2006 and 2011 as total AUM managed by mutual fund management companies and
securities firms increased from RMB857.1 billion in 2006 to RMB2,188.0 billion in 2011
(including securities investment funds), representing a CAGR of 20.6%.
As of December 31, 2006-2011
2006 2007 2008 2009 2010 2011 CAGR
(RMB in 100 million, except percentages)
Net AUM managed by mutual fund
management companies and
securities firms . . . . . . . . . 8,571 32,766 19,381 26,761 24,844 21,880 20.6%
Source: 2006-2009 China Securities Investment Fund Annual Report; SAC
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INDUSTRY OVERVIEW
The PRC securities industry is still in its early stages of development and we believe there
is significant potential for further development
Despite its high growth rate, the PRC securities industry is still in its early stages of
development compared to the securities industries in developed overseas markets. The
following table sets forth a comparison of certain information about the PRC and U.S.
securities industries as of December 31, 2010:
Total assets of Total revenue of
securities firms as a non-brokerage
percentage of the business as a
total assets of percentage of total
Total assets of the financial Total revenue of revenue of
securities firms industry securities firms securities firms
(RMB in (RMB in
100 million) (%) 100 million) (%)
PRC . . . . . . . . . . . . . . . . . . . . . 19,686 1.9% 1,927 44.0%
U.S. . . . . . . . . . . . . . . . . . . . . . 305,640 20.0% 16,787 82.0%
Sources: CSDCC, NBSC, CSRC, SAC, SIFMA, U.S. Census Bureau
As of December 31, 2010, the assets of PRC securities firms accounted for 1.9% of the
total assets of the PRC financial industry compared with 20.0% for U.S. securities firms. As
of December 31, 2010, the total assets and total revenue of the PRC securities firms were
RMB1,968.6 billion and RMB192.7 billion, respectively, compared to RMB30,564 billion and
RMB1,678.7 billion, respectively, for the U.S. securities firms.
Currently, the brokerage business constitutes a major part of the PRC securities industry,
with revenue from non-brokerage businesses accounting for 44% of the total revenue,
compared with 82% for the U.S. The structural disparity between the PRC securities market
and developed securities markets suggests that there is great potential for growth in various
businesses in the PRC securities industry.
The PRC securities industry has a lower penetration rate and a higher return on assets than
other financial sectors
The penetration rate of the PRC securities industry is substantially lower than that of
banking and insurance industries. According to the 2010 China Payment System Development
Report published by the PBOC in June 2011, as of December 31, 2010, the PRC banking
industry had approximately 3.38 billion settlement accounts in the PRC whereas the PRC
securities industry had only approximately 155 million accounts (including A-share and
B-share accounts), which was approximately 4.6% of that of the banking industry. This
indicates that many potential clients are yet to be tapped by the securities firms. With further
urbanization and wealth accumulation, the PRC securities industry is likely to have greater
growth potential than other financial sectors as a result of its currently lower penetration rate.
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INDUSTRY OVERVIEW
In addition, the PRC securities industry has higher returns on assets than other financial
industries. In 2010, a return on assets was approximately 4.0%, compared with approximately
1.0% and approximately 1.3% for the PRC banking and insurance industries, respectively.
Significant growth potential in various business segments
Brokerage business: Significant development potential
Despite its substantial development in recent years, the PRC brokerage business still has
significant potential and will likely maintain its rapid growth. For example, we believe:
Urbanization in the PRC and the growth of the PRC economy are expected to lead
to the increase in the number of brokerage accounts opened. Furthermore, the
personal disposable income level in the PRC and the amount of tradable financial
assets are expected to stimulate investment needs and increase the trading volume
of PRC securities firms;
The brokerage branches of PRC securities firms are concentrated in more developed
coastal areas of the PRC. According to the Shanghai Stock Exchange, as of June 30,
2011, 61.5% of the brokerage branches of PRC securities firms were located in the
Pearl River Delta, the Yangtze River Delta and the Bohai Rim, which accounted for
only 39.3% of the PRC population. Conversely, as of June 30, 2011, 38.5% of the
brokerage branches of PRC securities firms were located in less developed central,
western and northeastern regions of the PRC, which accounted for 60.7% of the
nation’s population. With the continued economic growth of the underdeveloped
regions in the PRC, it is expected that there will be further growth of the PRC
brokerage business;
There is high growth potential due to the age and geographic distribution of
brokerage customers. According to CSDCC, as of December 31, 2010, accounts held
by individuals aged between 20 and 40 years totaled 65.7 million, accounting for
50.2% of brokerage accounts. This age group represents a major portion of the
working population in the PRC, the growth of which, we believe, will continue to
propel the increase in brokerage trading volume. In addition, the geographic
distribution of accounts among PRC securities firms is highly uneven. As of
December 31, 2010, the number of securities accounts in economically developed
areas such as Beijing and Shanghai exceeded their population. In contrast, in the less
developed areas such as central, western China, the number of securities accounts
per capita was 0.08 and 0.07, respectively. With the faster economic growth in less
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INDUSTRY OVERVIEW
developed regions in the PRC, the number of individual investors is likely to
increase. The following table sets forth the number of accounts per capita in various
regions of the PRC as of December 31, 2010:
Eastern Central Western Entire
Beijing Shanghai China(1) China(1) China(1) PRC
(2)
Number of accounts opened per capita as of
December 31, 2010 . . . . . . . . . . . . . . 1.37 1.34 0.23 0.08 0.07 0.15
(1) Central China covers provinces that include Anhui, Henan, Heilongjiang, Hubei, Hunan, Jilin,
Jiangxi, Inner Mongolia and Shanxi; Western China covers provinces that include Gansu,
Guizhou, Ningxia, Qinghai, Shaanxi, Sichuan, Tibet, Xinjiang, Yunnan and Chongqing; Eastern
China covers provinces that include Beijing, Fujian, Guangdong, Guangxi, Hainan, Hebei,
Jiangsu, Liaoning, Shandong, Tianjin and Zhejiang.
(2) Including accounts opened by institutions.
Sources: CSDCC, NBSC
As a result of the continuing economic development of the PRC and the expansion
of financial services targeting institutions and high net worth individuals,
institutions and high net worth individuals are expected to boost the trading volume
of securities; and
In the foreseeable future, margin financing and securities lending, margin and
securities refinancing, stock index futures trading and futures IB brokerage, among
other things, will stimulate interest in brokerage services and will create momentum
for the development of the securities industry.
We expect that commission rates for stocks and funds will stabilize in the future. Since
2002, commission rates for stocks and funds have been driven by market demand. In particular,
the CSRC allowed service outlets to offer securities brokerage services when the number of
securities branches surged rapidly, which led to intense price competition. According to the
China Securities Sector Report published by BOCOM International Securities Limited dated
July 14, 2011, the intense market competition caused industry average commission rates for
stocks and funds to fall from 0.160% in 2007 to 0.099% in 2010. However, we believe that
commission rates for stocks and funds are gradually stabilizing for the following reasons:
the commission rate level is close to that in developed markets, such as the U.S.
securities market. According to data from SIFMA, the commission rate for stocks
and funds in the U.S. was 0.08% in 2009. This suggests that the commission rates
for stocks and funds in the PRC brokerage business do not have much room for
further reduction;
a number of PRC securities firms, in particular large securities firms, have offered
a variety of specialized products and services, such as investment advisory services,
personalized wealth management and margin financing and securities lending. By
providing differentiated services, these securities firms aim to distinguish their
brokerage businesses from those of other securities firms that continue to offer
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INDUSTRY OVERVIEW
standard brokerage products and services. We believe such differentiation in
products and services can help stabilize or even raise commission rates for stocks
and funds in the foreseeable future;
the establishment of new securities branches will still be subject to stringent
regulation with respect to the number of securities branches that can be opened and
the areas where they may operate. The CSRC’s previous policy that allowed service
outlets to be upgraded to securities branches has resulted in intensified price
competition and significant reductions in commission rates for stocks and funds over
the last several years. The CSRC has subsequently instituted strict controls over the
opening of new securities brokerage branches, especially in certain major
economically developed regions of the PRC where the brokerage market is deemed
saturated and the opening of the new securities branches is basically prohibited.
Therefore, this restriction is favorable to large securities firms that have already
established their nationwide branch network in economically developed areas; and
to curb price competition and to prevent further declines in commission rates for
stocks and funds, the CSRC has published its updated opinion stipulating that
commission rates for stocks and funds must not be lower than the cost of the
brokerage operations of PRC securities firms. In addition, a number of CSRC local
representative offices in various provinces have successively announced minimum
commission rates for stocks and funds in these regions.
Investment banking business: Numerous potential growth drivers
Equity financing:
In 2010, the ratio of stock market capitalization in the PRC to its GDP was 67%,
significantly less than the ratio of 119% for the U.S. We believe a lower ratio implies
greater growth potential for equity financing. In addition, the ratios of the number of
listed companies to the total number of large and medium-sized PRC enterprises and to
the total number of enterprises with annual revenue of RMB5 million or more are still
relatively low, which implies a large number of companies still have the potential to seek
a listing in the future. The following tables set forth the ratio of the number of listed
companies to the total number of large and medium-sized PRC enterprises and to the total
number of enterprises with annual revenue of RMB5 million or more for the periods
indicated:
2006 2007 2008 2009
Ratio of listed companies to the total number of large and
medium-sized enterprises . . . . . . . . . . . . . . . . . . . 4.97% 4.82% 4.59% 4.47%
Sources: NBSC, Shanghai Stock Exchange, Shenzhen Stock Exchange. Classification of enterprises into
large, medium or small ones is made according to the criteria stipulated in the “Measures of
Classifying Large, Medium and Small-Sized Companies for Statistical Purpose (Provisional)”
announced by the NBSC in 2003. Data in the above table are figures as of December 31 of each
relevant year.
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INDUSTRY OVERVIEW
2006 2007 2008 2009
Ratio of listed companies to the total number of
enterprises with revenue of RMB5 million or
more. . . . . . . . . . . . . . . . . . . . . . . . 0.47% 0.46% 0.38% 0.40%
Sources: NBSC, Shanghai Stock Exchange, Shenzhen Stock Exchange
Bond offerings:
While bond offerings have experienced rapid growth in the PRC in the past, the
penetration rate is still substantially lower than that of developed countries and there is
still enormous potential for development.
According to Wind Info, SIFMA and Bloomberg, total corporate debt outstanding in the
PRC accounted for 7.3% of its GDP in 2010 compared to a 51.6% in the U.S. This implies
that the PRC bond market still has enormous growth potential. Driven by the
transformation towards direct financing channels, the amount of debt financing will
further expand and we believe its penetration will eventually reach a level comparable to
that of developed markets.
Mergers and acquisitions/restructuring:
We believe that domestic and cross-border M&A activities will grow significantly.
Economic transformation in the PRC is prompting various industries to consolidate,
which is likely drive domestic M&A transaction volume. In addition, as liquidity has
increased remarkably as a result of the launch of several rounds of quantitative easing by
a number of developed countries to deal with the recent financial crisis, we believe that
many large multinational enterprises with significant cash reserves are eager to conduct
M&A activities in the PRC. Furthermore, encouraged by PRC government policy, a
number of PRC enterprises have expedited their accumulation of capital reserves and
increased their pace of internationalization. As a result, the number of overseas M&A
transactions entered into by PRC enterprises has risen considerably during the past
several years.
In August 2011, the CSRC promulgated the “Decision to Revise Relevant Regulations on
the Restructuring of Major Assets and Obtaining of Related Financing by Listed
Companies” (eOe9N ^ QlS‘Y’u\"‘D ‘ YWvvlz[ ) to support
PRC enterprises to conduct M&A by taking advantage of the resources in PRC capital
market, which further promotes industrial consolidation and upgrading. We expect that
under a favorable business and regulatory environment, M&A activities will generate
more revenue particularly for leading securities firms with strong research capabilities
and a strong international network.
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INDUSTRY OVERVIEW
Asset management: Strong demand, expanding product types and low penetration rate to
drive strong growth
As of December 31, 2010, the ratio of AUM of mutual funds to GDP in the PRC was
6.3%, far below the ratio of 79.9% for the U.S. We believe that the following factors will
become the main drivers of the PRC asset management business:
Strong increase in demand:
The accumulation in per capita wealth in the PRC drives the demand for wealth
management products: The rapid accumulation of family wealth in the PRC has laid
a solid foundation for the development of asset management services. According to
the PBOC, savings deposits in the PRC increased from RMB16,159 billion in 2006
to RMB34,364 billion in 2011, representing a CAGR of 16.3%. We believe future
growth in family wealth will continue to foster the development of the asset
management industry in the PRC;
The increase in high net worth population: The growth of high net worth individuals
will likely boost the demand for high-end financial products; and
Demand of institutional or corporate clients for asset management services: The
demand for asset management services will boost the innovation of products and
services, including enterprise annuities and QFII asset management products.
Comparatively small scale basis:
Currently, banks in the PRC manage far more assets than securities firms. According
to the PBOC, as of June 30, 2011, the outstanding balance of wealth management
products of the PRC banks totaled RMB3.57 trillion. As of the same date, according to
the SAC, the AUM of PRC securities firms totaled RMB248.7 billion. As securities firms
have a competitive advantage in product design and innovation, there is great potential for
further development of the asset management business of PRC securities firms.
Expanding product types:
Expanded asset types, including real estate funds and alternative investment funds,
will likely propel the expansion of the asset management market.
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INDUSTRY OVERVIEW
Proprietary trading: More mature business model to drive growth, increased revenue
contribution to the industry and numerous advantages for large securities firms
In an emerging stock market that offers few choices of investment products, proprietary
trading business is limited to stocks, bonds and derivatives. In the past, as there were limited
financial instruments (including risk management and trading instruments), regulation was
more stringent. We believe that the proprietary trading business will likely account for a higher
percentage of the revenue generated by the industry because:
Business models and risk management systems continue to improve. As the industry
continues to develop, and risk management models, trading strategies and hedging
methods continue to improve, proprietary trading risks can be effectively monitored
and controlled. With the proprietary trading business model taking shape, securities
firms can use their capital more efficiently to improve their profitability; and
Regulation has gradually eased. While the CSRC imposed relatively more stringent
regulations on proprietary trading in the past, with the increase and improvement of
financial instruments, regulatory authorities have gradually eased the restrictions on
proprietary investments. Pursuant to the new requirements for permitted proprietary
trading business of securities firms promulgated in April 2011, permitted proprietary
investment products can be divided into three major categories, which include
securities listed on the domestic stock exchanges, securities traded in the domestic
inter-bank market (including government bonds, RMB-denominated bonds issued by
international development agencies, central bank notes, financial bonds, short-term
financing bonds, corporate bonds, medium-term notes and enterprise bonds), and
securities approved by or filed with the CSRC that are traded over the counter at
domestic financial institutions. In addition, PRC securities firms can also set up
subsidiaries to engage in a broader range of investment activities. The investment
scope of these subsidiaries includes the three major investment categories
mentioned above, as well as other types of investment products, such as financial
products including derivative investment products, trust products and inter-bank
wealth management products. Such subsidiaries can invest in a wide range of
financial products with more flexible investment strategies. The regulations impose
certain limitations on the proprietary trading business of securities firms, including,
among other things: (i) the total value of equity securities and security derivatives
held for proprietary trading shall not exceed 100% of the Net Capital of the
securities firms; (ii) the total value of fixed income securities held for proprietary
trading shall not exceed 500% of the Net Capital of the securities firms; (iii) the cost
of one kind of equity securities held by the securities firms shall not exceed 30% of
their Net Capital; and (iv) the market value of one kind of equity securities held by
the securities firms shall not exceed 5% of such securities’ market value, except
circumstances that result from full commitment securities underwriting and
otherwise required by the CSRC. Currently, the proprietary trading regulations do
not have any specific requirements with respect to the investment scale of securities
firms’ investment subsidiaries. According to the latest regulatory requirements,
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securities firms cannot provide financing or guarantees to their respective
investment subsidiaries and therefore, the risk exposure of securities firms in respect
of their investment subsidiaries is limited to the capital contributed to the latter. By
establishing investment subsidiaries, securities firms can expand the scope and
range of their proprietary trading business. With the gradual easing of regulation and
the inclusion of more tradable financial products, the sources of proprietary trading
revenue will become increasingly diversified.
With respect to the proprietary trading business, large securities firms have advantages
over smaller ones. The major advantages include:
Possession of abundant capital helps to fully capture business opportunities. As
funds used in proprietary trading businesses often come from the securities firms’
own capital, securities firms with strong capital bases can usually allocate more
funds to their proprietary trading business and, therefore, can better capture market
opportunities. In addition, a large securities firm with greater capital can expand the
revenue model for its proprietary trading business by setting up and making use of
special purpose subsidiaries dedicated to investments in alternative financial
products; and
Proprietary trading and other securities businesses provide strong support for one
another. For example, a large securities firm with a strong proprietary trading
business often has a large stock portfolio that can be used to support its securities
lending business. A large securities firm also possesses strong research capabilities
to assist the development of its proprietary trading business. A securities firm in
possession of sufficient assets can utilize its financial strength to develop various
products and services.
Direct investment: Fast growth, significant potential and unique advantages enjoyed by PRC
securities firms
Since the launch of pilot programs for direct investment by the CSRC in 2007, registered
capital of direct investment subsidiaries of the PRC securities firms increased from RMB3.1
billion in 2007 to RMB17.6 billion in 2010, representing a CAGR of 78.2%.
As of December 31, 2010, the ratio of stock market capitalization to GDP in the PRC was
only 67% and most of the PRC enterprises are not able to raise funds from the public market.
In addition, the increased use of direct financing for enterprises also encouraged the growth of
the direct investment business of securities firms. As such, the market for direct investment has
significant growth potential.
When competing with domestic and foreign private equity funds, PRC securities firms
have certain advantages over their competitors, which are mainly reflected in:
Extensive domestic knowledge on valuation, industry dynamics, due diligence
practice and exit mechanisms; and
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Early access to direct investment opportunities through a branch network across the
PRC.
In addition, securities firms with strong capital position generally can have a larger scale
of investment. According to the existing regulatory requirements, registered capital of the
direct investment subsidiary of a PRC securities firm cannot exceed 15% of the Net Capital of
such securities firm.
THE TRANSFORMATION OF THE PRC SECURITIES INDUSTRY
Momentum of transformation
After over 20 years of development, the PRC securities industry has established a
considerable scale. However, we believe various factors are driving the transformation of the
industry:
Driver of customer demand. With economic development and wealth accumulation
in the PRC, the demand of individual and institutional investors for financial
products and services has continued to evolve. Clients have generally looked beyond
standard services and demanded customized and value-added services. At the same
time, as a result of the economic reform and development of the PRC over the past
three decades, RMB has gradually become internationalized. With growing
capabilities and globalization, PRC enterprises have increasing desire to expand
overseas. We believe that such aspirations have led PRC securities firms to
strengthen their international business and overseas financial services.
Diversification of revenue composition. Historically, the PRC securities industry has
relied extensively on traditional channel-based brokerage services. According to the
SAC, in 2010, brokerage commissions generated approximately 56% of total
revenue of the PRC securities firms. PRC securities firms are inherently required to
diversify their businesses and to gradually reduce their reliance on the traditional
channel-based brokerage business to achieve sustainable growth.
Trend of regulation. The gradual relaxation of regulatory restrictions and increasing
emphasis on innovation, such as the introduction of margin financing and securities
lending (including margin and securities refinancing), stock index futures trading
and direct investment in the industry.
Through this transformation, the PRC securities industry will have a more diversified
revenue composition, reducing its reliance on the traditional channel-based brokerage business
and allowing it to meet evolving customer demands.
Key areas of transformation
The PRC securities industry is adopting a business model that features integrated and
value-added products and services and an optimized customer base.
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Customer service and product offering approach: From homogenous, channel-based
brokerage services to comprehensive and diversified product suite
The traditional channel-based brokerage business has been the backbone of the PRC
securities industry. However, as intense competition arises from homogenous brokerage
services, securities regulations gradually move towards a market-oriented regulatory regime
with an emphasis on innovation, and customer demands for differentiated products and services
increase, securities firms with a large capital base and strong operating capabilities have begun
to offer more integrated and comprehensive products and services. We believe this
transformation will enhance the competitiveness of these securities firms and help attract and
retain their customers, leading to more stable and diversified revenue streams. Currently, many
large PRC securities firms provide customers with integrated services, including investment
banking, asset management and private equity, to reduce their reliance on the traditional
channel-based brokerage business and aim to achieve a more diversified revenue composition.
Furthermore, in order to satisfy the demands of their customers and to maintain steady growth
of the revenue, many securities firms are expected to design and offer more diversified
products, such as private equity fund management, collective and targeted asset management
schemes, margin financing and securities lending (including margin and securities
refinancing), investment advisory services, stock index futures trading and futures IB
brokerage.
Customer base: From a predominantly retail customer base to a balanced client base with
higher proportion of institutional and high net worth customers
In the past, the PRC securities industry was primarily comprised of retail customers who
provided a steady stream of revenue. With the rapid growth of the PRC economy and the
resulting increase in corporate wealth, the total number and assets of institutional clients
increased. A broader array of products and services that securities firms could offer also serve
to meet the diverse needs of institutional clients. We expect that institutional clients will
contribute a greater portion of revenue to the PRC securities industry. In comparison to
individual investors, institutional investors have a higher demand for value-added securities
services, such as research, prime brokerage and market-making services. They are also less
price sensitive and are more likely to choose new businesses. As such, leading full-service
securities firms can leverage their first-mover advantage to capture business opportunities by
providing those value-added securities products and services, which generally command higher
margin.
In addition, with the rapid growth of individual wealth, we expect the demands of high
net worth individuals in the PRC for asset management services and value-added services to
increase. According to the “2011 China Private Wealth Report” jointly published by China
Merchants Bank and Bain & Company, in 2011, total assets available for investment held by
PRC high net worth individuals are expected to be RMB17.7 trillion in aggregate, representing
an increase of approximately 18% compared to 2010. In addition, the number of high net worth
individuals in the PRC is expected to reach 585,000, representing an increase of 16% compared
to 2010. In the future, demands from institutional and high net worth individual customers and
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their contribution to the PRC securities industry are likely to increase. As a result of the
accumulation of personal wealth and urbanization in the PRC, we also expect the number of
retail customers to increase, leading to a more balanced industry customer base.
Business model: From a capital-light business model to a capital based and value-added
business model
The PRC securities industry is transforming from a capital-light and low-leverage
operating model into a more capital-based and value-added model. Many new businesses, such
as margin financing and securities lending and direct investment, may require large amounts
of proprietary capital. This creates a competitive advantage for securities firms with larger
capital bases to differentiate themselves from their competitors and attract new and retain
existing clients. For example:
Brokerage business – Large capital base can strengthen a securities firm’s ability to
engage in the margin financing and securities lending business and to optimize its
product mix;
Underwriting business – Capital can be used to strengthen a securities firm’s
commitment in underwriting and securities offerings to enhance the competitiveness
of securities firms and in obtaining higher commissions and fees;
M&A financial advisory services – A higher capital base can assist a securities firm
in receiving higher financial advisory fees, interest income and investment returns
through M&A financing, bridge financing and partnership investment;
Asset management and direct investment businesses – Seed Capital can be deployed
to establish funds with other limited partners to obtain higher management fees and
investment returns from more AUM while achieving risk sharing; and
Proprietary trading business – As the PRC regulatory authorities began to permit
securities firms to establish subsidiaries specifically for making alternative
investments, large securities firms with strong capital base will be in a better
position to capture market opportunities, to expand product mix, to enhance the
scale of investments, to optimize the revenue model of the proprietary trading
business and to eventually improve their ability to realize investment returns.
With the gradual transformation of the business model in the PRC securities firms to a
capital-based and value-added model, we believe that the financial and operating leverage
ratios will be enhanced accordingly, thus increasing the profitability of the industry.
Scope of operations: Expansion into international businesses
As the RMB is gradually internationalized and foreign investments continue to flow into
the PRC, cross-border business is expected to become a fast-growing area of the PRC securities
industry. Overseas business, cross-border M&A, cross-border financing and cross-border asset
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management are expected to become catalysts for future growth and the PRC securities
industry will become more internationalized:
Overseas business: An increasing number of PRC securities firms, including
Haitong Securities, have established overseas branch networks to satisfy the
cross-border investment needs of their domestic clients. At the same time, these
firms have benefited from the growth in overseas securities markets;
Cross-border M&A: With the growth of PRC enterprises and the increasing demands
for cross-border M&A transactions, according to Dealogic Ltd., the transaction
value of cross-border M&A conducted by the PRC enterprises increased from
US$13.0 billion in 2000 to US$100.7 billion in 2010;
Cross-border financing: An increasing number of PRC enterprises are seeking
overseas listing of their shares. According to Dealogic Ltd., 63 Chinese enterprises
raised an aggregate amount of US$38.1 billion (including full deal value for
dual-listed deals) through their IPOs on the Hong Kong Stock Exchange in 2010,
accounting for 60.1% of the total amount of proceeds raised through IPOs in Hong
Kong in that year; and
Cross-border asset management: The establishment of the QFII system in 2002
marked an important step for the PRC capital markets to open up and to attract
foreign investment. On January 20, 2012, the amount of the QFII quota was US$22.2
billion. With the relaxation of stringent regulatory policies, QFII business is
expected to further expand. Meanwhile, the CSRC is discussing with the SFC in
connection with certain policies on RQFII, which will provide a mechanism for the
return of overseas RMB to the PRC through PRC securities firms and fund
management companies in Hong Kong.
Business transformation by segments
Transformation of the brokerage business: The growth of margin transactions, diversified
and customized products and a balanced customer base
As a result of the industry transformation and the development of margin financing and
securities lending business, the contribution of margin transactions in the brokerage business
has gradually increased, but it is significantly lower than that in the U.S. As of June 30, 2011,
the margin financing balance of the PRC accounted for 0.1% of its domestic market
capitalization, compared to 1.7% for the U.S. for the same period. The PRC securities lending
balance accounted for 0.001% of its domestic market capitalization, compared to 0.82% for the
U.S. for the same period. The PRC margin transactions have substantial development potential,
and are expected to be growth drivers of the brokerage business.
In addition to traditional channel-based brokerage services, the brokerage business will
offer diversified and value-added services such as investment advisory, stock index futures
trading, margin financing and securities lending (including margin and securities refinancing),
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equity market research, QFII brokerage and futures IB brokerage, which will enable the
stabilization of or increase in brokerage commission rates for stocks and funds. For example,
currently, the commission charged by discount brokers in the U.S., which do not provide
value-added services is between US$4.99 and US$9.99 per transaction, while that of
full-service securities firms is between US$16.00 and $20.00 per transaction. We believe
diversified, customized and value-added services will further increase the revenue of the
industry.
With the rapid increase in the number of institutions and high net worth individuals and
their growing importance in the PRC economy, we believe that they will form a substantial
customer base of the PRC brokerage business in the future. Therefore, the development of
customized products and the provision of better services to these customers will be a key
strategy for the PRC brokerage business in the future.
Transformation of the investment banking business: The development of bonds and other
financing channels, increase in the M&A business and the rise of small and medium-sized
clients
The investment banking business is expected to experience rapid growth with the
transformation from indirect financing to direct financing. According to Wind Info, SIFMA and
Bloomberg, total corporate debt outstanding in the PRC accounted for 7.3% of its GDP in 2010
compared to 51.6% in the U.S. In addition, the emergence of new listing venues, such as the
SME Board, the ChiNext Board and the upcoming International Board and the New OTC Board
will continue to contribute to the development of the investment banking business.
In terms of M&A transactions, the economic transformation in the PRC has led to a trend
of consolidation in a variety of industries. With increasing corporate restructuring, mergers and
overseas expansion, M&A activities are expected to grow rapidly. It is expected that leading
securities firms with strong research capabilities and international branch networks will benefit
from this trend.
In terms of customer base, investment banks have begun to switch their focus to SME
clients whose participation in capital markets are growing rapidly. In 2010 and 2011, according
to Wind Info, the total amount of the funds raised from IPOs on the SME Board and the
ChiNext Board were US$45 billion and US$29 billion, respectively, compared to US$28
billion and US$16.8 billion, respectively, on the main board.
Transformation of the asset management business: Transformation to diversified asset
management structure and optimization of customer base
Of the AUM in the PRC securities industry, 95.7% is in traditional mutual funds and 4.3%
is in collective asset management schemes. Transformation to a more mature asset management
structure in the PRC offers an opportunity for the PRC asset management business, especially
in the area of hedge funds, private equity funds and collective asset management schemes.
With the accumulation of wealth in the PRC and the increase in the number of high net
worth individuals, we believe high net worth customers will become increasingly important,
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and asset management services for high net worth individuals will experience strong growth.
The increase in the number of high net worth customers will further optimize the customer base
of asset management business.
As additional investment products appear in the PRC capital market, including real estate
funds, hedge funds, commodity funds, the PRC asset management business will attract more
individual and institutional investors.
New businesses are driving growth for PRC securities firms
We believe new businesses are key for PRC securities firms to achieve:
Customer-oriented, differentiated product offerings. Pursuant to the traditional channel-
based brokerage business model where customer demand analysis is limited, PRC securities
firms primarily provide homogeneous products and services despite differences in customer
characteristics. Securities firms will continue to enhance customer demand analysis with the
development of new businesses such as investment advisory and wealth management services.
PRC securities firms are expected to eventually transform into a customer-oriented model and
promote differentiated solutions through a combination of traditional and new products and
services.
Diversification in revenue composition. New businesses will serve as new growth areas
for PRC securities firms and lessen their reliance on traditional channel-based brokerage
business and homogeneous products and services. We believe the revenue composition of PRC
securities firms will become more diversified through the development of new businesses.
Optimization of customer base. New businesses are key to attracting and retaining high
net worth individual and institutional clients. Increasing the revenue contribution from such
customers is an important element of customer base optimization.
Capital-based and value-added business model. As sufficient capital base is necessary for
conducting value-added new businesses, such as margin financing and securities lending and
direct investment, as well as new businesses to be introduced, such as alternative financial
products investments. New businesses will reinforce the transformation of PRC securities firms
into a capital-based and value-added business model.
The following are some examples of the impact of new businesses on the transformation:
Margin financing and securities lending
The CSRC launched the pilot program for margin financing and securities lending
in March 2010, which was converted to a regular business available to all PRC securities
firms that meet certain requirements in October 2011. Margin financing refers to the
services by which securities firms lend money to investors to buy securities. Securities
lending refers to the services by which securities firms lend securities to their clients to
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enable them to short sell the underlying securities. According to relevant guidelines
issued by the CSRC, the interest rate for margin financing is generally 3% higher than the
PBOC benchmark interest rate for six-month RMB loan to financial institutions. The
interest rate for securities lending is set at the same level or even higher. Margin financing
and securities lending not only enable securities firms to charge interest income and
facilitate more transactions to generate additional commission, but also earn more
commission fees through stimulating of trading activities. Margin financing and securities
lending business can facilitate the securities firms to improve revenue composition and
transform their business models to capital-based and value-added models. In addition,
margin financing and securities lending as an additional value-added service allows
customers to broaden their investment and trading strategies, which in turn improve
customer loyalty of PRC securities firms.
While margin financing and securities lending business is highly regulated in the
PRC, the PRC authorities recently adopted initiatives to encourage the development of
this new business by the PRC securities firms. For instance, prior to December 2011,
there were only 90 stocks eligible for margin financing and securities lending and a
securities firm can only use its own securities for securities lending. On December 5,
2011, Shanghai Stock Exchange and the Shenzhen Stock Exchange expanded the scope of
securities eligible for margin financing and securities lending to 278 stocks and 7 ETFs.
In addition, in October 2011, the Trial Supervision and Management Measures on Margin
and Securities Refinancing Business (I imRvwc{t ) was promulgated by
the CSRC and the Securities Finance Company was established, which will be responsible
for, among others, providing funding and securities refinancing services to support the
margin financing and securities lending business of PRC securities firms. We believe the
above initiatives will enhance the development of the margin financing and securities
lending business and increase the leverage ratio of PRC securities firms.
Stock index futures
Stock index futures were launched in April 2010. They are standard futures contracts
based on a specific stock price index (such as CSI 300 Index). Investors can trade stock
index futures contracts on the futures exchange and use stock index futures for hedging,
arbitrage, calendar spread arbitrage and other activities. Their trading volume of stock
index futures is close to the stock trading volume since its introduction. In 2011, the
trading volume of stock index futures was RMB43,765.9 billion, which was equivalent to
65.7% of stock trading volume during the same year. We expect the participation of more
institutional investors in the trading of stock index futures will create further business
opportunities and diversify revenue streams for the PRC securities firms. In addition,
securities firms can leverage stock index futures to lower the risks associated with
proprietary trading and increase the types of assets under management.
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Private equity investment
PRC private equity investments have experienced rapid growth in recent years. We
believe there are synergies between PRC private equity investment and IPO underwriting
businesses. A successful IPO will provide an effective exit opportunity for private equity
investors. In the PRC, leading securities firms with integrated platforms for private equity
investment and IPO underwriting businesses will gain more competitive advantages.
Private equity business will not only help diversify revenue stream for securities firms,
but also enhance the utilization of capital.
Large securities firms have more advantages in securities industry transformations
Large securities firms possess the following advantages in the transformation of the PRC
securities industry:
Advantage of business innovation. Large securities firms are generally rated higher
by the CSRC and have larger capital bases. These advantages also meet the key
criteria for the grant of regulatory approvals for conducting new businesses on a trial
basis. In addition, with large customer bases, solid traditional businesses, large
capital bases and strong brand, large securities firms are better positioned to develop
new businesses;
Economy of scale and low commission rate sensitivity. Fierce competition and
declining in commission rates for stocks and funds creates substantial market
pressure on the brokerage business. However, with the benefits of economies of
scale and diversified income sources, large securities firms are more resilient to
declines in commission rates for stocks and funds and thus, maintaining steady
levels of total income;
Large customer base and cross-selling ability. Large customer base and established
business platforms will enable large securities firms to take advantage of cross-
selling opportunities, provide customers with a one-stop solution and allow them to
attract new customers and improve customer relationships;
Superior nationwide network. Large securities firms generally have well-established
nationwide networks, which are crucial for their effective product distribution and
provision of localized services to retail and institutional clients;
Branding and human resources. Large securities firms generally have better brand
recognition, which not only gives them an advantage in attracting new customers,
but also helps them attract and retain highly proficient professionals to ensure
long-term business development; and
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High and stable profitability. For example, the weighted average profit margin in
2010 of the top 20 PRC securities firms was 44.7% compared to 21.8% for the
bottom 20 PRC securities firms. From 2008 to 2010, weighted average profit margin
of the top 20 PRC securities firms in terms of revenue was consistently above 40%,
whereas that of the bottom 20 PRC securities firms was very volatile ranging from
-4.4% to 41.4%. The table below sets forth the change of average profit margin of
the top 20 securities firms and the bottom 20 securities firms from 2008 to 2010:
2008-2010
Weighted
2008 2009 2010 average
Weighted average profit margin of the top 20 PRC
securities firms in terms of business revenue . . . . . 44.9% 48.2% 44.7% 45.9%
Weighted average profit margin of the bottom 20 PRC
securities firms in terms of business revenue . . . . . -4.4% 41.4% 21.8% 19.6%
Source: SAC
THE COMPETITIVE LANDSCAPE IN THE PRC SECURITIES MARKET
According to the SAC, as of June 30, 2011, there were 109 registered securities firms in
the PRC securities industry.
The current market landscape reflects the PRC government’s effort to regulate the
securities industry. Between 2004 and 2005, a significant number of companies dissolved,
merged or restructured during the rectification process. In 2007, the CSRC introduced a rating
mechanism, pursuant to which securities firms were rated based on their risk controls,
corporate governance, capital base, profitability and market position.
The rectification and the rating mechanism accelerated the consolidation of the securities
industry, which benefited large securities firms. During the past five years, there has been a
significant increase in market concentration, in terms of net assets, among the large securities
firms. According to the SAC, as of December 31, 2010, the top ten securities firms (based on
net assets) accounted for 47.6% of net assets, 39.5% of the total assets, 44.6% of Net Capital
and 48.7% of net profit of the PRC securities industry.
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The following table sets forth the key information relating to net assets, total assets, Net
Capital, net profit, brokerage market share and underwriting market share of the top ten PRC
securities firms (based on net assets) as of December 31, 2010:
Top 10 Brokerage
Securities Firms Market Underwriting
(Based on Net Net Total Net Net Share Market
Assets) Assets % Assets % Capital % Profit % %(1) Share %(2)
(RMB in million, except percentages)
CITIC . . . . . 61,523 10.8% 109,371 5.6% 41,050 9.5% 11,814 15.1% 2.5% 11.1%
Haitong . . . . . 43,852 7.7% 100,718 5.1% 32,460 7.5% 3,417 4.4% 4.4% 5.7%
Huatai . . . . . 29,998 5.3% 86,479 4.4% 21,658 5.0% 2,369 3.0% 4.2% 3.2%
Guotai Junan . . 23,711 4.2% 93,572 4.8% 17,347 4.0% 3,738 4.8% 5.1% 5.5%
CMS . . . . . . 23,443 4.1% 89,584 4.6% 14,063 3.3% 3,012 3.8% 4.4% 3.2%
Everbright . . . 22,344 3.9% 56,418 2.9% 17,646 4.1% 2,102 2.7% 2.7% 1.2%
Guangfa . . . . 19,006 3.3% 91,036 4.6% 11,963 2.8% 4,887 6.2% 5.3% 2.4%
Guosen . . . . . 17,306 3.1% 63,726 3.2% 12,490 2.9% 3,115 4.0% 3.2% 4.6%
Guoyuan . . . . 14,867 2.6% 23,902 1.2% 11,771 2.7% 875 1.1% 0.7% 0.7%
Shenyin
Wanguo. . . . 14,806 2.6% 60,215 3.1% 12,084 2.8% 2,835 3.6% 3.5% 1.2%
Total . . . . . . 270,856 47.6% 775,021 39.5% 192,532 44.6% 38,164 48.7% 36.0% 38.8%
(1) Based on the total value of customers’ brokerage transaction.
(2) Based on the value of securities underwritten by a securities firm acting as the lead underwriter.
Source: SAC
The CSRC rates every securities firm in the PRC annually. The CSRC rating is divided
into 11 categories, the highest of which is an “AAA” rating, and the lowest of which is a “E”
rating. Highly rated securities firms generally become the designated securities firms for new
pilot products and services approved by the CSRC and will then benefit from first-mover
advantages. As of September 30, 2011, only 16 securities firms (representing 16.7% of the total
number of securities firms) were “AA” rated by the CSRC. To date, no securities firms has
obtained an “AAA” rating from the CSRC.
The PRC securities industry also faces fierce competition from international investment
banks. In recent years, foreign securities firms have been actively looking for chances to access
the PRC securities market through joint ventures. However, the business scope of Sino-foreign
joint venture securities firms is relatively limited and primarily focuses on equity and debt
financing and M&A advisory services. Most of the Sino-foreign joint venture securities firms
were not permitted to operate retail brokerage businesses. We believe, currently, the
competition posed by Sino-foreign joint venture securities firms against PRC securities firms
is insignificant.
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In addition to competition from domestic and foreign securities firms, the PRC securities
industry also faces competition in certain businesses, including but not limited to, asset
management, direct investment and bond underwriting, from domestic financial institutions,
such as banks, asset management firms, trust companies and private equity firms. For example,
banks are the largest bond underwriter in the PRC. We believe that PRC securities firms still
have some competitive advantages over other financial institutions in terms of personnel,
product mix and customer service.
HONG KONG SECURITIES MARKET
History of the stock market in Hong Kong
The Stock Exchange of Hong Kong Limited, previously named the Stockbrokers’
Association of Hong Kong at the time of its establishment in the late 19th century, was the first
formal securities trading market established in Hong Kong and has been the main exchange in
Hong Kong. In 1986, The Stock Exchange of Hong Kong Limited merged with the other
exchanges in Hong Kong and retained its name. It also established GEM in 1999 to provide a
fund-raising platform for growth companies from different industries and to promote the
development of the technology industry in the region. In 2000, The Stock Exchange of Hong
Kong Limited, Hong Kong Futures Exchange Limited and Hong Kong Securities Clearing
Company Limited merged into the Hong Kong Stock Exchange and Clearing Limited, which
was subsequently listed on the Main Board by way of introduction.
Overview of the stock market in Hong Kong
International financial center
After years of continuous efforts, the Hong Kong Stock Exchange has become a key
capital market in Asia for overseas investors. The rapid development of the PRC economy and
expansion of PRC enterprises overseas have steadily strengthened the importance of Hong
Kong in global financial markets over the years. According to WFE, in 2011, the Hong Kong
Stock Exchange ranked 11th in terms of annual and daily average trading value and ranked
third in terms of the amount of proceeds raised from equity offerings (including primary market
and secondary market). In addition, as of December 31, 2011, total market capitalization of the
listed companies on the Main Board and GEM ranked third in Asia and seventh in the global
market.
From 2001 to 2011, the total market capitalization of listed companies on the Hong Kong
Stock Exchange (including Main Board and GEM) increased from approximately HK$3.95
trillion to approximately HK$17.54 trillion at a CAGR of 16.1%. The annual trading volume
increased from approximately HK$1.99 trillion to approximately HK$17.15 trillion at a CAGR
of 24.0%. The number of listed companies on the Main Board increased from 756 to 1,326
while the number of companies listed on the GEM has increased from 111 to 170.
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INDUSTRY OVERVIEW
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Market Capitalization
(HK$ in billions) . . . 3,946 3,611 5,548 6,696 8,180 13,338 20,698 10,299 17,874 21,077 17,537
Number of Main Board
listed companies. . . . 756 812 852 892 934 975 1,048 1,087 1,145 1,244 1,326
Number of GEM listed
companies. . . . . . . 111 166 185 204 201 198 193 174 174 169 170
Annual trading volume
(HK$ in billions) . . . 1,990 1,643 2,584 3,974 4,520 8,376 21,666 17,653 15,515 17,210 17,154
Daily trading volume
(HK$ in billions) . . . 8.19 6.65 10.42 15.96 18.3 33.91 88.07 72.05 62.31 69.12 69.73
Source: Hong Kong Stock Exchange
Diversified and well-organized Hong Kong Stock Exchange participants
The Hong Kong stock market is characterized by (i) its globalization; (ii) high level of
participation of institutional investors; and (iii) increasing participation by PRC investors.
According to the Cash Market Transaction Survey 2010/2011 issued by the Hong Kong Stock
Exchange, from October 2010 to September 2011, the stock trading volume by overseas
investors and institutional investors accounted for approximately 46.1% and 61.6% of the total
trading volume, respectively. In addition, the proportion of PRC retail investors in the stock
trading volume also increased from 3.0% for the period from October 2000 to September 2001,
to 9.9% during October 2010 to September 2011, reflecting increasing participation by PRC
investors.
To deal in listed securities through the Hong Kong Stock Exchange, a person must be an
Exchange Participant holding an Exchange Trading Right. An Exchange Participant must be a
permanent resident of Hong Kong or a limited liability company incorporated in Hong Kong
and registered with the SFC as a licensed corporation authorized to conduct Type 1 (dealing
in securities) regulated activity under the SFO. An Exchange Participant must maintain sound
financial condition and comply with the Securities and Futures (Financial Resources) Rules
and the rules of the Hong Kong Stock Exchange. As of December 31, 2011, there were a total
of 555 of Exchange Participants, including 498 trading participants, 36 non-trading
participants and 21 non-Exchange Participants. Exchange Participants are classified into three
categories:
Group A – top 14 largest firms in terms of trading volume, which mainly comprise
large international institutional investors;
Group B – firms ranked 15-65 in terms of trading volume, who are engaged in a
mixture of overseas and local institutional trading and retail trading; and
Group C – other Exchange Participants.
In December 2011, the market share of Exchange Participants (based on the total trading
volume) from Group A, Group B, and Group C accounted for approximately 58.8%, 31.5%, and
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INDUSTRY OVERVIEW
9.7%, respectively. The market share of Exchange Participants from Group C decreased from
36.8% in 1999, representing the most significant change among the three. This decline in
market share during recent years is primarily attributed to the absence of economies of scale
and the inability to provide a comprehensive and sophisticated platform.
Attractive listing venue
As an international financial hub, Hong Kong has become one of the preferred listing
venues for overseas and domestic companies. One of the core strategies in the Strategic Plan
2010-2012 of Hong Kong Stock Exchange is to attract different types of companies to list in
Hong Kong, including companies in the Greater China area, companies engaged in PRC-related
business and companies from other strategically important international markets. Since 2007,
to help more foreign companies getting listed in Hong Kong, Hong Kong Stock Exchange
actively increased the number of admitted jurisdictions in which the issuer may be incorporated
from three in 2007 to 21 as of December 31, 2011. In addition, Hong Kong Stock Exchange
also launched a variety of facilities for foreign companies to become listed such as IPOs,
secondary listings and Hong Kong depositary receipts. As a result, a number of world
renowned companies, including AIA Group Limited, Glencore International plc, L’Occitane
International S.A., Samsonite International S.A., Prada S.p.A. and United Company Rusal
Limited, have listed in Hong Kong, making Hong Kong a popular listing venue for
international companies. In 2011, Hong Kong ranked first globally in terms of IPOs fund
raising.
In the past 11 years, the amount of funds raised in Hong Kong (including primary and
secondary market) increased significantly from approximately HK$64.4 billion to HK$488.3
billion. Due to the weak performance of the stock market in 2011, the total funds raised
dropped significantly from approximately HK$858.7 billion in 2010 to HK$488.3 billion. The
funds raised from IPO market also dropped from approximately HK$449.5 billion to HK$258.9
billion during the same period. However, Hong Kong still strived to continue to be the world’s
largest IPO market for three consecutive years.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(HK$ in billions)
Amount of funds raised
Primary market . . . . 25.71 51.98 59.14 97.16 165.65 333.85 292.44 65.98 248.23 449.48 258.91
Secondary market . . . 38.71 58.53 154.62 184.64 136.06 190.69 298.41 361.27 393.89 409.24 229.36
Total funds raised . . . . 64.42 110.51 213.76 281.8 301.71 524.54 590.85 427.25 642.12 858.72 488.27
Source: Hong Kong Stock Exchange
The interaction between Hong Kong and the PRC capital markets
Cross-border activities between Hong Kong and the PRC has increased rapidly due to
their close economic ties and frequent capital flows. In addition, the influence of PRC
companies in the Hong Kong stock market gradually increased and PRC companies has become
a vital part of Hong Kong capital market.
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INDUSTRY OVERVIEW
Cross-border activities driven by the internationalization of RMB
The internationalization of RMB is a highlight of Hong Kong capital market and is a
catalyst to further enhance the business interaction between Hong Kong and PRC capital
markets. This has enabled Hong Kong to become a key overseas platform for the development
of RMB financial products. RMB derived from trade settlement is the main source of Hong
Kong’s offshore RMB settlement center. In the second half of 2011, the total amount of RMB
trade settlement by Hong Kong banks amounted to approximately RMB1,100 billion. This
figure almost tripled compared to 2010 when the total amount of RMB trade settlement was
RMB370 billion. In addition, RMB trade settlement by Hong Kong banks as a percentage of
that of the PRC increased from 73% in 2010 to 80% in the first half of 2011, demonstrating
that Hong Kong remained the most important platform for RMB cross-border trade settlement.
According to Hong Kong Monetary Authority, RMB deposits in Hong Kong increased
substantially from RMB12.1 billion as of December 31, 2004 to RMB588.5 billion as of
December 31, 2011, representing a CAGR of 74.1%. Hong Kong as an offshore RMB center
soon develops. We believe that, with the on-going internationalization of RMB and its
increasing demand, an increasing amount of offshore RMB trade settlement will be carried out
in Hong Kong.
As of December 31,
2004-2011
2004 2005 2006 2007 2008 2009 2010 2011 CAGR
(RMB in millions)
Balance of RMB deposits
in Hong Kong . . . . . 12,127 22,586 23,403 33,400 56,060 62,718 314,938 588,529 74.1%
Source: Hong Kong Monetary Authority
As the RMB liquidity pool in Hong Kong continues to expand, RMB financial
intermediary activities have become more active, especially the development of RMB dim sum
bonds. In the first eight months of 2011, RMB bonds issued amounting to RMB70.8 billion in
Hong Kong, already breaking the record of RMB35.8 billion of RMB bonds issued for the
entire year of 2010. In addition, the internationalization of RMB also offers significant RMB
business opportunities in Hong Kong. It is expected that more RMB-linked products and
services will be launched in Hong Kong, such as RMB funds, RMB denominated IPOs and
QFII, which will support the sustained growth of the RMB business in Hong Kong.
Strengthening Hong Kong’s capital market under favorable policies
In August 2011, in order to strengthen Hong Kong as an international financial hub and
facilitate its growth as the offshore RMB center, the PRC government promulgated six policies
to promote further development of Hong Kong and deepen the cooperation between the PRC
and Hong Kong in trade and financial sectors. These policies include the launch of Hong Kong
Stock ETFs in the PRC, the continued encouragement of PRC enterprises to list in Hong Kong
and the involvement of PRC licensed Hong Kong banks in the distribution of mutual funds. The
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INDUSTRY OVERVIEW
PRC government will also give full support to the development of the RMB market in Hong
Kong, encourage direct investments in RMB by Hong Kong investors in the PRC and allocate
an initial aggregate amount of RMB20 billion to RQFIIs to invest in the domestic securities
market. In addition, the PRC government will permit more PRC financial institutions and
enterprises to issue dim sum bonds in Hong Kong and increase the approved size of dim sum
bond issuances. The PRC government intends to institutionalize RMB sovereign bonds and
gradually increase their size. In light of Hong Kong’s favorable environment and policies,
Hong Kong is set to further expand its capital market activities by leveraging its relationship
with the PRC.
Active participation of PRC companies in the Hong Kong stock market
Since the first H share company listed in Hong Kong in 1993, more PRC companies
(H-share and red-chip listed companies) followed and the frequency of fund-raising activities
has also increased. In the past 11 years, the number of PRC companies listed on the Main Board
and GEM increased from 128 to 275 and the aggregate amount of proceeds raised by PRC
companies by equity offerings increased from HK$25.9 billion to HK$150.1 billion,
representing 31% of the total amount of proceeds raised in Hong Kong in 2011. As of
December 31, 2011, there were 168 H-share listed companies, 107 red-chip listed companies
and 365 non-H-share PRC private enterprises listed on the Hong Kong Stock Exchange, with
a total market capitalization of HK$9.73 trillion, representing 55.5% of the total market
capitalization. After the recent announcement by the PRC government of its continued support
for the listing of PRC enterprises in Hong Kong, it is expected that more PRC enterprises will
seek listings in Hong Kong. The continued entry of PRC companies and the related
fund-raising activities will further stimulate growth of the Hong Kong stock market. This will
in turn be one of the driving forces for shaping the competitive landscape of the Hong Kong
securities industry and the growth in the investment banking business.
The following table sets forth the changes of the total market capitalization of listed
companies and PRC companies and their respective numbers on the Hong Kong Stock
Exchange (including Main Board and GEM) for the periods indicated:
As of December 31,
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total Market
Capitalization (HK$
in billions)
All listed companies . . . 3,946 3,611 5,548 6,696 8,180 13,338 20,698 10,299 17,874 21,077 17,537
PRC companies . . . . . 1,012 939 1,606 1,872 2,998 6,331 10,604 5,608 8,582 9,616 8,104
Number of listed
companies
All listed companies . . . 867 978 1,037 1,096 1,135 1,173 1,241 1,261 1,319 1,413 1,496
PRC companies . . . . . 128 143 164 184 200 222 238 245 253 265 275
Source: Hong Kong Stock Exchange
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INDUSTRY OVERVIEW
In light of the above developments, investment banking businesses in Hong Kong have
also changed in the past ten years, from a market dominated by international investment banks
to a market shared by international investment banks and investment banks with Chinese
background. Revenues generated from the investment banking business is becoming the main
source of income of PRC securities firms in Hong Kong. In 2011, investment banks with
Chinese background had participated as sponsors (or one of the sponsors) in 30 Main Board
IPOs, the fund raising amount of which represented approximately 30% of the total fund raised.
This percentage has increased from approximately 16% in 2001. Accordingly, the proceeds
from the equity offerings sponsored by such investment banks on the main board of the Hong
Kong Stock Exchange increased from approximately HK$16.8 billion in 2001 to approximately
HK$76.9 billion in 2011, representing a CAGR of 16.4%. These factors demonstrate the rising
prominence of investment banks with Chinese background in the Hong Kong stock market.
SOURCE OF INFORMATION
In addition to statistics, market share information and industry data from publicly
available government sources, some information and data contained in this section are derived
from Wind Info. As a leading integrated service provider of financial data, information and
software in the PRC domestic market. Wind Info serves financial enterprises, including
securities firms, fund management firms, insurance companies, banks and investment
companies. The financial database of Wind Info contains comprehensive information on stocks,
bonds, futures, foreign exchange, insurance, derivatives and the macro-economy. Historic data
and market estimates provided by Wind Info are collected by Wind Info independently from
various public information sources, including the SAC, the Shanghai Stock Exchange and the
Shenzhen Stock Exchange.
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REGULATORY ENVIRONMENT
REGULATION ON THE PRC SECURITIES INDUSTRY
Overview
The Company currently conducts its business activities mainly in securities industry,
futures industry and fund industry. All businesses conducted by securities companies, fund
management companies and futures companies are regulated by the CSRC. The current
applicable laws and regulations for the Company mainly include the Company Law, the
Securities Law, the Regulations on Supervision and Management of Securities Companies (I
R8QlSvwc{t hO ) (which was effective on June 1, 2008), the Securities Investment Funds
Law of the PRC (N-N”l QqTW R8bWú‘l ) (which was effective on June 1, 2004), the
Management Rules on Securities Investment Funds Management Companies (IR8bWú‘
t QlS{t ) (which was effective on October 1, 2004), the Regulations on Risk Handling
of Securities Companies (IR8QlS“UnhO ) (which was effective on April 23, 2008), the
Futures Trading Management Regulations (g ¤ { hO ) (which was effective on April
15, 2007), the Administrative Measures for Futures Companies (g lS{t ) (which
was effective on April 15, 2007) and so forth. At the same time, the securities industry is also
regulated and restricted by the policies, laws, regulations, rules and other regulatory documents
in relation to taxation, foreign exchange and so forth.
Major Regulatory Authorities
CSRC
According to the regulations of the Securities Law and Futures Trading Regulations (g
¤ { hO ), the CSRC is responsible for supervision and management of the securities
and future market of the PRC and for maintaining the order thereof, and to secure their lawful
operations in accordance with the laws, regulations and the authorities of the State Council.
The main duties of the CSRC include:
To enact regulations and rules in relation to the supervision and management of the
securities and futures market, and to exercise the right of examination, approval or
verification according to law;
To supervise and manage the issuance, listing, trading, registration, deposit and
settlement of securities and the listing, trading, settlement, delivery of futures and
related activities according to law;
To supervise and manage the securities activities of the securities issuers, listing
companies, securities companies, securities investment funds management
companies, securities services organizations, stock exchanges and securities
registration and settlement organizations according to law; and to supervise and
manage futures business activities of market-related participants, including the
futures exchanges, futures companies, other futures business institutions, non-
futures companies clearing member, futures margin security depository regulating
institutions, futures margin depository bank, delivery warehouse and so forth;
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REGULATORY ENVIRONMENT
To enact qualification standards and practice codes for securities business personnel
and futures practitioners according to law, and to supervise the implementation;
To supervise and inspect the disclosure of information in issuance, listing and
trading of securities and information of futures trading according to law; and
To investigate and punish for activities in violation of laws and administrative
regulations in relation to supervision and management of securities market and
futures market according to law.
The Securities Association of China (SAC)
The SAC is a self-regulatory organization established under the relevant regulations of
the Securities Law and the Society Groups Registration and Management Regulations (y>g W
v{ { hO ) (which was effective on October 25,1998), and it is a non-profit society
group legal entity, it is subject to the guidance and supervision of the CSRC and the Ministry
of Civil Affairs of the PRC, and it regulates the securities industry by its members meeting,
which is formed by members such as securities companies.
Stock Exchange
Under the Securities Law, a stock exchange is a self-regulatory legal entity which
provides venues and facilities for centralized trading of securities and organizes and supervises
trading of securities. According to the Measures for the Administration of Stock Exchange (I
R8N¤f b@t ) (which was effective on December 12, 2001), the main duties of a stock
exchange include:
To provide venues and facilities for trading of securities;
To enact operating rules for the stock exchange;
To accept listing applications and to arrange listing of securities;
To organize and supervise trading of securities;
To supervise its members;
To supervise the listed companies;
To manage and announce market information;
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REGULATORY ENVIRONMENT
To handle listing suspension of stocks and company securities, resume or
termination of listing;
To adopt measures of technical suspension or to decide for temporary suspension in
unexpected incidents; and
Other duties as assigned by the securities regulatory authorities.
Futures Exchange
Under the Futures Trading Management Regulations (g ¤ { hO ), a futures
exchange is a self-regulatory legal entity which provides venues and facilities for centralized
trading of futures and organizes and supervises trading of futures. The main duties of a futures
exchange include:
To provide venues and facilities for trading;
To design contracts and to arrange listing of contracts;
To organize and supervise trading, clearing and settlement;
To ensure fulfillment of contracts;
To supervise and manage its members in accordance with its articles and trading
rules; and
Other duties as specified by the futures supervision and management authorities of
the State Council.
According to the Measures for the Administration of Futures Exchange (g ¤ b@t
) (which was effective on April 15, 2007), the main duties of a futures exchange include:
To enact and implement the trading rules and implementing regulations of the
futures exchange;
To announce market information;
To regulate members and its clients, specified delivery warehouse, futures margin
depository bank and futures business of other participants in the futures market; and
To investigate and punish irregularities.
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REGULATORY ENVIRONMENT
Entry Requirements
Entry Requirements for Securities Companies
Establishment requirements
The Securities Law and the Regulations on Supervision and Management of Securities
Companies (IR8QlSvwc{t hO ) stipulate the authorized business scope of securities
companies, establish entry standards and other requirements. Establishment of securities
companies must be approved by the CSRC and business license must be obtained. The relevant
conditions include:
The articles of association of the proposed securities company must comply with the
laws and administrative regulations;
The major shareholders of the proposed securities company must have sustained
profitability, good reputation and no record of serious violation of law or regulation
during the latest three years, and have net assets of not less than RMB200 million;
If the proposed securities company is to operate the business of securities brokerage,
securities investment consultation and financial advisory business in relation to
securities trading and securities investment activities, the minimum registered
capital shall be RMB50 million; the minimum registered capital for companies
operating one of the securities underwriting and sponsorship, securities proprietary,
securities assets management and other securities businesses shall be RMB100
million; the minimum registered capital for companies operating two or more of the
securities underwriting and sponsorship, securities proprietary, securities assets
management and other securities businesses shall be RMB500 million;
The directors, supervisors, senior management of the proposed securities company
must be qualified, the practitioners must have securities practice qualification and
no less than three of them shall be senior management officers with each with at
least two years of experience in senior management in securities industry;
The proposed securities company must have good risk management system and
internal control system; and
The proposed securities company must have suitable premises and facilities for
operation.
The Rules for Establishment of Foreign-invested Securities Companies (Y SIR8Ql
S-z‰RG ) (which was effective on July 1, 2002 and amended on December 28, 2007) clearly
sets out the conditions and procedures for establishment of Foreign-invested Securities
Companies. The accumulated (including direct holding and indirect control) shareholdings of
foreign shareholders or their interest proportions in a foreign-invested securities company shall
not exceed 1/3; among the domestic securities companies which are domestic shareholders, at
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REGULATORY ENVIRONMENT
least one of them shall have a shareholding or an interest proportion in a foreign-invested
securities company of not less than 1/3; and after the domestic securities company has been
converted into a foreign-invested securities company, the shareholding proportion of at least
one domestic shareholder shall be no less than 1/3. For foreign investors who lawfully hold 5%
or more of the shares in a listed domestic securities company acquired by buying securities on
a security exchange or who jointly hold with others by agreement and other arrangement more
than 5% of the shares of a listed domestic securities company, approval from the CSRC must
be obtained, and the shareholdings held (including direct holding and indirect control) by a
single foreign-investor in a listed domestic securities company shall not exceed 20%.
Shareholdings held (including direct holding and indirect control) by all foreign investors in
a listed domestic securities company shall not exceed 25%. Establishment of a foreign-invested
securities company must be approved by the CSRC and business license must be obtained. The
relevant conditions include:
The registered capital must meet the requirements of the Securities Law;
The shareholders must have the qualifications as prescribed in the Rules, their
proportions of capital and contribution patterns must comply with the Rules;
As required by the CSRC, the number of staff with securities practice qualification
shall not be less than 30, and it shall have necessary accountants, legal and computer
professionals;
It shall have good internal management and risk control systems and a system that
separately manages the businesses of underwriting, brokerage and self-operation in
terms of various aspects, such as organization, personnel, information, business
implementation, etc., and it shall have a proper internal control technology system;
It must have premises that meet the requirements and qualified business facilities;
and
Other prudential requirements as prescribed by the CSRC.
In addition, according to the requirements of the Working Guidelines for the Examination
and Approval in Connection with the Administrative Permission of Securities Companies No.
10: Share Increase and Changes in Equity Interests of Securities Companies (IR8QlSLe?1
S[éh8]O\c _ { 10 – R8QlSXdTk ) promulgated on June 17, 2011, in the
case of an enterprise with direct or indirect equity participation from a foreign investor taking
an equity interest in a securities company, the percentage of the equity interest in the securities
company owned indirectly by the foreign investor, as calculated based on equity penetration,
may not reach 5%. A foreign investor may be exempted from such restriction if they satisfy all
of the following circumstances:
(1) The foreign investor indirectly holds the securities company’s equity interest by
taking an equity interest in a listed company;
(2) The largest shareholder, controlling shareholder or de facto controller of the listed
company is a Chinese investor;
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REGULATORY ENVIRONMENT
(3) If there is a change in the equity structure of the listed company in the future and
the foreign investor indirectly controls the equity interest of the securities company
by taking control of the listed company, thereby violating China’s open door policy,
the matter shall be rectified within a time limit, and the relevant equity interest may
not carry any voting rights if the matter is not rectified before the deadline; and
(4) The overseas investor may not establish any equity securities joint venture with a
domestic securities company or make a strategic investment in a listed securities
company during the period in which the overseas investor indirectly owns at least
5% of the equity interest of one or more domestic securities company(ies).
Business scopes
According to the Securities Law, upon approval of the CSRC, a securities company can
engage in some or all of the following business:
Securities brokerage;
Securities investment advisory;
Financial consultations in relation to securities trading and securities investment
activities;
Securities underwriting and sponsorship;
Securities proprietary;
Securities assets management; and
Other securities businesses.
According to Tentative Provisions for the Examination and Approval of the Scope of
Business of Securities Companies (IR8QlSimR{W [ébyfL[ ) which was effective from
December 1, 2008, securities companies which are under common control of the same entity
or individual or mutual control relationship exists between them shall not operate in the same
business, unless the relevant companies adopt effective measures to obviously distinguish the
operating regions or the target clients and there is no competition between the companies;
unless otherwise provided for by the CSRC, when the securities company is established, the
CSRC approves its business scope according to the statutory provisions and grants approval to
not more than four types of business to the newly established company; the securities company
shall obtain approval from the CSRC for any change of the business scope while the number
of additional types of business to apply for shall not exceed two; subject to the approval by the
CSRC, securities company may operate the business not clearly stated in the Securities Law,
the Regulations on Supervision and Management of Securities Companies (IR8QlSvwc{t
hO ) and the rules and regulations of the CSRC.
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REGULATORY ENVIRONMENT
According to the Rules for Establishment of Foreign-invested Securities Companies (Y
SIR8QlS-z‰RG ), foreign-invested securities companies may carry the following
business:
(1) underwriting and sponsorship of shares (including RMB ordinary shares and
foreign-invested shares) and bonds (including government bonds and corporate
bonds);
(2) brokerage of foreign-invested shares;
(3) brokerage and proprietary trading of bonds (including government bonds and
corporate bonds); and
(4) any other business approved by the CSRC.
Material changes
According to the rules of Securities Law and the Regulations on Supervision and
Management of Securities Companies (IR8QlSvwc{t hO ), approval from the CSRC must
be obtained before a securities company can establish, acquire or de-register a branch, or
change of the business scope or registered capital, or change of any shareholder holding more
than 5% of the shares, change of de facto controller, change of important provisions of the
articles of association of the company, or any merger, division, change of incorporation,
cessation, dissolution and bankruptcy.
According to Administrative License in Relation to the First Eleven Local Branch Offices
Exam and Approve Some of the Securities Institutes (CSRC Notice [2011] No. 15) (ebyc
k 11[mQúj_i[éh8èR R8j_iLe?1SN vlz[ ) (N-W vg QlTJ [2011]15 ) (which
was effective on July 1, 2011) promulgated by the CSRC on June 29, 2011, the local branch
offices of the CSRC in 11 provinces such as Shanghai have the examination and approval
authority in the following five types of administratively approved matters:
(1) change of important provisions of the articles of association of the company;
(2) establish, acquire or de-register a branch;
(3) change of the registered capital, with the exception of the following: a listed
securities company changes its registered capital; the existing shareholders of an
unlisted securities company increase the registered capital without creation of
shareholder(s) with more than 5% of the shareholdings and there is no change to the
de facto controller, controlling shareholder(s) and the largest shareholder of the
securities company;
(4) a change of shareholder(s) with more than 5% of shareholdings and de facto
controller, with the exception of a change of shareholder(s) with more than 5% of
shareholdings and de facto controller of a listed securities company;
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REGULATORY ENVIRONMENT
(5) increase or decrease business of securities brokerage, securities investment
consultation and financial advisory business in relation to securities trading and
securities investment activities, proprietary trading of securities, management of
securities assets and underwriting of securities.
On September 2, 2011 and December 9, 2011, CSRC authorized local branch offices of
the CSRC in another 25 provinces and counties to accept the above matters, and make
decisions on the relevant administrative license.
Establishment of subsidiaries and branches
According to The Provisional Regulatory Requirements on Establishment of Subsidiaries
of Securities Companies (IR8QlS-z[PQlSfL ) which was effective from January 1,
2008, subject to the approval of the CSRC, securities companies may establish wholly-owned
subsidiaries, and also invest jointly in the establishment of subsidiaries with other investors
who meet the required conditions for shareholders of securities companies stipulated in the
Securities Law. However, operation of similar businesses that face conflicts of interest or
competition, is not permitted for a securities company and its subsidiaries, or for subsidiaries
that are under common control of the same securities company. The Regulatory Requirements
on Branches of Securities Companies (Provisional) (IR8QlSR QlSv{ (fL )) that was
effective from May 13, 2008 and Rules for Further Regulation of Securities Operating Outlets
(e2N ke‰IR8qim}v ) which was effective from November 1, 2009 provide
that securities companies in compliance with the regulatory requirements can establish new
branches and operating outlets upon approval of the CSRC. The Securities Law and the
Regulations on Supervision and Management of Securities Companies (IR8QlSvwc{t h
O ) regulate that, approval from the securities regulatory authorities of the State Council must
be obtained before a securities company can establish, acquire or de-register a branch or before
merger or division; approval from the CSRC must be obtained before a securities company
establish, acquire or purchase shares of any securities operating institutions outside the PRC.
Entry requirements for fund management companies
Establishment requirements
The Securities Investment Funds Law of the PRC (N-N”l QqTW R8bWú‘l ) and
the Management Rules for Securities Investment Fund Management Companies (IR8bWú
‘ { QlS{t ) establish entry standards and other requirements for fund management
companies. Establishment of a foreign-invested securities company must be approved by the
CSRC and business license must be obtained. The relevant conditions include:
The articles of association of the proposed fund management company must comply
with the Securities Investment Funds Law of the PRC (N-N”l QqTW R8bWú
‘ l ) and the Companies Law;
The registered capital of the proposed fund management company must not be less
than RMB100 million, and it must be paid-in capital by cash, foreign shareholders
shall be able to freely convert currencies for contribution;
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REGULATORY ENVIRONMENT
The major shareholders of the proposed fund management company shall have good
operation performance and good social reputation in securities business, securities
investment advisory, trust assets management or other financial assets management,
there was no record for violation of law during the last three years, and that the
registered capital shall not be less than RMB300 million;
The proposed fund management company shall have senior management who are in
compliance with laws, administrative regulations and rules of the CSRC and staff
engage in research, investment, valuation and marketing business, the number of the
proposed senior management and operating staff shall not be less than 15, and they
shall obtain funds practice qualification;
The proposed fund management company must have good internal control systems
that are in compliance with the requirements of the CSRC for supervision, auditing
and risk control; and
The proposed fund management company must have operating premises, security
facilities and other facilities in relation to fund management business in compliance
with the requirements;
The Management Rules on Securities Investment Funds Management Companies (IR8b
Wú‘t QlS{t ) stipulates a series of regulatory conditions for foreign shareholders
of Sino-foreign joint venture fund management companies, including:
Foreign shareholders shall meet the following conditions:
(1) It is a financial institution established and lawfully existing under the laws of
its home country or region with financial asset management experience, is in
sound financial conditions and on good credit standing,and has not been
subject to penalty by the regulatory or judicial authority in the most recent
three years;
(2) Its home country or region has sound systems for securities laws and
regulation, and the securities regulatory authority has signed a memorandum of
understanding on securities regulatory cooperation,and is maintaining effective
regulatory cooperation, with the CSRC or another authority recognized by the
CSRC;
(3) Its paid-up capital is not less than RMB300 million or equivalent in a freely
convertible currency; and
(4) Other conditions stipulated by the CSRC that are approved by the State
Council.
– 142 –
REGULATORY ENVIRONMENT
The Capital Contribution Ratio or the equity interests may not, in aggregate
(including direct and indirect holdings), exceed the commitment to open up the
securities industry to foreign investors made by the State.
In respect of an overseas shareholder of a Sino-foreign equity joint venture Fund
Management Company, in the event that there are requirements on record filing of
overseas investment by the competent authority at the place in which such overseas
shareholder is registered or in which its principal business is conducted, if such
overseas shareholder submits the relevant record filing materials to the competent
authority after it has obtained the approval document from the CSRC in accordance
with the law, it shall at the same time provide a copy of the materials to the CSRC.
In addition, Management Rules on Securities Investment Fund Management Companies
impose restriction on the number of fund management companies a shareholder may invest,
that is, the number of fund management companies that an institution or institutions under the
control of the same de facto controller may invest must not exceed two, of which the number
of fund management companies in which such institution or institutions hold controlling
interests must not exceed one.
Material changes
According to Management Rules on Securities Investment Fund Management Companies,
the following material changes of fund management companies must be reported to the CSRC
for approval:
Any change of shareholders, registered capital or proportion of shareholders’
contribution;
Any change of name, address;
Any amendment to the articles of association; and
Any change of other material matters as stipulated by the CSRC.
Entry requirements for futures companies
Establishment requirements
The Futures Trading Management Regulations (g ¤ { hO ) and the
Administrative Measures for Futures Companies (g lS{t ) provide for the entry
standards and other requirements. Establishment of futures companies must be approved by the
CSRC. The relevant conditions include:
The minimum registered capital of the proposed futures company is RMB30 million.
The registered capital shall be paid-in capital. Shareholders shall contribute by cash
or non-monetary assets which are necessary for the operations of the futures
company, the proportion of monetary contribution shall not be lower than 85%;
– 143 –
REGULATORY ENVIRONMENT
The directors, supervisors and senior management of the proposed futures company
shall be qualified for their positions; practitioners shall have futures practice
qualifications; the number of staff with futures practice qualifications shall not be
less than 15; and the number of senior management staff with practice qualifications
shall not be less than three;
The articles of association of the proposed futures company must comply with the
requirements of laws and regulations;
The major shareholders and de facto controller of the proposed futures company
shall have sustained profitability, good reputation, and no record of serious violation
of law or regulation during the last three years;
The proposed futures company must have qualified premises and facilities for
operation;
The proposed futures company shall have sound risk management and internal
control systems; and
According to the Provisions on Issues Relating to the Regulation of Controlling
Interests and Equity Interests in Futures Companies (e‰c§0 Sg lS
g UOLv ) (which was effective on June 1, 2008) promulgated by CSRC on
May 22, 2008, the number of futures companies that an institution may take a
controlling stake and invest must not exceed two, of which the number of futures
companies in which such institution holds controlling interests must not exceed one.
Material changes
According to the Administrative Measures for Futures Companies (g lS{t ),
approval of the CSRC shall be obtained for change of shareholdings in any one of the situations
below:
Shareholding of one single shareholder to be increased up to 5% or above, or the
accumulated shareholding of the associated shareholders is to be increased up to 5%
or above; and
Shares are to be transferred to shareholders holding 5% or above of the shares, or
to associated shareholders accumulatively holding 5% or above of the shares.
Any change of registered capital of a futures company shall be examined and approved
by the CSRC. If a futures company changes its legal representative, the futures company shall
submit application material to its local branch office of the CSRC. If a futures company
changes its address, it shall submit application material to the branch office of the CSRC at the
place where it is to be moved to. If a futures company closes its business, it shall submit
application material to the CSRC. For any establishment, change, dissolution, bankruptcy,
– 144 –
REGULATORY ENVIRONMENT
revocation of futures business license of a futures company or the establishment, change or
termination of its operation branches, the futures company shall announce the same on the
press or media as designated by the CSRC.
Establishment of branches
A futures company can establish operation branches; if a futures company applies to
establish an operation branch, it shall submit application to the branch office of the CSRC at
the place where the proposed operation branch is to be established.
Regulation on Operations
Securities
Securities and related business we currently engage in include, but not limited to,
securities brokerage, securities proprietary trading, securities underwriting and sponsorship,
securities investment consulting, financial advisory relating to securities trade and securities
investment activities, securities assets management, direct investment business, securities
investment fund distribution, provision of intermediary business for futures companies, margin
financing and securities lending, and QDII-related business. Securities companies that engage
in securities business in the PRC are subject to various laws and regulations. Laws and
regulations and policy documents including the Securities Law (N-N”l QqTW R8l ), the
Regulations on Supervision and Management of Securities Companies (IR8QlSvwc{t h
O ), Tentative Provisions for the Examination and Approval of the Scope of Business of
Securities Companies (IR8QlSimR{W [ byfL ), the Provisional Measures on
Management of Investment Consultations on Securities and Futures (IR80 g {
fLl ) (which was effective on April 1, 1998), the Management Measures on Securities
Issuing and Underwriting (IR8v|L bt ) (which was effective on September 19,
2006 amended on October 11, 2010), Measures for the Administration of the Sponsorship of
the Offering and Listing of Securities (IR8v|LN ^ O…imR{t ) (which was effective
on December 1, 2008 amended on May 13, 2009), the Regulations on Investment Scopes of
Proprietary Trading Business of Securities Companies and the Relevant Matters (eIR8Ql
SIR8êqimRbW Sg N v ) (which was effective on June 1, 2011), the
Provisional Measures on Client Assets Management of Securities Companies (IR8QlS[b6
u\"{t imRfLl ) (which was effective on February 1, 2004), the Management Measures
on Margin Financing and Securities Lending (IR8QlSR8imR{t ) (which was
effective on August 1, 2006 amended on October 26, 2011), the Guidelines of Supervision and
Administration for Direct Investment Business of Securities Companies (IR8QlSvcbim
Rv{c _ ) (which was effective on July 8, 2011), the Management Measures on Sales of
Securities Investment Funds (IR8bWú‘U.{t ) (which was effective on July 1,
2004 amended on October 1, 2011), the Provisional Measures on Provision of Futures IB
Business (IR8QlSp”g lScON-N}9imRfLl ) (which was effective on April 20,
2007), the Provisional Measures on Management of Investing in Overseas Securities by
Qualified Domestic Institutional Investors (T h
– 145 –
REGULATORY ENVIRONMENT
Securities by RMB Qualified Foreign Institutional Investors of Funds Management Companies
and Securities Companies (Wú‘t QlS0 R8QlSN”l ^ T h
companies.
Securities brokerage
The Securities Law of the PRC and the Regulations on Supervision and Management of
Securities Companies provide (i) that securities companies that engage in securities brokerage
shall examine the sufficiency of the funds and securities of a client’s account; (ii) a securities
company may appoint a person other than those of the securities company as a securities
broker; and (iii) for a securities company that engages in the business of securities brokerage,
the trading settlement funds of its client shall be deposited in a designated commercial bank,
and a separate account shall be opened and managed for each of the clients. A securities
company is not allowed to categorize the transaction settlement funds of the clients as its own
property. Access of the trading settlement funds of the clients shall be handled by the
designated commercial banks. The securities company cannot accept authorizations to engage
in discretionary securities trading on its customer’s account, including, for example, deciding
the type, quantity and price of securities to buy or sell for its customers.
On March 13, 2009, the CSRC promulgated the Provisional Measures on Management of
Securities Brokers (IR8} N”{t fL ) to further strengthen the supervisions on the
securities brokers and to regulate the activities of securities brokers. Pursuant to these
measures, securities brokers are required to pass the qualifying exam, complete professional
training and register their qualification status with the SAC.
Securities investment consulting
According to the Provisional Measures on Management of Investment Consultations on
Securities and Futures (IR80 g { fLl ), a business license approval must
be obtained from the CSRC in accordance with the regulations of the Provisional Measures so
as to engage in securities investment consulting business. Institutions engage in securities
investment consulting business and its investment consulting personnel provide direct or
indirect paid consulting services activities (securities investment analysis, prediction or
recommendation, etc.) to securities investors or clients in the following manner:
accept the delegation of investors or clients to provide securities investment
consulting services;
organize securities investment consultation seminar, public lecture, analytical
meeting, etc.;
publish securities investment consultation articles, discussions, reports, and provide
securities and futures investment consultation services through public media (radio,
television, etc.); and
– 146 –
REGULATORY ENVIRONMENT
provide securities investment consultation services through telecommunication
equipment systems including telephone, facsimile, computer network, etc.
Institutes proposed to engage in qualified securities investment consulting shall meet the
necessary conditions and obtain a business license from the CSRC; personnel proposed to
engage in investment consulting business of securities and futures must obtain qualification for
investment consulting in securities and join a qualified institute of securities investment
consulting before engaging in the business of securities investment consulting.
Securities proprietary trading
The Securities Law (N-N”l QqTW R8l ) and the Regulations on Supervision and
Management of Securities Companies (IR8QlSvwc{t hO ) stipulate the categories of
securities that a securities company can sell and purchase in its securities proprietary business;
a securities company that engages in securities proprietary business shall use real name
securities proprietary account, and shall report to the stock exchange for records within three
trading days from the date when the proprietary account is opened; the scope of activities of
a securities company which engages in securities proprietary business; risk control indicators
such as the proportion of proprietary securities in the Net Capital of the company, the
proportion of the value of one single security in the Net Capital of the company, the proportion
of the amount of one single security in the total amount of issued securities, shall be in
accordance with the requirements of the CSRC. The securities company must conduct its
proprietary trading business in its own name and use their own funds or funds lawfully raised.
In order to urge the securities companies to reform the securities proprietary systems and
to guard against the risks of securities proprietary business, the CSRC promulgated the CSRC
Notice on Forwarding the “Guidelines on Proprietary Business of Securities Companies” and
Strengthening the Regulation on Proprietary Business of Securities Companies (N-W R8vwc
{ Y Tág eIv|
November 11, 2005, which stipulates that securities companies must establish comprehensive
securities management system for securities proprietary business, investment decision-making
mechanism, operating procedures and risk control system, and shall conduct proprietary
business with risks that can be measured, controlled and affordable.
On April 29, 2011, the CSRC promulgated the Regulations on Investment Scopes of
Proprietary Trading Business of Securities Companies and the Relevant Matters (eIR8Ql
SIR8êqimRbW Sg N v ), which became effective from June 1, 2011, and
further clarified the investment scopes of the securities proprietary business of securities
companies. Accordingly, the following securities are allowed for the proprietary trading
business of securities companies:
securities which have been or may be legally listed and traded on a domestic stock
exchange.
– 147 –
REGULATORY ENVIRONMENT
securities which have been or may be legally listed and traded on the domestic
inter-bank market, including:
(1) Government bonds;
(2) RMB bonds issued by international development institutions;
(3) Central bank bills;
(4) Financial bonds;
(5) Short-term financing bonds;
(6) Corporate bonds;
(7) Medium-term notes; and
(8) Enterprise bonds.
securities issued with the approval of the CSRC or after filing with the CSRC and
traded over the counters of domestic financial institutions.
A securities company may form subsidiary companies to invest in financial products other
than those listed above. To form such a subsidiary company, a securities company shall be
qualified for the proprietary trading business. A securities company shall not provide financing
or guarantee for a subsidiary company as mentioned above.
Securities underwriting and sponsoring
According to the Measures for the Administration of the Sponsorship of the Offering and
Listing of Securities (IR8v|LN ^ O…imR{t ), securities companies must apply for
the sponsoring institution qualification from the CSRC in accordance with the regulations, so
as to engage in securities issuance, listing and sponsoring business. Sponsoring institutions
should designate an individual, who has obtained sponsor representative qualification, to be
responsible for sponsorship duties, so as to discharge sponsorship responsibilities. Issuers
should employ securities companies which have obtained sponsoring institution qualification
to perform the sponsorship duties for the following matters:
Initial public offering and listing;
Issuance of new shares and convertible corporate bonds by listing companies; and
Other conditions identified by the CSRC.
– 148 –
REGULATORY ENVIRONMENT
To apply for sponsoring institution qualification, securities companies shall meet the
following conditions:
Registered capital of not less than RMB100 million, and the Net Capital of not less
than RMB50 million;
With comprehensive corporate governance and internal control systems, and the risk
control indicators shall be in compliance with the relevant provisions;
The sponsoring business department shall have comprehensive business procedures,
internal risk assessment and control systems and reasonable internal structuring, and
shall have appropriate back-office supports such as research capabilities and
marketing capabilities;
With good sponsoring business team and reasonable professional structuring, the
number of practitioners shall not be less than 35, including not less than 20 staff who
have been working in sponsoring-related business in the last three years;
No less than four personnel are qualified to be sponsor representative;
Without any administrative penalties because of significant violation of laws and
rules in the last three years; and
Other conditions regulated by the CSRC.
In addition, Measures for the Administration of the Sponsorship of the Offering and
Listing of Securities (IR8v|LN ^ O…imR{t ) stipulates that, if the aggregate holding
of a sponsoring institution and its controlling shareholder, de facto controller, important related
party exceeds 7% of the issuer’s shares, or an issuer holds or controls more than 7% of the
shares of the sponsoring institution, the institute shall perform the duties of sponsoring with an
unrelated sponsoring institute, which shall perform as main sponsor upon sponsoring the listing
of securities of the issuer. Meanwhile, according to Guidelines on Supervision and
Administration of Direct Investment Business of Securities Companies (IR8QlSvcbim
Rv{c _ ) promulgated by the CSRC on July 8, 2011, a direct subsidiary, direct investment
fund, fund for industry and fund management of a company which is the counseling institute,
financial advisor, sponsoring institute or main underwriter of a to-be-listed company shall not
invest in the said company after the execution of the relevant agreement or the practical
commencement of the relevant business.
The Management Measures on Securities Issuing and Underwriting (IR8v|L bt
) which was effective from September 19, 2006 and amended on October 11, 2010
regulates the issuance of shares or convertible bonds in the PRC by issuers, the underwriting
of securities in the PRC by the securities companies, and the investors’ subscription of
securities issued in the PRC. The securities company shall submit offering and underwriting
plans to the CSRC prior to engaging in any underwriting activities.
– 149 –
REGULATORY ENVIRONMENT
Securities assets management
According to the Provisional Measures on Client Assets Managements of Securities
Companies (IR8QlS[b6u\"{t imRfLl ), securities companies engaging in client
assets managements shall apply to the CSRC for qualification on client assets managements
according to the provisions of the Measures. Subject to the approval of the CSRC, a securities
company may engage in handling targeted asset management businesses for single clients,
handling collective asset management businesses for multiple clients and handling specific-
purpose special asset management businesses for clients. A securities company engaging in
client assets managements shall comply with the following conditions:
It shall be approved by the CSRC as a comprehensive securities company;
Its Net Capital shall not be less than RMB200 million, and it shall comply with the
requirements of the CSRC on the various risk control indicators of comprehensive
securities companies;
Practitioners of clients assets managements shall have securities practice
qualification, and have no record of bad behavior, and the number of staff who have
three years of experience in securities proprietary, assets management or securities
investment funds management shall not be less than five;
It shall have good corporate governance structure, comprehensive internal control
and risk management system, which are effectively implemented;
It has not been subjected to administrative punishment or criminal punishment
within the past one year; and
Other conditions as specified by the CSRC.
According to the Securities Law and the Regulations on Supervision and Management of
Securities Companies, securities companies which engage in securities assets management
shall not do the following:
guarantee the clients that their principal assets will not suffer loss or promise that
they will receive a minimum profit;
the assets value of one single entrustment of a client is lower than the minimum
value as specified by the CSRC;
use the assets of the client for unnecessary securities tradings;
carry out transactions between securities proprietary accounts and assets
management accounts or among different securities assets management accounts,
and there is no sufficient evidence that they have been separated according to law;
and
– 150 –
REGULATORY ENVIRONMENT
Other activities prohibited by laws, regulations and the CSRC.
The Detailed Implementation Rules for the Targeted Asset Management Business of
Securities Companies (Trial Implementation) (IR8QlS[T u\"{t imR[e}0RG (fL ))
and the Detailed Rules for the Implementation of the Collective Asset Management Business
of Securities Companies (Trial Implementation) (IR8QlS–T u\"{t imR[e}0RG (fL )),
which were both promulgated by CSRC on May 31, 2008, and the Trial Rules for Fund
Management Companies’ Asset Management Business for Specific Clients (Wú‘t QlSry[
[ 6u\"{t imRfl ) which was promulgated by CSRC on August 25, 2011 and takes
effect on October 1, 2011, set detailed regulations on the targeted asset management business
and collective asset management business of securities companies.
Margin financing and securities lending (including margin and securities refinancing)
According to the Securities Law (N-N”l QqTW R8l ) and the Regulations on
Supervision and Management of Securities Companies (IR8QlSvwc{t hO ), securities
companies engage in margin financing and securities lending shall enter into margin financing
and securities lending contracts with the client, and open client securities guarantee account at
the securities registration and settlement institution under the name of the securities company,
and open client capital guarantee account at designated commercial banks.
The Management Measures on Securities Companies Margin Financing and Securities
Lending (IR8QlSR8imR{t ) promulgated by the CSRC on June 30, 2006 and
amended on October 26, 2011 clearly state that approval from the CSRC must be obtained for
a securities company to carry out margin financing and securities lending business; it is
stipulated in the operating regulations that, among others, securities companies doing margin
financing and securities lending business shall by reference to third-party custody of the
client’s transaction settlement funds enter into client credit funds custody agreement with their
clients and commercial banks; debt guarantees and interest processing, etc., are clearly
stipulated; supervision and management of securities companies engaged in margin financing
and securities lending by the CSRC, the stock exchanges and securities registration and
settlement institutions.
Pursuant to the recently amended Management Measures on Securities Companies
Margin Financing and Securities Lending (IR8QlSR8imR{t ), PRC securities
firms that apply for the qualification to engage in margin financing and securities lending
business must satisfy of the conditions set out below:
(i) have a minimum operation history of three years in the securities brokerage
business;
(ii) have a sound system of corporate governance and effective internal control in place
that enable the securities firm to identify, control and prevent any potential
operation risk and internal control risk;
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REGULATORY ENVIRONMENT
(iii) the securities firms and their respective directors, supervisors and senior
management must not have been subject to any administrative and criminal penalty
for any violation of relevant laws and regulations in their operation during the past
two years, and they are not subject to any investigation or rectification, orders by the
CSRC for any regulatory non-compliances;
(iv) a sound financial position, with each of their risk control indicators in compliance
with the relevant requirements for the most recent two years and their registered
capital and Net Capital also in compliance with the requirements subsequent to the
commencement of conducting the margin financing and securities lending business;
(v) clients’ assets remain secured and intact with effective measures in place for clients’
third-party fund depository, and client’s particulars remain true and intact;
(vi) the establishment of a comprehensive complaint-feedback mechanism that ensures
the timely and due solution to any disputes with clients;
(vii) the maintenance of a stable information security system, with no material incident
occurred during the past year due to any management issue, and the systems
designated for margin financing and securities lending business have been approved
by the applicable PRC stock exchange and registrars;
(viii) an appropriate number of qualified senior management and professionals who are
responsible for the margin financing and securities lending business, and the
proposals and internal control system have been approved and accredited by the
SAC; and
(ix) any other conditions stipulated by the CSRC.
On October 26, 2011, the CSRC promulgated the Trial Supervision and Management
Measures on Margin and Securities Refinancing Business (I imRvwc{t ) and
specified (i) the requirements for the establishment and operation of the Securities Finance
Company; (ii) the responsibilities of the Securities Finance Company, which include, among
others, providing funding and securities refinancing services to support the margin financing
and securities lending business of PRC securities firms; (iii) the rules and regulations relating
to the margin and securities refinancing business; (iv) the source of funding and securities to
be used in the margin and securities refinancing business by the Securities Finance Company;
and (v) that Securities Finance Company shall establish compliance and risk management
system to ensure its compliance with rules and regulations relating to risk control indicators.
On November 25, 2011, the Shanghai Stock Exchange and the Shenzhen Stock Exchange
separately announced the Implementation Rules of Shanghai Stock Exchange on Margin
Financing and Securities Lending (N mwIR8N¤f b@R8N¤f [ e}0RG ) and the
Implementation Rules of Shenzhen Stock Exchange on Margin Financing and Securities
Lending (mW3IR8N¤f b@R8N¤f [ e}0RG ) which, among others, contain express rules
on regulating the specific procedures for this business and the requirements for eligible
securities. On the same day, according to the implementation rules, the Shanghai Stock
Exchange and the Shenzhen Stock Exchange announced new notices to expand the scope of
securities eligible for margin finance and securities lending business from 90 stocks to 278
stocks and 7 ETFs. The new notices have become effective on December 5, 2011.
– 152 –
REGULATORY ENVIRONMENT
Direct investment
According to the provisions of the Letter on the Relevant Work of Direct Investment
Business Trials of Securities Companies (eIR8QlSvcbimRfg ] O\vQ ) and
its attachment Guidelines for Direct Investment Business Trials of Securities Companies (IR8
QlSvcbimRfc _ ), approval from the CSRC shall be obtained for a securities
company to carry out direct investment business, and no objection letter allowing companies
at trials to carry out direct investment business shall be obtained. Without consent of the CSRC,
a securities company is not allowed to carry out direct investment business by any means. For
a securities company to carry out direct investment business trials, it shall set up a subsidiary
which engages in direct investment business (the “direct investment subsidiary” hereinafter) to
carry out direct investments.
Guidelines on Supervision and Administration of Direct Investment Business of
Securities Companies (IR8QlSvcbimRv{c _ ) made a series of requirements in
respect to investment amount, risk control, compliance management, management of
personnel, the establishment of direct investment fund by direct investment subsidiary, and the
operation and management of direct investment fund for securities companies directly
engaging in investment.
For a securities company to carry out direct investment business, several regulatory
requirements shall be complied with, such as:
For those investing in a direct investment subsidiary, direct investment funds,
industry funds and fund management institutions with its own funds, the aggregate
amount shall not exceed 15% of the Net Capital of the securities company;
A sound internal control mechanism shall be established, risks management and
compliance management shall be strengthened, conflict of interests with the direct
investment subsidiary, the risks of transfer of benefits, “black box” operations and
moral hazard shall be avoided;
Where a security company acts as counseling agency, financial advisor, sponsor or
lead underwriter of a company to be listed, with effect from the date on which
relevant agreement are signed or relevant business are carried out in a substantive
manner, its direct investment subsidiary, direct investment fund, industry fund and
fund management institution are no longer allowed to invest in the said company;
Be independent with the direct investment subsidiary with respect to personnel,
constitution, finance, assets, management, business operation, etc; and
All of the risk control indicators continue to meet the requirements; after
establishment of direct investment companies, all of the risk control indicators
comply with the regulations.
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REGULATORY ENVIRONMENT
Subject to the approval of the CSRC, a direct investment subsidiary may engage in the
following business:
use its own funds to invest in shareholdings of domestic enterprises;
provision of financial advisory services on equity investment to clients;
establish direct investment funds, raise and manage clients’ fund and carry out
equity investments;
use unemployed capital to invest in securities with low risk but high liquidity such
as national debts, investment grade corporate bonds, money market fund and central
bank bills, and the approved establishment of collection of asset management plan
and specific asset management plan of securities companies for the purpose of cash
management provided that effective control of risk and continuous liquidity is
maintained; and
other business with the consent of the CSRC.
Securities investment funds distribution
On June 25, 2004, the CSRC promulgated the Management Measures on Sales of
Securities Investment Funds (IR8bWú‘U.{t ) which took effect on July 1, 2004.
On June 9, 2011, the CSRC promulgated the new Management Measures on Sales of Securities
Investment Funds (e°0 R8bWú‘U.{t 0 ), which was effective from October 1,
2011, and the Management Measures on Sales of Securities Investment Funds with effect from
July 1, 2004 was abolished on October 1, 2011.
The new Management Measures on Sales of Securities Investment Funds provides new
requirements a securities company which applies for the qualification for funds distribution
business shall satisfy:
It shall have good corporate governance structure, comprehensive internal control
and risk management system, which are effectively implemented;
It shall have good financial conditions, standardized and stable operations;
It shall have a place of business, security facilities and other facilities suitable for
carrying out funds distributions business;
It shall have safe and efficient technical facilities to handle funds offering,
application and redemption which shall comply with CSRC’s requirements for
information management platform for funds distribution business, the technology
systems for funds distribution business have been connected and tested with the
corresponding technology systems of the fund managers and China Securities
Depository and Clearing Company Limited, and the test results are in line with the
standards of the PRC;
– 154 –
REGULATORY ENVIRONMENT
It shall have formulated comprehensive fund clearance processes and fund
management conforming to CSRC’s requirements for funds distribution settlement
fund management;
It shall have a method system for assessing risk-bearing capacity of fund investors
and risk level of fund products;
It shall establish management systems for funds distributions such as comprehensive
business processes, practice rules of salesmen and emergency response measures,
etc., which conform to CSRC’s requirements for internal control of fund distribution
institutions;
It shall establish internal control systems related to anti-money laundering as
required by laws and regulations; and
Other requirement promulgated by CSRC.
Provision of Futures IB Business
According to Provisional Measures on Provision of Futures IB Business (IR8QlSp”g
lScON-N}9imRfLl ), a securities company applying for the qualification for the
provision of futures IB Business to futures companies shall comply with the following
conditions:
All risk control indicators meet the required standards in the six months before
application;
The third-party custody system for client transaction settlement funds has been set
up according to the regulations;
It wholly owns or controls a futures company, or is under control of the same
institution with a futures company, and that futures company has the membership
qualification to be a futures exchange implementing members classification
settlement system, and the risks regulatory indices thereof are continuously in
compliance with the required standards in the two months before the application
date;
It has necessary operational staff, and there are at least five and two operational staff
with futures practice qualification respectively in the headquarter of the company
and in the operational department;
Comprehensive systems of operational procedures, internal control, risks isolation
and compliance inspection, etc., have been established according to the regulations;
There are technology systems that meet the demands of the business; and
Other conditions as required by the CSRC based on the developments of the market
and the principle of prudential regulation.
– 155 –
REGULATORY ENVIRONMENT
Securities companies which engage in futures IB Business shall obtain futures IB
Business qualification according to the provisions of the Measures, and shall operate carefully
and uniformly manage the futures IB Business carried out by its operational department. A
securities company engaged by a futures company to carry out futures IB Business shall
provide the following services:
Assist in account opening procedures;
Provide information on the futures market and trading facilities; and
Other services as required by the CSRC.
Securities companies cannot carry out futures trading, clearing, settlement or delivery for
their clients, and they cannot receive or pay futures deposits for futures companies or clients,
to save, withdraw or transfer futures deposits for clients with the securities capital accounts.
Securities companies can only engage in the provision of futures IB Business to their
wholly-owned or controlling futures companies, or futures companies with which they are
under common control of the same institute. They cannot engage in the provision of futures IB
Business to other futures companies. Securities companies shall have adequate business staff
with futures practice qualifications and cannot employ business staff without futures practice
qualifications to engage in the provision of futures IB Business. Staff engaging in futures IB
Business in securities companies cannot carry out futures trading. Securities companies cannot,
directly or indirectly, raise funds or provide guarantee in futures trading for clients.
QDII
According to the Provisional Measures on Management of Investing in Overseas
Securities by Qualified Domestic Institutional Investors (T h
domestic commercial banks to be responsible for assets custody, and they can engage overseas
securities service institutions for sale and purchase of securities. Securities companies which
are QDIIs can raise funds by setting up collection schemes, etc., and to use the funds raised
in the overseas securities market. Applying to be a QDII shall comply with the following
conditions:
All risk control indicators shall meet the required standards; the Net Capital shall
not be less than RMB800 million; the proportion of Net Capital in the net assets
shall not be less than 70%; it shall have been engaging in collection of assets
management scheme (“collection scheme” hereinafter) for more than one year; the
value of assets under management as of the last quarter-end shall not be less than
RMB2 billion or its equivalent in foreign currency;
It shall have staff with overseas investment and management related experience in
compliance with the regulations;
It shall have sound governance structure and comprehensive internal control system,
and standardized operations;
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It has not been subject to material penalty by any regulatory body in the last three
years, and is not being investigated by any judiciary or regulatory body for any
serious matter; and
Other conditions as required by the CSRC based on the principle of prudential
regulation.
RQFII
According to the Provisional Measures on Investing in Domestic Securities by the RMB
Qualified Foreign Institutional Investors of Funds Management Companies and Securities Companies
(Wú‘t QlS0 R8QlSN”l ^ T h
market using the RMB raised in Hong Kong by the Hong Kong subsidiaries of the domestic
funds management companies and securities companies (HK subsidiaries hereinafter), HK
subsidiaries shall obtain CSRC’s approval before they invest in domestic security market and
obtain investment quota approved by SAFE. HK subsidiaries carrying out the trial business of
domestic securities investment shall engage domestic commercial banks with QFII trustee
qualification for asset custody, and they can engage domestic securities companies for sale and
purchase of securities. HK subsidiaries may also authorize domestic fund management
companies and securities companies to manage domestic securities investment. QFIIs are
supervised and administrated by the CSRC, PBOC and SAFE.
The following requirements shall be complied by the HK subsidiaries to conduct domestic
securities investment trial business using RMB raised in Hong Kong:
It shall possess the qualification issued by the Hong Kong securities supervision and
administration authority in asset management business and has commenced such
business with sound finance and credit;
It shall have sound corporate governance and comprehensive internal control, and its
staff shall be qualified according to the related professional regulations and
standards in Hong Kong;
The business of the applicant and its domestic parent company shall be under lawful
and compliant operation, without major punishment rendered by the local
supervision and administration authorities within the past 3 years;
Its domestic parent company shall possess the business qualification of securities
asset management; and
Other conditions as required by the CSRC based on the principle of prudential
regulation.
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Pursuant to the Measures on Implementation of the Provisional Measures on Investing in
Domestic Securities by RMB Qualified Foreign Institutional Investors of Funds Management
Companies and Securities Companies (e[e0 Wú‘t QlS0 R8QlSN”l ^ T h
the trial institution with qualification of domestic securities investment (“the trial institution”)
may, within the approved quota, invest stocks, bonds, warrants, securities investment funds
tradable in domestic securities exchanges and other financial tools allowed by CSRC and
PBOC. Additionally, the trial institution may subscribe for issuance of new shares, convertible
bonds, additional issuance of shares and allotment of shares. Within approved investment
quota, capital for investment in stocks and stock funds shall not exceed 20% of the fund-raising
scale; capital for investment in fixed income securities (including bonds and fixed income
funds) shall be no less than 80% of the fund-raising scale.
Pursuant to the Notice on Relevant Issues of the Provisional Measures on Investing in
Domestic Securities by RMB Qualified Foreign Institutional Investors of Funds Management
Companies and Securities Companies (eWú‘t QlS0 R8QlSN”l ^ T h
RQFII shall not transfer, re-sell its approved quota to other institutions or individuals. The
approved quota which is not used by the RQFII within one year from the approval date will be
reduced or even canceled by SAFE.
Funds
Funds management companies engage in funds business in the PRC are also subject to
regulations of various laws and regulations. Laws and regulations as well as policy documents
such as the Securities Investment Funds Law of the PRC (N-N”l QqTW R8bWú‘l ),
the Management Rules on Securities Investment Funds Companies (IR8bWú‘t QlS{
t ) and the Administration of Securities Investment Fund Operations Procedures (IR8b
Wú‘KO\t ) regulate various aspects of the business of the funds companies.
Under the Securities Investment Funds Law of the PRC, offering funds for sale or raising
funds by funds management companies shall be approved by the CSRC; funds management
companies shall publish the prospectus, funds contracts and other relevant documents three
days before offering of the funds; upon expiry of the funds raising period, if the total amount
of funds raised by closed-end funds reaches 80% of the approved amount, or if the total amount
of funds raised by open-ended funds exceed the approved minimum raising amount, and that
the number of fund holders is in line with the requirements of the CSRC, the fund management
company shall appoint authorized capital verification company to verify capital ten days after
expiry of the fund-raising period, and submit the capital verification report to the CSRC within
ten days after receipt of the capital verification report for records, make funds records, and
shall announce the same; the close-end funds can be listed at the stock exchange for trading
upon application by the funds management company and approval of the CSRC; the fund
managers are responsible for the application, redemption and registration of open-end funds;
sufficient cash or government bonds shall be reserved for the open-end funds to prepare for
redemption payment to the fund holders.
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These laws also provide for the products capable of being invested in with the funds and
the prohibited usages, the disclosure obligations of fund information, the rights of fund holders
and the ways to exercise such rights, which include: in the circumstance where fund holders
holding 10% or above of the funds request to convene the general meeting of fund holders on
the same matter, but the fund management company and the fund custodian refuse to convene,
fund holders holding 10% or above of the funds has the right to convene by themselves, and
report to the CSRC for records. The general meeting of fund holders can only be held when
fund holders holding 50% or above of the funds attend the meeting. The decisions made at the
meeting on the matter under consideration shall be passed by more than 50% of the voting
rights of the fund holders attending the meeting. However, for change of the operation mode
of funds, replacement of fund managers or fund custodians, or early termination of fund
contracts shall be passed by two-thirds of the voting rights of the fund holders attending the
meeting. The matters decided by the general meeting of fund holders shall be reported to the
CSRC for approval or records, and the same shall be announced.
In addition, our Company is one of the first four securities companies who have obtained
fund evaluation license in May 2010 by SAC, based on which we can evaluate securities
investment funds and release funds evaluation results in public. As to the evaluation of funds,
the Tentative Measures on the Administration of Evaluation Businesses of Securities
Investment Funds (IR8bWú‘UPùimR{t fLl ), promulgated by CSRC on
November 6, 2009 and came into effect on January 1, 2010) and the Rules on the
Self-Regulatory Administration of Securities Investment Fund Valuation Services (Trial
Implementation) (IR8bWú‘UPùimRêt ‰ G (fL )), promulgated by SAC in
January 11, 2010), set rules about the conditions, operation and supervision for carrying out
fund evaluation business for securities companies. Our Company is subject to such regulations
and rules when engaged in fund evaluation business.
Futures
Futures companies which engage in futures business in the PRC are also subject to
regulations of various laws and regulations. Laws, regulations and policy documents such as
the Futures Trading Management Regulations (g lSN¤f { hO ), the Provisional
Measures on Futures Investment Consulting Business by Futures Companies (g lSg
imRfLl ) effective from May 1, 2011 regulate various businesses of futures
companies.
The Futures Trading Management Regulations clearly states, among other things, that a
licensing system applies to the business of futures companies. The CSRC is responsible for
issuance of licenses according to the types of business of the commodity futures and financial
futures. Apart from domestic futures brokerage business, futures companies can also apply to
conduct business of overseas futures brokerage, futures investment consulting and other
futures business as specified by the CSRC, and to obtain the business qualification; the
deposits system shall be strictly applied to futures trading. The futures company trade futures
in its own name for its customers and cannot engage in proprietary trading of futures.
The Rules on Management of Client Accounts Opening in Futures Market (g X [ 6
6{t ‰ ) enacted and effective on August 27, 2009 refined the rules for opening accounts
by the clients and management of client information by futures companies.
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On March 23, 2011, the CSRC promulgated the Provisional Measures on Futures
Investment Consulting Business by Futures Companies (g lSg imRfL
l ), which clearly states that for futures companies to engage in futures investment consulting
business, approval from the CSRC shall be obtained to be qualified to do futures investment
consulting business. Staff conducting futures investment consulting business in futures
companies shall obtain the practice qualification for futures investment consulting business.
Stock Index Futures
On April 21, 2010, the CSRC promulgated the Guidelines for Securities Companies
Participating in Stock Index Futures Trading (IR8QlSS g ¤ c _ ), which
regulates the activities of securities companies participating in stock index futures trading.
Securities companies that participate in the trading of stock index futures through securities
proprietary business, collection assets management business, directed assets management
business or amount-limited and specific assets management business shall comply with the
rules of the China Financial Futures Exchange (hereinafter the “CFFE”) regarding hedging.
Securities companies that participate in stock index futures trading through securities
proprietary business without the purpose of hedging shall get approval from the CSRC. The
securities company is allowed to trade stock index futures as part of its asset management
business.
On the same date, the CSRC promulgated the Guidelines for Securities Investment Funds
Participating in Stock Index Futures Trading (IR8bWú‘S g ¤ c _ ), which
provides that equity funds, hybrid funds and capital preservation funds can participate in
trading of stock index futures, while bond funds and money market funds are not allowed to
participate in trading of stock index futures; and the specific procedures and investment
proportion limits for funds in participating in stock index futures trading.
The Guidelines for Qualified Foreign Institutional Investors Participating in Transaction
of Stock Index Futures (T h
participating in trading of stock index futures can only engage in hedging transactions; each
qualified investor can appoint not more than three domestic futures companies to conduct the
stock index futures trading; qualified investors, custodians and futures companies shall,
according to the relevant rules of the CFFE, ascertain the trading and clearing modes of stock
index futures trading participated by qualified investors.
Corporate Governance and Risk Control
Corporate Governance and Risk Control of Securities Companies
Corporate Governance
The Company Law (N-W N”l QqTW QlSl ), the Securities Law (N-N”l QqTW R8
l ), the Regulations on Supervision and Management of Securities Companies (IR8QlSvwc
{ hO ), the Rules for Governance of Securities Companies (Trial Implementation) (IR8Ql
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(fL )) and other laws, regulations and regulatory documents of the PRC provides
a clear basis for corporate governance. Securities companies shall have independent directors
in accordance with the requirements of the CSRC. A securities company that engages in two
or more businesses in securities brokerage business, securities capital management business,
margin financing and securities lending business, securities underwriting and sponsoring
business, its board of directors shall have a remuneration and nomination committee, an audit
committee and a risk control committee to exercise the rights and perform the duties as
specified in the articles of association of the company. A securities company shall have a
secretary for the board of directors to be responsible for the preparation of shareholders
meetings and directors meetings, preservation of documents and management of shareholders
information. A securities company shall set up an organization to perform the duties of
operation and management of the securities company, the name, composition, duties and rules
of procedures of the organization shall be set out in the articles of association of the company,
and the members of the organization shall be the senior managements of the securities
company. At the same time, the above laws and regulations also provide that the directors,
supervisors, senior managements of the securities company shall be honest, with good
character, be familiar with securities laws and administrative regulations, and with the
operating and management capabilities as required for discharging the duties, and they shall
obtain the approval of the securities regulatory authorities to hold the post before taking office.
A person in one of the following circumstances shall not be a director, supervisor or senior
management of a securities company:
No civil capacity or with limited capacity for civil conduct;
Sentenced to criminal penalty because of corruption, bribery, seizure of property,
misappropriation of property or damage to the socialist market economic order, and
it has not been five years since the expiry of the execution period, or was deprived
of political rights for crime and it has not been five years since the expiry of the
execution period;
Has been a director, factory director or manager of a liquidated company or
enterprise, and was personally liable for the bankruptcy of the company or
enterprise, and it has not been three years since completion of the bankruptcy or
liquidation of the company or enterprise;
Has been the legal representative of a company or enterprise of which the business
license was revoked for violation of law and which was ordered to be closed, and
was personally liable, and it has not been three years since the revocation of the
business license of such company or enterprise;
Has large amount of outstanding personal debts;
A person in charge of a securities exchange or a securities registration and clearing
institution, or a director, supervisor or senior management of a securities company,
who was relieved of his duties due to illegal or disciplinary behaviors, and it has not
been five years since the date when he was relieved of his duties; and
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A lawyer, certified public accountant or a professional of an investment advisory
institution, financial consultancy institution, credit rating institution, assets
evaluation institution or certification institution, whose qualification was revoked
due to illegal or disciplinary behavior, and it has not been five years since the date
when the qualification was revoked.
On December 1, 2006, the Regulatory Measures on Qualifications of Directors,
Supervisors and Senior Management of Securities Companies (IR8QlScN0 vNT {
t N”TáNwh
Risk Control
The Securities Law provides for the risk control system of securities companies, which
include: the state establishes the Investor Protection Fund; a securities company shall reserve
for trading risk from the annual after-tax profits to cover the loss of securities trading; a
securities company shall establish and enhance its internal control system, and to adopt
effective isolation measures to prevent conflicts of interest between the company and its clients
and among different clients; a securities company must handle its securities brokerage
business, securities underwriting business, securities proprietary business and securities assets
management business separately, mixed operations are prohibited; the transaction settlement
funds of the clients of a securities company shall be deposited in commercial banks, a separate
account shall be opened and managed for each of the clients; a securities company is not
allowed to categorize the transaction settlement funds of the clients as its own property, any
unit or person is not allowed to misappropriate the transaction settlement funds or securities
of clients in any way.
Under the “Guidelines on Internal Control of Margin Financing and Securities Lending of
Securities Companies” (IR8QlSR8imRQgèc§R6c _ ), which was effective from
August 2, 2006 and amended on October 26, 2011 by the CSRC, a securities company shall
improve its business isolation system, and implement centralized management for margin
financing and securities lending; a securities company shall establish decision-making and
authorization systems for margin financing and securities lending; establish client choice and
credit systems; develop rules and procedures for compulsory liquidation; establish technology
systems for margin financing and securities lending managed by the headquarter; strengthen
the risk control of margin financing and securities lending and examinations of business;
establish scale monitoring and adjustment mechanism centralized in Net Capital for margin
financing and securities lending.
The Regulations on Risk Handling of Securities Companies (IR8QlS“UnhO ) was
effective on April 23, 2008; it provides that the CSRC is responsible for the organization,
coordination and supervision of the risk handling of securities companies. In circumstances
where the risk indicators of a securities company do not comply with the regulations, or
material risk control indicators, the risk handling measures include temporary closure for
rectification, custody, taking over, administrative reorganization, liquidation and restructuring;
the legal liabilities of the controlling shareholders, actual controllers, directors, supervisors,
senior managements of securities companies are also stipulated.
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Under the Administrative Measures for Risk Control Indicators of Securities Companies
(IR8QlS“c§R6c j { ) (which was effective from November 1, 2006 and was
amended on June 24, 2008), a securities company shall calculate the Net Capital and reserve
of risk capital, prepare Net Capital calculation sheets, risk capital reserves calculation sheets
and risk control indicator supervision statements according to the regulations. The CSRC may
make appropriate adjustments to the standards for risk control indicators and the calculated
proportion of risk capital reserve of a particular business of different kinds of companies based
on the principle of classification and according to the governance structure, the internal control
and risk control of the securities companies. The CSRC and its local counterparts shall inspect
the generation of the risk control data of securities companies and supervise the authenticity,
accuracy and completeness of such data regularly or from time to time. They may require a
securities company to engage certified public accountants with relevant securities
qualifications to audit its monthly Net Capital calculation sheets, risk capital reserves
calculation sheets and risk control indicators supervision statements. A securities company
shall establish dynamic monitoring and amendment mechanisms for risk control indicators, and
to ensure that all risk control indicators such as Net Capital are in compliance with required
standards at any time.
Under the Risk Control Indicator Measures, a securities company is required to maintain
a minimum level of Net Capital that varies based on its business activities. According to the
Risk Control Indicator Measures, Net Capital is measured by subtracting from net assets the
risk-adjusted value of the securities company’s financial assets, the risk-adjusted value of its
other assets, and the risk-adjusted value of its contingent liabilities, and further adding or
subtracting any other adjustments determined or authorized by the CSRC. The Risk Control
Indicator Measures stipulate a warning ratio and a minimum regulatory ratio for certain risk
control indicators. A securities company shall comply with the following risk control indicators
standards on a continuing basis:
Warning level (1) Minimum level
Net Capital/total risk capital reserves (%) . . . . . . . . . >120.0% >100.0%
Net Capital/net assets (%) . . . . . . . . . . . . . . . . . . >48.0% >40.0%
Net Capital/total liabilities (%) . . . . . . . . . . . . . . . . >9.6% >8.0%
Net assets/total liabilities (%) . . . . . . . . . . . . . . . . >24.0% >20.0%
Value of equity securities and derivatives held/Net
Capital (%) . . . . . . . . . . . . . . . . . . . . . . . . . . <80.0% <100.0%
Value of fixed income securities held/Net Capital (%) . <400.0% <500.0%
(1) The warning level is set by the CSRC according to the Risk Control Indicator Measures. If a risk control
indicator is required to stay above a minimum level, the warning level is 120% of the minimum
requirement, and if a risk control indicator is required to stay below a maximum level, the warning level
is 80% of the maximum requirement.
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According to the Administrative Measures for Risk Control Indicators of Securities
Companies (IR8QlS“c§R6c j { ), a securities company shall calculate its risk
capital reserve according to a certain standard and establish corresponding relation between the
risk capital reserve and the Net Capital, when operating business and establishing branches and
other activities which may incur the risk of loss of Net Capital. The Regulations on Calculation
Standard for Risk Capital Reserve of Securities Companies (eIR8QlS“g,n–P {
j n–v , promulgated by the CSRC on June 24, 2008 and came into effect on December 1,
2008) set different standards to calculate risk capital reserve for different businesses of a
securities company and securities companies of different classifications.
In addition, the Administrative Measures for Risk Control Indicators of Securities
Companies require a securities firm to comply with the following requirements when engaging
in proprietary trading: (i) the cost of holding one kind of equity securities shall not exceed 30%
of its Net Capital; and (ii) the market value of one kind of equity securities held by a securities
company shall not exceed 5% of its total market value, excluding the situations resulted from
the underwriting or other regulations by the CSRC. Meanwhile, when conducting margin
financing and securities lending activities, a securities firm needs to comply with the following
requirements: (i) the margin financing value for a single customer should not exceed 5% of its
Net Capital; (ii) the business scale of securities lending business for a single customer should
not exceed 5% of its Net Capital; and (iii) the market value it accepts for a single
security-backed stock should not exceed 20% of its total market value.
Under the Regulations on Classification of Securities Companies (IR8QlSR {
[ ) (which was effective from May 26, 2009), the CSRC and its branches classify the securities
companies into five types and eleven categories as A (AAA, AA, A), B (BBB, BB, B), C (CCC,
CC, C), D, E, on the basis of six indicators: capital adequacy, corporate governance and
compliance management, dynamic risk control, safety of information system, protection of
clients’ rights and interests and the information disclosure. The CSRC and its branches
implement different regulatory policies on different kinds of securities companies according to
the classification results for securities companies.
In March 2011, the CSRC issued Questions Concerning Strengthening the Ability of the
Newly Established Securities Sales Department in Providing Service to Clients and Policy of
Setting Commission of Securities Trade in a Scientific Way Official Reply (ee°-IR8qim
_ S [ 6g RRTy[xR6[IR8N¤f Oc‘e?Vg UOLvQ ), which clearly requests to
strengthen the supervision on the ability of newly established sales departments of securities
companies in the provision of service to their clients as well as the setting of commission in
a scientific way.
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Corporate Governance and Risk Control of Funds Companies
Corporate Governance
On June 15, 2006, the Governance Guidelines for Securities Investment Funds Companies
(IR8bWú‘t QlSlt n–RG ) enacted and promulgated by the CSRC enhance the
corporate governance of securities investment funds management companies, and clearly
stipulates the duties and rights of the shareholders meeting, board of directors, supervisors or
executive supervisors, managements and the inspector general. The above regulations stipulate
that shareholders may make special arrangements for the exercise of some of their rights within
the scope as allowed by the laws, administrative regulations and the regulations of the CSRC,
and they may resolve to pass the contents of the articles of association; the articles of
associations clearly state the duties of the shareholders meeting, the company shall develop
procedures for the shareholders meetings; the articles of associations clearly state the duties of
the board of directors, the company shall develop procedures for the board meetings and
independent directors system; the articles of associations shall clearly state the duties,
personnel, procedures, voting procedures, etc.; the company shall have a inspector general who
is responsible for supervision and inspection of legality and compliance of the operations of the
funds and the company and the internal risk control of the company, and to exercise the duties
and rights as provided by the laws, administrative regulations, the CSRC and the articles of
association of the company; the avoid-voting system for related party transactions; the
company shall establish long-term incentive and restraint mechanisms such as equity
incentives.
In order to enhance the internal control of the funds management companies, the CSRC
promulgated the Guidance Opinions on Management of Investment Management Personnel of
Funds Management Companies (Wú‘t QlSbt N”Tá{t c \ a ‰ ) on March 17,
2009, which further provides for, among other things, the basic code of conduct of the
investment management personnel of the funds management companies and the supervision
and management systems for the management personnel of the funds management companies.
Risk Control
The CSRC Notice on the Relevant Issues about Risk Reserve of Funds Management Companies
(N-W R8vwc{t Y Tág eWú‘t QlScS“n–Pg UOLv w ) effective from
August 14, 2006 was amended by the CSRC Notice about Amending the “Notice on the Relevant
Issues about Risk Reserve of Funds Management Companies” (N-W R8vwc{t Y Tág eOe9
24, 2008), provides that funds management companies shall reserve for risk funds from the
income of funds management fee on a monthly basis, the proportion of the reserve shall not be
less than 10% of the income of funds management fee. No reserve will be required if the
balance of the risk reserve reaches 1% of the net value of the fund assets. Upon use of the risk
reserve, if the balance thereof falls below 1% of the net value of the fund assets, the funds
management company shall continue to reserve until the proportion of the risk reserve in the
net value of the fund assets achieves 1%. Funds management companies shall establish a
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REGULATORY ENVIRONMENT
management system for risk reserves to regulate the procedures of reservation, transfer, use and
payment, etc., of the risk reserves, the same shall be approved by the board of directors and
then reported to the CSRC for records.
Corporate Governance and Risk Control of Futures Companies
Corporate Governance
The Management Measures on Futures Companies (g lS{t ) provides that the
CSRC implements the qualification management system on the directors, supervisors, senior
managements and other futures practicing persons of the futures companies and other futures
operating institutions; the business, personnel, assets, finance and place of business of a futures
company shall be strictly separated from those of its controlling shareholders, the operations
and accounting shall be independent; the shareholders meeting of a futures company shall
consider and vote for the matters within their scope of duties according to the Companies Law
and the articles of association of the company. The shareholders meeting shall be held at least
once a year; a futures company shall have a board of directors. The board meeting shall be held
at least two times a year; the circumstances which shall be noticed to all shareholders in writing
by the futures companies and shall be reported to the local branch of the CSRC of the futures
company are also stipulated; futures companies with the qualification for clearing business of
a futures exchange under the membership classification and clearing system and wholly-owned
futures companies, etc., shall have directors; a futures company shall have a board of
supervisors or supervisors, and a chief risk officer as well.
The Management Measures on Qualifications of Directors, Supervisors and Senior
Managements of Futures Companies (g lScN0 vNT { N”TáNwh<{t )
enacted by the CSRC and was effective from July 4, 2007 further strengthens the management
of qualifications of the directors, supervisors and senior managements of futures companies.
Effective on the same date, the Management Measures on Futures Practitioners (g mN”Tá
{ ) regulates the activities of the futures practitioners; the awarding and revocation of
the practice qualification and practice rules for futures practitioners are also provided.
Risk Control
According to the Regulations on Management of Futures Trading, a futures company
engages in futures brokerage and other futures business shall strictly implement the systems for
separation of business and separation of capital, mixed operations are prohibited; the CSRC
makes regulations on the risk regulatory indices such as the proportion of Net Capital in the
net assets, the proportion of Net Capital in the business scale of domestic futures brokerage and
overseas futures brokerage etc., and the ratio of current assets and current liabilities of the
futures companies; the CSRC makes requirements on the operating conditions, risk
management, internal control, depositories, related party transactions etc. of the futures
companies and their branches; a futures company shall set up risk management department or
positions to manage and control the operating risks of the futures company. A futures company
shall set up compliance department or positions to review and examine the operating and
– 166 –
REGULATORY ENVIRONMENT
management activities of the futures company; a futures company is not allowed to operate and
manage its business department through joint venture or cooperation with others, and the
business department is not allowed to be contracted, leased or delegated to others for operation
and management.
The Guidance on Further Strengthen the Management of Information Technologies of
Futures Companies (e2N keR7g lSOá`obSt ] O\vc \ a ‰ ) which was
enacted by the CSRC and was effective on July 3, 2009 provides guidelines for the futures
companies to strengthen the establishment and management of information systems, and to
control the technology operating risks of the industry effectively.
In order to enhance the long-term mechanism for protection of futures investors, the
CSRC promulgated the Regulations on the Relevant Matters about Contribution of Futures
Investors Protection Fund by the Futures Exchanges and Futures Companies (eg ¤
b@0 g lS~s g O–Wú‘g N v ) on March 15, 2010, which provides
that futures companies shall contribute to the Futures Investors Protection Fund, and the
specific proportion and rules for contribution to the Futures Investors Protection Fund by the
Futures Companies.
The Regulations on Management of Information Publications of Futures Companies (g
lSOá`oQly:{t ‰ ) effective from November 16, 2009 provides that the basic
information, information about the senior management and the staff, information about the
shareholders, information about the credit records, etc., of the futures companies and its
subsidiaries shall be published to the public.
On April 12, 2011, the CSRC enacted and promulgated the Regulations on Classification
and Supervision of Futures Companies (g lSR { ), which provides that the
CSRC shall establish the Evaluation Committee for Classification and Supervision of Futures
Companies to determine the classes of the futures companies according to the evaluation
indicators.
Regulation on Anti-money Laundering
The Anti-money Laundering Law of the PRC (N-N”l QqTW Sm “ l ) effective on
January 1, 2007 provides for the duties of the relevant financial regulatory authorities in
anti-money laundering, which includes participation in enactments of rules and regulations on
anti-money laundering of the financial institutions under their supervisions, and require the
financial institutions to establish comprehensive anti-money laundering internal control
systems.
In order to promote the implementation of the Anti-money Laundering Law of the PRC,
the PBOC promulgated the Provisions on Anti-money Laundering of Financial Institutions (‘
_ Sm “ ‰ ), which was effective on January 1, 2007. According to these regulations,
financial institutions shall establish internal anti-money laundering procedures, and shall
establish independent anti-money laundering department or appoint the relevant departments to
implement the anti-money laundering procedures.
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According to the Measures on Administration of Identification of Clients and
Preservation of Client Identities Information and Trading Records of Financial Institutions (‘
_ [b6NXR%Tb6NeSN¤f “ O[Xt ) which was enacted by The
People’s Bank of China, China Banking Regulatory Commission, the CSRC, China Insurance
Regulatory Commission and was effective on August 1, 2007, financial institutions shall
establish client identification systems, and shall record the identities of all clients and the
information about each of the transactions, and shall preserve the retail trading documents and
books.
According to the Administrative Measures for the Financial Institutions’ Report of
Large-sum Transactions and Doubtful Transactions (‘jiY’MN¤f TSu‘Nf X1TJ{t
l ) which was enacted by The People’s Bank of China and was effective on March 1, 2007 once
a suspicious transaction or a transaction involving a large amount of money is found, the
financial institutions shall report the relevant transaction to the PBOC or the Administration of
Foreign Exchange (if applicable). When necessary, financial institutions shall cooperate with
the government authorities in anti-money laundering actions and assets freezing in accordance
with the appropriate procedures. According to the Anti-money Laundering Law of the PRC, the
PBOC supervises and conducts on-site inspections on the compliance with the anti-money
laundering regulations by the financial institutions, and will impose penalties for any violating
activities.
The Measures on the Anti-money Laundering by Securities and Futures Industry (IR8g
mSm “ ] O\el ), which was enacted by the CSRC and was effective on October 1,
2010, further provides for the anti-money laundering regulations for the Securities and Futures
Industry, as well as the anti-money responsibilities of the institutions engage in sales of funds
in funds selling business, securities and futures institutions shall establish and enhance internal
control systems for anti-money laundering.
Exchange Control
The State Administration of Foreign Exchange (“SAFE”) promulgated the Notice of
SAFE on the Relevant Issues Concerning Foreign Exchange Administration of Foreign
Investment by Funds Management Companies and Securities Companies (W [ S/{t \ e
Wú‘t QlSTIR8QlSX R8b S/{t g UOLv w ) on September 29, 2009,
which regulates the exchange control for investments in overseas securities by funds
management companies and securities companies. It is stipulated that for securities operating
institutions which have the qualification to engage in foreign exchange business to conduct
investments in overseas securities, they shall apply to the SAFE for investment quotas; the
SAFE adopts the method of quota balance in managing the investment quotas, the net amount
remitted by a securities operating institution shall not exceed the approved investment quota,
a securities institution is not allowed to transfer or sell its investment quota to other institutions
in any form; a securities operating institution may raise foreign exchange funds from the
domestic investors, or it may raise capital in RMB from the domestic investors to purchase
foreign currency for investments in overseas securities, domestic investors are not allowed to
purchase the relevant products issued by securities operating institutions with foreign
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REGULATORY ENVIRONMENT
currencies; a securities company shall, within seven working days after establishment of each
product, report to the SAFE the situations such as the actual size and source of funds of the
product, a securities operating institution shall, within seven working days after the end of each
month, report to the SAFE the aggregate data on overseas securities investments by that
institution, a domestic custodian shall, within seven working days after the end of each month,
report to the SAFE the relevant data for investments in overseas securities by the securities
operating institutions under the custody. Securities operating institutions and domestic
custodians shall discharge their declaration responsibilities in accordance with the relevant
provisions of the declaration of international balance of payment statistics.
The Provisions on Foreign Exchange Administration of Domestic Securities Investments
by Qualified Foreign Institutional Investors (T h
management system on the investments in domestic securities by the qualified foreign
investors. The SAFE approves the investment amount of the individual qualified investors; the
investment amount applied for by an individual qualified investor shall not be less than the
equivalent of US$50 million each time, and the aggregate total amount shall not exceed the
equivalent of US$1 billion. The SAFE has the right to adjust. A qualified investor is not
allowed to apply to increase the investment amount within one year after approval of the
investment amount last time. The lock-up period for the investment principal amount of the
qualified investors such as pension funds, insurance funds, mutual funds, charity funds,
endowment funds, governments and monetary authorities, and the open-end China funds
established by the qualified investors is three months; the lock-up period for the investment
principal amount of other qualified investors is one year; a custodian shall, within five working
days after opening of the foreign currency account and RMB special account of the qualified
investors, report to the local foreign exchange bureau for records, and submit the formal
custody agreement to the SAFE, and to collect the “Foreign Exchange Registration Certificate”
(Y S/v{ ) for the qualified investors. The Provisions on Foreign Exchange Administration
of Domestic Securities Investments by Qualified Foreign Institutional Investors (T h
exchange management, statistics and supervision management of the qualified investors.
Regulation on the Listed Companies
Our A Shares were listed on the Shanghai Stock Exchange in 2007, therefore our
Company shall comply with the Securities Law and the listing rules of the Shanghai Stock
Exchange. The listing rules of the Shanghai Stock Exchange regulate the listing matters and the
information disclosures by the listed companies (including our Company), with the aim to
maintain the order of the stock market and to protect the interests of the investors. As the A
Shares of our Company are listed on the Shanghai Stock Exchange, the various obligations as
provided by the Shanghai Stock Exchange must be complied with, including:
Publication of annual, interim and quarterly reports;
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REGULATORY ENVIRONMENT
Disclosure of all information that may have an important impact on the affairs of our
Company;
Publication of announcements in relation to certain affairs of our Company; and
Appointment of a secretary for the board of directors of our Company to be
responsible for matters including certain administrative affairs and disclosure of
information of our Company.
Our Company is also subject to various laws of the PRC regulating the securities market.
The CSRC is responsible for drafting the securities market regulatory rules and regulations to
regulate the securities companies, to manage the Chinese listed companies in issuing securities
to the public, and to manage securities trading. For example, it is prohibited for a listed
company to use inside information in securities issuing or trading. Companies whose securities
are listed in both China and overseas also have to comply with the laws and regulations of
China and the regulations of the relevant country in relation to management of securities
market, and shall disclose important information to the investors.
HONG KONG REGULATORY OVERVIEW
Securities and Futures Commission
The SFC is a statutory regulatory body in Hong Kong that administers the SFO, which
governs the securities and futures markets and the non-bank retail leveraged foreign exchange
market in Hong Kong.
Securities and Futures Ordinance
The SFO is the primary legislation regulating the securities and futures industry in Hong
Kong, including the regulation of securities, futures and leveraged foreign exchange markets,
the offering of investments to the public in Hong Kong, trading services, margin financing,
asset management, credit rating services and intermediaries conducting regulated activities.
Part V of the SFO particularly deals with licensing and registration matters.
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REGULATORY ENVIRONMENT
Types of Regulated Activities
The SFO promulgates a single licensing regime where a person needs only one license to
carry on different types of regulated activity as defined in Schedule 5 to the SFO for which it
is licensed provided that the individual is fit and proper to do so.
The SFO prescribes ten types of regulated activities, namely:
Type 1: dealing in securities;
Type 2: dealing in futures contracts;
Type 3: leveraged foreign exchange trading;
Type 4: advising on securities;
Type 5: advising on futures contracts;
Type 6: advising on corporate finance;
Type 7: providing automated trading services;
Type 8: securities margin financing;
Type 9: asset management; and
Type 10: providing credit rating services.
The SFC is currently reviewing the regulatory framework in respect of regulating the
over-the-counter derivatives market through amendments to the SFO and the introduction of a
new regulated activity. The new regulations will cover areas including reporting, clearing and
trading of over-the-counter derivatives. The SFC is aiming to have the new regulations on
over-the-counter derivatives to take effect by the end of 2012.
As of the Latest Practicable Date, the following Group companies are licensed under the
SFO to carry out the following regulated activities:
Licensed to carry out the
Group Companies following regulated activities:
HFT Investment Management (HK) Limited Type 4 and Type 9
Hai Tong Asset Management (HK) Limited Type 4, Type 5 and Type 9
Hai Tong Capital (HK) Limited Type 6
Haitong International Asset Management Limited Type 4, Type 5 and Type 9
Haitong International Capital Limited Type 6
Haitong International Consultants Limited Type 1, Type 4 and Type 9
Haitong International Futures Limited Type 2 and Type 5
Haitong International Investment Managers Limited Type 1, Type 4 and Type 9
Haitong International Investment Services Limited Type 1
Haitong International Research Limited Type 4
Haitong International Securities Company Limited Type 1, Type 3 and Type 4
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REGULATORY ENVIRONMENT
Overview of Licensing Requirements
Under the SFO, any person who:
(a) carries on a business in a regulated activity; or
(b) holds itself out as carrying on a business in a regulated activity
must be licensed under the relevant provisions of the SFO to carry on that regulated activity,
unless one of the exceptions under the SFO applies. It is a serious offense for a person to
conduct any regulated activity without the appropriate license.
Further, if a person actively markets (whether by itself or another person on his behalf and
whether in Hong Kong or from a place outside of Hong Kong) to the public in Hong Kong any
services that it provides and such services, if provided in Hong Kong, would constitute a
regulated activity, then that person will also be subject to the licensing requirements under the
SFO.
In addition to the licensing requirements on corporations, any individual who:
(a) performs any regulated function in relation to a regulated activity carried on as a
business; or
(b) holds himself out as performing such regulated function,
must separately be licensed under the SFO as a licensed representative accredited to his
principal.
For each regulated activity conducted by a licensed corporation, it must appoint at least
two responsible officers, at least one of whom must be an executive director, to supervise the
business of the regulated activity. A responsible officer is an individual approved by the SFC
to supervise the regulated activity or activities of the licensed corporation to which he/she is
accredited. In addition, every director of the licensed corporation who actively participates in
or is responsible for directly supervising the licensed corporation’s regulated activity or
activities must apply to the SFC to become a responsible officer.
Fit and Proper Requirement
Persons applying for licenses under the SFO must satisfy and continue to satisfy after the
grant of such licenses by the SFC that they are fit and proper persons to be so licensed. In
simple terms, a fit and proper person means one who is financially sound, competent, honest,
reputable and reliable.
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REGULATORY ENVIRONMENT
In considering whether an applicant is a fit and proper person to be licensed under the
SFO, the SFC will have regard to:
(a) the financial status or solvency of the applicant;
(b) the educational or other qualifications or experience of the applicant having regard
to the nature of the functions to be performed;
(c) the ability of the applicant to carry on the regulated activity competently, honestly
and fairly;
(d) the reputation, character, reliability and financial integrity of the applicant; and
(e) any decisions made by competent authority or regulatory organization whether in
Hong Kong or elsewhere in respect of the applicant.
The above matters will also be considered in respect of any officer of the applicant where
the applicant is a corporation.
In considering the fitness and properness of a corporate applicant, the SFC will also take
into account, among other things:
(a) whether the applicant has established effective internal control procedures and risk
management systems to ensure compliance with all applicable regulatory
requirements;
(b) the state of affairs of any other business which the applicant carries on or proposes
to carry on; and
(c) any information in the possession of the SFC relating to:
any substantial shareholder or officer of the applicant;
any person who is or is to be employed by, or associated with, the applicant for
the purposes of the regulated activity in question;
any person who will be acting for or on behalf of the applicant in relation to
the regulated activity in question; and
any other corporation in the same group of companies as the applicant, and any
substantial shareholder or officer of any such intra-group company.
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REGULATORY ENVIRONMENT
Continuing Obligations of Licensed Corporations
Licensed corporations, licensed representatives and responsible officers must remain fit
and proper at all times. They are required to comply with all applicable provisions of the SFO
and its subsidiary rules and regulations as well as the codes and guidelines issued by the SFC.
Outlined below are some of the key continuing obligations of a licensed corporation:
maintenance of minimum paid-up share capital and liquid capital, and submission of
financial returns to the SFC, in accordance with the requirements under the
Securities and Futures (Financial Resources) Rules (as discussed in more detail
below);
maintenance of segregated account(s), and custody and handling of client securities
in accordance with the requirements under the Securities and Futures (Client
Securities) Rules;
maintenance of segregated account(s), and holding and payment of client money in
accordance with the requirements under the Securities and Futures (Client Money)
Rules;
issue of contract notes, statements of account and receipts, in accordance with the
requirements under the Securities and Futures (Contract Notes, Statements of
Account and Receipts) Rules;
record keeping requirements prescribed under the Securities and Futures (Keeping
of Records) Rules;
submission of audited accounts and other required documents in accordance with the
requirements under the Securities and Futures (Accounts and Audit) Rules;
payment of annual fees and submission of annual returns to the SFC, within one
month after each anniversary date of the license;
maintenance of insurance against specific risks for specified amounts in accordance
with the requirements under the Securities and Futures (Insurance) Rules;
notification to the SFC of certain changes and events, in accordance with the
requirements under Securities and Futures (Licensing and Registration)
(Information) Rules;
complying with the continuous professional training requirements under the
Guidelines on Continuous Professional Training issued by the SFC;
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REGULATORY ENVIRONMENT
implementation of appropriate policies and procedures relating to customer
acceptance, customer due diligence, record keeping, identification and reporting of
suspicious transactions and staff screening, education and training, in accordance
with the requirements under the Prevention of Money Laundering and Terrorist
Financing Guidance Note issued by the SFC (as discussed in more detail below); and
business conduct requirements under the Code of Conduct for Persons Licensed by
or Registered with the SFC, the Management, Supervision and Internal Control
Guidelines for Persons Licensed by or Registered with the SFC, and other applicable
codes and guidelines issued by the SFC.
Securities and Futures (Financial Resources) Rules (“Financial Resources Rules”)
Subject to certain exemptions described below, a licensed corporation is required to
maintain minimum paid-up share capital of:
HK$5,000,000 – in the case of: (i) a corporation licensed for Type 1 regulated
activity that does not provide securities margin financing; (ii) a corporation licensed
for Type 2 or Type 7 regulated activity; (iii) a corporation licensed for Type 3
regulated activity that is an approved introducing agent; (iv) a corporation licensed
for Type 4, Type 5, Type 9 or Type 10 regulated activity that is not subject to the
licensing condition that it shall not hold client assets; or (v) a corporation licensed
for Type 6 regulated activity that is subject to the no sponsor work licensing
condition (but is not subject to the licensing condition that it shall not hold client
assets);
HK$10,000,000 – in the case of (i) a corporation licensed for Type 1 regulated
activity that provides securities margin financing; (ii) a corporation licensed for
Type 8 regulated activity; or (iii) a corporation licensed for Type 6 regulated activity
that is not subject to the no sponsor work licensing condition; or
HK$30,000,000 – in the case of a corporation licensed for Type 3 regulated activity
that is not an approved introducing agent.
There is no minimum paid-up share capital requirement if the corporation is (i) licensed
for Type 1 regulated activity and is an approved introducing agent or a trader; (ii) licensed for
Type 2 regulated activity and is an approved introducing agent, a trader or a futures
non-clearing dealer; (iii) licensed for Type 4, Type 5, Type 9 or Type 10 regulated activity that
is subject to the licensing condition that it shall not hold client assets; or (iv) licensed for Type
6 regulated activity that is subject to both the licensing condition that it shall not hold client
assets and the no sponsor work licensing condition.
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REGULATORY ENVIRONMENT
Pursuant to the Financial Resources Rules, a licensed corporation shall also maintain
minimum liquid capital of the higher of the amount of (a) and (b) below:
(a) the amount of:
HK$100,000 – in the case of a corporation licensed for Type 4, Type 5, Type
6, Type 9 or Type 10 regulated activity that is subject to the licensing condition
that it shall not hold client assets;
HK$500,000 – in the case of (i) a corporation licensed for Type 1 regulated
activity that is an approved introducing agent or trader; or (ii) a corporation
licensed for Type 2 that is an approved introducing agent, a trader or a futures
non-clearing dealer; or
HK$3,000,000 – in the case of (i) a corporation licensed for Type 1 regulated
activity that is not an approved introducing agent or a trader; (ii) a corporation
licensed for Type 2 that is not an approved introducing agent, a trader or a
futures non-clearing dealer; (iii) a corporation licensed for Type 3 regulated
activity that is an approved introducing agent; (iv) a corporation licensed for
Type 4, Type 5, Type 6, Type 9 or Type 10 regulated activity that is not subject
to the licensing condition that it shall not hold client assets; or (v) a corporation
licensed for Type 7 or Type 8 regulated activity; or
HK$15,000,000 – in the case of a corporation licensed for Type 3 regulated
activity that is not an approved introducing agent; and
(b) its variable required liquid capital, as defined in the Financial Resources Rules.
If the licensed corporation is licensed for more than one type of regulated activity, the
minimum paid-up share capital and liquid capital that the corporation should maintain shall be
the highest amount required among those regulated activities.
Anti-Money Laundering and Terrorist Financing
Licensed corporations are also required to comply with applicable anti-money laundering
laws and regulations in Hong Kong, as well as the Prevention of Money Laundering and
Terrorist Financing Guidance Note (“Guidance Note”) issued by the SFC.
The Guidance Note sets out the steps that a licensed corporation and its representatives
should implement to discourage and identify any money laundering or terrorist financing
activities. Under the Guidance Note, licensed corporations should, among other things:
develop customer acceptance policies and procedures to identify the types of
customers that are likely to pose a higher than average risk of money laundering and
terrorist financing;
– 176 –
REGULATORY ENVIRONMENT
take all reasonable steps to establish the true and full identity of each customer, and
of each customer’s financial situation and investment objectives;
ensure compliance with all applicable record keeping requirements and maintain
such records that are sufficient to permit reconstruction of individual transactions;
and
conduct ongoing monitoring for identification of suspicious transactions and ensure
compliance with their legal obligations of reporting funds or property known or
suspected to be proceeds of crime or terrorist property to the Joint Financial
Intelligence Unit, a unit jointly run by the Hong Kong Police Force and the Hong
Kong Customs & Excise Department to monitor and investigate suspected money
laundering.
We set out below a brief summary of the principal legislation concerned with money
laundering and terrorist financing in Hong Kong.
(1) Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of
Hong Kong) (“DTROP”)
Among other things, the DTROP contains provisions for the investigation of assets
suspected to be derived from drug trafficking activities, the freezing of assets on arrest and the
confiscation of the proceeds from drug trafficking activities. It is an offence under the DTROP
if a person deals with any property knowing or having reasonable grounds to believe it to
represent the proceeds of drug trafficking. The DTROP requires a person to report to an
authorized officer if he/she knows or suspects that any property (directly or indirectly)
represents the proceeds of drug trafficking or is intended to be used or was used in connection
with drug trafficking, and failure to make such disclosure constitutes an offence under the
DTROP.
(2) Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong)
(“OSCO”)
Among other things, the OSCO empowers officers of the Police and the Customs and
Excise Department to investigate organized crime and triad activities, and it gives the courts
jurisdiction to confiscate the proceeds of organized and serious crimes, to issue restraint orders
and charging orders in relation to the property of defendants of specified offences. The OSCO
extends the money laundering offence to cover the proceeds of all indictable offences in
addition to drug trafficking.
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REGULATORY ENVIRONMENT
(3) United Nations (Anti-Terrorism Measures) Ordinance (Chapter 575 of the Laws of
Hong Kong) (“UNATMO”)
Among other things, the UNATMO provides that it would be a criminal offence to: (i)
provide or collect funds (by any means, directly or indirectly) with the intention or knowledge
that the funds will be used to commit, in whole or in part, one or more terrorist acts; or (ii)
make any funds or financial (or related) services available, directly or indirectly, to or for the
benefit of a person knowing that, or being reckless as to whether, such person is a terrorist or
terrorist associate. The UNATMO also requires a person to report his knowledge or suspicion
of terrorist property to an authorized officer, and failure to make such disclosure constitutes an
offence under the UNATMO.
– 178 –
HISTORY AND CORPORATE STRUCTURE
OUR HISTORY
The history of our Company traces back to August 1988 when Shanghai Haitong
Securities Company* (N mwmw R8QlS ), our Company’s predecessor, was established in the
PRC as an enterprise owned by the whole people (Qhl b@g R6O im ) with a registered share
capital of RMB10 million and solely funded by Bank of Communications, Shanghai Branch.
We were one of the founding members of the Shanghai Stock Exchange in 1990, and we
became a member of the Shenzhen Stock Exchange when it started admitting members in 1992.
On September 27, 1994, our Company was converted into a limited liability company, and
was renamed as Haitong Securities Company Limited* (mw R8g – QlS ).
On January 28, 2002, upon approval from the CSRC and the Shanghai municipal
government, Haitong Securities Company Limited was converted into a joint-stock limited
liability company, and was renamed as Haitong Securities Co., Ltd* (mw R8Ng – QlS ).
On July 31, 2007, we were listed on the Shanghai Stock Exchange via a reverse takeover
of SUABC with stock code 600837.
We provide a comprehensive range of financial products and services and primarily focus
on five principal business lines in the PRC, including securities and futures brokerage
(including margin financing and securities lending), investment banking, asset management,
proprietary trading and direct investment. We also provide a variety of securities products and
services overseas.
MAJOR INCREASE IN SHARE CAPITAL
On December 29, 2000, upon the approval from the CSRC, the registered share capital of
our Company was increased to RMB3,746,928,000.
On December 6, 2002, upon the approval from the CSRC, the registered share capital of
our Company was increased to RMB8,734,438,870.
On July 6, 2007, the registered share capital of our Company was changed to
RMB3,389,272,910 as a result of the reverse takeover of SUABC.
On November 21, 2007, the registered share capital of our Company was increased to
RMB4,113,910,590 as a result of issuance of 724,637,680 shares in a non-public offering.
On June 11, 2008, upon the approval by our Shareholders in the 2007 Shareholders’
meeting, we distributed a cash dividend of RMB411,391,059 together with a total of
1,234,173,177 bonus shares, and a total of 2,879,737,413 A Shares by converting a portion of
our capital reserve into share capital. As a result, our total share capital was increased to
RMB8,227,821,180.
– 179 –
HISTORY AND CORPORATE STRUCTURE
BUSINESS MILESTONES IN OUR HISTORY
We have achieved the following important milestones in the history of our business:
1990 In November, we became one of the founding members of the Shanghai Stock
Exchange.
1992 In January, we started our B share business.
In July, we were admitted as a member of the Shenzhen Stock Exchange.
1999 In April, Fullgoal Fund Management, one of the first ten fund management
companies authorized by the CSRC to provide asset management services in
the PRC, was established, and we held 27.775% of its equity interests as of the
Latest Practicable Date.
2003 In April, HFT Investment Management was established in the PRC, and we
held 51.00% of the equity interests of HFT Investment Management as of the
Latest Practicable Date.
2004 In October, we established Haitong-Fortis PE Management (the first private
equity fund management company in the PRC) to act as the manager of the
China-Belgium Fund (the first industrial private equity fund approved by PRC
government) which was jointly set up by the governments of the PRC and
Belgium in November; we held 67.00% of the equity interest in Haitong-Fortis
PE Management as of the Latest Practicable Date.
2005 In May, we were qualified by the SAC as one of the pilot innovative securities
companies.
In August, we took over the business of Gansu Securities Co., Ltd.* (u
R8g – QlS ), with its nine sales branches, six services branches and all of
its operational assets and necessary trading seats in relation to functional
division associated with brokerage business, increasing our customer base and
branch offices.
In October, we acquired 56.67% of the equity interest in Shanghai Huanghai
Futures Brokerage Co., Ltd.* (N mwmwg g – QlS ), currently known
as Haitong Futures, which marked the launch of our futures business; we held
66.67% of its equity interest as of the Latest Practicable Date.
In December, we took over the securities business of Xing’an Securities Co.,
Ltd. ( [ R8g – QlS ), with its 23 sales branches, 30 services branches
and all of its operational assets and necessary trading seats in relation to
functional division associated with brokerage business, increasing our
customer base and branch offices.
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HISTORY AND CORPORATE STRUCTURE
2007 In July, our wholly-owned subsidiary Haitong Finance Holding (HK) Co., Ltd.
(currently known as Haitong International Holdings) was incorporated in Hong
Kong, through which we provide securities and futures brokerage, margin
financing and securities lending, corporate finance and advisory services and
asset management products and services.
In July, our A Shares were listed on the Shanghai Stock Exchange with the
stock code 600837 via a reverse takeover of SUABC.
2008 In January, we were approved by the CSRC as a QDII.
In April, we were permitted by the CSRC to provide futures IB business.
In July, we were approved by the CSRC as one of the pilot companies in direct
investment, and in October, we incorporated Haitong Capital Investment, a
wholly-owned subsidiary, to develop the direct investment business.
In July, we were first granted an “AA” rating by the CSRC, and have received
such a rating for the past four consecutive years.
2009 In December, through Haitong Finance Holding (HK) Co., Ltd. (currently
known as Haitong International Holdings), we acquired 52.86% of the equity
interest of Taifook Securities (currently known as Haitong International
Securities), a company listed on the Hong Kong Stock Exchange with stock
code 00665, and through a series of purchase and loan capitalization, we
increased our equity interest to 69.74% as of the Latest Practicable Date.
2010 In February, Haitong Futures qualified as one of the first PRC futures
companies to open accounts for stock index futures tradings.
In March, we qualified as one of the first PRC securities companies to
participate in the pilot program of margin financing and securities lending.
In August, a subsidiary of Taifook Securities (currently known as Haitong
International Securities) successfully launched the first offshore RMB fixed
income fund in Hong Kong.
In November, Taifook Securities was renamed as Haitong International
Securities.
2011 In June, we applied to the CSRC to establish a subsidiary engaging in
investment services of alternative financial products.
2012 In January, a subsidiary of Haitong International Securities successfully
launched one of the first offshore investment funds which invest in the
domestic securities market through RQFII.
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HISTORY AND CORPORATE STRUCTURE
OUR KEY SUBSIDIARIES AND AFFILIATES
Our key subsidiaries and affiliates include:
1. HFT Investment Management
HFT Investment Management was established in April 2003 with a registered capital of
RMB150 million. Its main scope of business includes fund raising, fund sale, and asset
management. We and BNPP IP BE Holding held 51% and 49% of the equity interest in HFT
Investment Management as of the Latest Practicable Date, respectively. According to Measures
for the Administration of Securities Investment Fund Management Companies (IR8bW
{ QlSt ) promulgated by CSRC on August 10, 2004 and effective from October 1,
2004, equity interest held by non-PRC shareholders in a securities investment fund
management company incorporated under the PRC law shall not exceed 49%. Upon Listing, the
aggregate of equity interest percentage in HFT Investment Management held by BNPP IP BE
Holding and that held by the H Share Shareholders through the Company, which, under the
Administration of Securities Investment Fund Management Companies, represents the
shareholding percentage of the H Shareholders in the Company multiplied by the equity
interest percentage of the Company in HFT Investment Management, will exceed 49%.
Accordingly, we have undertaken to the CSRC to take appropriate measures to ensure the
shareholding structure of HFT Investment Management complies with the relevant regulatory
requirements within one year following the Listing.
2. Haitong International Holdings and Haitong International Securities
Haitong International Holdings, our wholly-owned subsidiary, was incorporated in July
2007 in Hong Kong with an authorized capital of HK$4 billion. Haitong International
Securities is a company listed on the Hong Kong Stock Exchange with stock code 00665. As
of the Latest Practicable Date, 69.74% of its equity interest was held by Haitong International
Holdings. The main scope of business of these two companies includes investment holding,
brokerage business, corporate finance and asset management business authorized by Hong
Kong securities regulatory rules through various subsidiaries, and other businesses.
– 182 –
HISTORY AND CORPORATE STRUCTURE
3. Haitong Futures
Haitong Futures is a limited liability company incorporated in the PRC in March 1993
with a registered capital of RMB1.0 billion. Its main scope of business includes commodity
futures brokerage and financial futures brokerage.
4. Haitong Capital Investment and its subsidiaries
Haitong Capital Investment, our wholly-owned subsidiary, was established in October
2008 with a registered capital of RMB4 billion. Its main scope of business includes equity
investments in domestic enterprises, investment in treasury bonds and central bank notes,
financial advisory services on equity investment, and establishment of direct investment funds.
Haitong Jihe Management and Haitong Chuangxin Management are subsidiaries of Haitong
Capital Investment.
Haitong Jihe Management was established in November 2010 with a registered share
capital of RMB50 million. Its main scope of business includes management of equity
investment and investment consultancy.
Haitong Chuangxin Management was established in February 2011 with a registered share
capital of RMB50 million. Its main scope of business includes investment management, asset
management, investment consultancy, industrial investment, and venture capital investment.
5. Haitong-Fortis PE Management
Haitong-Fortis PE Management was established in October 2004 with a registered capital
of RMB20 million. Its main scope of business includes industrial investment fund
management, investment advisory, and establishment of investment funds by way of
promotion.
6. Fullgoal Fund Management
Fullgoal Fund Management was established in April 1999 with a registered capital of
RMB180 million. Its main scope of business includes the provision of traditional fund
management services, fund raising, fund sale, and asset management.
– 183 –
HISTORY AND CORPORATE STRUCTURE
OUR SHAREHOLDING AND GROUP STRUCTURE
The following chart sets out our simplified shareholding structure and key subsidiaries
and affiliates, immediately following the completion of the Global Offering (assuming there is
no change in the number of Shares held by the top ten A Share Shareholders of our Company
and the shareholdings held by our Company in our subsidiaries after the Latest Practicable Date
and the Over-allotment Option is not exercised):
Top 10 A Share Other A Share H Share
Shareholders NSSF(2)
Shareholders(1) Shareholders
29.34% 56.36% 13.00% 1.30%
Our Company
51.00% 66.67% 100.00% 67.00% 27.775% 100.00%
HFT Haitong Haitong- Fullgoal Haitong
Haitong
Investment Capital Fortis PE Fund International
Management(3) Futures(4)
Investment Management(5) Management(6) Holdings
51.00% 51.00% 69.74%
Haitong Haitong Haitong
Jihe Chuangxin International
Management(7) Management(8) Securities(9)
(1) The top ten shareholders of our Company are Bright Food (Group) Co., Ltd., Shanghai Haiyan
Investment Management Company Limited, Shanghai Electric (Group) Corporation, Shenergy Group
Company Limited, Shanghai Jiushi Company, Shanghai Shangshi, Shanghai Friendship Group
Incorporated Company, Wenhui-Xinmin United Press Group, Shanghai Lansheng Corporation, and
Liaoning Energy Investment (Group) Co., Ltd. Immediately following completion of the Global
Offering, none of the top ten A Share Shareholders will directly or indirectly control, or is entitled to
exercise, or control the exercise of, 5% or more of our total issued share capital. As of the Latest
Practicable Date, to the Directors’ best knowledge, eight of our ten largest shareholders are controlled
by Shanghai SASAC and such shareholders held an aggregate of approximately 27.94% shareholding in
the Company. However, under the Hong Kong Listing Rules, a PRC Governmental Body as defined
under Rule 19A.04 such as Shanghai SASAC is normally not considered as a Connected Person or a
controlling shareholder of a PRC issuer.
(2) H Shares that are converted from an equal number of A Shares immediately after the completion of the
Global Offering (assuming the Over-allotment Option is not exercised) are held by the NSSF. For
details, please see “Share Capital – Share Capital – Transfer of the State-owned Shares to the NSSF”
in this prospectus.
(3) The rest of the equity interest in HFT Investment Management is held by BNPP IP BE Holding. BNPP
IP BE Holding is a member of BNP Group, which is in turn a banking group headquartered in Paris,
France. The principal businesses of BNP Group are retail banking, corporate and investment banking,
and investment solutions. Investment solutions provides integrated solutions to investors (including
institutional investors, businesses, individuals and high net worth clients) and to its distribution
partners. Investment solutions’ services encompass amongst others wealth management, asset
management and securities services. BNP Group is a Connected Person of our Group due to and solely
due to its shareholding in HFT Investment Management and Haitong-Fortis PE Management.
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HISTORY AND CORPORATE STRUCTURE
(4) The rest of the equity interest in Haitong Futures is held by Shanghai Shengyuan Real Estate (Group)
Co., Ltd.* (N mwvnbW0u\" (–W )g – QlS ) (“Shanghai Shengyuan Real Estate (Group)”). Shanghai
Shengyuan Real Estate (Group) is a limited liability company incorporated in the PRC and primarily
engaged in the development and valuation of real estate, maintenance of real estate properties, and
management of real estate properties. Shanghai Shengyuan Real Estate (Group) is an independent third
party.
(5) The rest of the equity interest in Haitong-Fortis PE Management is held by BNPP IP BE Holding. BNPP
IP BE Holding is a member of BNP Group, which is in turn a banking group headquartered in Paris,
France. The principal businesses of BNP Group are retail banking, corporate and investment banking,
and investment solutions. Investment solutions provides integrated solutions to investors (including
institutional investors, businesses, individuals and high net worth clients) and to its distribution
partners. Investment solutions’ services encompass amongst others wealth management, asset
management and securities services. BNP Group is a Connected Person of our Group due to and solely
due to its shareholding in HFT Investment Management and Haitong-Fortis PE Management.
(6) The rest of the equity interest in Fullgoal Fund Management is held by Shenyin & Wanguo Securities
Co., Ltd. (27.775%), Bank of Montreal (27.775%), and Shandong International Trust Corporation
(16.675%), respectively. Shenyin & Wanguo Securities Co., Ltd. is a limited liability company
incorporated in the PRC, and it is primarily engaged in securities brokerage, securities investment
advisory, financial advisory related to securities trading and investment, proprietary trading, securities
underwriting and sponsoring, asset management, futures IB business and margin financing and
securities lending business. Bank of Montreal is a banking group the headquarters of which is in Canada,
and it is primarily engaged in investment and corporate banking and wealth management. Shandong
International Trust Corporation is a limited liability company incorporated in the PRC; it is primarily
engaged in various trust business, investment banking business and proprietary trading. Each of Shenyin
& Wanguo Securities Co., Ltd., Bank of Montreal and Shandong International Trust Corporation is an
independent third party.
(7) The rest of the equity interest in Haitong Jihe Management is held by Jilin Investment Group Co., Ltd.*
(T g—w b (–W )g – QlS ) (43%) and Hangzhou Wulian Investment Management Company* (gm]N
bt g – QlS ) (6%). Jilin Investment Group Co., Ltd. is a limited liability company incorporated
in the PRC and it is primarily engaged in investment, financing, asset management and investment
consultancy business. Hangzhou Wulian Investment Management Company is a limited liability
company incorporated in the PRC, and it is primarily engaged in investment management consultancy.
Jilin Investment Group Co., Ltd. is a Connected Person of our Group due to and solely due to its
shareholding in Haitong Jihe Management. Hangzhou Wulian Investment Management Company is an
independent third party.
(8) The rest of the equity interest in Haitong Chuangxin Management is held by Xi’an Space Center
Chuangxin Investment Co., Ltd.* (‰*Y)WúW0Rue°bg – QlS ). Xi’an Space Center Chuangxin
Investment Co., Ltd. is a limited liability company incorporated in the PRC and it is primarily engaged
in investment in high-tech projects, investment consultancy and management consultancy business.
Xi’an Space Center Chuangxin Investment Co., Ltd. is a Connected Person of our Group due to and
solely due to its shareholding in Haitong Chuangxin Management.
(9) Haitong International Securities is a company listed on the Hong Kong Stock Exchange, the stock code
of which is 00665. It was previously named Taifook Securities until November 2010.
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BUSINESS
OVERVIEW
We are a leading full-service securities firm in the PRC with an integrated business
platform, extensive branch network and substantial customer base. We have established
prudent operating strategies and are the only major PRC securities firm founded in the 1980s
that remains in operation under the same brand without receiving government-backed capital
injections or being the target of a successful acquisition. Leveraging our integrated business
platform, we provide a comprehensive range of financial products and services, and primarily
focus on five principal business lines in the PRC, comprising securities and futures brokerage
(including margin financing and securities lending), investment banking, asset management,
proprietary trading and direct investment. We have gained leading market positions across
multiple business lines in the PRC securities industry. We also provide a variety of securities
products and services overseas.
We are one of the largest securities firms in the PRC. According to the SAC, we ranked
second among all securities firms in the PRC in terms of total assets and net assets as of
December 31, 2011 and second in terms of total revenue in 2011 (1). As of December 31, 2011,
we owned 216 securities and futures brokerage branches, the fourth largest branch network
among all PRC securities firms according to the data from the Shanghai Stock Exchange and
the China Futures Association. Headquartered in Shanghai, the financial center of the PRC, our
branches are located across 27 provinces and 125 cities in the PRC. In addition, as of December
31, 2011, we operated 13 branches in Hong Kong and Macau through our Hong Kong-listed
subsidiary, Haitong International Securities. As of December 31, 2011, we had over 4.0 million
retail customers (including approximately 2.1 million active customers) and over 12,000
institutional and high net worth customers in the PRC. Our A Shares have been listed on the
Shanghai Stock Exchange since July 2007. In July 2007, December 2007 and December 2008,
we were admitted to the CSI 300 Index, the SSE 180 Index and the SSE 50 Index, respectively.
In addition, in June 2008, our A Shares became one of the constituent stocks of the SSE
Corporate Governance Index.
Our five principal business lines in the PRC include:
Securities and futures brokerage. We engage in the trading of equities, bonds, funds
and warrants, as well as futures on behalf of our customers, and also provide margin
financing and securities lending and investment advisory services.
Investment banking. We provide corporate finance services, including equity
underwriting, debt underwriting and financial advisory services to our institutional
clients.
Asset management. We offer traditional asset management products and services
through our Company and one of our subsidiaries, HFT Investment Management.
We operate our private equity asset management business through our subsidiaries,
Haitong-Fortis PE Management, Haitong Jihe Management and Haitong Chuangxin
Management.
(1)
The 2011 data from the SAC was based on the preliminary results of PRC securities firms.
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BUSINESS
Proprietary trading. We engage in the trading of equities, bonds, funds, derivatives
and other financial products for our own account.
Direct investment. We make direct equity investments in private companies and earn
capital gains by exiting from these private equity investments through IPOs or share
sales, or by receiving dividends from these portfolio companies. In addition, we
invest in private equity funds with our own capital.
We conduct our overseas business primarily through our Hong Kong-based subsidiary,
Haitong International Holdings. Haitong International Securities, a subsidiary of Haitong
International Holdings, is a leading full-service securities firm in Hong Kong. Haitong
International Securities provides securities and futures brokerage, corporate finance and
advisory services, asset management services and other securities products and services to a
broad range of retail customers and institutional clients in Hong Kong and overseas.
Established in 1988, we have navigated through various market and business cycles,
regulatory reforms and industry developments over our 23 years of operating history, including
the Asian financial crisis in 1997 and the most recent global financial crisis in 2008. We have
established prudent corporate governance and effective risk management and internal control
systems to reduce our exposure to various risks in the securities markets. In recognition of our
strong capital position, effective risk management and internal control systems, as well as our
proven track record, we have received an “AA” regulatory rating from the CSRC for the past
four consecutive years, the highest rating given to a PRC securities firm to date.
Leveraging our prudent operating strategies and proven execution capabilities, we have
gained leading market positions in securities and futures brokerage, investment banking and
other traditional businesses in the PRC, which have experienced steady growth in recent years.
According to the data from the SAC, the Shanghai Stock Exchange, the Shenzhen Stock
Exchange and the CSRC, among all PRC securities firms, we ranked:
second in terms of total assets and net assets as of December 31, 2009, 2010 and
2011 (1);
among the top five in terms of securities brokerage trading volume in 2009, 2010
and 2011;
third in terms of the number of equity securities underwritten in 2011; and
in the top two in terms of the number of major asset restructuring transactions for
listed domestic PRC companies we advised in 2009, 2010 and 2011.
(1) The 2011 data from the SAC was based on the preliminary results of PRC securities firms.
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BUSINESS
We have also established leading positions in developing new businesses, such as margin
financing and securities lending, stock index futures brokerage and direct investment
businesses. We are frequently designated by the PRC regulatory authorities as one of the first
PRC securities firms to participate in pilot programs for new securities products and services.
Benefiting from our strong capital position, substantial customer base and proven execution
capabilities, we have experienced rapid growth and achieved leading market positions in
developing new businesses in the PRC securities industry, such as margin financing and
securities lending, stock index futures brokerage and direct investment businesses. According
to the data from the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the China
Financial Futures Exchange, we ranked:
first among PRC securities firms in terms of margin trading volume in 2011, and in
terms of margin loan balance and market value of securities lent as of December 31,
2011;
first among PRC futures companies in terms of stock index futures brokerage
trading volume in 2011; and
second among PRC securities firms in terms of registered capital of direct
investment subsidiaries as of December 31, 2011.
In recent years, we have received numerous awards and honors in recognition of our
outstanding performance and management capabilities, including, among others:
“2011 Best PRC Securities Firm” by Moneyweek;
“2011 Best PRC Investment Bank” by Moneyweek;
“2011 Most Respectable Investment Bank” by New Fortune Magazine;
“2011 Best Margin Financing Broker” by Securities Times;
“2011 Best IB Business Underwriter” by Securities Times;
“2010 Best PRC Securities Firm” by 21st Century Business Herald;
“2010 Top 10 PRC Investment Banks” by Moneyweek; and
“2009 Best Securities Broker” by Securities Times.
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BUSINESS
As of December 31, 2009, 2010 and 2011, we had total assets of RMB120,730.2 million,
RMB115,413.1 million and RMB98,977.0 million, respectively, and total equity of
RMB44,518.6 million, RMB45,616.8 million and RMB46,610.7 million, respectively. For the
years ended December 31, 2009, 2010 and 2011, our total revenue and other income was
RMB11,315.8 million, RMB11,304.9 million and RMB10,860.4 million, respectively, and our
profit was RMB4,661.7 million, RMB3,868.2 million and RMB3,282.0 million, respectively.
COMPETITIVE STRENGTHS
We believe the following competitive strengths contribute to our success and distinguish
us from our competitors:
Full-service securities firm in the PRC with leading market positions across multiple
business lines
We are one of the largest securities firms in the PRC. According to the SAC, we ranked
second among PRC securities firms in terms of total assets and net assets as of December 31
2009, 2010 and 2011 (1), respectively. We primarily focus on five principal business lines in the
PRC, including securities and futures brokerage, investment banking, asset management,
proprietary trading and direct investment. Each of these businesses contributed 38.3%, 9.8%,
10.1%, 10.5% and 0.5%, respectively, to our total revenue and other income in 2011. Our
overseas business, conducted primarily through Haitong International Holdings, contributed
8.8% to our total revenue and other income in 2011.
With our extensive network, substantial customer base and proven track record, we have
gained leading market positions in the securities and futures brokerage and investment banking
businesses in the PRC and have established a well-recognized brand. According to the
Shanghai Stock Exchange and the Shenzhen Stock Exchange, among PRC securities firms, we
ranked among the top five in terms of securities brokerage trading volume in 2009, 2010 and
2011, among the top two in terms of the number of domestic listed PRC companies we advised
on major asset restructuring transactions in 2009, 2010 and 2011 and third in terms of the
number of equity securities underwritten in 2011. In addition, we have experienced rapid
growth and achieved leading market positions in developing new businesses, such as margin
financing and securities lending, stock index futures brokerage and direct investment.
Our diversified business model has allowed us to achieve sustainable growth. Our
securities and futures brokerage and asset management businesses have achieved steady growth
and provided us with stable revenue streams. In addition, our investment banking, proprietary
trading, direct investment businesses and the development of new businesses have served as
additional growth drivers. We believe our business model generates balanced revenue streams
which provide sustainable profits and strong growth prospects.
In addition, we believe our integrated business platform has allowed us to benefit from
revenue and cost synergies across different business lines and enhanced our capabilities to
attract and retain customers by maximizing cross-selling opportunities and the sharing of
business resources.
(1) The 2011 data from the SAC was based on the preliminary results of PRC securities firms.
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BUSINESS
Strategically located branch network across the PRC with a substantial and stable customer
base
We have an extensive nationwide branch network in the PRC. As of December 31, 2011,
we had 216 securities and futures brokerage branches spanning across 27 provinces and 125
cities in the PRC, as well as 13 branches in Hong Kong and Macau operated through our
subsidiary, Haitong International Securities. According to the data from the Shanghai Stock
Exchange and the China Futures Association, we ranked fourth among all securities firms in
the PRC in terms of the number of securities and futures brokerage branches as of December
31, 2011. In addition, in order to adapt to the evolving competitive landscape and development
trends specific to different regions, we have established 20 branch offices in Beijing, Shanghai
and several other provinces. Such branch offices directly manage and supervise regional
securities brokerage branches and allow us to enhance management efficiency and resource
allocation at our branches.
Our branches are also strategically located. We are headquartered in Shanghai, the
financial center in the PRC. We first expanded into the Yangtze River Delta, Pearl River Delta
and Bohai Rim where high net worth customers and SMEs are concentrated. As of December
31, 2011, approximately half of our securities brokerage branches were located in these
well-developed regions. We also established branches in less penetrated regions such as the
northeastern, central and western regions of the PRC. While expanding our traditional branch
network, we have also developed a web-based platform, which our customers can use to trade
online. In addition, our customer service representatives at our branches offer real-time
advisory services to our customers. This has provided a solid foundation for attracting new
customers and expanding our businesses. We believe that our balanced geographic coverage of
branches in the PRC has enabled us to benefit from the rapid economic growth and accelerating
urbanization in certain developing regions.
We believe our strategic geographic coverage has enabled us to provide localized services
to our customers and capture growth potential and cross-selling opportunities among multiple
business lines. For example, we have identified investment banking opportunities from our
numerous SME customers covered by our branch network. Our extensive branch network and
localized services also support our distribution of differentiated and value-added products and
services, such as our wealth management products.
Leveraging our extensive and strategically located branch network, we have built a large
and stable customer base. As of December 31, 2011, we had over 4.0 million retail customers
(including approximately 2.1 million active customers) and over 12,000 institutional and high
net worth customers in the PRC. Among these customers, approximately 76% had opened
accounts with us for over three years and approximately 38% had a business relationship of
over ten years with us.
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BUSINESS
A pioneer in the PRC securities industry for offering new businesses
In recognition of our strong capital position, effective risk management and internal
controls and proven execution capabilities, we are frequently designated by the regulatory
authorities as one of the first few securities firms to participate in pilot programs for new
businesses in the PRC securities industry, for example:
in February 2010, we became one of the first few PRC securities firms approved by
the CSRC to conduct a stock index futures brokerage business in the PRC;
in March 2010, we were designated by the CSRC as one of the first six securities
firms in the PRC to pilot run the margin financing and securities lending business;
in October 2008, we became one of the first few PRC securities firms to launch a
direct investment business. As early as 2004, we co-founded the China-Belgium
Fund with other shareholders and established Haitong-Fortis PE Management to
enter into the private equity investment and management businesses; and
in April 2008, we were among the first few PRC securities firms approved by the
CSRC to conduct futures IB business.
In recent years, we have experienced rapid growth and established leading market
positions in our new businesses. According to data from the Shanghai Stock Exchange, the
Shenzhen Stock Exchange and the China Financial Futures Exchange, we ranked:
first among PRC securities firms in terms of margin trading volume during the year
ended December 31, 2011, and in terms of margin loan balance and market value of
securities lent as of December 31, 2011;
first among PRC futures companies in terms of stock index futures brokerage
trading volume in 2011; and
second among PRC securities firms in terms of registered capital of direct
investment subsidiaries as of December 31, 2011.
We believe our substantial customer base, strong capital position, extensive branch
network, strong cross-selling and execution capabilities have enabled us to gain a first-mover
advantage in offering new businesses. In addition, we believe our integrated business platform
has enabled us to expand our new businesses quickly. For example, our sizable proprietary
trading business has provided a sufficient pool of stocks to expand our securities lending
business and our strong futures IB business platform has contributed to the rapid growth of our
stock index futures and futures brokerage businesses.
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BUSINESS
We believe that our leadership in new businesses could enable us to further expand our
market share in traditional securities businesses. For example, our leading market position in
margin financing and securities lending and stock index futures businesses has expanded our
source of revenue, diversified our product and service offerings and enhanced customer loyalty
in our brokerage business.
We expect the CSRC to continue to launch pilot programs and encourage the introduction
of new businesses in the PRC securities markets. With the gradual relaxation of the PRC
securities regulations, we believe we are well-positioned to capture future market opportunities
by leveraging our leading market positions in multiple business lines and our first-mover
advantage in new businesses.
Well-established international platform to capture growing cross-border business
opportunities
In December 2009, we acquired a controlling interest in Taifook Securities in Hong Kong,
which we subsequently renamed as Haitong International Securities. The acquisition and
successful integration of Taifook Securities allowed us to establish a foothold in Hong Kong
and provided a platform for further overseas expansion.
Haitong International Securities is one of the leading local full-service securities firms in
Hong Kong, with 39 years of operating history, and has been awarded the best equity house in
Hong Kong for over ten consecutive years by internationally renowned financial media, such
as FinanceAsia, Asiamoney and Euromoney. Currently, through 13 branches in Hong Kong and
Macau, two representative offices in Beijing and Shanghai and six investment advisory centers
in six major cities in the PRC, Haitong International Securities serves over 145,000 brokerage
customers with comprehensive securities and futures brokerage products and services, and
other clients with corporate finance and advisory services and asset management services.
Currently, there are only a small number of PRC securities firms which have listed business
platforms in Hong Kong, among which Haitong International Securities has a long operating
history, with the most extensive distribution network in Hong Kong.
The full-service overseas platform of Haitong International Securities and its overseas
customer base and branch network have allowed us to capture increasing cross-border business
opportunities and to meet changing customer demands in the Greater China region. We are
well-positioned to benefit from potential cross-selling opportunities among our PRC and
overseas customer bases. For example:
we have successfully referred large PRC institutional and QDII brokerage clients, as
well as corporate clients who intend to raise capital overseas to Haitong
International Securities;
with the potential launch of the International Board, Haitong International Securities
is positioned to refer overseas clients who intend to raise capital in the PRC to our
investment banking business; and
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BUSINESS
we are well-positioned to develop RQFII and QDII businesses through our PRC and
Hong Kong platforms. In addition, our Hong Kong platform will continue to capture
business opportunities arising from the on-going internationalization of the
Renminbi. For example, a subsidiary of Haitong International Securities launched
the first SFC-authorized public offshore Renminbi fund in Hong Kong in August
2010 and one of the first offshore investment funds which invest in the domestic
securities market through RQFII in January 2012.
The overseas platform of Haitong International Securities enables us to enhance our brand
recognition overseas. The successful acquisition and integration of Haitong International
Securities have helped us realize our business strategy of capitalizing on growing cross-border
business opportunities. It also provided us with a solid foundation for pursuing overseas
acquisitions in the future.
Prudent corporate governance and effective risk management and internal control systems
We have navigated through various market and business cycles, regulatory reforms and
industry developments over our 23 years of operating history, including the most recent global
financial crisis in 2008. We have established prudent corporate governance, effective risk
management and internal control systems to reduce our exposure to various risks in the
securities markets. We are the only major PRC securities firm founded in the 1980s that
remains in operation under the same brand without receiving government-backed capital or
being the target of a successful acquisition.
Since our listing on the Shanghai Stock Exchange, we have maintained effective and
transparent corporate governance measures as required by the Shanghai Stock Exchange and
the CSRC. We have developed a comprehensive, firm-wide risk control system that effectively
manages market risk, credit risk, liquidity risk and operational risk, and have received an “AA”
regulatory rating from the CSRC for the past four consecutive years, the highest rating given
to a PRC securities firm to date. We have also established effective Chinese walls and
precautionary mechanisms across our business lines to prevent potential conflicts of interests.
In addition, we have established an independent and centralized internal audit and compliance
system, which effectively monitors our operations and transactions. In June 2008, our A Shares
became one of the constituent stocks of the SSE Corporate Governance Index in recognition
of our sound corporate governance.
In addition, we have no single shareholder owning more than 6.0% of our total
outstanding A Shares as of December 31, 2011. Such shareholding structure allows our Board
of Directors and senior management team to exercise independent judgment and a high level
of professionalism, with a view to maximizing our corporate value in the best interest of all
shareholders.
Experienced and stable management team with a highly proficient professional workforce
Our success is attributable to the sound leadership of our Directors and senior
management. The majority of our Directors, including our Chairman and Vice Chairman, and
members of our senior management, including our General Manager, Deputy General Manager,
Chief Financial Officer and General Compliance Officer, have an average of 20 years of
experience in the PRC financial and securities industries. Most of them have served us for over
ten years.
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BUSINESS
We believe that the strategic vision of our senior management team has distinguished us
from our competitors and has allowed us to capture business opportunities arising from product
innovation and globalization of the PRC securities industry. In recognition of the achievements
of our senior management team, from 2008 to 2010, our Board of Directors was awarded as
“Excellent Board of Directors” by the “Directors and Boards” magazine for each of years from
2008 to 2010. Our Chairman, Mr. Wang Kaiguo, was awarded “The Most Visionary Chairman
of the Board” by “Directors and Boards” magazine in 2010. Our General Manager, Mr. Li
Mingshan, was awarded “The Most Respected Chief Executive Officer of a PRC Securities
Firm” by “Directors and Boards” magazine in 2011.
We have a highly proficient professional workforce. As of December 31, 2011, 5,377 of
our employees held a bachelor’s or more advanced degree, representing 73.7% of the total
number of our employees. Our Directors believe that the retention of key employees is
attributable to our well-recognized brand name, business prospects and successful recruitment
and customized professional training programs.
BUSINESS STRATEGIES
We aim to become a domestically top-tier and globally renowned financial group with a
distinct focus on our securities business. Through continuous innovation and leveraging our
international platform, we plan to focus on the PRC market and stay committed to core
financial intermediary services, including our securities and futures brokerage, investment
banking and asset management businesses. Further, we intend to expand and promote our
proprietary trading and direct investment businesses to supplement our core financial
intermediary businesses while generating competitive risk-adjusted returns. In addition, we
plan to strengthen our business infrastructure, including risk management, research
capabilities, IT and human resources, to support our business growth. Our specific strategies
include the following:
Further enhance our leading market position and profitability in the securities and futures
brokerage business
The securities and futures brokerage business is one of our core businesses with stable
revenue streams and considerable growth potential. We believe our securities and futures
brokerage business will continue to be a major source of revenue. We will continue to focus
on serving retail customers, institutional clients and high net worth customers and expanding
our futures and cross-border brokerage businesses. We plan to enhance our leading market
position and profitability in the securities and futures brokerage business by improving our
market share, increasing customer loyalty and enhancing pricing power through the
implementation of the following strategies:
further improving customer segmentation by offering customized investment
solutions and differentiated products and services, such as investment advisory
services, wealth management services, futures IB services and research reports
support, to our high-end retail customers, institutional clients and high net worth
customers;
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BUSINESS
actively promoting new businesses and products, such as margin financing and
securities lending and stock index futures brokerage, and enhancing cross-selling
capabilities by leveraging our integrated business platform in order to diversify the
revenue composition and optimize the profit-making model of our brokerage
business;
organically broadening our coverage and optimizing operating efficiency by
strategically positioning our branches, such as establishing, subject to the PRC
regulatory approvals, a number of new branches each year in central and western
regions and second and third-tier cities of the PRC, which we believe are less
penetrated and offer significant growth potential, and introducing flagship branches
as permitted by the CSRC that are established to offer financial products, investment
advisory, wealth management and other value-added services, as well as improving
the quality and training of our brokers who support our branch network expansion;
capturing market consolidation and acquisition opportunities of selected securities
firms in the PRC to enhance our geographic reach and market share; and
leveraging Haitong International Securities’ presence in Hong Kong to develop
cross-border brokerage businesses in the PRC and overseas markets by offering
comprehensive financial products and services to overseas customers to further
expand our customer base while providing our domestic customers with access to
international markets to further strengthen our competitiveness.
Maintain the growth momentum of our investment banking business and further integrate
our business platform
Our investment banking business grew rapidly in recent years, and we believe it has
significant growth potential. In addition, the rapid growth of our investment banking business
will substantially enhance our brand name and provide cross-selling opportunities across
different business lines. We plan to strengthen our market leadership in our investment banking
business by implementing the following strategies:
enhancing our customized investment banking solutions to clients, in particular
those in the PRC financial, technology and cultural industries, while strengthening
our coverage of both large corporations and SMEs. We cover large corporations by
industry sectors and provide localized services to SMEs, including private
enterprises;
focusing on SMEs, in particular private enterprises, to better capture business
opportunities arising from the fast growing ChiNext Board and SME Board, as well
as the potential launch of the New OTC Board in the PRC;
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BUSINESS
maximizing synergies between our PRC and overseas business platforms to capture
new business opportunities, such as the increasing demand for overseas fundraising
by PRC enterprises and the potential launch of the International Board in the PRC,
and to capitalize on potential cross-selling opportunities;
strengthening our debt underwriting capabilities and financial advisory services to
capture the growth potential of debt financing and M&A activities in the PRC capital
markets, and increase their revenue contribution;
further developing our equity and debt capital markets divisions to enhance our
pricing and distribution capabilities; and
integrating the back office operations of equity underwriting, debt underwriting and
financial advisory services to improve operating efficiency.
Strategically expand our asset management business to provide comprehensive product
offerings to meet increasing and diversifying customer demands
We believe our asset management business is a strategically important business with
long-term growth potential and will allow us to improve our revenue composition and
effectively serve our retail and institutional clients with sizable investment assets.
We will leverage our extensive branch network and substantial customer base to capture
potential cross-selling opportunities between our asset management business and other
business lines and to further develop our asset management products and services in order to
increase the range of our product suites, our AUM and operating income.
For our traditional asset management business, we plan to implement the following to
broaden our product and service offerings, enhance our ability to design new and customized
products, integrate our distribution channels and improve the quality of customer service:
building on HFT Investment Management’s platform of mutual fund products that
are primarily offered to retail customers, we intend to actively expand asset
management services for institutional clients, such as enterprise annuity and
investment advisory services for QFII;
continuing to expand Fullgoal Fund Management’s mutual fund products that are
primarily offered to retail customers, further enhancing its brand name and
expediting the development of product distribution channels; and
establishing a wholly-owned asset management subsidiary to serve mid to high-end
retail customers and high net worth individual customers. Such subsidiary will adopt
an optimized investment decision-making process and an enhanced performance
appraisal system with market-driven incentive schemes to attract and retain
professionals.
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For our alternative asset management business, we intend to continue to focus on private
equity asset management and other relevant businesses by implementing the following:
leveraging our competitive advantages in the direct investment business to establish
a leading franchise in private equity asset management; and
expanding our alternative asset management services and providing new products
such as real estate investment trusts and commodity trading advisory services to
meet the diversified demand of our customers.
Continue to expand and promote new businesses and products with high growth potential
The development of new businesses is key to our continued growth and successful
transformation. These new businesses will enhance our service quality and customer loyalty,
strengthen our competitive advantage in traditional businesses and contribute to additional
revenue growth. We will keep abreast of market dynamics and continue to expand and compete
through new and differentiated products and services with high growth potential.
We intend to further enhance our existing new businesses by implementing the following
strategies:
Margin financing and securities lending: Our margin financing and securities
lending service is a value-adding service, which allows our securities brokerage
customers to diversify their trading strategies while promoting customer loyalty. We
believe margin financing and securities lending will not only help maintain our
market leading position in securities brokerage but also expand our revenue streams.
On October 26, 2011, the CSRC converted margin financing and securities lending
business from a pilot program conducted by CSRC-designated PRC securities firms
to a regular business operation available to all the PRC securities firms that meet
certain requirements. In addition, on the same day, the CSRC promulgated the Trial
Supervision and Management Measures on Margin and Securities Refinancing
Business (I imRvwc{t ) pursuant to which we expect a pilot
program for the margin and securities refinancing business to be launched in the
PRC. On December 5, 2011, the Shanghai Stock Exchange and the Shenzhen Stock
Exchange further expanded the scope of securities eligible for the margin financing
and securities lending business from 90 stocks to 278 stocks and 7 ETFs. Please see
“– Our Business and Operations – Securities and Futures Brokerage – Margin
financing and securities lending.” In order to capture the new business opportunities,
we aim to expand our margin financing and securities lending business by (i)
deploying additional capital to expand the scale of such business; (ii) promoting
cross-selling in order to increase customer penetration; and (iii) developing our
margin and securities refinancing business in order to enhance our financial leverage
and, as a result, the profitability of our margin financing and securities lending
business.
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Direct investment: Our direct investment business allows us to further expand our
private equity asset management business and positions our investment banking
business to capture future opportunities in securities underwriting for our SME
customers. We intend to increase capital contributions in Haitong Capital Investment
and to continue to establish, invest in, and manage a variety of private equity funds
to further develop our private equity asset management business. For example, we
invested in Jilin Modern Agricultural and Emerging Industrial Investment Fund (T
g—w sNimTe u\"imbW ) and Xi’an Aerospace and New Energy Industry
Fund (‰*Y)e°nu\"imWú ), which are managed by Haitong Jihe Management
and Haitong Chuangxin Management, respectively, both of which are subsidiaries of
Haitong Capital Investment. In addition, we have gained approval from the Shanghai
municipal government and the CSRC to establish the Shanghai Cultural Industry
Fund.
Financial futures and other derivatives business: The development of financial
futures and other derivatives products such as stock index futures which was
launched in February 2010 enables us to offer our brokerage and asset management
customers comprehensive investment solutions and to reduce volatility in our
proprietary trading business. We plan to increase capital contributions to expand our
financial futures and other derivatives business, including, but not limited to, stock
index futures and other financial derivative products, such as interest rate futures
and options and foreign currency futures and options, when they are introduced to
the market. Meanwhile, we will adhere to our stringent risk management procedures
as we grow this business.
In addition, we also intend to promote the following newly-introduced securities
businesses:
Alternative financial product investment: We plan to invest in alternative financial
products to enhance the diversity and stability of our proprietary trading business
while developing a market-making business to facilitate trading and issuance of
financial products. According to regulations promulgated by the CSRC in April
2011, in addition to the three categories of investment products that have been
approved for trading, PRC securities firms can also establish subsidiaries to engage
in investment activities involving alternative financial products, such as derivative
investment, trust and inter-bank wealth management products. We became the first
PRC securities firm to apply to the CSRC in July 2007 for establishing such a
subsidiary to diversify our investment product suite, such as developing our market
making business and broadening our revenue streams. Please see “ Our Business
and Operations Proprietary Trading.” We plan to contribute RMB3.0 billion to our
proposed subsidiary for alternative financial product investments as initial
registered capital. We expect to build a team of professional staff with two to five
years of experience in derivative and alternative financial product investments. We
intend to independently operate this business through our designated subsidiary and
establish a risk control management system through which we can designate its
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directors, impose investment limitations, formulate risk control indicators, establish
an effective reporting structuring and perform regular inspections and reviews. We
have also conducted a feasibility study with respect to the alternative financial
product investment business, which was presented to our Board of Directors for
consideration and was subsequently approved.
Going forward, we will continue to seek opportunities in new businesses in response to
changes in PRC regulatory requirements, market trends and customer demands, and to capture
new business opportunities, such as the potential launch of the International Board, the New
OTC Board, margin and securities refinancing and financial derivatives in the PRC by
capitalizing on our strong capital position, integrated business platform and innovation,
execution and risk management capabilities.
Actively pursue our internationalization strategy to capture cross-border opportunities
Our internationalization strategy forms an important part of our overall business strategy.
We aim to implement a customer-focused strategy to satisfy our customers’ increasing demands
for cross-border financial services and further enhance our ability to service our customers in
the PRC and overseas, optimize our revenue composition and enhance our brand recognition
overseas.
By leveraging Haitong International Holdings as the flagship of our overseas business, we
plan to expand the scale of our overseas operations and business platform through organic
growth and/or acquisitions. Our criteria for overseas acquisition targets include: (i) meaningful
presence in local markets; (ii) complementary business and synergies with our business; (iii)
ability for us to exercise control in the target; and (iv) likelihood to strengthen our existing
customer base, distribution network and professional expertise. As of the Latest Practicable
Date, we have not identified any specific acquisition targets.
We also intend to implement the following strategies with respect to our existing
international platform:
strengthening Haitong International Securities’ leading position in Hong Kong
market and taking advantage of its proximity to overseas markets, sales network and
international customer base;
expanding cross-selling opportunities among PRC and overseas customers and
developing new businesses by capitalizing on Hong Kong’s position at the forefront
of the internationalization of RMB. We intend to offer more RMB-related products
and services, such as RMB funds, RMB-denominated IPOs, RMB bond underwriting
and RQFII products; and
developing cross-border business and realizing synergies between our PRC and
overseas businesses, especially in the areas of investment banking, asset
management, securities brokerage and research. For example, our PRC and overseas
businesses can refer investment banking, assets management and securities
brokerage customers to each other and share research resources.
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Strengthen our risk management systems, internal controls, IT capabilities, research
capabilities and human resource management to support our business operations
We believe an effective risk management system, internal controls, research and IT
capabilities and human resource management are essential to developing a sustainable business
and maintaining our market leadership. We plan to strengthen our overall risk management and
regulatory compliance by implementing the following strategies:
enhancing our internal control and risk management framework;
strengthening our risk management capabilities through classification of risk
profile;
enhancing the monitoring system of the Net Capital-based risk control indicators
and optimizing capital allocation efficiency among different business lines; and
strengthening the Chinese walls across various business divisions.
We recognize the importance of a strong research team to the development of our
principal business lines. We will continue to enhance our research capability to support our
business development by:
expanding our research team and enhancing its market recognition;
upgrading our research knowledge management and database infrastructure; and
increasing our research coverage for listed companies in the PRC and developing
our overseas research capabilities in a focused manner.
We also plan to devote more resources to enhance our IT systems in order to provide
efficient, secure and stable technology services to support our business operations. We plan to
strengthen our IT systems by implementing the following strategies:
conducting a full review of our IT infrastructure and strengthening our IT
administration and risk management capabilities;
further strengthening the development of our IT infrastructure; and
upgrading critical IT applications relating to our operational and management
functions.
Our success, to a large extent, depends on our ability to attract, motivate and retain
professional and experienced personnel. In order to maintain our competitive advantage in the
marketplace, we intend to:
continue to attract and retain qualified professionals, such as senior management,
licensed sponsor representatives and experienced investment managers with
international vision;
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offer professional training to our employees and provide clear career advancement
and comprehensive development opportunities; and
promote a merit-based compensation system across all business lines and continue
to support and recognize the importance of a market-driven compensation system
that rewards performance and results.
OUR BUSINESS AND OPERATIONS
Our five principal business lines in the PRC comprise securities and futures brokerage
(including margin financing and securities lending), investment banking, asset management,
proprietary trading and direct investment. In addition, we conduct our overseas business
primarily through our Hong Kong-based subsidiary, Haitong International Holdings.
The following table sets forth the breakdown of our total revenue and other income by
business segments and segment revenue and other income (excluding inter-segment revenue),
expressed as a percentage of our total revenue and other income for the periods indicated:
Year ended December 31,
2009 2010
(RMB in (RMB in (RMB in
millions) % millions) % millions) %
PRC business
Securities and futures brokerage . . 7,284.0 64.4 5,774.8 51.1 4,163.1 38.3
Investment banking . . . . . . . . . . 496.8 4.4 1,091.7 9.7 1,068.6 9.8
Asset management . . . . . . . . . . 878.9 7.8 868.5 7.7 1,092.1 10.1
Proprietary trading . . . . . . . . . . 804.8 7.1 779.8 6.9 1,144.8 10.5
Direct investment . . . . . . . . . . . 52.1 0.5 106.0 0.9 55.0 0.5
Headquarters and others (1) . . . . . 1,602.0 14.1 1,779.1 15.7 2,382.3 22.0
Overseas business . . . . . . . . . . . 197.2 1.7 905.0 8.0 954.5 8.8
Total . . . . . . . . . . . . . . . . . . . 11,315.8 100.0 11,304.9 100.0 10,860.4 100.0
(1) Revenue and other income in headquarters and others mainly includes: (i) interest income from our own bank
deposits and deposits we hold on behalf of our customers; and (ii) dividends and other investment gains as well
as government grants. Please see “Financial Information – Summary Segment Results” and “Appendix I –
Accountants’ Report” in this prospectus.
Securities and Futures Brokerage
Overview
Our securities and futures brokerage business primarily engages in the following
activities:
securities brokerage;
futures brokerage;
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margin financing and securities lending; and
investment advisory services.
As of December 31, 2011, through our 216 securities and futures brokerage branches
located in 27 provinces and 125 cities across the PRC and utilizing over 6,300 sales and
marketing personnel, we provide securities brokerage services to over 4.0 million retail
customers (including approximately 2.1 million active customers) and over 12,000 institutional
and high net worth customers, as well as futures brokerage services to over 40,000 customers
in the PRC.
Historically, revenue from our securities and futures brokerage business has represented
the largest source of our revenue. For the years ended December 31, 2009, 2010 and 2011,
segment revenue and other income from our securities and futures brokerage business
amounted to RMB7,284.0 million, RMB5,774.8 million and RMB4,163.1 million, respectively,
representing 64.4%, 51.1% and 38.3% of our total revenue and other income, respectively.
According to the Shanghai Stock Exchange and the Shenzhen Stock Exchange, from 2009
to 2011, we ranked among the top five PRC securities firms in terms of securities brokerage
trading volume. According to the Shanghai Stock Exchange and the Shenzhen Stock Exchange,
we ranked first in terms of margin trading volume among PRC securities firms in 2011 and first
in terms of margin loan balance and market value of securities lent among PRC securities firms
as of December 31, 2011. In addition, according to the China Financial Futures Exchange, we
ranked first among PRC securities firms in terms of stock index futures brokerage trading
volume in 2011.
In recent years, we received the following major awards in recognition of our securities
and futures brokerage business:
“2011 Best PRC Securities Firm” by Moneyweek;
“2011 Best Margin Financing Broker” by Securities Times;
“2010 Best Securities Firm in the PRC” by the 21st Century Business Herald;
“2009 Best PRC Securities Broker” by Securities Times; and
“2009 Best Corporate Brand in the PRC Futures Market Award” by Shanghai
Securities News.
Securities brokerage
We engage in the trading of a wide range of financial products on behalf of our customers,
including:
Stocks – primarily shares of listed companies on the Shanghai Stock Exchange, the
Shenzhen Stock Exchange and the OTC markets in the PRC;
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Funds – listed funds, including open-end funds, closed-end funds and ETFs;
Bonds – enterprise bonds (bonds issued by private companies), corporate bonds
(bonds issued by listed companies), financial bonds (bonds issued by financial
institutions), government bonds and convertible bonds; and
Derivatives – derivative products, such as warrants, listed on the Shanghai Stock
Exchange and the Shenzhen Stock Exchange.
The following table sets forth the breakdown by product type of our securities brokerage
business in terms of trading volume and market share for the periods indicated:
Year ended December 31,
2009 2010
Trading volume
(RMB in billions)
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . 4,448.2 4,419.6 3,447.3
Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 45.5 57.2 55.6
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . 575.1 846.0 2,100.4
Warrants . . . . . . . . . . . . . . . . . . . . . . . . 342.7 75.9 17.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,411.5 5,398.7 5,620.4
Market share (%) (1)
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 4.1 4.1
Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 3.4 4.6
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 6.9 5.6
Warrants . . . . . . . . . . . . . . . . . . . . . . . . 3.2 2.5 2.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 4.3 4.6
(1) Market share is calculated based on total trading volume of member securities firms of the Shanghai
Stock Exchange and Shenzhen Stock Exchange.
Source: Shanghai Stock Exchange and Shenzhen Stock Exchange
We classify our securities brokerage business into two categories based on customer
types: (i) retail brokerage business and (ii) brokerage business for institutional and high net
worth customers.
Retail brokerage business
Our retail brokerage business is the foundation of our brokerage business. It serves
individual customers with less than RMB10 million of assets in their accounts held with us. We
provide standard brokerage trading services, investment advisory and other value-added
services to our retail customers. We have also established the “Rainbow Treasure Club,” a
loyalty program that is dedicated to providing our retail customers with active trading and
sizable assets, through which we offer customized and differentiated services. Please see “–
Customer Services.” In addition, we distribute asset management products and introduce
futures products to customers through our sales and marketing team, enabling us to diversify
our product and service offerings while promoting cross-selling across multiple business lines.
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As of December 31, 2011, we had over 4.0 million retail brokerage customers (including
approximately 2.1 million active customers) in the PRC, one of the largest customer bases
among PRC securities firms. Of our retail customer base, approximately 76% had maintained
accounts with us for over three years and approximately 38% had a business relationship of
over ten years with us. We believe that a sizeable and stable retail customer base provides a
solid foundation for our future business growth.
Brokerage business for institutional and high net worth customers
We provide securities brokerage services for institutional and high net worth customers.
Our institutional brokerage customers primarily include fund management companies,
commercial banks, trust companies and other large corporations. As of December 31, 2011, we
had over 12,000 institutional and high net worth customers in the PRC.
In addition to traditional brokerage trading services, we also provide other value-added
products and services to our institutional and high net worth customers, such as customized
research, block trades, financial advising, mutual funds distribution, securities custodian
services, wealth management and tax planning services.
We also provide trading, research and investment advisory services to QFII clients. We
are an authorized broker in the PRC for a number of large QFIIs, including investment banks,
commercial banks and asset management firms. The total assets our QFII clients have entrusted
to us amounted to approximately RMB27.5 billion as of December 31, 2011, with QFII
brokerage trading volume amounting to approximately RMB72.0 billion in 2011.
Futures brokerage
We provide futures brokerage services through our subsidiary, Haitong Futures. As of
December 31, 2011, our futures products included all 26 commodity and stock index futures
that are listed and traded on the PRC futures exchanges.
We became one of the first PRC securities firms to launch a futures brokerage business
after we acquired a controlling interest in Huanghai Futures (renamed as Haitong Futures) in
October 2005. As of December 31, 2011, among the 163 PRC futures brokerage firms, we had
a market share of 4.4% in terms of futures brokerage trading volume.
We are one of the founding members of the Shanghai Futures Exchange, the Dalian
Commodity Exchange and the Zhengzhou Commodity Exchange. We are also one of the first
clearing members of the China Financial Futures Exchange since December 2007. In addition,
we were among the first group of futures companies to be certified for ISO9001:2008 Quality
Management System Certification in recognition of our effective risk management system. In
March 2010, we were one of the first futures companies to be licensed to conduct the stock
index futures brokerage business. According to the China Financial Futures Exchange, we
ranked first among PRC futures companies in terms of brokerage trading volume of stock index
futures in 2011, representing an approximately 8.3% of the total market share.
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The following table sets forth the total trading volume and market share of our futures
brokerage business for the periods indicated:
Year ended December 31,
2009 2010
Trading volume
(RMB in billions) (1) . . . . . . . . . . . . . . . . . 1,866.8 10,517.5 12,094.8
Market share (%) (2) . . . . . . . . . . . . . . . . . . 1.4 3.4 4.4
(1) The trading volume of the PRC futures market before 2011 includes both sides of the trades. Since 2011,
the trading volume of the PRC futures market includes only one side of the trades.
(2) Market share is based on the total trading volume disclosed by the China Futures Association.
As of December 31, 2011, we had 23 futures brokerage branches in 21 cities in the PRC.
Furthermore, 73 of our 193 securities brokerage branches are qualified for futures IB business,
which allows those branches to refer their securities brokerage customers to Haitong Futures.
As of December 31, 2011, our futures brokerage business had over 40,000 customers.
From 2009 to 2011, the number of our futures brokerage customers increased at a CAGR of
approximately 46.3% and the trading volume of our futures brokerage increased at a CAGR of
approximately 154.5%.
Margin financing and securities lending
In March 2010, we were authorized by the CSRC as one of the first six PRC securities
firms to pilot a margin financing and securities lending business. Our margin financing services
involve offering securities-backed loans to brokerage customers who wish to finance their
securities purchases. Margin financing offers funding flexibility to our brokerage customers
and assists them in maximizing investment returns through leverage. Our securities lending
services involve the lending of securities held on our own account to customers. Securities
lending allows our brokerage customers to borrow securities to take advantage of potential
short selling opportunities in the markets. Our agreements with customers typically include
terms such as margin loan or securities lending amount, maturity date and interest rate, which
represents a percentage of our customers’ margin loan balance and the market value of the
securities we lent. Currently, we charge an annualized interest rate on margin financing and
securities lending, which was approximately 9.1% as of December 31, 2011. In addition, we
charge brokerage commission fees on margin trading and short selling.
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Benefiting from our substantial securities brokerage customer base, distribution network,
capital strength, proprietary business capabilities and brand recognition, our margin financing
and securities lending business has grown rapidly since its launch in March 2010. We ranked
first among PRC securities firms in terms of margin trading volume in 2011 and margin loan
balance and the market value of securities lent as of December 31, 2011. As of December 31,
2011, 175 of our 193 securities branches in the PRC were allowed to provide margin financing
and securities lending services. At the same time, we had 68,737 customers who were eligible
for margin financing and securities lending services, among which 13,489 customers had
opened margin financing and securities lending accounts with us and 5,713 had executed
transactions, representing 19.6% and 8.3%, respectively, of our eligible customer pool. As
such, we believe there is significant growth potential in our margin financing and securities
lending business.
In 2011, interest income from our margin financing and securities lending business in the
PRC amounted to RMB280.2 million. According to the data from the Shanghai Stock Exchange
and the Shenzhen Stock Exchange, we had a margin loan balance of over RMB3.6 billion as
of December 31, 2011, representing 9.8% of total market share in the PRC. We had margin
trading volume of approximately RMB47.7 billion in 2011, representing 16.4% of total market
share in the PRC. In addition, according to data from the Shanghai Stock Exchange and the
Shenzhen Stock Exchange, as of December 31, 2011, the market value of securities we lent was
approximately RMB254.1 million, representing 38.6% of total market share in the PRC. As of
December 31, 2011, there were 278 stocks and 7 ETFs eligible for margin financing in the
PRC, of which we offered 221 stocks and 3 ETFs to customers for securities lending and we
deemed 277 stocks and 7 ETFs eligible for margin financing.
The following table sets forth a summary of the operating and financial information of our
margin financing and securities lending business:
As of and for As of and for the
the year ended year ended
December 31, December 31,
2010
Number of our customers who are eligible for margin
financing and securities lending services (1) . . . . . . . . . . . 88,031 68,737
Percentage of total number of brokerage customers (%): . . . 2.3% 1.7%
Number of customers with margin financing and securities
lending accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,068 13,489
Percentage of total number of brokerage customers (%): . . . 0.1% 0.3%
Margin trading volume (RMB in billions) . . . . . . . . . . . . . 19.2 47.7
Market share of margin trading volume . . . . . . . . . . . . . 27.5% 16.4%
Margin loan balance (RMB in millions) . . . . . . . . . . . . . . 2,091 3,675
Market share of margin loan balance(2) . . . . . . . . . . . . . . 16.4% 9.8%
Market value of securities lent (RMB in millions) . . . . . . . . 0.3 254.1
Market share of market value of securities lent (2) . . . . . . . 2.5% 38.6%
(1) As a result of the adverse market condition in the second half of 2011, the number of customers eligible
for the margin financing and securities lending business declined in 2011 as fewer customers could
maintain a minimum balance of RMB500,000 in their brokerage accounts with us, which is one of the
criteria for the margin financing and securities lending business.
(2) Market share is calculated based on margin loan balance and market value of securities lent as disclosed
by the Shanghai Stock Exchange and Shenzhen Stock Exchange.
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We have established strict criteria for acquiring new customers and a rigorous risk
management system in our margin financing and securities lending business. In compliance
with the CSRC’s guidance, we require our customers to maintain a brokerage account with us
for at least 18 months before they become eligible for margin financing and securities lending
services. In addition, we require our customers to maintain a minimum balance of
RMB500,000 in their brokerage accounts upon their applications for margin financing and
securities lending accounts. Furthermore, we require our customers to have sound credit
history and strong risk tolerance. We require our customers to deposit with us a portion of the
cash or securities in their accounts. We also hold the securities acquired from margin financing
or the funds received from short selling by our customers as collateral. We determine the credit
limit we extend to our customers based on various factors, such as the value of their total assets
maintained with us and their creditworthiness. We determine a customer’s eligibility for a new
transaction based on the credit line available to the client and the balance of the client’s
deposits. We have also established a margin call risk control mechanism through which we
monitor the value of our customers’ collateral on a real-time basis.
While margin financing and securities lending is an established business in many mature
securities markets in the world, it is still an emerging business in the PRC. The CSRC imposed
stringent entry requirements regarding a securities firm’s Net Capital, risk management
capabilities and regulatory ratings. In addition, the CSRC imposed specific restrictions on the
margin financing and securities lending business in the PRC when the pilot program was
launched in March 2010. For example:
a securities firm can only use its own funds for margin financing services and its
own securities for securities lending services; and
potential customers must have maintained a brokerage account with the same
securities firm for at least 18 months in order to open a margin financing and
securities lending account.
On October 26, 2011, the CSRC revised the Management Measures on Securities
Companies Margin Financing and Securities Lending Trials (IR8QlSR8imRft
) and Guidelines on Internal Control of Margin Financing and Securities Lending Trials of
Securities Companies (IR8QlSR8imRfQgèc§R6c _ ), and converted margin
financing and securities lending business from a pilot program conducted by CSRC-designated
PRC securities firms to a regular business available to all the PRC securities firms that meet
certain requirements. In addition, on the same day, the CSRC promulgated the Trial
Supervision and Management Measures on Margin and Securities Refinancing Business (I
imRvwc{t ) pursuant to which we expect a pilot program for the margin and
securities refinancing business to be launched in the PRC. On December 5, 2011, the Shanghai
Stock Exchange and the Shenzhen Stock Exchange further expanded the scope of securities
eligible for the margin financing and securities lending business from 90 stocks, being the
constituent stocks of the SSE 50 Index and SZSE Component Index and representing only 3.1%
of the total number of stocks listed on the two exchanges as of December 31, 2011, to 278
stocks and 7 ETFs, which accounted for 9.8% of the total number of stocks listed on the two
exchanges as of December 31, 2011.
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Following the lifting of restrictions on the use of external funding and securities
borrowing, the expansion of the scope of securities eligible for margin trading and short
selling, the relaxation of account opening requirements and the conversion of the margin
financing and securities lending business from a pilot program to a regular business, we believe
the margin financing and securities lending business has great potential for further
development. We aim to expand our margin financing and securities lending business by (i)
deploying additional capital to expand the scale of such business; (ii) promoting cross-selling
in order to increase our customer base; and (iii) developing the margin and securities
refinancing business in order to enhance our financial leverage and, as a result, the profitability
of our margin financing and securities lending business.
Customers
We develop and maintain our brokerage customer base through various channels:
Retail brokerage customers – we primarily source and serve retail customers
through our nationwide securities branch network and over 6,300 marketing and
sales personnel;
Institutional and high net worth customers – we primarily established contact with
such customers through our headquarters and nationwide branch network, as well as
internal referrals from our other business lines. To expand our customer base, we
also maintain good relationships with major custodian banks and global financial
institutions.
As of December 31, 2011, we provided securities brokerage services to over 4.0 million
retail customers (including approximately 2.1 million active customers) and over 12,000
institutional and high net worth customers, as well as futures brokerage services to over 40,000
customers in the PRC. The following table sets forth the breakdown of our securities brokerage
customers in the PRC for the periods indicated:
As of December 31,
2009 2010
Retail brokerage customers . . . . . . . . . . . . . . 3,721,430 3,746,659 4,097,269
Institutional and high net worth customers . . . . . 11,742 12,078 12,134
Total customers . . . . . . . . . . . . . . . . . . . . . 3,733,172 3,758,737 4,109,403
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We maintain long-term and stable relationships with our customers. The following table
sets forth the breakdown of our brokerage customers in the PRC in terms of account holding
period for the periods indicated:
As of December 31,
2009 2010
(%) (%) (%)
Account holding period
not less than ten years . . . . . . . . . 1,082,650 29.0 1,320,641 35.1 1,556,143 37.9
five to ten years (excluding five and
ten years) . . . . . . . . . . . . . . . . 719,482 19.3 429,235 11.4 291,128 7.1
three to five years (excluding three
and five years) . . . . . . . . . . . . 120,643 3.2 1,024,823 27.3 1,283,678 31.2
less than three years . . . . . . . . . . 1,810,397 48.5 984,038 26.2 978,454 23.8
Total . . . . . . . . . . . . . . . . . . . 3,733,172 100.0% 3,758,737 100.0% 4,109,403 100.0%
We believe we have successfully maintained our customers’ loyalty as a result of our
well-established brand, comprehensive customer services, strong capital base and stable
operations. As of December 31, 2011, approximately 76% of our brokerage customers had
maintained accounts with us for over three years and approximately 38% had a business
relationship of over ten years with us. We believe that a sizeable and stable customer base
provides a solid foundation for our future business growth.
Our retail customers, representing the majority of our brokerage customers, are the
foundation of our brokerage business. We intend to diversify our retail brokerage business by
expanding our wealth management services for retail customers in the first-tier cities and by
originating new customers in the second and third-tier cities, where we believe brokerage
business has lower market penetration and less competition.
We are committed to developing our base of institutional and high net worth customers
and expanding cross-selling opportunities by leveraging our full-service integrated platform.
Brokerage commission and fee income
We receive commission and fee income from customers who trade securities and futures
through our trading platforms. For the years ended December 31, 2009, 2010 and 2011,
segment revenue and other income from our securities and futures brokerage business in the
PRC accounted for 64.4%, 51.1% and 38.3% of our total revenue and other income,
respectively.
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BUSINESS
The following tables set forth the total trading volume and commission and fee income
of our securities and futures brokerage business in the PRC market and the average commission
rate for stocks and funds in the PRC market for the period indicated:
Year ended December 31,
2009 2010
Securities Business
Trading volume (1)
(RMB in billions) . . . . . . . . . . . . . . . . . . . 4,866 4,562 3,891
Commission and fee income (2)
(RMB in millions) . . . . . . . . . . . . . . . . . . 6,777 5,242 3,426
Futures Business
Trading volume(3)
(RMB in billions) . . . . . . . . . . . . . . . . . . . 1,867 10,518 12,095
Commission and fee income
(RMB in millions) . . . . . . . . . . . . . . . . . . 143 273
Total commission and fee income
(RMB in millions) . . . . . . . . . . . . . . . . . . 6,920 5,515 3,705
Average securities brokerage
commission rate . . . . . . . . . . . . . . . . . . . 0.147% 0.118% 0.100%
(1) Sourced from our internal data.
(2) Commission and fee income includes commission and fee income from our securities brokerage
business and other fee income from fund management firms, our margin financing and securities lending
and QFII clients.
(3) According to the practice adopted by the China Financial Futures Exchange, the trading volume of the
PRC futures market before 2011 included both sides of each trade. Since 2011, the trading volume of
the PRC futures market has only included one side of the trade.
In recent years, intense competition in the PRC securities brokerage business has lowered
commission rates for the securities brokerage business. Please see “Risk Factors – Risks
Relating to Our Business and Industry – Our securities and futures brokerage business is
subject to various risks and we cannot assure you that our brokerage commission and fee
income can be sustained.”
In order to mitigate the impact of price competition, we have implemented the following
measures:
further developing and expanding the scope of our products and services, including
margin financing and securities lending, stock index futures brokerage and futures
IB businesses and investment advisory services. Moreover, we offer differentiated
products and services to our customers to avoid homogeneous competition, as well
as to diversify our revenue streams;
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further improving the quality of our customer service and providing customized and
comprehensive investment solutions for our customers. We aim to implement a
vertically integrated service platform and to enhance our customers’ loyalty,
especially those customers with sizable assets, by providing customized wealth
management services;
expanding our branch network with strategic coverage and improving our operating
efficiency to further expand our customer coverage. Please see “– Business
Network;” and
further enhancing our research capabilities and expanding our professional research
team to provide better securities brokerage services for our customers.
We monitor and adjust the structure and the level of our brokerage commission rates on
a regular basis based on geographic location, asset size, trading pattern and loyalty of our
customers. We charge different commission rates for different services in accordance with our
internal rating and classification system. Nonetheless, we adhere to the principle of equal
treatment of clients in terms of services provided and fees charged in accordance with the
Circular on Further Reinforcing the Management of Securities Firms’ Client Service and
Commission Income of Securities Transactions (e2N keR7IR8QlS[b6g RTIR8N¤
f Oc‘t ] O\v w ) promulgated by the SAC.
Investment Banking
Overview
We provide corporate finance services, including equity underwriting, debt underwriting
and financial advisory services to our institutional clients. We are committed to offering our
clients customized corporate finance services and expanding cross-selling opportunities across
multiple business lines through our integrated investment banking platform.
We have gained a leading position in the PRC investment banking industry and aim to
continue to improve this position. According to the SAC, we ranked third among PRC
securities firms in terms of the number of equity securities underwritten in 2011. According to
the CSRC, as measured by the number of major asset restructuring transactions we advised for
A share listed companies, we ranked in the top two PRC securities firms for the past three
consecutive years.
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In recent years, we have received the following major awards in recognition of our
investment banking business:
“2011 Best PRC Investment Bank” by Moneyweek;
“2011 Most Respectable Investment Bank” by New Fortune Magazine;
“2011 Best Local Investment Banking Team” by New Fortune Magazine;
“2011 Best Follow-on Offering” by New Fortune Magazine;
“2011 Best Rights Issue” by New Fortune Magazine;
“2011 Best IB Business Underwriter” by Securities Times;
“2011 Best PRC Investment Bank For Equity Refinancing” by Moneyweek; and
“2010 Top 10 PRC Investment Banks” by Moneyweek.
Equity underwriting
Equity underwriting is the core strength of our investment banking business in the PRC.
We sponsor and underwrite IPOs, follow-on offerings and rights issues on the A share market
to assist our clients’ equity financing activities. Up to December 31, 2011, we had acted as the
lead underwriter for equity offerings of over 224 institutional clients. During the Track Record
Period, we acted as the lead underwriter for equity offerings with an aggregate value of
RMB72.2 billion, including RMB37.2 billion from 31 IPOs, RMB28.3 billion from 22
follow-on offerings and RMB6.7 billion from four rights issues.
According to the Measures for the Administration of the Sponsorship of the Offering and
Listing of Securities (IR8v|LN ^ O…imR{t ) promulgated by the CSRC, the CSRC
only allows a qualified securities firm to underwrite equity offerings on the A share market, and
such firm is required to designate two sponsor representatives to be principally responsible for
each offering. As a result, the number of sponsor representatives is key to the scale of a
securities firm’s equity underwriting business. As of December 31, 2011, we had 74 qualified
sponsor representatives and an additional 20 sponsor representative candidates who are in the
process of applying for qualification. The number of sponsor representatives we have ranks
among the top in the PRC securities industry.
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The following table sets forth a breakdown of equity offerings for which we acted as the
lead underwriter in terms of listing venues for the periods indicated:
Year ended December 31,
2009 2010
Number of equity offerings 10 26
Main board . . . . . . . . . . . . . . . . . . . . . . . . 5 11
SME Board . . . . . . . . . . . . . . . . . . . . . . . . 2 11
ChiNext Board . . . . . . . . . . . . . . . . . . . . . . 3 4
Total amount underwritten
(RMB in millions) 7,530.4 49,657.7 15,091.0
Main board . . . . . . . . . . . . . . . . . . . . . . . . 4,366.7 37,771.5 5,257.5
SME Board . . . . . . . . . . . . . . . . . . . . . . . . 1,618.8 8,716.2 7,497.2
ChiNext Board . . . . . . . . . . . . . . . . . . . . . . 1,544.9 3,170.0 2,336.3
We have successfully completed several landmark equity offerings in the PRC, including
acting as:
the lead underwriter for the A share follow-on offering of Shanghai Shangling
Electric Appliances in 1999. This transaction was the first in the PRC to apply a
market price discount method that followed the international general pricing
standard, a method which is now widely adopted by listed companies in the PRC for
their follow-on offerings;
the lead underwriter for the first IPO of a commercial bank, Shanghai Pudong
Development Bank, after the removal of restrictions on the listing of PRC financial
institutions in 1999; and
the lead underwriter for the first IPO of a non state-owned commercial bank, China
Minsheng Banking Corp., Ltd., in 2000.
We divide our institutional clients into large corporate clients and SME clients based on
the scale of their business. We provide customized coverage and equity underwriting services
based on prevailing market conditions and customer needs. We have established sector-focused
groups of designated relationship managers to serve our large corporate clients. We cover our
SME clients through local relationship managers deployed in strategically important markets
in the PRC.
We have participated in a number of landmark equity offerings involving large corporate
clients in the PRC and have established long-term business relationships with them. For
example, during the Track Record Period, we acted as:
the joint sponsor and the joint lead underwriter for China Construction Bank
Corporation in its rights offering;
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BUSINESS
the joint lead underwriter for SAIC Motor Corporation Limited in its private
placement; and
the sponsor and the lead underwriter for Fosun Pharmaceutical (Group) Co., Ltd. in
its private placement.
In addition, we participated in various financing activities for China Minsheng Banking
Corp., Ltd., including its IPO, follow-on offerings, subordinated bond issuance and hybrid
capital bond issuance in the PRC. We also participated in at least three financing activities for
each of the Bank of Communications Co., Ltd., Shenzhen Development Bank Co., Ltd. and
Shanghai Shimao Co., Ltd.
We are also focused on providing equity underwriting services to SMEs, especially non
state-owned companies, which have contributed significantly to our fast-growing investment
banking business. From 2009 to 2011, we acted as the lead underwriter for 36 equity offerings
on the SME Board and the ChiNext Board. The total proceeds raised from these equity
offerings increased from RMB3.2 billion in 2009 to RMB9.8 billion in 2011, representing a
CAGR of 76.3%. In 2011, we acted as the lead underwriter for 16 equity offerings on the SME
Board and the ChiNext Board. The revenue contribution from our equity underwriting on the
SME Board and the ChiNext Board increased from approximately 57% in 2009 to 82% in 2011
of our total revenue from equity underwriting in those years. In addition, based on the equity
offerings in which we participated in the past, underwriting fee rates of the SME Board and the
ChiNext Board are generally higher than those of the main board in the PRC.
Debt underwriting
We underwrite enterprise bonds, corporate bonds, financial bonds, medium-term notes,
short-term commercial papers and asset-backed securities to assist our clients’ debt financing
activities.
Our debt underwriting business primarily serves large corporate clients. In recent years,
our debt underwriting business expanded rapidly. For the years ended December 31, 2009,
2010 and 2011, the total amount of bonds we underwrote as the lead underwriter was RMB10.6
billion, RMB12.3 billion and RMB19.2 billion, respectively, representing a CAGR of 34.2%
from 2009 to 2011. We have increased the employee headcount in our debt underwriting
business from 45 as of December 31, 2009 to 67 as of December 31, 2011 in order to better
capture the strategic opportunities in, and to meet increasing demands from, the fast-
developing debt underwriting market in the PRC.
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The following table sets forth our performance as lead underwriter in debt underwriting
business for the periods indicated:
Year ended December 31,
2009 2010
Number of debt offerings . . . . . . . . . . . . . . . 8 10
Total amount underwritten
(RMB in millions) . . . . . . . . . . . . . . . . . . 10,640.0 12,320.0 19,158.0
We believe that we have established a competitive advantage in the marketing and
innovation capabilities of our debt underwriting business. We have established a distribution
network for fixed income products that covers major investors such as large commercial banks,
insurance companies, fund management companies and rural credit cooperation associations.
We assign our sales and marketing personnel to cover specific geographic regions and maintain
nationwide sales coverage. We are a pioneer in product innovation and are committed to
assisting our clients to achieve lower financing costs. For example, according to China Central
Depository & Clearing Co., Ltd., the bond issuance by Shanghai Huayi (Group) Company,
underwritten by us in 2007, was the first floating rate notes offering benchmarking Shibor and
represented a milestone of the PBOC’s efforts to promote Shibor.
Financial advisory services
We provide financial advisory services on M&A, restructuring, stock option schemes of
listed companies and private financing transactions. During the Track Record Period, we
mainly provided financial advisory services to listed companies across different industry
sectors in the PRC. We provide localized customer coverage through our branch network
nationwide in order to develop an in-depth understanding of our customers’ needs and provide
customized financial advisory services.
According to the CSRC, for each of the years ended December 31, 2009, 2010 and 2011,
we were among the top two financial advisors in the PRC in terms of the number of major asset
restructuring transactions we advised for domestic listed PRC companies. From 2009 to 2011,
we advised on 14 major asset restructuring transactions with a total transaction value of
RMB41.4 billion. In addition, we have strong innovation capability. For example, we advised
on the first listing of a publication group through reverse takeover in the PRC. In terms of
financial advisory services relating to non-tradable shares reform in the PRC, we have advised
133 companies since the launch of such reform in 2005, representing approximately 10.0% of
total market share in terms of the number of transactions, ranking first in the PRC securities
industry.
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Asset Management
Overview
We offer traditional asset management products and services through our Company and
our subsidiary, HFT Investment Management and our affiliate, Fullgoal Fund Management. In
addition, we operate our private equity asset management business through Haitong-Fortis PE
Management, Haitong Jihe Management and Haitong Chuangxin Management.
In recent years, we have received the following major awards in recognition of our
achievements in the asset management business, including:
HFT Investment Management was awarded the “Top Ten Fund Companies” by
Securities Times in 2010 and was rated “M2+” by Fitch Ratings from 2009 to 2011
in recognition of our accomplishments;
“Best Collective Asset Manager among PRC Securities Firms” by Thomson Reuters
and Sinolink Securities in 2008, “Continued Excellence Award for Private Equity
Funds in the PRC” by Sinolink Securities in 2009, and our Haitong Stable Growth
Collective Asset Management Scheme was awarded “Best Collective Asset
Management Product of PRC Securities Firms” sponsored by Thomson Reuters and
Sinolink Securities in 2008; and
In 2008 and 2009, the president of Haitong-Fortis PE Management was awarded by
Forbes as the “Best China Venture Capitalists”. Haitong-Fortis PE Management was
also awarded “Top Ten Chinese Private Equity Investment Institution” by China
Venture in 2008, 2009, 2010 and 2011, and “PE Exit Winner of the Year 2010” by
Zero2IPO in December 2010.
Traditional asset management products and services
We develop asset management products and services based on asset size and customer
demands, which mainly include collective asset management schemes and targeted asset
management schemes. As of December 31, 2011, we had seven collective asset management
schemes and seven targeted asset management schemes. The total AUM at our Company level
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amounted to approximately RMB13.7 billion as of December 31, 2011. The table below sets
forth the total AUM of our different asset management schemes for the periods indicated:
As of December 31,
2009 2010
(RMB in millions)
Collective asset management schemes . . . . . . . . 1,102.7 1,054.7 2,506.0
Targeted asset management schemes . . . . . . . . 2,944.2 7,644.6 11,185.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,046.9 8,699.3 13,691.6
Collective asset management schemes include large and small collective asset
management schemes. As of December 31, 2011, all of our collective asset management
schemes were large collective asset management schemes. We are also in the planning stage to
launch small collective asset management schemes. Large collective asset management
schemes, designed mainly for retail customers and certain institutional customers, typically
have a minimum subscription amount of RMB50,000 to RMB100,000 per customer. We charge
a management fee of 0.6% to 1.5% of the total AUM of such schemes, plus a pre-agreed
performance fee for certain schemes. In order to meet investor demands with different risk
profiles, we provide diversified products, such as equity funds, balanced funds, bond funds,
FOF and money market funds. Small collective asset management schemes, designed mainly
for up to 200 institutional and high net worth customers, typically have a total AUM of up to
RMB1 billion with a minimum subscription amount of RMB1 million per customer. We plan
to charge a management fee of up to 1.5% of the total AUM of such schemes, plus a pre-agreed
performance fee for certain schemes.
We also provide targeted asset management schemes, which are customized wealth
management plans designed for a single customer and typically have a minimum subscription
amount of RMB10 million. We charge a management fee of up to 2.0% of the total AUM of
such schemes, plus a pre-agreed performance fee. Through our targeted asset management
schemes, we provide customized investment plans to our customers based on their
characteristics and investment needs, as well as the most suitable financial products available
in the market, such as fixed income funds, balanced funds, selected FOF, selected equity funds
and stock index futures.
We have formulated different marketing strategies and established various sales channels
for our products. Our collective asset management products are promoted through our branches
nationwide or through agency banks. We cross-sell our diversified asset management products
and services to our brokerage customers through our nationwide sales network. Our customer
managers analyze our customers’ needs in order to identify suitable candidates for our targeted
asset management products. Institutional clients are also referred by our investment banking
business and securities brokerage business.
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HFT Investment Management
HFT Investment Management is our fund management subsidiary in which we own a
51.0% equity interest. Please see “History and Corporate Structure”. HFT Investment
Management offers a full range of asset management products and services, including mutual
funds, enterprise annuities, segregated account management services and QFII investment
advisory services. As of December 31, 2011, HFT Investment Management managed mutual
funds, including 20 open-end funds, which had total AUM of over RMB32.5 billion.
Meanwhile, HFT Investment Management acted as the investment manager for more than 60
enterprise annuity funds, which had total AUM of approximately RMB15.9 billion. Total AUM
under HFT Investment Management’s segregated account management reached over RMB2.8
billion as of December 31, 2011. Since the end of 2004, HFT Investment Management has been
offering investment advisory and sub-management services to QFIIs and other domestic and
overseas investment portfolios. As of December 31, 2011, the assets managed by our customers
to whom HFT Investment Management provides investment advisory services amounted to
approximately RMB20.6 billion. During the Track Record Period, the management fee rate
charged by HFT Investment Management ranged from 0.33% to 2.0%, subject to adjustments,
according to different asset sizes and types of funds and investment portfolios. During the same
period, the management fee rate of mutual funds ranged from 0.33% to 1.8%, and varied by
different product types such as stocks and bonds. The management fee rate of segregated
account management services ranged from 0.4% to 2.0%, plus a performance fee if certain
conditions are satisfied.
The following table sets forth the total AUM of our different types of asset management
products as of the dates indicated:
As of December 31,
2009 2010
(RMB in millions)
Product
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . 45,818.9 46,898.4 32,488.4
Enterprise annuities . . . . . . . . . . . . . . . . . . . 10,096.8 13,607.1 15,887.5
Segregated account management services . . . . . . 1,039.4 2,553.6 2,862.8
HFT Investment Management, with its diversified product offerings, attracts a wide
spectrum of customers. Its customer base ranges from retail individuals to high net worth and
institutional customers. The minimum subscription amount of the products offered by HFT
Investment Management is RMB1,000. As of December 31, 2011, HFT Investment
Management had approximately 1.27 million retail customers and over 680 institutional
clients. In December 2010, HFT Investment Management was designated by the NSSF as its
entrusted domestic investment manager. Thus, HFT Investment Management became a
fully-licensed fund management company offering asset management products such as mutual
funds, segregated account management services and enterprise annuity plans. We are also
licensed to provide asset management services to QDIIs.
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Fullgoal Fund Management
Fullgoal Fund Management is an affiliate fund management company in which we own
an equity interest of approximately 28%. Please see “History and Corporate Structure”. As of
December 31, 2011, Fullgoal Fund Management managed 26 mutual funds and provided
various segregated account management services and enterprise annuity fund management
services, with a total AUM of approximately RMB72.4 billion. Fullgoal Fund Management
primarily distributes investment management products to retail and institutional customers
nationwide through banks, securities firms and our branches. In December 2010, Fullgoal Fund
Management was designated by the NSSF as its entrusted domestic investment manager. Thus,
Fullgoal Fund Management became a fully-licensed fund management company offering asset
management products such as mutual funds, segregated account management services and
enterprise annuity plans. We are also licensed to provide asset management services to QDIIs.
Private equity asset management business
In addition to our traditional asset management business, by leveraging our experience
and advantages in direct investment business, we have developed our private equity asset
management business and thereby broadened the revenue streams of our asset management
business through management fees and performance fees received from private equity funds we
manage.
We established Haitong-Fortis PE Management in 2004 to manage the assets of the
China-Belgium Fund. Please see “– Our Business and Operations – Direct Investment –
China-Belgium Fund.” Haitong-Fortis Private Equity Fund Management was the first industry
investment fund management company in the PRC, approved by the NDRC. As of December
31, 2011, Haitong-Fortis Private Equity Fund Management is a joint venture fund management
company in which we and BNPP IP BE Holding (formerly known as “Fortis Investment
Management SA/NV”) hold equity interests of 67.0% and 33.0%, respectively. In addition, we
manage several private equity funds through Haitong Jihe Management and Haitong
Chuangxin Management, which are subsidiaries of Haitong Capital Investment. These private
equity funds include Jilin Modern Agriculture and Emerging Industry Investment Fund and
Xi’an Aerospace New Energy Fund. Please see “– Our Business and Operations – Direct
Investment” for details of these private equity funds.
Proprietary Trading
Overview
We engage in the trading of equities, bonds, funds, derivatives and other financial
products for our own account. For the years ended December 31, 2009, 2010 and 2011, segment
revenue and other income from our proprietary trading business in the PRC was RMB804.8
million, RMB779.8 million and RMB1,144.8 million, respectively, accounting for 7.1%, 6.9%
and 10.5% of our total revenue and other income, respectively.
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According to the Regulations on Investment Scopes of the Proprietary Trading Business
of Securities Companies and the Relevant Matters (eIR8QlSêqimRbW Sg N
v ) promulgated in April 2011, PRC securities firms can invest in three categories of
investment products, including (i) securities listed on domestic stock exchanges; (ii) securities
traded in the domestic inter-bank market (including government bonds, RMB denominated
bonds issued by international development agencies, instruments of central banks, financial
bonds, short-term financing bonds, corporate bonds, medium-term notes and enterprise bonds);
and (iii) securities approved by or filed with the CSRC that are issued and traded over the
counters of domestic financial institutions. In addition, the CSRC allows PRC securities firms
to set up special purpose subsidiaries in the PRC for trading certain alternative financial
products with its own capital in addition to the above three categories. In June 2011, we
became the first PRC securities firm to apply to the CSRC for establishing a subsidiary for
investments in alternative financial products. With the ability to invest in an additional array
of financial products, we are well-positioned to diversify our investment product suite, such as
developing our market making business and broadening future revenue streams.
Investment portfolio
We invest in a diversified suite of financial products, including debt securities, equity
securities, funds and derivatives for our own account. The table below sets forth our investment
portfolio of financial instruments held for trading in our proprietary trading business as of the
dates indicated:
As of December 31,
2009 2010
(RMB in (RMB in (RMB in
millions) % millions) % millions) %
Debt securities . . . . . . . 5,539.1 45.8 7,508.9 67.4 11,303.0 81.0
Equity securities . . . . . . . 2,038.6 16.9 2,851.4 25.6 1,503.0 10.8
Funds . . . . . . . . . . . . . 4,278.1 35.4 785.7 7.0 1,053.0 7.5
Derivatives . . . . . . . . . . 230.6 1.9 – – 101.0 0.7
Total . . . . . . . . . . . . . . 12,086.4 100.0% 11,146.0 100.0% 13,960.0 100.0%
The table below sets forth our investment portfolio of available-for-sale investments in
our proprietary trading business as of the dates indicated:
As of December 31,
2009 2010
(RMB in (RMB in (RMB in
millions) % millions) % millions) %
Debt securities . . . . . . . . 40.7 0.9 201.1 5.0 436.0 10.8
Equity securities . . . . . . . 4,256.9 99.1 3,774.2 94.8 3,611.0 89.2
Funds . . . . . . . . . . . . . – – 6.4 0.2 – –
Total . . . . . . . . . . . . . 4,297.6 100.0% 3,981.7 100.0% 4,047.0 100.0%
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Investment strategies
For our investment in equity securities, we adhere to a value-investing strategy with the
aim of achieving stable returns. We make equity investment decisions based on our research,
which covers macroeconomics, industry sectors and individual stocks. We have an equity
securities investment product selection pool consisting of over 300 stocks listed on domestic
stock exchanges. Before reaching an investment decision, our investment managers select
different types of stocks for investment from the selection pool based on our research,
discussions with research analysts and the prevailing market conditions. After our investment
decision committee approves an investment decision, our investment managers seek final
authorizations from different levels of management based on the value of each investment and
subsequently place orders with our traders.
For our investments in debt securities, we have adopted a stringent risk management
system to keep our investment risks within a reasonable level. We strictly control our
investment periods to minimize the risk of default. Currently, most of our debt securities
comprise short-term and mid-term bonds which mature within five years. Based on prevailing
market conditions, we actively adjust our investment strategies and asset allocation between
aggressive and conservative approaches to minimize risks and capture gains. In addition, to
manage our credit risks in investing in debt securities, we adopt the following measures:
primarily purchasing investment products with high credit ratings issued by major
state-owned enterprises in the PRC. We invest in long-term debt securities that are
rated AA or higher, and short-term debt securities that are rated A-1 or higher in the
PRC;
diversifying our investment portfolio and closely monitoring the business operations
and credit rating of the issuers of our debt securities; and
classifying our counterparties based on their credit ratings and setting our settlement
methods and trading scope accordingly.
We conduct derivative trading activities primarily through the trading of ETFs and stock
index futures. Our traders and analysts select suitable derivative products for investment based
on internal research and analysis and our special investment decision committee reviews and
gives final approval for such investment decisions.
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Direct Investment
Overview
We classify our direct investment activities into the following two categories:
making direct equity investments in private companies and earning capital gains by
exiting from these private equity investments through IPOs or share sales, or by
receiving dividends from these portfolio companies; and
investing in private equity funds with our own capital.
The following table sets forth a summary of our direct investments as of December 31,
2011:
Amounts
Number of invested
investment as of
projects December
Date (year/ Our share of as of 31, 2011
Fund Investment month) of Management interest in December (RMB in
Company establishment company Focused industries Size of funds the funds 31, 2011 millions)(1)
Haitong Capital 2008/10 – Renewable and clean RMB4,000 100.0% 36 1,569
Investment energy, new million
materials, consumer
goods,
biomedicine, IT,
communications
and advanced
manufacturing
Jilin Modern 2010/12 Haitong Jihe Emerging industries RMB800 37.5% 6
Agricultural and Management such as modern million
Emerging agriculture and
Industrial biotechnology
Investment Fund
Xi’an Aerospace 2011/1 Haitong Emerging industries RMB1,000 37.0% 10
and New Energy Chuangxin such as aerospace, million
Industry Fund Management green energy, clean
technology and
new materials
China-Belgium 2004/11 Haitong-Fortis PE All industries EUR100 10.0% 33 1,250
Fund Management (excluding real million
estate)
(1) Invested amounts include re-investments after we exit our previous investment projects.
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Haitong Capital Investment
We were among the first PRC securities firms to engage in the direct investment business
after the CSRC launched a pilot program to allow securities firms to engage in direct
investment business in September 2007. We established a wholly owned subsidiary, Haitong
Capital Investment, to engage in direct investment business after we received the approval
from the CSRC in 2008. The CSRC requires PRC securities firms to conduct direct investment
activities through their subsidiaries and limit the capital dedicated to their direct investment
business to 15% of its Net Capital. As of the Latest Practicable Date, Haitong Capital
Investment had a registered capital of RMB4.0 billion, and as of December 31, 2011, it was the
second largest direct investment subsidiary of PRC securities firms. Haitong Capital
Investment mainly invests in industries with steady growth potential, which include renewable
and clean energy, new materials, consumer products, biomedicine, IT, telecommunications and
advanced manufacturing. According to our investment policy, Haitong Capital Investment
cannot hold more than 20% equity interest in a target company. In addition, we generally invest
in companies with the following characteristics: a clean corporate history, clear shareholding
structure, operating in a sector with viable growth potential, being profitable, and having the
potential for IPO within three years. Haitong Capital Investment generally imposes an
investment period of four to six years.
Haitong Capital Investment successfully completed its first exit from a private equity
investment in 2010. From its inception in 2008 through December 31, 2011, Haitong Capital
Investment had invested in 36 companies with a total investment amount of approximately
RMB1.6 billion, and among these companies, four have been listed in the PRC. Major awards
that Haitong Capital Investment has received include:
the “Distinguished Securities Firms for Direct Investment Business” by Securities
Times in May 2011;
the “Best Securities firm for Direct Investment Business” by 21st Century Business
Herald in 2010; and
the “Outstanding Investment Institution Award” by Shanghai Securities News in
May 2010.
With the rapid development of emerging industries in the PRC, we will continue to
broaden the scope of our direct investment business. In 2010, Haitong Capital Investment
established Jilin Modern Agricultural and Emerging Industrial Investment Fund and Xi’an
Aerospace and New Energy Resources Industry Fund. Jilin Modern Agricultural and Emerging
Industrial Investment Fund is managed by Haitong Jihe Management, a subsidiary of Haitong
Capital Investment, and mainly invests in emerging industries such as modern agriculture and
biotechnology. As of December 31, 2011, this fund has invested in six projects. Xi’an
Aerospace and New Energy Resources Industry Fund is managed by Haitong Chuangxin
Management, a subsidiary of Haitong Capital Investment, and mainly invests in emerging
industries such as aerospace, new energy, green technology and new materials. As of December
31, 2011, this industry fund has invested in ten projects. Moreover, we have gained approval
from the Shanghai municipal government and the CSRC and are in the process of establishing
a Shanghai Cultural Industry Fund.
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China-Belgium Fund
Before the CSRC allowed PRC securities firms to conduct direct investment business, we
co-founded the China-Belgium Fund with the Ministry of Finance of the PRC, the National
Council for Social Security Fund Committee, China Development Bank and Fortis Bank in
November 2004 with an initial capital of EUR100 million. We have also established and owned
a controlling interest in Haitong-Fortis Private Equity Fund Management to manage the
China-Belgium Fund which principally invests in domestic high-tech SMEs that are at a
high-growth stage with a clear path to IPO, adhering to its prudent investment strategy. As of
December 31, 2011, the China-Belgium Fund had invested in 33 portfolio companies, 11 of
which were completely or partially exited.
In July 2011, the CSRC promulgated guidelines that allow a PRC securities firm’s direct
investment subsidiary to raise funds through private placement and to use its proceeds, in
addition to its own capital, to make direct investments. Following these guidelines, we believe
that there is great potential for our direct investment business in the PRC, and we will continue
to expand our direct investment business under active and prudent management strategies. We
believe that Haitong Capital Investment and China-Belgium Fund will continue to exit from
existing direct investment projects. In addition, in order to further strengthen our direct
investment business and capture market opportunities, we intend to increase the capital of
Haitong Capital Investment and invest in more PRC industry funds.
Overseas Business
Overview
In addition to our PRC business operations, we are also actively developing our business
overseas. In July 2007, we established Haitong International Holdings in Hong Kong. In
December 2009, we acquired a controlling interest in Taifook Securities and, through
acquisition, became among the first group of PRC securities firms to own a full-service
overseas securities platform. Please see “History and Corporate Structure” for more
information. Established in 1973 and listed on the Hong Kong Stock Exchange in August 1996,
Taifook Securities was a leading local full-service securities firm in Hong Kong. In November
2010, we renamed Taifook Securities as Haitong International Securities. As of June 30, 2011,
Haitong International Securities had total assets of approximately RMB10.0 billion and was the
largest listed securities firm in Hong Kong with a PRC background in terms of total assets.
Through Haitong International Securities, we provide securities and futures brokerage
(including margin financing and securities lending), corporate finance and financial advising,
wealth management and other financial services overseas. As of December 31, 2011, we had
13 branches located in Hong Kong and Macau with approximately 152 account executives, two
representative offices located in Beijing and Shanghai and six investment advisory centers
located in Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou and Xiamen. Our high-quality
service is well recognized in the securities industry, and we have been named the best equity
house in Hong Kong for over ten consecutive years by internationally renowned financial
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media, such as FinanceAsia, Asiamoney and Euromoney. In 1999, we were among the first
group of Hong Kong securities firms to obtain the ISO9002 Quality Control System
Certification. We have established an outstanding track record in fund management. We
received the Lipper Fund Award as the “Best Pension Fund Over Five Years, Equity Hong
Kong” for three consecutive years from 2008 to 2010 and the “Best Fund Over Three Years,
Equity China” in 2010.
The number of our overseas brokerage customers increased from approximately 100,000
as of December 31, 2009 to approximately 145,000 as of December 31, 2011. Apart from retail
customers, we also have a large institutional and QDII customer base, including large well
known PRC-based institutional investors, such as China Asset Management Corporation, China
Southern Fund and China Merchants Fund.
For the years ended December 31, 2009, 2010 and 2011, revenue and other income
generated from our overseas business was RMB197.2 million, RMB905.0 million and
RMB954.5 million, respectively, representing 1.7%, 8.0% and 8.8% of our total revenue and
other income. In addition, our segment results from our overseas business amounted to
RMB109.6 million, RMB178.8 million and RMB120.9 million for the years ended December
31, 2009, 2010 and 2011, respectively, representing 1.9%, 3.6% and 2.9% of our profit before
income tax during those years.
Brokerage services
We provide innovative and flexible securities trading and investment services to our
global institutional, corporate and retail customers, such as trading of securities and
derivatives, futures and options, bonds, bullion and forex, margin financing, wealth
management, nominee and custodian services and research.
Corporate finance and financial advisory services
We provide corporate finance and financial advisory services to companies listed in Hong
Kong, the PRC and other global exchanges, as well as private enterprises. Our services include
IPO sponsorship, underwriting and pre-IPO financing, financial advisory services and
compliance advisory services. During the Track Record Period, we sponsored eight IPOs,
underwrote 50 IPOs and completed 16 private placements and rights issues, raising total
proceeds of approximately HK$226.1 billion in Hong Kong.
In 1999, we became one of the first group of GEM sponsors approved by the SFC and
sponsored the first H share IPO of a PRC state-owned enterprise on GEM. Our landmark
corporate finance transactions include acting as:
the joint bookrunner and joint lead manager for the offshore RMB bonds offering of
RMB1.25 billion issued by Zhongsheng Group Holdings Limited in April 2011;
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the joint sponsor, joint bookrunner and joint lead manager for the listing of the
H shares of Goldwind Science & Technology Co., Ltd. in 2010, raising
approximately HK$8.2 billion, the fourth largest H share IPO in 2010; and
the joint bookrunner and joint lead manager for the listing of the H shares of China
Minsheng Banking Corp., Ltd. in 2009, raising approximately HK$31 billion, the
largest Hong Kong IPO in 2009.
Asset management and wealth management
We provide our institutional and retail customers with a wide range of fund management
services. We are also one of the service providers for the Hong Kong mandatory provident
funds.
Capitalizing on the opportunities arising from RMB appreciation and internationalization
and fast growing offshore RMB deposits, in August 2010 we launched Haitong Global RMB
Fixed Income Fund, which is the first SFC-authorized public offshore RMB fund and in
January 2012 we launched Haitong China RMB Income Fund, which is one of the first offshore
funds which invest in the domestic securities market through RQFII. We also intend to raise
other types of RMB-denominated funds, such as RMB money-market funds and high-yield
RMB-funds.
Synergies
Hong Kong is a major international financial center which connects the PRC’s capital
markets to the international capital markets. As such, we believe that our service platform in
Hong Kong and our ability to attract international customers could enable us to capture
fast-growing cross-border opportunities for expanding our overseas business, gain brand
recognition overseas and benefit from synergies between our PRC and overseas operations.
Major examples of cross-selling opportunities between Haitong International Securities
and our PRC operations are as follows:
in securities brokerage, we have introduced a number of large institutional and QDII
customers to Haitong International Securities;
in corporate finance, we have referred large PRC corporate clients to Haitong
International Securities for their fund raising activities in Hong Kong. These clients
include, among others, China Minsheng Banking Corp., Ltd., China Pacific
Insurance (Group) Co., Ltd. and Goldwind Science & Technology Co., Ltd;
Haitong International Securities can benefit from the comprehensive coverage and
in-depth understanding of the PRC economy and enterprises of our research team;
and
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our operations in the PRC can benefit from Haitong International Securities’
experience and use of best practices in the international capital markets to gain
insight into the development of international securities markets and new businesses.
Delineation of businesses
Currently, we principally conduct all our business in Hong Kong and Macau through
Haitong International Securities, which is controlled by Haitong International Holdings, one of
our wholly owned subsidiaries. Haitong International Holdings is the holding company of our
operating subsidiaries in Hong Kong and Macau and does not itself conduct any other material
business operations. Haitong International Securities and its subsidiaries have licenses to
conduct securities-related business in Hong Kong and Macau. As of the Latest Practicable
Date, apart from our operations in Hong Kong and Macau, Haitong International Securities had
six investment advisory centers and two representative offices in the PRC to promote its
overseas business and provide assistance to customers with respect to their investments outside
the PRC.
Following the Listing, Haitong International Holdings will continue to be our overseas
platform, while Haitong International Securities will continue to be our flagship company in
Hong Kong and Macau through which we conduct our business in Hong Kong and Macau and
cross-border business between the PRC and Hong Kong and Macau. If we decide to pursue any
new business opportunities in the future, we intend to continue to follow such strategies in
assigning different businesses to different members of our Group to avoid any potential
conflicts of interest.
Given the cooperative nature of the business relationship and the clear delineation of
business between Haitong International Securities and the rest of our Group, and as both
Haitong International Securities and the rest of our Group are under the supervision of a
number of regulators, we believe that minority shareholders of our Company and Haitong
International Securities will be adequately protected when new business opportunities arise in
the future.
RESEARCH
Our research capability is one of our core competencies and plays a key role in the
development of our principal business lines. In recent years, we have increased our resource
allocation to strengthen our research capability. The number of employees in our research team
has increased from 85 as of December 31, 2009 to 114 as of December 31, 2011. Over 92%
of our research analysts hold master’s degrees and a number of our research analysts hold
professional qualifications, such as CFA, FRM and CIIA. We encourage our research analysts
to participate in training to enhance their professional expertise. Our research team provides
research reports and regular company updates to external customers, including domestic fund
management companies, insurance companies and institutional investors, assisting them in
identifying and evaluating investment opportunities. In addition, our research team provides
support to our other business lines, such as our investment banking, asset management and
proprietary trading businesses.
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We have broad research coverage, including macroeconomic analysis, investment
strategies, industry sector and company research, fixed income products, derivatives, financial
engineering and policy studies. Our equity research covers 28 industry sectors and over 1,013
listed companies in the PRC. As of December 31, 2011, the total market capitalization of the
listed companies under our research coverage accounted for over 71% of the aggregate market
capitalization of the Shanghai Stock Exchange and the Shenzhen Stock Exchange. In May
2010, we were among the first securities firms in the PRC to obtain qualification from the
CSRC to evaluate PRC mutual funds. As of the Latest Practicable Date, there were only four
securities firms in the PRC with such qualifications.
In addition to our research department, our subsidiary, Haitong Futures, has established
a dedicated research team focusing on technical analysis of futures products and providing
recommendations to its customers to maximize their returns while minimizing investment
risks. As of December 31, 2011, our Haitong Futures research team consisted of 14 research
analysts, covering commodities futures, financial futures, financial engineering and investment
strategies.
In addition, our Hong Kong-based research team under Haitong International Securities
provides research coverage on Hong Kong-listed companies, which serves to complement our
research coverage on domestic listed companies. As of December 31, 2011, the research team
of Haitong International Securities consisted of 18 research analysts and has covered 13 sectors
and over 130 listed companies in Hong Kong since 2009.
In recent years, we have received a number of awards in recognition of our research
capabilities, including:
first in the wholesale and retail sector by New Fortune Magazine in 2009, 2010 and
2011;
third in the petrochemical sector by New Fortune Magazine in 2011;
awards for two outstanding research analysts for the IT and consumer durables and
software and services industries by Thomson Reuters StarMine in 2011;
second in the transportation and logistics sector by Financial Times in 2010;
five awards from the Shanghai Futures Exchange for outstanding analysts and
research teams in our Haitong Futures research department in 2010; and
third in Hang Seng Index Recommendation, fourth in SME Stock Recommendation
and seventh in HSCEI Recommendation for our Haitong International Securities
research department from South China Morning Post/StarMine in 2010.
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TREASURY MANAGEMENT
We believe the management of our liquidity and capital resources is critical to our
success. Our planning and finance department actively monitors our capital structure, source
of financing and liquidity, and is responsible for ensuring the liquidity and safety of our capital
while improving yields on surplus cash.
We have a comprehensive budgeting system that forecasts our cash inflow, cash outflow,
and cash balance and estimates our liquidity needs for business expansion and other
investments. We have also established stringent treasury management measures based on our
Net Capital, which require stress tests on overall liquidity and other financial indicators before
we make any capital investments.
To manage our liquidity while improving yields on surplus cash, in addition to bank
deposits and inter-bank borrowings, we actively manage our liquid assets through money
market and bond market operations by investing in liquid financial instruments with low risk,
such as fixed income securities and financial assets held under resale agreements.
We seek to diversify our source and type of financing to meet various liquidity needs in
our operations. Currently, we derive short-term financing for our PRC operations primarily
from bond repurchase transactions in the interbank market or through stock exchanges.
Income from our treasury management activities is included in the revenue and other
income of headquarters and others. Please see “Financial Information – Summary Segment
Results” and “Appendix I – Accountants’ Report”.
BUSINESS NETWORK
As of December 31, 2011, we had 216 brokerage branches, including 193 securities
brokerage branches and 23 futures brokerage branches in the PRC, as well as 13 securities
brokerage branches in Hong Kong and Macau. According to the data from the Shanghai Stock
Exchange and the China Futures Association, we ranked fourth among all PRC securities firms
in terms of branch network coverage in the PRC as of December 31, 2011.
The table below sets forth the total numbers of our securities and futures brokerage
branches in the PRC as of the indicated dates.
As of December 31,
2009 2010
Securities brokerage. . . . . . . . . . . . . . . . . . . 180 183
Futures brokerage . . . . . . . . . . . . . . . . . . . . 18 18
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 201
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Our business network in the PRC covers 27 provinces (excluding Tibet, Qinghai, Inner
Mongolia and Ningxia in the PRC) and 125 cities, as well as Hong Kong and Macau. In
addition, we have 20 branch offices in Beijing, Shanghai and several other provinces to manage
our brokerage branches locally, which could contribute to greater operating efficiency and
more effective resource allocation.
In expanding our branch network, we also consider the differences in securities market
developments and the regulatory requirements of different regions. Our branches are
strategically located in the economically well-developed coastal regions in Eastern China and
Southern China with high concentrations of affluent individuals and SME clients, such as
Shanghai, Zhejiang, Shandong, Jiangsu and Guangdong. We also set up branches in less
penetrated regions with high growth potential but less price competition, such as Heilongjiang,
Gansu, Jiangxi and Anhui. As such, we have developed a strategically located branch network,
with coverage spanning from first-tier cities to third-tier cities. As of December 31, 2011,
approximately half of our securities branches were located in developed areas including the
Yangtze River Delta, the Bohai Rim and the Pearl River Delta and the remaining half were
located in the PRC’s central, western and northeastern regions.
The following table sets forth the coverage of our securities brokerage branches in the
PRC by region as of December 31, 2011:
Location Number Percentage
Yangtze River Delta . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 29.0%
Central and western region . . . . . . . . . . . . . . . . . . . . . . 51 26.4%
Northeastern region . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 22.3%
Bohai Rim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 13.5%
Pearl River Delta . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.7%
Hainan and Fujian provinces . . . . . . . . . . . . . . . . . . . . . 4 2.1%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 100.0%
In terms of staff structure at the branches, each branch has its sales and marketing teams,
customer service centers and back-office operations. Our sales and marketing team is typically
composed of marketing managers and licensed brokers, primarily engaging in business
development and product promotion. Our customer service centers engage in the provision of
customer service, customer management and investment advisory services, as well as the
provision of sales and trading-related services. Our back-office team provides comprehensive
support to other teams, including finance, accounting and IT functional support.
We have established a top-down management structure governing our local branches
based on our business management model, with the aim of forming a comprehensive local
platform. We intend to extend the services we provide through our branch network from local
brokerage services to one-stop customer solutions.
Our extensive network and market presence in strategic locations in the PRC has enabled
us to provide regionally focused customer service and coverage. In addition, through our
branch network and together with our substantial customer base, we believe we can maximize
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cross-selling opportunities across our business segments. For example, products such as margin
financing and securities lending, asset management and stock index futures may be cross-sold
to retail customers, while business opportunities with investment banking and customized
financial products may be developed among institutional customers.
We believe, to some extent, the extensive coverage of branches will play a more important
role in the competition among securities firms, especially if current regulations set limitations
to mitigate commission competition among securities firms in the PRC. In addition, given the
CSRC’s regulatory requirements governing the opening of securities brokerage branches, the
size of branch networks of securities firms has become an important factor for gaining
competitive edge. Therefore, we have been actively developing and expanding our branch
network and we strive to achieve a balance between branch network expansion and profitability
at individual branches. Specifically, our criteria for opening a brokerage branch in a particular
location typically take into consideration the size of the local brokerage market as compared
to the overall PRC brokerage market, as well as its growth potential.
We have been actively adjusting and optimizing our existing network coverage. Since
2009, we have been establishing new branches in fast-growing second- and third-tier cities and
relocating branches from highly competitive and concentrated regions to regions with
relatively low penetration, moderate competition and high growth potential. We will continue
to establish new branches in order to expand our brokerage network coverage to increase our
revenue.
Development of our futures business network has always been one of our business
focuses. We increased our futures brokerage branches to 23 as of December 31, 2011 compared
to 18 as of December 31, 2009. Our futures brokerage branches and securities brokerage
branches are complementary to each other. In regions where our securities brokerage business
has less customer penetration, we intend to devote more resources to develop our futures
business platform in order to capture a larger market share. We intend to allocate resources
towards developing our futures business network to capture a dominant market position.
SALES AND MARKETING
Our sales and marketing team not only has extensive sales and marketing experience in
the financial and securities industries, but also possesses a broad knowledge of financial
products. In order to maintain our competitive advantage, we require our sales and marketing
professional staff to complete rigorous training and examinations. In addition, we have
implemented a competitive incentive scheme to reward sales and marketing personnel who
demonstrate outstanding performance.
To support local sales and marketing teams, our branches have established service centers
to handle customers’ enquiries, account opening procedures and the offering of after-sales
services and technical support. As of December 31, 2011, we had over 1,800 customer service
staff members serving at our service centers.
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The stability of our sales and marketing teams is crucial to the ongoing development of
our new businesses and serving of our existing customers. The size of our sales and marketing
team increased from approximately 3,000 as of December 31, 2009 to over 6,300 as of
December 31, 2011, including 4,815 licensed brokers who have an exclusive agent contract
with us. Given their independent nature, these licensed brokers are not considered our
employees. The remuneration of our brokers primarily depends on the brokerage commissions
contributed by their respective clients, their compensation index and the results of our monthly
broker performance appraisal. Among these factors, the compensation index depends on the
rank and seniority of each broker, and the results of our monthly broker performance appraisal
are based on a grading system that factors in the broker’s personal performance and compliance
history. We conduct monthly reviews of our brokers’ compliance and have established a
detailed point deduction system for any non-compliance.
The licensed brokers system was amended in accordance with Provisional Measures on
Management of Securities Brokers (IR8} N”{t fL ) promulgated by the CSRC in
March 2009 pursuant to which securities brokers are required to pass a qualifying exam,
complete certain professional training and register their qualification status with the SAC. For
details, please see “Regulatory Environment – Regulation on the PRC Securities Industry –
Regulation on Operations – Securities – Securities brokerage.” To comply with these
provisions, we do not allow our brokers to engage in securities brokerage activities until they
have passed the qualification exam, completed required professional training and registered
their qualification status with the SAC. Through the implementation of these measures, the
number of our licensed brokers increased significantly from 349 as of December 31, 2009 to
3,762 as of December 31, 2010 and further to 4,815 as of December 31, 2011. The table below
sets forth the total number of our licensed brokers as of the dates indicated:
As of December 31,
2009 2010
Number of licensed brokers . . . . . . . . . . . . 349 3,762 4,815
As of December 31, 2011, we ranked first in the PRC securities industry in terms of the
total number of licensed brokers we contracted with.
To maximize our sales and marketing efforts, we leverage cross-selling opportunities
among our various business operations, as well as between our PRC and overseas platforms.
For example, our investment banking business may refer high net worth customers and
institutional clients to our securities and futures brokerage business, while our securities and
futures business may refer potential institutional clients to our direct investment business. In
addition, our brokerage business may also refer customers to our asset management business.
To enhance brand awareness, our sales and marketing team conducts face-to-face
meetings with prospective customers, hosts public relations and investor education events and
attends industry conferences. Our sales and marketing team also distributes our featured
research reports and provides other value-added financial advisory services to our customers
in order to enhance customers’ loyalty.
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CUSTOMER SERVICES
We operate a customer service network that provides a full range of services through
different channels, including our nationwide branch network, customer service hotline,
Rainbow Treasure Club and online platform. Our customer services principally include:
Branches: We offer customized services at our branches. Many of our branches in
the PRC have different service zones to provide specific types of services to our
customers.
Customer service hotline: Our customer service hotline is a comprehensive platform
that combines trading, information, consultation and marketing functions. Our
customer service hotline was awarded five-star head office level accreditation under
the Customer Contact Center Standard in 2009, making us the first PRC securities
firm to receive such an accreditation.
Rainbow Treasure Club: Our Rainbow Treasure Club is a loyalty program dedicated
to our active retail customers with sizable assets. Under this program, we designate
our investment advisors to provide customized and value-added services, including
investment advice on securities and other financial products, to our members.
Online platform: Our online platform allows our customers to execute real-time
trades, record trading status and records, and check position and account
information. We also offer stock quotes, financial news, global market updates and
financial commentaries, as well as research reports on stocks through our online
platform. In 2011, online trading accounted for more than 80% of our total securities
and futures trading volume. Please see “Risk Factors – Risks Relating to Our
Business and Industry – We rely heavily on IT systems to process and record our
transactions and offer online products and services” for risks associated with our
online platform.
In addition, we actively provide customized and value-added services to institutional
clients to satisfy their demands through our nationwide branch network and comprehensive
services, such as product recommendations, advice on asset allocation and distribution of
featured research reports.
INTERNAL CONTROL AND RISK MANAGEMENT
Governance Structure
We believe effective risk management and internal controls are key to our success. We
have established an effective and comprehensive risk management and internal control system
to identify, evaluate and manage the risks we face in our business operations. As a result of our
sound internal controls and risk management capabilities, we have received an “AA”
regulatory rating from the CSRC for the past four consecutive years, the highest rating given
to a PRC securities firm to date. In 2007, we were selected by the CSRC as one of the first six
PRC securities firms to participate in the pilot compliance management program.
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We have established a five-level risk management and internal control governance
structure, which includes: (i) the Compliance and Risk Management Committee; (ii) the
General Compliance Officer; (iii) the Compliance and Risk Management Department; (iv) the
functional departments; and (v) the risk management staff in our business lines. The following
chart sets forth a brief overview of our five-level governance structure:
Compliance and Risk Management Committee
General Compliance Of cer
Compliance and Risk Management Department
Functional Departments
Risk Management Staff in Our Business Lines
Compliance and Risk Management Committee
The Compliance and Risk Management Committee is the highest level of our risk
management and internal control structure. Organized under our Board, the Compliance and
Risk Management Committee is designed to assist our Board in overseeing our compliance
with the laws and regulations applicable to our business operations. The Compliance and Risk
Management Committee is mainly responsible for:
overseeing our general risk management and internal control systems;
reviewing and modifying our internal control policies; and
ensuring all risks associated with our business activities are identified and
controlled.
As of December 31, 2011, the Compliance and Risk Management Committee consisted of
five members of our Board, including Mr. Li Mingshan, Mr. Zhou Donghui, Mr. Feng Huang,
Mr. Zhang Huiquan and Mr. Dai Genyou. They have long-term professional experience in the
PRC securities, financial management, investment and/or legal industries. For more details
about their background, please see “Directors, Supervisors and Senior Management.”
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General Compliance Officer
The General Compliance Officer appointed by our Board is independent from our
management and reports directly to our Board and other PRC regulatory authorities. Our
General Compliance Officer serves as the counsel to the Compliance and Risk Management
Committee and advises our Board and the Compliance and Risk Management Committee on a
regular basis about the following major areas:
implementing our risk management and internal control policies;
overseeing and identifying risks management issues in our material corporate
decisions and business activities;
conducting independent investigations into potential non-compliance incidents; and
engaging external counsels or third parties, at its discretion, to conduct independent
assessments of major corporate activities, such as mergers and acquisitions.
Our General Compliance Officer, Mr. Wang Jianye, who is also our Chief Risk Control
Executive, has over 25 years of working experience in the PRC banking and securities
industries, including 15 years of management experience. For more details about Mr. Wang’s
background, please see “Directors, Supervisors and Senior Management.”
Compliance and Risk Management Department
The Compliance and Risk Management Department reports directly to our Board and our
General Compliance Officer on a regular basis and plays a critical role in implementing our
internal control policies through assisting our General Compliance Officer in:
designing our internal compliance protocols relating to our business, employees and
subsidiaries;
preparing our internal control reports, manuals and training materials;
monitoring our compliance risks;
evaluating whether each of our business operations, branch offices and subsidiaries
adhere to our internal control policies; and
implementing Chinese wall policies and managing our anti-money laundering and
foreign exchange risks.
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As of December 31, 2011, our Compliance and Risk Management Department consisted
of 40 professional staff, among which approximately 20 had over five years of professional risk
management experience. Our Compliance and Risk Management Department currently has
eight different operating units, including (i) compliance monitoring unit; (ii) trading risk
management unit; (iii) operation risk management unit; (iv) investment banking risk
management unit; (v) compliance and review unit; (vi) inspection and audit unit; (vii) legal and
litigation unit; and (viii) regulatory liaison unit. In addition to the risk management staff at our
head office, we recruit additional staff at our branch offices, brokerage branches and
subsidiaries to assist us in monitoring and managing our risk management and internal control
systems on-site.
Functional Departments
Our functional departments primarily include our brokerage operation center, finance and
planning department and IT department. Our functional departments cooperate with the
Compliance and Risk Management Department to manage risk exposure arising from the
securities trading, capital deployment and asset allocation, financial, accounting and IT
systems, as well as to implement department-specific risk management procedures.
As of December 31, 2011, our functional departments consisted of 131 professional staff,
among which approximately 110 had over five years of working experience in the industry.
Risk Management Staff in Our Business Lines
We have risk management staff in our principal business lines to monitor and manage
risks specific to our business activities, and these staff work closely with our Compliance and
Risk Management Department.
As of December 31, 2011, we had 207 risk management staff, among which
approximately 160 had over five years of working experience in the industry.
Risk Management and Internal Control Policies and Procedures
We have implemented a series of risk management and internal control procedures to
manage risks that are specific to our business activities.
Brokerage Business
To ensure our brokerage business and branch network’s compliance with the applicable
laws and regulations and to standardize our brokerage business practice, we have established
comprehensive internal rules and guidelines for our brokerage business. We manage our
brokerage branch network based on a three-level governance structure: (i) head office; (ii)
branch offices; and (iii) brokerage branches.
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We manage the risks associated with our brokerage business through the following major
risk management measures:
Account opening procedures Our account opening procedures are designed to
ensure that our customers’ account opening
information is accurate, sufficient and in
compliance with the applicable PRC regulations and
our internal control policies. For example, our
account executives are required to obtain the
original IDs of our brokerage customers before
opening accounts for them.
Customer risk profiling To assess our customers’ risk tolerance on a
particular type of financial product, we evaluate our
customers’ risk profiles based on a combination of
factors, such as financial strength, knowledge of
financial products and investment experience, as
well as educational background.
Segregation of customer According to the relevant laws and regulations that
deposits govern cash held on behalf of customers, we require
our brokerage branches to maintain trust accounts
with qualified commercial banks and authorized
financial institutions to hold customer deposits. We
also prohibit our sales and marketing personnel
from managing customer accounts or handling
customer deposits to minimize the occurrence of
improper trading.
Real-time monitoring system Through our IT system, we are able to monitor our
customers’ transactions on a real-time basis and
detect unusual transactions and irregular trading
patterns.
Centralized brokerage trading To prevent our customers’ funds from
misappropriation, we have established and
implemented standardized procedures for brokerage
deposit, account management, contract execution,
fund transfers, liquidation and transfer of
customers’ assets. Our brokerage operation center
conducts account liquidation, registration, deposit
and settlement of our customers’ securities and
funds on a centralized and independent basis.
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Segregation of front and back We also have segregated supervision and
offices management of our branch network’s front and back
offices. We have a dedicated internal control team to
manage access controls and segregation of duties
among our employees. We prohibit our back office’s
operational and risk management personnel from
participating in sales and marketing activities,
managing customer accounts or handling customer
deposits.
Regular and special audit Our internal audit department and the Compliance
and Risk Management Department schedule regular
and special audits on our brokerage business
department and branch network with respect to their
internal controls, ordinary business operations,
financial and accounting management and
operational performance.
In response to the increasing risks associated with the margin financing and securities
lending business, we:
have established a monitoring system based on Net Capital requirements to strictly
control the scale of our margin financing and securities lending business and to
prevent concentration of business in a single customer or single kind of stock;
perform a credit check on each margin financing and securities lending customer,
assign different credit ratings to different customers based on standardized customer
selection and rating systems and grant credit to customers based on decisions made
by our margin financing and securities lending credit granting management
committee;
determine different financing limits for different customers and set warning notices,
margin call notices and closing notices to ensure that we hold an adequate amount
of collateral from each customer; and
use a mark-to-market system to monitor customer transactions on a real-time basis
and issue margin call notices and closing notices, or impose compulsory liquidation
if our customers fail to cover shortfalls on collaterals or repay the financing granted
after we issue warning notices.
We also have stringent internal control measures that monitor and control the size of our
margin financing and securities lending business. We generally perform the following steps to
determine and control the size of our margin financing and securities lending business:
conducting surveys on customers’ demands and the value of their applicable assets
in accounts with us in order to estimate the potential size of our margin financing
and securities lending business;
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conducting stress tests to assess whether our proposed business size would comply
with the applicable PRC regulatory requirements, especially Net Capital
requirements;
determining the size and required funding for our margin finance and securities
lending business;
submitting the proposed size of our business to our Board for approval; and
monitoring and controlling the size of our margin financing and securities lending
business based on our margin loan balance and the value of securities we lend on a
daily basis.
We also have predetermined parameters in our operating systems when conducting margin
financing and securities lending business to ensure compliance with the PRC regulations: (i)
the business scale of margin financing business for a single customer should not exceed 5% of
our Net Capital; (ii) the business scale of securities lending business for a single customer
should not exceed 5% of our Net Capital; and (iii) the market value we hold for a single kind
of securities should not exceed 20% of its total market value.
Investment Banking Business
We control and manage the risk exposures associated with our investment banking
business through the Internal Review Group, the Quality Control Group and the Compliance
and Risk Management Department, which are generally involved in project approval, on-site
due diligence, documents review, internal review meetings and continuous supervision.
Project approval An internal committee of our investment banking
business holds meetings to discuss whether to
proceed with an underwriting mandate based on its
independent business judgment and submits its
recommendation to our Internal Review Group for
further action.
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On-site due diligence Our Quality Control Group and our Compliance and
Risk Management Department conduct on-site
reviews in connection with each transaction,
primarily including the following procedures:
reviewing due diligence documents and
gathering and analyzing data;
visiting manufacturing facilities and office
buildings; and
attending meetings and interviews with the
issuer’s management and employees,
customers and suppliers.
Documents review Our Compliance and Risk Management Department
conducts preliminary reviews of the major
transaction documents. Our Internal Review Group
then conducts a thorough review of the issuer’s
corporate, legal and financial matters to ensure that
these transaction documents are accurate and
complete, without any material misstatements or
omissions, and comply with the relevant listing
requirements. After receiving the review opinion,
we require our investment banking team in charge
of the particular transaction to examine and address
any queries or recommendations raised by our
Compliance and Risk Management Department and
Internal Review Group.
Internal review meeting Our Internal Review Groups holds meetings to give
opinions and decide whether to approve an
underwriting transaction based on their professional
independent business judgment.
Two of our sponsor representatives in charge of the
transaction will sign the transaction mandate and
bear personal responsibility for our role as sponsor.
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Continuous supervision Based on the PRC regulations on the continuous
supervision of listed companies, we are responsible
for overseeing our listed clients’ compliance with
the CSRC’s requirements, internal controls,
corporate governance, disclosure matters and other
obligations during a post-listing continuous
supervision period. We have established detailed
internal guidelines on the continuous supervision of
our listed investment banking clients. To ensure
strict compliance with the applicable PRC
regulations and our internal guidelines, we have
prepared various documentation templates to
standardize our supervision practices. If any
particular issue is identified during the continuous
supervision period, our internal control teams will
submit a report to our investment banking
department for further action.
Asset Management Business
Our Compliance and Risk Management Department monitors and evaluates our exposure
to potential market risks, operational risks, credit risks and regulatory risks arising from our
asset management business. It cooperates with our risk management staff working for our asset
management business to monitor market risks, operational risks, credit risks and regulatory
risks in order to ensure effective implementation of our entrusted responsibilities, the accuracy
of our disclosure of risk-related information, prudence to develop our business and the
protection of our legal interests and the rights of our investors.
The primary internal control and risk management measures of our asset management
business include:
maintaining segregated asset management accounts at qualified commercial banks
and authorized financial institutions to hold customer funds;
monitoring our daily asset management activities to ensure that the investment
strategy and scope, asset allocation, selection of asset class and concentration level
of each asset management product matches its product descriptions and disclosure
in marketing materials;
maintaining a carefully selected “securities pool” for our investments based on
research recommendations; and
scheduling a quarterly on-site review of our overall asset management activities and
engaging independent accountants to perform special audits.
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In addition, we manage the risks associated with our asset management business by the
following three steps:
Risk control indicators Our asset management department formulates
formulation compliance indices for each product in accordance
with the contracts entered into with our clients and
relevant laws and regulations and implements
measures to prevent losses in the investment-
making process.
Risk control indicators Our risk management staff set thresholds for the
monitoring compliance indicators in the investment and trading
risk management system. We rely on technical
methods to set such thresholds in our system. Our
risk management staff monitors compliance
indicators on a real-time basis to ensure that
non-compliance incidents are discovered early.
Risk control indicators Our risk management staff within our asset
evaluation management business and our Compliance and Risk
Management Department are responsible for
reporting circumstances where the value of relevant
indicators exceed their respective predetermined
thresholds and monitoring the adjustments
conducted by our investment managers.
At the subsidiary level, we have appointed directors, supervisors and senior management
to supervise and monitor the risk management and internal control measures of our asset
management subsidiaries. We require our asset management subsidiaries to establish their own
risk management and internal control systems based on applicable PRC regulations and our
internal policies. We oversee and monitor these subsidiaries’ implementation of our internal
policies and review the effectiveness of their risk management and internal control systems on
a regular basis. We also have a reporting system which requires the compliance officer of each
subsidiary to report its overall risk management and internal controls to us at least twice a year
and to timely notify us of any material risk management issues.
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Proprietary Trading Business
We have established a four-level risk management governance structure to manage the
risks associated with our proprietary trading business, which includes: the Board of Directors,
the investment decision committee, the Compliance and Risk Management Department and the
proprietary trading department.
The Board of Directors Our Board determines the size of our proprietary
trading activities based on PRC regulatory
requirements such as Net Capital requirements, the
size of our assets, liabilities and income, our capital
adequacy and our our business strategy.
Any subsequent increase in the size of our
proprietary trading activities must be approved by
our Board.
Investment decision committee Our investment decision committee:
determines our business strategy with respect
to proprietary trading activities and adjusts our
decision-making procedures and risk
management system;
determines the size and allocation of our
investments in different asset classes or
underlying industries; and
researches major factors affecting our
proprietary trading business, including but not
limited to adverse changes to the securities
markets and our response.
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Compliance and Risk Our Compliance and Risk Management
Management Department Department:
collects trading position data through trading
and settlement systems;
uses a market risk monitoring system based on
risk control indicators, such as VaR, basis
point value and portfolio beta;
monitors the size of our proprietary trading
activities and our risk exposures and ensures
that they are within the limits prescribed by
our Board;
implements a “stop-loss” policy and monitors
our investment portfolio on a daily basis to
limit our potential loss, especially with respect
to high-risk financial products such as stock
index futures; and
monitors and evaluates our hedging activities
to ensure that our risk exposure and losses do
not exceed the predetermined limits.
Proprietary trading department Our proprietary trading department:
manages and adjusts our risk exposure range
within its authorized limits;
closes out a position when the losses incurred
exceed the predetermined maximum loss limit;
establishes the counterparty credit approval
policy and adopts different settlement methods
with counterparties with different credit
ratings to manage counterparty risk; and
develops investment restrictions based on the
rating of credit products.
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In addition, our internal audit department and the Compliance and Risk Management
Department schedule quarterly on-site reviews and special audits of our overall proprietary
trading business with respect to its internal controls, ordinary business operations, financial
and accounting management and the operational performance of our proprietary trading
business.
Direct Investment Business
We conduct our direct investment business primarily through Haitong Capital Investment,
which has established its own investment decision committee to review and approve its
investment decisions. We have appointed several directors, supervisors and senior management
of Haitong Capital Investment to supervise and monitor its risk management and internal
control systems. We oversee and monitor Haitong Capital Investment’s implementation of our
internal policies and review the effectiveness of its risk management and internal control
systems on a regular basis. We also have a reporting system which requires Haitong Capital
Investment to report its overall risk management and internal controls to us at least twice a year
and to notify us on a timely basis of any material risk management issues.
Haitong Capital Investment has established stringent risk management and internal
control systems based on applicable PRC regulations and our general internal policies,
covering investment target selection, negotiation, due diligence review, investment strategy,
contract execution, post-investment management and project exits. For example, Haitong
Capital Investment requires its internal audit managers and compliance officers to participate
in all project approval meetings and financial due diligence interviews as well as to attend the
target company’s board and shareholder meetings in order to closely monitor the target’s
business operations.
The investment decision committee of Haitong Capital Investment manages the risks
associated with direct investment activities by keeping the size of our investments within the
limits authorized by our Board. The investment decision committee is responsible for
reviewing investment plans and strategies relating to medium and long-term investments and
approving decisions for investments valued at less than RMB80 million. The members of the
investment decision committee must reach unanimous agreement to implement the relevant
investment decisions. For any investment valued over RMB80 million, the investment decision
committee recommends such investments to our Board for approval.
The investment decision committee consists of Haitong Capital Investment’s chairman of
the board, Ms. Zhang Saimei, general manager, Mr. Zhang Xiangyang, and chief investment
officer, Ms. Xiong Xumin, all of whom have over ten years of experience in the PRC securities
industry. Among them, the chairman is qualified as a senior economist and served as the
general manager of our derivative products department, strategies department and investment
banking department; the general manager served as the general manager of our Compliance and
Risk Management Department; and the chief investment officer is qualified as a sponsor
representative and served in our derivative products department and investment banking
department.
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Overseas business
Currently, we principally conduct our businesses in Hong Kong and Macau through
Haitong International Securities. The board of directors of Haitong International Securities has
the ultimate responsibility for Haitong International Securities’ internal controls and, through
the audit committee, the board of directors of Haitong International Securities is responsible
for reviewing the effectiveness of its internal control systems.
The audit committee currently comprises three independent non-executive directors of
Haitong International Securities, namely Mr. Man Mo Leung (Chairman of the committee), Mr.
Tsui Hing Chuen, William and Mr. Lau Wai Piu, Bill and one non-executive director, Mr. Ji
Yuguang. The chairman of the audit committee has appropriate professional qualifications and
experience in financial matters. The audit committee meets not less than twice a year to review
the following:
business affairs managed by the executive directors, particularly in relation to
connected transactions and continuing connected transactions, if any;
the interim and annual financial statements before their submission to the board of
directors and the annual general meeting for approval; and
the effectiveness of the internal control and risk management system.
In addition to the audit committee, Haitong International Securities has an independent
internal audit team, which plays a major role in monitoring the corporate governance of
Haitong International Securities and providing objective assurance to the board of directors of
Haitong International Securities that sound internal control systems are maintained and
operated by management. The head of the internal audit team directly reports to the board of
directors of Haitong International Securities and the audit committee on audit matters.
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Haitong International Securities adopts a risk-based approach to evaluate risk levels in a
controlled environment and maintains up-to-date operations manuals with ISO certification.
Haitong International Securities also adopts specific risk management policies and monitoring
systems to manage its risk exposure associated with credit, liquidity, market and IT in its
business operations:
Credit risk Members of the credit committee currently comprise
some of the executive directors and senior executives
of Haitong International Securities and its
subsidiaries. The main responsibility of this
committee is to formulate credit policies and to
manage the asset quality of Haitong International
Securities and its subsidiaries.
The credit control department is responsible for
monitoring securities transactions made on credit and
making margin calls to customers whose trades
exceed their respective limits. Any such excess is
required to be covered within two days from the date
of the deficiency report for securities and the next
day for futures. The deficiency report is monitored
daily by Haitong International Securities’ finance
director and responsible officers.
Liquidity risk Haitong International Securities’ operating units are
subject to various statutory liquidity requirements as
prescribed by the relevant regulatory authorities in
Hong Kong. Haitong International Securities has
established a monitoring system to ensure that it
maintains adequate liquidity to fund its business
commitments and to comply with the rules and
regulations applicable to it. Haitong International
Securities also maintains long-term and other
stand-by banking facilities with banks to meet any
contingencies in its operations.
Market risk Haitong International Securities has adopted detailed
investment policies to limit its proprietary trading,
exposed underwriting commitments and position
exposures.
IT risk Haitong International Securities is able to effectively
monitor the availability and performance of various
IT systems. A vigilant team acts and reports to the
senior management in the event of disruption or other
crisis that affects its IT systems.
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Chinese walls
As a securities firm with a diversified range of businesses, we inevitably face situations
where two or more interests conflict. We recognize the importance of managing such conflicts
of interest in order to protect the interests of our customers and staff. Therefore, we have
established Chinese walls in different business lines to prevent and minimize potential
conflicts of interest by controlling the flow of material non-public information and ensuring
compliance with relevant rules and regulations.
A Chinese wall is a barrier to ensure that material non-public information obtained by one
division of our business regarding listed companies is not released to our other divisions. A
Chinese wall aims to isolate those persons who make investment decisions from those who are
privy to material non-public information which may influence those decisions.
We have developed and implemented reasonable policies and procedures to safeguard
insider information and to prevent improper trading activities. To enforce the Chinese wall
policy, we have established physical segregation and password-protected access between
departments and operational units, including the following:
Brokerage;
Investment banking;
Asset management;
Proprietary trading;
Equity research; and
Legal and compliance.
Our staff engaged in a particular operational activity is prohibited from entering the
premises or office area used to undertake any other operational activities on the other side of
a Chinese wall without prior permission from our senior management.
Segregation of Duties
To minimize the opportunity for collusion and the occurrence of improper trading, duties
and functions within each of our business operations are assigned to and discharged by
different teams of employees. The following is an overview of the allocation of duties within
our brokerage division, our largest business line:
Customer service: We employ a team of customer service personnel responsible for
handling account opening applications and customer enquiries. Policies governing
the opening of customer trading accounts are governed by our internal guidelines;
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Taking trade orders: PRC brokerage customers can place orders by phone, internet
and counter trading systems;
Dealing and broking in securities: Dealing orders placed by brokerage customers are
processed via a direct dealing system, which interfaces with stock exchanges’
trading systems. Hong Kong brokerage customers may also issue deal orders to be
processed by our licensed account executives through our trading system;
Account management: Printing and mailing of customer statements are handled by
staff members of the settlement department. Customers can also obtain a summary
of orders via the Internet. Normally we will mail a summary of orders to our
customers on a regular basis (monthly or yearly). The process is computerized to
minimize time and costs and to maintain customer confidentiality;
Custody of customer assets: We ensure that our customers’ assets are adequately
safeguarded and properly accounted for. We have established procedural guidelines
in accordance with relevant PRC regulations. For example, PRC customers’ money
must be deposited into trust accounts at an authorized financial institution after our
receipt of such monies and no account executive is allowed to handle customer fund
deposits or transfers;
Customer complaints: Complaints from customers are reported to and handled by
our General Compliance Officer and our legal and compliance department.
According to our internal policy, no staff is allowed to handle customer complaints
without first notifying our General Compliance Officer. Upon receipt of a complaint,
the legal and compliance team gather information and conduct independent
investigations. Investigation reports are promptly presented to our Board of
Directors for consideration; and
Our General Compliance Officer ultimately responds to the customer with
investigation results and takes remedial measures as directed by our Board of
Directors.
Conflicts of Interest
Conflicts of interest arise in situations where two or more interests within our business
legitimately exist but are in competition or conflict. Conflict may arise between (i) interests of
our different operating units; (ii) our interests and those of our customers; (iii) interests of
different customers; (iv) our interests and the interests of our staff’s personal activities; or (v)
interests of our staff’s personal activities and those of our customers.
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Our employees’ personal activities include any personal trading, outside directorships and
businesses. The Securities Law states that PRC securities professionals are prohibited from
engaging in personal stock transactions. Our internal policies require that there is an adequate
level of awareness by our staff of the issues relating to conflicts of interest and that our staff
understand the basic principles relating to customer priority, insider dealing, confidentiality,
staff dealing and Chinese walls. In addition, policies emphasize avoidance or minimization of
conflicts of interest. Under these policies, where a conflict cannot be reasonably avoided, staff
must ensure that the conflict is properly disclosed to relevant parties and that approval is
sought from management before any action can be taken. Under all circumstances, staff must
ensure customers are fairly treated and the interests of staff should be subordinated to those of
our customers where any conflict arises between our staff and customers.
Anti-Money Laundering
We are fully committed to establishing and enforcing appropriate policies and procedures
to prevent money laundering and terrorist financing and are compliant with all relevant legal
and regulatory requirements. Money laundering covers a wide range of activities intended to
mask or alter the source of illegally obtained money. Our staff are required to comply with PRC
laws and regulations. When new customers apply to open trading accounts, our staff must
manually check their identities and backgrounds. Staff members who know, suspect or have
reasonable grounds to believe that a customer might have engaged in money laundering
activities must immediately report the details to the General Compliance Officer and our
Compliance and Risk Management Department.
In addition, we have established a risk-based approach in our customer acceptance policy
which aims to identify those types of customers that are likely to pose a higher than average
risk of money laundering and terrorist financing. This approach is based on a customer due
diligence process that takes into account factors such as the customer’s background, the nature
of its business, its origin or residence, associated persons or entities, its structure of ownership
and any other information that may suggest that the customer presents any risk in respect of
money laundering and terrorist financing.
We have never engaged in or knowingly assisted any money laundering activities. For
risks associated with money laundering activities, please see “Risk Factors – Risks Relating to
Our Business and Industry – We may not be able to fully detect money laundering and other
illegal or improper activities in our business operations on a timely basis.”
Risk Management
We have historically been focused on risk prevention and control in line with our prudent
and conservative investment policies. We have developed dedicated systems for our securities
brokerage, investment banking, asset management and proprietary trading businesses. We have
also built sophisticated risk monitoring systems for new businesses development.
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Principal types of risks inherent to our business include market risk, credit risk, liquidity
risk and operational risk. Market risk includes the risk of price volatility, foreign exchange risk
and interest rate risk, and is associated with the possibility of loss or reduction in income due
to partial or overall changes in the securities market. Credit risk occurs when a borrower or
financing counterparty fails to perform its duties. Liquidity risk relates to whether our assets
in the foreseeable future could repay debt without any loss of value. Operational risk includes
risks involving errors, omissions, imperfect internal processes, incomplete information systems
and transaction failure and fraud, all of which can occur in our businesses.
In accordance with the five-level internal control and risk management structure set forth
above, the Compliance and Risk Management Committee, our General Compliance Officer and
our Compliance and Risk Management Department work together in managing and monitoring
these exposures to ensure appropriate measures are implemented in a timely and efficient
manner.
LEGAL AND REGULATORY
Licensing requirements
We conduct our securities business mainly in the PRC and Hong Kong and are, therefore,
subject to the restrictions and regulatory requirements of the PRC and Hong Kong. Our
Directors and our PRC legal advisors, Grandall Law Firm (Shanghai), confirmed that, during
the Track Record Period and up to the Latest Practicable Date, we have complied with the
relevant PRC regulatory requirements and guidelines in all material respects and obtained all
the important consents and licenses necessary for our operations in accordance with the PRC
laws and regulations. To the best knowledge of our Directors after due inquiry, our Directors
confirm that as of the Latest Practicable Date all of our employees and brokers have obtained
the relevant licenses as required for their business activities. Since our A Share offering in July
2007 and up to the Latest Practicable Date, neither our Company nor any of our Directors have
been subject to auditing or administrative penalty by the CSRC, or been criticized or publicly
reprimanded by the Shanghai Stock Exchange for violations of any listing rules or other
applicable rules.
Due to the licensing regimes of the SFC, some of our Hong Kong subsidiaries must obtain
licenses to conduct their businesses in Hong Kong. These subsidiaries have obtained the
relevant licenses and have been in compliance with the relevant regulatory requirements.
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The following table sets forth a summary of the relevant licenses currently held by our
licensed subsidiaries in Hong Kong:
Type 3 Type 6
Type 2 Leveraged Type 4 Type 5 Advising
Type 1 Dealing in foreign Advising Advising on Type 9
Name of the licensed Dealing in futures exchange on on futures corporate Asset
subsidiaries securities contracts trading securities contracts finance management
HFT Investment Management
(HK) Limited
Hai Tong Asset Management
(HK) Limited
Hai Tong Capital (HK)
Limited
Haitong International Asset
Management Limited
Haitong International Capital
Limited
Haitong International
Consultants Limited
Haitong International Futures
Limited
Haitong International
Investment Managers
Limited
Haitong International
Investment Services Limited
Haitong International Research
Limited
Haitong International
Securities Company Limited
Our Directors confirmed that, during the Track Record Period and up to the Latest
Practicable Date, we had complied with the relevant Hong Kong regulatory requirements and
guidelines in all material respects and obtained the permits and licenses necessary for our
operations in accordance with Hong Kong’s laws and regulations.
Legal proceedings
We are a party to a number of legal proceedings arising in the ordinary course of our
business. As of the Latest Practicable Date, we had four interrelated pending legal proceedings,
each with a potential claim amount of RMB5 million or above, and as far as our Directors are
aware, the potential maximum claim amount of these four interrelated proceedings was
approximately RMB26.8 million (excluding interest) in the aggregate. We summarize these
four interrelated pending proceedings below:
Our former branch office in Hubei Province and our Zhongbei Road and Jiangda Road
brokerage branches were defendants in four interrelated legal proceedings in connection with
tort claims arising from a stock trading dispute with an aggregate claim amount of
approximately RMB53.1 million (excluding interest). In March 2009, the Higher People’s
Court of Hubei delivered a final judgment in favor of the plaintiffs and ordered us to pay
approximately RMB26.3 million (excluding interest) to the plaintiffs. We have fulfilled the
court judgment and reflected the claim expenses in our financial statements accordingly.
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Recently, the PRC Supreme People’s Court received a formal protest filed by the PRC Supreme
People’s Procuratorate against the final judgment delivered by the Higher People’s Court of
Hubei in connection with these four interrelated proceedings, citing erroneous application of
the law. After reviewing the merits of the protest, the PRC Supreme People’s Court issued a
summons in November 2011 to the original defendants requiring them to appear in the PRC
Supreme People’s Court. In the event the PRC Supreme People’s Court issues an adverse
judgment against us, we may face an aggregate maximum claim amount of approximately
RMB26.8 million (excluding interest).
As of the Latest Practicable Date, the aggregate outstanding claim or judgment amount
of our pending legal proceedings (including the four material pending proceedings discussed
above and other immaterial proceedings) amounted to approximately RMB27.2 million, which
is less than 1% of the profit attributable to the owners of the Company in 2011. Our Directors
and PRC legal advisors confirmed that, as of the Latest Practicable Date, none of the legal
proceedings to which we were a party, individually or in the aggregate, would have a material
effect on our business, financial condition or results of operations.
Regulatory non-compliances
We are subject to a number of regulatory requirements and guidelines issued by the
regulatory authorities in the PRC, Hong Kong and Macau (including but not limited to the
CSRC, the Shanghai Stock Exchange, the Hong Kong Stock Exchange, the SFC and their
respective local branches and offices (if applicable)).
We or our employees have, from time to time, been involved in incidents of regulatory
non-compliance and received related notices or warnings from the relevant regulatory
authorities. Based on the nature of the cases, we classify the incidents of regulatory
non-compliance committed by us and our employees into the following three categories: (i)
non-compliance incidents that led to administrative penalties; (ii) non-compliance incidents
that led to regulatory measures and the deduction of regulatory points; and (iii) employee
non-compliance incidents.
Our Directors and our PRC legal advisors confirm that the regulatory non-compliance
incidents disclosed in this prospectus are not significant to our business operations and did not
have any material adverse effect on our business, financial condition and results of operations.
Our Directors also confirm that none of our existing Directors or members of our senior
management were involved in any regulatory non-compliance incidents.
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BUSINESS
Non-compliance incident that led to administrative penalties
We set out below the details of our non-compliance incident that led to the administrative
penalties during the Track Record Period and up to the Latest Practicable Date and the primary
remedial measures we adopted:
Brief explanation and
Non-compliance incident our primary remedial measures
In December 2008, the PBOC After our investigation, we found that this incident
Taiyuan Branch imposed an was caused by the introduction of a new PBOC
administrative penalty on our regulation that became effective in 2007 and required
Xinjianlu Branch in Taiyuan, the collection of customer identification information
Shanxi for its failure to obtain in account opening procedures which was not
customer identity information otherwise required by the SAC prior to 2007. We
(such as occupation) in relation promptly revised our account opening procedures and
to agency agreements entered handled our customer account opening in accordance
into for our securities brokerage with this new regulation after 2007. For our
business. This failure required customers who opened their brokerage accounts
prompt remediation and before the new regulation, we attempted to collect all
payment of a fine of their missing identification information. However,
RMB50,000. Two responsible due to our failure to reach some of our existing
officers were also fined a total customers, or their inability to provide necessary
of RMB8,000. information in a timely manner, some customers’
identification information was still missing by the
time the regulator conducted its regulatory
investigation on us.
Immediately after the incident, we reviewed our
account opening policies to ensure that they were
fully compliant with the PBOC requirements. We
have also adopted the following remedial measures:
(i) proactively contacted our customers to obtain
missing information through various channels,
including mailing notices and publishing notices in
the local newspapers; and (ii) suspended all fund
transfers from customers’ securities accounts to bank
accounts if we found that the account holder’s ID
card recorded in our system had expired for more
than three months.
We did not receive any follow-up comments from the
regulator in connection with this incident. As of the
Latest Practicable Date, we have collected the
identification information from substantially all of
our retail brokerage customers and are currently
attempting to obtain the missing information from the
remaining customers.
Our PRC advisors confirmed that, apart from the non-compliance incident disclosed
above, there were no other regulatory non-compliance incidents that led to material monetary
fines or administrative penalties during the Track Record Period and up to the Latest
Practicable Date.
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BUSINESS
Non-compliance incidents that led to regulatory measures and the deduction of regulatory
points
We set out below the details of non-compliance incidents that led to regulatory measures
and the deduction of regulatory points imposed by the CSRC during the Track Record Period
and up to the Latest Practicable Date and the primary remedial measures we adopted in
response to these incidents:
Brief explanation and
Non-compliance incidents our primary remedial measures
In March 2006, our Youhaobei We closed this unauthorized sub-branch when the
Road Branch in Urumqi opened PRC securities market was at an early stage of
a sub-branch to conduct comprehensive regulation and supervision and the
securities brokerage business in CSRC required unauthorized securities brokerage
Karamay City, Xinjiang prior to branches of all PRC securities firms to be closed. In
receiving authorization from the addition, we made proper arrangements with our
CSRC. We received a warning customers affected by the closure of this sub-branch.
letter from the Xinjiang
Securities Regulatory Bureau in We reviewed our internal control procedures on
2008 in relation to our branch opening and strengthened our internal
unauthorized branch-opening measures for the administration of brokerage
incident in 2006. branches in September 2006 and 2009. Our revised
measures require, among other things, our internal
committee to conduct a more comprehensive
approval process and review all necessary approvals
and permits before we open a brokerage branch to
ensure that we are in compliance with the relevant
regulations in the PRC.
Since this incident, we have found no occurrence of
similar incidents nor have we received any similar
warning letter from the regulators. According to our
PRC legal advisors, all the securities brokerage
branches we opened have received the relevant
approvals and permits as of the Latest Practicable
Date.
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BUSINESS
Brief explanation and
Non-compliance incidents our primary remedial measures
In December 2008, the Zhejiang After we were notified by the regulator about this
Securities Regulatory Bureau incident, we reviewed our existing internal control
found our Baiguan Branch in procedures that are designed to (i) prevent our
Shangyu to have violated the brokerage branches from outsourcing their customer
applicable CSRC rules by (i) acquisition function to third-party agents; and (ii)
having opened brokerage require regular reviews of brokerage accounts and
accounts without funds or timely liquidation. Also, we have existing internal
securities; (ii) acquiring policies regulating the qualifications of our sales
customers from third-party personnel. We have found these internal control
agents and sharing commission procedures to be adequate. After our internal
received with those institutions; investigation, we concluded that this incident was
and (iii) recruiting over 20 caused by this brokerage branch’s negligence in
college students without breaching our internal policies.
appropriate qualifications to
engage in sales. In addition, as part of our on-going compliance
practice, we also regularly publicize the qualification
of our securities brokers online to increase
transparency and promote public awareness of our
qualified sales personnel and require our securities
brokers to attend 60 hours of training before they join
our sales team.
We adopted the following remedial measures
immediately after this incident: (i) terminated our
relationship with our third-party sourcing agents; (ii)
dismissed unqualified sales personnel and only
allowed our head office to select and approve
internships for sales personnel; (iii) designated a
special team to continuously monitor and liquidate
dormant brokerage accounts without funds or
securities; (iv) improved our compliance review
system for our brokerage branches; and (v) degraded
the internal rating of Baiguan Branch and publicized
this decision among our Group according to our
disciplinary policy.
We also submitted a report to the Zhejiang Securities
Regulatory Bureau to explain those remedial
measures we adopted.
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BUSINESS
Brief explanation and
Non-compliance incidents our primary remedial measures
In December 2009, our After we were notified by the regulator about this
Youhaobei Road Branch in incident, we reviewed our internal control procedures
Urumqi received a warning and found that they were adequate. After internal
letter from the Xinjiang investigations, we concluded that this incident was
Securities Regulatory Bureau in caused by this brokerage branch’s negligent breach of
connection with the content of our internal policies on publishing marketing
its fund marketing materials, which require a branch manager to draft an
advertisement published in local advertisement and then submit it to the branch
newspapers, which was found to director for approval.
be non-compliant with relevant
fund marketing regulations in We took the following remedial measures
the PRC. immediately after this incident: (i) published a
correction announcement before the actual fund sale,
which did not negatively affect our customers; and
(ii) provided a special training session to all sales
personnel at Youhaobei Road Branch on the
marketing of fund products.
Since this incident and up to the Latest Practicable
Date, we have found no occurrence of similar
incidents nor have we received any similar warning
letters from regulators.
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BUSINESS
Brief explanation and
Non-compliance incidents our primary remedial measures
In April 2010, the Shenzhen After we were notified by the regulator about this
Securities Regulatory Bureau incident, we reviewed our internal control procedures
found our Shenzhen in relation to the administration of non-compliant and
Honglingnan Road Branch to dormant accounts and the monitoring of over-the-
have sold customers’ stocks counter brokerage transactions and found that they
without proper customer consent were adequate. After internal investigations, we
in connection with closing concluded that this incident was caused by this
inactive accounts and failure to brokerage branch’s unauthorized liquidation of
keep certain trading records, approximately 450 accounts with inactive trading
which violated relevant records for more than three years, worth
regulations in the PRC. The approximately RMB0.5 million in total. We recorded
Shenzhen Securities Regulatory the liquidated funds as accounts payable and made
Bureau met our responsible appropriate provisions. According to the policies
officers and urged them to adopted by Shenzhen Honglingnan Road Branch,
rectify the situation. We once the staff at this branch is able to contact those
received a regulatory notice in inactive account holders, those customers are entitled
May 2010. to receive their accounts’ liquidated value or their
current market value, whichever is higher.
Immediately after this incident, we conducted a
comprehensive review of our brokerage accounts and
adopted a series of measures to further strengthen our
supervision over the business activities of our
brokerage branches. We also enhanced our internal
accountability systems. In response to the liquidation
of dormant accounts, we have reserved a special fund
to cover potential customer claims.
Since this incident, this branch has not encountered
any customer dispute over the liquidation of dormant
customers’ accounts up to the Latest Practicable
Date.
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BUSINESS
Brief explanation and
Non-compliance incidents our primary remedial measures
In October 2010, the Shenzhen After our investigation, we found this incident to be
Securities Regulatory Bureau caused by the fact that some of our brokerage
issued a regulatory letter to our customers have, against our prior warnings,
Huafu Road Branch in voluntarily disclosed their transaction passwords to
Shenzhen which identified that their relationship managers and further requested the
we improperly operated managers to execute transactions on their behalf.
customers’ accounts and
employed unqualified personnel After we were notified by the regulator about this
to engage in sales and incident, we reviewed our internal control procedures
marketing, and required this and found them to be adequate. We reminded our
branch to rectify the situation. brokerage customers of the risks of releasing their
account passwords to third parties when they opened
their accounts with us. We have an IT monitoring
system that tracks any multi-account brokerage
transactions executed on the same IP address. Once
the system detects such a transaction, our system will
send a confirmation notice to our customer for due
authorization. In addition, as part of our ongoing
compliance practices, we regularly publicize the
qualification of our securities brokers online to
increase transparency and promote public awareness
of our qualified sales personnel and our requirement
that securities brokers attend 60 hours of training
before they join our sales team.
Immediately after the incident, we adopted the
following remedial measures: (i) promptly formed a
rectification team and a cross-department supervision
team to conduct a thorough review of our branch
network’s operating systems in order to improve our
compliance practices; and (ii) prohibited the
installation of any trading software on employees’
work stations at this branch.
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BUSINESS
Brief explanation and
Non-compliance incidents our primary remedial measures
We submitted a report to the Shenzhen Securities
Regulatory Bureau to explain the remedial measures
we adopted.
According to our disciplinary policy, we degraded the
internal rating of Huafu Road Branch and announced
this decision within our Group.
In addition to the primary remedial actions we adopted immediately after each incident
was reported, we implemented other general remedial and rectification measures to prevent
future occurrence of such incidents and received no follow-up comments from the relevant
regulatory authorities. These measures include, among other things:
prompt revision of our internal policies and procedures;
strict internal inspection and examination; and
enhanced staff training and a strict internal sanction mechanism.
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BUSINESS
Employee non-compliance incidents
We set out below the details of our employee non-compliance incidents in which our
employees received formal warning letters from the regulatory authorities during the Track
Record Period and up to the Latest Practicable Date and the primary remedial measures we
adopted:
Brief explanation and
Non-compliance incidents our primary remedial measures
In June 2009, the Shenzhen The responsible sponsor representatives involved in
Stock Exchange publicly these two incidents carefully considered the issues
reprimanded our two sponsor raised in the reprimand and submitted written reports
representatives for not advising to the Shenzhen Stock Exchange.
Zhejiang Dadongnan Packaging
Co., Ltd. to fulfill its ongoing Although the Shenzhen Stock Exchange’s reprimand
compliance obligations in only applied to the sponsor representatives
connection with the themselves, we adopted a series of remedial measures
misappropriation of funds by to improve our internal control systems for
the controlling shareholders of sponsorship and other investment banking activities.
Zhejiang Dadongnan Packaging These measures include the following: (i) in August
Co., Ltd. and its failure to 2011, we issued detailed internal guidance on
comply with proper vetting continuous supervision of our listed clients. We also
procedures and disclosure prepared various types of documentation templates
obligations. for our sponsorship and other investment banking
activities; (ii) we required our employees to carefully
In September 2010, the study and comply with our internal guidance on
Shenzhen Stock Exchange continuous supervision of listed clients; and (iii) we
publicly reprimanded our two prepared comprehensive training materials for our
sponsor representatives for not listed clients during their two-year supervision
advising Shandong Jining Ruyi periods.
Woolen Textile Co., Ltd. to
fulfill its ongoing compliance
obligations in connection with
its non-compliance with
relevant vetting procedures and
its obligations to disclose daily
transactions by Shandong Jining
Ruyi Woolen Textile Co., Ltd.
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BUSINESS
Brief explanation and
Non-compliance incidents our primary remedial measures
In June 2011, in connection with The responsible sponsor representatives carefully
the follow-on offering of Shanghai considered the issues raised in the warning letter and
Shyndec Pharmaceutical Co., Ltd., submitted explanatory reports to the CSRC.
the CSRC issued a warning letter
to our two sponsor representatives After we were notified by the regulator about this
for their failure to conduct incident, we promptly conducted an internal review.
adequate due diligence on the In March 2011, we withdrew our sponsorship in
issuer’s financial and accounting connection with the follow-on offering of Shanghai
matters. Shyndec Pharmaceutical Co. Ltd.
Although the CSRC’s warning only applied to the
sponsor representatives themselves, we adopted a
series of remedial measures to improve the internal
control system for our sponsorship and investment
banking activities. These measures include the
following: (i) in addition to requiring all of our
sponsor representatives to attend professional
training organized by the SAC, in August 2011, we
provided internal training to all of our investment
banking employees regarding key issues arising from
the sponsorship and other investment banking
activities; (ii) we required our sponsor
representatives to strictly comply with relevant PRC
regulations and our internal rules on sponsorship and
other investment banking activities, particularly
those related to due diligence investigation on the
issuer’s financial and accounting matters; and (iii) we
designated a special team to review for a second time
the documentation prepared by our sponsor
representatives for regulatory approvals, perform
substantive analysis and suggest remedial plans on
existing matters in our sponsorship activities and
conduct on-site inspections, if necessary.
As part of our on-going practice, we review the performance of our sponsor
representatives on a regular basis. We downgraded the performance rating of the responsible
sponsor representatives involved in these incidents and submitted the results to the CSRC. As
of the Latest Practicable Date, we and the relevant sponsor representatives have not received
any follow-up comments from the relevant regulatory authorities in connection with these
incidents.
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BUSINESS
Regulatory inspections
The regulatory authorities, such as the CSRC and the SFC, carry out periodic or ad hoc
inspections, examinations and inquiries in respect of our compliance with the laws, regulations,
guidelines and regulatory requirements applicable to us and our business.
During the Track Record Period and up to the Latest Practicable Date, the CSRC and its
local offices and bureaus carried out routine or ad hoc inspections of our Group covering,
among other things, risk management and internal controls, corporate governance and business
line specific areas, including our securities brokerage business (including the practice and
management of our brokerage branches), futures brokerage business, futures IB business,
margin financing and securities lending business and direct investment business. Certain
inspections, although not resulting in fines or other penalties, have revealed deficiencies and
weaknesses in our business operations, risk management and internal controls, and we took
immediate remedial measures and enhanced our risk management and internal control systems
in response to the CSRC’s recommendations. Recent examples of these inspections are as
follows:
In September 2011, the Shanghai Securities Regulatory Bureau conducted a
comprehensive on-site inspection on our business, including, but not limited to, our
securities and futures brokerage, investment advisory, research report issuance and
proprietary trading businesses, and on November 13, 2011, the bureau provided
recommendations in its regulatory opinion with respect to (i) our internal control
policy regarding the minimum retention period for the records of customer
complaint phone calls; (ii) our investment advisory platform and stock pick text
messaging practice; (iii) our internal control policy for authorizing proprietary
trading of fixed income securities; and (iv) a stop-loss mechanism that should be
established for our proprietary trading of fixed income securities. We took
immediate remedial measures by (i) lengthening our minimum retention period for
the recordings of customer complaint phone calls from two years to five years; (ii)
imposing penalties on the relevant staff and the brokerage branches that violate our
investment advisory and stock pick message policy; designating staff to conduct
monthly review of the stock pick messages posted by each investment advisor on its
online investment advisory board; and requiring each investment advisor to
complete a mandatory stock advisory form after sending stock pick messages to its
clients, an activity which can only be performed by qualified investment advisors;
(iii) strictly following our internal authorization procedures from 2012 onwards for
all of our proprietary trading activities; and (iv) revising our internal control and risk
management system to specifically provide for a stop-loss mechanism for
proprietary trading of fixed income securities. On December 15, 2011, we submitted
a rectification report to the Shanghai Securities Regulatory Bureau, which did not
raise any follow-up comments on our remedial measures nor the rectification report.
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BUSINESS
In August 2011, the Shanghai Securities Regulatory Bureau conducted an on-site
inspection of our direct investment business. Such bureau did not find any instances
of material regulatory non-compliance but provided some recommendations in its
regulatory opinion to address the internal control weaknesses in our direct
investment business with respect to (i) management of conflicts of interest; (ii)
information disclosure practices; and (iii) management of investment risks. We took
immediate remedial measures by (i) reinforcing our internal compliance manual on
conflicts of interest which we required our relevant staff to endorse; (ii) updating the
information on our corporate website with respect to (a) our various management
systems for our direct investment business; (b) our arrangements for preventing
conflicts of interest between Haitong Capital Investment and our Company; and (c)
our complaint and reporting procedures; and (iii) requiring Haitong Capital
Investment to cease its online subscription for IPO and liquidate all shares it bought
immediately and preventing Haitong Capital Investment from conducting similar
transactions in the future. Subsequent to this inspection, we submitted a rectification
report to the Shanghai Securities Regulatory Bureau, which did not raise any
follow-up comments on our remedial measures nor the rectification report.
In 2011, local securities regulatory bureaus conducted ad hoc onsite inspections of
our securities brokerage branches in Shandong, Yunnan and Liaoning provinces, and
issued several regulatory opinions, which provided that (i) adequate security
measures should be implemented on our office computers to monitor brokerage
trading; (ii) certain information regarding the legal representative of an institutional
client was incomplete; (iii) some of our branches in Yunnan province have a high
rate of inactive accounts with little or no balance; (iv) some branches should
enhance their account-opening standards to comply with our internal control policy;
and (v) our branches should confirm the applicable securities commission rate with
each new client upon account opening and file commissions charged on each client
with the SAC. We took immediate remedial measures by (i) creating administrator
accounts for our IT staff and general accounts for our brokerage employees, and
requiring our brokerage employees to strictly operate on pre-installed software and
prohibiting them from installing other software such as those that are securities
trading-related; (ii) immediately following up for the incomplete information on the
legal representative; (iii) we have designated staff to communicate with inactive
accounts holders and cancel those accounts if the holders express no intention for
brokerage trading and allow securities accounts that are not traded for over three
years to go dormant before automatic cancelation; (iv) according to our internal
inspection, the limited account opening information in certain institutional accounts
was due to our branch’s lack of standardized client information tracing system in the
early phase of development and replied primarily on information furnished by
clients themselves, and such branch is enforcing its policy to verify and track client
information to ensure accuracy; and (v) although the Liaoning Securities
Association currently does not require securities branches to provide written
confirmation on commission rate for new clients and we used to provide oral
confirmation, however, going forward, we will file our confirmation letter on
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BUSINESS
commission rate for new clients with the Liaoning Securities Regulatory Bureau and
the Liaoning Securities Association and send such written confirmation to new
clients after approval by local securities authorities. Subsequent to the above
inspections, we submitted rectification reports to the relevant securities regulatory
bureaus in Shandong, Yunnan and Liaoning, which did not raise any follow-up
comments on our remedial measures nor the rectification report.
In 2010 and 2011, the SFC conducted inspections of Haitong International Capital
Limited, Haitong International Consultants Limited, Hai Tong Capital (HK) Limited and Hai
Tong Asset Management (HK) Limited. For the inspection of Haitong International Capital
Limited, no exceptions were noted. For the inspection of Haitong International Consultants
Limited, the SFC raised queries regarding its selling practices, and this subsidiary satisfactorily
responded to the queries. For the inspection of Hai Tong Capital (HK) Limited and Hai Tong
Asset Management (HK) Limited, the SFC raised several recommendations regarding their
internal policies and systems, and they have implemented improvements and remedial
measures in accordance with the SFC’s recommendations. The SFC did not raise any follow-up
comments on these remedial measures adopted by these subsidiaries in Hong Kong.
Our Directors confirm that, except as disclosed in the section entitled “– Legal and
Regulatory – Regulatory non-compliance,” there were no other material regulatory
examination findings or material incidents of regulatory non-compliance during the Track
Record Period and up to the Latest Practicable Date.
MAJOR CLIENTS
We serve a diverse base of institutional and retail clients across a spectrum of sectors. Our
key clients range from large corporations and SME clients to high net worth individuals and
retail customers. Our clients are primarily located in the PRC. We expect to serve more
overseas clients as we seek to further expand our overseas operations.
For each of years ended December 31, 2009, 2010 and 2011, our revenue attributable to
our five largest clients accounted for less than 30% of our total revenue and other income.
To the knowledge of our Directors, none of our directors, supervisors, their respective
associates or any shareholders holding more than 5% of our issued share capital has any
interests in any of our five largest clients as of the Latest Practicable Date.
We have no major suppliers due to the nature of our business.
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BUSINESS
INFORMATION TECHNOLOGY
Our IT system has been an integral part of our operations since our inception. Our IT
system consists of three key components: front office, middle office and back office systems
that generally cover transaction management, customer service and internal management. Our
IT system serves not only as an integral part of our operations, but also our business
development platform. Our IT system utilizes products provided by IBM, HP, CISCO and other
leading IT system providers. We incur IT-related capital expenditures mainly for the purchase
of systems and software. For the years ended December 31, 2009, 2010 and 2011, such
expenditures amounted to RMB132.5 million, RMB192.5 million and RMB167.0 million,
respectively. We believe our well-developed IT system will improve our operational efficiency
and transaction management, customer service and quality of internal management.
Our IT system has three key features that distinguish us from our competitors. On
transaction management, our system is among the best in terms of processing capacity. Our IT
system can process the transactions on a real-time basis in a timely and cost-efficient manner,
which facilitates new businesses development and promotion. In addition, our IT system assists
management to gain a better understanding of our products’ profitability. On customer service,
we are committed to meeting our customer needs through diversified channels, including but
not limited to online transactions, mobile transactions and SMS platforms. Our system is able
to accommodate over 400,000 customers trading online and provide all the necessary
transactions and related information at the same time to support the trading process operating
at full capacity. In addition, the internal risk management modules of our system can identify
risks promptly and obtain detailed risk-related data in order to respond to the risks imposed in
a timely and succinct fashion. Meanwhile, our IT system allows us to standardize our internal
procedures. As such, it facilitates our record-keeping, improves our reliability and enhances
our communication and operational efficiency. Our system also allows us to have a better
understanding of our financial position. We adopt multiple layers of security measures,
including firewalls and digitalized verification and intrusion prevention systems, in order to
achieve our network security. During the Track Record Period, we did not experience any
material malfunctions in our IT system.
COMPETITION
The PRC securities industry is highly competitive. We believe that competition in the
PRC securities industry is based on the following principal factors:
the range of products and services offered;
pricing;
customer service;
network coverage;
marketing and distributing capacities;
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BUSINESS
perceived financial strength; and
brand recognition.
For our securities brokerage business, we compete primarily with other PRC securities
firms, including CITIC Securities International Company Limited, China Galaxy Securities
Co., Ltd., the Guotai Junan Securities Co., Ltd, Guosen Securities Co., Ltd., China Merchants
Securities Company Limited, Everbright Securities Company Limited, and Guangfa Securities
Company Limited, in terms of pricing and the range of products and services offered.
Currently, there are more than 100 registered securities firms in the PRC and intense price
competition in recent years has lowered commission rates for our securities brokerage
business.
For our investment banking business, we compete primarily with other PRC and
Sino-foreign joint venture securities firms as well as PRC commercial banks in terms of brand
recognition, marketing and distribution capacity, service quality, execution capacity, financial
strength and pricing.
For our asset management business, we compete primarily with fund management
companies, banks, insurance companies and other financial institutions in the PRC in terms of
the range of products and services offered, pricing and quality of customer service.
For our direct investment business, we compete primarily with other PRC securities firms
that are qualified to conduct direct investment business, as well as private equity investment
companies qualified for direct investment business.
Some of our competitors may enjoy certain competitive advantages, including greater
financial resources, more sophisticated management experience and advanced IT systems,
wider geographic coverage and the ability to offer more financial products and services than
us.
In addition, with regulatory changes and other factors that contribute to the gradual
relaxation of the PRC securities regulations, more competitors are seeking to enter or expand
in the market. We believe that the securities industry in China is becoming increasingly
competitive. Our failure to maintain a competitive position to compete successfully against our
competitors may materially and adversely affect our business, financial position, results of
operations and prospects.
Please see “Risk Factors – Risks Relating to Our Business and Industry – We face intense
competition and our business could be materially and adversely affected if we are unable to
compete effectively.”
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BUSINESS
EMPLOYEES
As of December 31, 2009, 2010 and 2011, we had 8,050, 7,638 and 7,294 employees who
entered into labor contracts (excluding securities brokers and part-time employees),
respectively. The following table sets forth a breakdown of all our employees with labor
contracts as of December 31, 2011:
Number Percentage
Securities and futures brokerage . . . . . . . . . . . . . . . . . . . 4,823 66.1%
Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 4.8%
Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 3.6%
Proprietary trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 0.5%
Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 0.4%
Overseas business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 872 12.0%
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 923 12.6%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,294 100.0%
Our core staff are generally young and well-educated. As of December 31, 2011, most of
our employees are 35 years old or younger, accounting for approximately 62.4% of the total
number of employees. At the same date, we have 5,377 employees holding bachelor’s degrees
or above, accounting for approximately 73.7% of the total number of employees. The
performance of our employees is key to our success. In order to ensure their sustainable
contribution to our business, we offer professional training to our employees on a regular basis.
The table below sets forth the breakdown of educational backgrounds and ages of our
employees as of December 31, 2011:
Item Number Percentage
Educational background . . . . . . Doctor’s degree 101 1.4%
Master’s degree 1,155 15.8%
Bachelor’s degree 4,121 56.5%
Junior college graduate and
below 1,917 26.3%
Total 7,294 100.0%
Age distribution . . . . . . . . . . . 35 or below 4,549 62.4%
36 to 50 2,422 33.2%
51 or above 323 4.4%
Total 7,294 100.0%
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BUSINESS
We have not experienced any strikes or other material labor disturbances that have
interfered with our operations to date and we believe that our management, the labor union and
employees have maintained good relationships with each other. On January 18, 2011, we
entered into a collective labor contract with the labor union representing our employees, which
has an initial term of six months, subject to automatic renewals. The labor contract provides,
among other things, that:
our employees shall in general work not more than eight hours per day and not more
than 40 hours per week, subject to limited circumstances where such restriction is
not suitable due to the nature of an employee’s work;
we will provide our employees paid annual vacation days based on the length of
their employment;
our employees are entitled to receive fixed monthly salaries and performance-based
bonuses;
we are obligated to contribute to employee housing fund and pay for basic social
insurance premiums on a monthly basis;
our employees are entitled to receive additional welfare treatments, such as
supplementary medical insurance and housing subsidies, subject to our annual
economic performance; and
we will provide no less than 40 hours of training annually, which shall include 15
hours of advanced training for securities professionals.
PROPERTIES
Owned Properties
As of December 31, 2011, we owned 92 properties in the PRC with an aggregate gross
floor area of approximately 136,217 square meters, and two properties in Hong Kong with an
aggregate gross floor area of approximately 656 square meters.
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BUSINESS
The following table sets forth the breakdown of our 92 owned properties in the PRC by
provinces and municipalities as of December 31, 2011:
Number of
Provinces and Municipalities Properties
Shanghai . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Jiangsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Guangdong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Shandong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Jilin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Guizhou . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Chongqing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Liaoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shaanxi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Beijing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Zhejiang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Hainan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Sichuan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Heilongjiang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Hebei. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Jiangxi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Gansu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Henan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Yunnan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our owned properties are primarily used for business and office purposes, with a range
of gross floor area from approximately 39 square meters to 10,395 square meters. In addition,
we have a small number of owned properties being used for residential and warehouse
purposes, with a range of gross floor areas from approximately 84 square meters to 135 square
meters and a range of gross floor area from approximately 97 square meters to 559 square
meters, respectively.
As of December 31, 2011, among the properties we owned, we have not obtained proper
building ownership certificates and/or land use certificates for 29 properties in the PRC with
a gross floor area of approximately 32,805 square meters, representing 24.1% of the aggregate
gross floor area of our owned properties. Among these properties:
We have obtained the relevant building ownership certificates and administrative
allocated land use rights certificates in respect of nine properties with a gross floor
area of approximately 7,221 square meters, representing 5.3% of the aggregate gross
floor area of the properties that we owned. We have been advised by Grandall Law
Firm (Shanghai), our PRC legal advisors, that we can legally occupy and use the
above properties, but our rights to transfer, lease, mortgage or dispose of such
properties are restricted unless we obtain the granted land use rights certificates by
paying the relevant land use premiums. We currently have not entered any definitive
agreements to transfer, lease, mortgage or dispose of these properties and,
accordingly, we are not required to pay the relevant land use premiums in the near
term. We are unable to ascertain the relevant land use premiums until, and if, we
– 270 –
BUSINESS
apply for rights to transfer, lease, mortgage or dispose of the above properties.
However, we believe that the payment of any such land use premiums, if required,
will not have a material effect on our business or financial condition.
We have obtained the building ownership certificates, but have not obtained the land
use rights certificates in respect of 16 properties with a gross floor area of
approximately 18,642 square meters, representing 13.7% of the aggregate gross
floor area of the properties that we owned. We have been advised by our PRC legal
advisors that we can legally occupy, use and lease the above properties, but our
rights to transfer, mortgage or dispose of such properties are restricted unless we
obtain the relevant land use rights certificates or the approval of the third parties
holding such land use rights certificates. We currently have not entered any
definitive agreements to transfer, mortgage or dispose of these properties and,
accordingly, we are not required to pay the relevant land use premiums in the near
term. We are unable to ascertain the relevant land use premiums until, and if, we
apply for rights to transfer, lease, mortgage or dispose of the above properties.
However, we believe that the payment of any such land use premiums, if required,
will not have a material effect on our business or financial condition. We are in the
process of applying for the relevant land use rights certificates.
We have not obtained the building ownership certificates and land use rights
certificates in respect of four properties with a gross floor area of approximately
6,942 square meters, representing 5.1% of the aggregate gross floor area of the
properties that we owned. While we are unable to ascertain when the relevant land
and property management authorities will grant us the relevant title certificates, we
are using our commercially reasonable efforts to obtain the relevant title certificates
for all of such properties. In the event we are unable to obtain such title certificates
and are required to relocate, we may incur additional relocation costs, which we
believe would not have a material impact on our business or financial condition.
Our Directors believe that the above 29 owned properties with defective titles are not
crucial to, and will not have a material impact on our operations because (i) we have obtained
the relevant valid building ownership certificates and/or land use rights certificates for a
majority of our owned properties, representing 75.9% of the aggregate gross floor area of our
owned properties; (ii) for 25 of the defective owned properties, we have been advised by our
PRC legal advisors that we can legally occupy, use and/or lease the properties and, therefore,
there is no impact on our business or financial condition; (iii) with respect to the remaining
four defective owned properties, if necessary, we would be able to replace such properties with
comparable alternative buildings without any material adverse effect on our operations; and
(iv) a majority of our securities and futures brokerage branches are located on leased
properties.
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BUSINESS
Leased Properties
As of December 31, 2011, we leased 279 properties in the PRC with an aggregate gross
floor area of approximately 252,710 square meters, and 29 properties in Hong Kong and two
properties in Macau with an aggregate gross floor area of approximately 13,772 square meters.
Our leased properties are primarily used for business and office purposes, with a range of gross
floor area from approximately 12 square meters to 5,351 square meters. In addition, as of
December 31, 2011 we have two leased properties being used for residential and warehouse
purposes, with a gross floor area of 583 square meters and 45 square meters, respectively.
The following table sets forth the information relating to our total rental expenses and
average monthly rental expenses for each of the periods indicated:
Year ended December 31,
2009 2010
(RMB in millions)
Total rental expenses . . . . . . . . . . . . . . . . . . . . . . . . 125.0 194.4 234.6
Average monthly rental expenses . . . . . . . . . . . . . . . . 10.4 16.2 19.6
For our leased properties in the PRC, as of December 31, 2011, our landlords had not
obtained proper ownership certificates for 34 buildings with a gross floor area of
approximately 33,509 square meters, representing 13.3% of the aggregate gross floor area of
the buildings we leased. Of these 34 buildings, our landlords of 11 buildings, accounting for
3.0% of the aggregate gross floor area of the buildings we leased, had not agreed to indemnify
us for any potential liabilities we would incur as a result of the title defects. However, we have
been advised by our PRC legal advisors that we will have the right to seek compensation from
the lessors pursuant to the relevant lease agreements or confirmation letters from relevant
lessors. We are of the view that most of these leased properties we occupy can, if necessary,
be replaced by other comparable alternative premises without any material adverse effect on
our business or financial condition.
According to section 6(2) of the Companies Ordinance (Exemption of Companies and
Prospectuses from Compliance with Provisions) Notice, this prospectus is exempted from
compliance with the requirements of section 342(1)(b) of the Companies Ordinance in relation
to paragraph 34(2) of the Third Schedule to the Companies Ordinance, which require a
valuation report with respect to all our company’s interests in land or buildings, for the reason
that as of December 31, 2011, the carrying amount of all the owned properties of our company
represented approximately 0.7% of the value of our total assets and the leased properties are
considered to have no commercial value.
Our Directors confirm that none of our property interests is individually material to us in
terms of income contribution or rental expense. The carrying amount of the value of the most
valuable single property interest we own is approximately RMB74.1 million, accounting for
less than 0.1% of our total assets.
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CONNECTED TRANSACTIONS
EXEMPT CONTINUING CONNECTED TRANSACTIONS
In our ordinary course of business, we have entered into certain continuing transactions
with BNP BE Group on normal commercial terms in respect of provision of supportive services
(such as document translation and information collection) by certain members of the BNP BE
Group to our Group and securities brokerage services and investment consultancy services by
our Group to certain members of the BNP BE Group.
The historical amounts (where available) of such transactions for each of the three
financial years ended December 31, 2009, 2010 and 2011 are RMB142.8 million, RMB154.5
million and RMB122.4 million, respectively.
BNPP IP BE Holding holds 33.00% of the equity interest in Haitong-Fortis PE
Management, a subsidiary of the Company in which the Company holds 67.00% of its equity
interest. BNPP IP BE Holding also holds 49.00% of the equity interest in HFT Investment
Management, a subsidiary of the Company in which the Company holds 51.00% of its equity
interest. Accordingly, upon the listing of our H Shares on the Hong Kong Stock Exchange,
BNPP IP BE Holding will become a Connected Person of the Company under the Hong Kong
Listing Rules and its associates will also become the Company’s Connected Persons under the
Hong Kong Listing Rules. The transactions between the BNP BE Group and our Group will
constitute continuing connected transaction under the Hong Kong Listing Rules.
Based on the above, the members of the BNP BE Group will be Connected Persons at the
level of the Company’s subsidiaries rather than at the level of the Company. The relevant
percentage ratios in respect of HFT Investment Management and Haitong-Fortis PE
Management as described under Rule 14A.31(9) of the Hong Kong Listing Rules are less than
10% for each of the three financial years ended December 31, 2009, 2010 and 2011. Pursuant
to Rule 14A.31(9) of the Hong Kong Listing Rules, the transactions between the BNP BE
Group and our Group are exempt from the reporting, announcement and independent
shareholders’ approval requirements under Chapter 14A of the Hong Kong Listing Rules.
– 273 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
OVERVIEW
Our Board currently consists of 17 Directors, comprising two executive Directors, nine
non-executive Directors and six independent non-executive Directors. The Directors were all
elected by our Shareholders at the shareholders’ meetings for a term of three years, which is
renewable upon re-election and re-appointment.
Our Supervisory Committee currently consists of 11 Supervisors. Except for the four
employee representative Supervisors elected by the workers’ congress, other Supervisors were
elected by our Shareholders at the shareholders’ meeting for a term of three years, which is
renewable upon re-election and re-appointment.
Save as disclosed in this section, each of the Directors, Supervisors and senior
management personnel has not been a director of any public company the securities of which
are listed on any securities market in Hong Kong or overseas in the three years immediately
preceding the date of this prospectus.
Save as disclosed in this section, none of our Directors are engaged in any businesses
which compete or are likely to compete, either directly or indirectly, with our business under
Rule 8.10(2). The Director(s) who have conflict of interest in certain matters shall abstain from
voting on the resolutions in relation to such matters at the board meeting pursuant to the
Articles of Association of the Company and the relevant PRC and Hong Kong laws and
regulations.
Directors
The following table sets forth information regarding our Directors. All of our Directors
meet the qualification requirements under relevant PRC laws and regulations and the Hong
Kong Listing Rules for their respective positions.
Name Age Position
Mr. Wang Kaiguo (sW ) 53 Executive Director and Chairman
Mr. Li Mingshan (gNf \ ) 59 Executive Director and General Manager
Mr. Qian Shizheng (“\"N e? ) 59 Non-executive Director and Vice Chairman
Mr. Zhuang Guowei (W … ) 57 Non-executive Director
Mr. Zhou Donghui (Thgq ) 42 Non-executive Director
Mr. He Jianyong (OUPeR 49 Non-executive Director
Mr. Zhang Jianwei (_5úPI ) 57 Non-executive Director
Mr. Xu Chao (_on ) 56 Non-executive Director
Mr. Wang Hongxiang (s;ye ) 56 Non-executive Director
Mr. Li Gewei (gN ) 44 Non-executive Director
Mr. Feng Huang (qL ) 41 Non-executive Director
Mr. Xia Bin (Y e ) 60 Independent Non-executive Director
Mr. Chen Qiwei (–st&PI ) 60 Independent Non-executive Director
Mr. Zhang Huiquan (_5àl ) 44 Independent Non-executive Director
Mr. Zhang Ming (_5 ) 53 Independent Non-executive Director
Mr. Dai Genyou (b4h9g ) 62 Independent Non-executive Director
Mr. Liu Chee Ming (R‰×eO ) 61 Independent Non-executive Director
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Executive Directors
Mr. Wang Kaiguo (sW ), aged 53, serves as our Chairman and an executive Director.
Mr. Wang joined our Company in February 1995 as deputy general manager and has been our
Chairman since May 1998. He was appointed as our Director on August 23, 1996. He has over
15 years of management experience in securities industry. Mr. Wang obtained a bachelor’s
degree in economics from Jilin University in July 1984, a master’s degree in economics from
Jilin University in July 1987, and a doctor’s degree in economics from Xiamen University in
July 1990. Mr. Wang is a senior economist recognized by Economics and Accounting Senior
Professional and Technical Title Evaluating Committee* (}og | R } \ imbSwRU
[ YTág ) of Bank of Communications Co., Ltd. in December 1997. Mr. Wang previously
served in various positions in Research Institute of National State-owned Assets
Administration Bureau* (W [ g u\"{t \ x b@ ) from July 1990 to February 1995,
including deputy head of this bureau, mainly in charge of policy research in relation to
state-owned asset management and internal management. He was also director of policy
research office of policy and regulation department of the same bureau from March 1992 to
February 1994, mainly in charge of SOE(s) reform and policy research. Mr. Wang was deputy
general manager of our Company from February 1995 to November 1997 mainly in charge of
investment banking business and financial management, secretary of Communist Party of
China (“CPC”) party group of our Company from November 1997 to December 1998 and
general manager of our Company from November 1997 to May 2001. Mr. Wang has been
secretary of CPC party committee of our Company since December 1998, director of the
Shanghai Stock Exchange since April 1999 and vice president of SAC since July 2002. In
addition, Mr. Wang was a non-executive director of Shanghai Shimao Co., Ltd. (N mwN
Ng – QlS ) from October 2000 to February 2009 (a company listed on the Shanghai Stock
Exchange and its stock code is 600823). Mr. Wang has been a non-executive director of
Shenzhen Development Bank Co., Ltd. (mW3v|ULNg – QlS ) (a company listed on the
Shenzhen Stock Exchange and its stock code is 000001) since June 2006 and an independent
non-executive director of Shanghai Chlor-Alkali Chemical Co., Ltd. (N mwl/S ] g –
QlS ) (a company listed on the Shanghai Stock Exchange and its stock code is 600618) since
December 2009.
Mr. Li Mingshan (gNf \ ), aged 59, serves as our General Manager and an executive
Director. Mr. Li joined our Company in May 2001 and has been our General Manager since
then. He has been our Director since November 28, 2002. He is fully in charge of the overall
management of our operations. He has around 20 years of management experience in securities
industry. Mr. Li graduated from East China Normal University as a post-graduate with a major
in global economics in May 1998 and obtained a master’s degree in business administration
from Asia International Open University (Macau) in September 2000. Mr. Li is a senior
economist recognized by Shanghai Professional Qualification Evaluation Centre* (N mw^ Nw
h
charge of safety and security. Mr. Li was previously vice general manager of Shanghai Shenyin
Securities Co., Ltd. (N mwu3’IR8QlS , predecessor of Shenyin & Wanguo Securities Co., Ltd.
(u3’,W R8Ng – QlS )) from January 1993 to June 1996 and vice general manager of
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Shenyin & Wanguo Securities Co., Ltd. from June 1996 to March 1998, mainly in charge of
brokerage business. Mr. Li was also deputy general manager of the Shanghai Stock Exchange
from March 1998 to May 2001 mainly in charge of communication, trading system and
membership management. Mr. Li was a non-executive director and chairman of Haitong
International Securities from January 2010 to April 2011 and also chairman of Haitong
International Holdings from August 2010 to March 2011. Mr. Li has been deputy secretary of
CPC party committee of our Company since March 2002 and a director of Fullgoal Fund
Management since 2005.
Non-executive Directors
Mr. Qian Shizheng (“\"N e? ), aged 59, serves as our Vice Chairman and a non-executive
Director. Mr. Qian has been our Director and our Vice Chairman since May 30, 2006. Mr. Qian
obtained a bachelor’s degree in economics from Shanghai University of Finance and
Economics in July 1983, and a doctor’s degree in management from Fudan University in July
2001. Mr. Qian lectured in accounting department of Fudan University from September 1983
to December 1997. Mr. Qian joined SIIC in January 1998 and has been vice president since
then mainly in charge of financial management. He has been an executive director and vice
president of Shanghai Industrial Holdings Limited (N mw[imc§g – QlS ) (a company listed
on the Hong Kong Stock Exchange and its stock code is 00363), which is an affiliate of
Shanghai Shangshi 1, since January 2002 (mainly in charge of financial management), an
independent non-executive director of Lonking Holdings Limited (N-W c§g – QlS ) (a
company listed on the Hong Kong Stock Exchange and its stock code is 03339) since February
2005, an independent non-executive director of Zoomlion Heavy Industry Science &
Technology Development Co., Ltd. (N-oybvUNg – QlS ) (a company listed on
both the Shenzhen Stock Exchange and the Hong Kong Stock Exchange and its stock code is
000157 and 01157 respectively) since July 2010 and an executive director of Shanghai
Industrial Urban Development Group Limited (N mw[imW^ | W g – QlS ) (a company
listed on the Hong Kong Stock Exchange and its stock code is 00563) since July 2010.
Mr. Zhuang Guowei (W … ), aged 57, serves as a non-executive Director. Mr. Zhuang
has been our Director since July 16, 2007. Mr. Zhuang obtained a bachelor’s degree in
economics from Party School of the Central Committee of the CPC* (N-QqN-Y.èh!Qcxb )
in December 1994, graduated from Shanghai Academy of Social Sciences as a postgraduate in
economics in January 1996, and obtained a master’s degree in business administration from
Arizona State University in May 2009. Mr. Zhuang is a registered manager* (;Qt ) of
Chinese Registered Career Manager (N-W Qwim}t N” ) recognized by China Enterprises
Evaluation Association (N-W O imUPùSTg ) in 2005. Mr. Zhuang previously served in various
positions in Shanghai Wusi Farm* (N mw^ N”VX4 ) and Shanghai NGS (Group) Wusi
Corporation* (N mwUF–W N”V~QlS ) from July 1984 to August 1999, including general
manager and deputy secretary of its CPC party committee, mainly in charge of management
* For identification purpose only
1
Shanghai Shangshi held 2.94% shareholding in our Company prior to the Global Offering as of the Latest
Practicable Date.
– 276 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
and operations. He was manager of asset operation department of Shanghai NGS (Group)
Corporation (N mw^ UF (–W )~QlS ) from August 1999 to April 2001 and was deputy
general manager of the same company from April 2001 to August 2006, mainly in charge of
corporate management and land and asset management. He was deputy chairman of Shanghai
Urban Agro-Business Co., Ltd. (N mw^ ^ Fy>Ng – QlS ) from June 2001 to February
2003 and chairman of Shanghai HaiBo Co., Ltd. (N mwmwSZNg – QlS ) (a company listed on
the Shanghai Stock Exchange and its stock code is 600708) from February 2004 to April 2009.
In addition, Mr. Zhuang has been vice president of Bright Food (Group) Co., Ltd.2 (QIf T
(–W )g – QlS ) since August 2006 (mainly in charge of corporate management and land and
asset management), chairman of Bright Dairy & Food Co., Ltd. (QIf NsimNg – QlS ) (a
company listed on the Shanghai Stock Exchange and its stock code is 600597) since April
2010, a director of Shanghai HaiBo Co., Ltd. since April 2009 and chairman of NGS Real
Estate (Group) Co., Ltd* (UFb?W0u\" (–W )Ng – QlS ) since December 2011.
Mr. Zhou Donghui (Thgq ), aged 42, serves as a non-executive Director. Mr. Zhou has
been our Director since May 8, 2009. He has over ten years of financial management
experience. Mr. Zhou graduated with a major in accounting from Adult Education College* (b
N”eYxb ) of Fudan University in July 2001. Mr. Zhou is a senior accountant recognized by
State Tobacco Monopoly Administration of PRC* (N-W W [ YI \ ) in December 2007.
Mr. Zhou previously served in various positions in the finance and price department of
Shanghai Tobacco (Group) Company* (N mwqYI(–W )QlS ) (predecessor of Shanghai
Tobacco (Group) Co., Ltd* (N mwqYI(–W )g – QlS )) from July 1991 to October 2000,
including deputy section chief of finance section and deputy section chief of fund and price
section. Mr. Zhou was also deputy manager of finance department of China Tobacco Shanghai
Import & Export Co., Ltd.* (N-W qYIN mw2QúSg – QlS ) from October 2000 to August
2003, manager of that department from August 2003 to October 2008 and was deputy director
of investment management division of Shanghai Tobacco (Group) Company from October
2008 to May 2011. Mr. Zhou has been deputy director of finance management division of
Shanghai Tobacco (Group) Co., Ltd. since May 2011 and a non-executive director of Orient
Securities Company Limited (gqeIR8Ng – QlS ) since May 2009. As Orient Securities
Company Limited is mainly engaged in, among others, securities underwriting, proprietary
trading, investment consultation, financial advisory, enterprise mergers and acquisitions and
asset management, it competes or is likely to compete, either directly or indirectly, with some
aspects of the business of the Company.
2
Bright Food (Group) Co., Ltd. held 5.87% shareholding in our Company prior to the Global Offering as of the
Latest Practicable Date.
– 277 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Mr. He Jianyong (OUPeR), aged 49, serves as a non-executive Director. Mr. He has been
our Director since September 16, 2011. Mr. He obtained a bachelor’s degree in economics from
Northeast Finance Institute in July 1986 and graduated from Liaoning University in December
1999 as a postgraduate (part time) with a major in accounting. Mr. He previously served in
various positions in Liaoning Energy Development Corporation* (w nvQlS ) from
August 1986 to December 1989, including assistant accountant of the finance department and
deputy manager of the energy-efficient product distribution department, mainly in charge of
power plant investment, budget auditing, financing and marketing of energy-saving products.
Mr. He worked with the Provincial “San Liao” Poverty Aid Taskforce at Kazuo County in
Liaoning Province* (w e?U# N bvO\ ) from December 1989 to
December 1990 and served as head of the finance department of Liaoning Energy and Materials
Company* (nriQlS ) from December 1990 to July 1995. He was deputy manager of
Liaoning Energy Efficiency and Thermal Electricity Group Company* (q––W Ql
S ) from July 1997 to January 1999, mainly in charge of operation management and financing.
He was deputy general manager and then executive deputy general manager of Liaoning
Energy Corporation* (nQlS ) from January 1999 to December 2003, mainly in
charge of operation management and financing. He joined Liaoning Energy Investment
(Group) Co., Ltd. 3 (nb (–W )g – QlS ) in December 2003 and served in
various positions including general manager and vice chairman, and is currently chairman of
this company, mainly in charge of the overall management of operation.
Mr. Zhang Jianwei (_5úPI ), aged 57, serves as a non-executive Director. Mr. Zhang has
been our Director since November 28, 2002. He has nine years of management experience in
securities industry. Mr. Zhang obtained a junior college degree in industrial economic
management from Fudan University in July 1986 and also graduated with a major in enterprise
management from Fudan University (Evening School) in July 1995, respectively. He also
obtained a master’s degree in business administration from China Europe International
Business School in May 1999. Mr. Zhang is a senior economist recognized by Shanghai
Economics (Circulation) Senior Professional and Technical Title Qualification Evaluating
Committee* (N mw^ } |R (mA W ) \ imbSwRNwh
mwNENQlS from July 1994 to December 2002, including general manager of industry division
and assistant to general manager, mainly in charge of external equity investment. Mr. Zhang
has been deputy general manager of Shanghai Jiushi Corporation Co., Ltd. since December
2002 mainly in charge of foreign investment, asset management and real estate investment, a
non-executive director of Shenyin & Wanguo Securities Co., Ltd. (u3’,W R8Ng – Ql
S ) since January 2002, a director of Shanghai International Trust Corp., Ltd. (N mwW – ábX
g – QlS ) since June 2005, a director of Shenergy Company Limited (u3Ng – QlS ) (a
company listed on the Shanghai Stock Exchange and its stock code is 600642) since May 2008,
a director of Shanghai Highly (Group) Co., Ltd. (N mwmwzNg – QlS ) (a company listed on
3
Liaoning Energy Investment (Group) Co., Ltd. held 1.93% shareholding in our Company prior to the Global
Offering as of the Latest Practicable Date.
4
Shanghai Jiushi Corporation Co., Ltd. held 2.95% shareholding in our Company prior to the Global Offering as
of the Latest Practicable Date.
– 278 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
the Shanghai Stock Exchange and its stock code is 600619) since May 2008 and a supervisor
of China Pacific Insurance Group Co., Ltd. (Y*^sm O–“W g – QlS ) (a company listed
on both the Hong Kong Stock Exchange and the Shanghai Stock Exchange and its stock code
is 02601 and 601601 respectively) since February 2011. As Shenyin & Wanguo Securities Co.,
Ltd. is mainly engaged in, among others, securities brokerage, securities investment advisory,
financial advisory related to securities trading and investment, proprietary trading, securities
underwriting and sponsoring, asset management, futures IB business and margin financing and
securities lending business, it competes or is likely to compete, either directly or indirectly,
with some aspects of the business of the Company.
Mr. Xu Chao (_on ), aged 56, serves as a non-executive Director. Mr. Xu has been our
Director since May 16, 2011. Mr. Xu graduated with a major in Marxism-Leninism theory from
Cadre Training College of Shanghai Municipal Party School (Junior College)* (N mw^ Yèh!
^ \ Oy (Y’\ )) in July 1985 and obtained a master’s degree in business administration from
China Europe International Business School in April 2000. Mr. Xu is a senior economist
recognized by Shanghai Economics Senior Professional and Technical Title Qualification
Evaluating Committee* (N mw^ } |R } \ imbSwRNwh<éYTág ) in
December 2009. Mr. Xu successively served as deputy secretary of CPC party branch, secretary
of CPC party branch and deputy director of reform office of Shanghai Turbine Works* (N mw
l}*j_à ) from 1986 to June 1994, mainly in charge of administrative management. He was
director of financial division, head of financial department and chief financial officer of
Shanghai Turbine Co., Ltd.* (N mwl}*j_g – QlS ) from August 1996 to October 2004 mainly
in charge of financial management, and vice president of the same company from October 2004
to October 2006 mainly in charge of financial management. He joined Shanghai Electric
Capital Management Co., Ltd.* 5 (N mw–l#u\"{t g – QlS ) in October 2006 and served in
various positions including chief financial officer from March 2007 to October 2011 and vice
president of the same company since May 2008, mainly in charge of production management
and financial management. He was head of financial budget department of Shanghai Electric
(Group) Corporation* 5 (N mw–l# (–W )~QlS ) from October 2010 to October 2011. He has
also been the executive director and legal representative of Shanghai Electrical Industrial
Investment Co., Ltd.* 5 (N mw–l#[imQlS ) since May 2010, a non-executive director of
Orient Securities Company Limited (gqeIR8Ng – QlS ) since March 2011, chairman of
supervisory committee of Shanghai Prime Machinery Co., Ltd. (N mw–Q*j_hNg – QlS )
(a company listed on the Hong Kong Stock Exchange and its stock code is 02345) since May
2010, vice chairman of Shanghai Highly (Group) Co., Ltd (N mwmwzW )Ng – QlS )
since June 2011 and chairman of supervisory committee of Shanghai Automation
Instrumentation Co., Ltd (N mwêRS Q “ g – QlS ) (a company listed on the Shanghai
Stock Exchange and its stock code is 600848) since June 2011. As Orient Securities Company
Limited is mainly engaged in, among others, securities underwriting, proprietary trading,
investment consultation, financial advisory, enterprise mergers and acquisitions and asset
management, it competes or is likely to compete, either directly or indirectly, with some
aspects of the business of the Company.
5
Shanghai Electric Capital Management Co., Ltd. and Shanghai Electrical Industrial Investment Co., Ltd. are
affiliates of Shanghai Electric (Group) Corporation* (N mw–l# (–W )~QlS ), which held 4.77% shareholding in
our Company prior to the Global Offering as of the Latest Practicable Date.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Mr. Wang Hongxiang (s;ye ), aged 56, serves as a non-executive Director. Mr. Wang
has been our Director since May 16, 2011. He has over 20 years of finance and accounting
working experience since he graduated from university. Mr. Wang obtained a bachelor’s degree
in accounting from Xiamen University in July 1983 and an EMBA degree from Shanghai
University of Finance and Economics in June 2006. Mr. Wang is a senior accountant
recognized by Shanghai Accounting Senior Professional and Technical Title Qualification
Evaluating Committee* (N mw^ g | R } \ imbSwRNwh
number of years. Mr. Wang has been deputy chief accountant of Shenergy Group Company
Limited 6 (u3 (–W )g – QlS ) mainly in charge of financial work since December 1998.
Mr. Li Gewei (gN ), aged 44, serves as a non-executive Director. Mr. Li has been our
Director since May 16, 2011. Mr. Li obtained a bachelor’s degree in science from Lanzhou
University in June 1989. Mr. Li is an economist recognized by Professional and Technical Title
Qualifications Evaluating Committee of Nankai District, Tianjin* (Y)m%^ SWS imbSNw
h
stock code is 600480) from April 2010 to January 2012, mainly in charge of investment
management. Mr. Li has been an executive director of New World Strategic Investment Limited
(e°N uL{Vuebg – QlS ) since June 2003, vice general manager of Tibet Linzhi Fuxi Jewels
& Gold Co,. Ltd.* (‰g—yysà[Lg – QlS ) since October 2010, and executive vice
chairman of Shenzhen Sunlong Communication Co., Ltd. (mW3^ g – QlS ) since
March 2006, in charge of investment management for all of these three companies. Mr. Li has
been an independent non-executive director of Orient Group Incorporation (gqeW g –
QlS ) (a company listed on Shanghai Stock Exchange and its stock code is 600811) since June
2008. As an independent non-executive director of Sichuan Direction Photo-electricity Co.,
Ltd. (V]eT QI–Ng – QlS ) from April 2002 to April 2007, Mr. Li was held responsible,
and received a warning letter from CSRC in February 2006, for such company’s failure to
disclose balances of related parties transactions in accordance with applicable regulations in its
interim reports and annual reports for 2003 and 2004.
Mr. Feng Huang (qL ), aged 41, serves as a non-executive Director. Mr. Feng has been
our Director since May 16, 2011. Mr. Feng obtained a bachelor’s degree in hotel management
from Shanghai Jiao Tong University in July 1993, and a master’s degree in business
administration from Webster University in November 1998. Mr. Feng is an economist
recognized by Ministry of Personnel of PRC in November 2001, and an in-house legal counsel
recognized by Ministry of Personnel, Ministry of Justice and State-owned Assets Supervision
and Administration Commission of PRC in October 2007. Mr. Feng joined SIIC Investment
6
Shenergy Group Company Limited held 4.11% shareholding in our Company prior to the Global Offering as of
the Latest Practicable Date.
7
Tibet Linzhi Fuxi Jewels & Gold Co., Ltd. held 0.56% shareholding in our Company prior to the Global Offering
as of the Latest Practicable Date.
– 280 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
(Shanghai) Co., Ltd. 8 (N [ b (N mw)g – QlS ) in January 1999 and served in various
positions, and has been vice president since June 2010 mainly in charge of investment and asset
management. He has been a director and president of Shanghai SIIC Investment Management
Consulting Co., Ltd.* 8 (N mwN [ bt g – QlS ) since August 2007 mainly in charge
of operations, a director of Shanghai Lujiazui Finance & Trade Zone United Development Co.,
Ltd.* (N mw–xV4‘f S@oT v|Ug – QlS ) since July 2004, vice chairman of Shanghai
Qixiang Qingchen New Materials Co., Ltd.* (N mwYG`óRfhe°gPeNg – QlS ) since
December 2007, chairman of Shanghai Zhendong Auto Service Company* (N mwc/gql}g R
g – QlS ) since September 2008 and a director of Shanghai Information Investment Inc. (N
mw^ Oá`obNg – QlS ) since June 2011.
Independent Non-executive Directors
Mr. Xia Bin (Y e ), aged 60, serves as an independent non-executive Director. Mr. Xia
has been our Director since May 30, 2006. He has over 28 years of management experience in
banking and securities industry. Mr. Xia obtained a master’s degree in economics from the
Graduate School of PBOC in December 1984. Mr. Xia is a researcher recognized by PBOC
Research Senior Professional and Technical Title Evaluating Committee* (N-W N”l ’ x zv
| R } \ imbSwRUéYTág ) in November 1997. Mr. Xia served as director and deputy
head of financial research institute of PBOC mainly in charge of research on macroeconomic
and financial policy from January 1982 to March 1993 and from March 1993 to July 1993,
respectively. He served as director of trading department of CSRC from July 1993 to October
1993 mainly in charge of management of secondary market, the Shanghai Stock Exchange and
the Shenzhen Stock Exchange, general manager of the Shenzhen Stock Exchange from July
1993 to October 1993 mainly in charge of the overall management of the daily operation and
marketing of the exchange, deputy director of policy research office of PBOC from October
1996 to September 1998 mainly in charge of macro-policy research and drafting major
financial regulations and director of non-bank institution department of PBOC from August
1998 to September 2002 mainly in charge of supervision of non-bank financial institutions. Mr.
Xia has been head of Institute of Finance of Development Research Centre of State Council
since September 2002. Mr. Xia has been an independent non-executive director of Tsinghua
Tongfang Co., Ltd. (n T eNg – QlS ) (a company listed on the Shanghai Stock
Exchange and its stock code is 600100) since May 2006. Mr. Xia has been a supervisor of
China Everbright Bank Co., Ltd. (N-W QIY’’LNg – QlS ) (a company listed on the
Shanghai Stock Exchange and its stock code is 601818) since September 2006.
Mr. Chen Qiwei (–st&PI ), aged 60, serves as an independent non-executive Director. Mr.
Chen has been our Director since July 16, 2007. Mr. Chen obtained a bachelor’s degree in
economics from East China Normal University in September 1982 and a doctor’s degree in
economics from East China Normal University in October 1988. Mr. Chen is a professor
recognized by the Teachers’ Senior Professional and Technical Title Evaluating Committee of
Shanghai Jiao Tong University* (N mwN¤ Y’[xeY^ \ imbSwRNwh
8
SIIC Investment (Shanghai) Co., Ltd. and SIIC Investment Management Consulting Co., Ltd. are affiliates of
Shanghai Shangshi.
– 281 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Economics & Management, Shanghai Jiao Tong University (N mwN¤ Y’[xl}o { [
– ) since August 1997, chairman of Shanghai Asia Business Development Group Co., Ltd.* (N
mwNUFv|UW g – QlS ) since March 2004, an independent non-executive director of
Shanghai Oriental Pearl (Group) Co., Ltd. 9 (N mwgqef sà (–W )Ng – QlS ) (a company
listed on the Shanghai Stock Exchange and its stock code is 600832) since June 2008, an
independent non-executive director of Guangzhou Development Industry (Holdings) Co., Ltd.
(^v|Uimc§W g – QlS ) (a company listed on the Shanghai Stock Exchange and
its stock code is 600098) since July 2009, a director of China Entrepreneurs Forum (N-W O im
[ X ) and a rotating chairman of New Shanghai Businessman Federation (e°nìUFoT g )
since December 2008.
Mr. Zhang Huiquan (_5àl ), aged 44, serves as an independent non-executive Director.
Mr. Zhang has been our Director since July 16, 2007. He has around 15 years of working
experience in legal compliance. Mr. Zhang obtained a bachelor’s degree in law from Nanjing
Institute of Politics of the People’s Liberation Army* (N-W N”l ‰ e>SWNel[xb ) in July
1990 and a master’s degree in economic law from Peking University in July 2002. Mr. Zhang
was granted the Certificate of PRC Lawyer by the PRC Ministry of Justice in September 1995.
Mr. Zhang was previously an officer of political department of People’s Court of Jingshan
District, Beijing (S N fo\qS@N”l l–b ) from October 1996 to March 2000 and a director of
research office and judge of the same court from April 2000 to December 2002. Mr. Zhang has
been a lawyer of Union Best Partner (S NV _ b@ ) since December 2002.
Mr. Zhang Ming (_5 ), aged 53, serves as an independent non-executive Director. Mr.
Zhang has been our Director since May 5, 2008. He has over 25 years of working experience
in relation to accounting. Mr. Zhang obtained a bachelor’s degree in accounting, a master’s
degree in accounting and a doctor’s degree in economics from the accounting department of
Shanghai University of Finance and Economics in June 1983, June 1988 and January 1996,
respectively. Mr. Zhang lectured in Shanghai University of Finance and Economics since
graduation in 1983 and has successively been deputy director, professor and doctoral
supervisor of the accounting college of the same university. Mr. Zhang has been an independent
non-executive director of Shanghai Shenda Co., Ltd. (N mwu3TNg – QlS ) (a company
listed on the Shanghai Stock Exchange and its stock code is 600626) since May 2010, and an
independent non-executive director of SGSB Group Co., Ltd. (N ] u3 (–W )Ng – QlS )
(a company listed on the Shanghai Stock Exchange and its stock code is 600843) since June
2009.
Mr. Dai Genyou (b4h9g ), aged 62, serves as an independent non-executive Director. Mr.
Dai has been our Director since May 16, 2011. He has around 35 years of working experience
in financial industry including over 25 years of management experience. Mr. Dai graduated
with a major in political economics from Anhui Labor University (predecessor of Anhui
University) in September 1977. Mr. Dai is a senior economist recognized by PBOC in 1989.
He was granted a special allowance by the State Council in October 2000. Mr. Dai previously
served in various positions in PBOC. He successively served as vice president of Anqing
9
Shanghai Oriental Pearl (Group) Co., Ltd. held 1.84% shareholding in our Company prior to the Global Offering
as of the Latest Practicable Date.
– 282 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Branch of PBOC, director of the first economic analysis division of research and investigation
department of PBOC, and head and deputy director of economic analysis division of survey and
statistics department of PBOC from October 1983 to February 1993. He held a position at the
finance and trade group of the Leading Group for Financial and Economic Affairs of the CPC
Central Committee* (N-Y. \ \ } l[D ) from February 1993 to November 1997
and was a deputy leader thereof since September 1994 and concurrently was deputy director
and inspector of survey and statistics department of PBOC. He was head of monetary policy
department and secretary-general of monetary policy committee of PBOC from November
1997 to November 2003, director of credit information system bureau of PBOC from
November 2003 to April 2004, and director of credit information center of PBOC from April
2004 to March 2010. Mr. Dai has been an independent non-executive director of Zhangjiang
High-Tech Park Development Co., Ltd. (N mw_5l_ybW S@vNg – QlS ) (a company
listed on the Shanghai Stock Exchange and its stock code is 600895) since April 2010.
Mr. Liu Chee Ming (R‰×eO ), aged 61, serves as an independent non-executive Director.
Mr. Liu has been our Director since September 16, 2011. Mr. Liu obtained a bachelor’s degree
in business administration from National University of Singapore in July 1976. He has been a
member of the Takeovers Appeal Committee under the Hong Kong SFC (n/IR8Sg
v[YTág e6üN YTág ) since May 1995, and deputy chairman of the Takeovers and
Mergers Panel since April 2008, the duties include reviewing mergers and acquisition cases and
dealing with relevant appeals. In addition, he established the Platinum Holdings Company
Limited (v~c§g – QlS ) in April 1996 and oversees the stock broking, corporate finance
and asset management businesses. He has been an independent non-executive director of Kader
Holdings Company Limited (TW g – QlS ) (a company listed on the Hong Kong Stock
Exchange and its stock code is 00180) since June 1998, an independent non-executive director
of CIMC Raffles Offshore (Singapore) Limited (N-–OyXmwm ] z (e°RWa )g – QlS ) since
December 2005, and an independent non-executive director of StarHub Ltd (f Tg – QlS ) (a
company listed on the Singapore Exchange and its stock code is STH SP) since August 2004.
On March 14, 2012, the Board passed a resolution that the appointment of Mr. Zhu
Xiaogang as a non-executive Director in replacement of Mr. Zhou Donghui will be submitted
to both holders of our A Shares and holders of our H Shares for approval at the next annual
general meeting of our Company expected to be convened by June 2012. Such appointment is
subject to approvals from both holders of our A Shares and holders of our H Shares. After the
appointment of Mr. Zhu Xiaogang is approved at such annual general meeting, such
appointment will be submitted to the CSRC for approval. Except for (i) the approvals from both
holders of our A Shares and holders of our H Shares, on the assumption that the Global
Offering is completed on April 27, 2012, and (ii) the approval from the CSRC, the appointment
of Mr. Zhu Xiaogang is not subject to any other condition. The detailed biography of Mr. Zhu
Xiaogang will be included in the circular to be despatched by June 2012 to both holders of our
A Shares and holders of our H Shares, on the assumption that the Global Offering is completed
on April 27, 2012, for the purpose of such annual general meeting.
Save as disclosed above, there are no other matters that need to be brought to the attention
of the Shareholders of the Company in connection with the appointment of our Directors and
there is no other information relating to our Directors that should be disclosed pursuant to Rule
13.51(2) of the Hong Kong Listing Rules.
– 283 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Supervisors
The following table sets forth information regarding our Supervisors. Our Supervisors all
meet the qualification requirements under relevant PRC laws and regulations and the Hong
Kong Listing Rules for their respective positions.
Name Age Position
Mr. Wang Yimin (svl ) 60 Chairman of Supervisory Committee,
Employee Supervisor
Mr. Yang Qingzhong (iJav_à ) 55 Vice Chairman of Supervisory
Committee, Employee Supervisor
Mr. Yuan Lingcai ( bM ) 51 Supervisor
Mr. Dong Xiaochun (c f% ) 47 Supervisor
Mr. Wu Zhilin (T3 ) 60 Supervisor
Ms. Jin Yanping (‘q ) 56 Supervisor
Mr. Xu Qi (1YG) 49 Supervisor
Mr. Xing Jianhua (ú ) 52 Supervisor
Mr. Wang Yugui (ss ) 60 Supervisor
Ms. Qiu Xiaping (NY ) 51 Employee Supervisor
Mr. Du Hongbo (g\m*l ) 49 Employee Supervisor
Mr. Wang Yimin (svl ), aged 60, serves as our employee Supervisor and our
Chairman of Supervisory Committee. Mr. Wang joined our Company in January 2010 and was
appointed as our Supervisor on April 7, 2010. He has around 20 years of experience as a
director, supervisor and senior management of securities companies. Mr. Wang graduated with
a major in economics by correspondence from Fudan University (undergraduate) in July 1992,
and obtained a master’s degree in economics and a master’s degree in business administration
from Shanghai University of Finance and Economics and China Europe International Business
School in January 1997 and in April 2000 respectively, and a doctor’s degree in management
from Tongji University in November 2001. Mr. Wang is a senior economist recognized by
China People’s Construction Bank (predecessor of China Construction Bank) in February 1993.
Mr. Wang served in various positions in China Construction Bank (Shanghai Branch) from
September 1979 to September 1990, including section chief and deputy division chief, mainly
in charge of planning, statistics, capital and project review. Mr. Wang served as vice president
of China Construction Bank (Shanghai Pudong Branch) mainly in charge of planning and credit
from September 1990 to October 1992, an executive director and deputy general manager of
Guotai Securities Co., Ltd. (W lIR8g – QlS ) (predecessor of Guotai Jun’an Securities Co.,
Ltd. (W lT [ R8Ng – QlS )) mainly in charge of operation and management from
October 1992 to August 1999, chairman of supervisory committee and secretary of discipline
inspection commission of Guotai Jun’an Securities Co., Ltd. from August 1999 to September
2004, mainly in charge of the chairing of the supervisory committee and the discipline
inspection commission, and chairman of Orient Securities Company Limited (gqeIR8Ng
– QlS ) and secretary of CPC party committee from September 2004 to January 2010 mainly
in charge of the chairing of the Board of Directors and the CPC party committee. Mr. Wang has
also been a member of the CPC party committee of our Company since January 2010.
– 284 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Mr. Yang Qingzhong (iJav_à ), aged 55, serves as our employee Supervisor and our Vice
Chairman of Supervisory Committee. Mr. Yang joined our Company in 1998 and was appointed
as our Supervisor on May 21, 2004. He has around 13 years of working experience in securities
industry. Mr. Yang obtained a bachelor’s degree in economic management from Party School
of the Central Committee of CPC in December 1995 and graduated as a postgraduate with a
major in management science and engineering from Shanghai University in April 2001. Mr.
Yang is a senior political officer recognized by Shanghai Senior Professional and Technical
Titles of Enterprise Personnel of Political Work Qualification Evaluating Committee* (N mw^
O im` ` e?l]O\N”Tá \ imwRNwh
August 1998. He served in various positions in our Company, including deputy director of CPC
party committee office and the member of discipline inspection committee from August 1998
to November 2002 and deputy chief of organization department of our CPC party committee
from August 1998 to August 2003 and general manager of our training center from May 2003
to April 2005. Mr. Yang has been the director of our department of party-masses relationship
since November 2002, the general manager of our human resources development department
since August 2003, the head of our organization department of the CPC party committee since
August 2003 and the secretary of our discipline inspection commission since October 2008.
Mr. Yuan Lingcai ( bM ), aged 51, serves as a Supervisor. Mr. Yuan joined our
Company on May 16, 2011 and has been our Supervisor since then. He has around 30 years of
working experience in finance. Mr. Yuan graduated with a major in accounting from China
Central Radio and Television University in July 2003. Mr. Yuan is a senior accountant
recognized by Shanghai Accounting Senior Professional and Technical Title Qualification
Evaluating Committee* (N mw^ g | R } \ imbSwRNwh<éYTág ) in March
2003. Mr. Yuan was manager of finance department of Shanghai Hardware Machinery
Corporation Metal Material Company* (N mwN”j_hQlS‘lSeQlS ) from August 1981
to October 1995, manager of finance department and chief financial officer in Hardware
Company of Shanghai Friendship (Group) Co., Ltd.* (SW N mwN”QlS ) from November
1995 to October 1999, assistant to the director of audit and supervision department of Shanghai
Friendship (Group) Co., Ltd. (N mwS (–W )g – QlS ) from October 1999 to August 2000
mainly in charge of internal auditing and manager of finance department of Haomeijia
Decoration Co., Ltd. under Friendship Group* (SW Y}obg – QlS ) from August
2000 to December 2001. Mr. Yuan was a supervisor of Shanghai SIIC Investment Management
Consulting Co., Ltd. (N mwN [ bt T¨bg – QlS ) from August 2010 to March 2012. Mr.
Yuan has been working at SIIC Investment (Shanghai) Co., Ltd. (N [ b (N mw)g – QlS )
since January 2002 and is currently the general manager of the planning and finance
department and chief finance officer of the company. He has also been a director of Shanghai
SIIC Zhentai Chemical Co., Ltd. (N mw[imc/lS ] g – QlS ) since March 2007 mainly in
charge of accounting and financial management, and a director of Shanghai SIIC Investment
Management Consulting Co., Ltd. (N mwN [ bt T¨bg – QlS ) since March 2012.
Mr. Dong Xiaochun (c f% ), aged 47, serves as a Supervisor. Mr. Dong joined our
Company on July 16, 2007 and has been our Supervisor since then. He has over 20 years of
working experience in finance and over four years of experience as supervisor. Mr. Dong
– 285 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
graduated with a major in accounting from Shanghai TV University in July 1989 and obtained
a master’s degree in business administration from Shanghai Jiao Tong University in July 2000.
Mr. Dong is a senior accountant recognized by Shanghai Accounting Senior Professional and
Technical Title Qualification Evaluating Committee* (N mw^ g | R } \ imbSwRNw
h<éYTág ) in April 2001. Mr. Dong served as chief financial officer and secretary to the
board of Hualian Supermarket Co., Ltd. (o g – QlS ) from October 1992 to August
2004 mainly in charge of financial management and securities management, chief financial
officer of department store division of Shanghai Bailian Group Co., Ltd. (formerly known as
Bailian Group (v~oW )) from August 2004 to April 2006 mainly in charge of financial
management and a director of Shanghai Bailian Group Co., Ltd. (N mwv~oW g – QlS )
(a company then listed on the Shanghai Stock Exchange until August 2011 and its stock code
was 600631) from April 2010 to April 2011. Mr. Dong was secretary to the board and chief
financial officer of Shanghai Bailian Group Co., Ltd. from April 2006 to September 2011
mainly in charge of securities management, and he is now secretary to the board and chief
financial officer of Shanghai Friendship Group Incorporated Company 10 (N mwSW g
– QlS ) (a company listed on the Shanghai Stock Exchange and its stock code is 600827)
mainly in charge of financial management.
Mr. Wu Zhilin (T3 ), aged 60, serves as a Supervisor. Mr. Wu joined our Company
on May 19, 2010 and has been our Supervisor since then. He has around 35 years of working
experience in media industry. Mr. Wu graduated with a major in Chinese literature from
Shanghai Education College* (N mweYxb ) in July 1986. Mr. Wu is a senior editor
recognized by Shanghai Journalism Senior Professional and Technical Title Qualification
Evaluating Committee* (N mw^ e°R } \ imbSwRNwh<éYTág ) in January
1996. Mr. Wu served in various positions in Jiefang Daily (‰e>eX1 ) from October 1973 to
November 1994, which include editorial committee member and director of literature
department, mainly in charge of news reporting and editing. Mr. Wu was deputy chief editor
of People’s Daily East China Branch (N”l eX1y>gqR y> ) and deputy chief editor of Wenhui
Paper (eS/X1 ) from November 1994 to May 1998 and from May 1998 to July 2008,
respectively, mainly in charge of news reporting and editing. Mr. Wu has been a member of
CPC party committee of Wenhui-Xinmin United Press Group 11 (eS/e°l T X1im–W ) since
July 2008, secretary of the CPC party committee and deputy chief editor of Xinmin Evening
News (e°l fZX1 ) since July 2008 mainly in charge of the overall operation of the newspaper
group and the chairman of supervisory committee of Shanghai Oriental Sports Media Co., Ltd.
(N mwgqPZg – QlS ) since February 2010.
Ms. Jin Yanping (‘q ), aged 56, serves as a Supervisor. Ms. Jin joined our Company
on July 16, 2007 and has been our Supervisor since then. She has over 25 years of working
experience including over four years of experience as supervisor. Ms. Jin obtained a bachelor’s
degree in literature from Shanghai University of Technology in October 1982. Ms. Jin is a
10
Shanghai Friendship Group Incorporated Company held 2.61% shareholding in our Company prior to the Global
Offering as of the Latest Practicable Date.
11
Wenhui-Xinmin United Press Group held 2.38% shareholding in our Company prior to the Global Offering as of
the Latest Practicable Date.
– 286 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
senior political officer recognized by Propaganda Department of the CPC Shanghai
Committee* (N mw^ Y[Pè ) in May 1992. Ms. Jin was previously member of CPC party
committee and deputy director of CPC party committee office of Shanghai Foreign Trade
Corporation* (N mw\ Y f ~ lS ) from February 1986 to December 1987. Ms. Jin was
previously secretary of CPC general branch of Shanghai Overseas Company* (N mwmwY QlS
from January 1988 to December 1990. Ms. Jin also served as deputy secretary of CPC party
committee and deputy general manager of Shanghai Advertising Co., Ltd. (N mw^TJg – QlS )
from December 1990 to December 1994 mainly in charge of human resources. Ms. Jin was
Shanghai office’s executive vice director and secretary of CPC general branch of SIIC from
January 1995 to October 1998, head of the research office of Shanghai Lansheng (Group) Co.,
Ltd. (N mw-u (–W )g – QlS ) from October 1998 to March 2001 and manager of the general
corporate business department of Shanghai Lansheng (Group) Co., Ltd. from March 2001 to
June 2003. Ms. Jin has been assistant to president of Shanghai Lansheng (Group) Co., Ltd.
since October 1998, general manager of investment management department of the same
company since June 2003, a director of Shanghai Lansheng Corporation 12 (N mw-u g –
QlS ) (a company listed on the Shanghai Stock Exchange and its stock code is 600826) since
May 2003, vice chairman of Soochow Asset Management Co., Ltd. (gqT3Wú‘t g – QlS )
since April 2004 and chairman of supervisory committee of Shanghai CP Guojian Pharma Co.,
Ltd. (N mwN-OáW Pe…imNg – QlS ) since February 2011.
Mr. Xu Qi (1YG), aged 49, serves as a Supervisor. Mr. Xu joined our Company on July
16, 2007 and has been our Supervisor since then. He has around 20 years of extensive working
experience in finance and accounting and over four years of experience as supervisor. Mr. Xu
graduated with a major in economic management (junior college course) from Shanghai
Normal University in July 1988. He graduated from East China Normal University as a
postgraduate with a major in international enterprise management in November 1997. Mr. Xu
is an accountant recognized by Leading Working Group for Shanghai Professional Title
Reform* (N mw^ z1e9—iO\ \ \ } ) in July 1992. Mr. Xu was awarded China’s
outstanding CFO of 2005 by Selection Committee of Annual Figure of China CFO* (N-WCFO
^ ^ ”riUxYTág ) and Xinlicai Magazine* (e°t > ) in March 2006. He was a
Chinese registered career manager (N-W Qwim}t N” ) recognized by China Enterprise
Evaluation Association (N-W O imUPùSTg ) in July 2006. He was a senior member of the
Chinese Enterprise Operation and Management Talent Bank* (N-W O im}q{t N”bM^b Tá
( )) recognized by National Talent Service Centre under the Ministry of Human Resources
(N”NèQhW N”bMmARN-_ ) in September 2006. He was also awarded the Annual Figure of
China Chief Financial Officer in November 2006 recognized by Organizing Committee of
China CFO International Summit* (N-WCFOW – g } Yg ) and China CFO Magazine* (N-
W~ ^ > ). He is a qualified professional director and qualified director and
supervisor (Senior) recognized by China Institute of Directors* (N-W NSTg ) and Chinese
Director and Supervisor Certification Experts Committee* (N-W imcvNhg ) in May 2007. He was a senior international finance manager recognized by China
Association of Chief Financial Officers (N-W ~ ^ Tg ), Ministry of Labor and Social
Security (N-W RRTyg O–è ) and International Financial Management Association (W –
12
Shanghai Lansheng Corporation held 2.32% shareholding in our Company prior to the Global Offering as of the
Latest Practicable Date.
– 287 –
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
) in November 2007. Mr. Xu served in various positions in Shanghai Chlor-
Alkali Chemical Co., Ltd. (N mwl/S ] g – QlS ) (a company listed on the Shanghai
Stock Exchange and its stock code is 600618) from April 1988 to June 2002, including deputy
manager of asset operation department and deputy manager of asset finance department. He
also served as deputy manager of asset finance department of Shanghai Tianyuan Group Co.,
Ltd. (N mwY)SW g – QlS ) from March 1996 to April 1997 mainly in charge of financial
management. Mr. Xu was also manager of planning and finance department and vice chief
financial officer of Shanghai Oriental Pearl (Group) Co., Ltd. (N mwgqef sà (–W )Ng – Ql
S ) (a company listed on the Shanghai Stock Exchange and its stock code is 600832) from July
2002 to March 2003 and March 2003 to March 2004, respectively. Mr. Xu has been chief
financial officer of Shanghai Oriental Pearl (Group) Co., Ltd. since March 2004.
Mr. Xing Jianhua (ú ), aged 52, serves as a Supervisor. Mr. Xing joined our
Company on November 28, 2002 and has been our Supervisor since then. He has over four
years of experience as supervisor. Mr. Xing obtained a bachelor’s degree in economics from
East China Normal University in December 1992. Mr. Xing is a senior accountant recognized
by Shanghai Accounting Senior Professional and Technical Title Evaluating Committee* (N mw
^ g | R } \ imbSwRNwh
November 1986 to July 1989, and deputy director of finance department of Shanghai Fertilizer
United Co., Ltd.* (N mw^ S T QlS ) from July 1989 to April 1993. Mr. Xing was deputy
general accountant of Shanghai Rubber Belt Co., Ltd. (N mw6Ng – QlS ) from April
1993 to April 1995 and director and deputy general manager of the same company from April
1995 to July 1996 mainly in charge of strategic planning, asset operation and financial work.
Mr. Xing was also manager of asset department of Shanghai Huayi (Group) Company (N mw
(–W )QlS ) from July 1996 to April 2001 mainly in charge of property management,
enterprise reform and asset operation. He successively served as deputy director and director
of finance department of Orient International (Holding) Co., Ltd. 13 (gqeW – (–W )g – QlS )
from April 2001 to November 2003. He has been director of asset operation department of the
same company mainly in charge of asset management and asset operation since April 2002. Mr.
Xing was director of Orient International Enterprise Ltd.* 14 (gqeW – uimNg – QlS ) (a
company listed on the Shanghai Stock Exchange and its stock code is 600278) from April 2008
to April 2011. He has been deputy chief economist of Orient International (Holding) Co., Ltd.
since February 2009 mainly in charge of asset management and asset operation, vice chairman
of Shanghai Orient International Asset Management & Administration Co., Ltd. (N mwgqeW
– u\"}q{t g – QlS ) since April 2007 and a director of Shanghai Silk (Group) Co., Ltd.
(N mw}r (–W )g – QlS ) since January 2003.
Mr. Wang Yugui (ss ), aged 60, serves as a Supervisor. Mr. Wang joined our
Company on May 16, 2011 and has been our Supervisor since then. He has around 30 years of
financial working experience. Mr. Wang graduated with a major in English from Beijing
13
Orient International (Holding) Co., Ltd. held 0.95% shareholding in our Company prior to the Global Offering
as of the Latest Practicable Date.
14
Orient International Enterprise Ltd. held 0.36% shareholding in our Company prior to the Global Offering as of
the Latest Practicable Date.
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Second Foreign Language Institute in February 1977. Mr. Wang is a senior economist
recognized by Certification Committee of Specialized Technical Post of the Ministry of
Communications* (N¤ \ imbSwRUéYTág ) in November 1994. Mr. Wang has been
general manager of China Shipowners Mutual Assurance Association (N-W gqN’OSTg )
since February 1993 in charge of shipowners’ mutual assurance and relevant work, and a
non-executive director of China Minsheng Banking Corp., Ltd. (a company listed on both the
Shanghai Stock Exchange and the Hong Kong Stock Exchange and its stock code is 600016 and
01988 respectively) since December 1995.
Ms. Qiu Xiaping (NY ), aged 51, serves as our employee Supervisor. Ms. Qiu joined
our Company in November 1994 and has been our Supervisor since July 16, 2007. She has
around 30 years of working experience in banking and securities industry and over four years
of experience as supervisor. Ms. Qiu graduated with a major in finance from Shanghai TV
University (junior college degree) in July 1982 and obtained a bachelor’s degree in law from
Correspondence Institute of Party School of Central Committee of the CPC* (N-QqN-Y.èh!Q
cxb ) in December 2005. She graduated from Shanghai Academy of Social Sciences as a
postgraduate with a major in economics in January 2002, and a master’s degree in business
administration from Washington International University in July 2003. Ms. Qiu is an
accountant recognized by Industrial and Commercial Bank of China in September 1992. She
was an officer of Yangpu branch of Industrial and Commercial Bank of China from August
1980 to August 1992 and worked at Pudong branch of the same bank from March 1993 to
August 1993. She also worked at Dongfang Road branch of Huaxia Securities Co., Ltd. from
August 1993 to November 1994 mainly in charge of the branch’s finance work. She was an
officer of our Company from November 1994 to August 1996, section chief of finance and
accounting department from August 1996 to April 1998. Ms. Qiu was assistant to general
manager and has been deputy general manager of our planning and finance department from
April 1998 to July 2000 and since July 2000, respectively. Ms. Qiu has been a director of
Haitong Futures since October 2005, a director of Haitong Capital Investment since October
2008, a supervisor of Fullgoal Fund Management since October 2008 and a supervisor of
Haitong Jihe Management since November 2010.
Mr. Du Hongbo (g\m*l ), aged 49, serves as our employee Supervisor. Mr. Du joined our
Company in March 2002 and has been our Supervisor since May 16, 2011. He has around 15
years of working experience in securities industry. Mr. Du obtained a bachelor’s degree in
industrial automation from Huazhong Institute of Technology (N-]xb ) in July 1984. Mr.
Du is an engineer recognized by Wuhan Personnel Bureau in December 1992. Mr. Du
successively worked at Wuhan Computer Application Institute* (kfo\"^ { _ u(vx zv
b@ ), Wuhan Branch of Stone Group Corp.* (V – W kfo\"R QlS ) and Wuhan Software
Research Center* (kfo\"Nx zvN-_ ) from August 1984 to August 1996 mainly in charge of
computer application, development and research. Mr. Du worked at information technology
department of Guotai Jun’an Securities Co., Ltd. (W lT [ R8Ng – QlS ) from August
1996 to March 2002 mainly in charge of information systems development and operation
management. He was assistant to general manager of the website management department and
brokerage business department of our Company from March 2002 to May 2005 and deputy
general manager of risk control headquarters of our Company from May 2005 to March 2011.
Mr. Du has been our general manager of compliance and risk management headquarters since
March 2011 mainly in charge of compliance management and risk control.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Senior Management
The following table sets forth information regarding our senior management of the
Company. Our senior management all meet the qualification requirements under the relevant
PRC laws and regulations for their respective positions. Our personnel are responsible for the
day-to-day management of the Company’s business.
Name Age Position
Mr. Li Mingshan (gNf \ ) 59 General Manager
Mr. Shen Degao (l ) 59 Deputy General Manager
Mr. Ji Yuguang (T [ I ) 54 Deputy General Manager
Mr. Ren Peng (No ) 49 Deputy General Manager
Mr. Wu Bin (T3e ) 39 Deputy General Manager
Mr. Li Xunlei (gN÷ ) 48 Deputy General Manager
Mr. Hiroki Miyazato ([U_f ) 46 Deputy General Manager
Mr. Jin Xiaobin (‘fe ) 57 Secretary to the Board
Mr. Wang Jianye (súim ) 51 General Compliance Officer and
Chief Risk Control Executive
Mr. Li Chuqian (gNy RM 55 Chief Financial Officer
Mr. Li Mingshan (gNf \ ), aged 59, is our General Manager. Please see “– Overview –
Executive Directors” in this prospectus for his biography.
Mr. Shen Degao (l ), aged 59, joined our Company in September 1991 and has been
our Deputy General Manager since December 1991. He has over 20 years of management
experience in securities industry. Mr. Shen graduated from the People’s Liberation Army Air
Force Political Science College* (‰e>zze?l[xb ) with a major in economic management
in July 1999 and obtained a master’s degree in business administration from Asia International
Open University (Macau) in March 2002. Mr. Shen is an economist recognized by Appraisal
Committee of Intermediate Professional Technical Titles* (N-} \ imbSwRUéYTág ) in
the Bank of Communications (Shanghai Branch) in December 1992. Mr. Shen served in various
positions in the People’s Liberation Army Navy (N-W N”l ‰ e>mw ) from March 1968 to
September 1989. He was a discipline inspector (section chief level) of Bank of
Communications (Shanghai Branch) from March 1990 to September 1991. Mr. Shen served in
various positions in our Company, including office director from September 1991 to June 1994,
member of the CPC party group from June 1994 to December 1998 and secretary of the
discipline inspection committee from May 2006 to October 2008. Mr. Shen has been our deputy
secretary of CPC party committee since December 1998.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Mr. Ji Yuguang (T [ I ), aged 54, joined our Company in November 1995 and has been
our Deputy General Manager since November 1997. He is mainly in charge of proprietary
trading and international business. He has around 25 years of working experience in banking
and securities industry including over 15 years of management experience. Mr. Ji obtained a
bachelor’s degree in economics from Beijing Finance and Commerce College in July 1983 and
graduated with a major in economy management as a postgraduate from Party School of
Central Committee of the CPC (N-QqN-Y.èh! ) in June 1999. Mr. Ji is a senior economist
recognized by Senior Professional and Technical Title Evaluating Committee* ( \ imwR
[ YTág ) of the Bank of Communications in April 1994. Mr. Ji was an officer of Finance
Department of Beijing Planning Commission* (S N YU ) from August 1983 to
November 1988. Mr. Ji served in various positions in Bank of Communications (Beijing
Branch) from November 1988 to November 1995, including deputy manager and manager of
securities trading department of the same branch. He also served as leading officer and general
manager of Beijing Langjiayuan Branch of Haitong Securities Company Limited from
November 1995 to November 1997. Mr. Ji served as chairman of Jilin Investment Fund from
December 2010 to May 2011. Mr. Ji has been a non-executive director of Haitong International
Securities since January 2010 and chairman of board of directors of Haitong International
Securities since March 2011, a director of Haitong International Holdings since August 2010
and chairman of board of directors of Haitong International Holdings since March 2011.
Mr. Ren Peng (No ), aged 49, joined our Company in March 1996 and has been our
Deputy General Manager since November 1997. He is mainly in charge of investment banking
and direct investment businesses. He has around 30 years of working experience in banking
and securities industry including over 15 years of management experience. Mr. Ren graduated
with a major in finance from Fudan University in January 2004 and obtained a master’s degree
in business administration from China Europe International Business School in July 2006. Mr.
Ren is an economist recognized by the Medium-leveled Professional and Technical Title
Evaluating Committee* (N-} \ imbSwRUéYTág ) of Bank of Communications
(Hangzhou Branch) in July 1989. Mr. Ren served in several managerial positions in the Xihu
Office of the Industrial and Commercial Bank of China from June 1982 to February 1988 and
served in various positions in Bank of Communications (Hangzhou Branch) from March 1988
to March 1996 including head of saving business and manager of securities department, mainly
in charge of daily operations. In addition, Mr. Ren was manager of Hangzhou branch of
Haitong Securities Company Limited from March 1996 to November 1997 mainly in charge of
daily operations. Mr. Ren was a director of Haitong Capital Investment from October 2008 to
August 2011. He has been a director of China-Belgium Fund since March 2011 and chairman
of Jilin Investment Fund since May 2011 mainly in charge of strategies implementation.
Mr. Wu Bin (T3e ), aged 39, joined our Company in July 1998 and has been our Deputy
General Manager since March 2012. He is mainly in charge of asset management business, the
Company’s strategy development and information technology (“IT”). He has around 14 years
of working experience in the securities industry including over ten years of management
experience. Mr. Wu obtained a bachelor’s degree in law from East China Normal University in
July 1995, a master’s degree in economic law from East China College of Politics and Law in
July 1998 and a doctor’s degree in economics from Fudan University in June 2003. Mr. Wu
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
obtained the lawyer qualification certificate of China which is recognized by the Ministry of
Justice of the PRC (N-N”l QqTW Slè ) in April 1997 and is an economist recognized by
PRC Ministry of Personnel (N-N”l QqTW N”Nè ) in November 2000. Mr. Wu served in
various positions in our Company including a project manager in the investment bank
department from July 1998 to March 2001, deputy section chief and section chief of the general
manager office from March 2001 to October 2003, assistant to general manager in the
international business division from October 2003 to May 2005, deputy director in the general
manager office from May 2005 to January 2007, chief compliance director from July 2007 to
August 2010, director of compliance office and general manager of compliance department
from October 2007 to March 2011 during which time he was working part-time as an inspector
assistant in the Shanghai municipal government from January 2010 to January 2011. Mr. Wu
has been the director of our general manager office since January 2007, a non-executive
director of Haitong International Securities since January 2010, a director of Haitong
International Holdings since August 2010 and the director of strategic development and IT
management committee and the head of preparatory group of Haitong Asset Management
Company* (mw u\"{t QlS ) since March 2011.
Mr. Li Xunlei (gN÷ ), aged 48, joined our Company in October 2011 and has been our
Deputy General Manager and Chief Economist since March 2012. He is mainly in charge of
research and institutional business. He has around 15 years of working experience in securities
industry, including over ten years of management experience. Mr. Li obtained a bachelor’s
degree and a master’s degree in economics from Shanghai University of Finance and
Economics in July 1985 and in July 1991 respectively. Mr. Li was a librarian and assistant
researcher of Institute of Economics and Finance in Shanghai University of Finance and
Economics from July 1985 to September 1996. Mr. Li was deputy director of research institute
of Jun’an Securities Co., Ltd. (T [ R8g – QlS ) from September 1996 to August 1999,
mainly in charge of research business. He was deputy director of the research institute, director
of the research institute and general manager of sales and trading department, assistant to
president and chief economist in Guotai Junan Securities Co., Ltd. (W lT [ R8g – QlS )
from August 1999 to October 2011, mainly in charge of research and institutional business.
Mr. Hiroki Miyazato ([U_f ), aged 46, joined our Company in May 2009 and has
been our Deputy General Manager since March 2012. He is mainly in charge of securities
investment. He has around 20 years of working and management experience in banking and
securities industry. Mr. Miyazato obtained a bachelor’s degree in science from Fudan
University in July 1986 and obtained a master’s degree in biophysics and biochemistry from
University of Tokyo in March 1993. Mr. Miyazato was a manager in fixed income department
of Credit Suisse First Boston (currently known as Credit Suisse Group AG) from April 1993
to March 1994, mainly in charge of Japanese government bond and Euro-yen bond trading and
investment in the Asia-Pacific region. He was head of Asia department of Tokyo branch of
Deutsche Genossenschaftsbank AG (currently known as Deutsche Zentral-Genossenschaftbank
AG) from April 1994 to March 1998, mainly in charge of European government bond trading
and investment in the Asia-Pacific region. Mr. Miyazato was the global market investment
manager of proprietary investment department of Tokyo branch of J.P. Morgan from April 1998
to September 1999, mainly in charge of the company’s capital operation. Mr. Miyazato was a
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
fund manager of global strategic asset management, a senior fund manager of alternative
investment, general manager of the China Investment Department and president of the Greater
China area of Nikko (Citi) Asset Management Co., Ltd. from October 1999 to March 2009,
mainly in charge of investment and management. He was also a director and the shareholder
representative of Rongtong Fund Management Co., Ltd. ( Wú‘t g – QlS ) from April
2007 to April 2009. He was general manager of international business department,
commissioner of international business coordination committee and commissioner of strategic
development and IT management committee of our Company from May 2009 to March 2012,
mainly in charge of expanding international business.
Mr. Jin Xiaobin (‘fe ), aged 57, joined our Company in August 1998 and has been our
Secretary to the Board since May 2005 and the deputy director of our investment banking
committee since March 2010. He is mainly in charge of the office of the Board and office of
Supervisory Committee. He mainly assists in the management of investment banking business.
He has 13 years of management experience in securities industry. Mr. Jin obtained a bachelor’s
degree in political education from Shanghai Second Institute of Education (N mw{,NeYxb )
in July 1988, a master’s degree in economics from Fudan University in July 1993, a doctor’s
degree in economics from Fudan University in January 1997 and a postdoctoral degree in
finance from Shanghai University of Finance and Economics in July 1999. Mr. Jin has been a
deputy researcher (deputy professor level) recognized by Shanghai University of Finance and
Economics since June 1998 and has been an expert with special allowance from the State
Council since June 2002. Mr. Jin worked in the People’s Liberation Army Navy (N-W N”l ‰
e>mw ) from December 1972 to March 1998. Mr. Jin has served in various positions in our
Company and subsidiaries including deputy general manager of research and development
center from December 1998 to March 2000, head of research institute from March 2000 to
August 2004, general manager of brokerage business headquarters from May 2003 to March
2005, general manager of M&A financing department from January 2007 to March 2008, and
chairman and legal representative of Haitong Jihe Management from June 2010 to May 2011,
mainly in charge of private equity direct equity investment. He was deputy director member of
analysts committee of SAC from July 2000 to June 2011. Mr. Jin has been assistant to our
general manager since July 2003, secretary to the Board of Directors of our Company since
May 2005, the deputy director of investment banking commission of our Company since March
2010, mainly providing assistance in the management of equity financing department, debt
financing department and M&A financing department. He has been a professional evaluation
expert of securities companies in SAC since January 2011, and leader of preparation team of
Liaoning New Resource and Low Carbon Industry Investment Fund* (e°nTONxu\"im
bWú‘ ) since June 2011.
Mr. Wang Jianye (súim ), aged 51, joined our Company in August 1994 and has been
our General Compliance Officer since July 2010 and our Chief Risk Control Executive since
May 2011. He is mainly in charge of compliance and risk management headquarters. He has
around 25 years of working experience in banking and securities industry including over 15
years of management experience. Mr. Wang graduated with a major in finance from Shaanxi
Institute of Finance and Economics (junior college degree) in June 1984 and graduated with a
major in money and banking from Graduate School of Xiamen University in January 1994. Mr.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Wang is a senior economist recognized by PBOC in July 1993. Mr. Wang was successively
deputy director-level clerk* (RoN;NyTá ), trainee deputy director, deputy director of education
department of financial administration division of PBOC Inner Mongolia Branch from August
1984 to August 1990, deputy director of Financial Administration Division of PBOC Inner
Mongolia Branch from August 1990 to May 1992, deputy general manager of the securities
department of Inner Mongolia Securities Company* (QgSêlS@IR8QlS ) from May 1992
to March 1993 and deputy general manager of the same company from March 1993 to July
1994 mainly in charge of securities brokerage and underwriting services. Mr. Wang previously
served in various positions in our Company including head of trading department from August
1994 to March 1996, deputy general manager of business management headquarters from
March 1996 to September 1998, and general manager of integrated business management
headquarters from September 1998 to August 2004. Mr. Wang was assistant to general manager
of our Company from June 2001 to February 2011, general manager of brokerage business
headquarters from March 2005 to June 2006 and general manager of risk control headquarters
from October 2008 to March 2011, and was successively in charge of integrated business
management headquarters, brokerage business headquarters, I.T. department, brokerage
operations center, sales and transactions headquarters, customer asset management department
and risk control department.
Mr. Li Chuqian (gNy RM aged 55, joined our Company in August 1994 and has been our
Chief Financial Officer and general manager of planning and finance department since July
2007. He is mainly in charge of planning and finance department and assists in the management
of equity management department. He has around 25 years of working experience in financial
management including over 15 years of financial experience in securities industry. Mr. Li
obtained a bachelor’s degree in engineering from Hefei University of Technology in September
1982 and a master’s degree in economics from Zhongnan University of Economics
(predecessor of Zhongnan University of Economics and Law) in October 1988. Mr. Li is an
accountant recognized by the PRC Ministry of Finance in December 1992 and a senior
economist recognized by Job Title Qualification Evaluating Committee in the Department of
Finance of Anhui Province* ([w ? j_wz1YTág ) in April 1993. Mr. Li was
previously deputy director clerk of Central Enterprise Department of Anhui Provincial
Department of Finance* ([w ? N-O ) from July 1988 to August 1991 and section
chief of Anhui Provincial State-owned Assets Supervision and Administration Bureau ([w
W g u\"{t \ ) from August 1991 to July 1994 mainly in charge of management of
state-owned assets of Anhui provincial business agriculture and forestry and administrative
institutions. Mr. Li served in various positions in our Company including head of planning and
finance department from August 1994 to March 1996, deputy general manager of finance and
accounting department from March 1996 to April 1998, general manager of finance and
accounting department from April 1998 to July 2001, deputy chief financial officer and general
manager of finance and accounting department from July 2001 to July 2007. Mr. Li has been
chief supervisor of HFT Investment Management since April 2003, a director of Haitong-Fortis
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
PE Management since June 2010, and a director of Shanghai Jielong Industry Group
Corporation Limited (N mwuLim–W g – QlS ) (a company listed on the Shanghai
Stock Exchange and its stock code is 600836) from May 2006 to May 2009.
Joint Company Secretaries
Mr. Jin Xiaobin (‘fe ), one of our joint company secretaries, is also a member of our
senior management. Please see “– Overview – Senior Management” in this prospectus for his
biography.
Ms. Mok Mingwai (f ag ), aged 40, was appointed as our joint company secretary on
November 8, 2011. She has over 15 years of professional and in-house experience in the
company’s secretarial field. Ms. Mok is a fellow member of the Hong Kong Institute of
Chartered Secretaries and the Institute of Chartered Secretaries and Administrators in the
United Kingdom. Ms. Mok worked in the Corporate Services Division of KPMG from August
1994 to April 2002 in Hong Kong. She subsequently worked for various commercial and
professional organizations during the period from April 2002 to March 2008. Ms. Mok acted
as the company secretary from March 2008 to December 2010 for a group with two listed
companies, namely HKC (Holdings) Limited (n/^ú- (c§ )g – QlS ) (a company listed on
the Hong Kong Stock Exchange and its stock code is 00190) and Hong Kong Energy
(Holdings) Limited (now known as China Renewable Energy Investment Limited (N-W Qu
nbg – QlS )) (a company listed on the Hong Kong Stock Exchange and its stock code is
00987). Ms. Mok is currently an associate director of KCS Hong Kong Limited, a corporate
secretarial and accounting services provider in Hong Kong. She currently acts as the joint
company secretary of Shanghai Pharmaceuticals Holding Co., Ltd. (N mw‘W g – Ql
S ) (a company listed on the Hong Kong Stock Exchange and its stock code is 02607), Huaneng
Renewables Corporation Limited (e°nNg – QlS ) (a company listed on the Hong
Kong Stock Exchange and its stock code is 00958) and China Hanking Holdings Limited (N-
W scg – QlS ) (a company listed on the Hong Kong Stock Exchange and its stock code
is 03788), and also acts as the sole company secretary of Hongguo International Holdings
Limited (;W W – § – QlS ) (a company listed on the Hong Kong Stock Exchange and its
stock code is 01028) and Tenfu (Cayman) Holdings Company Limited (Y)y (fü )c§g – Ql
S ) (a company listed on the Hong Kong Stock Exchange and its stock code is 06868).
BOARD COMMITTEES
The Board delegates certain responsibilities to various dedicated committees. In
accordance with relevant PRC laws, regulations, the Articles of Association, and the Hong
Kong Listing Rules, we have formed four board committees, namely: the audit committee, the
nomination, remuneration and assessment committee, the development strategy and investment
management committee and the compliance and risk control committee.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Audit Committee
We have established an audit committee with written terms of reference in compliance
with Rule 3.21 of the Hong Kong Listing Rules and paragraph C3 of the HKSE Corporate
Governance Code. The audit committee consists of seven Directors: Mr. Zhou Donghui, Mr. Xu
Chao, Mr. Wang Hongxiang, all of whom are non-executive Directors, and Mr. Zhang Huiquan,
Mr. Zhang Ming, Mr. Dai Genyou and Mr. Chen Qiwei, all of whom are independent
non-executive Directors. Mr. Zhang Ming, who has the appropriate professional qualifications,
currently serves as the chairman of the audit committee. The primary duties of the audit
committee are to review and supervise our financial reporting process, which include, among
others:
to propose the appointment or removal of the external auditor of the Company and
to review and supervise the independence and objectivity of the external auditors
and the effectiveness of the audit process;
to discuss with the external auditor on the nature and scope of the audit work prior
to the commencement of the audit work;
to oversee the Company’s internal audit system and its implementation;
to be in charge of communication between the internal auditors and external auditors
and meet the external auditor at least twice a year;
to review the Company’s financial information and disclosure thereof, and to review,
where necessary, any major related party transactions;
to review the internal control systems of the Company and its subsidiaries and
branches from the perspective of appropriateness, reasonableness and effectiveness
as well as implementation, and make recommendations on the pursuit of
accountability of responsible persons;
to review the arrangements for employees to raise concerns about financial reporting
improprieties;
to make recommendations on performance assessment of internal auditors in
discharging their responsibilities; and
to review the regular and interim audit reports submitted by the internal audit
departments of the Company.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Nomination, Remuneration and Assessment Committee
We have established a nomination, remuneration and assessment committee with written
terms of reference in compliance with paragraph B1 of the HKSE Corporate Governance Code.
The nomination, remuneration and assessment committee consists of seven Directors: Mr. Qian
Shizheng, Mr. He Jianyong, Mr. Li Gewei, all of whom are non-executive Directors, Mr. Zhang
Ming, Mr. Liu Chee Ming, Mr. Dai Genyou and Mr. Xia Bin, all of whom are independent
non-executive Directors. Mr. Xia Bin currently serves as the chairman of the nomination,
remuneration and assessment committee. The primary duties of the nomination, remuneration
and assessment committee are to formulate the nomination procedures and standards for
candidates for Directors, evaluate the performance of Directors and senior management, make
recommendations on the remuneration package of our Directors and senior management, and
evaluate and make recommendations on employee benefit arrangements, which include, among
others:
to consider and make recommendation on the selection criteria and procedures
applicable to directors and management;
to carry out extensive search for qualified candidates of directors and management
and to consider and make recommendation on the same;
to review the structure, size and composition of the board of directors at least
annually to complement the Company’s corporate strategy; where necessary, to seek
professional advice to perform its responsibilities;
to study the performance assessment criteria for directors and management, and to
propose the performance assessment system, competitive remuneration package, and
the incentive scheme of stock or stock options based on and financial performance
and the executive liability insurances in each case based on the characteristics of the
financial and securities industry and the job responsibilities of the directors and
management as well as the remuneration of the same position in other relevant
enterprises;
to establish the policies on remuneration, including without limitation the
performance assessment criteria and procedures and the main evolution system,
major plans and policies related to reward and punishment;
based on the result of the Audit Committee’s annual audit, review the performance
of the Company’s directors and management, conduct annual performance
assessment of the directors and management, and make recommendations; and
to consider and discuss the Company’s remuneration reform plan, and to oversee the
implementation of the Company’s remuneration system.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Development Strategy and Investment Management Committee
Our development strategy and investment management committee consists of five
Directors: Mr. Wang Kaiguo, an executive director, Mr. Qian Shizheng, Mr. Zhuang Guowei,
Mr. Zhang Jianwei, all of whom are non-executive Directors, and Mr. Chen Qiwei, an
independent non-executive Director. Mr. Wang Kaiguo currently serves as the chairman of this
committee. The primary duties of this committee are to conduct studies and submit proposals
regarding our mid-to-long-term development strategies and planning of the Company, which
include, among others:
to study and make suggestions to the financing plans of major investment
transactions which the Articles of Association of the Company has required to be
approved by the Board of Directors;
to conduct feasibility study and make suggestions to the major capital operation,
asset management, mergers and acquisitions which the Articles of Association of the
Company has required to be approved by the Board of Directors;
to study and make suggestions to major issues affecting the development of the
Company; and
to conduct inspection and supervision to the implementation of the above matters.
Compliance and Risk Control Committee
The compliance and risk control committee consists of five Directors: Mr. Li Mingshan,
an executive director, Mr. Zhou Donghui, Mr. Feng Huang, all of whom are non-executive
Directors, and Mr. Zhang Huiquan and Mr. Dai Genyou, both of whom are independent
non-executive Directors. Mr. Zhang Huiquan currently serves as the chairman of the
compliance and risk control committee. The primary duties of this committee are to review the
Company’s compliance operation and risk controls, formulate compliance management
policies, review the work report of the General Compliance Officer, diagnose and complete the
internal control system, review and monitor the compliance management system, and perform
other duties and responsibilities as assigned by our Board, which include, among others:
to formulate compliance management policies and to regularly or irregularly review
the work report of the General Compliance Officer and make suggestions to the
improvement of the compliance management;
to review and monitor the feasibility, rationality, effectiveness and implementation
of the compliance management system of the Company;
to formulate the overall risk management policies and to review and monitor the
Company’s identification and evaluation of the various existing and potential risks
and completeness and effectiveness of the Company’s risk control system;
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
to review and monitor the management of the Company to the risk parameter,
formulate the risk control principles and the limitations of major risks for the
Company;
to review and supervise the implementation of the internal control system and
provide guidance to the same; and
to provide evaluation to the business authorization and operation risks, investment
risks, financial risks and morality risks, and provide timely guidance to strengthen
and improve the risk controls.
CORPORATE GOVERNANCE
Our Directors are aware that, effective from April 1, 2012, the recommended best practice
of arranging appropriate insurance cover in respect of legal actions against directors has been
upgraded to a code provision in the HKSE Corporate Governance Code. Our Directors are also
aware that, upon Listing, we are expected to comply with, but may choose to deviate from such
code provision. However, such deviation shall be carefully considered and reasons for such
deviation shall be given in the interim report and the annual report of