IMPORTANT
If you are in any doubt about any of the contents of this prospectus, you should seek independent professional advice.
Holly Futures (a joint stock company incorporated in the People’s Republic of China with limited liability under the Chinese corporate name 弘業期貨股份有限公司 and carrying on business in Hong Kong as Holly Futures) GLOBAL OFFERING Number of Offer Shares under the : 249,700,000 H Shares (comprising Global Offering 227,000,000 H Shares to be offered by the Company and 22,700,000 H Shares to be offered by the Selling Shareholders, subject to the Over-allotment Option) Number of Hong Kong Offer Shares : 24,970,000 H Shares (subject to reallocation) Number of International Placing Shares : 224,730,000 H Shares (subject to reallocation and the Over-allotment Option) Maximum Offer Price : HK$2.98 per H Share (payable in full upon application in Hong Kong dollars and subject to refund), plus brokerage of 1%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005% Nominal Value : RMB1.00 per H Share Stock Code : 3678
Sole Sponsor
Guotai Junan Capital Limited Sole Global Coordinator, Sole Bookrunner and Sole Lead Manager
Guotai Junan Securities (Hong Kong) Limited
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 “Appendix VII — Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection”, has been registered by the Registrar of Companies in Hong Kong as required by section 342C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance of Hong Kong (Chapter 32 of the Laws of Hong Kong). The Securities and Futures Commission and the Registrar of Companies in Hong Kong take no responsibility for the contents of this prospectus or for any other document referred to above. The Offer Price is expected to be determined by an agreement between our Company (for itself and on behalf of the Selling Shareholders) and the Sole Global Coordinator (on behalf of the Underwriters) on the Price Determination Date. The Price Determination Date is expected to be on or about Monday, 21 December 2015 and, in any event, not later than Monday, 28 December 2015. The Offer Price will be not more than HK$2.98 and is currently expected to be not less than HK$2.43 per Offer Share unless otherwise announced. The Sole Global Coordinator (on behalf of the Underwriters, and with our consent) may reduce the number of Offer Shares stated in this prospectus 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 which case, notice of such reduction will be published in the The Standard (in English) and the Hong Kong Economic Times (in Chinese), and will be posted on the website of the Stock Exchange (www.hkexnews.hk) and on the website of our Company (www.ftol.com.cn). Further details are set out in the sections headed “Structure of the Global Offering” and “How to Apply for Hong Kong Offer Shares” in this prospectus. If, for whatever reason, the Offer Price is not agreed between our Company (for itself and on behalf of the Selling Shareholders) and the Sole Global Coordinator (on behalf of the Underwriters) on or before Monday, 28 December 2015, 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 the legal, economic and financial systems between the PRC and Hong Kong, and the fact that there are different risks relating to investment 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 the H Shares. Such differences and risk factors are set forth in the sections headed “Risk Factors”, “Regulatory Overview”, “Appendix IV — Summary of Principal Legal and Regulatory Provisions” and “Appendix V — Summary of Articles of Association” in this prospectus. The Offer Shares have not been and will not be, registered under the U.S. Securities Act or any state securities laws in the United States, and may not be offered, sold, pledged or transferred within the United States, except that the Offer Shares may be offered, sold and delivered outside the United States in reliance on Regulation S. The obligations of the Hong Kong Underwriters under the Hong Kong Underwriting Agreement to subscribe for, and to procure applicants for the subscription for, Hong Kong Offer Shares are subject to termination by the Sole Global Coordinator (for themselves and on behalf of the Underwriters), if certain grounds arise at or prior to 8:00 a.m. (Hong Kong time) on the day dealings in the H Shares first commence on The Stock Exchange of Hong Kong Limited (such first dealing date is currently expected to be Wednesday, 30 December 2015). Such grounds are set out in the section headed “Underwriting” in this prospectus. It is important that you refer to that section for further details. 16 December 2015 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. on Monday, 21 December 2015
Application lists open(3) ...... 11:45 a.m. on Monday, 21 December 2015
Latest time for lodging WHITE and YELLOW Application Forms ...... 12:00 noon on Monday, 21 December 2015
Latest time to give electronic application instructions to HKSCC(4) ...... 12:00 noon on Monday, 21 December 2015
Latest time to complete payment for White Form eIPO applications by effecting Internet banking transfer(s) or PPS payment transfer(s) ...... 12:00 noon on Monday, 21 December 2015
Application lists close ...... 12:00 noon on Monday, 21 December 2015
Expected Price Determination Date(5) ...... Monday, 21 December 2015
Announcement of:
• the final Offer Price;
• the level of applications in the Hong Kong Public Offering;
• the level of indications of interest in the International Placing; and
• the basis of allotment of the Hong Kong Offer Shares will be published (a) in The Standard (in English) and the Hong Kong Economic Times (in Chinese); (b) on our website at www.ftol.com.cn(6) and the website of the Stock Exchange at www.hkexnews.hk(7) on ...... Tuesday, 29 December 2015
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 “How to Apply for Hong Kong Offer Shares — Publication of Results” in this prospectus from ...... Tuesday, 29 December 2015
—i— EXPECTED TIMETABLE
Results of allocations in the Hong Kong Public Offering (with successful applicants’ identification document numbers, where appropriate) will be available at www.iporesults.com.hk with a “search by ID” function...... Tuesday, 29 December 2015
H Share certificates in respect of wholly or partially successful applications will be dispatched or deposited into CCASS on(8) ...... Tuesday, 29 December 2015
Refund cheques (if applicable) will be dispatched on(8)(10) ...... Tuesday, 29 December 2015
White Form e-Refund Payment Instructions will be dispatched on(8)(9) ...... Tuesday, 29 December 2015
Dealings in H Shares on the Stock Exchange to commence at 9:00 a.m. on...... Wednesday, 30 December 2015
Notes:
(1) All dates and times refer to Hong Kong local time and dates unless otherwise stated.
(2) If you have already submitted your application through the designated website at www.eipo.com.hk and obtained an application reference number from the designated website prior to 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 close. You will not be permitted to submit your application through the designated website at www.eipo.com.hk after 11:30 a.m. on the last day for submitting applications.
(3) If there is a tropical cyclone warning signal number 8 or above, or a “black” rainstorm warning in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Monday, 21 December 2015, the application lists will not open on that day. See “How to Apply for Hong Kong Offer Shares — Effect of Bad Weather on the Opening of the Application Lists.”
(4) Applicants who apply for the Hong Kong Offer Shares by giving electronic application instructions to HKSCC should see “How to Apply for Hong Kong Offer Shares — Applying by Giving Electronic Application Instructions to HKSCC via CCASS.”
(5) The Price Determination Date is expected to be on or about Monday, 21 December 2015 and in any event will not be later than Monday, 28 December 2015. If, for any reason, the Offer Price is not agreed on or before Monday, 28 December 2015, the Global Offering (including the Hong Kong Public Offering) will not proceed and will lapse.
(6) None of the website or any of the information contained on the website forms part of this prospectus.
(7) The announcement will be available for viewing on the Stock Exchange’s website at www.hkexnews.hk.
—ii— EXPECTED TIMETABLE
(8) Applicants who apply for 1,000,000 or more Hong Kong Offer Shares and have provided all information required by their Application Forms may collect refund cheques (where applicable) and/or H Share certificates (where applicable) in person from 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 from 9:00 a.m. to 1:00 p.m. on Tuesday, 29 December 2015.
Applicants being individuals who opt for personal collection must not authorize any other person to make collection on their behalf. Applicants being corporations who opt for personal collection must attend by their authorized representatives each bearing a letter of authorization from his corporation stamped with the corporation’s chop. Both individuals and authorized representatives (if applicable) must produce, at the time of collection, evidence of identity acceptable to Computershare Hong Kong Investor Services Limited. Uncollected refund cheques and H Share certificates will be dispatched promptly by ordinary post to the addresses as specified in the applicants’ Application Forms at the applicants’ own risk. Details of the arrangements are set out in “How to Apply for Hong Kong Offer Shares” in this prospectus.
(9) Applicants who apply through the White Form eIPO service and paid their applications monies through single bank accounts may have refund monies (if any) dispatched to their application payment bank accounts, in the form of e-Refund payment instructions. Applicants who apply through the White Form elPO service and paid their application monies through multiple bank accounts may have refund monies (if any) dispatched to the addresses as specified in their application instructions to the White Form eIPO Service Provider, in the form of refund cheques, by ordinary post at their own risk.
(10) Refund cheques will be issued in respect of wholly or partially unsuccessful applications and in respect of successful applications if the Offer Price is less than the price payable on application.
The H Share certificates will only become valid certificates of title provided that the Global Offering has become unconditional in all respects and neither the Hong Kong Underwriting Agreement nor the International Underwriting Agreement is terminated in accordance with its respective terms prior to 8:00 a.m. on the Listing Date. The Listing Date is expected to be on Wednesday, 30 December 2015. Investors who trade the H Shares on the basis of publicly available allocation details prior to the receipt of H Share certificates or prior to the H Share certificates becoming valid certificates of title do so entirely at their own risk.
— iii — CONTENTS
IMPORTANT NOTICE TO INVESTORS
This prospectus is issued by Holly Futures Co., Ltd. solely in connection with the Hong Kong Public Offering and the Hong Kong Offer Shares. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the Hong Kong Offer Shares offered by this prospectus pursuant to the Hong Kong Public Offering. 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 jurisdictions or in any other circumstances. No action has been taken to permit a public offering of the Offer Shares in any jurisdiction other than Hong Kong and no action has been taken to permit 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 authorisation 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 authorised anyone to provide you with information that is different from what is contained in this prospectus.
Any information or representation not made in this prospectus must not be relied upon by you as having been authorised by us, the Sole Sponsor, the Sole Global Coordinator, the Sole Bookrunner, the Sole Lead Manager, any of the Underwriters, any of our or their respective directors, employees, agents, affiliates or advisers, or any other person or party involved in the Global Offering. Information contained in our website, located at www.ftol.com.cn does not form part of this prospectus.
Page
EXPECTED TIMETABLE ...... i
CONTENTS ...... iv
SUMMARY ...... 1
DEFINITIONS ...... 17
GLOSSARY OF TECHNICAL TERMS ...... 29
FORWARD-LOOKING STATEMENTS ...... 31
RISK FACTORS ...... 33
WAIVERS FROM STRICT COMPLIANCE WITH LISTING RULES ...... 65
INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING ...... 69
DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING ...... 75
CORPORATE INFORMATION ...... 79
—iv— CONTENTS
Page
INDUSTRY OVERVIEW ...... 81
REGULATORY OVERVIEW ...... 94
HISTORY, DEVELOPMENT AND CORPORATE STRUCTURE ...... 121
BUSINESS ...... 134
RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDER ...... 221
CONNECTED TRANSACTIONS ...... 234
DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT ...... 247
SUBSTANTIAL SHAREHOLDERS ...... 266
SHARE CAPITAL ...... 269
CORNERSTONE INVESTOR ...... 274
FINANCIAL INFORMATION ...... 278
FUTURE PLANS AND USE OF PROCEEDS ...... 338
UNDERWRITING ...... 340
STRUCTURE OF THE GLOBAL OFFERING ...... 350
HOW TO APPLY FOR HONG KONG OFFER SHARES ...... 358
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 LEGAL AND REGULATORY PROVISIONS ...... IV-1
APPENDIX V — SUMMARY OF 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, which constitute an integral part of this prospectus, before you decide to invest in our Offer Shares. Information contained in our website, located at www.ftol.com.cn does not form part of this prospectus.
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 the largest futures firm headquartered in Jiangsu Province in terms of commission and fee income and net profit for the year ended 31 December 2014, as well as Net Capital as at 31 December 2014. We are also one of the leading futures firms in the PRC with diversified futures business and strong presence in the PRC. As at 31 December 2014, there were about 150 futures firms in China. According to the CFA, we ranked the 8th among the about 150 futures firms in China in terms of Net Capital as at 31 December 2014, and we ranked the 16th in terms of commission revenue for the year ended 31 December 2014 with a market share of 1.6% in China. In addition, we have been rated “Class A of the A Category” by the CSRC for the seven years consecutively, since the CSRC launched such regulatory evaluation in 2009. Our principal business lines include:
1. Futures Brokerage. Our Company, Holly Futures, provides futures brokerage service in the PRC in respect of all futures products available at the PRC Futures Exchanges, including commodity futures and financial futures. Since January 2013, Holly Su Futures has been providing futures brokerage services in Hong Kong, in respect of a wide range of futures products available in HK Futures Exchange and other major global futures exchanges.
2. Asset Management. We provide asset management service by way of targeted asset management schemes, in which each assets management scheme is an investment portfolio that we select and/or manage for relevant individual client, comprising primarily investment in futures and other financial products. Besides, we have also launched seven collective asset management schemes since May 2015, in which we manage assets for groups of clients.
3. Commodity Trading and Risk Management. We provide futures and commodity related cash management and risk management service that is tailor-made for our clients, where we derive our net investment gain through cooperative hedging activity together with our clients, commission and fee income from providing commodities trading services, or interest income from purchase and re-sale of commodities. We believe this service can meet the risk management needs of our clients while allowing us to take advantage of hedging and arbitrage opportunities to manage our own risks and realise gains.
—1— SUMMARY
To better utilise our cash, we have engaged in financial investment activities like investing in listed and unlisted equity securities, wealth management products issued by banks, funds and asset management plans for our own account. Gains from our financial investment activities amounted to approximately RMB5.2 million, RMB10.3 million, RMB14.7 million and RMB19.0 million, representing approximately 1.4%, 3.1%, 5.1% and 10.7% of our total operating income for the years ended 31 December 2012, 2013, 2014 and the six months ended 30 June 2015, respectively.
In line with our business strategy, we have strived to diversify our business and revenue mix by engaging in new businesses. We commenced our futures asset management in February 2013 and our commodity trading and risk management businesses in June 2013 to provide futures and spot arbitrage, cooperative hedging and warehouse receipts services, which in turn complement our business as a whole. We aim to continue to strengthen our futures brokerage business while striving to further develop our asset management business and commodity trading and risk management business to broaden our income base.
We focus on monitoring and managing five major risks, namely (i) operational risk, (ii) compliance risk, (iii) market risk, (iv) credit risk, and (v) investment risk. Our risk management’s objective is to implement a comprehensive risk management system to ensure our business operation complies with the relevant rules and regulations, and limit our risks related to our business operation to a tolerable level, thereby maximising our value. There are four management levels in our risk management’s organisational structure, namely the Board, the Risk Management Committee, the Chief Risk Officer and the officers responsible for risk management of each business department.
We have implemented internal control measures which are designed to monitor each of our specific business lines and activities, including futures brokerage business, asset management service, commodity trading and risk management business. We also have internal control measures of Chinese Wall, segregation of duties, prevention of conflict of interest, anti-money laundering as well as internal controls for our financial investment.
COMPETITIVE STRENGTHS
We believe that we have the following competitive advantages that differentiate us from our competitors:
• We are well positioned to benefit from the strong economic position of Jiangsu Province and the fast growing futures trading industry in China
• We are the largest futures firm headquartered in Jiangsu Province in terms of commission revenue and net profit for the year ended 31 December 2014 as well as Net Capital as at 31 December 2014 with a diversified futures business in China
• Strategic and extensive network of futures branches
—2— SUMMARY
• Strong innovative capabilities to capitalise on opportunities from the transformation of the PRC futures industry
• Efficient, integrated and stable online trading platform
• Strong customer service capabilities
• Experienced and stable senior management team
BUSINESS STRATEGIES
Our vision is to strengthen our leading position in the futures brokerage business in Jiangsu Province and capture the growth potential of the futures industry in the PRC. Our business strategies are as follows:
• Capitalise on the growth potential of the PRC futures industry
• Capture opportunities from PRC futures industry reform to strengthen our competitive advantage in our futures business and our innovation capability in diversifying our existing businesses
• Strengthen risk management, internal controls and IT capabilities to improve overall operational efficiency
• Reinforce our human resources management for effectively attracting, incentivising and retaining talented professionals
• Steadily expand our international business and build an integrated overseas platform
• Pursue selective acquisitions of relevant businesses compatible with our development strategy
SUMMARY OF FINANCIAL AND OPERATING INFORMATION
The following tables present our summary of financial information as of and for the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015 as extracted from the Accountants’ Report in Appendix I to this prospectus. You should read this summary in conjunction with our combined financial information included in the Accountants’ Report in Appendix I to this prospectus, including the accompanying notes.
—3— SUMMARY
Combined income statements
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Revenue 375,642 325,398 273,875 133,074 151,006 Net investment gains 4,244 11,523 17,246 1,088 26,635 Operating income 379,886 336,921 291,121 134,162 177,641 Other income 5,045 5,672 4,366 2,436 2,436 Operating expenses (258,560) (252,963) (218,586) (99,342) (106,411) Profit from operations 126,371 89,630 76,901 37,256 73,666 ------
Share of (losses)/gains of associates (154) (598) (519) (80) (49) Profit before taxation 126,217 89,032 76,382 37,176 73,617 ------
Income tax expense (29,681) (25,753) (18,178) (9,094) (17,641) Profit for the year/period 96,536 63,279 58,204 28,082 55,976
During the years ended 31 December 2012, 2013 and 2014 and six months ended 30 June 2015, refunds of trading fees that we received from the PRC Futures Exchanges represented approximately 16.1%, 9.4%, 8.3% and 5.8% of our total operating income, respectively. We recognise refunds of trading fees as our revenue upon receipt of such from the PRC Futures Exchanges. The amount of refunds that we can receive from the PRC Futures Exchange can be affected by various factors, such as the type of futures products, our trading volumes and market conditions. None of the PRC Futures Exchanges has published any definite guideline for determining the amount of trading fees to be refunded. Whether to refund any trading fees, the frequency and the amount of refunds remain subject to the exchanges’ sole discretion, and as such, the historical pattern of refunds does not indicate any correlation between the trading volume and refunds. For further details, please see section headed “Risk Factors — We receive refunds of handling fees from PRC Futures Exchanges from time to time and we cannot assure you whether we can receive any refunds of trading fees in the future and if so, the amount of such refund” at page 37 of this prospectus.
—4— SUMMARY
The table below sets out our net profit during the Track Record Period as adjusted for the refunds of trading fees from the PRC Futures Exchanges (which were determined at the discretion of the PRC Futures Exchanges) and the net gains from our financial investment, net of applicable taxes:
For the year ended For the six months 31 December ended 30 June 2012 2013 2014 2014 2015 (RMB’000)
Profit for the year 96,536 63,279 58,204 28,082 55,976 Excluding: - Gain from financial investment(1) (3,684) (7,309) (10,422) 354 (13,447) - Refunds of trading fees(2) (43,217) (22,540) (17,177) (4,164) (7,248) Adjusted net profit 49,635 33,430 30,605 24,272 35,281
Notes:
(1) Arising from financial investments activities like investing in listed and unlisted equity securities, wealth management products issued by banks, funds and asset management plans for our own account, net of enterprise income tax, business tax and surcharges.
(2) Net of enterprise income tax, business tax and surcharges.
Summary of combined statements of financial position
As at As at 31 December 30 June 2012 2013 2014 2015 (RMB’000)
Total current assets 2,887,701 3,210,446 3,267,773 3,652,487 Total current liabilities 1,769,438 2,060,555 2,113,258 2,469,718 Net current assets 1,118,263 1,149,891 1,154,515 1,182,769 Total non-current assets 57,171 90,250 99,867 97,610 Total non-current liabilities — — 403 1,781 Net assets 1,175,434 1,240,141 1,253,979 1,278,598
—5— SUMMARY
Summary of combined statements of cash flow
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Net cash (used in)/generated from operating activities (355,750) 71,008 160,588 252,949 236,704 Net cash generated from/(used in) investing activities 39,018 (60,750) 16,797 (11,471) (256,421) Net cash (used in)/generated from financing activities (33,858) 4,052 23,382 (46,466) (1,794) Net (decrease)/increase in cash and cash equivalents (350,590) 14,310 200,767 195,012 (21,511) Effect of foreign exchange rate changes 1 (247) (19) 63 (5) Cash and cash equivalents at 1 January 367,811 17,222 31,285 31,285 232,033 Cash and cash equivalents at 31 December/30 June 17,222 31,285 232,033 226,360 210,517
Selected operating and financial data
The following table sets forth our key operating data as of the dates or the years indicated:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (unaudited)
Client balances in the PRC (RMB’ million) 1,722 2,078 1,976 1,718 2,253 Trading volume handled by the Company’s futures brokerage service in the PRC (RMB’ billion) 5,284 4,426 3,775 1,713 3,116 Average brokerage commission rate in the PRC(1) 0.36 bps 0.23 bps 0.17 bps 0.18 bps 0.10 bps
Average brokerage commission rate of the Company in the PRC Commodity futures 0.64 bps 0.79 bps 0.65 bps 0.63 bps 0.62 bps Financial futures 0.30 bps 0.19 bps 0.12 bps 0.12 bps 0.11 bps Overall 0.56 bps 0.55 bps 0.44 bps 0.46 bps 0.28 bps
Note:
(1) In accordance with industry practice, average brokerage commission rate is calculated based on the aggregate of commission and fee income from futures brokerage business and refunds of trading fees, divided by futures brokerage trading volume.
—6— SUMMARY
The PRC futures industry is characterised by intense competition. In particular, the average commission rate of the PRC futures brokerage industry also decreased from 0.36 bps in 2012 to 0.17 bps in 2014 due to keen competition. Nevertheless, according to the CFA, the trading volume of China’s futures market has increased from approximately 1,054.1 million lots in 2011 to 2,505.8 million lots in 2014, representing a CAGR of approximately 33.5% and the trading turnover increased from approximately RMB137,516.2 billion in 2011 to RMB291,986.7 billion in 2014, representing a CAGR of approximately 28.5%. Driven by rapid economic growth, continuous increase in disposal income of residents as well as policies support for the development and expansion of futures companies, we believe the PRC futures industry has considerable growth prospects. We believe the growth drivers include:
• Higher level of participation by overseas institutions
• Accelerated innovative development
• Market integration
• Accelerated launch of new futures products
• Application of information technology in operation and monitoring
• Cross-licensing among financial institutions offering development opportunities as well as increasing the competition for futures companies
The following table sets forth the key measurements of our profitability for the years/period included:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’ 000 except for %)
Profit from operations 126,371 89,630 76,901 37,256 73,666 Operating margin(1) 32.8% 26.2% 26.0% 27.3% 40.9% Profit for the year/period 96,536 63,279 58,204 28,082 55,976 Net margin(2) 25.1% 18.5% 19.7% 20.6% 31.1% Adjusted current ratio(3) 23.5 38.9 7.7 7.4 7.4
Notes: (1) Operating profit divided by operating income plus other income. (2) Profit for the year/period divided by operating income plus other income. (3) Adjusted current ratio is calculated by dividing by the adjusted current assets by the adjusted current liabilities.
For further information of our capital adequacy and risk control indicators, please see the section headed “Financial Information — Capital Adequacy and Risk Control Indicators” of this prospectus.
—7— SUMMARY
The following table sets forth our operating income (including inter-segment operating income) by business segment for the years indicated.
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000) Commission and fee income Futures brokerage and asset management business segment Futures brokerage business 233,541 210,340 141,975 72,686 79,977 Refunds from PRC Futures Exchanges 61,041 31,835 24,261 5,882 10,237 Asset management business — 137 401 190 470 Futures brokerage business and asset management business segment 294,582 242,312 166,637 78,758 90,684 Commodity trading and risk management business segment — — 752 — 1,960 Subtotal 294,582 242,312 167,389 78,758 92,644
Interest income Futures brokerage business and asset management business segment 81,060 82,582 99,942 52,082 54,600 Commodity trading and risk management business segment — 504 6,544 2,234 3,762 Subtotal 81,060 83,086 106,486 54,316 58,362
Inter-segment revenue Futures brokerage business and asset management business segment — — 12 — 89 Commodity trading and risk management business segment ————— Subtotal — — 12 — 89
Other income and gains Futures brokerage business and asset management business segment 9,289 17,195 11,691 (262) 13,084 Commodity trading and risk management business segment — — 9,921 3,786 15,987 Subtotal 9,289 17,195 21,612 3,524 29,071
—8— SUMMARY
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000) Segment revenue and other income Futures brokerage business and asset management business segment 384,931 342,089 278,282 130,578 158,457 Commodity trading and risk management business segment — 504 17,217 6,020 21,709 Total 384,931 342,593 295,499 136,598 180,166
Segment margins Futures brokerage business and asset management business segment 32.8% 26.1% 24.3% 25.7% 35.8% Commodity trading and risk management business segment — 37.5% 54.5% 62.0% 78.6% Overall 32.8% 26.2% 26.0% 27.3% 40.9%
During the Track Record Period, our revenue from futures brokerage services decreased. It was mainly brought by intense competition, which also led to decrease in trading volume and average commission rate of our Company. The decrease in our average commission rate was in line with the industry trend of commission rate. We believe we are in a position to charge a higher brokerage commission rate than the average brokerage commission rate in the PRC futures market, due to (i) our good brand name and reputation in the market, (ii) our ability to offer a trustworthy and stable trading platform, and (iii) our ability to conduct researches and analysis on the futures market.
During the Track Record Period, we reduced our number of Introducing Brokers and strived to develop our own sales team, explore market and provide services directly by our own employees. By reducing our reliance on Introducing Brokers, we aim to better manage our clientele and increase in our operation efficiency. As such, while our number of Introducing Brokers decreased, with our own marketing effort, our number of clients increased during the Track Record Period, our client balance in the PRC increased in 2013, decreased slightly in 2014 and increased again in the first half of 2015.
While our commission income from customers referred by Introducing Brokers decreased by 17.9% in 2013, 60.2% in 2014 and 29.6% in the first half of 2015, our commission expenses paid to Introducing Brokers also decreased significantly by 27.7% in 2013, 57.8% in 2014, and 28.7% in the first half of 2015. Mainly, due to the intense market competition, our overall commission and fee income from futures brokerage business decreased by 9.9% in 2013, 32.5% in 2014, and increased by 10.0% in the first half of 2015, while our segment operating profit of futures brokerage and asset management business decreased by 29.3% in 2013, 24.5% in 2014 and increased by 69.3% in the first half of 2015 as compared to the corresponding period in 2014. Going forward, we will continue to keep up our quality of services, expand our scope of service and source of income as mentioned in our strategy and future plan.
—9— SUMMARY
OUR CONTROLLING SHAREHOLDER
As at the Latest Practicable Date, SOHO Holdings, directly through itself and indirectly through its shareholdings in Artall Culture Group which in turn held the controlling stake in Holly Corporation and Holly Logistics, was directly and indirectly interested in 449,705,474 Domestic Shares (representing approximately 66.14% of our total share capital) and constitutes our Controlling Shareholder as defined under the Listing Rules. For details, please see the section headed “Substantial Shareholders” in this prospectus. Immediately upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), SOHO Holdings will be, directly and indirectly, interested in 431,642,122 Shares (representing approximately 47.59% of our enlarged total share capital) and will therefore continue to be our Controlling Shareholder as defined under the Listing Rules.
SOHO Holdings, our Controlling Shareholder, is a limited liability company established under the laws of the PRC in April 1994 and a stated-owned enterprise wholly owned by Jiangsu SASAC. SOHO Holdings is an investment holding company principally engaged in (i) financial and industrial investment, authorised operation and management of state-owned assets; (ii) domestic and international trading; (iii) property leasing; and (iv) production, R&D and sales of silk, textiles and garments. For more details, please see the section headed “Relationship with Our Controlling Shareholder” in this prospectus.
REGULATORY REQUIREMENT ON FOREIGN SHAREHOLDERS
Pursuant to the relevant requirements under the Supervision and Administration Measures on Futures Firms (期貨公司監督管理辦法), the increase in the shareholding proportion of any single shareholder or the aggregate shareholding proportion of connected shareholders to 5% or above with the involvement of foreign shareholder(s) is subject to the approval of CSRC. A foreign shareholder holding 5% or more shares shall meet certain requirements in addition to those required for a legal person or other organization holding 5% or more shares. For details, please see the section headed “Regulatory Overview” in this prospectus.
DIVIDEND POLICY AND DISTRIBUTION PRIOR TO THE LISTING
In 2014, we declared and distributed cash dividends in the amount of RMB54.4 million for the year ended 31 December 2013 out of our distributable profit. On 9 June 2015, we declared and subsequently distributed on 7 August 2015 a dividend in the amount of RMB34 million for the year ended 31 December 2014. We did not declare any dividend in 2013 and 2012. Following the Global Offering and such distribution, our Shareholders will have an equal right to the distributable profit in respect of the year ending 31 December 2015 and thereafter. After completion of the Global Offering, we may distribute dividends by way of cash or shares. Any proposed distribution of dividends shall be formulated by our Board and will be subject to our Shareholders’ approval. A decision to declare or to pay any dividends in the future, and the amount of any dividends, will depend on a number of factors, including our results of operations, cash flows, financial condition, capital adequacy ratio, payments by our subsidiaries of cash dividends to us, future prospects, statutory, regulatory and contractual restrictions on our declaration and payment of dividends and other factors that our Board may consider important. Following the Global Offering, we plan to distribute about 10% to 30% of
—10— SUMMARY our distributable profits realised in that year as cash dividends in any fiscal year so long as we have profits after tax and accumulated undistributed profits in that year, except that we may decide not to distribute cash dividends because of a significant investment. For more details, please see the section headed “Financial Information — Dividend Policy” in this prospectus.
FUTURE PLANS AND USE OF PROCEEDS
We estimate that we will receive net proceeds from the Global Offering of approximately HK$550.4 million after deducting the underwriting fees and expenses payable by us in the Global Offering, assuming the Over-allotment Option is not exercised and an Offer Price of HK$2.7 per H Share, being the mid-point of the indicative Offer Price range of HK$2.43 to HK$2.98 per H Share in this prospectus. We will not receive any of the proceeds from the sale of the Sale Shares by the Selling Shareholders in the Global Offering. We intend to use the net proceeds we will receive from this offering for the following purposes:
• approximately 32%, or HK$176.1 million, will be applied to further develop our Hong Kong and global futures business by, among other things, pursuing acquisition where opportunities exist, trying to apply for additional licenses to conduct other regulated securities and futures related activities in Hong Kong and offering a wider range of futures related products and services;
• approximately 25%, or HK$137.6 million, will be applied to further develop our asset management business by, among other things, expanding the variety of our asset management schemes and products offering, providing seed money of collective asset management schemes to be established by our Group and developing our own investment advisory team;
• approximately 20%, or HK$110.1 million, will be applied to further develop our commodity trading and risk management business by providing additional capital to Holly Capital;
• approximately 10%, or HK$55.0 million, will be applied to further develop and strengthen our existing futures brokerage business by, among other things, optimizing our branch coverage network and geographical coverage, conducting more internet (on-line) related services and sales and hiring more sales and marketing staff as well as client managers;
• approximately 5%, or HK$27.5 million, will be applied to purchase IT equipment and software for upgrading and improving our IT infrastructure and capacities, including our on-line trading platform, our risk monitoring programmes and our software and computer programme structure for the provision of personalised trading and risk management functions; and
• approximately 8%, or HK$44.1 million, will be applied to general working capital of our Group.
—11— SUMMARY
LISTING EXPENSES
The total listing expenses (including professional fees, underwriting commissions and other fees incurred in connection with the Listing and Global Offering) payable by our Company are estimated to be approximately RMB51.6 million until completion of the Global Offering, assuming the Over-allotment Option is not exercised and based on an Offer Price of HK$2.7 per H Share (being the mid-point of our Offer Price range of HK$2.43 and HK$2.98 per H Share), among which RMB2.1 million was reflected in our combined statements of comprehensive income and RMB21.4 million was capitalised during the Track Record Period; and RMB1.0 million is expected to be reflected in our combined statements of comprehensive income subsequent to the Track Record Period and RMB27.1 million will be capitalised. The listing expenses above are the latest practicable estimate for reference only and the actual amount may differ from this estimate. We do not expect these listing expenses to have a material impact on our results of operations in 2015.
OFFERING STATISTICS
The statistics in the following table are based on the assumptions that (i) the Global Offering is completed and 249,700,000 H Shares are issued pursuant to the Global Offering; and (ii) the Over-allotment Option is not exercised:
Based on Based on an indicative an indicative Offer Price of Offer Price of HK$2.43 per HK$2.98 per H Share H Share
Market capitalisation of the H Shares (in millions)(1) 606.8 744.1 Unaudited pro forma adjusted combined net tangible assets per Share(2) HK$2.15 HK$2.29
Notes:
(1) The calculation of market capitalisation is based on 249,700,000 H Shares (including 227,000,000 H Shares to be issued in the Global Offering and 22,700,000 H Shares to be converted from Domestic Shares and sold for the benefit of the NSSF).
(2) The unaudited pro forma adjusted combined net tangible asset per Share are calculated after making the adjustments referred to in “Appendix II — Unaudited Pro Forma Financial Information” in this prospectus.
—12— SUMMARY
RISK FACTORS
You should note that there are certain risks and uncertainties involved in our operations, which may have a material and adverse impact on our business, financial condition, results of operations and prospects. You should read carefully the entire section headed “Risk Factors” starting from page 33 of this prospectus together with all the information set out in this prospectus prior to making an investment decision. We believe our major risks include the following: (i) general economic and market conditions in the PRC and in the world could materially and adversely affect our business; (ii) futures brokerage commission and fee income constitutes a significant portion of our operating income and any decline or slowdown in our brokerage commission fees income can materially and adversely affect our business, financial condition and results of operations; (iii) our asset management business could decline if the investments we manage perform poorly, or our customers withdraw assets we manage or if we lose our customers; (iv) our commodity trading and risk management business and our financial investment are subject to our investment decisions and market volatility and may expose us to unexpected risks and potential losses; (v) we face intense competition in the PRC futures industry; (vi) investments in the PRC futures firms are subject to ownership restrictions that may adversely affect the value of your investment; (vii) we face the risks of concentration of customers and business in Jiangsu Province; (viii) we receive refunds of handling fees from PRC Futures Exchanges from time to time and we cannot assure you whether we can receive any refunds of trading fees in the future and if so, the amount of such refund; (ix) our relationships with Introducing Brokers are important for our business operation. Failure to maintain these relationships or change to our business strategy in relation to Introducing Brokers could have a material adverse effect on our business, financial condition and results of operations; and (x) our warehouse receipts business exposes us to risks resulting from losses to commodities held by us.
REGULATORY NON-COMPLIANCE AND LEGAL PROCEEDINGS
We are subject to a number of regulatory requirements issued by the regulatory authorities in the PRC and Hong Kong, including but not limited to the CSRC, the PRC Futures Exchanges, the CFA, the Stock Exchange and the SFC. For more details, please see the section headed “Regulatory Overview” in this prospectus.
Our Directors, our PRC legal advisers and our Hong Kong legal advisers in respect of our acquisition of the entire equity interest in Holly Su Futures confirm that, during the Track Record Period and up to the Latest Practicable Date, save as disclosed in the sections headed “Business — Regulatory Non-compliance” and “Business — Legal Proceedings” in this prospectus, we have complied with the relevant PRC and Hong Kong regulatory requirements in all material aspects, and there were no other material incidents of regulatory non-compliance that led to regulatory measures or fines imposed by any regulatory authorities in the PRC or Hong Kong, or in which our employees were prosecuted or convicted.
RECENT DEVELOPMENTS
Our recent business performance
Our operating income increased in the ten months ended 31 October 2015 as compared to the same period in 2014. It was mainly brought by the increase in our net investment gain, increase in our commission and fee income, client balances and interest income.
—13— SUMMARY
Our trading volume in the PRC increased by 74.1% to RMB3,953 billion in the ten months ended 31 October 2015 as compared to RMB2,270 billion in the same period in 2014. For the ten months ended 31 October 2015, our average brokerage commission rate in the PRC was 0.11 bps for financial futures and 0.57 bps for commodities futures, as compared to 0.13 bps for financial futures and 0.64 bps for commodities futures in the same period in 2014. As of 31 October 2015, our clients’ balance in the PRC increased to RMB2,273 million from RMB2,253 million as of 30 June 2015. As of 31 October 2015, AUM in our asset management business increased to RMB242.5 million as compared to RMB173.6 million as of 30 June 2015.
Based on our unaudited management accounts, compared with that for the four months ended 31 October 2014, our revenue for the four months ended 31 October 2015 remained relatively stable at about RMB86.9 million, while our net investment gains decreased by 41.5% to RMB7.5 million, mainly due to the decrease in fair value gain on investment. For the ten months ended 31 October 2015, our revenue amounted to about RMB237.9 million, representing an increase of about 11.1% as compared to the same period in 2014; our net investment gains amounted to about RMB34.2 million, representing an increase of about 144.8% as compared to the same period in 2014; and our total operating expenses increased by 7.7% to RMB187.3 million, mainly due to the increase in staff cost and warehouse cost for our commodity trading.
As of 31 October 2015, our position of financial investment (including equity securities, funds, wealth management products and asset management plans) decreased to RMB122.5 million from RMB188.9 million as of 30 June 2015. For the ten months ended 31 October 2015, our income from financial investment (including realized gains and unrealized fair value gain and interest income) decreased to RMB14.4 million as compared to RMB19.0 million for the six months ended 30 June 2015.
The audited financial information for the six months ended 30 June 2015 is set forth in “Appendix I — Accountants’ Report” to this prospectus. The unaudited financial information for the ten months ended 31 October 2015 has been derived from our unaudited interim financial statements for the ten months ended 31 October 2015, which have been reviewed by our reporting accountants in accordance with the Hong Kong Standard on Review Engagement 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Hong Kong Institute of Certified Public Accountants.
Market turbulence
Since mid-2015, it is noted that there has been significant fluctuation in the stock market in the PRC. Nevertheless, given that (i) investors’ demand for futures trading would generally increase for the purposes of risk management and portfolio management at times of economics fluctuation; (ii) the futures business of our Group in the PRC focuses more on commodity futures rather than financial futures, and that commodity futures often provide alternative investment opportunities at times of pessimistic or uncertain stock market sentiment; and (iii) commodity futures trading volume fluctuates depending more on climate, demand and supply of the commodity products rather than stock market fluctuation, our Directors believe that the recent stock market turbulence in the PRC would not
—14— SUMMARY materially affect the positive business outlook of our Group in the long run. In the short run, we do exercise special caution in monitoring our clients’ margin deposit level as well as other risks connected with our asset management business, commodity trading and risk management business, and our financial investment.
Accompanied with the recent market turbulence, the PRC government has undertaken various market-stablisation measures. For more details, please refer to the section headed “Industry Overview — Overview of the PRC Economy” of this prospectus. In addition, The China Financial Futures Exchange announced in August and September 2015 certain new regulatory requirements with a view to curb market speculation, including increasing the margin requirement for trading of stock index futures and transaction fees for position clearing. For further details, please refer to the section headed “Regulatory Overview — Regulatory Measures relating to Stock Index Futures” of this prospectus. Our Directors consider that these policies may affect our financial futures trading volume but would not materially and adversely affect our commodity futures trading volume (which contributed about 85.8% of our commission and fee income in the PRC during the Track Record Period). For our actual recent business performance, please refer to the paragraph headed “Our recent business performance” above.
On the other hand, stock market turbulence may affect the value of our financial investment portfolio. Our financial investment includes listed and unlisted equity securities, wealth management products issued by banks, funds and asset management plans for our own account. For the years ended 31 December 2012, 2013, 2014 and the six months ended 30 June 2015, we recorded gains from financial investment of RMB5.2 million, RMB10.3 million, RMB14.7 million and RMB19.0 million respectively.
Since 1 June 2015 up to the Latest Practicable Date, the difference between the lowest and highest points of Shanghai Stock Exchange Composite Index amounted to about 43%. Set out below is the sensitivity analysis of the value of our investment portfolio as of the dates specified against assumed market price movement in the components in our investment portfolio:
Book value of our financial Changes in book value upon % of investment price fluctuation portfolio 10% 20% 35% 40% 45% -10% -20% -35% -40% -45% (RMB’000)
31 December 2012 37,345 2,675 5,349 9,361 10,700 12,038 (2,675) (5,349) (9,361)(10,700)(12,038) 31 December 2013 43,647 2,344 4,688 8,204 9,376 10,548 (2,344) (4,688) (8,204) (9,376)(10,548) 31 December 2014 26,374 2,637 5,275 9,230 10,548 11,867 (2,637) (5,275) (9,230)(10,548)(11,867) 30 June 2015 310,452 5,876 11,752 20,566 23,504 26,442 (5,876)(11,752)(20,566)(23,504)(26,442)
For details of the risk related to market volatility, please refer to the section headed “Risks relating to our business and industry” in the Risk Factor section of this prospectus.
—15— SUMMARY
Outlook
Our Directors are of the view that the PRC futures industry has potential to grow attributable to the economic growth potential in China, increasing demand for futures trading for risk management and portfolio management purposes and accelerated launch of new futures products and services. Our Directors also have a positive outlook on our Group’s business because we possess long history, experienced management team, good reputation and grading which enable us to capture opportunities opened up by new services and products emerged along with the development of the PRC futures and financial industry. Further details are set out in the section headed “Our Business Strategies” in the Business section of this prospectus.
No material adverse change
Save as disclosed in this prospectus, our Directors have confirmed, after performing all due diligence work which the Directors consider appropriate, that there is no event which could materially affect the information shown in our combined financial statements included in the Accountants’ Report set forth in Appendix I to this prospectus since 30 June 2015, and as at the date of this prospectus, there has been no material adverse change in our financial or trading position or prospects.
—16— DEFINITIONS
In this prospectus, unless the context otherwise requires, the following expression shall have the following meanings.
“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
“Artall Culture Group” Artall Culture Group Company Limited (愛濤文化集團有限公 司, formerly known as Jiangsu Holly International Group Company Limited (江蘇弘業國際集團有限公司)), a limited liability company established under the laws of the PRC on January 20, 1999 and a wholly-owned subsidiary of our Controlling Shareholder; for more details, please see the section headed “History, Development and Corporate Structure” in this prospectus
“Articles of Association” or the articles of association of our Company adopted on 13 “Articles” April 2015 which will become effective upon the Listing Date, as amended from time to time, a summary of which is set out in “Appendix V — Summary of Articles of Association” to this prospectus
“associate(s)” has the meaning ascribed thereto under the Listing Rules
“Board” or “Board of Directors” our board of Directors
“Business Day” or “business day” any day (other than a Saturday, Sunday or public holiday) in Hong Kong on which banks in Hong Kong are open generally for normal banking business
“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
“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 or a CCASS Custodian Participant or a CCASS Investor Participant
“Chairman” the chairman of the Board of our Company
—17— DEFINITIONS
“Chief Risk Officer” the chief risk officer of our Company
“China Futures Association” or China Futures Association (中國期貨業協會) “CFA”
“close associate(s)” has the meaning ascribed thereto under the Listing Rules
“CME” Chicago Merchantile Exchange
“Companies Ordinance” the Companies Ordinance (Chapter 622 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time
“Companies (Winding Up and the Companies (Winding Up and Miscellaneous Provisions) Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong), as Ordinance” amended, supplemented or otherwise modified from time to time
“Company” or “our Company” Holly Futures Co., Ltd. (弘業期貨股份有限公司), a joint stock limited company established under the laws of the PRC with limited liability on 29 November 2012
“Company Law” or “PRC Company Law of the PRC《中華人民共和國公司法》 ( ), as Company Law” amended and adopted by the Standing Committee of the Tenth NPC on 27 October 2005 and effective on 1 January 2006 and further amended on 28 December 2013 and effective on 1 March 2014, as amended, supplemented and otherwise modified from time to time
“connected person(s)” has the meaning ascribed thereto under the Listing Rules
“Controlling Shareholder” has the meaning ascribed thereto under the Listing Rules, and unless the context requires otherwise, refers to SOHO Holdings
“core connected person(s)” has the meaning ascribed thereto under the Listing Rules
“Cornerstone Investor” Coastal Capital Limited (沿海資本有限公司), a company incorporated under the laws of Hong Kong
“CSDCC” China Securities Depositary and Clearing Corporation Limited (中國證券登記結算有限責任公司)
“CSRC” China Securities Regulatory Commission (中國證券監督管理 委員會)
“Director(s)” director(s) of our Company
“Domestic Share(s)” ordinary share(s) in our capital, with a nominal value of RMB1.00 each, which are subscribed for and paid up in Renminbi
—18— DEFINITIONS
“Euromonitor Report” the industry report with respect to the PRC futures industry prepared by Euromonitor International Limited for the Global Offering
“Global Offering” the Hong Kong Public Offering and the International Placing
“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”, “us” or our Company and its subsidiaries (or our Company and any “we” one or more of its subsidiaries, as the context may require)
“H Share(s)” overseas listed foreign shares in our ordinary share capital, with a nominal value of RMB1.00 each, to be subscribed for and traded in Hong Kong dollars and listed on the Stock Exchange
“H Share Registrar” Computershare Hong Kong Investor Services Limited
“High Hope Corporation” Jiangsu High Hope International Group Corporation (江蘇匯 鴻國際集團股份有限公司) (formerly known as Jiangsu High Hope Corporation) (江蘇匯鴻股份有限公司)), a limited liability company established in the PRC on 13 October 1992 which was subsequently converted to a joint stock limited company in 1994 and a Shareholder holding 10% of our total share capital as at the Latest Practicable Date, the A shares of which are listed on the Shanghai Stock Exchange (stock code: 600981); for more details, please see the section headed “History, Development and Corporate Structure” in this prospectus
“High Hope International” Jiangsu High Hope International Group Co., Ltd. (江蘇匯鴻國 際集團有限公司), a limited liability company established under the laws of the PRC on 18 December 1996 and one of our promoters, which was de-registered on 23 September 2015 as a result of the merger with High Hope Corporation by way of absorption; for more details, please see the section headed “History, Development and Corporate Structure” in this prospectus
“HK$” or “Hong Kong dollars” Hong Kong dollars, the lawful currency of Hong Kong
“HK Futures Exchange” Hong Kong Futures Exchange Limited
—19— DEFINITIONS
“HK Futures Exchange a licensed corporation to carry on Type 2 (dealing in futures Participant” contracts) regulated activity under the SFO who, in accordance with the rules of the HK Futures Exchange, may trade on or through the HK Futures Exchange and whose name is entered in a list, register or roll kept by the HK Futures Exchange as a person who may trade on or through the HK Futures Exchange
“HK Futures Exchange Trading a right to be eligible to trade on or through the HK Futures Right” Exchange and entered as such a right in a list, register or roll kept by the HK Futures Exchange
“HKCC” HKFE Clearing Corporation Limited, a wholly-owned subsidiary of HKEx
“HKEx” Hong Kong Exchanges and Clearing Limited
“HKSCC” Hong Kong Securities Clearing Company Limited
“HKSCC Nominees” HKSCC Nominees Limited, a wholly-owned subsidiary of HKSCC
“Holly Capital” Holly Capital Management Co., Ltd. (弘業資本管理有限公 司), a limited liability company established under the laws of the PRC on 25 June 2013 and a wholly-owned subsidiary of our Company
“Holly Corporation” Jiangsu Holly Corporation (江蘇弘業股份有限公司) (formerly known as Jiangsu Crafts Import & Export Trading Group Co., Ltd. (江蘇省工藝品進出口集團股份有限公司)), a limited liability company established under the laws of the PRC on 30 June 1994 and one of our promoters and a Shareholder holding approximately 21.75% of our total share capital as at the Latest Practicable Date, the A shares of which are listed on the Shanghai Stock Exchange (stock code: 600128); for more details, please see the section headed “History, Development and Corporate Structure” in this prospectus
“Holly Logistics” Jiangsu Holly International Logistics Corporation (江蘇弘業 國際物流有限公司) (formerly known as Jiangsu Pengcheng International Storage & Transportation Company Limited (江 蘇鵬程國際儲運有限公司)), a limited liability company established under the laws of the PRC on 12 February 1996 and one of our promoters and a Shareholder, which held approximately 1.3% of our total share capital as at the Latest Practicable Date; for more details, please see the section headed “History, Development and Corporate Structure” in this prospectus
—20— DEFINITIONS
“Holly Su Futures” Holly Su Futures (Hongkong) Co., Limited (弘蘇期貨(香港) 有限公司), a company incorporated under the laws of Hong Kong with limited liability on 20 October 2011 and a wholly-owned subsidiary of our Company which is licensed to carry on Type 2 (dealing in futures contracts) regulated activity under the SFO
“Holly Su Industrial” Jiangsu Holly Su Industrial Co., Ltd. (江蘇弘蘇實業有限公 司), a limited liability company established under the laws of the PRC on 23 January 2011 and one of our promoters and a Shareholder, which held approximately 21.11% of our total share capital as at the Latest Practicable Date; for more details, please see the section headed “History, Development and Corporate Structure” in this prospectus
“Holly Su Share Purchase a share purchase agreement dated 7 January 2015 and entered Agreement” into among our Company, SOHO Hong Kong and Holly International Group (H.K.) Limited (弘業國際(香港)有限公 司), as supplemented by the Supplemental Share Purchase Agreement, the details of which are described in the section headed “History, Development and Corporate Structure — History and Development — Our Company — Reorganisation” in this prospectus
“Hong Kong” or “HK” the Hong Kong Special Administrative Region of the PRC
“Hong Kong Offer Share(s)” the H Share(s) offered in the Hong Kong Public Offering
“Hong Kong Public Offering” the offer by our Company of initially 24,970,000 H Shares for subscription by the public in Hong Kong (subject to adjustment as described in the section headed “Structure of the Global Offering”) for cash at the Offer Price (plus brokerage fee of 1%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005%) and on the terms and subject to the conditions described in this prospectus and the Application Forms, as further described in the section headed “Structure of the Global Offering” in this prospectus
“Hong Kong Underwriters” the underwriters listed in the section headed “Underwriting — Hong Kong Underwriters”, being the underwriters of the Hong Kong Public Offering
—21— DEFINITIONS
“Hong Kong Underwriting the underwriting agreement dated Tuesday, 15 December Agreement” 2015 relating to the Hong Kong Public Offering entered into among the Company, SOHO Holdings, the Sole Sponsor, Sole Global Coordinator, the Sole Bookrunner, the Sole Lead Manager and the Hong Kong Underwriters, as further described in the section headed “Underwriting — Underwriting Arrangements and Expenses — Hong Kong Underwriting Agreement” in this prospectus
“Hongrui Venture Capital” Jiangsu Hongrui Venture Capital Co., Ltd. (江蘇弘瑞科技創 業投資有限公司), a limited liability company established under the laws of the PRC on 29 September 2002 and one of our promoters and a Shareholder, which held approximately 1.39% of our total share capital as at the Latest Practicable Date; for more details, please see the section headed “History, Development and Corporate Structure” in this prospectus
“Independent Third Party(ies)” any person or entity and any of their respective ultimate beneficial owner, who/which, as far as the Directors are aware after having made all reasonable enquiries is not a connected person of our Company as defined under the Listing Rules
“International Placing” the offer of initially 224,730,000 H Shares by the International Underwriters outside the United States in offshore transactions in accordance with Regulation S, as further described in the section headed “Structure of the Global Offering” in this prospectus, subject to the Over-allotment Option
“International Placing Share(s)” the H Share(s) offered in the International Placing
“International Underwriters” the group of international underwriters expected to enter into the International Underwriting Agreement
“International Underwriting the international underwriting agreement relating to the Agreement” International Placing and to be entered into between, among others, us, the Selling Shareholders, the International Underwriters and the Sole Global Coordinator on or around the Price Determination Date, as further described in the section headed “Underwriting — Underwriting Arrangements and Expenses — International Placing” in this prospectus
—22— DEFINITIONS
“Jiangsu Holly” Jiangsu Holly Futures Brokerage Company Limited (江蘇弘 業期貨經紀有限公司) (formerly known as Jiangsu Jinling Futures Brokerage Company Limited (江蘇金陵期貨經紀有限 公司), Jiangsu Holly Futures Brokerage Company Limited (江 蘇弘業期貨經紀有限公司) and Jiangsu Holly Futures Company Limited (江蘇弘業期貨有限公司)), a limited liability company established under the laws of the PRC on 31 July 1995 and our predecessor and, where the context refers to any time prior to its establishment, the business which its predecessors were engaged in
“Jiangsu SASAC” State-owned Assets Supervision and Administration Commission of Jiangsu Provincial Government of the PRC (中國江蘇省人民政府國有資產監督管理委員會)
“Latest Practicable Date” Tuesday, 8 December 2015, the latest practicable date for the purpose of ascertaining certain information in this prospectus prior to its publication
“Listing” listing of our H Shares on the Main Board of the Stock Exchange
“Listing Date” the date, expected to be on Wednesday, 30 December 2015, on which our Offer Shares are listed and from which dealings therein are permitted to take place on the Stock Exchange
“Listing Committee” the listing committee of the Stock Exchange
“Listing Rules” The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, as amended from time to time
“LME” London Metal Exchange
“Mandatory Provisions” the Mandatory Provisions for Articles of Association of Companies to be Listed Overseas《到境外上市公司章程必備 ( 條款》), for inclusion in the articles of association of companies incorporated in the PRC to be listed overseas, promulgated by the former State Council Securities Committee and other PRC government departments on 27 August 1994
“MOF” or “Ministry of Finance” Ministry of Finance of the PRC (中華人民共和國財政部)
“MOFCOM” or “Ministry of Ministry of Commerce of the PRC (中華人民共和國商務部) Commerce
“NPC” the National People’s Congress (全國人民代表大會)
—23— DEFINITIONS
“NSSF” National Council for Social Security Fund of the PRC (中華人民共和國全國社會保障基金理事會)
“Offer Price” the final Hong Kong dollar price per Hong Kong Offer Share (exclusive of the brokerage, Stock Exchange trading fee and SFC transaction levy) at which the Hong Kong Offer Shares are to be subscribed for pursuant to the Hong Kong Public Offering, to be determined as further described in the section headed “Structure of the Global Offering” in this prospectus
“Offer Share(s)” the H Share(s) offered by us and the Selling Shareholders in the Global Offering, where relevant including any additional H Shares issued pursuant to the exercise of the Over-allotment Option
“Over-allotment Option” the option granted by us and the Selling Shareholders to the International Underwriters, exercisable by the Sole Global Coordinator on behalf of the International Underwriters, pursuant to the International Underwriting Agreement, for up to 30 days from the last day for lodging applications under the Hong Kong Public Offering, to require us to allot and issue up to 34,050,000 additional H Shares and our Selling Shareholders to sell up to 3,405,000 additional H Shares both at the Offer Price (in aggregate representing 15% of the H Shares initially being offered under the Global Offering) to cover, among other things, over-allocations in the International Placing, if any, details of which are described in the section headed “Structure of the Global Offering” in this prospectus
“PBOC” People’s Bank of China (中國人民銀行)
“PBOC rate” the exchange rate for foreign exchange transactions set daily by the PBOC based on the previous day’s interbank foreign exchange rate in China and with reference to prevailing exchange rates on the world financial markets
“PRC” or “China” or “People’s the People’s Republic of China which, for the purpose of this Republic of China” prospectus, excludes Hong Kong, Macau Special Administrative Region of the PRC and Taiwan
“PRC EIT Law” the Enterprise Income Tax Law of the PRC《中華人民共和國 ( 企業所得稅法》), adopted by the Tenth NPC on 16 March 2007 and effective on 1 January 2008
“PRC Futures Exchanges” China Financial Futures Exchange (中國金融期貨交易所), Dalian Commodity Exchange (大連商品交易所), Shanghai Futures Exchange (上海期貨交易所) and Zhengzhou Commodity Exchange (鄭州商品交易所)
—24— DEFINITIONS
“PRC GAAP” generally accepted accounting principles in the PRC
“PRC government” or the government of the PRC, including all political “government”, “State” or “state” subdivisions (including provincial, municipal and other regional or local government entities) and their instrumentalities or, where the context requires, any of them
“Price Determination Date” the date, expected to be on or around Monday, 21 December 2015 and, in any event, not later than Monday, 28 December 2015, on which the Offer Price is to be fixed by agreement between our Company (for itself and on behalf of the Selling Shareholders) and the Sole Global Coordinator (on behalf of the Underwriters) to determine the Offer Price
“Province” or “province” 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
“Registrar of Trade Marks” Registrar of the Hong Kong Trade Marks Registry
“Regulation S” Regulation S under the U.S. Securities Act
“Renminbi” or “RMB” the lawful currency of the PRC
“Reorganisation” the reorganisation arrangements of our Group through acquiring Holly Su Futures as described in the section headed “History, Development and Corporate Structure” in this prospectus
“Risk Management Committee” the risk management committee of our Companny
“SAFE” State Administration of Foreign Exchange of the PRC (中華人 民共和國國家外滙管理局)
“SAIC” State Administration of Industry and Commerce of the PRC (中華人民共和國國家工商行政管理總局)
“Sale Shares” the 22,700,000 H Shares assuming the Over-allotment Option is not exercised (or 26,105,000 H Shares assuming the Over-allotment Option is exercised in full) to be sold by the Selling Shareholders for the benefit of the NSSF pursuant to the relevant PRC laws relating to the conversion/reduction of state-owned shares. The Selling Shareholders will convert an equal number of Domestic Shares held by them to be offered for sale as the Sale Shares. References to “Sales Shares” include, where the context requires, the Domestic Shares from which the Sale Shares are converted
—25— DEFINITIONS
“SASAC” State-owned Assets Supervision and Administration Commission of the State Council of the PRC (中華人民共和 國國務院國有資產監督管理委員會)
“SAT” State Administration of Taxation of the PRC (中華人民共和國 國家稅務總局)
“Selling Shareholders” the state-owned Shareholders, who, collectively, are required to convert the Domestic Shares they held to H Shares and sell for the benefit of the NSSF pursuant to the relevant PRC laws relating to the conversion/reduction of state-owned shares, as further described in the section headed “Information about this Prospectus and the Global Offering — Selling Shareholders” in this prospectus
“SFC” the Securities and Futures Commission of Hong Kong
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended from time to time
“Shanghai Mingda” Shanghai Mingda Industrial (Group) Company Limited (上海 銘大實業(集團)有限公司), a limited liability company established under the laws of the PRC on 26 December 2002 and one of our promoters and a shareholder, which held approximately 1.36% of our total share capital as at the Latest Practicable Date; for more details, please see the section headed “History, Development and Corporate Structure” in this prospectus
“Shareholder(s)” holder(s) of our Shares
“Share(s)” share(s) in the share capital of our Company, with a nominal value of RMB1.00 each, including both the Domestic Share(s) and the H Share(s)
“SOHO Holdings” Jiangsu SOHO Holdings Group Co., Ltd. (江蘇省蘇豪控股集 團有限公司) (formerly known as Jiangsu Silk Group Company Limited (江蘇省絲綢集團有限公司), a wholly state-owned limited liability company established under the laws of the PRC on 29 April 1994, which is our Controlling Shareholder and one of our promoters and, where the context refers to any time prior to its establishment, the business which its predecessors were engaged in
—26— DEFINITIONS
“SOHO Hong Kong” Jiangsu Financial Holding Co., Limited (江蘇金融控股有限公 司) (formerly known as SOHO Group Limited (蘇豪有限公 司)), a company incorporated under the laws of Hong Kong with limited liability on 1 June 1984, a wholly-owned subsidiary of SOHO Holdings and one of the former shareholders of Holly Su Futures
“Sole Bookrunner” or Guotai Junan Securities (Hong Kong) Limited, a licensed “Sole Global Coordinator” or corporation under the SFO to engage in type 1 (dealing in “Sole Lead Manager” securities) and type 4 (advising on securities) regulated activities
“Sole Sponsor” Guotai Junan Capital Limited, a licensed corporation to conduct type 6 (advising on corporate finance) regulated activity under the SFO
“Special Regulations” Special Regulations of the State Council on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (國務院關於股份有限公司境外募集股份及上市的 特別規定), promulgated by the State Council on 4 August 1994
“Stabilizing Manager” Guotai Junan Securities (Hong Kong) Limited, a licensed corporation under the SFO to engage in type 1 (dealing in securities) and type 4 (advising on securities) regulated activities
“State Council” State Council of the PRC (中華人民共和國國務院)
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“subsidiary” or “subsidiaries” has the meaning ascribed thereto under the Listing Rules
“Substantial Shareholder(s)” has the meaning ascribed thereto under the Listing Rules
“Supervisor(s)” the member(s) of the Supervisory Committee
“Supervisory Committee” our supervisory committee established pursuant to the Company Law, as described in the section headed “Directors, Supervisors and Senior Management” in this prospectus
“Supplemental Share Purchase a supplemental agreement to the Holly Su Share Purchase Agreement” Agreement dated 10 July 2015 and entered into among our Company, SOHO Hong Kong and Holly International Group (H.K.) Limited, the details of which are described in the section headed “History, Development and Corporate Structure — History and Development — Our Company — Reorganisation” in this prospectus
—27— DEFINITIONS
“Takeovers Code” the Codes on Takeovers and Mergers and Share Buy-backs issued by the SFC, as amended, supplemented or otherwise modified from time to time
“Track Record Period” the three years ended 31 December 2014 and the six months ended 30 June 2015
“Trade Marks Registry” the Hong Kong Trade Marks Registry
“U.K.” the United Kingdom
“Underwriters” the Hong Kong Underwriters and the International Underwriters
“Underwriting Agreements” the Hong Kong Underwriting Agreement and the International Underwriting Agreement
“United States” or “U.S.” the United States of America, its territories, its possessions and all areas subject to its jurisdiction
“U.S. dollars” or “US$” United States dollars, the lawful currency of the United States
“U.S. Securities Act” the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder
“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 the White Form eIPO Service Provider, www.eipo.com.hk
“White Form eIPO Service Computershare Hong Kong Investor Services Limited Provider”
“%” per cent
The names of companies and entities established in the PRC and the laws and regulations in the PRC have been included in this prospectus both in English and Chinese. Unless such companies, entities, laws and regulations have an English name as part of their legal name, all English translations of official Chinese names are for identification purposes only. In the event of any inconsistency between the Chinese names and their English translations, the Chinese name shall prevail.
In this prospectus, unless otherwise specified, references to “province(s)” in the PRC also include ethnic minority autonomous regions and municipalities directly administered by the central government.
—28— GLOSSARY OF TECHNICAL TERMS
In this prospectus, the following expressions shall have the meanings set out below unless the context otherwise requires.
“AUM” the amount of assets under management
“average brokerage commission equals the sum of net commission and fee income from rate” futures brokerage business and refunds of trading fees as divided by the corresponding futures brokerage trading volume
“bps” basis points (1 basis point = 0.01%)
“CAGR” compound annual growth rate
“client balances” cash and cash equivalents deposited by our brokerage clients with us for trading purpose, consisting of client margin deposits and settlement reserve funds
“collective asset management an asset management contract entered into with multiple scheme” clients by an asset manager, pursuant to which the clients’ assets are placed in the custody of commercial bank qualified to hold client transaction settlement funds or in other institutions approved by the CSRC, and the asset manager provides asset management services to the clients through designated accounts
“commission revenue” for the purpose of this prospectus, commission revenue of a futures company represents the sum of (i) commission and fee income generated from futures brokerage operations of a futures company and (ii) refund of relevant commission from futures exchanges
“Introducing Broker(s)” a business partner of our Company who introduces clients to our Company for commission, as further described in “Business — Introducing Brokers for our Futures Brokerage Business”
“lot” the standardized quantity of futures as set out by the PRC Futures Exchange, and represents the minimum quantity of that futures that may be traded
“Net Capital” equals net assets minus asset adjustment value plus liability adjustment value minus the deposits which the clients fail to fully replenish minus/plus other adjustment items recognised or approved by the CSRC
“R&D” research and development
—29— GLOSSARY OF TECHNICAL TERMS
“settlement reserve funds” unrestricted and unutilised cash balances reserved for the settlement and clearing of the futures trading, which are deposited with the futures exchanges and commercial banks. Settlement reserve funds include client settlement reserve funds and our own settlement reserve funds
“sq.m.” square meter(s)
“targeted asset management a targeted asset management contract entered into with a scheme” single client by an asset manager in China, pursuant to which the asset manager provides asset management services to the client through accounts under the client’s name
—30— FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are not historical facts, but relate to our plans, intentions, beliefs, expectations and predictions for the future, particularly under the sections headed “Summary”, “Risk Factors”, “Industry Overview”, “Regulatory Overview”, “History, Development and Corporate Structure”, “Business”, “Relationship with our Controlling Shareholder”, “Connected Transactions”, “Financial Information” and “Future Plans and Use of Proceeds”. By their nature, these forward-looking statements are subject to risks and uncertainties.
These forward-looking statements in this prospectus include, without limitation, statements relating to:
• the competition in the market or industry in which we operate and their potential impact on our business;
• our operations and business strategies;
• general domestic and global economic conditions, including those related specifically to China;
• changes in the regulatory policies of the PRC government and other relevant government authorities relating to the industries discussed herein and their potential impact on our business;
• changes in pricing for our services;
• changes in the availability of, or requirements for, financing;
• changes in regulations and restrictions;
• our ability to expand and manage our business and to introduce new services;
• future development, trends and conditions in the industry in which we operate;
• changes in political, economic, legal and social conditions in the PRC, including specifically, the PRC government’s policies with respect to economic growth, inflation, capital market development and foreign exchange;
• macroeconomic measures taken by the PRC government to manage economic growth;
• changes in restrictions on foreign currency convertibility and remittance abroad;
• our financial condition and performance;
• our ability to implement our business strategies, plans objectives and goals;
• our expansion and capital expenditure plans;
—31— FORWARD-LOOKING STATEMENTS
• our dividend policy;
• certain statements in the sections headed “Business” and “Financial Information” in this prospectus with respect to trends in prices, volumes, operations, margins, overall market trends, risk management and exchange rates; and
• other statements in this prospectus that are not historical facts.
In addition, statements regarding our future financial position, strategies, projected costs and the plans and the objectives of our management for future operations are forward-looking statements. In some cases, we use words such as “aim”, “continue”, “predict”, “propose”, “believe”, “seek”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “target”, “plan”, “potential”, “will”, “would”, “may”, “could”, “should” and “expect”, and the negatives of these words and other similar expressions, to identify forward-looking statements.
These forward-looking statements reflect our current views on future events but are not assurance of future performance, and will be affected by certain risks, uncertainties and assumptions, including the risk factors mentioned in this prospectus. The possible occurrence of one or more relevant risk factors or uncertainties, or the potential inaccuracy of the relevant assumptions, may cause actual results, performance or effects or industry results to differ materially from any future results, performance or presentation indicated expressly or implicitly in the forward-looking statements.
These forward-looking statements are based on current plans and estimates, and speak only as at the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements contained in this prospectus, whether as a result of new information, future events or otherwise, except as required by law and the Listing Rules. Forward-looking statements involve inherent risks and uncertainties and are subject to assumptions, some of which are beyond our control. We caution you that a number of important factors could cause actual outcomes to differ, or to differ materially, from those expressed in any forward-looking statements.
Due to these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur in the way we expect, or at all. Accordingly, you should not place undue reliance on any forward-looking information. All forward-looking statements contained in this prospectus are qualified by reference to these cautionary statements.
—32— 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. You should pay particular attention to the fact that our Company was incorporated in the PRC and we conduct substantially all of our operations in the PRC, the legal and regulatory environment of which differs in certain respects from that which prevails in other countries. Our business, financial condition, results of operations or prospects may be materially and adversely affected by any of these risks and the trading price of our H Shares may decline as a result. You may lose all or part of your investment.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
General economic and market conditions in the PRC and in the world could materially and adversely affect our business.
Our business is highly dependent on the economic and market conditions in China, as substantially all of our revenue is derived from the futures market in China. In particular, our business is subject to China’s macro-economic and monetary policies, legislation and regulations affecting the futures industry, supply and demand in the commodities markets, upward and downward trends in the financial sectors, import and export volumes, inflation, currency fluctuations, availability of short-term and long-term market funding sources, cost of funding and the level and volatility of interest rates. Any one or more of these factors, or other factors may adversely affect our business and results of operations. In addition, as China’s capital markets are still at an early stage of development, market conditions may change suddenly and dramatically, for more details about the volatility of China’s capital markets, please refer to the section headed “Industry Overview — Overview of the PRC Economy”. Any significant decrease in the prices of the listed stocks that we have invested in, or that our portfolio investment funds have invested in, could materially reduce the value of our investment portfolio and have a material adverse effect on our business, financial condition and results of operations.
We generate revenue primarily from commission and fee income that we obtained through managing our futures brokerage business, asset management business, commodity trading and risk management business. In managing our asset management business we mainly invest in a wide variety of commodity and financial futures products in China. As such, our revenue is influenced by the general level of trading activities in the PRC futures market which could be materially affected by the general economic and market conditions in the PRC and the world. Our revenue and results of operations may vary significantly from period to period due primarily to movements and trends in the futures market and fluctuations in trading levels. Even in the event of lower levels of volatility, our revenue and profitability will likely be negatively affected.
In the past few years, there has been significant disruptions and volatility in the global financial markets and economic conditions and many countries, including the United States, have been in an economic slowdown. China’s economic growth also signalled slowdown in recent years. Downturns in general economic conditions and adverse market conditions in China may result in declines in trading volume and turnovers by our clients and the futures trading activities in the market, which could
—33— RISK FACTORS adversely affect our income from our futures brokerage business and asset management business. General global economic and market conditions may materially affect the general economic and market conditions in the PRC and in turn affect the PRC futures market and hence our operations and financial condition.
In addition, under unfavourable financial or economic conditions, the value of our asset management portfolio may be adversely affected, which may, in turn, reduce the management fees and performance-based compensation we could earn from our asset management business. Furthermore, we may be faced with an influx of client redemptions in our asset management portfolio, which, in turn, could also adversely affect the revenue from our asset management business. Moreover, our commodity trading and risk management business may also be adversely affected by the reduction in the value of our trading and investment positions.
Futures brokerage commission and fee income constitutes a significant portion of our operating income and any decline or slowdown in our brokerage commission fees income can materially and adversely affect our business, financial condition and results of operations.
For the three years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, our futures brokerage commission and fee income amounted to RMB233.5 million, RMB210.3 million, RMB142.0 million and RMB80.0 million, respectively, representing approximately 61.5%, 62.4%, 48.8% and 45.0% of our operating income, respectively.
Our futures brokerage commission and fee income is directly influenced by futures trading volume of our clients and the commission rates. Trading volume is subject to various factors beyond our control including, among others, general economic conditions, macro-economic and monetary policies, volatility of commodity markets and securities market conditions, fluctuations in interest rates and investor behavior, which in turn, could adversely affect our clients’ willingness to conduct trading or investment activities, in which case, the total client trading volumes could be further affected.
As a result of the gradual evolvement of the PRC futures market and the expansion of PRC futures companies, competition has intensified, which leads to a decrease in the average commission rate in the PRC. According to the CFA, in 2012, 2013 and 2014, the average futures brokerage commission rate of PRC futures companies was 0.36 bps, 0.23 bps and 0.17 bps, respectively, while our average brokerage commission rate in the PRC was 0.56 bps, 0.55 bps and 0.44 bps, respectively. There is no assurance that our commission rate may not further decrease due to the increased competition from our peers, our failure to maintain or expand our customer base or market share, or our failure to adapt to new technologies, particularly, the internet trading that keeps evolving and affecting the overall competitive landscape of the futures industry. While we intend to further diversify our business portfolios, we expect that the brokerage commission fees income will continue representing a substantial portion of our revenue. As a result, any decline in brokerage commission fees we generate materially and adversely affect our business, financial condition and results of operations.
—34— RISK FACTORS
Our asset management business could decline if the investments we manage perform poorly, or our customers withdraw assets we manage or if we lose our customers.
To diversify our business lines, we have engaged in asset management business since February 2013. We charge asset management fees based on the asset size of each asset management scheme as well as pre-agreed performance-based compensation based on investment returns from the assets under our management. We mainly invest in commodities futures and other financial derivatives under our asset management business. We believe that our investment performance is one of the most important factors in retaining our existing customers and attracting new customers. Limited investment choices in the PRC futures market as well as market volatility could negatively affect our ability to provide stable returns for our customers or the investment returns could not reach our customers’ expectation, under which circumstance, our existing customers may withdraw their assets from us and transfer to products provided by our competitors with better investment returns or may require us to lower our asset management fees and performance-based compensation, either of which could lower our revenue from the asset management business. In addition, our performance-based compensation is closely linked to the investment returns of the assets under our management, poor investment performance will result in lower compensation we receive.
We are still in the process of developing and expanding our asset management business and face intense competition from securities companies, insurance companies, fund houses and other financial intermediaries which have extensive experience in this respect. If we fail to maintain or increase investment returns for our customers, we may lose customers to our competitors, in which case our asset management business may decline and our financial condition and results of operations may be adversely affected.
Our commodity trading and risk management business and our financial investment are subject to our investment decisions and market volatility and may expose us to unexpected risks and potential losses.
We commenced our commodity trading and risk management business, which mainly included futures and spot arbitrage, cooperative hedging and warehouse receipts service, through our subsidiary, Holly Capital. The commodity trading and risk management business we engage in may expose us to unexpected market, credit and operational risks that could cause us to suffer unexpected losses. For example, a client or counterparty might fail to perform its contractual obligations or that the value of collaterals held by us to secure the obligations of our clients or counterparties might be inadequate. Any material non-payment or non-performance by a client or counterparty could materially and adversely affect our business, financial condition and results of operations.
During the Track Record Period, we also used our own capital to engage in financial investment for investment returns, which included listed or unlisted equity securities, principal guaranteed or non-principal guaranteed wealth management products issued by banks, funds and asset management plans for our own account. The performance of our financial investment relies on our investment decisions and judgments based on our assessment of existing and future market conditions. We closely monitor the market value of our investment portfolio and actively refine the structure of our portfolio 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 minimise losses while capturing gains, or our forecasts do not conform to actual changes in market conditions, our investment may not achieve the investment returns we anticipate or may even suffer material losses, any of which could materially and adversely affect our business, financial condition and results of operations.
—35— RISK FACTORS
In addition, the values of certain classes of our assets, such as our available-for-sale financial assets, are marked to market. A decline in the value of our available-for-sale financial assets can result in the recognition of impairment losses if the management determines that there has been a significant or prolonged decline in the fair value of the investment assets below its cost or carrying amount. This evaluation is a matter of judgment, which includes the assessment of several factors. Please see the section headed “Financial Information — Significant Accounting Policies and Estimates” in this prospectus. If we recognise impairment losses, our results of operations will be adversely affected.
We face intense competition in the PRC futures industry.
The PRC futures industry is highly competitive, and we face intense competition in most of our business lines. We compete with over 150 PRC futures companies in the PRC on the basis of a number of factors, including prices, products and services, risk management, financial strengths, brand recognition, business innovation, experience and knowledge of our staff, employee compensation and geographic coverage. We expect the competition to continue and intensify in the future. Many futures companies expand their operational scale, market share as well as geographic coverage through mergers and acquisitions and many increase capital through various methods so as to increase their influence on the PRC futures market and risk resistance ability. We also compete with other financial institutions, such as securities companies which are acquiring futures companies to expand their services into the traditional businesses of futures companies.
In addition, we seek to diversify our business to involve in asset management business and commodity trading and risk management business. In the asset management business, we face intense competition from securities companies and other financial institutions which may have greater capital resources, customer bases and experience than us. We also believe we will continue to experience competition in our asset management business in the future as our competitors seek to expand market shares by reducing prices. Other innovative products and services may emerge in the PRC futures market as the PRC futures industry is gradually evolving, and we cannot guarantee that we will be able to provide such innovative products and services promptly. Meanwhile, the gradual deregulation of the PRC futures industry and the tendency towards mixed business operations in the PRC’s financial industry may cause banks, insurance companies, trusts and other financial institutions to enter into our industry, or allow our current competitors to expand the scope of their business into new business lines. Some of our competitors may have certain competitive advantages over us, such as wider geographic coverage, broader range of product and service offerings, greater financial resources, stronger brand recognition and more advanced IT systems. If we fail to compete effectively with our current or future competitors, our business, financial condition, results of operations and prospects may be materially and adversely affected.
Investments in the PRC futures firms are subject to ownership restrictions that may adversely affect the value of your investment.
Investments in PRC futures firms are subject to a number of ownership restrictions. Prior approval from the CSRC is required for any person or entity to hold 5.0% or more of the registered capital or total issued capital of a PRC futures company. If a shareholder of a PRC futures company increases its shareholding above the 5.0% threshold without obtaining prior approval from the CSRC,
—36— RISK FACTORS the shareholders voting right will be deemed invalid to the extent exceeding the 5.0% threshold and the shareholder could be subject to sanctions by the CSRC, such as reversal of such increase in shareholding, fines and confiscation of any related gains. Ownership restrictions imposed by the government may materially adversely affect the value of your investment.
We face the risks of concentration of customers and business in Jiangsu Province.
As of the Latest Practicable Date, 17 of our total 43 futures branches were located in Jiangsu Province. As at 30 June 2015, approximately 70% of our futures brokerage customers opened their accounts at our futures branches in Jiangsu Province. We expect that our future business will continue to concentrate in Jiangsu Province. If there is a significant economic downturn or material adverse changes in the economic and regulatory environment or any severe natural disasters or catastrophic events in Jiangsu Province, our business, financial condition and results of operations could be materially and adversely affected.
If we cannot successfully maintain and increase our customer base, our business, financial condition and results of operations could be materially and adversely affected.
The futures business is highly competitive and we have to maintain our customer base and attract new customers to achieve future success. Customers in the futures industry are sensitive to, among other things, the costs of trading futures through us, the quality of services we offer, the availability and security of online trading, the speed and reliability of order execution and breadth and effectiveness of the information we provide. Our service quality, online trading systems, the speed and reliability of order execution, the industry information and analysis we provide and our product innovation abilities may no longer be satisfactory to our customers. In addition, we may be unable to provide competitive brokerage rate to our customers.
In addition, our customers are not bound to use our services and products and can freely switch to other futures companies and decrease their trading activities conducted through us at any time. As a result, we may lose our existing customers to our competitors or fail to attract new customers. If any of the foregoing events happen, our business, financial condition and results of operations may be materially and adversely affected.
We receive refunds of handling fees from the PRC Futures Exchanges from time to time and we cannot assure you whether we can receive any refunds of trading fees in the future and if so, the amount of such refund.
The PRC Futures Exchanges may from time to time refund certain percentage of handling fees they charge for the trading of futures to futures companies to support their development. We are allowed to record such refunds of trading fees as revenue in our financial statements. For the three years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, refunds from the PRC Futures Exchanges amounted to RMB61.0 million, RMB31.8 million, RMB24.3 million and RMB10.2 million, respectively, representing approximately 16.1%, 9.4%, 8.3% and 5.8% of our operating income during the respective periods. However, we cannot predict whether the PRC Futures Exchanges will refund trading fees in the future and if so, the amount of such refunds, which depends entirely on the PRC Futures Exchanges that may consider general market conditions, the trading fee
—37— RISK FACTORS rates they charge and competition in the futures industry in making decisions about such refunds. Therefore, if any of the PRC Futures Exchanges decides not to refund trading fees or reduces the refund percentage of trading fees, our revenue from futures brokerage business could be materially and adversely affected.
Our relationships with Introducing Brokers are important for our business operation. Failure to maintain these relationships or change to our business strategy in relation to Introducing Brokers could have a material adverse effect on our business, financial condition and results of operations.
We have relationships with Introducing Brokers who introduce customers to us and provide marketing and other services to these customers. They typically receive compensation from us based on the trade volume of the customers they introduce. For the three years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, 67.1%, 61.2%, 36.0% and 25.6% of our futures brokerage commission fee income in the PRC were generated from clients referred by Introducing Brokers. For details of arrangement with Introducing Brokers, please see the section headed “Business — Introducing Brokers for our futures brokerage business” in this prospectus. Many of our relationships with Introducing Brokers are non-exclusive or may be terminated by them on short notice. In addition, Introducing Brokers have no obligation to provide us with new customers or minimum levels of transaction volume. Furthermore, during the Track Record Period, we experienced a decrease in number of our Introducing Brokers as a result of our development strategy, which further resulted a decrease in the number of customers referred by Introducing Brokers, which partially contributed to the decrease of our commission and fee income from futures brokerage business during the Track Record Period. The failure of the Introducing Brokers to provide us with customers or our failure to maintain relationships with Introducing Brokers may result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations. To the extent any of our competitors offers more attractive compensation terms to our Introducing Brokers, we could lose the Introducing Brokers’ services or be required to increase the compensation we pay to retain the Introducing Brokers.
Our cooperation with Introducing Brokers may expose us to significant reputational and legal risks as we could be harmed by Introducing Brokers’ misconduct or errors that are difficult to detect and deter.
Currently, there is no national licensing or qualification requirement in the PRC for individuals or enterprises (other than enterprises in certain business, such as securities firms) to act as Introducing Brokers. In general, we enter into contracts with Introducing Brokers, which regulate their conducts and provide for the compensation we pay for them. For details of arrangement with Introducing Brokers, please see the section headed “Business — Introducing Brokers for our futures brokerage business” in this prospectus. We periodically train Introducing Brokers on disclosure of risks to customers and futures trading rules. Other than that, we have limited control over Introducing Brokers as they are third parties and are not employed by us. If Introducing Brokers mislead customers or make representations on gains from trading futures or even trade futures on behalf of the customers
—38— RISK FACTORS or conduct other illegal or improper activities that are difficult to detect and deter, which may result in great losses to customers, we may be subject to litigations, regulatory investigations or sanctions although we do not control Introducing Brokers’ activities. As a result, our business, financial condition, results of operations and reputation may be materially and adversely affected.
Our warehouse receipts business exposes us to risks resulting from losses to commodities held by us.
We have been engaging in the warehouse receipts business through our subsidiary, Holly Capital, since 2013, under which we hold legal titles to commodities before delivery to counterparties pursuant to relevant contracts. If there is any loss to the commodities as a result of various factors, such as storage losses, fire and natural disaster, we may be unable to meet our contractual obligations to counterparties and may be subject to legal liabilities and material losses. In addition, the insurance for such commodities may not be sufficient to cover our losses. As a result, our business, financial condition and results of operations may be adversely affected.
Furthermore, the warehouse receipts business, similar to other businesses, is inherently exposed to the fraudulent risk. For instance, in warehouse receipts services, the relevant counterparties may present warehouse supervisor/logistic service provider with fake warehouse receipts as evidence of possession, or privately pledge the same batch of goods multiple times for loans or borrowings at different institutions. In the event of default repayment of the relevant counterparty, our capacity to receive full amount of the repayment in time or claim the full value of the pledged goods could be materially and adversely affected, which may further cause material loss in our expected gains or investment.
We enter into sales and repurchase contracts with our clients in our warehouse receipts business and we are exposed to credit risk and default risk of the counterparties. Any breach of contract by our counterparties could adversely affect our business, financial position and results of operations. For instance, in August 2015, one of our clients in warehouse receipts business defaulted in fulfilling its repurchase obligation of approximately RMB24.95 million, and the relevant commodities (being about 8,500 tons of rice crops in this case) that we owned and stored in warehouses had been removed without our authorisation. The counterparty was neither able to return the rice crops nor fulfill its repurchase obligation pursuant to the relevant agreements. For more details, please refer to the section “Business — Legal Proceedings”. In this incident, we are able to negotiate with the warehouse supervisor and obtain full compensation for the loss of goods under their supervision and thus it is expected that such incident would not have material and adverse financial impact on us. Although we regularly review our credit exposure to specific clients or counterparties, default risks may arise from unforeseen events or circumstances. In addition, fraud incidents involving the use of fake warehouse receipts and/or other dishonest actions were noted in recent years in the PRC. There is no assurance that we can detect and avoid the credit risk, default risk and risk of fraud of counterparties, which may result in material and adverse impact on our financial position.
We are subject to margin funding requirements on short notice and may suffer financial losses as a result of customers’ failure to meet margin call.
Generally, our customers pay an initial margin when a futures position is opened and maintain a certain amount as maintenance margin at all times. If the equity in a customer’s account drops to
—39— RISK FACTORS or below the level of maintenance margin because of adverse price movement, we will issue a margin call to require the customer to restore the equity to the initial level within a designated time. If the customer fails to do so, we will mandatorily and promptly liquidate the customers’ position. However, we cannot assure that in each case the liquidation of the positions will not result in a loss to us or that liquidation will be feasible. In the event of severe adverse price movements affecting open positions of our customers, they may suffer huge losses before we can take any mitigation measures and the customers’ equity in the account may become negative as a result. We may in turn suffer losses if the customers fail to restore the equity to the required level. Such mandatory liquidation mechanism may give rise to disputes between customers and our Company which may subject us to reputational risks. If this happens, our business, results of operations and financial condition may be materially and adversely affected.
We face increasing risks as a result of business innovation, the failure of which may materially and adversely affect our business, financial condition and results of operations.
We continue to diversify and grow our business lines to include, among others, asset management and commodity trading and risk management businesses in response to the changing market. We offer new products and services within our traditional and new business lines. In accordance with market conditions and PRC regulations, we may continually develop various innovative business lines and provide new products and services. However, there are greater risks and uncertainties associated with innovative business lines and new products or services, particularly in instances where the markets are not fully developed, which may have different operational parameters and risk profiles from our established existing businesses. As a result, these innovative business lines and new products or services may expose us to further potentially challenging risks. For example:
• Due to little historical data and insufficient experience or expertise in offering new products and services and dealing with new counterparties and clients, we may be subject to disputes with or complaints from our customers;
• Initial timetables for the introduction and development of new lines of business and new products or services may not be achieved and pricing and profitability targets may not prove feasible;
• We may be subject to greater regulatory scrutiny and increased credit risks, market risks and operational risks;
• We may suffer from reputational concerns or even legal disputes with counterparties and clients due to deficiencies in our new products and inadequate levels of services;
• Our internal controls and risk management may prove to be ineffective with respect to any new lines of business and new products or services;
• We may not be able to hire additional competent qualified personnel to design and manage the offering of a broader range of products and services;
• Our new products and services may not be accepted by our clients; and
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• We may not be able to obtain sufficient financing from internal and external sources to support our business expansion.
Should any of the risks discussed above occur, our business, financial condition and results of operations, as well as our reputation and prospects may be materially and adversely affected.
Our business may be subject to risks associated with expansion outside Jiangsu province.
We have expanded, and intend to further expand, our operations outside Jiangsu Province. As at the Latest Practicable Date, 26 of our futures branches were located across cities outside of Jiangsu Province. In particular, we expanded our business operations into Hong Kong through Holly Su Futures. Such expansion may expose us to additional risks, including (without limitation):
• We may not attract sufficient number of new customers due to our limited presence and brand recognition;
• We may not be able to establish a presence in saturated markets where our competitors have already established a historical presence and large market shares;
• We may not be able to anticipate competitive conditions in new markets that are different from those in our existing markets, such as market saturation;
• We may be unfamiliar with the local cultural, commercial and operating environments;
• We may experience difficulties in recruiting and retaining qualified personnel;
• We may experience economic instability and recessions in the new markets;
• We may not be able to anticipate potential adverse tax consequences; and
• We may encounter difficulties in effectively enforcing contractual or legal rights.
Our current and future acquisitions may not be successful.
We acquired certain assets of Huazheng Futures Co., Ltd. (華證期貨有限公司)(“Huazheng Futures”) relating to its futures brokerage business in June 2013 to expand our business operations. As our strategic development plans, we may further acquire complementary businesses and enter into other overseas markets. This strategy entails potential risks that could have a material adverse effect on our business, financial condition, results of operations and prospects, including (without limitation):
• unidentified or unanticipated liabilities or risks in the assets or businesses which we have acquired or may acquire in the future;
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• inability to successfully integrate the products, services and personnel of the businesses which we have acquired or may acquire into our operation or to realise 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 payment obligations;
• inability to retain employees and customer relationships;
• customer overlap or loss of customers;
• diversion of management attention and other resources;
• inability to attract a sufficient number of customers due to our limited presence in those markets;
• economic instability and recessions;
• political instability;
• inability to obtain approvals or licenses to operate our business;
• obligations to comply with foreign laws and other regulatory requirements;
• potential adverse tax consequences;
• changes in tariffs;
• difficulties in administering foreign operations generally;
• increased risks of exposure to terroist activities;
• fluctuations and changes in currency exchange rates; and
• inability to effectively enforce contractual or legal rights.
Our reported financial results could be negatively affected if there is an impairment of goodwill.
We are required to make annual test to our goodwill, including the goodwill related to the acquisition of certain assets of Huazheng Futures and any future acquisitions, to determine if impairment has occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds fair value of the assets would be recognized. For example, such impairment could occur if our businesses underperform the cash-flow projection or if we fail to grow at expected rates or decline. In particular, we recorded impairment losses of RMB10.1 million in 2013, among which RMB9.8 million was relating to an impairment of goodwill in connection with our acquisition of Huazheng Futures in June 2013. For details, please also see the section headed
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“Financial Information — Results of Operations — Operating Expenses — Impairment losses” of this prospectus. We cannot assure you that we will not make impairment to our goodwill in the future when the relevant assumptions and factors change, the occurrence of which may negatively impact our reported financial results.
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 expenditures. 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.
We are subject to extensive regulatory requirements, the non-compliance with which may subject us to penalties.
As a participant in the futures industry, we are subject to extensive PRC and overseas (including Hong Kong) laws and regulatory requirements including rules and regulations of the CSRC, the SFC, the CFA, the relevant PRC regulators, futures exchanges and other self-regulatory organisations, which are designed to safeguard the integrity of the financial markets and the soundness of futures companies and to protect participants in the futures market. These regulations often serve to regulate certain aspects of our business including, among other things, capital requirements, the types of products and services we may offer, qualification and conduct of our Directors, officers and employees, scope of business, risk management and internal control procedures, changes in Controlling Shareholders or the largest Shareholder, anti-money laundering and social insurance coverage. Please see the section headed “Regulatory Overview” in this prospectus for further information.
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 implements a classified regulation system on futures companies and assigns a regulatory rating to each futures company every year based on its risk management capabilities, taking into consideration of its market competitiveness, the fostering and development of institutional investors and continuous compliance with regulatory requirements. For seven consecutive years since 2009, we have been rated “Class A of the A Category” by the CSRC. We cannot assure you that CSRC will not lower our regulatory rating in the future which may result in a higher reserve ratio for our investor protection fund or make us ineligible for obtaining approvals to conduct certain new businesses or suspending or disqualifying us from carrying on some of our existing business lines. Failure to comply with the applicable regulatory requirements could result in sanctions, fines, penalties or other disciplinary actions including, among other things, a downgrade of our regulatory rating, suspension or revocation of required registrations or memberships and limitations or prohibitions on our future business activities, which may limit our ability to conduct pilot programmes and launch new businesses and could materially and adversely affect our reputation, business, financial condition and results of operations.
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Moreover, the relevant rules and regulations in the futures industry may change from time to time based on the development of the futures markets or otherwise. New legislation, rules and regulations and changes in the interpretation or enforcement of existing ones may impact our business strategies, operations and prospects. Competent authorities may from time to time implement policies and guidelines on the restrictions of futures products to be traded on the futures exchanges, and these changes in policies, rules and regulations could result in limitations on the business lines that we may conduct or modifications to our business practices or additional costs, which may materially and adversely affect our business, financial condition and results of operations. For more details of the respective policies, measures and guidelines, please see the section headed “Regulatory Overview — Regulatory Environment in China” in this prospectus.
Furthermore, during the Track Record Period, we were subject to potential penalties in relation to payment of social insurance and housing fund contributions. For details, please see the section headed “Business — Regulatory Non-compliance” of this prospectus. There is no assurance that the relevant PRC authorities may not set further penalties should there be any further changes to the relevant laws and regulations, in which case, our business, financial conditions and results of operations could be materially and adversely affected.
New legislation or changes in the PRC regulatory requirements may affect our business operations and prospects.
The PRC futures industry is still in the development stage and the regulatory environment is subject to changes. In recent years, the CSRC has gradually deregulated the futures industry and encouraged business diversification and innovation. For example, the CSRC launched a pilot programme to allow futures companies to engage in asset management business since 1 September 2012 and according to the Administration Measures on the Asset Management Business of Futures Companies《期貨公司資產管理業務管理規則 ( （試行）》) published by the CFA on 4 December 2014, regulation on asset management business of futures companies are further relaxed and futures companies are allowed to provide a collective asset management scheme to a group of clients. In addition, on 29 October 2014, the CSRC published Supervision and Administration Measures on Futures Companies《期貨公司監督管理辦法》 ( ), which among other things, reduces entry barriers, enhances information disclosure obligations of futures companies and clarifies relevant requirements for futures companies to engage in diversified business. These changes could materially affect our business, financial condition and results of operations.
There are uncertainties regarding the enforcement of new rules and the existing rules and regulations in relation to new businesses. Furthermore, while the deregulation of the futures industry may intensify competition in the futures industry and, therefore, expose us to challenges in maintaining and increasing our market shares and rankings in various business lines, strengthening of and changes in futures regulations could result in limitations on the business lines we may conduct, modifications to our business practices or additional costs. There is no guarantee that we will be able to fully comply with the new rules and regulations, or compete with new market players effectively, or efficiently adjust our business according to the new environment and the effects of any newly or revised legislation or regulations or their interpretations or enforcement are unpredictable. Any such failure could materially and adversely affect our business, financial condition and results of operations.
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Our operations may be materially and adversely affected if we fail to obtain or maintain necessary approvals for conducting a particular business or offering specific products.
We operate in a highly regulated financial industry where many aspects of our business are subject to obtaining and maintaining necessary approvals, licenses or permits from government authorities in China, Hong Kong and other jurisdictions where we operate including the CSRC, the SFC and their authorised organisations. Please see the section headed “Regulatory Overview” in this prospectus for further details. We are required to comply with the relevant regulatory requirements prescribed by regulatory authorities, such as capital requirements, risk management, corporate governance, professional staff, corporate structure and compliance operations. If we fail to continuously comply with such regulatory requirements, we may encounter the risks of being disqualified for our existing business by the regulatory authorities. Our compliance obligations will be subject to scrutiny especially when we apply for approvals, licenses or permits for conducting new businesses or offering new products. In addition, in respect of any new businesses and new products or services that we contemplate, we may not be able to obtain the relevant approvals for developing such new business if we fail to fully comply with the relevant regulations and regulatory requirements or the new business is currently subject to unclear regulations. As a result, we may fail to develop our new business as planned or recover our initial investments, or we may fall behind our competitors in such businesses or lose our existing customers, which may materially and adversely affect our business, financial condition and results of operations.
We are subject to capital requirements, including the Net Capital requirement, which may restrict our business activities.
According to the CSRC’s requirements, (i) our Company’s Net Capital should not be less than RMB15 million, (ii) the ratio of our Company’s Net Capital against the risk capital reserves should not be less than 100%, (iii) the ratio of our Company’s Net Capital against our net assets should not be less than 40%, (iv) the ratio of our current assets against our current liabilities should not be less than 100% and (v) the ratio of our liabilities against our net assets should not exceed 150%. If we fail to meet any of the regulatory capital requirements, the relevant regulatory authorities may impose penalties on us or limit the scope of our business, which could have a material and adverse effect on our business, financial condition and results of operations. Please see the section headed “Regulatory Overview” in this prospectus for further details.
Our revenue decreased during the Track Record Period and there is no assurance that our revenue will not decline in the future.
For the three years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, we recorded revenue of RMB375.6 million, RMB325.4 million, RMB273.9 million and RMB151.0 million, respectively. Our revenue decreased during the Track Record Period, primarily due to the decrease of our futures brokerage trading volume and our average brokerage commission rate. For further details, please see the section headed “Financial Information — Results of Operations” in this prospectus. To diversify our revenue streams, we have been engaging in the asset management business since February 2013 and the commodity trading and risk management business since mid 2013. For the year ended 31 December 2014 and the six months ended 30 June 2015, our segment profit before tax from the commodity trading and risk management business amounted to
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RMB9.4 million and RMB17.1 million, respectively. However, as we only had a short operation period in the asset management business and the commodity trading and risk management business, we cannot guarantee that our revenue from these newly established businesses will continue to increase and our operating income will not further decrease or experience fluctuations in the future.
Our risk management and internal control policies and procedures may not be adequate or effective and may expose us to unidentified or unexpected risks, which may have a material adverse effect on our business, financial condition and results of operations.
We are dependent on our risk management and internal control policies and the adherence to such policies by our trading staff to manage our risk exposure. Our policies, procedures and practices are used to identify, monitor and control a variety of risks including market risks, operating risks, credit risks and compliance risks. Some of our methods for managing risks are discretionary by nature and are based on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods may fail to predict future risk exposure, which could be significantly greater than those indicated by our historical measures, and fail to mitigate identified risks and risks of unpredictable or unforeseeable nature especially as we are diversifying our business lines and expanding our operations. Other risk management methods depend on an evaluation and analysis of available information with respect to market and operating conditions as well as other matters, which may not be accurate, complete, up-to-date or properly evaluated. In addition, the information and experience on which we rely for our risk management methods may become quickly outdated as markets and regulations continue to evolve. If we fail to promptly adjust and improve our risk management and internal control policies and procedures in response to the development of futures market and the expansion of our business, our business, financial condition and results of operations could be materially adversely affected.
Our risk management methods rely on a combination of technical and human controls and supervision that are subject to error and failure. Even though we can properly identify potential risks, our evaluation of such risks and corresponding measures adopted to handle such risks may be inadequate or ineffective. In addition, management of operating and compliance 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 our internal control systems, which, however, we cannot assure you. Furthermore, due to the size of our operations and our extensive branch network, we cannot assure you that our staff will fully comply with our risk management and internal control policies. In addition, we may elect to adjust our risk management policies to allow for an increase in risk tolerance, which could expose us to the risk of greater losses. Our risk management and internal control policies and procedures may not protect us against all risks or may protect us to an extent less than anticipated, in which case our business, financial condition and results of operations may be materially adversely affected.
We are subject to the risks arising from any failures of, or inadequacies in, our IT systems.
Our business is heavily dependent on the stable and effective operations of our IT systems and is also affected by the operations of the IT systems of telecommunication carriers, futures exchanges and other financial institutions. The proper functioning of our futures trading, financial control, risk management, accounting, client service and other data processing systems, together with the
—46— RISK FACTORS communication networks between our headquarters, subsidiaries and branches and our communication networks with futures exchanges and other financial institutions, are critical to our business and our ability to compete effectively. The operations of our IT systems are exposed to risks of disruptions from human error, natural disasters, power failure, acts of war or terrorism, fire, sabotage, hardware or software malfunctions or defects, intentional acts of vandalism, computer viruses, spam attacks, unauthorised access, data loss or leakage, customer error or misuse, lack of proper maintenance or monitoring and other similar events. We utilise IT products and services provided by a variety of third-party developers, contractors and vendors. If we fail to effectively manage our external IT developers, contractors and vendors and their products and services, we may experience system failures, incompatibility of software or platforms, as well as synchronisation, data transfer and data management issues across our various IT systems and platforms. We cannot assure you that there will be no systems failures which may materially disrupt our operations in the future.
A prolonged disruption to, or failure of, our information processing or communications systems would limit our ability to execute orders on behalf of our customers and for our own account and may result in financial losses, customer complaints, litigation or arbitration claims filed by or on behalf of our customers as well as regulatory investigations and sanctions. Such disruption or failure could also have a negative effect on our reputation, which in turn could cause us to lose existing customers to our competitors or make it more difficult to attract new customers in the future. Furthermore, any financial loss to be suffered by us or our customers as a result of a disruption to, or failure of, our computer and communications systems and networks may be magnified when the commodities and financial markets fluctuate dramatically. As a result, our business, financial condition and results of operations could be materially and adversely affected. Furthermore, we cannot guarantee that our disaster recovery system will function well when there is any failure in our IT systems.
The futures industry is characterised by rapidly changing technology. Online futures trading platforms and other new channels, such as mobile devices, are becoming increasingly popular among our clients due to their convenience and user-friendliness. If our information systems are unable to upgrade in response to our business development and expansion, our capabilities of business management, client service, risk management and internal control may be adversely affected. Failure to upgrade the original systems may also result in client dissatisfaction. If we upgrade our information systems, or launch new information systems for our new businesses or new products, we may encounter a slowdown, breakdown or collapse of the systems due to their defects. Furthermore, disruptions to, or instability of, our technology or external technology used by our clients for our online products and services and operational errors of technicians could harm our reputation and business.
Our business is susceptible to the operational failure of third parties.
As engaged in the futures trading business as a broker and clearing agent, we face the risk of operational failure or termination of any of the futures exchanges, banks or other institutions we use to facilitate our futures transactions. Any operational failure or termination of the particular institutions that we use could materially and adversely affect our ability to execute transactions, serve our clients and manage our exposure to various risks. Any disputes or difficulties in cooperating with these institutions could materially and adversely affect our business operations.
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Interest income constitutes a significant portion of our operating income and any decline or slowdown in our interest income may materially and adversely affect our business, financial condition and results of operations.
During the Track Record Period, we derived interest income from client balances and our own deposits with banks and financial settlement institutions, which amounted to RMB81.1 million, RMB83.1 million, RMB106.5 million and RMB58.4 million, respectively, representing 21.34%, 24.66%, 36.58% and 32.88% of our operating income in the respective periods. Our interest income is affected by the general economic conditions that could in turn affect our client’s investment activities. Fluctuation of interest rate may also materially and adversely affect our interest income. For instance, client balances are directly affected by the investment activities and trading volume carried out by our clients, which is subject to various factors beyond our control, such as market conditions and monetary policies. For further details, please also see the section headed “Risk Factors — Futures brokerage commission and fee income constitutes a significant portion of our operating income and any decline or slowdown in our brokerage commission fees income can materially and adversely affect our business, financial condition and results of operations”. In addition, our own deposits are directly influenced by our commission revenue and fee income which is in turn affected by our client’s trading activities. Any decrease in the trading volume and slowdown of our client’s investment activities could result in a decrease in our interest income, which will adversely affect our business, financial condition and results of operations. Furthermore, interest income from the aforementioned sources is also linked to the prevailing market interest rates. If market interest rates decrease, our interest income will generally decrease. We also make interest payments on our bank loans. Our interest expenses are also associated with our exposure to the interest risk. During periods of rising interest rates, our interest expenses and financing costs will generally increase. We currently do not have measures to hedge the interest rate risk exposure. Interest rates are highly sensitive to factors that are beyond our control, which include general economic conditions and policies of various governmental and regulatory authorities. Significant interest rate fluctuations could affect our interest income or increase our interest expenses, any of which could materially and adversely affect our financial condition and results of operations.
We depend on our senior management and key personnel, and the loss of members of our senior management team or key personnel may disrupt our business.
Our future success is largely dependent upon the continued services of our senior management who possess extensive knowledge and management skills with respect to futures industry and its development trends. We also rely on the continued service and performance of our key personnel including members of our core management, IT specialists, sales, trading and compliance staff. Owing to the expansion of our business and our increasing range of products and services, we need talented employees and have devoted resources to recruitment and professional training. However, competition for qualified management and key personnel is significant in futures industry as our competitors are competing for the same pool of qualified personnel and we may be unable to retain our management team and key personnel and to attract, assimilate or retain other qualified personnel in the future.
Some of our employees are not subject to non-competition agreements. They may resign at any time to join our competitors and may seek to divert customer relationships that they have developed while working for us. We cannot guarantee that we will be able to recruit staff in sufficient numbers
—48— RISK FACTORS or with sufficient experience, or that competition in recruitment will not lead to increases in our employment costs. The loss of the services of any of our management team and key personnel or the inability to identify, recruit and retain a sufficient number of qualified staff in the future could materially and adversely affect our business, financial condition and results of operations.
In addition, owing to the rapid development of the PRC futures industry, our current professionals’ knowledge and skills may be insufficient to meet our needs for product and service innovations, which may also materially and adversely affect the development of our business.
Our insurance coverage may not be adequate to protect us from all potential losses.
We maintain insurance coverage for our motor vehicles. We do not carry liability insurance that extends coverage to all potential liabilities that may arise in the ordinary course of our business, nor do we maintain any insurance coverage for our business interruption. Significant uninsured damage to any of our properties, or other assets, whether as a result of earthquakes or other causes, could materially and adversely affect our business, financial condition, results of operations and growth prospects. Furthermore, our insurance coverage may not be sufficient to cover all of our potential losses and/or liabilities.
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 laws, anti-terrorism laws and other regulations. These laws and regulations require 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 a client identification system in accordance with relevant rules, keep clients’ information, record details of client activities and report suspicious transactions to relevant authorities. Please see the section headed “Regulatory Overview” in this prospectus for further details.
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, in light of the complexity of money-laundering activities and other illegal or improper activities, such policies and procedures may not completely eliminate the possibility of us being utilised by other parties to engage in money laundering and other illegal or improper activities. To the extent that we fail to fully comply with such laws and regulations, the relevant government authorities may impose fines and other penalties on us. In addition, our business and reputation could deteriorate if our customers manipulate their transactions with us for money laundering or other illegal or improper purposes.
We may not be able to detect and prevent fraud or other misconduct committed by our employees, representatives, agents, clients, Introducing Brokers or other third parties on a timely basis, which may materially and adversely affect our reputation, business, financial condition and results of operations.
We may be exposed to fraud or other misconduct committed by our employees, representatives, agents, clients, Introducing Brokers or other third parties including without limitation, unauthorised
—49— RISK FACTORS trading, misuse or disclosure of confidential information, improper manipulation of futures prices, unfair competition, provision of false information, forge of corporate seals, illegal fundraising, improper tunneling and insider trading, or otherwise not complying with laws or regulations or our internal control procedures. These incidents of misconduct could subject us to legal liability, regulatory sanctions against us and material reputational or financial harm to us, or could bind us to unauthorised or excessive trading to the detriment of our customers or us.
Employee errors, such as mistakes in executing, recording or processing orders from customers, could cause us to enter into transactions that customers may disaffirm and refuse to settle, which could subject us to the risk of material financial losses even if the errors are detected and the transactions are unwound or reversed afterwards. If the clients are unable to settle their transactions on a timely basis, the time needed to detect employee errors may increase and our risk of material losses could increase. The risk of employee error or miscommunication may be greater for products that are new or have non-standardised terms. Regardless of whether we are alleged to have any responsibility for any misconduct or employee error, investigation or prosecution of persons engaged in such activities could cause reputational harm, litigation costs and management distraction for us.
Our internal control procedures are designed to monitor our operations and ensure overall compliance. 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, other misconduct or employee errors, and the precautions we take to detect and prevent such activities may not be fully effective in all cases. We cannot assure you that no misconduct or employee error will occur in the future. Any occurrence of such misconduct or employee error may materially and adversely affect our reputation, business, financial condition and results of operations.
A failure to appropriately identify and address conflicts of interest could materially and 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. We may encounter conflicts of interest arising among (i) our various business lines, (ii) our clients and us, (iii) our various clients, (iv) our employees and us or (v) our clients and our employees. Please see “Business — Internal Control Measures — Conflicts of Interest.”
In light of the complexity and difficulty in appropriately identifying and dealing with potential conflicts of interest, our internal control and risk management procedures that are designed to identify and address conflicts of interest may not be sufficient. Our failure to manage conflicts of interest could harm our reputation and erode our clients’ confidence in us. In addition, potential or perceived conflicts of interest may also subject us to litigation or regulatory sanctions. Any of the foregoing could materially and adversely affect our business, financial condition and results of operations.
Our continued success depends on our ability to maintain and enhance our brands and reputation.
We believe the brand awareness, reputation and client trust and confidence we have established are significant to our business operations. Maintaining and enhancing our brands and reputation will
—50— RISK FACTORS be critical to expanding our customer base and attracting talent personnel. The strength of our brands and reputation will also affect the market acceptance of our futures products and services. However, we are exposed to the risks of litigation and disputes, employee misconduct, senior personnel changes, client complaints and regulatory investigations, the outcome or penalties of which could tarnish our reputation and diminish the value of our brands. Any harm to our brand and reputation could cause existing and potential clients to be reluctant to purchase products or services from us and our business, results of operations and financial condition may be materially and adversely affected.
We may be subject to liability and regulatory actions if we are unable to protect personal data and confidential information of our clients.
We routinely transmit and receive personal data and confidential information of our customers through the Internet, by email and other electronic means and may not be able to ensure that our vendors, service providers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information.
Various laws, regulations and rules require us to protect the personal data and confidential information of our clients. The relevant authorities may issue sanctions or orders against us if we fail to protect the personal information of our clients, and we may have to provide compensation for economic losses arising from our failure to protect the personal information of our clients in accordance with applicable laws and regulations. Incidents of mishandling personal information or failure to protect the confidential information of our clients could create a negative public or client perception on our operations or our brand, which may materially and adversely affect our reputation and prospects.
Some of our landlords do not possess the relevant building ownership certificates for some of the properties leased by us.
As at the Latest Practicable Date, we leased 76 properties in China, with an aggregate gross floor area of 26,266.6313 sq.m. We have not been provided with the relevant building ownership certificates by the landlords of two properties with a gross floor area of 562.75 sq.m., representing 2.14% of the aggregate gross floor area of our leased properties. Please see the section headed “Business — Properties” in this prospectus for further details.
Our landlords are currently making attempts to obtain the building ownership certificates, but the timing for obtaining such certificates is beyond our control. Before our landlords obtain the proper building ownership certificates for such properties, our rights with respect to such properties may not be fully protected. Any disputes or claims with respect to these leased properties with defective titles may result in the relocation of our futures branches.
We cannot assure you that our use and occupation of these two leased properties with defective titles 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 our landlords cannot obtain the relevant
—51— RISK FACTORS building ownership certificates in a timely manner and our legal right to use or occupy the relevant properties is challenged, we may have to find alternative properties, incur additional relocation costs, and interrupt our business operations any of which may have a material adverse effect on our business, financial condition and results of operations.
Certain defects caused by non-registration of our lease agreements related to certain properties occupied by us in the PRC may adversely affect our business and operations.
As of the Latest Practicable Date, we leased 76 properties in China, with an aggregate gross floor area of 26,266.6313 sq.m., among them, 10 lease agreements in relation to our leased properties had not been registered with the appropriate government authorities in the PRC, which are used as premises for our office and staff quarters. The aggregate gross floor area of these properties is approximately 1,637.68 sq.m.. Please see the section headed “Business — Properties” in this prospectus for further details.
As advised by our PRC legal adviser, under PRC laws, an executed lease agreement must be registered and filed with the relevant land and real estate administration bureau. The lessor and the lessee are under the obligation to register and file such executed lease agreement with the relevant authorities. A failure to register an executed lease agreement will not invalidate the lease agreement, but the competent governmental authorities may demand us to rectify the non-compliance within a specified period, and if we fail to rectify such non-compliance in such time limit, we will be subject to potential penalties. Up to the Latest Practicable Date, we have not received any requests or instructions from the relevant PRC authorities in relation to such non-compliance. If the relevant authorities so request, we might be subject to potential fines, which may have an adverse impact on our business and operations.
Substantial legal liability or significant regulatory actions against us could materially and adversely affect our business, financial condition and results of operations, or cause us significant harms to our reputation and business prospects.
We face significant legal risks in our business, and the volume and amount of claims in litigation and regulatory proceedings against financial institutions are high. These risks include potential liabilities under laws for mishandling of personal data and confidential information of our clients, material false or misleading statements made in connection with futures or other transactions, potential liabilities for the advice provided to clients in corporate transactions and possible disputes over the terms and conditions of complex trading arrangements. We may also be subject to claims for alleged negligent conduct, breach of fiduciary duty or breach of contract. These risks are often difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. We may also be subject to inquiries, investigations, and proceedings by regulatory and other governmental agencies.
We may be a party to legal proceedings and regulatory investigations arising from the ordinary course of business. Please see “Business — Laws and Regulations.” 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
—52— RISK FACTORS damages sought in litigations and regulatory proceedings may increase. A significant judgment, arbitration award or regulatory action against us, or a disruption in our business arising from adverse adjudications in proceedings against our Directors, senior management or key employees, could materially and adversely affect our liquidity, business, financial condition, results of operations and prospects.
The use of our Chinese name in this prospectus and in the course of our business in Hong Kong may be challenged due to potential trademark infringements.
Our history can be traced back to 31 July 1995 when Jiangsu Jinling, our predecessor, was established in the PRC. Our Company changed its name to “江蘇弘業期貨經紀有限公司” in 1999, and in 2011 changed its name to “江蘇弘業期貨有限公司” and in November 2012 further changed its name to “弘業期貨股份有限公司” and has since then been carrying on business under the same name in the PRC.
On 28 January 2015, the Company applied to the Trade Marks Registry for the registration of , , as trademarks in Hong Kong. The latter two applications have been accepted by the Registrar of Trade Marks and are registered. However, in respect of the application to register , the Trade Marks Registry informed us that the application cannot be accepted for registration yet due to conflict with an earlier trademark “弘業” which covers financial and related services, similar to the services applied for in the Company’s said trademark application.
We have registered “ ”, “Holly Futures” and a portfolio of “ ”, “弘業期貨” and
“Holly Futures” as trademarks in the PRC. But we cannot operate business under trademark “弘業” in Hong Kong, otherwise we may be challenged for breach of intellectual property rights in Hong Kong, which may subject us to legal proceedings and claims. In addition, we may be even challenged for the use of our Chinese name in this prospectus.
In light of this circumstance, our Company does not intend to use “弘業” to provide financial and related services in Hong Kong and all our business operations in Hong Kong relating to the provision of financial and related services have been and will continue to be undertaken through our subsidiary Holly Su Futures under the name of “弘蘇”. Holly Su Futures has applied to the Trade Marks Registry for the registration of “ ” and“ ” as trademarks in Hong Kong. For further details, please see the section headed “Business — Intellectual Property Rights” and “Appendix VI — Statutory and General Information — B. Further Information about Our Business — 2. Intellectual Property Rights of our Group”.
However, there is no guarantee that there will not be any claim against us with respect to our Chinese name even with the steps and measures as described above. Intellectual property rights litigation can be costly and time-consuming, and could divert our management’s attention from business operations. In addition, should we be held liable for any trademark infringement, our reputation as well as our business, financial condition and results of operations may be materially and adversely affected.
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Our Controlling Shareholder is able to exercise significant influence over our Company and its interests may not be aligned with the interests of our other Shareholders.
Following the completion of the Global Offering (assuming the Over-allotment Option is not exercised), SOHO Holdings will remain the Controlling Shareholder, which will directly and indirectly hold approximately 47.59% of our enlarged total share capital.
As the Controlling Shareholder of our Company, SOHO Holdings may have the ability to exercise significant influence over our business including matters relating to our management and policies and decisions regarding mergers, expansion plans, business consolidation, the sale of all, or substantially all, of our assets, election of Directors, dividends or other distributions and other significant corporate actions. In addition, the interests of SOHO Holdings may differ from the interests of our other Shareholders. Although SOHO Holdings has committed to us that it will not prejudice the interests of our Company, or our other Shareholders, by taking advantage of its position as the Controlling Shareholder, subject to our Articles of Association and applicable laws and regulations, SOHO Holdings will continue to have the ability to cause us to enter into transactions or take, or not to take, actions or make decisions which may conflict with the best interests of our other Shareholders.
RISKS RELATING TO THE PRC
Changes in the PRC economic, political and social conditions, as well as government policies, could have a material and adverse effect on our business, financial condition, results of operations and prospects.
Since substantially all of our assets are located in the PRC and substantially all of our revenue is derived from the PRC, our business, financial condition, results of operations and prospects can be substantially affected by changes and developments in the PRC economic, political and social conditions.
The economy of the PRC differs from the economies of most developed countries in a number of respects, such as the extent of government involvement, level of development, growth rate and control of foreign exchange. The PRC government exerts substantial control over the growth of the domestic economy by the means of resource allocation, setting policy on foreign exchange and payment of debts denominated in foreign currencies, setting monetary policies and giving preferential treatment to specific industries or companies. In recent years, the PRC government has implemented market-oriented reforms. Such economic reform measures could be adjusted or revised and may differ between industries or various regions in the PRC. As such, we may not benefit from such measures. In addition, many of the economic reforms carried out by the PRC government are unprecedented or experimental and are expected to be refined and improved over time. This refining and adjustment process may not necessarily have a positive effect on our operations and business development. Other political, economic and social factors may also lead to further adjustments of the reform measures. From time to time, the PRC government, in stabilizing the economic environment and performance of the stock and futures market, may implement policies and guidelines on the restrictions of the volume and type of futures products to be traded on the futures exchanges, for more details of the stabilization measures undertaken by the PRC government, please see the section headed “Industry Overview —
—54— RISK FACTORS
Overview of the PRC Economy” and the section headed “Regulatory Overview — Regulatory Environment in China” in the prospectus. These measures may reduce our clients’ willingness to participate in trading of the futures products, which may adversely affect our business, financial condition and results of operations.
As calculated by GDP, China is one of the fastest growing economies in the world in recent years. However, China’s economy growth rate shows signal of slight slowdown since 2012. China may fail to sustain its growth rate in the future. In order to maintain economic growth in China, the PRC government has taken and may continue to implement a range of monetary policies and other economic measures to expand the investment in infrastructure projects, increase the liquidity of credit market and encourage employment. But there can be no assurance that such monetary or economic measures will be successful. Any change in the PRC economy and relevant markets in future may adversely affect our business, financial condition and results of operations.
PRC legal system involves a significant degree of uncertainties, which could have a material and adverse effect on us.
We are incorporated under the laws of the PRC and our business and operations are primarily conducted in the PRC, thus we are governed by the PRC laws, regulations and rules. The PRC legal system is based on written statutes and their interpretations by relevant legislative and judicial authorities. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, the PRC government has been committing to develop a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organisation and governance, commerce, taxation and trade. However, as many of these laws and regulations are relatively new, and due to the limited number of published cases and judicial interpretations and their lack of precedential force, interpretations and enforcements of these laws and regulations involve a significant degree of uncertainties. In particular, the PRC futures industry is highly regulated. Many aspects of our business such as the scope of business, establishment of branches are subject to PRC laws and regulations. There can be no assurance that changes in such laws and regulations, or in their interpretations or enforcements, will not have a material and adverse effect on our business operations.
The PRC is geographically large and divided into various provinces and municipalities and as such, different laws, regulations, rules and policies apply in different provinces and may have different and varying applications and interpretations in different parts of the PRC. Legislation or regulations, particularly for local applications, may be enacted without sufficient prior notice or announcement to the public. Accordingly, we may not be aware of the existence of new legislation or regulations.
The PRC has not developed a fully-integrated legal system, and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activity in the PRC. In addition, the PRC legal system is based, in part, on government policies and administrative rules that may have a retroactive effect. As a result, we may not be aware of our violations of these policies and rules until
—55— RISK FACTORS sometime after the violations. Furthermore, the legal protection available to us under these laws, regulations and rules may be limited. Any litigation or regulatory enforcement action in the PRC may be protracted and may result in substantial costs and the diversion of resources and management attention.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC based on foreign laws against us and our Directors, Supervisors and senior management residing in the PRC.
We are incorporated under the laws of the PRC and a substantial portion of our assets are located in the PRC. In addition, almost all of our Directors, Supervisors and officers reside in the PRC and their personal assets may also be in the PRC. Therefore, investors may encounter difficulties in effecting service of process from outside PRC upon us or most of our Directors, Supervisors and officers. Moreover, it is understood that the enforcement of foreign judgments in the PRC is still subject to uncertainties. A judgment of a court from a foreign jurisdiction may be reciprocally recognised or enforced if the jurisdiction has a corresponding treaty with China or if the judgments of the PRC courts have been recognised before in that jurisdiction, subject to the satisfaction of other requisite requirements. However, China does not have any such treaty with Japan, the U.K., the United States and many other countries providing for the reciprocal recognition and enforcement of judgments, resulting in uncertainties in relation to the enforcement of foreign judgments against us or our Directors, Supervisors and officers. In addition, Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, in the PRC or Hong Kong, recognition and enforcement of court judgments from the jurisdictions mentioned above may be difficult or impossible in relation to any matter that is not subject to a binding arbitration provision.
On 14 July 2006, the Supreme People’s Court of the PRC and the Government of Hong Kong signed an Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters《關於內地與香港特別行政區法院相互認可和執行當事人協議管轄的民商事案 ( 件判決的安排》). Under this arrangement, where any designated People’s Court of the PRC or Hong Kong court has made an enforceable final judgment requiring payment of money in a civil and commercial case pursuant to a choice of court agreement, any party concerned may apply to the relevant People’s Court of the PRC or Hong Kong court for recognition and enforcement of the judgment. Although this arrangement became effective on 1 August 2008, the outcome and effectiveness of any action brought under the arrangement remain uncertain.
Dividends payable by us to our foreign investors and gains on the sale of our shares, may be subject to withholding tax under the PRC tax laws.
Under the applicable PRC tax laws, non-PRC resident individual holders of our H Shares are subject to PRC individual income tax on dividends received from us at a rate of 20%. Pursuant to the Circular on Questions Concerning the Collection of Individual Income Tax following the Repeal of Guo Shui Fa [1993] No. 045 (關於國稅發[1993]045號文件廢止後有關個人所得稅徵管問題的通知) (Guo Shui Han [2011] No. 348) (the “Circular”), issued by the SAT on 28 June 2011, a non-PRC resident individual is entitled to lower tax rate on dividends paid by us in accordance with applicable
—56— RISK FACTORS tax treaties or arrangements between the PRC and the jurisdiction in which the shareholder resides. Such lower tax rates range from 5% to 20%. As required, non-PRC resident individual shall directly or through a tax agent apply for such lower tax rates, which will be subject to the approval of the competent tax authority.
The Circular further provides that considering the general applicable tax rate under applicable tax treaties or arrangements is 10%, to simplify the collection procedures of income tax, we can withhold 10% of the dividends we pay without making prior application with competent tax authorities. For a non-PRC resident individual enjoying a tax rate lower than 10% in accordance with the relevant tax treaties or arrangements, we could make relevant applications on his behalf and refund the excess tax withheld by us subject to approval from the competent tax authority. For a non-PRC resident individual residing in a jurisdiction where the applicable tax rate for dividends we pay, as stipulated in the relevant tax treaties or arrangements, is more than 10% but less than 20%, we shall withhold the individual income tax at the actual tax rate without seeking prior consent from competent tax authorities. For a shareholder 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 shall withhold the individual income tax at the rate of 20%.
Despite these arrangements, there are significant uncertainties as to the interpretations and applications of applicable PRC tax laws and rules due to several factors, including the relatively short history of such laws and rules, and whether the relevant preferential tax treatment will be revoked in the future such that all non-PRC resident individual holders of H shares will be subject to PRC individual income tax at a flat rate of 20%.
Pursuant to the Circular on Continuing to Exempt from Individual Income Tax on Gains from Transfers of Shares (關於個人轉讓股票所得繼續暫免徵收個人所得稅的通知) jointly issued by the MOF and the SAT on 30 March 1998, individual’s gains on transfers of listed shares shall be exempt from individual income tax.
Under the EIT Law and its implementation regulations, a non-PRC resident enterprise is generally subject to enterprise income tax at a rate of 10% on its PRC-sourced income, including dividends received from a PRC company and gains derived from the disposition of equity interests in a PRC company, subject to reductions under any special arrangement or applicable treaty between the PRC and the jurisdiction in which the non-PRC resident enterprise resides. Pursuant to the Notice of Withholding and Payment of Enterprise Income Tax for the PRC Resident Enterprises Paying Dividends to Overseas Non-resident Enterprise Shareholders of H Shares《關於中國居民企業向境 ( 外H股非居民企業股東派發股息代扣代繳企業所得稅有關問題的通知》) promulgated by the SAT on 6 November 2008, we are required to withhold enterprise income tax at 10% from dividends payable to non-PRC resident enterprise holders of H Shares (including HKSCC Nominees) for the year 2008 and thereafter. Non-PRC resident enterprises that are entitled to a reduced tax rate under an applicable income tax treaty or arrangement shall apply to competent PRC tax authorities and any excess amount withheld will be refunded subject to the competent PRC tax authorities’ approval.
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According to the Interim Measures for Source-based Withholding of Enterprise Income Tax on Non-resident Enterprises《非居民企業所得稅源泉扣繳管理暫行辦法》 ( ) issued by the SAT on 9 January 2009, in offshore H share transfers between non-PRC resident enterprises, the transferor is required to directly or through a tax agent file enterprise income taxes with competent PRC tax authorities.
In addition, it is also unclear whether and how the PRC individual income tax and enterprise income tax on gains realised by non-PRC 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. Considering these uncertainties, non-PRC resident holders of our H Shares should be aware that they may be obligated to pay PRC income tax on gains realised through the sale, or transfer by other means of our H Shares.
Payment of dividends is subject to restrictions under PRC law.
Under PRC law and our Articles of Association, we may only pay dividends out of distributable profits. Distributable profits are our after-tax profits as determined under PRC GAAP or IFRS, whichever is lower, less any recovery of accumulated losses and appropriations to statutory and other reserves that we are required to make. As a result, we may not have sufficient or any distributable profit to enable us to make dividend distributions to our Shareholders, including in periods for which our financial statements indicate we are profitable. Any distributable profit not distributed in a given year is retained and available for distribution in subsequent years.
Moreover, our operating subsidiaries in the PRC may not have distributable profit as determined under PRC GAAP. Accordingly, we may not receive sufficient distributions from our subsidiaries for us to pay dividends. Failure by our operating subsidiaries to pay us dividends could materially and adversely impact our ability to make dividend distributions to our Shareholders and our cash flow, including periods in which we are profitable.
Fluctuations in exchange rates, the value of the RMB and governmental control over currency conversion may affect the value of your investment and limit our ability to utilise our cash effectively.
We receive substantially all of our payments from customers in RMB and will need to convert RMB into foreign currencies for the payment of dividends, if any, to holders of our Shares. The RMB is currently not a freely convertible currency. Under the PRC’s existing foreign exchange regulations, following the completion of the Global Offering, we will be able to pay dividends in foreign currencies without prior approval from the SAFE or its local branches by complying with certain procedural requirements. However, the PRC government may take measures at its discretion in the future to restrict access to foreign currencies for current account transactions if foreign currencies become scarce in the PRC, which may result in inability of us to pay dividends in foreign currencies to our Shareholders. Foreign exchange transactions under our capital account continue to be subject to significant foreign exchange controls and require the approval of the SAFE or its local branches. These limitations could affect our ability to obtain foreign exchange through equity financing, or to obtain foreign exchange for capital expenditures.
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The exchange rate of the RMB against the U.S. dollar and other foreign currencies fluctuates and is affected by, among other things, the policies of the PRC government and changes in the PRC’s and international political and economic conditions. Since 1994, the conversion of RMB into foreign currencies, including U.S. dollar, has been based on rates set by the PBOC, which are set daily based on the previous business day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. From 1994 to 20 July 2005, the official exchange rate for the conversion of RMB to U.S. dollar was generally stable. On 21 July 2005, the PRC government introduced a managed floating exchange rate system to allow the value of RMB to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. On the same day, the value of RMB appreciated by approximately 2.0% against the U.S. dollar. The PRC government has made, and in the future may make, further adjustments to the exchange rate system.
There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which, together with domestic policy considerations, could result in a further and more significant appreciation of RMB against the U.S. dollar, the Hong Kong dollar or other foreign currencies. If the appreciation of RMB continues, and as we need to convert the proceeds from the Global Offering and future financing into RMB for our operations, appreciation of RMB against the relevant foreign currencies would reduce the RMB amount as a result of such conversion. On the other hand, because the dividends on our Shares, if any, will be paid in Hong Kong dollars, any devaluation of RMB against the Hong Kong dollar could reduce the amount of any cash dividends on our Shares in Hong Kong dollar.
Furthermore, the net proceeds from the Global Offering are expected to be deposited in currencies other than RMB until we obtain necessary approvals from relevant PRC regulatory authorities to convert these proceeds into onshore RMB. If the net proceeds cannot be converted into onshore RMB in a timely manner, our ability to deploy these proceeds efficiently may be affected as we will not be able to invest these proceeds on RMB-denominated assets onshore or deploy them in uses onshore where RMB is required, which may materially and adversely affect our business, results of operations and financial condition.
We face risks related to force majeure events, natural disasters or outbreaks of contagious diseases in the PRC.
Any future occurrence of force majeure events, natural disasters or outbreaks of epidemics, including but not limited to those caused by avian influenza or swine influenza, may restrict business activities in the areas affected and materially and adversely affect our business and results of operations. For example, in 2009 and 2013, there were reports of the occurrence of two types of avian influenza in certain regions of the world, including the PRC, where we operate our business. Moreover, the PRC has experienced natural disasters such as 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, 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 materially and adversely affect our business, financial condition and results of operations.
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RISKS RELATING TO THE GLOBAL OFFERING
There has been no prior public market for our H Shares. The trading volume and market price of our H Shares following the Global Offering may be volatile.
Prior to the Global Offering, there was no public market for our H Shares. The initial Offer Price to the public for our H Shares was the result of negotiations between us (on behalf of ourselves and the Selling Shareholders) and the Sole Global Coordinator (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 to the Stock Exchange for the listing of, and permission to deal in, our H Shares on the Stock Exchange. A listing on the Stock Exchange, however, does not guarantee that an active liquid public trading market for our H Shares will develop, or if it does develop, that it will be sustained. In addition, the trading price and trading volumes of the H Shares may be subject to significant volatility as a result of various factors, some of which are beyond our control, such as variations in our revenue, earnings and cash flows or changes in our pricing policy as a result of competition, the addition or departure of key personnel, changes in the demand for our products or services or any other developments of our Company.
Moreover, in recent years, stock markets in general, and the H shares issued by other issuers in the PRC and listed on the Stock Exchange both have experienced trading price and volume fluctuations, some of which were unrelated or did not fully correspond to the operating performance of related companies. These broad market and industry fluctuations may adversely affect the market price and trading volumes of our H Shares in a similar manner.
There will be a time gap of several business days between the pricing and trading of our H Shares offered under the Global Offering.
The Offer Price of our H Shares sold to the public under the Global Offering will be determined on the Price Determination Date. However, trading of our H Shares on the Stock Exchange will not commence until they are delivered, which is expected to be several business days after the Price Determination Date. During that period, investors of our H shares may not be able to sell or otherwise deal in our H Shares. Accordingly, holders of our H Shares may be subject to the risk that our H Share trading price could fall before trading begins as a result of adverse market conditions or other unfavorable circumstances that may arise during the period between the Price Determination Date and the date on which the dealing begins.
Future sales or perceived sales of substantial amounts of our securities in the public market, including any future public offering in the PRC, or re-registration of our Domestic Shares into H Shares, could have a material and adverse effect on the prevailing market price of our H Shares and our ability to raise capital in the future, and may result in dilution of your shareholdings.
The market price of our H Shares could decline as a result of future sales of substantial amounts of our H Shares or other securities relating to our H Shares in the public market or the issuance of new H Shares or other securities, or the perception that such sales or issuances may occur. Future sales, or perceived sales, of substantial amounts of our securities, including any future offerings, could also
—60— RISK FACTORS materially and adversely affect our ability to raise capital in the future at a time and at a price which we deem appropriate. In addition, our Shareholders may experience dilution in their holdings to the extent we issue additional securities in future offerings. A certain amount of our Shares currently outstanding will be subject to contractual and/or legal restrictions on resale for a period of time after completion of the Global Offering. For more details, please see the sections headed “Underwriting — Underwriting Arrangement and Expenses — Undertakings to the Stock Exchange pursuant to the Listing Rules” and “Underwriting — Underwriting Agreement and Expenses — Undertakings pursuant to the Hong Kong Underwriting Agreement” in this prospectus. After these restrictions lapse or if they are waived or breached, future sales or perceived sales of substantial amounts of our Shares, or the possibility of such sales by us, could negatively impact the market price of our H Shares and our ability to raise equity capital in the future.
The Domestic Shares immediately after the Global Offering (assuming the Over-allotment Option is not exercised) will amount to 657,300,000 Shares, representing approximately 72.47% of our enlarged total share capital (or 653,895,000 Shares, representing approximately 69.49% of our enlarged total share capital assuming the Over-allotment Option is fully exercised). The H Shares to be issued and offered for sale by the Selling Shareholders under the Global Offering (assuming the Over-allotment Option is not exercised) will amount to 249,700,000 Shares, representing approximately 27.53% of our enlarged total share capital (or 287,155,000 Shares, representing approximately 30.51% of our enlarged total share capital assuming the Over-allotment Option is fully exercised).
According to the stipulations by the State Council’s securities regulatory authority and the Articles of Association, our Domestic Shares may be converted into H Shares, which may be listed or traded on an overseas stock exchange including the Stock Exchange, provided that prior to the conversion and trading of such converted Shares, the requisite internal approval processes have been duly completed and the approval from the relevant PRC regulatory authorities, including the CSRC, have been obtained. In addition, such conversion, trading and listing shall in all respects comply with the regulations prescribed by the State Council’s securities regulatory authorities and the regulations, requirements and procedures prescribed by such overseas stock exchange including the Stock Exchange. No approval by Shareholders in separate class meeting is required for the subsequent listing and trading of the converted Shares on an overseas stock exchange including the Stock Exchange. However, the PRC Company Law provides that in relation to the public offering of a company, the shares of that company which are issued prior to the public offering shall not be transferred within one year from the date of the listing. As such, upon obtaining the requisite approval, Shares currently held on our domestic share register may be traded, after the conversion, in the form of H Shares on the Stock Exchange after one year of the Global Offering. This could further increase the supply of H Shares in the market, and future sales, or perceived sales, of the converted Shares may adversely affect the trading price of our H Shares.
Investors of our H Shares will experience immediate dilution as the Offer Price is higher than the net tangible book value per H Share.
The Offer Price of our H Shares is higher than the net tangible book value per Share of our H Shares immediately prior to the Global Offering. Therefore, investors of our H Shares in the Global
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Offering will experience an immediate dilution in pro forma adjusted combined net tangible asset value and existing Shareholders will receive an increase in the pro forma adjusted combined net tangible asset value per Share of their Shares. If we issue additional H Shares in the future, purchasers of our H Shares may experience further dilution.
There can be no assurance if and when we will pay dividends in the future.
Our ability to pay dividends will depend on whether we are able to generate sufficient earnings. Distribution of dividends shall be formulated by our Board of Directors at their discretion and will be subject to our Shareholders’ approval. Under the applicable PRC laws, dividends may be paid only out of distributable profits. Distributable profits are our after-tax profits as determined under PRC GAAP or IFRS, whichever is lower, less any recovery of accumulated losses and appropriations to statutory and other reserves that we are required to make. A decision to declare, or to pay, any dividends and the amount of any dividends will also depend on various factors, including, but not limited to, our results of operations, cash flows and financial condition, operating and capital expenditure requirements, requirements of our Articles of Association, the Company Law and any other applicable PRC laws and regulations, market conditions, our strategic plans and prospects for business development, contractual limits and obligations, payment of dividends to us by our operating subsidiaries, taxation, regulatory restrictions and any other factors determined by our Board from time to time, to be relevant to the declaration or suspension of dividend payments. As a result, there can be no assurance whether, when and in what form we will pay dividends in the future. Subject to any of the above constraints, we may not be able to pay dividends in accordance with our dividend policy. Please see the section headed “Financial Information — Dividend Policy” for more details of our dividend policy.
We have significant discretion as to how we will use the net proceeds of the Global Offering and you may not necessarily agree with how we use them.
Our management may use the net proceeds from the Global Offering in ways you may not agree with or that do not yield a favourable return to our Shareholders. We plan to use the net proceeds from the Global Offering to develop our wealth management, investment management, investment banking and trading and institutional client services businesses and expand our Hong Kong and global futures businesses. Please see “Future Plans and Use of Proceeds — Use of Proceeds”. However, our management will have discretion as to the actual utilisation of our net proceeds. You are entrusting your funds to our management, upon whose judgment you must depend, for the specific uses we will make of the net proceeds from this Global Offering.
Some facts, forecasts and statistics contained in this prospectus with respect to the PRC, its economy or its capital and futures industry are derived from various official or third-party sources and may not be accurate, reliable, complete or up-to-date.
We have derived certain facts, forecasts and other statistics in this prospectus, particularly those relating to the PRC, the PRC economy and the industry in which we operate, from information published by the PRC and other government agencies, industry associations, independent research institutes or other third-party sources. While we have taken reasonable care in reproducing or extracting the information, it has not been prepared or independently verified by us, the Sole Sponsor,
—62— RISK FACTORS the Sole Global Coordinator, the Sole Lead Manager and the Sole Bookrunner or the Underwriters or any of our or their respective affiliates or advisers. Moreover, statistics derived from multiple sources may not be prepared on a comparable basis. We cannot assure you as to the accuracy and reliability of such facts, forecasts and statistics, which may not be consistent with other information compiled inside or outside the PRC. Such facts, forecasts and statistics include but not limit to the facts, forecasts and statistics used in the sections headed “Risk Factors”, “Industry Overview” and “Business” in this prospectus. Because of 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, forecasts or statistics.
Investors may not be able to participate in rights issue made by our Company from time to time or select to receive stock dividends and may experience dilution of your shareholdings as a result.
We may, from time to time, distribute rights to our Shareholders, including rights to acquire our H Shares. We cannot distribute rights to a holder of our H Shares in the United States unless such distribution and sale of rights and the securities to which there rights relate are either exempt from registration under U.S. Securities Act or are registered under the U.S. Securities Act and in other jurisdictions where there are similar restrictions. We cannot assure you that we will be able to obtain an exemption from registration under the U.S. Securities Act if so applied. In addition, we are under no obligation to file a registration statement with respect to any rights or underlying securities or to endeavour to have a registration statement declared effective under the U.S. Securities Act. Accordingly, holders of our H Shares in the United States or other jurisdictions which have relevant restrictions may be unable to participant in rights issue and may experience dilution of their shareholdings as a result. In addition, we may allow rights to lapse if we are unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonable practicable, in which case holders of our H Shares will receive no value for these rights.
We strongly caution investors not to place any reliance on any information contained in any press or media reports regarding our Group and the Global Offering.
Prior or subsequent to the publication of this prospectus, there has been or may be press and media coverage regarding us and the Global Offering, in addition to marketing materials published by us in compliance with the Listing Rules. We have not authorised any such press and media reports, and the financial information, financial projections, valuations and other information about us (if any) contained in such unauthorised press and media coverage may not truly reflect what is disclosed in this prospectus or the actual circumstances. We make no representation as to the appropriateness, accuracy, completeness or reliability of any such information or publication, and accordingly do not accept any responsibility for any such press or media coverage or the inappropriateness, inaccuracy, incompleteness or unreliability of any such information. To the extent that any such information
—63— RISK FACTORS appearing in the press or media is inconsistent or conflicts with the information contained in this prospectus or the actual circumstances, we shall not be liable on the same. Accordingly, investors should not rely on any such information in making a decision as to whether to purchase our H Shares, and should rely only on the information included in this prospectus and the Application Forms.
—64— WAIVERS FROM STRICT COMPLIANCE WITH LISTING RULES
In preparation for the Global Offering, we have sought the following waivers from strict compliance with the relevant provisions of the Listing Rules:
MANAGEMENT PRESENCE IN HONG KONG
Pursuant to Rule 8.12 of the Listing Rules, our Company must have sufficient management presence in Hong Kong. This normally means that at least two of our executive Directors must be ordinarily resident in Hong Kong. Rule 19A.15 of the Listing Rules prescribes that the requirement under Rule 8.12 of the Listing Rules applies to a new applicant incorporated in the PRC, however, such requirement may be waived by the Stock Exchange in its discretion. Given that our headquarters and our principal business operations are located, managed and conducted in the PRC, and Mr. Zhou Yong and Ms. Zhou Jianqiu, our executive Directors, currently reside in the PRC, we consider that it is in our best interests for them to be based in or near the places where our Group has significant operations, and it would be practically difficult and commercially unnecessary to either relocate our executive Directors who are based in the PRC to Hong Kong or to appoint additional executive Directors who are ordinarily resident in Hong Kong. We do not have, and do not contemplate in the foreseeable future that we will have, a sufficient management presence in Hong Kong for the purpose of satisfying the requirements under Rules 8.12 and 19A.15 of the Listing Rules. Accordingly, we have applied to the Stock Exchange for, and the Stock Exchange has agreed to grant, a waiver from the strict compliance with the requirements of Rules 8.12 and 19A.15 of the Listing Rules and the following arrangements have been made for maintaining regular and effective communication with the Stock Exchange:
(a) Ms. Zhou Jianqiu, an executive Director who is an ordinary resident in the PRC, and Mr. Zhao Weixiong, one of our joint company secretaries, have been appointed as the authorised representatives of our Company (the “Authorised Representatives”) and will be our principal channel of communication with the Stock Exchange. Our Company has also appointed Ms. Leung Wing Han Sharon, one of our joint company secretaries who is a Hong Kong resident, as our alternate authorised representative. Although both Ms. Zhou Jianqiu and Mr. Zhao Weixiong reside in the PRC, they possess valid travel documents to visit Hong Kong and are able to renew such travel documents when they expire. Accordingly, both the Authorised Representatives and the alternate authorised representative of our Company will be able to meet with the Stock Exchange within a reasonable period of time. The two Authorised Representatives and the alternate authorised representative will also be readily contactable by telephone, email and facsimile to promptly address any enquiries from the Stock Exchange.
(b) Mr. Lam Kai Yeung, our independent non-executive Director, is ordinarily resident in Hong Kong and will also serve as a channel of communication between the Stock Exchange and our Company.
(c) Both the Authorised Representatives and the alternate authorised representative of our Company have means to contact all Directors and the senior management promptly at all times as and when the Stock Exchange wishes to contact any of the Directors and the senior management on any matters.
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(d) Each of the Directors who is not ordinarily residing in Hong Kong possesses or can apply for valid travel documents to visit Hong Kong and is able to renew such travel documents when they expire and will be able to meet with the Stock Exchange upon reasonable notice and within a reasonable period. Each of the Directors will be readily contactable by telephone, facsimile and email, and is authorised to communicate on behalf of our Company with the Stock Exchange.
(e) Each of the Directors has provided his/her respective contact details, including office phone numbers, mobile phone numbers, fax numbers and e-mail addresses, to the Stock Exchange, the Authorised Representatives and the alternative authorised representative. In the event that any Director expects to travel or otherwise be out of office, he/she will provide the contact details and his/her place of accommodation to the Authorised Representatives and the alternate authorised representative.
(f) Our Company has appointed Guotai Junan Capital Limited to act as our compliance adviser pursuant to Rule 3A.19 of the Listing Rules who will have access at all times to the two Authorised Representatives, the alternate authorised representative, our Directors and other senior management, and will act as an additional channel of communication between our Company and the Stock Exchange. The compliance adviser has been appointed for a period commencing on the Listing Date and ending on the date on which our Company distributes our annual report for the first full financial year in accordance with Rule 13.46 of the Listing Rules.
(g) Meetings between the Stock Exchange and the Directors can be arranged through the Authorised Representatives, our alternate authorised representative or our compliance adviser or directly with the Directors within a reasonable time frame. Our Company will inform the Stock Exchange promptly in respect of any change in the Authorised Representatives, the alternate authorised representative and/or our compliance adviser.
APPOINTMENT OF JOINT COMPANY SECRETARIES
Pursuant to Rule 8.17 of the Listing Rules, we must appoint a company secretary who satisfies Rule 3.28 of the Listing Rules. According to Rule 3.28 of the Listing Rules, we must appoint as our company secretary an individual who, by virtue of his academic or professional qualifications or relevant experience, is, in the opinion of the Stock Exchange, capable of discharging the functions of company secretary.
The Stock Exchange considers the following academic or professional qualifications to be acceptable:
(a) a member of The Hong Kong Institute of Chartered Secretaries;
(b) a solicitor or barrister (as defined in the Legal Practitioners Ordinance (Chapter 159 of the Laws of Hong Kong)); and
(c) a certified public accountant (as defined in the Professional Accountants Ordinance (Chapter 50 of the Laws of Hong Kong)).
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In accessing “relevant experience”, the Stock Exchange will consider the following:
(a) length of employment with the issuer and other issuers and the roles he or she played;
(b) familiarity with the Listing Rules and other relevant laws and regulations including the SFO, the 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 Listing Rules; and
(d) professional qualifications in other jurisdictions.
We have appointed Mr. Zhao Weixiong and Ms. Leung Wing Han Sharon as our joint company secretaries, which will take effect on the Listing Date. Mr. Zhao Weixiong joined our Group in July 1999 as a member of the senior management and has been responsible for company secretarial matters and our securities department, international business department, a part of our futures branches as well as matters relating to Holly Capital. For more details of Mr. Zhao Weixiong’s biography, please see the section headed “Directors, Supervisors and Senior Management—Senior Management” in this prospectus. Although our Company believes, having regard to Mr. Zhao Weixiong’s past experience in handling administrative and corporate matters, that he has a thorough understanding of our Company and the Board, Mr. Zhao Weixiong does not possess the requisite qualifications as required by Rule 3.28 of the Listing Rules. Therefore, our Company has appointed Ms. Leung Wing Han Sharon, who is a Hong Kong resident and possesses such qualifications, to be a joint company secretary of our Company. For more details of the biography of Ms. Leung Wing Han Sharon, please see the section headed “Directors, Supervisors and Senior Management—Joint Company Secretaries” in this prospectus.
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 Listing Rules and other relevant laws and regulations, we have put in place the following arrangements:
(a) Ms. Leung Wing Han Sharon, one of our joint company secretaries who satisfies the requirements under Rule 3.28 of the Listing Rules, will assist Mr. Zhao Weixiong so as to enable him to discharge his duties and responsibilities as a joint company secretary of our Company. Given Ms. Leung Wing Han Sharon’s relevant experiences, she will be able to advise both Mr. Zhao Weixiong and our Company on the relevant requirements of the Listing Rules as well as other applicable laws and regulations of Hong Kong;
(b) Mr. Zhao Weixiong, one of our joint company secretaries, will be assisted by Ms. Leung Wing Han Sharon for a period of three years commencing from the Listing Date, which should be sufficient for him to acquire the requisite knowledge and experience under Rule 3.28 of the Listing Rules;
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(c) our Company will ensure that Mr. Zhao Weixiong has access to relevant training and support to enable him to familiarise himself with the Listing Rules and the duties required of a company secretary of a Hong Kong listed company, and Mr. Zhao Weixiong has undertaken to attend such training;
(d) Ms. Leung Wing Han Sharon will communicate with Mr. Zhao Weixiong on a regular basis regarding matters in relation to corporate governance, the Listing Rules as well as other applicable laws and regulations of Hong Kong which are relevant to the operations and affairs of our Company. Ms. Leung Wing Han Sharon will work closely with, and provide assistance to Mr. Zhao Weixiong with a view to discharging his duties and responsibilities as a company secretary, including but not limited to organising Board meetings and Shareholders’ meetings; and
(e) pursuant to Rule 3.29 of the Listing Rules, Mr. Zhao Weixiong and Ms. Leung Wing Han Sharon will also attend in each financial year no less than 15 hours of relevant professional training courses to familiarise themselves with the requirements of the Listing Rules and other regulatory requirements of Hong Kong. Both Mr. Zhao Weixiong and Ms. Leung Wing Han Sharon will be advised by our legal advisers as to Hong Kong laws and our compliance advisers as and when appropriate and required.
Accordingly, we have applied to the Stock Exchange for, and the Stock Exchange has agreed to grant to us, a waiver from strict compliance with the requirements under Rules 8.17 and 3.28 of the Listing Rules provided that Ms. Leung Wing Han Sharon will act as a joint company secretary and provide assistance to Mr. Zhao Weixiong. The waiver is valid for an initial period of three years commencing from the Listing Date and will be revoked immediately if Ms. Leung Wing Han Sharon ceases to provide assistance and guidance to Mr. Zhao Weixiong. Upon expiry of the initial three-year period, our Company will evaluate the qualifications and experiences of Mr. Zhao Weixiong. Upon the determination of our Company that no on-going assistance to Mr. Zhao Weixiong is necessary, we will demonstrate to the Stock Exchange that, with the assistance of Ms. Leung Wing Han Sharon over such three-year period, Mr. Zhao Weixiong has acquired the requisite knowledge and experience as prescribed in Rule 3.28 of the Listing Rules. The Stock Exchange will then re-evaluate whether any further waiver will be necessary.
CONTINUING CONNECTED TRANSATIONS
We have entered into certain transactions which would constitute non-exempt continuing connected transactions for our Group under the Listing Rules following completion of the Global Offering. We have applied to the Stock Exchange for, and the Stock Exchange has agreed to grant, a waiver from strict compliance with the requirements set out in Chapter 14A of the Lisitng Rules for such non-exempt continuing connected transactions for our Company. For details of our connected transactions and the waiver, please see the section headed “Connected Transactions” in this prospectus.
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DIRECTORS’ RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS
This prospectus, for which our Directors collectively and individually accept full responsibility, includes particulars in detail given in compliance with the Companies Ordinance, the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the Securities and Futures (Stock Market Listing) Rules of Hong Kong and the Listing Rules for the purpose of giving our information to the public with regard to the Group. Our 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 this prospectus or any statement herein misleading.
APPROVAL OF THE CSRC
The CSRC issued an approval letter on 18 August 2015 for the Global Offering and the submission of the application to list our H Shares on the Stock Exchange. In granting such approval, the CSRC accepts no responsibility for our financial soundness, nor for the accuracy of any of the statements made or opinions expressed in this prospectus or in the Application Forms.
UNDERWRITING AND INFORMATION ON THE GLOBAL OFFERING
This prospectus is published solely in connection with the Hong Kong Public Offering which forms part of the Global Offering. For applications under the Hong Kong Public Offering, this prospectus and the Application Forms contain the terms and conditions of the Hong Kong Public Offering. The Global Offering comprises the Hong Kong Public Offering of 24,970,000 H Shares initially offered and the International Placing of 224,730,000 H Shares initially offered (assuming the Over-allotment Option is not exercised and subject, in each case, to reallocation on the basis under the section headed “Structure of the Global Offering” in this prospectus).
The Listing is sponsored by the Sole Sponsor. Pursuant to the Hong Kong Underwriting Agreement, the Hong Kong Public Offering is underwritten by the Hong Kong Underwriters on a conditional basis, with one of the conditions being that the Offer Price is agreed between our Company (for itself and on behalf of the Selling Shareholders) and the Sole Global Coordinator (on behalf of the Underwriters). The International Underwriting Agreement is expected to be entered into on or about the Price Determination Date, subject to agreement on the Offer Price between our Company (for itself and on behalf of the Selling Shareholders) and the Sole Global Coordinator (on behalf of the Underwriters). Further details of the Underwriters and the underwriting arrangements are set out in the section headed “Underwriting” in this prospectus.
The H Shares are offered solely on the basis of the information contained and representations made in this prospectus and on the Application Forms and on the terms and subject to the conditions set out herein and therein. No person is authorised to give any information in connection with the Global Offering or to make any representation not contained in this prospectus, and any information or representation not contained herein must not be relied upon as having been authorised by our Company, the Selling Shareholders, the Sole Sponsor, the Sole Global Coordinator, the Sole Bookrunner, the Sole Lead Manager, the Underwriters, any of their respective directors, agents, employees or advisers or any other party involved in the Global Offering.
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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 this prospectus is correct as at any subsequent time.
Details of the structure of the Global Offering, including its conditions, are set out in the section headed “Structure of the Global Offering” in this prospectus, and the procedures for applying for our H Shares are set out in the section headed “How to Apply for Hong Kong Offer Shares” in this prospectus and on the relevant Application Forms.
DETERMINATION OF THE OFFER PRICE
The H Shares are being offered at the Offer Price which will be determined by the Sole Global Coordinator (for itself and on behalf of the Underwriters) and our Company (for itself and on behalf of the Selling Shareholders) on or around Monday, 21 December 2015 or such later date as may be agreed upon between our Company (for itself and on behalf of the Selling Shareholders) and the Sole Global Coordinator (on behalf of the Underwriters), and in any event no later than Monday, 28 December 2015. If the Sole Global Coordinator (on behalf of the Underwriters) and our Company (for itself and on behalf of the Selling Shareholders) are unable to reach an agreement on the Offer Price on such date, the Global Offering will not proceed.
RESTRICTIONS ON OFFER AND SALE OF THE H SHARES
No action has been taken to permit a public offering of the H Shares in any jurisdiction other than Hong Kong, or the distribution of this prospectus 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 for subscription in any jurisdiction or in any circumstance in which such an offer or invitation for subscription is not authorised or to any person to whom it is unlawful to make such an offer or invitation for subscription. The distribution of this prospectus and the offering and sales of the H 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 authorisation by the relevant securities regulatory authorities or an exemption therefrom.
Each person acquiring the H Shares under the Hong Kong Public Offering will be required to confirm, or be deemed by his acquisition of the H Shares to confirm, that he/she is aware of the restrictions on offers and sales of the H Shares in this prospectus. In particular, the H Shares have not been publicly offered or sold, directly or indirectly, in the PRC or the United States.
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Selling Shareholders
The Selling Shareholders are required to reduce their shareholdings in the Global Offering pursuant to the relevant PRC regulations relating to reduction of state-owned shares. Particulars of the Selling Shareholders are as follows:
Number of Sale Shares Number of Sale Shares (assuming the (assuming the Over-allotment Option Over-allotment Option Name Description Address is not exercised) is exercised in full)
1 SOHO Holdings an investment holding company principally engaged in (i) No. 48 Software 17,535,897 20,166,281 financial and industrial investment, authorised operation and Avenue, Nanjing, management of state-owned assets; (ii) domestic and the PRC international trading; (iii) property leasing; and (iv) production, R&D and sales of silk, textiles and garments
2 High Hope Corporation a company principally engaged in self-operation of and No. 91 Baixia 4,069,866 4,680,346 acting as agent for the import and export of various types of Road, Nanjing, the commodities and technologies, domestic trade, domestic and PRC foreign investment, R&D, manufacturing, warehousing of textile raw materials and finished products, R&D, installation, leasing of electronic devices, computer software and hardware, electronic products and network engineering design, installation, consultation and technical services, real estate development, residential property leasing, property management services, warehousing, wholesale of dangerous chemicals (operated within the scope as set out in the license), wholesale of pre-packaged food products and bulk food products, milk products (including infant formula milk powder), sale of fuel oil, sale and procurement of grain
3 Hongrui Venture Capital a company principally engaged in venture capital, corporate No. 50 Zhonghua 566,782 651,800 management, technology development and transfer, Road, Baixia investment consulting, asset management and entrusted asset District, Nanjing, management the PRC
4 Holly Logistics a company principally engaged in (i) self-operated and 24/F., Jiangsu 527,455 606,573 commissioned import and export trading business for International various commodities and technologies; and (ii) domestic Economics and trading, undertaking ocean shipping, air transportation and Trading Plaza, No. international transportation business 50 Zhonghua Road, Nanjing, the PRC
APPLICATION FOR LISTING ON THE STOCK EXCHANGE
We have applied to the Listing Committee of the Stock Exchange for the granting of listing of, and permission to deal in, (i) any H Shares which may be issued by us pursuant to the Global Offering and upon the exercise of the Over-allotment Option; and (ii) the H Shares which will be converted from state-owned Domestic Shares of the Selling Shareholders and to be sold for the benefit of the NSSF pursuant to the relevant PRC regulations relating to reduction of state-owned shares.
Dealings in the H Shares on the Stock Exchange are expected to commence at 9:00 a.m. on Wednesday, 30 December 2015. Except for our application to the Stock Exchange for the listing of, and permission to deal in, the H Shares, no part of our Shares or loan capital is listed on or dealt in on any other stock exchange and no such listing or permission to list is being or proposed to be sought in the near future.
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COMPLIANCE WITH THE LISTING RULES
We will comply with applicable laws and regulations in Hong Kong (including the Listing Rules) and any other undertakings which have been given in favour of the Stock Exchange from time to time. If the Listing Committee of the Stock Exchange finds that there has been a breach by us of the Listing Rules or such other undertakings which may have been given in favour of the Stock Exchange from time to time, the Listing Committee of the Stock Exchange may instigate cancellation or disciplinary proceedings in accordance with the Listing Rules.
REGISTRATION OF SUBSCRIPTION, PURCHASE AND TRANSFER OF H SHARES
We have instructed the H Shares Registrar, and the H Shares Registrar 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 the H Shares Registrar in respect of those H Shares bearing statements to the effect that the holder:
(a) 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 our Articles of Association;
(b) agrees with us, each of our Shareholders, Directors, Supervisors, managers and officers, and we, acting for ourselves and for each of our Directors, Supervisors, managers and officers agree with each Shareholder, to refer all differences and claims arising from our 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 our Articles of Association, and any reference to arbitration shall be deemed to authorise the arbitration tribunal to conduct hearings in open session and to publish its award, which shall be final and conclusive;
(c) agrees with us and each of our Shareholders that our H Shares are freely transferable by the holders of our H Shares; and
(d) authorises us to enter into a contract on his or her behalf with each of our Directors, Supervisors, managers and officers whereby such Directors, Supervisors, managers and officers undertake to observe and comply with their obligations to our Shareholders as stipulated in our Articles of Association.
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PROFESSIONAL TAX ADVICE RECOMMENDED
Potential investors in the Global Offering are recommended to consult their professional advisers as to the taxation implications of subscribing for, purchasing, holding or disposal of, and/or dealing in the H Shares or exercising rights attached to them. It is emphasised that none of us, the Selling Shareholders, the Sole Sponsor, the Sole Global Coordinator, the Sole Bookrunner, the Sole Lead Manager, the Underwriters, any of their respective directors, officers, employees, agents or representatives or any other person or party involved in the Global Offering accepts responsibility for any tax effects on, or liabilities of, any person resulting from the subscription, purchase, holding, disposition of, or dealing in, the H Shares or exercising any rights attached to them.
OVER-ALLOTMENT AND STABILISATION
Details of the arrangement relating to the Over-allotment Option and stabilisation are set out under the section headed “Structure of the Global Offering” in this prospectus.
PROCEDURES FOR APPLICATION FOR THE H 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” in this prospectus and on the Application Forms.
STRUCTURE OF THE GLOBAL OFFERING
Details of the structure of the Global Offering, including its conditions, are set out in the section headed “Structure of the Global Offering” in this prospectus.
REGISTER OF MEMBERS AND STAMP DUTY
All the H Shares issued pursuant to applications made in the Hong Kong Public Offering and the International Placing will be registered on the H Share register of members of our Company maintained in Hong Kong. We will maintain the Company’s principal register of members at our current registered place in the PRC.
Dealings in the H Shares registered in the H Share register of members of our Company in Hong Kong will be subject to Hong Kong stamp duty.
Unless determined otherwise by the Company, dividends payable in Hong Kong dollars in respect of our H Shares will be paid to the Shareholders listed on the H Share register of members of our Company in Hong Kong, by ordinary post, at the Shareholders’ risk, to the registered address of each Shareholder of the Company.
H SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS
Subject to the granting of the listing of, and permission to deal in, the H Shares on the Stock Exchange and compliance with the stock admission requirements of HKSCC, our H Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect
—73— INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING from the date of commencement of dealings in our H Shares on the Stock Exchange or on any other date HKSCC determines. Settlement of transactions between participants of the 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. Investors should seek the advice of their stockbroker or other professional advisers for details of the settlement arrangements as such arrangements may affect their rights and interests. All necessary arrangements have been made enabling the H Shares to be admitted into CCASS.
EXCHANGE RATE CONVERSION
Solely for your convenience, this prospectus contains translations among certain amounts denominated in Renminbi and Hong Kong dollars. No representation is made and none should be construed as being made that the amounts denominated in one currency could actually be converted into the amounts denominated in another currency at the rates indicated or at all on such date or any other date.
Unless indicated otherwise, the translations between Renminbi and Hong Kong dollars were made at the rate of RMB0.8268 to HK$1.00, the exchange rate prevailing on 8 December 2015, set by PBOC for foreign exchange transactions.
LANGUAGE
If there is any inconsistency between this prospectus and the Chinese translation of this prospectus, this prospectus shall prevail. However, the translated English names of the PRC nationals, entities, departments, facilities, certificates, titles, laws, regulations (including certain of our subsidiaries) and the like included in this prospectus and for which no official English translation exists are unofficial translations for your reference only. If there is any inconsistency, the Chinese name prevails.
ROUNDING
Certain amounts and percentages figures included in this prospectus have been subject to rounding adjustments, or have been rounded to one or two decimal places. Any discrepancies between totals and sums of amounts listed in any table are due to rounding.
—74— DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
DIRECTORS
Name Residential Address Nationality
Executive Directors
Zhou Yong (周勇) Flat 1703, Unit 2, Block 3 Chinese No. 9 Mochouhu Road East Jianye District Nanjing, Jiangsu Province the PRC
Zhou Jianqiu (周劍秋) Flat 606, Unit 4, Block 5 Chinese No. 47 Pailou Lane Gulou District Nanjing, Jiangsu Province the PRC
Non-executive Directors
Xue Binghai (薛炳海) Flat 405, Block 7 Chinese No. 26-3 Huowa Lane Baixia District Nanjing, Jiangsu Province the PRC
Zhang Fasong (張發松) Flat 501, Block15 Chinese No. 139 Diaoyutai Qinhuai District Nanjing, Jiangsu Province the PRC
Sun Changyu (孫昌宇) No. 2001, Block 46 Chinese Chengfulu 20 Xueyuan Road, Haidian District Beijing, the PRC
Independent non-executive Directors
Li Xindan (李心丹) Room 305, Block 15 Chinese Shawan Garden Xuanwu District, Nanjing Jiangsu Province, the PRC
—75— DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Residential Address Nationality
Zhang Jie (張捷） 5-3 Townhouse Chinese Jiahu Green Island No. 9 Jianhu Road West Jiangning Development District Nanjing, Jiangsu Province the PRC
Zhang Hongfa (張洪發) Flat 401, Block 4 Chinese No. 75 Huju Road North Gulou District Nanjing, Jiangsu Province the PRC
Lam Kai Yeung (林繼陽) Flat 9, 16/F. Chinese Hing Chung House Mei Chung Court Shatin, New Territories Hong Kong
SUPERVISORS
Name Residential Address Nationality
Xu Yingying (徐瑩瑩) Flat 2203, Block 6 Chinese Dashazhu Lane Baixia District, Nanjing Jiangsu Province, the PRC
Pu Xuenian (濮學年) Flat 302, Block 25 Chinese Hongjing Apartment Gulou District, Nanjing Jiangsu Province, the PRC
Wang Jianying (王健英) Flat 130-1, Fudi Langxiang Chinese No. 88 Focheng Road West Jiangning District, Nanjing Jiangsu Province, the PRC
For further information regarding our Directors and Supervisors, please see the section headed “Directors, Supervisors and Senior Management” in this prospectus.
—76— DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
PARTIES INVOLVED IN THE GLOBAL OFFERING
Sole Sponsor Guotai Junan Capital Limited 27/F., Grand Millennium Plaza 181 Queen’s Road Central Hong Kong
Sole Global Coordinator, Guotai Junan Securities (Hong Kong) Limited Sole Bookrunner and 27/F., Grand Millennium Plaza Sole Lead Manager 181 Queen’s Road Central Hong Kong
Co-lead Managers Ever-Long Securities Company Limited (in alphabetical order) 18th Floor, Dah Sing Life Building 99-105 Des Voeux Road Central Hong Kong
RHB Securities Hong Kong Limited 12th Floor, World-Wide House 19 Des Voeux Road Central Hong Kong
Legal Advisers to our Company As to Hong Kong Law and U.S. Law Paul Hastings 21-22/F, Bank of China Tower 1 Garden Road, Hong Kong
As to PRC Law Jingtian & Gongcheng 34th Floor, Tower 3 China Central Place 77 Jianguo Road, Chaoyang District Beijing 100025, the PRC
Legal Advisers to the Sole Sponsor As to Hong Kong Law Li & Partners 22/F, World-Wide House Central, Hong Kong
As to PRC Law Yongheng Partners 13/F, Changfa Science & Technology Building 222 Zhujiang Road Nanjing 210018, the PRC
—77— DIRECTORS, SUPERVISORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Auditor and Reporting Accountants KPMG Certified Public Accountants 8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong
Property Valuer Jones Lang LaSalle Corporate Appraisal and Advisory Limited 6/F Three Pacific Place 1 Queen’s Road East Admiralty, Hong Kong
Compliance Adviser Guotai Junan Capital Limited 27/F., Grand Millennium Plaza 181 Queen’s Road Central Hong Kong
Industry Consultant Euromonitor International Limited Room 01-08, Level 11 Cross Tower, 318 Fuzhou Road Shanghai 200001, the PRC
Receiving Banks Bank of China (Hong Kong) Limited 1 Garden Road Hong Kong
Wing Lung Bank Limited 45 Des Voeux Road Central Hong Kong
—78— CORPORATE INFORMATION
Registered Address and Headquarters No.50 Zhonghua Road Nanjing, the PRC
Place of Business in Hong Kong 18th Floor, Tesbury Centre registered under Part 16 of the 28 Queen’s Road East Companies Ordinance Wanchai, Hong Kong
Website Address www.ftol.com.cn (information contained in this website does not form part of this prospectus)
Authorised Representatives Zhou Jianqiu (周劍秋) Flat 606, Unit 4, Block 5 No. 47 Pailou Lane Gulou District Nanjing, Jiangsu Province, the PRC
Zhao Weixiong(趙偉雄) Flat 501, Unit 2, Block 4 Wutai Garden Gulou District Nanjing, Jiangsu Province the PRC
Alternate Authorised Representative Leung Wing Han Sharon (梁穎嫻) FCS, FCIS, CPA, FCCA 18/F., Tesbury Centre 28 Queen’s Road East Wanchai, Hong Kong
Joint Company Secretaries Zhao Weixiong (趙偉雄) Flat 501, Unit 2, Block 4 Wutai Garden Gulou District Nanjing, Jiangsu Province the PRC
Leung Wing Han Sharon (梁穎嫻) FCS, FCIS, CPA, FCCA 18/F., Tesbury Centre 28 Queen’s Road East Wanchai, Hong Kong
Audit Committee Lam Kai Yeung (林繼陽) (chairman) Xue Binghai (薛炳海) Zhang Hongfa (張洪發)
—79— CORPORATE INFORMATION
Remuneration Committee Zhang Jie (張捷) (chairlady) Sun Changyu (孫昌宇) Li Xindan (李心丹)
Nomination Committee Zhou Yong (周勇) (chairman) Zhang Jie (張捷) Zhang Hongfa (張洪發)
Risk Management Committee Li Xindan (李心丹) (chairman) Xue Binghai (薛炳海) Zhang Fasong (張發松) Zhou Jianqiu (周劍秋)
H Shares Registrar Computershare Hong Kong Investor Services Limited Shops 1712-1716 17th Floor, Hopewell Centre 183 Queen’s Road East Wan Chai Hong Kong
Principal Bankers Bank of China Limited Nanjing Zhonghua Road Sub-branch No. 50, Zhonghua Road Nanjing, Jiangsu Province the PRC
Industrial and Commercial Bank of China Limited Nanjing Chengnan Sub-branch Office No. 118, Daguang Road Nanjing, Jiangsu Province the PRC
China Construction Bank Corporation Nanjing Hongwu Sub-branch No. 188, Hongwu Road Nanjing, Jiangsu Province the PRC
Agricultural Bank of China Limited Nanjing Sanyuan Lane Sub-branch No. 242, Zhongshan Road South Baixia District, Nanjing Jiangsu Province the PRC
Bank of Communications Co., Ltd. Nanjing Zhongshan Road North Sub-branch No. 124, Zhongshan Road North Nanjing, Jiangsu Province the PRC
—80— INDUSTRY OVERVIEW
The information that appears in this Industry Overview has been prepared by Euromonitor International Limited and reflects estimates of market conditions based publicly available sources and trade opinion surveys, and is prepared primarily as a market research tool. References to Euromonitor International Limited should not be considered as the opinion of Euromonitor International Limited as to the value of any security or the advisability of investing in the Company. The Directors believe that the sources of information contained in this Industry Overview are appropriate sources for such information and have taken reasonable care in reproducing such information. The Directors have no reason to believe that such information is false or misleading or that any material fact has been omitted that would render such information false or misleading. The information prepared by Euromonitor International Limited and set out in this Industry Overview has not been independently verified by the Group, the Sole Sponsor, the Sole Global Coordinator, the Sole Bookrunner, the Underwriters or any other party involved in the Global Offering and none of them gives any representations as to its accuracy and the information should not be relied upon in making, or refraining from making, any investment decision.
SOURCE OF INFORMATION
The Company commissioned Euromonitor International Limited, an independent market research and consulting company, to conduct analysis on the PRC futures industry and other economic data and to prepare the Euromonitor Report. The Company has agreed to pay a fee of RMB300,000 for the Euromonitor Report, and RMB300,000 has been paid as at the Latest Practicable Date. The Company is of the view that the payment of such fee does not affect the fairness of the conclusions drawn in the Euromonitor Report.
Established in 1972, Euromonitor International Limited is the world leader in strategy research for both consumers and industrial markets. Comprehensive international coverage and leading edge innovation make its products an essential resource for companies large and small, national and global. With offices around the world and analysts in 80 countries, Euromonitor International Limited is a leading provider of global market intelligence.
The Euromonitor Report includes both historical and forecast information on the PRC futures industry and other economic data. When preparing the Euromonitor Report, Euromonitor International Limited derived information and data from authorised organisations and conducted primary research and secondary research. Primary research mainly involved interviewing leading industry participants and industry experts. Secondary research mainly involved reviewing published and official sources, specialist trade press, company reports, independent research reports and data based on the research database of Euromonitor International Limited.
Euromonitor International Limited built its report on the following bases and assumptions:
• The Chinese economy is expected to maintain steady growth over the forecast period;
• The Chinese social, economic and political environment is expected to remain stable in the forecast period;
• There will be no external shocks, such as financial crisis or any matter that affects the demand and supply of futures services in China during the forecast period; and
• Key market drivers, such as increase in per capita disposable income, rapid urbanisation, improving regulation environment, increasing awareness of wealth management and investment, are expected to boost the development of the PRC futures market.
—81— INDUSTRY OVERVIEW
The Directors, after taking reasonable care, confirm that there is no adverse change in the market information since the date of the Euromonitor Report.
OVERVIEW OF THE PRC ECONOMY
China’s economy has experienced a rapid growth in the last decade with the nominal GDP reaching RMB63,646.3 billion in 2014, representing a CAGR of approximately 13.0% since 2009. The nominal GDP per capita increased from RMB25,963.0 in 2009 to RMB43,320.0 in 2013, representing a CAGR of approximately 13.7%. China’s robust economic growth has spurred continuous growth in annual disposable income of urban residents per capita from RMB17,175.0 in 2009 to RMB28,844.0 in 2014, at a CAGR of approximately 10.9%. Growth in personal income has led to the expansion of personal investment. Due to the Eurozone debt crisis and slowed global economic recovery, China’s economic growth rate has witnessed slight slowdown since 2011.
The table below sets forth selected China’s economic data for the periods indicated.
CAGR (2009- 2009 2010 2011 2012 2013 2014 2014) Nominal GDP (RMB, billion) 34,562.9 40,890.3 48,412.4 53,412.3 58,801.9 63,646.3 13.0% Real GDP Growth Rate (%) 9.2% 10.6% 9.5% 7.7% 7.7% 7.4% — Nominal GDP per capita (RMB) 25,963 30,567 36,018 39,544 43,320 NA(1) NA Urban population (million) 645.1 669.8 690.8 711.8 731.1 749.2 3.0% Urban population as a percentage of the total population (%) 48.3% 50.0% 51.3% 52.6% 53.7% 54.8% — Annual disposable income of urban residents per capita (RMB) 17,175 19,109 21,810 24,565 26,955 28,844 10.9%
Note: (1) As at the date of the Euromonitor Report, the National Bureau of Statistics of the PRC has not published the nominal GDP per capita of 2014. Source: National Bureau of Statistics of the PRC (中華人民共和國國家統計局).
China’s capital markets, as affected by the volatile economic conditions, are still at an early stage of development and have experienced substantial fluctuations in the prices and trading volumes of listed securities, including significant price declines, from time to time in recent years. For example, during the last six months the Shanghai Stock Exchange (“SSE”) Composite Index has been fluctuating vigorously between its closing at 5,166.35 on 12 June 2015 and its closing at 2,927.29 on 26 August 2015. The PRC government has adopted various market stabilization measures including regulatory limitations on certain financial futures products. In addition, during August and September 2015, the China Financial Futures Exchange (the “CFFE”) adopted various regulatory and control measures on stock index futures to control excessive market speculations and potential market risks. For details, please see the section headed “Regulatory Overview — Regulatory Environment in China” in this prospectus.
OVERVIEW OF THE ECONOMY IN JIANGSU PROVINCE
Jiangsu Province is located in the Yangtze River Delta, one of the most economically developed regions in China. In terms of nominal GDP, Jiangsu Province was ranked second among all provinces in China and accounted for 10.2% of China’s nominal GDP in 2014. Various economic indicators of Jiangsu Province, such as real GDP growth rate, nominal GDP per capita and annual disposal income of urban residents per capita, are generally higher than the national average. High income, abundant private wealth and a mature financial investment environment allow Jiangsu Province residents to seek various investment options.
—82— INDUSTRY OVERVIEW
The table below sets forth selected economic data of Jiangsu Province for the periods indicated.
CAGR (2009- 2009 2010 2011 2012 2013 2014 2014)
Nominal GDP (RMB, billion) 3,445.7 4,142.5 4,911.0 5,405.8 5,916.2 6,508.8 13.6% Real GDP Growth Rate (%) 12.4% 12.7% 11.0% 10.1% 9.6% 8.7% — Nominal GDP per capita (RMB) 44,253 52,840 62,290 68,347 74,607 81,874 13.1% Urban population (million) 43.4 47.7 48.9 49.9 50.9 51.9 3.6% Urban population as a percentage of the total population (%) 55.6% 60.6% 61.9% 63.0% 64.1% 65.2% — Annual disposable income of urban residents per capita (RMB) 20,551.7 22,944.3 26,340.7 29,677.0 32,538.0 34,346.0 10.8%
Source: National Bureau of Statistics of the PRC (中華人民共和國國家統計局).
OVERVIEW OF THE PRC FUTURES INDUSTRY
China’s rapid economic growth has fuelled its capital market, of which China’s futures market has developed significantly in recent years. According to the CFA, the trading volume of China’s futures market has increased from 1,054.1 million lots in 2011 to 2,505.8 million lots in 2014, representing a CAGR of approximately 33.5% and the trading turnover increased from RMB137,516.2 billion in 2011 to RMB291,986.7 billion in 2014, representing a CAGR of approximately 28.5%.
The table below sets forth the trading volume and trading turnover of China’s futures market for the periods indicated.
CAGR (2011- 2011 2012 2013 2014 2014)
Trading volume (million lots) 1,054.1 1,450.5 2,061.8 2,505.8 33.5% Trading turnover (RMB, billion) 137,516.2 171,126.9 267,476.2 291,986.7 28.5%
Source: CFA.
Generally, there are three types of investors trade in the PRC futures market, including industrial investors, individual investors and financial institutional investors. Industrial investors, as participants in relevant industry chain, have hedging demands for price fluctuations. Individual and financial institutional investors trade futures mainly for speculative profits.
Investors’ investment in the PRC futures market experienced rapid growth in recent years. Client balance, which is the total margin and expendable funds in a customer’s account increased from RMB151,325.0 million as at 31 December 2011 to RMB274,271.9 million as at 31 December 2014. The table below sets forth the client balance held by futures companies in China as at the dates indicated.
As at 31 December 2011 2012 2013 2014
Client balance (RMB, million) 151,325 181,197 198,815 274,272
Source: CFA.
—83— INDUSTRY OVERVIEW
There are four futures exchanges in China, namely China Financial Futures Exchange, Dalian Commodity Exchange, Shanghai Futures Exchange and Zhengzhou Commodity Exchange, with 51 tradable products, of which 46 are commodity futures and 5 are financial futures. The commodity futures mainly include agriculture, metal and energy and the financial futures mainly include stock index futures and treasure bond futures which are listed on China Finance Futures Exchange.
The first financial futures product, CSI 300 Stock Index Futures was launched on 16 April 2010, which connected the securities market and the futures market and greatly expanded the depth and breadth of the PRC futures industry. From then on, the number of investors traded on China Finance Futures Exchange maintained steady growth. On 6 September 2013, the treasury bond futures were launched, which furthered the participation in the financial futures market by investors, especially financial institutional investors. According to the CFA, as at 31 December 2014, although the trading volume of financial futures accounted for only 8.7% of the overall futures market, the trading turnover accounted for approximately 56.2% of the overall futures market, reaching approximately RMB164,017.0 billion.
PRC Futures Companies
The CSRC applies a regulatory rating system for futures companies, that is, the CSRC evaluates a futures company based on its risk management capabilities taking into consideration of its market competitiveness, the fostering and development of institutional investors and regulation compliance status and then grants a rating to it. “A” category represents the best and “E” category is the worst within the rating system. As compared with 2013, futures companies within category “A” increased significantly in 2014, indicating that PRC futures companies are continuously increasing their strengths. The table below sets forth the rating category and the number of futures companies under each category as at the dates indicated.
Number of futures companies Rating category Rating As at(1) July September September October 2011 2012 2013 2014
A category AAA ———— AA 3 4 5 19 A 17181926 B category BBB 14 16 19 32 BB 15 16 20 23 B 10192625 C category CCC 21 29 16 20 CC 39 31 34 6 C 1920151 D category D 25 8 4 — E category E — — — 2 Total 163 161 158 154
Note:
(1) The gradings are usually conducted in the middle of the year, but not necessarily on the same month for each year.
Source: CFA.
—84— INDUSTRY OVERVIEW
Futures companies within category “A” generally enjoy various advantages than others, including better brand recognition and market reputation, lower ratio for the compulsory contribution of investor protection fund resulting in less costs, and the qualification to operate innovative business. The table below sets forth the brokerage commission revenue (including refunds of futures exchanges), customer margin deposits and profit of futures companies for the year ended 31 December 2014.
Brokerage commission revenue (including refunds of futures exchanges) Customer margin Profit/ loss No.of futures Market Market Market Rating categroy companies Total Average share Total Average share Total Average share (RMB (RMB (RMB (RMB (RMB (RMB billion) billion) (%) billion) billion) (%) billion) billion) (%) A category 43 6.54 0.15 65.19 209.11 4.86 76.24 3.31 0.08 79.80 B category 80 2.85 0.04 28.41 55.31 0.69 20.17 0.66 0.01 16.00 C category 27 0.64 0.02 6.41 9.85 0.36 3.59 0.18 0.01 4.30 D category 0 — — 0.00 — — 0.00 — — 0.00 E category 1 — — 0.00 — — 0.00 (0.00) (0.00) (0.10) Total 151 10.04 0.07 100.00 274.27 1.82 100.00 4.14 0.03 100.00
Source: CFA.
Futures Brokerage Business
Futures brokerage services are the primary business and source of revenue for futures companies in China. They mainly derive revenue from brokerage commission, interest from clients’ margin and the refund of futures exchanges’ commissions, among which brokerage commission contributes most to the PRC futures companies’ revenue. In line with the development of the PRC futures industry, the futures brokerage commission revenue of PRC futures companies has increased from RMB10,136.0 million in 2011 to RMB12,411.0 million in 2013. The brokerage commission revenue experienced slight decrease in 2014, mainly due to the slow growth in commodity futures trading turnover as a result of the decline of the global commodity price and the decreased commission rates. The average commission rate charged by PRC futures companies witnessed continuous decline from 0.37 bps in 2011 to 0.17 bps in 2014, primarily due to the intense competition in the PRC futures market, homogenisation of business among futures companies and decrease in commission rate by futures exchanges.
The table below sets forth the brokerage commission revenue and average commission rate of the PRC futures companies for the periods indicated.
2011 2012 2013 2014
Brokerage commission revenue (RMB, million) 10,136 12,363 12,411 10,035 Average commission rate(1) (bps) 0.37 0.36 0.23 0.17
Note:
(1) Average commission rate is calculated based on the brokerage commission revenue (net of trading and clearing fees paid, plus refunds of futures exchanges) divided by two times of the trading turnover.
Source: CFA.
Asset Management Business
On 31 July 2012, the CSRC issued the Trial Measures on the Asset Management Business of Futures Companies《期貨公司資產管理業務試點辦法》 ( ), which allows futures companies to engage in asset management business. In 2012, the first batch of 18 futures companies (including our Company) obtained the license to operate asset management business.
—85— INDUSTRY OVERVIEW
The Administration Measures on the Asset Management Business of Futures Companies《期貨 ( 公司資產管理業務管理規則(試行)》issued by the CFA on 4 December 2014, furthers the open-up of futures companies to allow them to provide asset management services to groups of clients under collectively asset management schemes and lowers the requirements for application to participate in asset management business by futures companies as well. Currently, banks, securities companies, fund companies, trust companies, insurance companies and futures companies are the most active providers of asset management services to clients.
The major clients of asset management business of futures companies include individual investors, industrial investors (manufacturers, processors and traders) and financial institution investors. Futures companies generate income from asset management business by charging clients management fees and obtaining bonus based on the performance of the assets in accordance with the agreed-upon contracts. According to the CFA, a total of 46 futures companies had been approved to provide asset management services by the end of 2014. The total income derived from asset management business of futures companies reached RMB86.7 million, with a total amount of assets under management of approximately RMB13.8 billion in 2014. The table below sets forth income derived from assets management business by futures companies in China in 2014.
Income derived from assets management business Number of by futures companies in 2014 futures companies More than RMB10 million 3 Between RMB5 million and RMB10 million 1 Between RMB1 million and RMB5 million 13 Between RMB500,000 and RMB1 million 3 Less than RMB100,000 14
Source: CFA.
The asset management business of futures companies enjoyed an explosive increase in 2014. According to the Asset Management Association of China, the total assets managed by futures companies reached approximately RMB12.5 billion as at 31 December 2014.
According to Euromonitor International Limited, the assets management business of futures companies will enjoy great growth in the future, mainly driven by growing wealth and wealth management demands from Chinese residents and policies support as well as the business transformation of futures companies. As compared with other providers of asset management services, futures companies mainly take advantage of their experience in futures market to invest clients’ assets in futures products.
Risk Management Business
According to Guidance on Establishment of Subsidiaries by Futures Companies to Engage in Risk Management Business《期貨公司設立子公司開展以風險管理服務為主的業務試點工作指引》 ( ) (the “Guidance”) issued by the CFA on 22 December 2012, futures companies are allowed to establish subsidiaries to engage in risk management business. According to the CFA, as at 31 December 2014, 33 futures companies (including our Company) had started the operation of the risk management business. Currently, the risk management business conducted by subsidiaries incorporated by futures companies mainly include cooperative hedging, warehouse receipts trading, futures and spot arbitrage and other risk management-related services. According to Euromonitor International Limited, as at 30 June 2015, 42 futures companies had been approved to incorporate subsidiaries providing risk management services to clients and most of them had been authorised to involve in warehouse receipts trading. According to the Guidance, clients of the risk management subsidiaries should be commercial entities, financial institutions, investment organisations and individuals with investable assets of over RMB1 million.
Warehouse receipts are the vouchers issued by the depositaries to the depositors after receiving the commodities being stored. Besides being the voucher for receiving and taking commodities, warehouse receipts can also be transferred with the possession of the commodities or be pledged. Warehouse receipts trading mainly includes warehouse receipts purchase and resale, redemption, exchange and pledge. Under cooperative hedging, subsidiaries of futures companies utilise their own money and jointly operate hedging with clients against market risks. Subsidiaries of futures companies may make profit created by the fluctuations of the basis (price difference between the spot price and the futures contract price) of a certain commodity and asset by engaging in basis trading.
—86— INDUSTRY OVERVIEW
Risk management subsidiaries of futures companies charge service fees (such as financing and agency fees) and/or earn disparities based on the type of risk management business they are involved in. Risk management business can benefit future companies business innovation as well as the real economy. By engaging in risk management business, futures companies can trade spot commodities, which drives the integration of the futures market with spot market, widens futures companies’ trading experience in spot market and improves their risk management capabilities. In addition, the risk management business of subsidiaries incorporated by futures companies can increase the liquidity of non-standard products which are not allowed to trade on the futures exchanges and provide flexibility for clients trading these non-standard products.
OVERVIEW OF THE FUTURES INDUSTRY IN JIANGSU PROVINCE
Located in one of China’s most economically developed areas, Yangtze River Delta region, Jiangsu Province enjoyed rapid growth in financial industry in the past few years. According to the Bureau of Statistics of Jiangsu Province, the total social financing reached approximately RMB1.3 trillion in 2014, the highest among all provinces in China. In August 2011, the Jiangsu provincial financial office signed an agreement with Nanjing city government to establish Nanjing as a regional financial centre. According to the agreement, Nanjing will become a vital financial centre in the greater Yangtze River Delta region oriented toward the central and western China.
Jiangsu Province is one of China’s largest manufacturing centres with the industrial value added reaching approximately RMB5,916.2 billion in 2013 or 25.9% of China’s total industrial value added in 2013. Numerous companies in these industry chains demand measures to hedge against price or exchange rate volatility, which largely drives the development of futures industry in Jiangsu Province. The trading turnover of the futures market in Jiangsu Province enjoyed steady growth from 2011 to 2013. In 2014, the trading turnover in Jiangsu Province experienced slight decrease mainly affected by the decline of the global commodity price. The table below sets forth the trading turnover of the futures market in Jiangsu Province for the periods indicated.
2011 2012 2013 2014
Trading turnover (RMB, billion) 17,848 19,716 21,267 19,672
Source: The Bureau of Statistics of Jiangsu Province.
During 2014, the trading turnover of China’s futures market increased by 9.2% while the trading turnover in Jiangsu Province decreased by 7.5%. Our Directors believe that such a divergent trend was mainly because, (i) during 2014, the growth in trading turnover of China’s futures market was mainly driven by trading of financial futures (which accounted for about 56.2% of the overall futures turnover in the PRC), benefited from the development of financial futures products and market growth in 2014 while the trading volume of commodity futures in the PRC in 2014 was close to the level as in 2013; (ii) Jiangsu as a major manufacturing and exporting province, commodities account for a more important role than financial products in the futures market; (iii) majority of the leading futures company in the overall futures industry in China were affiliated with securities firms and they tend to have business focus more on financial futures; and (iv) in contrast, most of the major futures companies in Jiangsu (including our Company) were not affiliated with securities firms or financial institutions, they tend to have business focus more on commodity futures rather than financial futures. Accordingly, the total trading volume in Jiangsu was likely affected by the decrease in commodity futures trading volume when there was a temporary shift of investor focus in 2014.
The client balance held by futures companies in Jiangsu Province increased rapidly from RMB7,607.9 million as at 31 December 2011 to RMB10,128.0 million as at 31 December 2014. The table below sets forth the client balance of futures companies in Jiangsu Province as at the dates indicated.
As at 31 December 2011 2012 2013 2014
Client balance (RMB, million) 7,607.9 8,304.7 9,073.4 10,128.2
Source: CFA.
—87— INDUSTRY OVERVIEW
Futures brokerage business is also the main business of futures companies in Jiangsu Province. The commission revenue of futures companies in Jiangsu Province increased from RMB899.5 million in 2011 to RMB986.5 million in 2012 primarily due to the steady growth of trading turnover during the period. The brokerage commission revenue in 2013 decreased slightly as compared with 2012, mainly due to the fierce competition among futures companies in Jiangsu Province. Due to intensified competition, the average commission rate charged by futures companies in Jiangsu Province kept decreasing and remained below the national average commission rate. The table below sets forth the brokerage commission revenue and average commission rate of futures companies in Jiangsu Province for the periods indicated.
2011 2012 2013 2014
Brokerage commission revenue (RMB, million) 899.5 986.5 866.8 651.4 Average commission rate(1) (bps) 0.25 0.25 0.20 0.16
Note:
(1) Average commission rate is calculated based on the brokerage commission revenue (net of trading and clearing fees paid, plus refunds of futures exchanges) divided by two times of the trading turnover.
Source: CFA.
As at 28 February 2015, mainly driven by policy support for the innovative business development of futures companies, seven futures companies out of ten incorporated in Jiangsu Province had obtained the approval to offer asset management services to clients and three futures companies out of ten incorporated in Jiangsu Province had been approved to incorporate subsidiaries to engage in risk management business.
Policies support
Jiangsu Province government greatly supports the development of its financial sectors and futures industry. In July 2012, provincial government of Jiangsu Province approved Several Opinions on Promoting the Innovative Development of Financial Services Industry《促進金融業創新發展若干 ( 意見》), which provides to guide futures companies to accelerate internal consolidation, increase futures companies’ capital and improve their shareholding structure by introducing strategic investors, raising capital or seeking public listing, guide the futures companies to incorporate futures branches in the central and northern Jiangsu Province and support the internationalisation of futures companies.
In July 2014, provincial government of Jiangsu Province further issued the Opinions on Accelerating the Financial Reform and Innovation《關於加快推進金融改革創新的意見》 ( ), pursuant to which, the provincial government would drive the reform of the management structures, decision-making mechanism and incentive mechanism of Guoxin Trust Company, the Company and Jiangsu Financial Leasing Company to strengthen their competitiveness in their respective industries and support private capital to invest in futures companies. We believe driven by these administrative opinions, the futures industry in Jiangsu Province will enjoy further development in the near future.
COMPETITIVE LANDSCAPE
Competition among futures companies is fierce in China. Futures companies endeavour to expand their geographic coverage so as to attract more clients. According to the CFA, there were 156 futures companies with a total of 1,469 futures branches by the end of 2013.
According to Euromonitor International Limited, the Company was ranked second in China in terms of the number of futures branches as at 31 December 2014 and 16th in China in terms of brokerage commission revenue in 2014. For seven consecutive years since 2009, the Company has been rated “Class A of the A Category” by the CSRC. The PRC futures industry is concentrated with
—88— INDUSTRY OVERVIEW the top 30 futures companies accounting for a majority market share. There is a trend that the market shares of the top 30 futures companies gradually increase. The table below sets forth the market shares of the top 10, top 20 and top 30 futures companies in terms of operating income, brokerage trading turnover, customer margin deposits and net profit in 2012 and 2013.
Market share Market share Market share of brokerage of customer Market share of operating trading margin of net profit income (%) turnover (%) deposits (%) (%) 2012 2013 2012 2013 2012 2013 2012 2013 Top 10 futures companies 26.8 29.8 32.3 35.1 33.1 35.0 35.6 41.9 Top 20 futures companies 42.6 45.8 48.9 50.9 50.7 51.7 57.1 64.3 Top 30 futures companies 54.3 57.2 60.3 61.8 60.9 62.2 70.8 77.7 Source: CFA. The futures industry in Jiangsu Province is highly concentrated. The three largest futures companies in aggregate accounted for 55.6% of total futures brokerage commission revenue and 54.8% of the total client balance in Jiangsu Province in 2014. Futures companies in Jiangsu Province also face competition from futures companies based in Shanghai and Zhejiang province, which are generally financially stronger and offer a diverse range of products and services. In addition, Shanghai and Zhejiang province are more attractive to financial professionals.
According to Euromonitor International Limited, the Company has a leading position in the futures industry in Jiangsu Province. According to the Jiangsu Statistic Bureau, there were 125 futures branches operated in Jiangsu Province as at 31 December 2014. According to Euromonitor International Limited, the Company was ranked the first in Jiangsu Province in terms of number of futures branches operated in Jiangsu Province as at 31 December 2014 which forms one of our competitive advantages as a strong market player in the industry.
Ranking in Number of futures branches Jiangsu operated in Jiangsu Province province Company as at 31 December 2014
1. The Company 17 2. Jiantai Futures Co., Ltd. (錦泰期貨有限公司)9 Guolian Futures Co., Ltd. (國聯期貨有限責任公司)9 Donghai Futures Co., Ltd. (東海期貨有限責任公司)9 3. Chuangyuan Futures Co., Ltd. (創元期貨經紀有限公司)8 Soochow Futures Co., Ltd. (東吳期貨有限公司)8
Source: Euromonitor International Limited estimates from desk research and trade interviews with leading futures companies and the relevant associations in the PRC.
According to the CFA, as at 31 December 2014, there were ten futures companies incorporated in Jiangsu Province. Our Company was ranked first among these ten futures companies incorporated in Jiangsu Province in terms of Net Capital and commission revenue as at 31 December 2014, and ranked second in terms of client balance as at 31 December 2014. Market share among Jiangsu Province Net Capital registered Ranking in as at futures Jiangsu 31 December companies in Province Futures companies incorporated in Jiangsu Province 2014 2014 (RMB, million) (%)
1. The Company 1,026.9 32.1 2. Donghai Futures Co., Ltd. (東海期貨有限責任公司) 554.5 17.4 3. Guolian Futures Co., Ltd. (國聯期貨有限責任公司) 416.1 13.0 4. Jintai Futures Co., Ltd. (錦泰期貨有限公司) 397.4 12.4 5. New Era Futures Co., Ltd. (新紀元期貨有限公司) 170.9 5.4
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Market share among Jiangsu Province registered Ranking in Commission futures Jiangsu revenue in companies in Province Futures companies incorporated in Jiangsu Province 2014 2014 (RMB, million) (%)
1. The Company 164.5 25.3 2. Guolian Futures Co., Ltd. (國聯期貨有限責任公司) 98.7 15.2 3. Donghai Futures Co., Ltd. (東海期貨有限責任公司) 98.7 15.2 4. New Era Futures Co., Ltd. (新紀元期貨有限公司) 83.6 12.8 5. Jintai Futures Co., Ltd. (錦泰期貨有限公司) 55.7 8.6 Net Capital as at Market share Ranking in 31 December in the PRC in the PRC Futures companies incorporated in the PRC 2014 2014 (RMB, million) (%)
1. Citic Futures Co., Ltd. (中信期貨有限公司) 1,806.6 3.8 2. COFCO Futures Co., Ltd.(中糧期貨有限公司) 1,757.5 3.7 3. Minmetals Futures Co., Ltd. (五礦期貨有限公司) 1,374.4 2.9 4. Galaxy Futures Co., Ltd. (銀河期貨有限公司) 1,249.7 2.6 5. China International Futures Co., Ltd. (中國國際期貨有限公司) 1,146.6 2.4 6. Yongan Futures Co., Ltd. (永安期貨股份有限公司) 1,042.2 2.2 7. Haitong Futures Co., Ltd.(海通期貨有限公司) 1,030.3 2.2 8. The Company 1,026.9 2.2 9. Shenyin & Wanguo Futures Co., Ltd. (申銀萬國期貨有限公司) 928.6 2.0 10. Huatai Great Wall Futures Co., Ltd. (華泰長城期貨有限公司) 869.3 1.8 11. Nanhua Futures Co., Ltd.(南華期貨股份有限公司) 859.9 1.8 12. Guotai Junan Futures Co., Ltd. (國泰君安期貨有限公司) 858.1 1.8 13. Guosen Futures Co., Ltd.(國信期貨有限責任公司) 816.2 1.7 14. GF Futures Co., Ltd.(廣發期貨有限公司) 803.0 1.7 15. Luzheng Futures Co., Ltd.(魯證期貨股份有限公司) 796.1 1.7 Commission Market share Ranking in revenue in in the PRC in the PRC Futures companies incorporated in the PRC 2014 2014 (RMB, million) (%)
1. Yongan Futures Co., Ltd. (永安期貨股份有限公司) 392.9 3.9 2. Guotai Junan Futures Co., Ltd. (國泰君安期貨有限公司) 349.9 3.5 3. Galaxy Futures Co., Ltd. (銀河期貨有限公司) 317.6 3.2 4. Haitong Futures Co., Ltd. (海通期貨有限公司) 291.7 2.9 5. Citic Futures Co., Ltd. (中信期貨有限公司) 282.0 2.8 6. Funder CIFCO Futures Co., Ltd. (方正中期期貨有限公司) 249.1 2.5 7. Nanhua Futures Co., Ltd. (南華期貨股份有限公司) 229.4 2.3 8. GF Futures Co., Ltd. (廣發期貨有限公司) 222.9 2.2 9. Shenyin & Wanguo Futures Co., Ltd. (申銀萬國期貨有限公司) 220.8 2.2 10. Everbright Futures Co., Ltd. (光大期貨有限公司) 216.4 2.2 11. China International Futures Co., Ltd. (中國國際期貨有限公司) 208.5 2.1 12. Huatai Great Wall Futures Co., Ltd. (華泰長城期貨有限公司) 193.2 1.9 13. Zheshang Futures Co., Ltd. (浙商期貨有限公司) 175.5 1.7 14. Changjiang Futures Co., Ltd. (長江期貨有限公司) 166.9 1.7 15. Guosen Futures Co., Ltd. (國信期貨有限責任公司) 165.9 1.7 16. The Company 164.5 1.6 17. Luzheng Futures Co., Ltd.(魯證期貨股份有限公司) 163.3 1.6 18. Ruida Futures Co., Ltd.(瑞達期貨股份有限公司) 152.1 1.5 19. China Merchants Futures Co., Ltd.(招商期貨有限公司) 150.9 1.5 20. COFCO Futures Co., Ltd.(中糧期貨有限公司) 145.5 1.4 Source: CFA.
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Entry barriers
The PRC futures industry is highly regulated and PRC futures companies are subject to extensive regulatory requirements from various perspectives, including business licenses, scope of business, shareholders, personnel qualification, sound risk management and internal control systems, registered capital and other conditions prescribed by the futures regulatory institution of the State Council. Satisfying regulatory requirements is the fundamental requirements to enter into futures industry in China. In addition, as the expansion of futures companies to asset management and risk management businesses, capital strength is a key factor in determining their innovative business capacities.
Development of innovative services to cater for clients needs
We not only provide traditional futures brokerage business, but also strive to provide innovative and differentiated services like asset management, commodity trading and risk management businesses. We capitalise on opportunities opened up by the gradually evolving regulatory environment. For example, in July 2012, the CSRC issued the policy which opened up asset management business to futures companies. 18 futures companies (including our Company) obtained trial qualifications as the first batch. In December 2014, the CFA issued the policy allowing futures companies to carry out collective asset management schemes. Besides, in October 2014, the CSRC issued the policy which expanded the trial scope of setting up risk management subsidiaries for futures companies, formulating supporting measures for risk management subsidiaries to conduct warehouse receipts trading, cooperative hedging, quotation services, etc., supporting qualified futures companies in setting up specialised subsidiaries to provide comprehensive services related to spot and futures, and offering industrial clients with customised bulk commodity quotation and risk management services. Following these policies, we are among the first batch of futures companies which started to provide asset management and risk management services. We strive to leverage on our market leadership and experience to meet the needs of different clients and become a comprehensive provider of financial derivatives services. We offer innovative and differentiated services, such as futures asset management services, and customised risk management solution through our wholly-owned subsidiary, Holly Capital.
DEVELOPMENT TRENDS OF THE PRC FUTURES INDUSTRY
Driven by rapid economic growth, continuous increase in disposal income of residents as well as policies support for the development and expansion of futures companies, we believe the PRC futures industry has considerable growth prospects.
Higher level of participation by overseas institutions
Subject to the liberalisation of PRC futures market, overseas institutions can participate in the PRC futures markets through the trading and settlement services provided by PRC futures companies. In addition, overseas subsidiaries of PRC futures companies can also participate in the trading of derivative financial instruments in the PRC through QFII (“Qualified Foreign Institutional Investor”) and RQFII (“RMB Qualified Foreign Institutional Investor”). Demand for cross-border services provided by PRC futures companies is expected to increase accordingly.
Accelerated Innovative Development
PRC government emphasises on the development of the futures market and provides great policy support. Since 2011 when the Trial Measures on the Futures Investment Advisory Business《期貨公 ( 司期貨投資諮詢業務試行辦法》) was issued by the CSRC, the regulatory departments in the PRC has introduced a series of measures and policies to expand the futures industry and allow futures companies to engage in innovative businesses, such as investment advisory business, asset management business and risk management business. The Opinions on Further Promoting the Innovative Development of the Futures Companies《關於進一步推進期貨經營機構創新發展的意 ( 見》) issued by the CSRC on 16 September 2014 further promotes the business expansion of futures companies into investment advisory, asset management and risk management businesses and required to lower the entries barriers to futures industry and simplify the application process for establishing futures companies.
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Due to the opening-up of the PRC futures industry, comprehensive futures companies will emerge and could offer various futures-related businesses to clients with different risk preferences and investment purposes.
Market integration
Around 2010, the launching of stock index futures brought about a boom in the merger and acquisition of futures companies by securities companies which are committed to expanding their business to futures market leveraging their rich experience in capital market and large customer base. At the same time, intensified competition in the futures market led to the merger and acquisition between futures companies. With the gradual opening-up of the futures industry, more and more futures companies will apply for the license to offer asset management business and establish subsidiaries to offer risk management business to clients so as to expand their revenue streams and strengthen their market shares and competitiveness. However, smaller futures companies at a competitive disadvantage may become the acquisition targets of securities companies or larger futures companies. We believe acquisition and merger of futures companies is still a development trend in the PRC futures industry in a short period of time, which can achieve the integration of resources and contribute to the overall development of the futures industry.
Accelerated launch of new futures products
The first financial futures in the PRC, CSI 300 Stock Index Futures was launched in April 2010 and the treasure bond futures was launched in September 2013, which greatly attracted investors’ attention on the futures market. In 2013, the introduction of new futures products was accelerated with a total of nine new products been introduced in the market, including the treasure bond futures and eight commodities futures products. Among them, the introduction of coking coal, iron ore and thermal coal futures further improved the futures trading in the ferrous metal industry chain while the introduction of egg, bitumen and japonica rice futures deepens the penetration of futures trading into relevant industry chains. In 2014, five new futures products were introduced. By the end of June 2015, three additional financial futures were launched, including SSE 50 Stock Index Futures, CSI 500 Stock Index Futures and 10-year Treasury Bond Futures, together with two new commodities futures products comprising nickel and tin, respectively. The introduction of new futures products in the market enables industrial enterprises with the risk hedging demands to hedge fluctuations in price of the commodities as well as offers opportunities for individual and financial institutional investors for arbitrary.
Application of information technology in operation and monitoring
The wide application of Internet-based technology such as cloud computing and mobile Internet has enhanced the efficiency of futures trading. Advanced information technology can also facilitate the establishment of industry-wide dynamic risk monitoring system crucial in ensuring regulatory compliance and preventing systematic risk.
Cross-licensing among financial institutions offering development opportunities as well as increasing the competition for futures companies
With the accelerating pace of the financial institutions’ innovation in China, the inter-cross and mutual penetration among financial business and the trend of integration of financial institutions will be further strengthened. In May 2014, the State Council issued Several Opinions on Further Promoting the Healthy Development of Capital Market《關於進一步促進資本市場健康發展的若干意見》 ( ), which encourages (i) implementing an open, transparent and order securities and futures license management system, (ii) exploring the cross-licensing among securities companies, fund management companies, futures companies and securities investment advisory companies, (iii) supporting qualified financial institutions to apply for license for operating securities and futures business, and (iv) promoting capital to invest in securities and futures business. In the long term, with the further introduction of stock index futures, treasury bond futures and other financial futures, the futures market will be further connected with the stock market and bond market. The strategic cooperation between futures companies and other financial institutions will become increasingly closed, which can make full use of their partners’ resources, technology and talent, providing one-stop financial services to clients.
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In addition, as financial institutions are encouraged to enter into futures market, futures companies will face intensified competition from those financial institutions with strong financial strength, rich experience and large customer base. Futures companies shall strengthen their competitiveness so as to maintain and earn more market shares. GLOBAL FUTURES MARKETS(1) Futures companies in Hong Kong offer products traded on the major global futures exchanges such as Chicago Mercantile Exchange (“CME”), Chicago Board of Trade (“CBOT”), the London International Financial Futures and Options Exchange (“LIFFE”), Intercontinental Exchanges Futures U.S. (“ICE Futures U.S.”), ICE Futures Europe, LME and HKEx. Each of such exchanges facilitates the trading of a wide array of products such as futures of various agricultural products and commodities (e.g. crops, metal and fuel), interest rates, fixed incomes, currencies and stock indices. The chart below sets forth the historical trading volume of major global futures exchanges for the periods indicated.
1800 Volume (contracts in Million) 1,536 1600 1,418 1,404 1400 1,290 1,216 1200 973 1000 907 902 800 801 799 766 800 689 656 600 416 359 358 400 265 268 299 308 216 169 112 138 153 157 164 200 43 93 51 94 47 51 50 0 2010 2011 2012 2013 2014
HKEx LME ICE Futures Europe ICE Futures U.S. LIFFE CBOT CME
Note: (1) Due to the migration of contracts from Liffe to ICE Futures Europe as described in Circular 14/102 (https://www.theice.com/publicdocs/circulars/14102.pdf), the trading volume figure of Liffe only contains data up to the migration dates for the respective contracts. On the other hand, the trading volume figures of ICE Futures Europe included Liffe volumes from the date of migration of the respective contracts.
Source: Official website of respective global futures exchanges.
The trading volume of the international futures markets from 2010 to 2014 is generally in an upward trend. The growth from 2012 to 2014 is mainly attributed to the following factors: (i) an increase in capital liquidity thanks to low interest rate at the global level; (ii) competition among exchanges and launch of new products; (iii) continual growth in the Asian market (for example China and India); (iv) a globally increasing scale of the assets under management. Based on the above factors, the Company holds a positive outlook for the global futures market. Hong Kong Futures Market In Hong Kong, dealing in futures contracts is an activity regulated by the SFC. As at 31 March 2015, 268 corporations were licensed to conduct type 2 (dealing in futures contracts) activity in Hong Kong. Turnover of futures (in terms of number of contracts) in Hong Kong has remained stable in recent years and amounted to about 50.4 million contracts in 2014. On the other hand, turnover of other futures products (such as One-Month HIBOR Futures, Three-Year Exchange Fund Note Futures, Mini H-shares Index Futures, Gold Futures, HSI Dividend Point Index Futures, HSCEI Dividend Point Index Futures) increased from approximately 1.9 million contracts in 2011 to approximately 3.9 million contracts in 2014.
Note: (1) Data and information with respect to the global futures markets are derived from public available data rather than the Euromonitor Report.
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REGULATORY ENVIRONMENT IN CHINA
Overview
As a financial institution engaging in futures business established within the territory of the People’s Republic of China, we are subject to the supervision and administration of China Securities Regulatory Commission and other institutions, with relevant businesses in compliance with prevailing PRC laws, regulations, rules and other normative documents. The said PRC laws, regulations, rules and other normative documents cover a wide range, including industry access, business regulation, corporate governance and risk control. In addition, our operation shall also comply with general regulations in China, e.g. foreign exchange and anti-money laundering related laws, regulations, rules and other normative documents.
About Foreign Investment Provisions
According to the Guiding the Direction of Foreign Investment Provisions, promulgated by the State Council and effective as from 1 April 2002, foreign-funded projects fall into 4 categories, namely encouraged, permitted, restricted and prohibited ones. The foreign-funded projects that are encouraged, restricted and prohibited shall be listed in the Catalog of Foreign-funded Industry Guidance. And the foreign-funded projects that don’t fall into the categories of encouraged, restricted or prohibited projects shall be the permitted foreign-funded projects. The permitted foreign-funded projects shall not be listed in the Catalog of Foreign-funded Industry Guidance.
According to the Catalog of Foreign-funded Industry Guidance, jointly issued and last revised by the Ministry of Commerce and National Development and Reform Commission and effective as from 10 April 2015, the financial sector belongs to the restricted category, in particular, for futures companies, the Chinese party shall take the holding position.
According to the Measures for the Supervision and Administration of Futures Companies effective as from 29 October 2014, futures companies holding shares in foreign-funded enterprises shall, in accordance with laws and administrative regulations, apply to the commercial administrative department of the State Council for certificate of approval for the foreign-funded enterprise, and apply to the foreign exchange administration department for registration of foreign exchange, capital account opening and formalities relating to fund settlement and foreign exchange purchase.
Major Supervision Department
Our operational activities are mainly subject to the supervision and administration of Chinese government, industry associations, futures exchanges and other industry self-regulatory bodies.
CSRC
China Securities Regulatory Commission (CSRC) performs a unified regulatory function, according to the relevant laws and regulations and as authorised by the State Council, over the securities and futures market of China, maintains an orderly securities and futures market order, and
—94— REGULATORY OVERVIEW ensures legal operation of the capital market. According to the Regulation on the Administration of Futures Trading, promulgated by the State Council and effective as from 15 April 2007, and revised respectively on 24 October 2012, 15 May 2013 and 18 July 2013, the CSRC shall conduct supervision and administration over the futures market and perform the following duties pursuant to the law:
• formulate rules and regulations relevant to the supervision and administration of the futures market and exercise examination and approval authority pursuant to the law;
• conduct supervision and administration over the listing, trading, settlement and delivery of commodities, and any other futures trading or related activities;
• conduct supervision and administration over the futures trading activities of futures exchanges, futures companies and other futures operating entities, non-futures companies clearing member, futures margin deposit supervisory entities, futures margin depository banks, delivery warehouses and other market participants;
• formulate the qualification accreditation standards and codes of conduct for futures practitioners and supervise their implementation;
• supervise and monitor the disclosure of information relating to futures trading;
• guide and supervise the activities of China Futures Association;
• investigate and penalise any conduct in violation of laws and administrative regulations on the supervision and administration of the futures market;
• develop international exchange and cooperation activities relating to the supervision and administration of the futures market; and
• perform any other duty stipulated by laws and administrative regulations.
China Futures Association
China Futures Association is a self-regulatory organisation of the futures industry, and is a non-profit social entity organisation. According to the Regulation on the Administration of Futures Trading, the futures companies and institutions specializing in futures operation shall join the China Futures Association, and China Futures Association shall perform the following duties:
• educate and organise members in the compliance of laws, rules and policies on futures;
• formulate industry self-regulation rules to be observed by members, supervise and monitor members’ conduct and take disciplinary action against members who violate the Association’s articles of association and self-regulation rules;
• be responsible for the accreditation, administration and revocation of the qualifications of futures practitioners;
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• formulate code of conduct and business standards for the futures industry;
• receive clients’ complaints relating to futures trading and mediate disputes between members and disputes between members and their clients;
• safeguard the lawful rights and interests of members pursuant to law and feedback members’ suggestions and requests to the futures supervision and administration department of the State Council;
• organise vocational training for futures practitioners and develop business exchanges between members; and
• perform any other duties stipulated by the articles of association of China Futures Association.
Futures Exchange
According to the Regulation on the Administration of Futures Trading, a futures exchange is to provide venues and facilities for collective futures trading, organise and supervise futures trading, and a non-profit and self-regulatory entity governed by its articles of association. A futures exchange’s duties mainly include:
• provide trading venues, facilities and services;
• standardize the trading contacts and arrange for the listing of the trading contracts;
• organise and supervise futures trading, settlement and delivery;
• provide centralised performance guarantee for futures trading;
• conduct supervision and administration over members pursuant to its articles of association and trading rules; and
• perform any other duty stipulated by the futures supervision and administration department of the State Council.
According to the Measures for the Administration of Futures Exchange effective as from 15 April 2007, a futures exchange shall also perform the following duties apart from those stated above:
• To formulate and implement the trading rules and implementing regulations of the futures exchange;
• To release market information;
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• To supervise futures businesses conducted by the members and its clients, the designated settlement houses, futures margin depository banks and the futures business of other participants of the futures market; and
• to investigate and punish violations.
Other Industry Self-regulatory Authorities
Other industry self-regulatory authorities mainly include China Futures Market Monitoring Center Co., Ltd. and the Assest Management Association of China.
Main Laws, Regulations and Normative Documents
Industry Entry Requirements
Establishment
Regulation on the Administration of Futures Trading and Measures for the Supervision and Administration of Futures Companies effective as from 29 October 2014 stipulate that establishment of a futures company shall seek the approval of CSRC and be registered with relevant company registration authority. Establishment of a futures company shall satisfy the requirements in the Company Law of the People’s Republic of China and the following conditions:
• Its minimum registered capital shall be RMB30 million;
• Its directors, supervisors and senior managers are qualified for their posts and practitioners shall have futures practice qualifications;
• Its articles of association shall comply with the laws and administrative regulations;
• Its main shareholders and actual controllers have sustained profitability and good reputation, and none of them has any record of material violation of laws and regulations in the last three years;
• It has a qualified operating site and business facilities;
• It has sound risk management and internal control systems;
• It has not less than 15 practitioners with qualification;
• It has not less than 3 qualified senior managers; and
• Other conditions as specified by CSRC.
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The futures supervision and administration department of the State Council may increase the minimum amount of registered capital according to the principle of prudent supervision and risk degree of various businesses. Registered capital shall be paid-up capital. The shareholders shall make capital contributions in cash or in non-monetary assets necessary for the business operations of a futures company and the capital contributions in cash shall not be less than 85% of the total.
According to the Measures for the Supervision and Administration of Futures Companies, any shareholder (including legal person or other organisations) holding more than 5% shares of a futures company shall meet the following conditions:
• Its paid-up capital and net assets are not less than RMB30 million;
• Its net assets are not less than 50% of the paid-up capital, its contingent liabilities are less than 50% of the net assets and any other risk, which may have material uncertain effects on its financial status, does not exist;
• It has no substantial debt which has fallen due and outstanding;
• It is not subject to any administrative punishment or criminal punishment due to material violation of laws and regulations during the recent three years;
• It is not under formal investigation conducted or subject to enforcement imposed by the competent authority due to suspected material violation of laws and regulations;
• As a shareholder or an actual controller of the company (including financial institution), it has not abused the shareholders’ rights or evaded from the shareholders’ obligations or committed any other dishonest acts during the recent three years; and
• It is not involved in any other circumstance under which it is not appropriate for it to hold the shares of the futures company as determined by the CSRC according to the principle of prudent supervision.
According to the Measures for the Supervision and Administration of Futures Companies, any foreign shareholder holding more than 5% shares of a futures company shall also meet the following conditions apart from the abovementioned conditions:
• It is a financial institution incorporated and legally subsisting under the laws of the country or region where it is located;
• Various financial indicators and regulatory indicators in the recent three years comply with the provisions of laws and requirements of regulatory authorities in the country or region where it is located;
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• The country or region where it is located has sound futures-related laws and regulatory system, and the relevant futures regulatory authority has concluded a Memorandum of Regulatory Cooperation and maintained effective regulatory cooperation relationship with CSRC; and
• The percentage of shares or percentage of rights and interests held by a foreign shareholder of a futures company accumulatively (including those held directly and indirectly) shall not exceed those in the commitment made by the China’s futures industry for opening to the outside world or Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region.
According to the Measures for the Supervision and Administration of Futures Companies, any individual shareholder holding more than 5% shares of a futures company shall meet the following conditions:
• His personal financial assets are not less than RMB30 million;
• He has no substantial debt which has fallen due and outstanding;
• He has not been given any administrative punishment or criminal punishment due to material violation of laws and regulations during the recent three years;
• He is not under formal investigation conducted or subject to enforcement imposed by the competent authority due to suspected material violation of laws and regulations;
• As a shareholder or an actual controller of the company (including financial institution), he has not abused the shareholders’ rights or evaded from the shareholders’ obligations or committed any other dishonest acts during the recent three years; and
• He is not involved in any other circumstance under which it is not appropriate for him to hold the shares of the futures company as determined by the CSRC according to the principle of prudent supervision.
In addition, according to the Provisions on Regulating Issues Concerning Holding Controlling Shares or Holding Shares in Futures Companies (effective as from 1 June 2008), an institution may hold controlling shares or hold shares in at most two futures companies. In particular, it may hold controlling interests in one futures company only.
Establishment of Futures Operation Branches
According to the Measures for the Supervision and Administration of Futures Companies, where a futures company applies for establishing a branch, it shall satisfy relevant conditions and make an application and submit application documents to the branch offices of CSRC at its location. When submitting application documents, the futures company shall submit copies of the application documents to the branch offices of CSRC at the location of the branch to be established. After the branch is established, the futures company shall make an announcement in the media designated by the CSRC.
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Establishment of Risk Management Subsidiaries
According to the Guidance on Pilot Business of Futures Companies Establishing Subsidiaries for the Businesses Focusing on Risk Management Service (promulgated and last revised by China Futures Association and effective as from 26 August 2014), a futures company shall meet the following conditions if it establishes a risk management company:
• It is not lower than Grade B of Class B in the last rating for categorised supervision of futures companies;
• Its net capital is not less than RMB300 million at the time of filing, and its risk supervision indicators in the recent six months and after establishment of the risk management company comply with relevant provisions;
• It has a feasible business pilot plan;
• It has a sound internal management system.
Business Scope
According to the Regulation on the Administration of Futures Trading and Measures for the Supervision and Administration of Futures Companies, a futures company may engage in the brokerage of commodity futures according to law; and shall obtain relevant business qualifications if it engages in financial futures and overseas futures brokerage and futures investment consulting. If it engages in asset management business, it shall register and file according to law. Upon approval, a futures company may engage in other businesses designated by the CSRC.
According to the Guidance on Pilot Business of Futures Companies Establishing Subsidiaries for the Businesses Focusing on Risk Management Service, a risk management company may conduct the following pilot businesses: futures and spot arbitrage, warehouse receipts service, cooperative hedging, pricing service, market-making business and other businesses related to risk management service. When carrying out pilot businesses, a risk management company shall include the businesses in the abovementioned basic categories according to the substances of the transactions and implement classified management over different types of businesses.
A futures company shall not engage in activities unrelated to futures business (save as otherwise stipulated by laws, administrative regulations or the futures supervision and administration department of the State Council); shall not engage or engage in disguise in futures proprietary trading; and shall not provide financing service to its shareholders, actual controllers or other related parties, or provide guarantee to outsiders.
Material Changes
In accordance with Measures for the Supervision and Administration of Futures Companies, approved of the CSRC shall be obtained for change of shareholdings in futures companies in any of the circumstances below:
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• Change of controlling shareholder or the largest shareholder;
• Shareholding of a single shareholder or the aggregate shareholding of affiliated shareholders amounts to 100%;
• Shareholding of a single shareholder or the aggregate shareholding of affiliated shareholders amounts to over 5% and foreign shareholders are involved.
Besides above regulations, the approval of the branch office of CSRC at the domicile of futures company is required where the shareholding by single shareholder or affiliated shareholders of the futures company amounts to over 5%.
Without the approval of CSRC or its detached office, if an individual shareholder or the aggregate shareholding of affiliated shareholders hold shareholding of futures company amounts to over 5% without authorisation or become the shareholders of futures company by providing false application materials and so forth, CSRC or its local branch can order them to transfer the shareholdings within the limited period. The shareholding excludes voting power and dividend right before being transferred.
In accordance with Measures for the Supervision and Administration of Futures Companies, under any of the following circumstances, the futures company shall submit written report to the branch office of CSRC at the domicile within five workdays.
• Change of name, form and articles of association;
• Other shareholding or registered capital changes apart from above circumstances;
• Change of principal of branches or premises;
• Material decisions like termination of business, etc.;
• Under investigation conducted or subject to mandatory measure imposed by competent authorities;
• Material event happens, affecting or potentially influencing the operation management, financial status, or the customer’s equity safety of the futures company;
• Other matters stipulated by CSRC.
In accordance with Administrative Regulations on Futures Trading, the futures company shall be approved by futures supervision and administration department of the State Council when carrying out following matters:
• Amalgamation, separation, termination, dismissal or bankruptcy;
• Change of business scope;
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• Change of registered capital and adjustment of ownership structure;
• Change of shareholder with shareholding amounts to over 5% or controlling shareholder;
• Establishment, acquisition, participation or termination of overseas futures operating organizations;
• Other matters stipulated by futures supervision and administration department of the State Council.
In accordance with Decision of the State Council on the Sixth Cancellation and Adjustment of Items Requiring Administrative Approval that came into effects on 23 September 2012, no approval is required for the change of shareholding of futures company amounts to over 5%, if newly increased shareholders with more than 5% shareholding, controlling shareholder and the largest shareholder are not involved.
In accordance with Decision of the State Council on Matters Concerning Administrative Approval Items to be Cancelled and Adjusted (Guo Fa [2014] No. 50), for futures companies, approval for change of legal representative, domicile and premises, establishment and termination of domestic branches, and change of business scope of domestic branches have been cancelled.
In accordance with Measures for the Supervision and Administration of Futures Companies, futures company shall announce on the medium platform as stipulated by CSRC in case of its establishment, change, termination, dismissal, bankruptcy, revocation of futures business permit or the establishment, change, termination, dismissal of its branches.
Business Regulation
We are currently engaged in futures and related businesses including commodity futures brokerage, financial futures brokerage and futures investment consulting, asset management and risk management.
The Regulation on the Administration of Futures Trading provides that futures companies conducting business shall be licensed by CSRC in accordance with the business type of commodity futures and financial futures. In addition to applying for operating domestic futures brokerage business, future companies can also apply for conducting overseas futures brokerage, futures investment consulting and other futures businesses regulated by CSRC in order to obtain business qualifications.
Futures companies are not allowed to engage in or otherwise engage in futures proprietary business. Futures companies can, in accordance with the provisions, use its own funds to invest in stocks, investment funds, bonds and other financial assets, business-related equity and other businesses as stipulated by CSRC, but shall not engaged in the businesses prohibited by Regulation on the Administration of Futures Trading.
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Futures Brokerage Business
Legally established futures companies can engage in commodity futures brokerage business and should obtain the appropriate qualification to engage in financial futures brokerage business. Futures trading should strictly enforce deposits system. Futures companies engaged in brokerage business accept orders of customers and conduct futures trading in their own name for customers and the trading results are borne by the customers.
According to the Supervisory and Administrative Measures on Futures Companies, futures companies shall satisfy the following conditions to apply for financial futures brokerage qualifications:
• risk supervision indicators continue to comply with requirements two months before the application;
• having sound corporate governance, risk management systems and internal controls system and implementing such systems effectively;
• the futures company shall satisfy the provisions of the CSRC on the futures margin deposits supervision;
• the business facilities and technical systems of the futures company shall be in compliance with the relevant technical specifications and operate properly;
• the senior officers of the futures company shall, over the past two years, have never been subject to any criminal penalty, have never been subject to any administrative penalty due to illegal or irregular business operations, have no unfavorable credit record, and are not currently under investigation by competent authorities as to suspected illegal or irregular business operations;
• the futures company has not been subject to any regulatory measure taken by the CSRC and its local offices;
• the futures company is not currently being investigated by competent authorities as to suspected violations of laws and regulations;
• the futures company shall not have been subject to any criminal or administrative penalty over the past two years due to violations of laws and regulations, not applicable if the futures company falls under the following circumstances: its controlling shareholder or actual controller, or over 50% of its senior officers have been changed; the senior officers and persons in charge of the relevant business who are liable for the above circumstances no longer hold positions in the future company; and the futures company has completed rectification and passed the final inspection by the local office of the CSRC at its domicile;
• the controlling shareholder of the futures company shall have no less than RMB30 million of net assets or personal financial assets; and
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• Other conditions as stipulated by CSRC in accordance with the prudential supervision principles.
According to the Supervisory and Administrative Measures on Futures Companies, futures companies shall not accept entrustment from the following units and individuals to carry out futures trading for them:
• state organs and public institutions;
• Staff of CSRC and its agencies, futures exchanges, futures margin security depository monitoring institutions, China Futures Association, as well as the spouses thereof;
• Staff of futures companies and their spouses;
• parties prohibited from entering securities and futures markets;
• entities and individuals failing to provide supporting materials of the account opening;
• other entities and individuals not allowed to engage in futures trading as prescribed by CSRC.
Futures Investment Consulting Business
Futures companies can engage in futures investment consulting business in accordance with the law and accept entrustment from customers and provide customers with risk management consultancy, research and analysis, transaction advisory, and other services.
Pursuant to the Supervisory and Administrative Measures on Futures Companies and the Provisional Measures on Futures Investment Consulting Business of Futures Companies effective on 1 May 2011, futures companies shall obtain approval from the CSRC in order to be qualified to engage in futures investment consulting business. Practitioners conducting futures investment consulting business in futures companies shall obtain the qualification for futures investment consulting business. The futures company shall keep records for their operation of futures investment consulting services, keep services materials involved in futures investment consulting services pursuant to the years of and requirements for storage prescribed by CSRC, and establish and improve ITS information isolation mechanism to prevent conflict of interest.
Asset Management Business
Futures companies can engage in asset management business according to the law, accept entrustment from customers, and use customers’ assets for investment. Investment returns and losses shall be attributable to the customers.
Pursuant to the Supervisory and Administrative Measures on Futures Companies, futures companies shall go through the filing procedures before conducting the asset management business according to the law.
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The scope of investment of asset management business includes:
• futures, options and other financial derivatives;
• stocks, bonds, securities investment funds, collective asset management plan, central bank bills, short-term financing bonds, asset-backed securities, and so on;
• other investment varieties as recognized by the CSRC.
Pursuant to the Notice on the Release of Rules for the Management of the Asset Management Business of Futures Companies (for Trial Implementation) issued by China Futures Association and effective on 15 December 2014, futures companies engaged in the asset management business may provide asset management services for a single client or a group of specific clients. Futures companies or subsidiaries engaged in the asset management business should register with the China Futures Association. The asset management plan made by futures companies and their subsidiaries shall be filed in the private equity registration system of the Asset Management Association of China. Futures companies and their subsidiaries specialised in asset management business shall not conduct asset management business at the same time. Futures companies or subsidiaries shall entrust the funds under the asset management plan to the institution having fund custody qualifications or private equity comprehensive custody qualifications.
Business of Risk Management Subsidiary
Pursuant to “Guidance on Pilot Work of Futures Companies Establishing Subsidiaries for the Businesses Focusing on Risk Management Service” issued by the China Futures Association, futures companies may set up subsidiaries to carry out risk management. Pilot business conducted by risk management companies includes: basis trading, warehouse services, cooperation hedging, pricing services, market making and other risk management service related businesses. China Futures Association implements self-disciplinary supervision on pilot business activities of futures companies and their risk management companies and shall file for registration their pilot business to the China Futures Association for record. Our risk management subsidiary Holly Capital Management Co., Ltd is approved to conduct pilot business, including basis trading, warehouse services and cooperation hedging.
Corporate Governance and Risk Control of Futures Companies
Corporate Governance
The CSRC implements qualification management system on directors, supervisors, senior managers and other futures practitioners of futures companies and other futures operating institutions. The business, personnel, assets, finance and places of a futures company should be strictly separated from those of its controlling shareholders and have independent operations and accounting.
The Administrative Measures for the Post-holding Qualifications of Directors, Supervisors and Senior Managers of Futures Companies effective on 4 July 2007 further strengthened management on qualifications of the directors, supervisors and senior managers of futures companies.
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The Measures for the Administration of Futures Practitioners effective on 4 July 2007 further strengthened the qualification management of futures practitioners and regulated the practice of futures practitioners. Futures practitioners must comply with the relevant laws, administrative regulations and administrative measures issued by CSRC, comply with the self-discipline rules of the Association and the Futures Exchange, shall not engage in or work with others in conducting fraud, insider trading, manipulation of futures prices, fabrication and spread of false information on futures trading and other illegal acts.
According to the Decision of the State Council on the Cancellation and Adjustment of a Batch of Administrative Examination and Approval Projects, which is effective on 24 February 2015, the qualification approval for directors, supervisors and senior managers of futures companies has been canceled.
Risk Control
Pursuant to the Futures Trading Management Regulations, the futures firm engaging in futures brokerage and other futures business should strictly enforce the system for separation of business and capital; and mixed operations are prohibited. The CSRC shall formulate rules on the proportion of net capital to net asset, the proportion of net capital to business scales of domestic futures brokerage and overseas futures brokerage, and the ratio of current assets and current liabilities of the futures companies. It shall also set out requirements on operating conditions, risk management, internal controls, depositories and related party transactions of futures companies and their branches. A futures company shall set up risk management departments or positions to manage and control its operating risks; it shall set up compliance department or position to review compliance of its operation and management. It is not allowed to operate and manage its branches through joint venture or cooperation with others, nor contract, lease or delegate to others for operation and management of branches.
Classified Supervision
Pursuant to the Provisions on Classification and Supervision of Futures Companies, which is effective on 12 April 2011, the Evaluation Committee for Classification and Supervision of Futures Companies under the CSRC defined the category of futures companies on the basis of evaluation criteria. Futures companies are divided into 11 levels in 5 categories by the CSRC on the basis of their risk management ability (namely A (AAA, AA, A), B (BBB, BB, B), C (CCC, CC, C), D, and E, in a descending order). The CSRC specified different risk control indicators and risk capital reserve calculation breakdown according to classified supervision principles and provide differential treatment for allocation of regulatory resources, on-site inspection and off-site inspection frequency, new business application and rate of futures investors’ protection fund paid.
Pursuant to the Administration of Risk Control Indicators of Futures Companies, which is promulgated on 21 February 2013 and effective on 1 July 2013, futures company shall constantly comply with the following risk control indicator criteria: (1) net capital shall not be less than RMB15 million; (2) the ratio of net capital to venture capital reserve of the company shall not be less than 100%; (3) the ratio of net capital to net assets shall not be less than 40%; (4) the ratio of current assets
— 106 — REGULATORY OVERVIEW to current liabilities shall not be lower than 100%; (5) the ratio of liabilities to net assets shall be no more than 150%; and (6) the minimum amount of the settlement reserve requirements as specified. For details of our historical risk control indicators, please refer to the paragraph headed “Capital Adequacy And Risk Control Indicators” in the section headed “Financial Information”.
A futures company shall, within seven business days after the end of each month, submit the monthly risk control statement to the local branch of the CSRC and within four months after the end of each year, submit the annual risk control statement that is audited by an accounting firm with the securities or futures business qualification. We have submitted the required monthly and annual risk control statements in a timely manner and complied with the above risk control indicator requirements.
Pursuant to the confirmation letter issued by the CSRC on 26 May 2015, for the twelve months ended 31 March 2015, we have complied with the risk control indicator criteria on a continual basis.
Other Regulations
Exchange Control
According to the Administrative Regulations on Futures Trading, futures companies whose equity is held by foreign-funded enterprise shall, in accordance with laws and administrative regulations, apply to the commerce department of the State Council for the certificate of approval for foreign-invested enterprises and to the foreign exchange management department for registration of foreign exchange, capital account opening and procedures for foreign exchange purchase.
The State Administration of Foreign Exchange under the authority of the PBOC is responsible for the management of all matters relating to foreign exchange, including the implementation of exchange control regulations.
Pursuant to the Regulations on the Foreign Exchange System of the People’s Republic of China, international payments and transfers are divided into the current account and capital account. China sets no restrictions on current international payments and transfers, while capital items shall be subject to the approval of the SAFE.
According to the Regulations on the Foreign Exchange System of the People’s Republic of China, current account foreign exchange income may, according to relevant regulations of the state, be retained or sold to any financial institutions engaged in foreign exchange settlement and sale business, and where any foreign exchange income on capital account is to be retained or sold to a financial institution engaged in foreign exchange settlement and sale business, an approval shall be obtained from the relevant foreign exchange administrative authority, except for those not subject to approval under the state provisions. PRC enterprises (including foreign-invested enterprises) which require foreign exchange for transactions relating to current account items may, without the approval of SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks, on the strength of valid receipts and proof of transactions. If foreign-funded enterprises need to distribute profits to shareholders in foreign currency, and the Chinese enterprises need to pay dividends to shareholders in foreign currency in accordance with relevant regulations,
— 107 — REGULATORY OVERVIEW such enterprises may, based on the resolution adopted at the shareholders’ meeting or the resolution adopted at the Board of Directors on distribution of profits, submit the required evidence documents and make payment from the foreign exchange account or conduct exchange and payment through a designated foreign exchange bank. Convertibility of foreign exchange in respect of capital account items, like direct investment and registered capital, is still subject to restriction and prior approval from the SAFE or its branch.
Pursuant to the Notice of the State Administration of Foreign Exchange on Relevant Issues Concerning the Foreign Exchange Administration for Overseas Listings, which is announced and effective on 26 December 2014:
• SAFE and its branches (hereafter as “Foreign Exchange Bureaus”) supervise, manage and inspect, among other things, the business registration, account opening and use, cross-border payments and capital exchange involved in the overseas listing of domestic companies.
• A domestic company shall conduct overseas listing registration with Foreign Exchange Bureaus at the place of its incorporation with related materials within 15 working days after the completion of the offering of its overseas listing shares.
• A domestic company may repatriate the proceeds from offshore listing to its domestic account or retain such proceeds at its overseas account. The use of such proceeds shall be consistent with the content of the prospectus or other public disclosure documents such as documents for issuance of corporate bonds, circulars to shareholders and resolutions of board of directors and shareholders’ meetings. Proceeds raised from issuance of convertible bonds by a domestic company and intended to be remitted to its domestic account shall be remitted to its specific domestic account for foreign debts and the company shall complete relevant procedures in accordance with relevant regulations on foreign debts administration; and proceeds raised from issuance of other types of securities by a domestic company and intended to be remitted to its domestic account shall be remitted to its special domestic account for offshore listing (foreign exchange) or payment account (RMB).
• A domestic company may use overseas funds as stipulated by relevant provisions or remit funds out of the PRC to repurchase overseas shares. Where the domestic company chooses to remit funds out of the PRC to repurchase overseas shares, it should, by presenting the certificate of overseas listing registration obtained following the registration of the repurchase related information (including change procedures) at the local Foreign Exchange Bureaus (if fail to register the repurchase related information, it is required to conduct the registration within 20 working days before the proposed repurchase and obtain relevant registration certificate) and statements or supporting materials of the repurchase, complete the remittance with deposit bank through domestic account for offshore listing (foreign exchange) or payment account (RMB). Upon completion of the repurchase, any surplus in the funds remitted overseas for such repurchase shall be transferred back to domestic company’s domestic account for offshore listing (foreign exchange) or payment account (RMB).
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• A domestic shareholder may, in accordance with applicable regulations, use overseas funds as stipulated by relevant provisions or remit funds out of the PRC to increase his/her overseas shares of a domestic company. Where the domestic shareholder chooses to remit funds out of the PRC to increase his/her shareholding, he/she should, by presenting his/her overseas shareholding registration certificate and statements or supporting materials of the shareholding increase, complete the transfer with deposit bank through domestic shareholder’s domestic account for offshore holding. Upon completion of the shareholding increase, any surplus in the funds remitted overseas for such increase shall be transferred back to the said account. The domestic shareholder may, by presenting the overseas shareholding registration certificate, complete such funds transfer or settlement procedures with the bank.
• A domestic shareholder’s income raised from reduction or transaction of overseas shares of a domestic company or raised from the shares delisted from overseas stock exchange on the capital account may be deposited at the shareholder’s overseas account or remitted to the domestic account for offshore shareholding. Where the domestic shareholder chooses to remit the income to its domestic account, the domestic shareholders may, by presenting the overseas shareholding registration certificate, complete the transfer or settlement procedures with the bank.
According to the Decision of the State Council on Cancellation and Adjustment of Batch of Administrative Approval Projects, the SAFE and its branches cancel foreign exchange approval for the overseas raised funds under the foreign stocks of domestic companies listed overseas.
The Regulations on Foreign Exchange Administration of Investment in Domestic Securities by Qualified Overseas Institutional Investors clearly define that the Chinese government implements a quota system of management for investment in domestic securities by qualified foreign investors. The SAFE approves the investment quota of the qualified investors and such quota may be adjusted by SAFE. Qualified investors are not allowed to apply for an increase in investment quota within one year after obtaining the approval for the last investment quota.
Regulatory Measures relating to Stock Index Futures
In order to curb excessive market speculations, prevent and control market risk, the China Financial Futures Exchange (the “CFFE”) has issued the Implementation of a Series of Measures on Stock Index Futures by CFFE to Curb Excessive Market Speculations on 25 August 2015, Further Curbs on Excessive Speculations in the Stock Index Futures Market by CFFE on 28 August 2015 and Further Enhancement in Market Management and Control to Strictly Restrict Excessive Market Speculations on 2 September 2015, pursuant to which a series of regulatory and control measures on stock index futures were adopted as follows:
(1) starting from the settlement time on 7 September 2015, the margin for each contract of CSI 300 Stock Index Futures, SSE 50 Stock Index Futures and CSI 500 Stock Index Futures with non-hedged position was increased to 40%, and the margin for each contract of CSI 300 Stock Index Futures, SSE 50 Stock Index Futures and CSI 500 Stock Index Futures with hedged position was increased to 20%, progressively;
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(2) in respect of CSI 300 Stock Index Futures, SSE 50 Stock Index Futures and CSI 500 Stock Index Futures, a client’s trading in a single product of stock index futures with a daily open position turnover of more than 600 board lots from 26 August 2015, the aforementioned trading of more than 100 board lots from 31 August 2015 and the aforementioned trading of more than 10 board lots from 7 September 2015 were deemed to be abnormal trading behavior with relatively large daily open position turnover, except for the open positions with hedged transactions;
(3) the standard rate of fees collected from closing transactions of new open positions in stock index futures closed on the same day was adjusted to 0.0115% on the turnover amount from 26 August 2015, and was subsequently adjusted to 0.23% from 7 September 2015;
(4) starting from 7 September 2015, clients without transactions for a prolonged period, before participating in financial futures transactions, shall be aware of the prevailing trading rules of the CFFE and their implementation rules, and shall make a promise including that the account is used by it in person and will not be lent or transferred or entrusted to other persons for operation and it will participate in trading in compliance with laws and regulations. A client may only commence trading in financial futures after the aforementioned letter of promise has been submitted to CFFE for filing through the member of CFFE.
Information Disclosure
The Management Regulations on Information Publication of Futures Companies, which are effective on 16 November 2009, set forth specific requirements on information disclosed by futures companies including methods, requirements and contents of information disclosure; the Regulations also require the futures companies to appoint a senior manager to be responsible for information disclosure and determine a special department to conduct information disclosure and continuous updating of information, which shall be reported to the CSRC in the location of the company for the record.
Anti-Money Laundering
Futures companies shall comply with the requirements related to anti-money laundering stipulated in the Anti-Money Laundering Law of the People’s Republic of China with effect from 1 January 2007, the Provisions on Anti-Money Laundering of Financial Institutions promulgated by the PBOC with effect from 1 January 2007, and the Measures on Administrative Identification of Clients and Preservation of Client Identities Information and Trading Records of Financial Institutions jointly promulgated the PBOC, the CBRC, the CSRC and the CIRC with effect from 1 August 2007.
The Measures on the Anti-Money Laundering by Securities and Futures Industry, enacted by the CSRC with effect from 1 October 2010, further set out the rules on anti-money laundering by securities and futures industry and the securities and futures operating institutions should establish and enhance internal control system for anti-money laundering.
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Financial Action Task Force on Anti-Money Laundering is an inter-governmental body established in 1989; its goal is to set standards and promote the effective implementation of legal, regulatory and operational measures so as to combat money laundering, terrorist financing and other threats to the international financial system. Financial Action Task Force on Anti-Money Laundering monitors the progress of its members in implementing the necessary measures, reviewing money laundering and terrorist financing techniques and countermeasures as well as promoting the adoption and implementation of appropriate measures. China joined the Financial Action Task Force on Anti-Money Laundering in 2007 and adopted the first mutual evaluation report in June 2007 and published the follow-up report in March 2012.
International Convention for the Suppression of the Financing of Terrorism
The International Convention for the Suppression of the Financing of Terrorism was passed in No. 54/109 Resolution adopted at the Fourth United Nations General Assembly on 9 December 1999. The Convention is designed to prevent, expose and punish the financing of terrorist activities and to promote intergovernmental cooperation in order to achieve these goals. As at the Latest Practicable Date, the Convention has been approved by 185 countries and the Chinese government has ratified the Convention with reservations on 19 April 2006.
The United Nations Convention against Corruption
China is a contracting party of the United Nations Convention against Corruption, which is a multilateral convention adopted at the UN General Assembly on 31 October 2003. The Convention provides that contracting parties shall implement anti-corruption standards and amend the laws, the constitution and the practice. The measures are aimed at promoting prevention, detection and sanctions against corruption, and strengthening cooperation among the ratifying member states on related matters. As at the Latest Practicable Date, the United Nations Convention against Corruption has been approved by 170 countries. Chinese government has ratified the Convention with reservations for Paragraph 2, Article 66 on 27 October 2005.
Regulatory and Shareholders Approvals for the Listing and Reorganisation
Pursuant to the PRC Securities Law, when a company intends to offer shares for subscription and list its shares on an overseas stock exchange, it shall obtain prior approval from the CSRC. Pursuant to Administrative Measures for the Supervision and Administration of Futures Companies, Administration Measures for overseas Investment and other relevant PRC laws, the Reorganisation shall obtain prior approval from the CSRC and make the filing with NDRC. As advised by our PRC legal advisers, we have obtained all necessary approvals from relevant PRC authorities for the Reorganization.
In addition, our existing articles of association also provides that the Global Offering shall be reviewed and approved by our Shareholders. We have acquired all the necessary regulatory and internal approvals for the Global Offering and Listing. Please see ‘‘Appendix VI—Statutory and General Information’’ for more details. In particular, we have obtained our Shareholders’ approval and the CSRC’s approval for the Global Offering and Listing on February 6, 2015 and 18 August 2015, respectively.
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HONG KONG REGULATORY OVERVIEW
SFC
Founded in May 1989, the SFC is an independent statutory body responsible for regulating the securities and futures market in Hong Kong. The SFC works to ensure orderly securities and futures market operations, to protect investors and help promote Hong Kong as an international financial centre and a key financial market in the PRC. The SFC’s regulatory objectives as set out in the SFO are:
• to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry;
• to promote the understanding by the public of the operation and functioning of the securities and futures industry;
• to provide protection for members of the public investing in or holding financial products;
• to minimise crime and misconduct in the securities and futures industry;
• to reduce systemic risks in the securities and futures industry; and
• to assist the Financial Secretary of Hong Kong in maintaining the financial stability of Hong Kong by taking appropriate steps in relation to the securities and futures industry.
Parties regulated by the SFC include, but are not limited to, licensed corporations and individuals carrying on Type 1 to Type 10 regulated activities under the SFO, investment products offered to the public, listed companies, HKEx, approved share registrars and all participants in trading activities.
SFO
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.
Types of Regulated Activities
The SFO promulgates a single licensing regime where a person needs only one licence to carry on different types of regulated activities 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;
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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.
As at the Latest Practicable Date, the following Group company is licensed under the SFO to carry out the following regulated activity:
Group Company Licensed to carry out the following regulated activity
Holly Su Futures Type 2
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.
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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.
Responsible Officer
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.
Qualification and experience required for being a Responsible Officer
A person who intends to apply to be a responsible officer must demonstrate that he fulfills the requirements on both competence and sufficient authority. An applicant should possess appropriate ability, skills, knowledge and experience to properly manage and supervise the corporation’s regulated activities. Accordingly, the applicant has to fulfil certain requirements on academic and industry qualification, industry experience, management experience and regulatory knowledge as stipulated by the SFC. If a responsible officer intends to conduct regulated activities in relation to matters falling within the ambit of a particular code issued by the SFC, for instance, the Takeovers Code or the Code on Real Estate Investment Trusts, additional competence requirements specific to that field would apply.
Licensed Representative
An individual is required to be a licensed representative if he is performing a regulated function for his principal which is a licensed corporation in relation to a regulated activity carried on as a business or he holds out as performing such function.
Qualification and experience required for being a Licensed Representative
A person who intends to apply to be a licensed representative must demonstrate his competence requirement under the SFO. An applicant has to establish that he has the requisite basic understanding of the market in which he is to work as well as the laws and regulatory requirements applicable to the industry. In assessing the applicant’s competence to be licensed as a licensed representative, the SFC will have regards to the applicant’s academic qualification, industry qualification and regulatory knowledge.
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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.
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, where the applicant is a corporation, any officer of the applicant; and
(e) any decisions made by competent authority or regulatory organisation whether in Hong Kong or elsewhere in respect of the applicant.
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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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;
• 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 Guideline on Anti-Money Laundering and Counter-Terrorist Financing issued by the SFC (as discussed in more detail below); and
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• 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 (“FRR”)
Depending on the type of regulated activity, licensed corporations have to maintain at all times paid-up share capital and liquid capital not less than the specified amounts according to the FRR. The FRR sets out the computation of a number of variables in respect of all the liquid assets and ranking liabilities of a licensed corporation and its liquid assets must exceed its ranking liabilities. If a licensed corporation conducts more than one type of regulated activity, the minimum paid-up share capital and liquid capital that it must maintain shall be the higher or the highest amount required amongst those regulated activities. If a licensed corporation offers credit facilities to its customers who would like to purchase securities on a margin basis, or provides financing for applications of shares in connection with IPOs, it must monitor its liquid capital level continuously in order to satisfy the FRR requirements. If the margin requirement of the licensed corporation increases, it would be required to maintain additional liquid capital.
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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Pursuant to the FRR, 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 Counter-Terrorist Financing
Licensed corporations are required to comply with applicable anti-money laundering and counter-terrorist financing laws and regulations in Hong Kong, as well as the Guideline on Anti-Money Laundering and Counter-Terrorist Financing (“Guideline”) issued by the SFC.
The Guideline assists licensed corporation and their senior management in formulating and implementing appropriate and effective policies, procedures and controls in order to meet applicable legal and regulatory requirements. Under the Guideline, licensed corporations must, among other things:
• assess the risks of any new products and services before they are launched and ensure that appropriate additional measures and controls are implemented to mitigate and manage the risks associated with money laundering and terrorist financing;
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• identify the client and verify the client’s identity by reference to any documents, information or data from reliable and independent sources, and take steps from time to time to ensure that the client information obtained is up-to-date and relevant;
• conduct on-going monitoring of activities of the clients to ensure that they are consistent with the nature of business, the risk profile and source of funds, as well as identify transactions that are complicated, large or unusual, or patterns of transactions that have no apparent economic or lawful purpose and may indicate money laundering and terrorists financing;
• maintain a database of names and particulars of terrorist suspects and designated parties which consolidates the information from various lists that have been made known to them, as well as conduct comprehensive on-going screening of the client database; and
• conduct on-going 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 that is concerned with the regulatory system of anti-money laundering and counter-terrorist financing in Hong Kong.
Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Chapter 615 of the Laws of Hong Kong) (“AMLO”)
Among other things, the AMLO imposes requirements relating to client due diligence and maintenance of records of specific financial institutions and empowers competent authorities to supervise compliance with the requirements under the AMLO. In addition, the competent authorities are empowered to (1) ensure that proper safeguards exist to prevent contravention of specified provisions in the AMLO and (2) mitigate money laundering and terrorist financing risks.
Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of Hong Kong) (“DTROP”)
Among other things, the DTROP empowers competent authorities to investigate 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 offense under the DTROP if a person deals with any property knowing or having reasonable grounds to believe it to be the proceeds from 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) is the proceeds from drug trafficking or is intended to be used or was used in connection with drug trafficking, and failure to make such disclosure constitutes an offense under the DTROP.
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Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong) (“OSCO”)
Among other things, the OSCO empowers officers of the Hong Kong Police Force and the Hong Kong Customs & Excise Department to investigate organized crime and triad activities, and 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 offense to cover the proceeds from all indictable offences in addition to drug trafficking.
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 offense to: (1) 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 (2) 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 offense under the UNATMO.
Regulatory and Shareholders’ Approval for the Reorganisation
Pursuant to the SFO, the Reorganisation, which entails the acquisition of all the issued shares of Holly Su Futures, a company incorporated in Hong Kong and licensed to carry on Type 2 (dealing in futures contracts) regulated activity under the SFO, requires the prior approval from the SFC, which has been obtained in September 2015. For details of the PRC regulatory requirements and Shareholders’ approval for the Reorganisation, please see the subsection headed “—Regulatory and Shareholders’ Approval for the Listing and Reorganisation” above.
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OUR MILESTONES
We have achieved the following key milestones in the development of our Group:
Year Events
1995 • Jiangsu Holly, our predecessor company, was established in Nanjing, Jiangsu Province.
1999 • Jiangsu Holly became a member of Dalian Commodity Exchange (大連商品交易所), Zhengzhou Commodity Exchange (鄭州商品交易所) and Shanghai Commodity Exchange (上海商品交易所).
2001 • Jiangsu Holly became one of the first members of the CFA.
2007 • Jiangsu Holly became a settlement member of China Financial Futures Exchange (中國金融期貨交易所).
2011 • Jiangsu Holly became the first futures company which has established a postdoctorate innovation practice base (博士後創新實踐基地) in the PRC.
2012 • Jiangsu Holly was converted into a joint stock limited company in the PRC, to become our Company.
2013 • We acquired certain assets of Huazheng Futures Co., Ltd. (華證期貨有限公司) (“Huazheng Futures”) relating to its futures brokerage business.
• We started to engage in the asset management business to diversify our business lines and revenue streams.
• Holly Capital, our wholly-owned subsidiary, was established in Shenzhen, Guangdong province. We started to engage in the commodity trading and risk management business to further diversify our revenue streams and client base.
2014 • We became a full-clearing member of China Financial Futures Exchange (中 國金融期貨交易所).
2015 • We made the strategic decision to undertake the Reorganisation and expand our business operations outside the PRC by acquiring Holly Su Futures, a company carrying on futures business in Hong Kong since 2011.
• We were recognised as the “National Civilised Unit” (全國文明單位)bythe Central Spiritual Civilization Development Steering Commission (中央精神 文明建設指導委員會).
• We were approved to act as the stock options trading participant by the Shanghai Stock Exchange.
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HISTORY AND DEVELOPMENT
Our Company
The history of our Group can be traced back to 31 July 1995, when Jiangsu Holly, our predecessor company, was established as a limited liability company in the PRC. Jiangsu Holly was recognised as Jiangsu Jinling Futures Brokerage Company Limited (江蘇金陵期貨經紀有限公司) upon its establishment. It was subsequently renamed as Jiangsu Holly Futures Brokerage Company Limited (江蘇弘業期貨經紀有限公司) on 14 December 1999 and Jiangsu Holly Futures Company Limited (江蘇弘業期貨有限公司) on 10 June 2011, respectively. For the purpose of this section, references to Jiangsu Holly include all or any of its former names, unless the context requires otherwise.
Capitalising on the development of the open-market economy and futures industry, in particular, commodity futures in China in the 1990s, Jiangsu Holly was founded by Jiangsu Metallurgy Commodities Trading Market (江蘇省冶金物資交易市場)(“Metallurgy Commodities”), an enterprise owned by the “whole people” (全民所有制企業) and engaged in commodity trading, and Jiangsu Nonferrous Metal Industrial Company Limited (江蘇省有色金屬工業公司)(“Jiangsu Nonferrous”), a state-owned enterprise engaged in manufacturing and refining of nonferrous metal, in July 1995. Upon its establishment, Jiangsu Holly had a registered capital of RMB10,000,000 and was owned by Metallurgy Commodities and Jiangsu Nonferrous as to 60% and 40%, respectively.
Capital restructurings prior to the Track Record Period
As part of our continuing efforts to streamline and optimise our shareholding structure, we had undergone several changes in our registered and paid-in capital as a result of capital injection and/or equity transfers prior to the Track Record Period, details of which are set out below.
In February 1999, Metallurgy Commodities transferred 60% equity interests and Jiangsu Nonferrous transferred 30% equity interests in Jiangsu Holly, respectively, to Holly Corporation at an aggregate consideration of RMB10,710,000. Meanwhile, Jiangsu Nonferrous transferred 10% equity interests in Jiangsu Holly to Holly Logistics at a consideration of RMB1,190,000. Upon completion of the equity transfers on 1 February 1999, Jiangsu Holly had a registered capital of RMB10,000,000 and was owned by Holly Corporation and Holly Logistics as to 90% and 10%, respectively.
In August 1999, Jiangsu Holly resolved in a shareholders’ meeting to increase its registered capital by RMB20,000,000. The increased registered capital of Jiangsu Holly was subscribed and contributed by Holly Corporation and Holly Logistics in the amount of RMB19,200,000 and RMB800,000, respectively. Upon completion of the capital increase on December 14, 1999, Jiangsu Holly had a registered capital of RMB30,000,000 and was owned by Holly Corporation and Holly Logistics as to 94% and 6%, respectively.
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In June 2000, Holly Corporation transferred 48% equity interests in Jiangsu Holly to Jiangsu Holly International Group Investment Management Company Limited (江蘇弘業國際集團投資管理有 限公司)(“Holly Investment”), a subsidiary of SOHO Holdings, at a consideration of RMB15,720,000 by reference to the audited net assets of Jiangsu Holly as at 31 December 1999. Upon completion of the equity transfer on 30 October 2001, Jiangsu Holly had a registered capital of RMB30,000,000 and was owned by Holly Investment, Holly Corporation and Holly Logistics as to 48%, 46% and 6%, respectively.
In March 2006, Jiangsu Holly resolved in a shareholders’ meeting to increase its registered capital by RMB8,000,000 by capitalizing its retained profits, which was recognised by Holly Investment, Holly Corporation and Holly Logistics in proportion to their then respective shareholdings in Jiangsu Holly. Upon completion of the capital increase on 21 July 2006, Jiangsu Holly had a registered capital of RMB38,000,000 and was owned by Holly Investment, Holly Corporation and Holly Logistics as to 48%, 46% and 6%, respectively.
In May 2007, Jiangsu Holly resolved in a shareholders’ meeting to increase its registered capital by RMB12,000,000, which was subscribed and contributed in cash by Holly Investment, Holly Corporation, Hongrui Venture Capital and Shanghai Mingda in the amount of RMB3,195,000, RMB3,955,000, RMB2,450,000 and RMB2,400,000, respectively. Upon completion of the capital increase on 24 July 2007, Jiangsu Holly had a registered capital of RMB50,000,000 and was owned by Holly Investment, Holly Corporation, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to approximately 42.87%, 42.87%, 4.90%, 4.80% and 4.56%, respectively.
In March 2008, Jiangsu Holly resolved in a shareholders’ meeting to increase its registered capital by RMB58,000,000, among which RMB4,920,000 was converted from its then capital surplus reserve, RMB15,080,000 was capitalised from its retained profits and RMB38,000,000 was subscribed and contributed in cash by the then shareholders in proportion to their then respective shareholdings in Jiangsu Holly. Upon completion of the capital increase on 11 July 2008, Jiangsu Holly had a registered capital of RMB108,000,000 and was owned by Holly Investment, Holly Corporation, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to 42.87%, 42.87%, 4.90%, 4.80% and 4.56%, respectively.
In August 2009, Jiangsu Holly resolved in a shareholders’ meeting to increase its registered capital by RMB30,000,000, which was subscribed and contributed in cash by Holly Investment and Holly Corporation in equal shares. Upon completion of the capital increase on 23 December 2009, Jiangsu Holly had a registered capital of RMB138,000,000 and was owned by Holly Investment, Holly Corporation, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to approximately 44.42%, 44.42%, 3.83%, 3.76% and 3.57%, respectively.
In February 2011, Jiangsu Holly resolved in a shareholders’ meeting to increase its registered capital by RMB242,000,000, which was subscribed by Holly Su Industrial, SOHO Holdings, High Hope International, Holly Investment, and Holly Corporation in the amount of RMB80,218,000, RMB81,081,200, RMB38,000,000, RMB21,350,400 and RMB21,350,400, respectively. Upon completion of
— 123 — HISTORY, DEVELOPMENT AND CORPORATE STRUCTURE the capital increase on 27 April 2011, Jiangsu Holly had a registered capital of RMB380,000,000 and was owned by Holly Investment, Holly Corporation, SOHO Holdings, Holly Su Industrial, High Hope International, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to 21.75%, 21.75%, 21.34%, 21.11%, 10.00%, 1.39%, 1.36% and 1.30%, respectively.
Capital restructuring during Track Record Period
To further streamline and optimise our shareholding structure and the investment portfolio of SOHO Holdings, in August 2012, Jiangsu Holly resolved in a shareholders’ meeting to approve the transfer of 21.75% equity interests in Jiangsu Holly from Holly Investment, a subsidiary of SOHO Holdings, to SOHO Holdings at nil consideration. Upon completion of the equity transfer on 21 November 2012, Jiangsu Holly was owned by SOHO Holdings, Holly Corporation, Holly Su Industrial, High Hope International, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to 43.09%, 21.75%, 21.11%, 10.00%, 1.39%, 1.36% and 1.30%, respectively. The following table sets forth the shareholding structure of Jiangsu Holly upon completion of the equity transfer on 21 November 2012:
Approximate Subscribed shareholding Name of shareholders capital percentage (RMB’000) (%)
SOHO Holdings 163,731.2 43.09 Holly Corporation 82,650 21.75 Holly Su Industrial 80,218 21.11 High Hope International 38,000 10.00 Hongrui Venture Capital 5,292 1.39 Shanghai Mingda 5,184 1.36 Holly Logistics 4,924.8 1.30
TOTAL 380,000 100.00
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Conversion
On 21 November 2012, the then shareholders of Jiangsu Holly (namely SOHO Holdings, Holly Corporation, Holly Su Industrial, High Hope International, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics) entered into a promoters’ agreement, pursuant to which each of them agreed to convert Jiangsu Holly into a joint stock limited company in the PRC with a registered capital of RMB680,000,000, divided into 680,000,000 Domestic Shares of a par value of RMB1.00 each (the “Conversion”). The following table sets forth the shareholding structure of our Company upon completion of the Conversion on 29 November 2012 and as at the Latest Practicable Date:
Number of Approximate Domestic shareholding Name of Shareholders Shares percentage (%)
SOHO Holdings 292,992,674 43.09 Holly Corporation 147,900,000 21.75 Holly Su Industrial 143,548,000 21.11 High Hope Corporation(1) 68,000,000 10.00 Hongrui Venture Capital 9,469,895 1.39 Shanghai Mingda 9,276,631 1.36 Holly Logistics 8,812,800 1.30
TOTAL 680,000,000 100.00
Note:
(1) High Hope International was deregistered on 23 September 2015 as a result of the merger with High Hope Corporation by way of absorption. Therefore, High Hope Corporation has become our Shareholder holding 68,000,000 Domestic Shares as at the Latest Practicable Date.
Reorganisation
In order to expand our footprint to the global futures market, our Group has undertaken the Reorganisation and made the strategic decision to acquire Holly Su Futures, a company incorporated under the laws of Hong Kong with limited liability on 20 October 2011 and licensed to carry on Type 2 (dealing in futures contracts) regulated activity under the SFO. Upon its incorporation, Holly Su Futures had an issued share capital of HK$10,000,000 divided into 10,000,000 shares of HK$1.00 each, which have been allotted and issued as fully paid to SOHO Hong Kong and Holly International Group (H.K.) Limited (弘業國際（香港）有限公司)(“Holly International (H.K.)”) as to approximately 51% and 49%, respectively. Notwithstanding several changes in Holly Su Futures’ shareholding, SOHO Hong Kong and Holly International (H.K.), each being a subsidiary of SOHO Holdings, had remained as the only two shareholders of Holly Su Futures from its incorporation up to the completion of the Reorganisation.
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Based on arm’s length negotiations, on 7 January 2015, our Company entered into the Holly Su Share Purchase Agreement, as supplemented by the Supplemental Share Purchase Agreement, with SOHO Hong Kong and Holly International (H.K.)(1), the then shareholders of Holly Su Futures and each being a subsidiary of SOHO Holdings thus our connected person, pursuant to which our Company acquired Holly Su Futures by purchasing all of its issued share capital, at a consideration of HK$28,075,300, which was determined with reference to the then net asset value of Holly Su Futures as appraised by an independent valuer. Pursuant to the Holly Su Share Purchase Agreement, the consideration was fully paid up by our Company on 30 September 2015.
Upon completion of the Reorganisation on 30 September 2015, Holly Su Futures became a wholly-owned subsidiary of our Company. As advised by our PRC legal advisers and our Hong Kong legal advisers as to the acquisition of Holly Su Futures, we have obtained and completed all requisite approvals and/or registrations in all material aspects from the relevant PRC and Hong Kong authorities in respect of the Reorganisation, and the Reorganisation to the extent that the relevant PRC and/or Hong Kong laws are applicable, has in all material aspects complied with the applicable laws and regulations in the PRC.
Our Existing Shareholders
SOHO Holdings
SOHO Holdings, a state-owned enterprise owned as to 100% by Jiangsu SASAC, was established as a limited liability company under the laws of the PRC in April 1994 and is our Controlling Shareholder and one of our promoters. SOHO Holdings is an investment holding company principally engaged in (i) financial and industrial investment, authorised operation and management of state-owned assets; (ii) domestic and international trading; (iii) property leasing; and (iv) production, R&D and sales of silk, textiles and garments. For more details, please see the section headed “Relationship with Our Controlling Shareholder” in this prospectus.
The investment in our Company by SOHO Holdings was financed by its own funds. As at the Latest Practicable Date, SOHO Holdings held, directly and indirectly, approximately 66.14% of our total share capial. Upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), it will hold approximately 47.59% of our enlarged total share capital.
Holly Corporation
Holly Corporation, one of our promoters, is a joint stock limited company established under the laws of the PRC in June 1994 and was listed on the Shanghai Stock Exchange in September 1997
Note:
(1) As SOHO Hong Kong’s name was inconsistently stated in the Holly Su Share Purchase Agreement, on 10 July 2015, our Company, SOHO Hong Kong and Holly International (H.K.) entered into the Supplemental Share Purchase Agreement, pursuant to which the parties thereto have confirmed (i) SOHO Hong Kong is one of the sellers in the Holly Su Share Purchase Agreement; and (ii) save for the correction of SOHO Hong Kong’s name, all terms and conditions set out in the Holly Su Share Purchase Agreement shall remain in full force and effect and binding on the parties thereto.
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(stock code: 600128). As at the Latest Practicable Date, Holly Corporation was directly owned by SOHO Holdings and Artall Culture Group, a wholly-owned subsidiary of SOHO Holdings, as to 1.4% and 24.02%, respectively. Accordingly, Holly Corporation was owned, directly and indirectly, by SOHO Holdings as to approximately 25.42% as at the Latest Practicable Date. Pursuant to the relevant PRC laws and as disclosed in the annual report of Holly Corporation for the year of 2014, Artall Culture Group is considered as the controlling shareholder of Holly Corporation. For details, please see the section headed “Substantial Shareholders” in this prospectus. Holly Corporation is principally engaged in (i) undertaking overseas engineering projects compatible with its strength, size and performance, and overseas dispatch of labor to implement such overseas projects; (ii) wholesale and mining of coal, wholesale of dangerous chemicals (specific projects to be operated pursuant to the requirements of relevant license); (iii) wholesale and retail of pre-packaged foods and dairy products (including infant formula milk powder) as well as class II and III medical devices (excluding implant products, in vitro reagents and plastic contact lenses); and (iv) industrial investment, domestic trade, self-operated and commissioned import and export business for various commodities and technologies.
The investment in our Company by Holly Corporation was financed by its own funds. As at the Latest Practicable Date, Holly Corporation held approximately 21.75% of our total share capital. Upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), it will hold approximately 16.31% of our enlarged total share capital.
Holly Su Industrial
Holly Su Industrial, one of our promoters, is a limited liability company established under the laws of the PRC in February 2011 and is principally engaged in industrial investment, enterprise management and domestic trading. As at the Latest Practicable Date, Holly Su Industrial was owned by Hony Capital Industrial Phase I Fund (Tianjin) Limited Partnership (弘毅投資產業一期基金（天 津）有限合夥), a Substantial Shareholder, and Hony Ruoshi Investment (Tianjin) Co., Ltd (弘毅若石 投資(天津)有限公司) as to 99.9955% and 0.0045%, respectively. For more details of the shareholding structure of Holly Su Industrial, please see the section headed “Substantial Shareholders” in this prospectus.
The investment in our Company by Holly Su Industrial was financed by its own funds. As at the Latest Practicable Date, Holly Su Industrial held approximately 21.11% of our total share capital. Upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), it will hold approximately 15.83% of our enlarged total share capital.
High Hope Corporation
High Hope Corporation was a limited liability company established under the laws of the PRC on 13 October 1992 which was subsequently converted to a joint stock limited company in 1994 and was listed on the Shanghai Stock Exchange in June 2004 (stock code: 600981). High Hope Corporation owed by Jiangsu Su Hui Asset Management Company Limited (江蘇蘇匯資產管理有限公司), a state-owned enterprise wholly-owned by Jiangsu SASAC, as to approximately 67.4% as at the Latest Practicable Date and is principally engaged in self-operation of and acting as agent for the import and
— 127 — HISTORY, DEVELOPMENT AND CORPORATE STRUCTURE export of various types of commodities and technologies, domestic trade, domestic and foreign investment, R&D, manufacturing, warehousing of textile raw materials and finished products, R&D, installation, leasing of electronic devices, computer software and hardware, electronic products and network engineering design, installation, consultation and technical services, real estate development, residential property leasing, property management services, warehousing, wholesale of dangerous chemicals (operated within the scope as set out in the license), wholesale of pre-packaged food products and bulk food products, milk products (including infant formula milk powder), sale of fuel oil, sale and procurement of grain.
The investment in our Company by High Hope Corporation was financed by its own funds(1).As at the Latest Practicable Date, High Hope Corporation held approximately 10.00% of our total share capial. Upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), it will hold approximately 7.05% of our enlarged total share capital.
Note:
(1) High Hope International was deregistered on 23 September 2015 as a result of the merger with High Hope Corporation by way of absorption. Therefore, High Hope Corporation has become our Shareholder holding 68,000,000 Domestic Shares as at the Latest Practicable Date.
Hongrui Venture Capital
Hongrui Venture Capital, one of our promoters, is a limited liability company established under the laws of the PRC in September 2002 and is principally engaged in venture capital, corporate management, technology development and transfer, investment consulting, asset management and entrusted asset management. As at the Latest Practicable Date, Hongrui Venture Capital was owned as to approximately 24% by Holly Corporation.
The investment in our Company by Hongrui Venture Capital was financed by its own funds. As at the Latest Practicable Date, Hongrui Venture Capital held approximately 1.39% of our total share capial. Upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), it will hold approximately 0.98% of our enlarged total share capital.
Shanghai Mingda
Shanghai Mingda, one of our promoters, is a limited liability company established under the laws of the PRC in December 2002. It is principally engaged in industrial investment, community development and the R&D of high-tech products and was owned by four individual shareholders as at the Latest Practicable Date, all of whom are Independent Third Parties.
The investment in our Company by Shanghai Mingda was financed by its own funds. As at the Latest Practicable Date, Shanghai Mingda held approximately 1.36% of our total share capial. Upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), it will hold approximately 1.02% of our enlarged total share capital.
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Holly Logistics
Holly Logistics, one of our promoters, is a limited liability company established under the laws of the PRC in February 1996 and is principally engaged in (i) self-operated and commissioned import and export trading business for various commodities and technologies; and (ii) domestic trading, undertaking ocean shipping, air transportation and international transportation business. As at the Latest Practicable Date, Holly Logistics was owned by Artall Culture Group, a wholly-owned subsidiary of SOHO Holdings and the controlling shareholder of Holly Corporation, as to 89.66% and owned by Holly Corporation as to 10.34%.
The investment in our Company by Holly Logistics was financed by its own funds. As at the Latest Practicable Date, Holly Logistics held approximately 1.30% of our total share capial. Upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), it will hold approximately 0.91% of our enlarged total share capital.
Our Subsidiaries
Holly Capital
Holly Capital was established as a limited liability company in the PRC on 25 June 2013 with a registered capital of RMB100,000,000, which had been fully paid up and contributed by our Company upon its establishment. On 17 August 2015, the registered capital of Holly Capital was increased to RMB150,000,000. It has remained a wholly-owned subsidiary of our Company since its establishment.
Holly Capital commenced its business on 25 June 2013 and is principally engaged in, among other things, (i) futures and spot arbitrage, (ii) cooperative hedging, and (iii) warehouse receipts services.
Holly Su Futures
Upon completion of the Reorganisation on 30 September 2015, Holly Su Futures became a wholly-owned subsidiary of our Company. As at the Latest Practicable Date, it had an issued share capital of HK$25,000,000 divided into 25,000,000 shares of HK$1.00 each. For more details of the history and shareholding changes of Holly Su Futures, please see the subsection headed “— History and Development — Our Company — Reorganisation” above.
Holly Su Futures commenced its business on 20 October 2011 and is a licensed corporation under the SFO to carry out Type 2 (dealing in futures contracts) regulated activities.
PRC Regulatory Requirements
Jingtian & Gongcheng, our PRC legal advisers, have confirmed that all relevant material approvals and permits in respect of the equity transfers and increases in the registered capital of our Company and the Conversion as described above have been obtained and the procedures and steps involved are, in all material aspects, in compliance with relevant PRC laws and regualtions.
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Hong Kong Regulatory Requirements
Jun He Law Offices, our Hong Kong legal advisers as to the acquisition of Holly Su Futures has confirmed that all necessary regulatory approvals have been obtained and filings have been made in respect of the purchase of all the issued shares of Holly Su Futures and the procedures and steps involved are, in all material aspects, in compliance with relevant Hong Kong laws and regulations.
ASSET ACQUISITION OF HUAZHENG FUTURES
To increase the market share of our futures brokerage business in the PRC and attract experienced practitioners in the industry, on 13 June 2013, after being selected as the successful bidder in the public tender held by Wuxi Assets and Equity Exchange (無錫產權交易所), our Company entered into an asset transfer agreement (the “Huazheng Futures Acquisition Agreement”) with Wuxi Assets and Equity Exchange and Huazheng Futures, a company principally engaged in securities and futures brokerage business and an Independent Third Party, pursuant to which our Company agreed to purchase certain assets of Huazheng Futures relating to its futures brokerage business line, including current assets, fixed assets, off-book intangible assets and related liabilities specified therein, at a consideration of RMB60,000,000. Such consideration was determined with reference to the cashflow projection of the assets acquired as appraised by an independent valuer and was fully paid up by our Company on 17 December 2013.
As confirmed by our PRC legal advisers, the above acquisition has been properly and legally settled and completed. All material permits, licenses, authorisations, approvals and consents necessary to the validity and effectiveness of such acquisition have been obtained from the relevant authorities and are valid, current, subsisting and not revoked.
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CORPORATE STRUCTURE AFTER THE REORGANISATION AND BEFORE THE GLOBAL OFFERING
As a result of the Reorganisation and immediately before completion of the Global Offering, the shareholding structure of our Group will be as follows:
SOHO Holdings(1) (PRC)
100%
Artall Culture Group 1.81% (PRC)
89.66% 24.02%
Holly Logistics(2) Holly Corporation(3) 24.0% (PRC) (PRC) Hongrui Venture High Hope Corporation(5) Holly Su Shanghai (3) (6) (7) Capital (PRC) Industrial Mingda (PRC) (PRC) (PRC) 10.34% 1.30% 21.75% 1.39% 43.09% 10.00% 21.11% 1.36%
our Company (PRC)
100% 100%
Holly Capital Holly Su Futures (PRC) (Hong Kong)
Notes:
(1) As at the Latest Practicable Date, SOHO Holdings was a state-owned enterprise owned as to 100% by Jiangsu SASAC.
(2) As at the Latest Practicable Date, Holly Logistics was directly owned by Artall Culture Group, a wholly-owned subsidiary of SOHO Holdings, as to approximately 89.66% and by Holly Corporation as to 10.34%.
(3) As at the Latest Practicable Date, Holly Corporation was directly owned by Artall Culture Group, a wholly-owned subsidiary of SOHO Holdings, as to approximately 24.02% and SOHO Holdings as to approximately 1.81%, respectively. Accordingly, Holly Corporation was owned, directly and indirectly, by SOHO Holdings as to approximately 25.83% as at the Latest Practicable Date.
(4) As at the Latest Practicable Date, Hongrui Venture Capital was owned by Holly Corporation as to approximately 24.0%.
(5) As at the Latest Practicable Date, High Hope Corporation was owned by Jiangsu Su Hui Asset Management Company Limited (江蘇蘇匯資產管理有限公司), a state-owned enterprise in the PRC wholly-owned by Jiangsu SASAC, as to approximately 67.4%.
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(6) As at the Latest Practicable Date, Holly Su Industrial was owned by Hony Capital Industrial Phase I Fund (Tianjin) Limited Partnership (弘毅投資產業一期基金(天津)有限合夥) and Hony Ruoshi Investment (Tianjin) Co., Ltd.(弘毅若石 投資(天津)有限公司) as to approximately 99.9955% and 0.0045%, respectively.
(7) As at the Latest Practicable Date, Shanghai Mingda was owned by four individual shareholders, each of whom is an Independent Third Party.
Pursuant to the requirements under the Provisional Measures on Reducing State-owned Shares to Raise Social Security Fund《減持國有股籌集社會保障資金暫行管理辦法》 ( ) issued by the State Council, upon completion of the Global Offering and assuming the Over-allotment is not exercised, the Selling Shareholders, will sell an aggregate of 22,700,000 Shares (or 26,105,000 Shares if the Over-allotment Option is fully exercised) in accordance with the letter dated 14 August 2015 and issued by the NSSF (Shebaojijinfa [2015] No. 133), representing 10% of the Offer Shares to be issued by our Company pursuant to the Global Offering. For more details, please see the section headed “Share Capital” in this prospectus.
CORPORATE STRUCTURE IMMEDIATELY AFTER THE GLOBAL OFFERING
Immediately upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), the shareholding structure of our Group will be as follows:
SOHO Holdings(1) (PRC) 100%
Artall Culture Group (PRC)
1.81%
89.66% 24.02%
Holly Logistics(2) Holly Corporation(3) (PRC) (PRC) 24.0% Hongrui Venture High Hope Holly Su Shanghai Capital(3) Corporation(5) Industrial(6) Mingda(7) Public Shareholders(8) (PRC) (PRC) (PRC) (PRC) 10.34% 0.91% 16.31% 0.98% 30.37% 7.05% 15.83% 1.02% 27.53%
our Company (PRC)
100% 100%
Holly Capital Holly Su Futures (PRC) (Hong Kong)
Notes:
(1) As at the Latest Practicable Date, SOHO Holdings was a state-owned enterprise owned as to 100% by Jiangsu SASAC.
(2) As at the Latest Practicable Date, Holly Logistics was directly owned by Artall Culture Group, a wholly-owned subsidiary of SOHO Holdings, as to approximately 89.66% and by Holly Corporation as to 10.34%.
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(3) As at the Latest Practicable Date, Holly Corporation was directly owned by Artall Culture Group, a wholly-owned subsidiary of SOHO Holdings, as to approximately 24.02% and SOHO Holdings as to approximately 1.81%, respectively. Accordingly, Holly Corporation was owned, directly and indirectly, by SOHO Holdings as to approximately 25.83% as at the Latest Practicable Date.
(4) As at the Latest Practicable Date, Hongrui Venture Capital was owned by Holly Corporation as to approximately 24%.
(5) As at the Latest Practicable Date, High Hope Corporation was owned by Jiangsu Su Hui Asset Management Company Limited (江蘇蘇匯資產管理有限公司), a state-owned enterprise in the PRC wholly-owned by Jiangsu SASAC, as to approximately 67.4%.
(6) As at the Latest Practicable Date, Holly Su Industrial was owned by Hony Capital Industrial Phase I Fund (Tianjin) Limited Partnership (弘毅投資產業一期基金(天津)有限合夥) and Hony Ruoshi Investment (Tianjin) Co., Ltd.(弘毅若石投資(天津)有限公司) as to approximately 99.9955% and 0.0045%, respectively.
(7) As at the Latest Practicable Date, Shanghai Mingda was owned by four individual shareholders, each of whom is an Independent Third Party.
(8) The Sale Shares coverted from Domestic Shares and offered by the Selling Shareholders in accordance with the PRC laws relating to the conversion/reduction of state-owned Shares are considered as part of the Shares held by public Shareholders. For more details, please see the section headed “Share Capital” in this prospectus.
For more details of our Shareholders, please see the subsection headed “—History and Development — Our Company — Our Existing Shareholders” above.
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OVERVIEW
We are the largest futures firm headquartered in Jiangsu Province in terms of commission and fee income and net profit for the year ended 31 December 2014, as well as Net Capital as at 31 December 2014. We are also one of the leading futures firms in the PRC with diversified futures business and strong presence in the PRC. In addition, we have been rated “Class A of the A Category” by the CSRC for the seven years consecutively, since the CSRC launched such regulatory evaluation in 2009. Our principal business lines include:
1. Futures Brokerage. Our Company, Holly Futures, provides futures brokerage service in the PRC in respect of all futures products available at the PRC Futures Exchanges, including commodity futures and financial futures. Since January 2013, Holly Su Futures has been providing futures brokerage services in Hong Kong, in respect of a wide range of futures products available in HK Futures Exchange and other major global futures exchanges.
2. Asset Management. We provide asset management service by way of targeted asset management schemes, in which each assets management scheme is an investment portfolio that we select and/or manage for relevant individual client, comprising primarily investments in futures and other financial products. Besides, we have also launched seven collective asset management schemes since May 2015, in which we manage assets for groups of clients.
3. Commodity Trading and Risk Management. We provide futures and commodity related cash management and risk management service that is tailor-made for our clients, where we derive our net investment gain through cooperative hedging activity together with our clients, commission and fee income from providing commodities trading services, or interest income from purchase and re-sale of commodities. We believe this service can meet the risk management needs of our clients while allowing us to take advantage of hedging and arbitrage opportunities to manage our own risks and realise gains.
To better utilise our cash, we have engaged in financial investment activities like investing in listed and unlisted equity securities, wealth management products issued by banks, funds and asset management plans for our own account. Gains from our financial investment activities amounted to approximately RMB5.2 million, RMB10.3 million, RMB14.7 million and RMB19.0 million, representing approximately 1.4%, 3.1%, 5.1% and 10.7% of our total operating income for the years ended 31 December 2012, 2013, 2014 and the six months ended 30 June 2015, respectively.
We are one of the leading futures brokerage service providers in China. We had the second largest number of futures branches in the PRC and largest number of futures branches in Jiangsu Province as at 31 December 2014. We have been ranked as a “Class A of the A Category” futures firm for the past seven years consecutively since the CSRC launched such regulatory evaluation in 2009, which is based on a futures company’s risk management capabilities, and also on the futures company’s market competitiveness, the fostering and development of financial institution investors, and regulatory compliance status. We were ranked 8th in the PRC in 2014 in terms of Net Capital and our commission and fee income from futures brokerage business ranked 16th in 2014 among all PRC futures brokerage
— 134 — BUSINESS firms. We are also the largest futures firm headquartered in Jiangsu Province in terms of commission and fee income and net profit for the year ended 31 December 2014 and Net Capital as at 31 December 2014. According to the Euromonitor Report, we ranked first among all futures firms headquartered in Jiangsu Province in terms of commission revenue, the number of futures branches, net profit and the Net Capital of RMB1,026.9 million as at 31 December 2014, respectively.
As at 30 June 2015, we had 43 futures branches, with 17 branches located in Jiangsu Province while the remaining branches strategically located across cities outside of Jiangsu Province such as Beijing, Shanghai and Shenzhen. Our branch network supports our sales teams in approaching potential clients. As at 30 June 2015, we had approximately 54,000 brokerage clients in the PRC. Our futures brokerage business covers all futures products, including both commodity futures and financial futures, available in all the four futures exchanges in the PRC, namely the Shanghai Futures Exchange, the Dalian Commodity Exchange, the Zhengzhou Commodity Exchange, and the China Financial Futures Exchange. Holly Su Futures, being our wholly-owned subsidiary, has started to provide brokerage services in respect of futures traded in major global futures exchanges since January 2013.
Since 2013, we have been diversifying our futures brokerage business by providing asset management services. Our AUM was RMB49.8 million, RMB209.2 million and RMB173.6 million as at 31 December 2013, 31 December 2014 and 30 June 2015, respectively. The decrease in our AUM RMB173.6 million as at 30 June 2015 compared to RMB209.2 million as at 31 December 2014 was mainly because, during 2015, there had been a decrease in market interest rate and since our fixed income based schemes are providing return based on market interest rate, such schemes become less attractive to investors at times of low interest rate and therefore some of our customers liquidated their subscriptions and did not renew upon the end of the term of the relevant asset management schemes.
COMPETITIVE STRENGTH
We believe that the followings are our key competitive strengths:
We are well positioned to benefit from the strong economic position of Jiangsu Province and the fast growing futures trading industry in China
We are headquartered, and have a strong presence, in Jiangsu Province with 17 of our 43 futures branches operating in Jiangsu Province as at 30 June 2015. Located in the eastern coast area of China, Jiangsu Province is one of the most developed provinces in China. With a nominal GDP of RMB6.5 trillion in 2014, Jiangsu Province ranked only second to Guangdong Province among all provinces in China, and accounted for 10.2% of the nominal GDP in China. Fuelled by China’s steady economic growth, Jiangsu Province’s nominal GDP increased from RMB3.4 trillion in 2009 to RMB6.5 trillion in 2014, representing a CAGR of 13.6%. Due to its strategic location, Jiangsu Province serves as an important manufacturing hub in eastern China, enabling it to capture abundant economic and industrial opportunities. In 2014, Jiangsu Province’s per capita GDP was RMB81,874, increased from RMB44,253 in 2009, representing a CAGR of 13.1%. During the past six years, Jiangsu Province has also benefited from favourable government policies to stimulate its economic development, especially the development of the financial services industry. For example, on 24 July 2014, the Jiangsu Province government issued Opinions on Accelerating Financial Reform and Innovation《關於加快推進金融 ( 改革創新的意見》) to (i) encourage the development and innovation of Jiangsu Province’s financial
— 135 — BUSINESS holdings platforms, (ii) strengthen the comprehensive investment capabilities of futures companies, banks, securities firms, insurance companies and trust companies, and (iii) further improve the securitisation ratio of Jiangsu Province. Capitalising on its strategic location, Jiangsu Province has established itself as an important manufacturing hub in eastern China. Given the above mentioned factors and the continuous efforts of the Jiangsu Province government to stimulate the economic development of Jiangsu Province’s financial services industry through government policies, we believe further new market opportunities for futures firms will be created, in particular, for regional futures firms.
In addition, the PRC futures industry has experienced significant growth in recent years. The total trading volume in China’s futures market increased from approximately RMB138.0 trillion in 2011 to RMB292 trillion in 2014, representing a CAGR of approximately 28.5%. Such significant growth is attributable to the introduction of new futures products, and the increasing governmental support to the development of the futures market in terms of reform and innovation as well as expansion of the industry’s scope of business.
Accordingly, we believe the futures industry in the PRC has growth potential. Furthermore, by being positioned as the largest futures firm in Jiangsu Province with a long-term presence, and having established well-recognised brand name in Jiangsu Province with in-depth knowledge in the local market and strong client demand in the local market, we believe we are well-positioned to capture the emerging opportunities from the continued growth of Jiangsu Province’s economy and financial sector as well as the fast-growing PRC futures markets.
We are the largest futures firm headquartered in Jiangsu Province in terms of commission revenue, net profit for the year ended 31 December 2014 as well as the Net Capital as at 31 December 2014, with a diversified futures business in China
Our Company’s history can be traced back to our predecessor, Jiangsu Holly, which was established on 31 July 1995. Having been established as early as 1995, we have witnessed and navigated through various market and business cycles, financial crises and regulatory reforms of the futures industry in the PRC. For the futures business of our Company, our client balances in the PRC grew from approximately RMB1,722 million as at 31 December 2012 to approximately RMB2,253 million as at 30 June 2015, and our futures branches increased from 34 as at 31 December 2012 to 43 as at 30 June 2015.
We currently offer a diversified range of futures services to our clients, including futures brokerage, asset management as well as commodity trading and risk management. We have been ranked as a “Class A of the A Category” futures firm for the past seven years consecutively since the CSRC launched such regulatory evaluation in 2009. In addition, we are one of the 24 general clearing members of the China Financial Futures Exchange, the only financial futures exchange in China.
We are also the largest futures firm in Jiangsu Province. According to the Euromonitor Report, we ranked first among all futures firms headquartered in Jiangsu Province in terms of commission revenue and net profit for the year ended 31 December 2014 as well as the Net Capital as at 31 December 2014.
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We believe that by leveraging our leading position in Jiangsu Province, we are well-positioned to attract various customers through providing futures brokerage services and other related services.
Strategic and extensive network of futures branches
As at 31 December 2014, we had the second largest number of futures branches in the PRC, and ranked first among all futures firms in Jiangsu Province in terms of the number of futures branches. As at 30 June 2015 we had 43 futures branches in China, consisting of 17 futures branches in Jiangsu Province and 26 futures branches in other cities outside of Jiangsu Province such as Beijing, Shanghai and Shenzhen. In addition, through Holly Su Futures, we provide futures brokerage services in the HK Futures Exchange and other major global futures exchanges under co-operation arrangements with three overseas brokers. We believe that the strategic locations of our futures branches enable us to acquire high-end clients in developed regions and benefit from the rapid economic growth and urbanisation of developing regions. We also believe that such strategic coverage would enable us to provide clients with convenient, locally accessible services, which further enhances our brand recognition, and increases our client loyalty.
Strong innovative capabilities to capitalise on opportunities from the transformation of the PRC futures industry
With the intensifying competition in the PRC futures industry, we have been seeking new opportunities to diversify our futures business, revenue channel and client base by exploring new opportunities from the transformation of the PRC futures industry. For example, in July 2012, the CSRC issued the “Trial Measures on Asset Management Business of Futures Companies”《期貨公司 ( 資產管理業務試點辦法》), thereby opening up asset management business to futures companies. Further, in December 2014, the CFA issued the “Administrations for Asset Management of Futures Companies (Trial)”(《期貨公司資產管理業務管理規則（試行）》), which allowed futures companies to provide asset management services to multiple clients. The commodity trading and risk management business has also emerged with the CFA issuing the “Guidelines on Futures Companies’ Establishment of Subsidiaries Operating Mainly Risk Management Businesses (Revised)”《期貨公司設立子公司開 ( 展以風險管理服務為主的業務試點工作指引（修訂）》) in December 2012, which allowed futures companies to engage in commodity trading and risk management business through their risk management subsidiaries. Furthermore, the CSRC issued the “Opinions on Further Promoting the Innovative Development of the Futures Companies”《關於進一步推進期貨經營機構創新發展的意 ( 見》) in September 2014 to further expand the trial scope of setting up risk management subsidiaries for futures companies.
Capitalising on opportunities from the transformation of the PRC futures industry, our strong innovative capacities and our market leadership and edges over our competitors, we:-
• were one of the first 12 futures companies to become accredited with the financial futures brokerage qualification in the PRC in 2007;
• swiftly formed our own professional team to develop our new asset management business following our accreditation with the asset management qualification on 15 November 2012.
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We launched our first asset management product in February 2013. Our AUM amounted to approximately RMB49.8 million as at 31 December 2013, approximately RMB209.2 million as at 31 December 2014 and approximately RMB173.6 million as at 30 June 2015, respectively;
• established Holly Capital in June 2013 to conduct our commodity trading and risk management business;
• established research department, which is comprised of our financial futures research institute, industrial commodities futures research institute and agricultural commodities futures research institute, and which has provided us with data to enable our analysis of the futures market. In addition to the regular analysis reports on the futures market, our research institutes also provide us and our clients with forecast commentary and futures related trading reports.
We believe that, with our strong capabilities to capitalise on opportunities from the transformation of the PRC futures industry through innovation, our market leadership and competitive strength, we are capable of providing customised risk management solutions and asset management services to clients, which would in turn, allow us to further diversify our operations and optimise our revenue mix, while achieving sustainable growth despite intense competition.
Efficient, integrated and stable online trading platform
As an online provider of futures trading services, our ability to provide an efficient and stable trading platform for our clients to engage in real-time trading is the key to ensure our success and maintain our competitiveness.
Through our online trading platform, our clients could engage in futures trading on a real-time basis when markets are open, as well as access their account details and history, charting systems, news feeds, historical market data and certain other tools, including technical analysis services. Our clients can execute their transactions quickly through free PC software trading programmes, and/or through smart phone applications.
We believe our ability to maintain a stable trading platform is a key factor in developing and maintaining loyalty of our clients and in attracting new clients.
Our online trading platform has been running stably and is supported by back-up systems. Since our commencement of operations, our online trading platform has not encountered any incidents that materially affected our clients’ activities. To ensure that our clients’ trading activities are conducted smoothly and continuously, we have established three separate data centres with two located in Nanjing and the other in Shanghai, all of which back up the trading records from our online trading platform on a daily basis. A failure in any particular physical servers containing these core databases would not disrupt our provision of services. As confirmed by our IT service provider, being the PRC arm of one of the world’s leading software and technology services companies, the system and the related network equipment we used could prevent any material malfunction of our core system.
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We have also implemented disaster recovery procedures and policies and a system testing programme to monitor our systems on an on-going basis to ensure that these procedures and policies are effective. Our on-site backup is conducted on a regular basis and our contingency site is routinely tested and maintained. We believe that our disaster recovery system will help to prevent interruptions and corruption of our system. We believe our ability to provide our clients an efficient, integrated and stable online trading platform has positioned us well to solidify our position in the futures market and to further broaden our client base in different countries and regions around the world.
Strong customer service capabilities
We provide customer service support to our clients. As at 30 June 2015, we had approximately 400 client managers assigned to provide customer services in our sales teams, which allowed us to provide strong customer service support to our clients. Through our customer service support, we are able to support our expansion and smooth operations in PRC with close customer relationship.
We provide guidance to clients in using our on-line trading platform. During the trading process, we provide feedback to our clients’ technical issues or questions they encounter regarding the trading system or the clients’ accounts status. We have a research team which provides our clients with value-added information such as price trend analysis of futures commodities. Our clients may contact our customer managers to discuss market sentiment and investment strategy.
We were also awarded with numerous awards, including “The Most Favourite Futures Company for Investors” in 2009, “The Best Broker in the Eyes of Investors” in 2011, “Branded Futures Company of the Year” in 2011 and “The Best Futures Company of China” in 2011 and 2013. As at the Latest Practicable Date, we are the only futures company in the PRC that was awarded as the “National Civilised Unit” in 2015. For details, please see “— Major Awards and Recognitions” below. We believe the high quality customer services and professional investment analysis provided to our clients have helped us to establish a good reputation.
Experienced and stable senior management team
We have a stable and experienced senior management team which has on average about 13 years of experience in the futures industry. We believe that our strong, experienced senior management team is a key factor in our ability to realise our future growth strategies. For details, please see the section headed “Directors, Supervisors and Senior Management” in this prospectus.
OUR BUSINESS STRATEGIES
Our vision is to strengthen our leading position in the futures brokerage business in Jiangsu Province and capture the growth potential of the futures industry in the PRC. We plan to continue developing our market position in Jiangsu Province and enhancing our competitive strengths to further expand our national presence. We will continue to strengthen our futures brokerage business while striving to further develop our futures-related asset management business and commodity trading and risk management business to broaden our revenue base. Our business strategies are detailed as follows:
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Capitalise on the growth potential of the PRC futures industry
We plan to further strengthen our leading position in the futures brokerage business in the Jiangsu Province market and to continue our nationwide expansion by, amongst others, the following ways:
• Optimising futures branch network: We intend to optimise the structure of our futures branches in different parts of the PRC based on the regional market potential and our competitive advantages. We also plan to improve our operational efficiency by opening new “light branches”, which generally require less office space, and fewer employees compared with traditional futures branch. These efforts will help us develop quality clientele with extended client reach, whilst at the same time, lowering our operating costs. In addition, we will take advantage of our strategically located branch network across the PRC to promote information and resources sharing to achieve greater synergies.
• Strengthen our marketing and promotional efforts: We believe our success is partly attributable to good market awareness of our brand name and our reputation in the market, which relate directly to our ability to strengthen our marketing and promotional efforts. In order to further promote our brand awareness and keep up our Company’s profile in the market, we intend to (i) continue to publish research reports and commentary on market analysis; and (ii) continue to hold more investors education events, conferences and sharing sections.
• Enhancing customer loyalty: We plan to enhance the loyalty of our customers by continuously offering differentiated and customised products and services based on our customers’ risk and returns preferences, account values and other requests, which we believe will enhance our pricing capacity, customer coverage and loyalty, which could in turn improve our overall competitiveness.
• Utilising the internet to maintain close-ties with our clients: We plan to use mobile phone applications, weblogs, as well as other medium to provide the latest news and trends of futures industry to our clients.
Capture opportunities from PRC futures industry reform to strengthen our competitive advantages in our futures business and our innovation capability in diversifying our existing businesses
According to “Opinions on Further Promoting the Healthy Development of Capital Market”《國 ( 務院關於進一步促進資本市場健康發展的若干意見》) published by the State Council in May 2014, the PRC government intends to promote the development of futures market through continued launching of futures products of major resources, gradually expanding stock index futures, stock index options and stock option products, and steadily developing the treasury bond futures. Given that we already have a well-established position in the futures industry, we believe we can capture further business opportunities by providing our existing and new clients an even more diversified range of futures related services.
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We also intend to further develop our futures related asset management business which we believe is a strategically important business with long-term growth potential and will enhance our ability to diversify our revenue mix and effectively serve our clients’ needs. Since 15 November 2012 and prior to 15 December 2014, our asset management business was licensed to provide targeted asset management scheme, which meant a specific investment plan or strategy is tailored and designed for a specific client through a designated account. In May 2015, we launched collective asset management scheme products which could enable us to manage pooled funds of groups of clients and to offer extended types of investment products. We also intend to enhance our asset management capabilities by continuously developing the skills and knowledge of our in-house asset management staff, as well as recruiting experienced professionals from leading PRC and international financial institutions. In addition, subject to the market conditions and the applicable legal requirements, we are also considering to establish an asset management company to better carry out our asset management business to meet the diverse investment requirements of a wider group of investors.
With the emergence of commodity trading and risk management business in the PRC futures industry in recent years, we are committed to developing a competitive commodity trading and risk management business through Holly Capital to serve the needs of our clients. For example, we intend to (i) provide more tailor-made trading strategies and services, (ii) cross-sell and promote such new kind of services to our existing clients of brokerage and asset management, (iii) attract, incentivise and increase the loyalty of experienced professionals in the commodity trading and risk management business, and (iv) enhance our research capabilities to provide accurate, timely information on price and risk to support our commodity trading and risk management business. We are also considering to establish an exchange (交易市場) in Jiangsu Province for trade of the agricultural products, subject to the applicable laws and regulations.
Strengthen risk management, internal control and IT capabilities to improve overall operational efficiency
As online trading contributed a major portion of our clients’ trading volume, emphases are being placed on the security and the reliability of our online trading system, both in terms of our investments in our IT infrastructure and also our IT staff dedicated for the operation and maintenance of the computer system. We will continue to make investment in our online trading platform which is connected to each of the Shanghai Futures Exchange, the Dalian Commodity Exchange, and the Zhengzhou Commodity Exchange, as well as the China Financial Futures Exchange, to receive real-time market data for up-to-date portfolio valuation (including margin balance) and to enable real-time risk management, including monitoring of abnormal transactions by our computer system and our personnel.
We intend to continue upgrading our back-office support by taking the following measures:
• To continuously enhance our backup systems, disaster recovery systems and data security in ensuring proper functioning of the online trading system in case of individual device failure;
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• To continuously review and where necessary, adjust our risk management system to prevent risks before they occur, manage and control risks when they occur, audit and review risks after they occur, thereby ensuring that risk management functions are integrated into our entire business operation for achieving a comprehensive risk management framework; and
• To provide support of our IT system for placing trading orders through mobile devices.
Reinforce our human resources management for effectively attracting, incentivising and retaining talented professionals
Our success depends to a great extent on our ability to attract, incentivise and retain professional and experienced personnel. In order to maintain and improve our competitive advantages in the market, we intend to implement the following human resources initiatives:
• pursue and optimise a market-oriented and performance-based remuneration system across our business lines;
• adopt well-designed recruitment strategy for attracting high-end professionals with international vision;
• promote outstanding professional personnel with strong leadership skills and execution ability, and continuously optimise our employee structure;
• provide our employees with professional trainings and clear and customised career development plans; and
• further incentivise and increase the loyalty of our employees through incentive schemes.
We will continue to invest in our post-doctoral research institute and our other three research institutes, being our financial research institute, industrial commodity research institute, and agricultural commodity research institute and through these institutes, we endeavour to enhance the professional skills of our futures brokerage team by attracting more high-end clients.
Steadily expand our international business and build an integrated overseas platform
We conduct our overseas business through Holly Su Futures, our wholly-owned subsidiary. For details, please see the section headed “History, Development and Corporate Structure — Reorganisation” in this prospectus. It has obtained the Type 2 license from the SFC for dealing in futures contracts. As the first platform for developing our overseas futures business, Holly Su Futures provides services to our clients for trading in major global futures exchanges, and it has laid a solid foundation for further overseas expansion of our business. We intend to further expand our overseas business as opportunities arise and steadily increase our overseas futures business operations.
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Pursue selective acquisitions of relevant businesses compatible with our development strategy
We will actively pursue selective acquisitions and capture the opportunities related to or compatible with our core business to help us strengthen our market position and help increase our competitiveness. Our criteria for acquisition targets include: (i) meaningful presence in local markets; (ii) complementary business and synergies with our business; and (iii) likelihood to strengthen our existing client base, distribution network and professional expertise. As at the Latest Practicable Date, we have not identified any specific acquisition targets.
OUR BUSINESS
We provide a range of futures related products and services to individuals and corporations. Our main products and services by business line include:
1. Futures Brokerage: Our Company, Holly Futures, provides futures brokerage service in the PRC in respect of all futures products available at the PRC Futures Exchanges, including commodity futures and financial futures. Since January 2013, Holly Su Futures provides futures brokerage service in Hong Kong in respect of futures contracts available in the HK Futures Exchange and other major global futures exchanges.
2. Asset Management: We provide asset management service by way of targeted asset management schemes in which each of the assets management schemes is a personalised investment portfolio for each of the individual clients, comprising primarily investment in futures and other financial products. We have launched seven collective asset management schemes since May 2015, in which we manage assets for groups of clients.
3. Commodity Trading and Risk Management: We provide futures and commodity related cash management and risk management service that is tailor-made for our clients, where we derive our net investment gain through cooperative hedging activity together with our clients, commission and fee income from providing commodities trading services, or interest income from purchase and re-sale of commodities. We believe this service can meet the risk management needs of our clients while allowing us to take advantage of hedging and arbitrage opportunities to manage our own risks and realise gains.
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During the Track Record Period, we generated operating income primarily through (i) commission and fee income from managing all our three principal business lines (include refunds from the PRC Futures Exchanges); (ii) interest income primarily generated from our own deposits, settlement reserve funds of us and clients and other transactions in relation to our operations; and (iii) net investment gains that we generated through our commodity trading and risk management business and investment activities by utilising excess cash generated from our operating activities. The table below sets forth details of our operating income for the periods indicated.
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000) (RMB ’000) (RMB ’000) (RMB ’000) (RMB ’000)
Revenue Commission and fee income Futures brokerage business 233,541 210,340 141,975 72,686 79,977 Refunds from the PRC Futures Exchanges 61,041 31,835 24,261 5,882 10,237 Asset management business — 137 401 190 470 Commodity trading and risk management business — — 752 — 1,960 Total commission and fee income 294,582 242,312 167,389 78,758 92,644 Interest income 81,060 83,086 106,486 54,316 58,362 Subtotal 375,642 325,398 273,875 133,074 151,006 Net investment gains 4,244 11,523 17,246 1,088 26,635 Operating income 379,886 336,921 291,121 134,162 177,641
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Set out below is the further analysis of the nature of net investment gains as set out in note 4 to the Accountants Report:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Net investment gains arisen from financial investment activities(1) 4,244 10,323 9,712 (497) 14,286 Net investment gains arisen from commodity trading and risk management business(2) — — 7,534 1,585 12,349 Other(3) — 1,200 — — — Total net investment gains (included in operating income) 4,244 11,523 17,246 1,088 26,635
Notes:
(1) Net investment gains arisen from financial investment activities comprised (i) net realized gains from disposal of financial assets at fair value through profit or loss (trading securities and funds); (ii) net realized gains from disposal of available- for-sale financial assets (listed securities and wealth management products issued by banks); (iii) net unrealized fair value changes of trading securities and funds; and (iv) dividend income from financial assets at fair value through profit or loss and available-for sale-financial assets, as disclosed in note 4 to the Accountants’ Report as set out in Appendix I.
(2) Net investment gains arisen from commodity trading and risk management business comprised (i) net realised gains from disposal of financial assets at fair value through profit or loss (receivables); (ii) net realised gains from disposal of financial liabilities at fair value through profit or loss (payables) and disposal of derivative financial instruments; and (iii) net unrealised fair value changes of financial assets designated at fair value through profit or loss, financial liabilities designated at fair value through profit or loss, derivative financial assets and derivative financial liabilities, as disclosed in note 4 to the Accountants’ Report as set out in Appendix I.
(3) Other comprised net realized gains from disposal of available-for-sale financial assets (unlisted equity investments), as disclosed in note 4 to the Accountants’ Report as set out in Appendix I. As at 31 December 2012, we had an investment of unlisted equity securities which amounted to RMB10.6 million and was accounted for as an available-for sale financial assets. During 2013, when we disposed of such investment, we recorded a gain of RMB1.2 million.
Futures brokerage
In managing our futures brokerage business, we execute trades on behalf of our clients in commodity futures and financial futures. We commenced our futures brokerage business in 1995.
Futures brokerage has long been our primary business, through which we derived a major portion of our operating income during the Track Record Period. For the three years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, commission and fee income from our futures brokerage business amounted to approximately RMB233.5 million, RMB210.3 million, RMB142.0
— 145 — BUSINESS million and RMB80.0 million, respectively, representing 61.5%, 62.4%, 48.8% and 45.0% of our operating income, respectively. For details on breakdown of the commission and fee income from our futures brokerage business, please see “— Our Business — Futures brokerage — Source of income — Commission and fee income” below.
We are a trading member of the Shanghai Futures Exchange, the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange, as well as a general clearing member of the China Financial Futures Exchange.
Commodity Futures
We offer brokerage services for all of the commodity futures products available at the three commodity futures exchanges in the PRC, namely, the Shanghai Futures Exchange, the Zhengzhou Commodity Exchange and the Dalian Commodity Exchange:
Futures exchange Futures products
Shanghai Futures Exchange copper, aluminium, zinc, lead, nickel, tin, gold, silver, rebar, wire rod, hot-rolled coil, fuel oil, bitumen, natural rubber
Zhengzhou Commodity Exchange common wheat, cotton No.1, early rice, ferrosilicon, flat glass, japonica rice, late indica rice, manganese silicon, methanol, pure terephthalic acid (PTA), rapeseed, rapeseed meal, rapeseed oil, strong gluten wheat, thermal coal and white sugar
Dalian Commodity Exchange blockboard, coke, coking coal, corn, corn starch, crude soybean oil, fiberboard, fresh hen egg, iron ore, linear low density polyethylene (LLDPE), No.1 soybeans, No.2 soybeans, polypropylene (PP), polyvinyl chloride (PVC), RBD palm olein and soybean meal Financial Futures
We offer brokerage services for the stock index futures and treasury bond futures traded on the China Financial Futures Exchange, the only exchange for the trading of financial futures in the PRC.
As more financial futures products, such as the foreign exchange futures and futures options and derivatives, are expected to become available in the PRC, we plan to take an active approach to cover such financial futures products and derivatives products to meet demands from our clients and further diversify our product portfolio.
Operation overview
Futures contracts are standardised contracts traded in futures exchanges. A futures contract represents a commitment to buy or sell a pre-defined amount of the underlying asset at a pre-determined price on a specified future date. The underlying assets of futures contracts could be stocks, indices, currencies, interest rates, commodities. Not all futures contracts can be physically delivered. In general, most of the futures contracts handled by our Group are settled in cash.
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Futures contracts are leveraged investments. When our clients buy or sell futures contracts, they have to make deposit with us as initial margin. At the end of each trading day, the client’s position is marked to market (i.e. valued according to the contract’s market value). If the contract price moves against the view of the client and as a result, the initial margin deposit falls below the maintenance margin level, we will issue a margin call, which means that the client will have to deposit an additional amount of money to restore the initial margin level. Otherwise, we may liquidate the client’s position at market. The client will have to bear any loss arising from the forced liquidation.
The relevant futures exchanges set the required initial and maintenance margin levels for each type of futures contracts. In addition, we, as the brokerage service provider, may ask for a higher margin level as a risk management buffer taking into account the creditworthiness of the clients, the current market volatility and the types of the futures contracts.
Our Company, as a trading member of the Shanghai Futures Exchange, the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange, as well as a general clearing member of the China Financial Futures Exchange, executes transactions of futures contracts on behalf of our clients. In addition, in November 2015, we were approved to act as the stock options trading participant by the Shanghai Stock Exchange. Holly Su Futures provides brokerage service for futures traded on HK Futures Exchange and on other major global futures exchanges through co-operation with three overseas brokers.
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Futures branch network
As at 30 June 2015, we had 43 futures branches throughout the PRC, and we had approximately 54,000 clients in the PRC. We believe that the large number, extensive coverage and strategic location of our brokerage futures branches are important for our branding and business development. On the other hand, our Hong Kong subsidiary provided overseas futures brokerage services to approximately 376 clients as at 30 June 2015. For details on our Hong Kong subsidiary, please see the section headed “History, Development and Corporate Structure” in this prospectus. The following diagram sets forth our futures branch network in each province as at 30 June 2015:
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Trading volume and client balance
The following table sets forth details of trading volume and market share of our Company’s futures brokerage business in the PRC by product type for the periods indicated:
Year ended 31 December Six months ended 30 June 2012 2013 2014 2014 2015 (unaudited) RMB’ Market RMB’ Market RMB’ Market RMB’ Market RMB’ Market billion share(1) billion share(1) billion share(1) billion share(1) billion share(1)
Commodity futures 3,987 2.09% 2,631 1.04% 2,228 0.87% 1,132 0.93% 1,050 0.82% Financial futures 1,297 0.86% 1,795 0.64% 1,547 0.47% 581 0.53% 2,066 0.36%
Total 5,284 1.54% 4,426 0.83% 3,775 0.65% 1,713 0.74% 3,116 0.44%
Note:
(1) Market share is adjusted to the Company’s trading volume on unilateral basis.
The following table sets forth our Company’s total client balances of our futures brokerage business in the PRC:
As at 31 December As at 30 June 2012 2013 2014 2015 RMB’ million RMB’ million RMB’ million RMB’ million
Client balances 1,722 2,078 1,976 2,253
Customer service
We strive to ensure client satisfaction through high-quality client services. Our customer services include, among other things:
• providing up-to-date market news and our researches and market analysis on our website (www.ftol.com.cn);
• providing toll-free customer service hotline ((86) 400-828-1288) through which our clients could receive real-time assistance, including answering inquiries about products, trading rules, account status and trading software;
• updating clients of the latest information in the futures industry. We also plan to promote our Company, and release information about our Company via mobile phone applications, weblogs and other communication medium;
• providing our online platform, which allows our clients to execute real-time trades, record trading status and records, and check positions and account information; and
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• providing our brokerage clients with investment and market analysis via emails and various other channels of communications. To increase client loyalty and promote differentiated services, we assign dedicated investment consultants to provide our high-end clients with personalised brokerage services. For avoidance of doubt, such investment advices would be for reference only and we neither provide guaranteed return nor do we bear any trading loss of the customers.
Source of income
The main sources of revenue and income from our futures brokerage business comprise:
(i) Commission and fee income from our clients’ futures transactions (which include futures brokerage and asset management business);
(ii) Refunds from the PRC Futures Exchanges; and
(iii) Interest earned from deposit of clients’ settlement reserve funds. a. Commission and fee income
We receive commission and fee income from clients who trade commodity and/or financial futures through our trading platforms. Such commission and fee is charged mainly by reference to various factors, including geographic location, type of futures commodity, commission fee charged by the relevant PRC Futures Exchanges, trading pattern and client loyalty. Our commission and fee income generated from our futures brokerage business during the Track Record Period amounted to approximately RMB233.5 million, RMB210.3 million, RMB142.0 million and RMB80.0 million, respectively.
The following tables set forth details of our commission and fee income generated from (i) futures brokerage business and refunds from the PRC Futures Exchanges; (ii) our commodity futures and financial futures brokerage business in the PRC; and (iii) average brokerage commission rate that we charged in the PRC during the Track Record Period:
Year ended Six months ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited)
Commission and fee income from our futures brokerage business (RMB’000) 233,541 210,340 141,975 72,686 79,977 Refunds from the PRC Futures Exchanges (RMB’000) 61,041 31,835 24,261 5,882 10,237 Sub-total (RMB’000) 294,582 242,175 166,236 78,568 90,214
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Six months Year ended 31 December ended 30 June 2012 2013 2014 2015 RMB’ RMB’ RMB’ RMB’ million % million % million % million %
Commodity futures 206.6 88.4% 180.8 86.2% 123.2 88.1% 57.0 72.9% Financial futures 27.0 11.6% 28.9 13.8% 16.6 11.9% 21.2 27.1% Total 233.6 100% 209.7 100% 139.8 100% 78.2 100%
Year ended Six months ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited)
Average brokerage commission rate of the Company in the PRC Commodity futures 0.64 bps 0.79 bps 0.65 bps 0.63 bps 0.62 bps Financial futures 0.30 bps 0.19 bps 0.12 bps 0.12 bps 0.11 bps Overall 0.56 bps 0.55 bps 0.44 bps 0.46 bps 0.28 bps
Industry average (1) 0.36 bps 0.23 bps 0.17 bps 0.18 bps 0.10 bps
Note:
(1) In accordance with industry practice, average brokerage commission rate is calculated based on the aggregate of commission and fee income from futures brokerage business and refunds of trading fees, divided by futures brokerage trading volume.
As noted in the table above, our average brokerage commission rate decreased during the Track Record Period. This was in line with the industry trend and was mainly due to the intensive market competition in the PRC. Nevertheless, our commission rate was in general higher than the average brokerage commission rate in the PRC futures market. We believe we are in a position to charge a higher brokerage commission rate than the average brokerage commission rate in the PRC futures market, due to (i) our good brand name and reputation in the market, (ii) our ability to offer a trustworthy and stable trading platform, and (iii) our ability to conduct researches and analysis on the futures market. b. Refunds from the PRC Futures Exchanges
When our clients trade futures through our platform, we, as a member of each of the PRC Futures Exchanges, place orders and execute the transactions in the PRC Futures Exchanges for our clients. The PRC Futures Exchanges charge us handling fee for each of the transactions. As a way for the PRC Futures Exchanges to support and to promote the development of the futures markets, the PRC Futures Exchanges return to the participating futures brokerage companies (including our Company) part of
— 151 — BUSINESS the handling fee charged (refund). The amount of the refunds and frequency of such practices are at the discretion of the PRC Futures Exchanges. The timing of grant of refunds can vary from time to time and as such, there was no fixed frequency in which we could expect to receive refunds from the PRC Futures Exchanges. The amount of refunds that we can receive from the PRC Futures Exchanges can be affected by a variety of factors, such as the type of futures products, our trading volumes and market conditions.
The table below sets forth the amount of refunds we have received from the PRC Futures Exchanges and the trading volume executed through our futures brokerage platform in the relevant exchanges during the Track Record Period. As the amount and frequency of refunds are at the discretion of the PRC Futures Exchanges, the table below only reflected the historical pattern.
For the year ended 31 December For the six months ended 30 June 2012 2013 2014 2014 2015 (unaudited) Percentage Percentage Percentage Percentage Percentage of Refunds of Refunds of Refunds of Refunds of Refunds Trading to Trading Trading to Trading Trading to Trading Trading to Trading Trading to Trading Refunds volume Volume Refunds volume Volume Refunds volume Volume Refunds volume Volume Refunds volume Volume RMB RMB (%) RMB RMB (%) RMB RMB (%) RMB RMB (%) RMB RMB (%) ’000 ’billion ’000 ’billion ’000 ’billion ’000 ’billion ’000 ’billion
Shanghai Futures Exchange 22,670 1,219 0.0019 11,401 1,168 0.0010 11,705 947 0.0012 2,983 489 0.0006 3,411 372 0.0009 Dalian Commodity Exchange 16,277 2,188 0.0007 11,833 1,075 0.0011 2,961 829 0.0004 759 446 0.0002 2,339 389 0.0006 Zhengzhou Commodity Exchange 10,157 580 0.0018 4,271 388 0.0011 7,157 452 0.0016 2,140 197 0.0011 2,271 289 0.0008 China Financial Futures Exchange 11,937 1,297 0.0009 4,330 1,795 0.0002 2,438 1,547 0.0002 — 581 0.0000 2,216 2,066 0.0001
Total 61,041 5,284 0.0012 31,835 4,426 0.0007 24,261 3,775 0.0006 5,882 1,713 0.0003 10,237 3,116 0.0003
c. Interest earned from deposit of clients’ settlement reserve fund
Our client balances consist of two components, namely, the client margin deposit and the clients’ settlement reserve fund. In accordance with the agreements with our customers and in line with industry practice, we may earn interest on our clients’ settlement reserve fund, which may either be deposited with PRC Futures Exchanges and accrue interest at an interest rate ranging between 1.98%-2.4%, or deposited with banks and accrue interest at interest rate ranging between 4.17%-6.8% during the Track Record Period. The interest rates are mainly determined based on the market interest rate. As at 31 December 2012, 2013 and 2014 and 30 June 2015, for the futures business of our Company, our client balances in the PRC amounted to approximately RMB1,722 million, RMB2,078 million, RMB1,976 million and RMB2,253 million, respectively. During the Track Record Period, our Company’s interest income earned from deposit of clients’ settlement reserve fund amounted to approximately RMB32.0 million, RMB38.3 million, RMB50.2 million and RMB32.8 million, respectively.
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Pricing and Payment Policy
In relation to our futures brokerage business in the PRC, we monitor and adjust the structure and level of our brokerage commission rates based on various factors, including geographic location, futures commodity, the commission fee charged by the relevant PRC Futures Exchanges, trading pattern and client loyalty. For our payment policy, our fees are deducted directly from the trading amount of our respective clients’ futures transactions.
Overseas Business
Overview
Leveraging our leading position in the futures industry in the PRC as a futures services provider, we expanded our business in Hong Kong through Holly Su Futures, which was incorporated in October 2011. It obtained Type 2 licence from the SFC in June 2012 and commenced business in January 2013. As at 30 June 2015, Holly Su Futures had approximately 376 futures brokerage clients. For the years ended 31 December 2013 and 2014 and the six months ended 30 June 2015, the revenue derived from our overseas brokerage business amounted to approximately HK$1.2 million and HK$4.9 million and HK$3.9 million, respectively.
Through recruiting experienced personnel, Holly Su Futures has established an internal management system and trading platforms.
Futures in Hong Kong
Our futures brokerage in Hong Kong is undertaken by Holly Su Futures, which is (i) an exchange participant of Hong Kong Futures Exchange Limited under the category “Futures Commission Merchant”; (ii) HKCC participant of HKFE Clearing Corporation Limited under the category “Clearing Participant”; and (iii) a licensed corporation under the SFO to carry on Type 2 (dealing in futures contracts) regulated activities.
Holly Su Futures provides brokerage services for futures traded on the HK Futures Exchange. Holly Su Futures’s online trading platform allows its futures brokerage clients to place orders through telephone or online.
Global futures
As an additional service to Holly Su Futures’s clients, Holly Su Futures also provides brokerage services to its clients on futures products including currency futures, index futures, metal and energy futures, agricultural and food futures and bond futures traded on exchanges on the CME, index and metal futures traded on the LME and other overseas futures exchanges such as Singapore Exchange Limited through three independent overseas brokers. One of them is headquartered in the U.K. with an office in Hong Kong. The second independent broker is headquartered in the United States with an office in Hong Kong. The third independent broker is headquartered in Singapore with an office in Hong Kong.
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The following table sets out the gross brokerage commission income generated from futures traded on the different exchanges for each of the two years ended 31 December 2013 and 2014 and the six months ended 30 June 2015:
For the six months Year ended ended 31 December 30 June 2013 2014 2014 2015 (unaudited) HK$ HK$ HK$ HK$
HK Futures Exchange 160 4,860 592 20,280 CME 981,261 1,712,700 706,614 1,969,958 LME 108,397 2,696,639 683,534 1,458,464 Other overseas exchanges 141,515 447,002 2,504 469,406
Total 1,231,333 4,861,201 1,393,244 3,918,108
Holly Su Futures places deposits and maintains trading accounts with the three independent brokers and provides brokerage services to its clients in Hong Kong in respect of the above futures products traded on overseas exchanges. When Holly Su Futures’s clients give instructions to Holly Su Futures, it will relay the instructions to the three independent brokers to deposit, purchase and/or sell overseas futures products and effect other transactions for their trading accounts.
Holly Su Futures pays to the three brokers subscription or commission fees on purchases, sales and other transactions or services. For each of the two years ended 31 December 2013 and 2014 and the six months ended 30 June 2015, it paid a total of approximately HK$0.5 million, HK$2.1 million and HK$1.6 million, respectively as commission fees to these three overseas brokers. Under the respective contracts signed by Holly Su Futures and the three overseas brokers, these contracts may be terminated by either side. The commission charged by the three independent brokers to Holly Su Futures and the brokerage commission fees charged by Holly Su Futures to its clients are generally calculated by reference to the number of orders. All such brokerage commission, charges, levies and duties may be deducted by Holly Su Futures from the clients’ accounts.
Holly Su Futures’s clients take full responsibility for all trading decisions in their trading accounts and the three independent brokers are responsible only for the execution, clearing and carrying out of transactions in such accounts.
Holly Su Futures has extended its services to futures products traded on the relevant overseas exchanges for the convenience of its clients who are interested in trading futures products on exchanges outside Hong Kong without having to open and maintain separate accounts with overseas brokers. All transactions and/or orders made by the clients executed by any of the independent brokers
— 154 — BUSINESS are subject to relevant laws, constitution, rules and regulations of the relevant stock exchanges, futures exchanges, markets, or clearing houses in jurisdictions in which the brokers are dealing on the client’s behalf. There is no additional requirement under the licensing regime in Hong Kong for provision of services in Hong Kong in relation to such overseas futures brokerage activities.
The Directors confirm that, when performing such services, neither Holly Su Futures nor its authorised representative gives advices on futures contracts traded within or outside Hong Kong which contravenes with Type 2 regulated activities. If Holly Su Futures incurs any costs and expenses in connection with anything done pursuant to any transaction entered into by Holly Su Futures on behalf of the clients, Holly Su Futures has the right to recover such costs and expenses from its clients in full under the relevant terms and conditions. To the best knowledge and belief of the Directors, Holly Su Futures has not received any claim, notice or demand issued, and there has not been any action taken, by the relevant authority or government official in the U.S. or the U.K. whereby the Company and/or its subsidiaries is/are liable or is/are sought to be made liable to make any payment of any form of taxation duties, rates, other impositions.
2. Asset management
On 15 November 2012, we obtained the approval by the CSRC for us to engage in asset management business for individual accounts. In February 2013, we launched our asset management business by providing targeted asset management scheme to clients.
Targeted asset management scheme
In accordance with the Administration Measures on the Asset Management Business of Futures Companies (《期貨公司資產管理業務管理規則（試行）》) of the PRC, we manage client assets through a separate, designated account for each asset management scheme. Unlike mutual funds (known as publicly offered funds in the PRC), asset management schemes issued by PRC futures firms are privately offered and generally have a minimum subscription amount of RMB1.0 million. With each targeted asset management scheme, we manage assets for a single client while keeping client assets in a designated account pursuant to the specific terms of the asset management contract between the client and us and the applicable laws and regulations. We analyse our clients’ needs to provide our clients with customised wealth management plans. The investment portfolios and strategy are tailored for each of the managed accounts according to the needs and risk acceptance level of each of the clients. Our clients of targeted asset management scheme include institutional investors and individuals.
We enter into a targeted asset management contract with each of the client, pursuant to which we provide asset management services and make investment in futures or interest-earning deposits on behalf of such client through the accounts under the client’s name. We utilise our expertise in economies and the futures market to manage the clients’ fund.
As at 31 December 2013 and 2014 and 30 June 2015, we had 8, 24 and 16 outstanding targeted asset management schemes respectively, with a total amount of AUM of RMB49.8 million, RMB209.2 million and RMB139.1 million respectively. The decrease in our targeted asset management schemes’ AUM RMB139.1 million as at 30 June 2015 compared to RMB209.2 million as at 31 December 2014
— 155 — BUSINESS was mainly because, during 2015, there had been a decrease in market interest rate and since our fixed income based schemes are providing return based on market interest rate, such schemes become less attractive to investors at times of low interest rate and therefore some of our customers liquidated their subscriptions and did not renew upon the end of the term of the relevant asset management schemes.
General contract terms
In general, our targeted asset management schemes have a minimum subscription amount of RMB1.0 million and have a term of one year.
We enter into asset management contracts with each of our clients under targeted asset management schemes. Pursuant to such contracts, the client appointed our Company to manage their funds. Major terms of the asset management agreements between our Company and our clients include:
— the scope of investment area, such as futures, futures options, and other derivative financial products;
— the investment strategy;
— the management fees, performance fees, disbursements, taxes and other expenses payable by the client, as well as the timing and method of payment;
— neither our Company nor our employees will guarantee any investment return or bear any investment loss;
— the client is not prohibited to engage in asset management activities by the PRC laws and regulations;
— the client is the actual party who engages in the asset management activities and guarantee the truth, accuracy and completeness of the information provided by it, and that the asset management account is opened in its own name and it is the sole beneficial owner;
— the client declares and guarantees the legal source of the funds, the legality of the purpose in which the funds would be put to use, and the compliance with any anti-money laundering rules and regulations of the PRC;
— the client agrees with the investment strategy, risk exposure and other relevant terms and conditions as stipulated in the relevant agreements and appendix;
— the Company will provide advice on investment strategy and is authorised to execute the investment and futures trading activities on behalf of the client; provide performance report to the client; issue warnings and executes stop-loss mechanism as stipulated in the agreement;
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— the clients are able to check the status of the managed accounts by logging in China Futures Market Monitoring Center Co., Ltd. (www.cfmmc.com) with their specific account number; and
— stop-loss limit, in which the client shall be entitled to terminate the agreement if the loss reaches a pre-determined level.
Before accepting our asset management client, we will conduct due diligence on the background of the client. Such process is similar to that in our futures brokerage business.
Fee structure
The fee structure of our asset management service is determined according to market practice and commercial negotiation between our Company and the clients. In general, the fee structure for our futures related asset management schemes comprised of management fees which are derived as a percentage of the net AUM, accrued daily and payable quarterly. For our payment policy, our fees are deducted directly from the client’s investment amount in the relevant asset management schemes. Some of the managed accounts also charge pre-agreed performance fees based on the performance of the funds, calculated with reference to the high watermark of the managed accounts, or with reference to certain pre-set targeted investment return. Such performance fees are to be calculated and chargeable at termination of the relevant managed accounts. As regards our fixed income based schemes, our fees are mainly derived from the management fee since such schemes purport to produce a stable income and no performance fee is charged. Additionally, for our fixed income based schemes, a custodian fee ranging from 0.07% to 0.1% per annum accrued daily is also payable by our clients on a quarterly basis, being the fees payable to the relevant bank involved in the fixed income based scheme. For the two years ended 31 December 2013 and 2014 and the six months ended 30 June 2015, the annualised management fee of our futures related investment schemes was about 0.1% to 1.5% of the AUM, and that of our fixed income based schemes was about 0.2% to 0.5% of the AUM.
Set out below is the breakdown of AUM and fees by the type of managed accounts under our asset management business as at the dates and for the periods indicated:
As at/for the year ended 31 December As at/for the six months ended 30 June 2013 2014 2014 2015 (unaudited) Number Number Number Number of of of of managed managed managed managed accounts AUM Fees accounts AUM Fees accounts AUM Fees accounts AUM Fees RMB’000 RMB’000 RMB’000 RMB’000 RMB’ 000 RMB’ 000 RMB’ 000 RMB’ 000
Futures related schemes 8 49,812 137 21 117,153 377 16 54,477 190 13 133,560 440 Fixed income based schemes — — — 3 92,064 24 2 14,003 — 3 5,496 30
Total 8 49,812 137 24 209,217 401 18 68,480 190 16 139,056 470
Note: Our asset management business commenced in February 2013 and therefore no information was shown for the year ended 31 December 2012.
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Apart from the asset management fees set out above, as the futures transactions are executed on the brokerage platform of our Company, our asset management business also brought us additional brokerage commission and fee income.
Co-operation with external investment consultants
To further develop our asset management business, we co-operate with external investment consultants with a view to penetrating in the market. High-calibre investment consultants are identified by our personnel through market information and reputation. Once they are identified, we conduct due diligence on such investment consultants regarding, among others, their investment performance track record, reputation and credit-worthiness in the industry, price competitiveness, integrity, capital base, shareholding structure, business scale, internal controls, and operation history. The acceptance of each of the investment consultants are reviewed and approved by our internal asset management business decision committee. We also constantly monitor and evaluate the performance of the external investment consultants.
Our Directors consider that such business model is beneficial to our Company because, (i) through the high-calibre external investment consultants, we can attract more customers for our asset management business; and (ii) by conducting due diligence and observing the performance of the investment consultants, we are able to identify out-performing investment consultants and to introduce such consultants to our potential customers.
A typical co-operation agreement entered into between our investment consultants and us generally includes the following materials terms:
— with the consent of our clients, the investment consultant is appointed to provide investment strategy and advices for the client’s managed account;
— the warning level and stop-loss level are agreed and stated in the agreement, in which the investment consultant will be required to re-formulate the investment strategy and advice in accordance with the terms of the co-operation agreement;
— the scope of investment (such as whether investment is to be limited to futures, futures options, other financial derivative products only, or to also include bonds, shares, securities and other investment products), principle trading strategy is agreed and stated in the agreement;
— the fees payable to the investment consultants;
— where applicable, risk deposit required to be paid by the investment consultant, in which the Company would be entitled to forfeit the risk deposit if, for example, the investment consultant is involved in a conflict of interest with the client in giving its investment advice, or if the investment consultant gives inconsistent investment advices, or contravenes legal requirements in giving its investment advice; and
— compliance with the relevant rules and regulations in connection with the schemes.
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During the Track Record Period, the investment consultants are generally entitled to part of the performance fee of the relevant managed accounts received.
While the external investment consultants are the principal responsible party for the investment strategy, our Company is still responsible for the execution of trading, administration, record-keeping and risk monitoring functions. We provide performance report to the account owners, monitor the trading of the accounts and execute warnings or stop-loss mechanism according to pre-set criteria, and keeping trading record for each of the accounts managed by the external investment consultants.
All of the external investment consultants are Independent Third Parties. As at the Latest Practicable Date, none of the Directors, their associates or any Shareholders who, to the knowledge of our Directors, owned more than 5% of our share capital or had any interest in any of the external investment consultants. Up to the Latest Practicable Date, we have established business relationships with more than 10 external investment consultants. We plan to increase the number of our in-house investment consultants and establish business relationships with more external investment consultants.
Set out below is the breakdown of AUM and fees by types of manager of the accounts under our asset management business for the periods indicated:
As at/for the year ended 31 December As at/for the six months ended 30 June 2013 2014 2014 2015 (unaudited) Number Number Number Number of of of of managed managed managed managed accounts AUM Fees accounts AUM Fees accounts AUM Fees accounts AUM Fees RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Managed directly by our Company 6 23,731 113 7 111,280 214 7 33,727 125 4 17,310 66 Managed by external investment consultants 2 26,081 24 17 97,937 187 11 34,753 65 12 121,746 404
Total 8 49,812 137 24 209,217 401 18 68,480 190 16 139,056 470
Note: Our asset management business commenced in February 2013 and therefore no information was shown for the year ended 31 December 2012.
Asset management business with our connected persons
As we possess the expertise in investment in futures market, we have been providing asset management services for our Controlling Shareholder, SOHO Holdings, and certain of its associates since early 2013.
The asset management agreements with our connected persons are of similar terms as compared to our agreements with independent customers. Further details are set out in the section headed “Connected Transactions” of this prospectus.
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Set out below is the breakdown of AUM and fees by types of managed accounts under our asset management business for the periods indicated:
As at/for the year ended 31 December As at/for the six months ended 30 June 2013 2014 2014 2015 (unaudited) Number Number Number Number of of of of managed managed managed managed accounts AUM Fees accounts AUM Fees accounts AUM Fees accounts AUM Fees RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Managed accounts owned by independent customers 4 3,917 1 17 60,418 67 13 15,061 14 11 33,646 74 Managed accounts owned by connected persons 4 45,895 136 7 148,799 334 5 53,419 176 5 105,410 396
Total 8 49,812 137 24 209,217 401 18 68,480 190 16 139,056 470
Note: Our asset management business commenced in February 2013 and therefore no information was shown for the year ended 31 December 2012.
Collective asset management scheme
In relation to collective asset management scheme which enables us to manage assets for groups of clients, we started to launch collective asset management schemes in May 2015. As at the Latest Practicable Date, we have launched seven collective asset management schemes. Each of the collective asset management scheme that we have launched requires a minimum of two and a maximum of 200 clients subscribing at any given time. As at 30 June 2015, we had four outstanding collective asset management schemes with a total amount of AUM of RMB34.5 million.
We generally charge management fees as a percentage of the net AUM for the relevant collective asset management scheme, accrued daily and payable quarterly. As at the Latest Practicable Date, the annualised management fee of our collective asset management scheme currently range from 0.2% to 1.5%. Some of the collective asset management schemes also have pre-agreed performance fees based on the performance of the relevant collective asset management scheme, calculated for example by reference to a pre-agreed percentage of the net increase in the investor’s capital upon the expiry or termination of the collective asset management scheme. Additionally, an annualised custodian fee ranging from 0.1% to 0.2%, accrued daily and payable quarterly, is also payable by our clients, being the fees payable to the relevant bank acting as custodian for the bank account of the scheme. One of our collective asset management schemes also charges an annualised 2% investment consultant fee payable to a third party investment consultant. Our collective asset management schemes invest in a range of investments including shares, commodity futures, financial futures, funds, bank deposits, fixed income financial products, and debentures. Our collective asset management schemes are intended for customers or a corporation who are capable of assessing and bearing the risk of investing in our collective asset management schemes. We also require all of our customers to make a minimum subscription of RMB1 million.
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3. Commodity Trading and Risk Management Business
Our commodity trading and risk management business is conducted by our wholly-owned subsidiary, namely, Holly Capital, which commenced operation since June 2013. The aim of such business is to provide cash management and risk management service to our clients, which are mostly enterprises operating in the value chain of commodities, by utilising futures and commodity trading strategy.
In late 2012, the CFA announced “The Guidelines of Futures Companies Establishing Subsidiaries operating risk management service”《期貨公司設立子公司開展以風險管理服務為主的 ( 業務試點工作指引》) (the “Guidelines”). According to the Guidelines, the aim of risk management service is mainly to provide risk management and hedging service for commodities related enterprises by utilizing the futures market and spots market. In our commodity trading and risk management business, we assist our clients in managing commodities price risk and capturing potential gain from price fluctuations. At the same time, we can take advantage of hedging and arbitrage opportunities to manage our risks and earn gains. This type of commodity trading is also known as basis trading in the PRC futures industry. Our targeted clients are mainly small to mid-size enterprises which engage in businesses or invest in the commodity related value chain, to which we provide customised risk management solutions.
For the years ended 31 December 2013, 31 December 2014 and the six months ended 30 June 2015, we recorded segment profit before tax of RMB0.2 million, RMB9.4 million and RMB17.1 million respectively for our commodity trading and risk management business. For the years ended 31 December 2013 and 2014 and the six months ended 30 June 2015, we traded with 6, 14 and 20 clients respectively for our commodity trading and risk management business.
Currently, we have the following major types of commodity trading and risk management services. a. Futures and spot arbitrage (基差交易):
In futures and spot arbitrage, Holly Capital mainly assists clients in realising potential profit and managing price risk of commodities through the futures market. Holly Capital looks into price differences which may exist in (i) futures contracts of different settlement dates of a commodity; and/or (ii) spots price and futures price of a commodity or related types of commodities. With the movement of the price differences, together with the trend of market change of the commodities, Holly Capital seeks for trading opportunities for the purpose of transaction, and design trading strategy and steps. Holly Capital also utilise futures market to hedge its own risk. b. Cooperative hedging (合作套保):
In a cooperative hedging arrangement, Holly Capital enters into an agreement with the client pursuant to which, Holly Capital would contribute portion of total amount as agreed in the agreement, while the balance of the total amount would be contributed by the client. Under such cooperative hedging arrangement, the contributed funds would serve as the margin deposit for the client’s trading in futures. The Company would be responsible for providing the trading platform and brokerage
— 161 — BUSINESS services, and risk control and management services by monitoring the level of margin deposits, the status of the account and the investment proportion. At the end of the agreement, the margin deposit would be returned to Holly Capital and the client respectively according to their initial contribution. In accordance with the agreement, Holly Capital would be entitled to a certain percentage of the investment return from the investment and trading conducted by the client with the contributed margin deposit. As a risk-control measures, the agreement provides a stop-loss mechanism in which if the loss incurred by the client reached a certain level and/or if the client failed to answer the margin call within the stipulated time, Holly Capital would be entitled to liquidate the client’s position, with the client bearing all losses.
By way of the cooperative hedging arrangement, Holly Capital provides short-term financial support to its clients thereby enabling them to conduct futures trading and hedging activities. In addition, Holly Futures and Holly Capital provide risk management service with its brokerage trading platform and risk monitoring system. c. Warehouse receipts service（倉單服務）
Warehouse receipts are documents that provide proof of ownership of commodities that are stored in warehouse. In the PRC, standardised warehouse receipts of commodities can be traded in the PRC Futures Exchanges. We provide warehouse receipts trading services with customised trading strategy. In a typical transaction, Holly Capital would enter into a purchase agreement (the “Purchase Agreement”) with the counter party (i.e. a client) for the purchase of certain type of commodity at the spot price. On the same date, Holly Capital would also enter into (i) an agreement with a warehouse service provider for the storage of the purchased commodities; and (ii) a repurchase agreement (the “Repurchase Agreement”) with the same client requiring the client to repurchase the subject commodities at a pre-determined forward price on a pre-determined future date, which are usually within a period of around three to six months from the date of the Purchase Agreement.
Upon the transfer of the legal title of the commodities purchased by Holly Capital, Holly Capital (as a buyer) will pay the client 100% of the purchase price under the Purchase Agreement and the client will pay Holly Capital an initial deposit of about 10% to 20% of the repurchase price under the Repurchase Agreement.
By the end of the specified timeframe, the client will repurchase the goods at the pre-determined forward price and pay the remaining percentage of the repurchase price under the Repurchase Agreement.
During the period subsequent to the Purchase Agreement and prior to the repurchase of the goods by the client, if the market price of the goods drops below the purchase price, the client is required to pay Holly Capital the shortfall between the market price and the purchase price which will be offset against the repurchase price.
By way of such arrangement, Holly Capital earns a profit (i.e. the difference between the purchase price and the repurchase price). Also, Holly Capital provides short term financial support to the client by its upfront payment of the purchase price. The credit risk of Holly Capital is largely
— 162 — BUSINESS safeguarded by (i) the payment by the client of the initial deposit of the repurchase price; (ii) having the legal title of the commodities as collateral (with marketability in futures and commodity market) during the period prior to the client’s repurchase; and (iii) having client to pay additional amount in case the market value of the subject commodities drops.
From the perspective of the counterparty (i.e. the client), this service helps our clients obtain desired temporary liquidity, and hence the clients will have the opportunity to capture potential gain from commodity price movement during such temporary period of time.
Trading activities conducted by Holly Capital on the futures market are an integral part of basis trading and intended to manage commodity price risk while capturing gains. As a result, we consider that our physical and futures commodity trading falls within the permitted categories of businesses, including futures and spot arbitrage, warehouse receipts service, cooperative hedging as set out in the Guidelines. In addition, Holly Capital has completed the applicable filing requirements with the CFA for its futures and spot arbitrage, warehouse receipts service, cooperative hedging business according to the Guidelines. Based on the above, our PRC legal advisers are of the view that the risk management business of Holly Capital falls into the businesses as permitted under the Guidelines.
From time to time, we adjust our trading strategies based on the type of commodities, market conditions, customers’ needs and other factors.
For details of our risk management control procedures in respect of the aforesaid businesses, please see “— Internal Control Measures — Commodity Trading and Risk Management Business” below.
MAJOR CLIENTS AND SUPPLIERS
We serve a diverse base of clients and our major clients comprise individuals and institutional clients across a spectrum of sectors. A majority of our clients are located in Jiangsu Province of the PRC. Please refer to section headed “Risk Factors — Risks relating to Our Business and Industry — We face the risks of concentration of customers and business in Jiangsu Province” in this prospectus.
For the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, the aggregate revenue derived from our five largest clients (which are all clients of our futures brokerage business) accounted for less than 10% of our commission and fee income from futures brokerage.
For the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, the revenue derived from our largest client (which is a client of our futures brokerage business) accounted for less than 5% of our commission and fee income from futures brokerage.
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 have any interests in any of our five largest clients as at the Latest Practicable Date.
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In respect of our PRC futures brokerage business, we had approximately 1,900 institutional investors and 52,100 individual clients as at 30 June 2015. Approximately 8%, 8%, 8% and 5% of revenue of our futures brokerage business was generated from our institutional clients for the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015 respectively, and approximately 92%, 92%, 92% and 95% of revenue of our futures brokerage business was generated from our individual clients for the corresponding period respectively.
During the Track Record Period, the movement of our number of our futures brokerage clients are as follows:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2015
Number of clients at the beginning of the relevant period 45,618 43,147 49,585 52,864 Number of new clients during the relevant period 3,173 6,937 6,049 3,352 Number of clients who closed their brokerage accounts during the relevant period (5,644) (499) (2,770) (2,137)
Number of clients at the end of the relevant period 43,147 49,585 52,864 54,079
In respect of our asset management business’s targeted management schemes, there were 16 managed accounts as at 30 June 2015, 7 of them are owned by enterprises such as companies and 9 of them are owned by individuals.
In respect of our asset management business’s collective asset management schemes, we had a total of 24 managed accounts as at 30 June 2015.
In respect of our commodity trading and risk management business, our clients are mostly enterprises engaging in business in commodity value chain. They require our commodity trading and risk management business in managing commodities price risk. During the years ended 31 December 2013 and 2014 and the six months ended 30 June 2015, we provided such services to 6, 14 and 20 clients, respectively.
We have no major suppliers due to the nature of our business.
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MARKETING
Our sales team consists of client managers who are our employees as well as Introducing Brokers who are Independent Third Parties. Both the client managers and the Introducing Brokers receive volume-based commissions. As at 30 June 2015, we had approximately 400 client managers and approximately 200 Introducing Brokers. For details of the arrangement with the Introducing Brokers, please see “— Introducing Brokers for our Futures Brokerage Business” below.
We aim to increase the awareness of our brand through our marketing efforts. We aim to make our trading website, www.ftol.com.cn, to be informative and helpful to our existing clients as well as our potential clients. Information about our services and customer hotlines can be found on our website, and our clients can download trading tools and software from our website. We also promote our Company, and release information about our Company via mobile phone applications, weblogs and other communication medium.
To enhance brand awareness, we conduct face-to-face meetings with prospective clients, hosts public relations and investor education events and attend industry conferences. We also publish our featured research reports to our clients to enhance customers’ loyalty. We also send our employees to participate in investment contests hosted by the CFA, in which we have obtained several awards.
We offer online demonstration trading accounts, which simulate an actual trading account on a real-time basis, to all new clients and to any person interested in our online trading platform. Our dedicated sales personnel will then follow up with demonstration account users who may then open a real trading account and become our clients. All of our marketing materials are approved by our compliance department to help ensure that there is no misrepresentation of our operations.
With 43 futures branches in the PRC as at 30 June 2015, we have coverage in major cities of the PRC, including Beijing, Shanghai and Shenzhen. We have also established futures branches in regions that we consider to have significant growth potential, optimised our futures branches network within the same province in order to extend our client coverage. We believe that the coverage and strategic location of our brokerage futures branches are important for our branding and business development.
Please see “— Our Business — Futures Brokerage — Futures Branch Network” above for further information on our futures branch network.
INTRODUCING BROKERS FOR OUR FUTURES BROKERAGE BUSINESS
As at 30 June 2015, we had business relationships with approximately 200 Introducing Brokers who introduce their customers to us from our PRC futures brokerage services in return for commissions. The majority of our Introducing Brokers are individuals and the remaining are corporations. All of our Introducing Brokers are Independent Third Parties.
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The table below sets forth the amount of futures brokerage commission fee income generated from clients referred by our Introducing Brokers, commission paid to our Introducing Brokers, the average and the range of commission rate payable to our Introducing Brokers for the years ended 31 December 2012, 2013 and 2014, and the six months ended 30 June 2015 as a result of Introducing Brokers referrals:
For the six For the year ended months ended 31 December 30 June 2012 2013 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000
Futures brokerage commission fee income generated from clients referred by Introducing Brokers 156,761 128,634 51,134 20,041 % of our total futures brokerage commission fee income in the PRC which was generated from clients referred by Introducing Brokers 67.1% 61.2% 36.0% 25.6% Commission paid to Introducing Brokers 90,778 65,610 27,660 11,072 Average commission rate payable to Introducing Brokers(1) 57.9% 51.0% 54.1% 55.2% Range of commission rate payable to Introducing Brokers(2) 5%-85% 5%-85% 10%-80% 13%-80%
Notes:
(1) “Average commission rate payable to Introducing Brokers” is calculated by dividing “Commission paid to Introducing Brokers” by “Futures brokerage commission fee income generated from clients referred by Introducing Brokers”
(2) “Range of commission rate payable to Introducing Brokers” is calculated by dividing commission paid to an Introducing Broker, by futures brokerage commission fee income generated from clients referred by that Introducing Broker.
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The futures brokerage commission fee and the percentage of our total futures brokerage commission fee income in the PRC generated from each of our top five Introducing Brokers (in term of the future brokerage commission fee income generated) during the Track Record Period are as follows:
For the year ended 31 December 2012
Futures brokerage commission fee % of our total income generated futures brokerage by the Introducing commission fee Nature of Five Largest Introducing Brokers Broker(1) income in the PRC RMB’000
Individual A 7,379 3.15% Individual B 3,629 1.55% Corporation A 3,503 1.49% Individual C 2,302 0.98% Individual D 2,029 0.86%
For the year ended 31 December 2013
Futures brokerage commission fee % of our total income generated futures brokerage by the Introducing commission fee Nature of Five Largest Introducing Brokers Broker(1) income in the PRC RMB’000
Individual B 7,637 3.64% Individual A 3,594 1.71% Individual E 2,497 1.19% Corporation B 2,438 1.16% Individual F 2,424 1.15%
For the year ended 31 December 2014
Futures brokerage commission fee % of our total income generated futures brokerage by the Introducing commission fee Nature of Five Largest Introducing Brokers Broker(1) income in the PRC RMB’000
Individual G 2,964 2.12% Individual H 2,962 2.11% Individual B 2,598 1.85% Individual E 1,808 1.29% Individual I 1,786 1.27%
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For the six months ended 30 June 2015
Futures brokerage commission fee % of our total income generated futures brokerage by the Introducing commission fee Nature of Five Largest Introducing Brokers Broker(1) income in the PRC RMB’000
Individual J 1,064 1.36% Individual K 852 1.08% Individual L 745 0.95% Individual H 648 0.82% Individual M 565 0.72%
Note:
(1) The futures brokerage commission fee has not deducted the commission payable to the relevant Introducing Broker.
The principal terms of the referral agreements that we have with our existing Introducing Brokers are as follows:
Obligations of the Introducing Broker:
• the Introducing Broker must fulfill the examination and/or qualification requirements of the relevant province (unless there is no such examination or qualification requirement in that relevant province);
• the Introducing Broker must disclose to the client the Introducing Broker’s role as a referrer, that he or she is not an employee of the Company and must not under any circumstances sign our client mandate on behalf of the client, nor engage in futures trading on behalf of the client;
• the Introducing Broker should procure the client to observe and fulfil the client’s obligations;
• the Introducing Broker must keep the client’s information private and strictly confidential; and
• the Introducing Broker must make full disclosure to the client on the operation and risk of futures trading, and must not in any way mislead the client as to the risks involved, nor make any promises or exaggeration of returns from futures trading. The Introducing Broker should also procure the client to sign a “Client Declaration Form”.
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Our obligations:
• Pay commissions to the Introducing Broker mainly on monthly basis in the manner and amount as previously agreed with the Introducing Broker. Such commission would be determined mainly with reference to the trading volume and our revenue brought by the referred clients.
Risk deposit fund:
• The Introducing Broker agrees that certain percentage of the commission payable to the Introducing Broker shall be set aside by us as the risk deposit fund on a monthly basis. If the referred client is in breach of its respective obligations under the relevant agreement signed with us, the risk deposit fund shall be forfeited by us to compensate us to the extent of damages that we have suffered. If the referred client was not in breach, the risk deposit fund shall be returned by us to the Introducing Broker free of interest in the following quarter; and
• Further, if the Introducing Broker is in breach of any provision of the referral agreement that it has signed with us, we reserve the right to (i) deduct all or part of the commission payable to the Introducing Broker, (ii) terminate the agreement, and (iii) seek damages from the Introducing Broker for any loss that we have incurred.
Termination:
• The term of the referral agreement is generally one year; and
• We reserve the right to terminate the referral agreement unilaterally if the Introducing Broker is in breach of any provision in the referral agreement.
We do not recruit our Introducing Brokers through advertising. We generally identify potential Introducing Brokers who are reputable in the futures industry from time to time. Introducing Brokers may also directly approach us from time to time expressing their interest to become our Introducing Brokers. We provide technical support to our Introducing Brokers by giving them regular training on (i) risk disclosure to clients regarding futures trading, and (ii) rules and regulations governing futures trading. We also invite our Introducing Brokers to attend our investment conferences from time to time.
Any persons or entities who wish to become our Introducing Brokers must fulfil our selection criteria. Our selection process and criteria are as follows:
• our Introducing Brokers must be capable of acting in their legal capacity and bear their legal responsibility;
• our Introducing Brokers must possess a sufficient degree of knowledge in the industry, the financial market and the futures market, be familiar with the relevant rules and regulations governing futures trading;
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• our Introducing Brokers must adhere to good business ethics, and all relevant rules and regulations. Our Introducing Brokers must not have any record of contravention of relevant rules and regulations, and not be prohibited under any relevant rules and regulations to engage in the futures market;
• our Introducing Brokers must adhere to any special conditions (if any) prescribed by any competent authorities or agency; and
• once our Introducing Brokers have passed the above selection criteria, they must, in their application to become our Introducing Brokers, provide to us their residential address proof, contact details and personal identification documents. Provided that they have passed the licensing and qualification requirements of the relevant province (if any) in which they engage their introductory brokerage business in (unless they are exempted from such licensing and qualification requirements under the relevant province), our futures branches will conduct a personal identification and suitability examination before we enter into an introductory brokerage agreement with them.
We also ensure our Introducing Brokers’ standard of quality is maintained by the following means:
• Review the record of complaints lodged by our clients to identity whether nature of compliants involve any breach of legal requirements and/or their obligations under the introductory brokerage agreements;
• Reviewing the volume of futures trading generated by their referred clients, the size of the margins maintained by their clients, the amount of our revenue generated by their referred clients;
• Reviewing the quality of services provided by our Introducing Brokers to their referred clients;
• Whether our Introducing Brokers have been subject to any complaints by local authorities or their referred clients; and
• Whether our Introducing Brokers have been involved in the breach of relevant laws and regulations, or their obligations under the introductory brokerage agreements.
We also seek feedback from our referred clients to assess the quality of services provided by our Introducing Brokers.
In line with our development strategy, we intend to steadily decrease our reliance on Introducing Brokers, and invest in development of our own sales team for introduction of clients. Starting from 2014 and going forward, with a view to better managing our clientele, we intentionally reduce the number of our Introducing Brokers and we strive to explore market and to provide service directly by our own sales team and/or client managers. Accordingly, the number of our Introducing Brokers has reduced from approximately 1,369, 1,080 and 270 as at 31 December 2012 and 2013, 2014,
— 170 — BUSINESS respectively, to approximately 200 as at 30 June 2015. Whilst this resulted in a reduced number of new clients in 2015, we believe this would bring us long term benefits of (i) reducing our fees payable to Introducing Brokers, making our brokerage fees more competitive, (ii) enhancing our independence and capability to bring in new clients, and (iii) increasing employee loyalty and providing further incentives for our employees to generate more sales as they would be receiving commissions for any successful client referrals. We intend to regain our market share resulting from the reduced number of client by (i) developing our own sales team by hiring more sales and marketing staff as well as client managers; (ii) motivating our sales team by increasing commissions for any successful client referrals; (iii) increasing our marketing efforts through the internet and other social media; (iv) opening new “light branches” to extend client reach; and (v) promoting our brand awareness by continuing to publish research reports and commentary on market analysis and to hold investors education events, conferences and sharing sections. We plan to use approximately 10%, or HK$55.0 million out of the net proceeds from the Global Offering, to further develop and strengthen our existing futures brokerage business by, among other things, executing the above business strategies. Please see “Future Plans and Use of Proceeds — Use of Proceeds”.
RESEARCH
In order to assist our clients in identifying and evaluating investment and hedging opportunities, we provide our clients with research services including research reports and regular updates that cover futures, macroeconomic analysis, investment strategies, commodities futures and financial futures, and industry sectors. In addition to serving our clients, our research team also provides support to our futures brokerage and other business lines. As at 30 June 2015, our research team consisted of 21 members, 16 of which held master’s degrees, and three of which held bachelor’s degrees. We also encourage our research analysts to attend professional training programmes to enhance their research expertise.
In 2011, we established our post-doctoral research institute to cultivate post-doctoral research analysis and to conduct research on the PRC economy, capital markets and the futures industry. As at the Latest Practicable Date, our post-doctoral research institute has one post-doctoral candidate. We have also established financial futures research institute, industrial commodities futures research institute and agricultural commodities futures research institute to conduct researches on specialised topics.
For the years ended 31 December 2012, 2013, 2014 and the six months ended 30 June 2015, we produced approximately 270, 400, 410 and 134 research reports and other publications, respectively. Some of our articles and research reports were published on the press media in the PRC. We also undertook research projects as organised by the PRC Futures Exchanges.
We have received several awards for our research excellence, such as “The No. 1 Farm Produce Futures R&D Team for November and December” in 2009 from Dalian Commodity Exchange, “Top Ten R&D Teams for Energy and Chemical Product Futures for 2011” in 2011 from Dalian Commodity Exchange. The research team for futures of industrial products of the Company was named as “The Most Potential Research Team for Futures of Industrial Products” in 2013 by Dalian Commodity Exchange, and the Company was named as “Top Ten Research Teams for Futures Investment” in 2014 by Dalian Commodity Exchange. For details, please see “— Major Awards and Recognition” below.
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MAJOR AWARDS AND RECOGNITIONS
Capitalised on our strong competitiveness and outstanding achievements, we were granted the following major awards, recognitions and certifications:
Year of Award name Awarding or granting organisation issue
The Most Favourite Futures Company China Securities Journal, CCTV 2009 for Investors
The Best Designated Dealer Futures Daily, the Organizing 2009 Committee of the National Futures Trading Competition
The Risk Control and Management Sohu Business 2009 Award of the Best Futures Company for 2009
The No. 1 Farm Produce Futures R&D Dalian Commodity Exchange 2009 Team for November and December
The Most Favourite Technical Platform The 8th China’s Financial Annual 2010 for Futures Investors Champion Awards
The Civilised Unit of Jiangsu Province The Spiritual Civilisation 2010 for 2007-2009 Development Steering Commission of Jiangsu Province
The Best Futures Company of China Futures Daily, Securities Times 2011
Branded Futures Company of the Year The 9th China’s Financial Annual 2011 Champion Awards
The Best Broker in the Eyes of Nanjing Daily 2011 Investors
Top Ten R&D Teams for Energy and Dalian Commodity Exchange 2011 Chemical Product Futures for 2011
The Excellent Member Award Dalian Commodity Exchange 2013
The Superior Trading Member Shanghai Futures Exchange 2013 Nomination Award
The Excellent Member Award and The Dalian Commodity Exchange 2013 Industrial Development Achievement Award
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Year of Award name Awarding or granting organisation issue
The Excellent Member in Rapeseed Zhengzhou Commodity Exchange 2013 Oil cultivar development, Excellent Member in Industrial Services and Excellent Member in Market Development
The Suitability System Implementation China Financial Futures Exchange 2013 Award
The Best Futures Company of China Futures Daily, Securities Times 2013
Best Civilised Unit in Jiangsu Jiangsu Provincial Committee of the 2013 Province (2010-2012) Communist Party of China, Jiangsu Provincial People’s Government
The Most Potential Research Team for Dalian Commodity Exchange 2013 Futures of Industrial Products
Top Ten Research Teams for Futures Dalian Commodity Exchange 2014 Investment
Model Unit of Safe Finance The Safe Finance Development 2014 Development for 2011-2013, Steering Group of Nanjing City Advanced Group of Safe Finance Development for 2011-2013
The Market Service Award Dalian Commodity Exchange 2014
The Best Industrial Development Dalian Commodity Exchange 2014 Award
National Civilised Unit Central Spiritual Civilisation 2015 Development Steering Commission
FINANCIAL INVESTMENT
To better utilise our cash, we have engaged in financial investment activities like investing in listed and unlisted equity securities, wealth management products issued by banks, funds and asset management plans for our own account. Gains from our financial investment activities amounted to approximately RMB5.2 million, RMB10.3 million, RMB14.7 million and RMB19.0 million, representing approximately 1.4%, 3.1%, 5.1% and 10.7% of our total operating income for the years ended 31 December 2012, 2013, 2014 and the six months ended 30 June 2015, respectively.
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Our investment principle and strategy are to utilize idle cash to earn returns with low risk. Our investment decisions depends on, among other things, the level of its idle cash, the market sentiment and the availability of investment opportunities. We do not aim to generate our primary income source from investment activities and therefore we treat financial investment activities only as an ancillary treasury operation rather than one of our principal business activities. Moreover, the amount of gain from financial investment in the six months ended 30 June 2015 was exceptionally high, mainly resulted from the bullish PRC stock market during the period and the amount of gain from financial investment may or may not continue to account for such a substantial portion of profit in the future.
The table below sets forth our financial investment during the Track Record Period.
(Unit: RMB’000)
As of As of 31 December 30 June 2012 2013 2014 2015
Investments classified as receivables — — — 200,000
Available-for-sale financial assets - Unlisted equity securities 10,600 — — — - Listed equity securities 11,314 7,983 10,632 10,215 - Wealth management products issued by banks — 20,207 — 43,320 - Unlisted funds 6,197 6,468 7,165 9,128 - Asset management plan — — — 1,000 Sub-total 28,111 34,658 17,797 63,663
Financial assets at fair value through profit and loss - Listed equity securities 9,234 8,975 3,429 34,502 - Listed funds — 14 5,148 4,916 - Asset management plan — — — 7,371 Sub-total 9,234 8,989 8,577 46,789
Total financial investment 37,345 43,647 26,374 310,452
Note:
Our financial investments during the Track Record Period were accounted for as investments classified as receivables, available-for-sale financial assets, and financial assets at fair value through profit and loss on our financial statements. According to our accounting policy, our principal and return guaranteed investments are classified as receivables; financial assets at fair value through profit or loss are mainly those acquired principally for the purpose of selling or repurchasing in the near term, managed in a pattern of short-term profit taking, or are managed, evaluated and reported internally on a fair value basis; while available-for-sale financial assets mainly include non-derivative financial assets that are not classified as another category of financial assets.
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Investment classified as receivables
The investment classified as receivables are principal guaranteed and return guaranteed wealth management products issued by banks. They are generally non-derivative financial products with fixed return and predetermined maturity date and therefore are classified as receivables. Their returns are calculated by reference to the principal amount, the annualized return rate and the duration of investment.
As at 30 June 2015, our investments classified as receivables comprised two similar wealth management products issued by a bank. The principal value of each of them amounted to RMB100 million. The underlying assets of both wealth management products are mainly bonds and money market deposits. Each of them has a predetermined term of maturity of about six months, from January to July 2015. Subsequent to the maturity of such products and up to the Latest Practicable Date, we had not invested in any similar kind of products. Nevertheless, we may invest in this kind of product again in the future if we see fit.
We emphasise prudent operation and value investing in our financial investment and aim to achieve stable returns while minimizing risks. Given that these investments are principal-guaranteed and return-guaranteed, such investments are considered as low-risk. Having considered the composition, risk level and expected return of our investment portfolio as a whole, we consider that it is appropriate to include such kind of low-risk nature of investments in our portfolio. We are normally required to hold this kind of investments throughout the whole predetermined maturity term of the relevant products pursuant to their respective contracts.
Equity securities
Based on our in-depth insight into the financial sector, we invest in a selected portfolio of stocks that aims to increase our profit by capturing the opportunities in the stock market.
Wealth management products classified as available-for-sale financial assets
We carefully select wealth management products for our investment based on our financial position and our risk-return profile. During the Track Record Period, we invested in certain wealth management products issued by banks which are classified as available-for-sale financial assets in our financial statements. Different from the investment classified as receivables as discussed above, such products are non-principal or return guaranteed.
As at 31 December 2012, 2013, 2014 and 30 June 2015, our balance of wealth management products issued by banks which were classified as available-for-sale financial assets amounted to nil, RMB20.2 million, nil and RMB43.3 million, respectively. As at 30 June 2015, the balance of RMB43.3 million consisted of one wealth management product issued by a bank. As at 31 December 2013, the balance of RMB20.2 million consisted of another wealth management product issued by a bank. Both of the products are operated as open ended funds, which means that we can redeem our investment
— 175 — BUSINESS pursuant to the terms of the contracts anytime during the allowed period at our discretion, with the return calculated based on the then net worth of the funds. While the funds stipulate an expected rate of return for investors’ reference and information, the actual rates of return are floating (i.e. not fixed and not guaranteed). The risk level for both products that we invested were considered as low level because a substantial portion of the underlying assets are mainly bonds and money market deposits.
Funds
We utilised a portion of our available cash to invest in a number of listed and unlisted funds raised in China developed/managed by financial institutions with the underlying investments being mainly in stocks listed on stock exchanges in the PRC and bonds. The risk level of these funds is considered high because such funds are equity in nature and are subject to fluctuations in the market prices of underlying investment.
Asset management plans
We started to invest in asset management plans in 2015 which are issued and managed by independent financial institutions. The risk level of the asset management plans is considered as high as the underlying investment is mainly in futures, options, stock and bonds listed on stock exchanges in the PRC. As at 30 June 2015, we invested in (i) an asset management plan which is classified as available-for-sale financial assets in our financial statements amounted to RMB1.0 million; and (ii) an asset management plan which is classified as financial assets at fair value through profit and loss in our financial statements amounted to RMB7.4 million. The asset management plan with our investment amount of RMB1.0 million is a collective asset management scheme managed by our Company. It is a closed-end fund with a term of one year. The asset management plan with our investment amount of RMB7.4 million is a targeted asset management scheme managed by an independent external fund company. It comprised the principal amount of RMB7.0 million and the fair value movement portion of RMB0.4 million. It is also a closed-end fund with a term of one year. The different classification of available-for-sale financial assets and financial assets at fair value through profit and loss was mainly to reflect our management’s intention, and to cater for our internal management, evaluation and reporting purpose.
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Investment return
The following table sets forth the risk categories of our investments for the years and periods indicated:
For the six months ended For the year ended 31 December 30 June 2012 2013 2014 2015
Risk category(1) of underlying investments - Equity securities High High High High - Wealth management products Low Low Low Low - Funds High High High High - Asset management plans N/A N/A N/A High
Note:
(1) The Company takes into account (i) the relevant issuing institution (for example, bank), (ii) the nature of principal-guaranteed or non principal-guaranteed, and (iii) the nature of generating fixed or floating return of the underlying financial investments in ascertaining their corresponding risk level.
The following table sets forth the average monthly balance of, and average investment return on, our financial investment activities for the years and periods indicated:
For the six months ended For the year ended 31 December 30 June 2012 2013 2014 2015 (RMB in thousands, except risk category)
Average monthly balance - Equity securities 16,005 16,523 24,264 28,690 - Wealth management products 57,500 145,000 110,850 144,993 - Funds 2,388 2,640 3,070 7,729 - Asset management plans — — — 7,500 Total 75,893 164,163 138,184 188,912 Gains from financial investment breakdown by types of investment - Equity securities 535 2,876 8,482 14,121 - Wealth management products 4,666 7,423 6,117 5,507 - Funds — 24 121 (635) - Asset management plans — — — — Total 5,201 10,323 14,720 18,993
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For the six months ended For the year ended 31 December 30 June 2012 2013 2014 2015 (RMB in thousands, except risk category)
Gains from financial investment breakdown by accounting items - Net investment gains arisen from financial investment activities(1)(2) 4,244 10,323 9,712 14,286 - Interest income from wealth management products (see note 3(b) to the Accountants’ Report) 957 — 5,008 4,707
Total 5,201 10,323 14,720 18,993
Average investment return(3)(4) - Equity securities 3.3% 17.4% 35.0% 98.4% - Wealth management products 8.1% 5.1% 5.5% 7.6% - Funds — 0.9% 3.9% (16.4%) - Asset management plans — — — — Overall 6.9% 6.3% 10.7% 20.1%
Notes:
(1) Net investment gains arisen from financial investment activities comprised (i) net realized gains from disposal of financial assets at fair value through profit or loss (trading securities and funds); (ii) disposal of available- for-sale financial assets (listed securities and wealth management products issued by banks); (iii) net unrealized fair value changes of trading securities and funds; and (iv) dividend income from financial assets at fair value through profit or loss and available-for sale-financial assets, as disclosed in note 4 to the Accountants’ Report as set out in Appendix I.
(2) Please refer to page 145 for the net investment gains generated from business activities in addition to financial investment activities.
(3) Average investment return equals our gains from financial investment divided by average monthly balance of our financial investments during the year/period.
(4) The amount of gains from financial investment increased throughout the Track Record Period was mainly caused by the increase in scale of financial investment along with the Group’s growth in equity. Moreover, our overall investment return in the six months ended 30 June 2015 was exceptionally high, mainly resulted from the bullish PRC stock market during that period.
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Investment strategies
We emphasise prudent operation and value investing in our financial investment and aim to achieve stable returns while minimising risks. Our investment strategy committee formulates our investment strategy, investment principles, investment objectives, funds allocation and limits on investments, and is responsible for determining the investment scale and risk exposure of our financial investments activities, based on our financial condition, industry and market trends analysis, stock research, and macro-economic conditions and analysis.
Our investment strategy committee convenes investment strategy meetings regularly (or on an ad-hoc basis when required) to reassess and adjust our maximum risk exposure and investment scale as well as industry focus in our equity trading. In addition, we also call special meetings to adjust our investment strategies following any material changes in market conditions. For details, please see “— Internal Control Measures — Investment and Treasury Policies and Internal Controls for Financial Investment” below.
Pursuant to the Procedures for the Adequacy Evaluation of Asset Management Business by Futures Companies, investments made by a PRC futures company or its asset management subsidiary in its collective asset management scheme must not exceed 50% of the amount of assets under management.
As advised by our PRC legal advisers, we are in compliance with the Futures Trading Management Regulations and the Procedures for the Adequacy Evaluation of Asset Management Business by Futures Companies in all material respects on the basis that: (i) our Company has not invested in any of its self-managed collective asset management schemes; (ii) as of the Latest Practical Date, Holly Capital, being our Company’s risk management subsidiary, has invested in one of our Company’s targeted asset management schemes and three of our Company’s collective asset management schemes, such investment does not contravene the Futures Trading Management Regulations pursuant to which PRC futures companies are prohibited from participating in proprietary futures trading; (iii) the 50% threshold set by Procedures for the Adequacy Evaluation of Asset Management Business by Futures Companies does not apply to Holly Capital’s investment in our Company’s collective asset management schemes, as Holly Capital is our Company’s risk management subsidiary rather than asset management subsidiary; and (iv) the collective asset management scheme participated by Holly Capital has already been registered with the Asset Management Association of China in accordance with the Rules for the Asset Management Business of Futures Firms (Trial).
Furthermore, pursuant to the Futures Trading Management Regulations, PRC futures companies are prohibited from participating in proprietary futures trading. As such, we do not engage in proprietary futures trading and do not engage in our financial investment activities any hedging arrangement involving the use of stock index futures or options. Hedging ratio of our financial investment activity was zero during the Track Record Period. Nevertheless, such restriction on hedging activities does not extend to subsidiaries established by PRC futures companies to conduct commodities trading and risk management business. For a description of the arbitrage and hedging activities of our commodity trading and risk management business, please see “— Our Business — Commodity Trading and Risk Management Business” above.
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Recent development
Recently, the financial market in the PRC experienced significant turbulence. Since 1 June 2015 up to the Latest Practicable Date, the difference between the lowest and highest points of Shanghai Stock Exchange Composite Index amounted to about 43%. Set out below is the sensitivity analysis of the value of our investment portfolio as of the dates specified against assumed market price movement in the components in our investment portfolio:
Book value of our financial investment Changes in book value upon % of price fluctuation portfolio 10% 20% 35% 40% 45% -10% -20% -35% -40% -45% (RMB’000)
31 December 2012 37,345 2,675 5,349 9,361 10,700 12,038 (2,675) (5,349) (9,361) (10,700) (12,038) 31 December 2013 43,647 2,344 4,688 8,204 9,376 10,548 (2,344) (4,688) (8,204) (9,376) (10,548) 31 December 2014 26,374 2,637 5,275 9,230 10,548 11,867 (2,637) (5,275) (9,230) (10,548) (11,867) 30 June 2015 310,452 5,876 11,752 20,566 23,504 26,442 (5,876) (11,752) (20,566) (23,504) (26,442)
RISK MANAGEMENT
Our risk management’s objective is to implement a comprehensive risk management system to ensure our business operation complies with the relevant rules and regulations, and limit our risks related to our business operation to a tolerable level, thereby maximising our value. The CSRC assigned us a “Class A of the A Category” regulatory category for the past seven years consecutively since 2009 when such rating was first introduced.
Our Directors confirm that, during the Track Record Period, there have not been any material erroneous trades or departures from our risk management system.
Risk Management Principles
We value the importance of an effective risk management system, which is established to achieve our following business goals: (i) preventing operational, compliance, market, and credit risks, (ii) ensuring the safety and integrity of our clients’ assets and our own assets; (iii) ensuring the reliability, completeness and timeliness of our business record, financial record and other information; and (iv) enhancing our operational efficiency and effectiveness for further business development.
Our risk management and internal control system was designed based on the following principles:
Comprehensiveness: We have developed a comprehensive and unified risk management system which covers the entire process of the Company’s businesses, different departments and individual employees and permeates through the decision making, execution, supervision and evaluation processes. Each department and individual employee must have a clearly defined role and responsibility in the risk management process.
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Sustainability: We take the initiative in actively setting risk management objectives, implementing risk management measures with proper supervision and evaluation on an ongoing basis.
Independence: Our Audit and Legal Department shall operate independently from other departments in inspecting, assessing and monitoring various risks applicable to the Company on a regular basis.
Effectiveness: Risk management should be in proportion with the Company’s business size, scope of business, potential and level of risks and circumstances in order to unite efficiency with actual delivered results, so as to realise the risk management objectives of the Company in a cost and time efficient manner.
Check and balance: We have established the internal structure and designed the business process for the purpose of segregating the powers of decision making department, execution department and inspection and evaluation department and proper check and balance are implemented among these departments.
Risk Management System
The organisational structure of our risk management is illustrated below:
Board
Risk Management Committee
Chief Risk Officer
Officer responsible for risk management of each business department
There are four management levels in our risk management’s organisational structure, namely the Board, the Risk Management Committee, the Chief Risk Officer and the officers responsible for risk management of each business department.
The Board is responsible for setting the strategic objectives of risk management, promoting the values of risk management, appointing and dismissing the Chief Risk Officer, assessing and approving risk management policies, ensuring the implementation of risk management systems, and providing feedback on the effectiveness of risk management systems.
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Our Risk Management Committee is responsible for: (i) reviewing the risk management strategies of our Group including the goals, risk tolerance and plans for managing and resolving material risks; (ii) analysing and evaluating our risk profiles and our overall risk management; (iii) making suggestions and proposals in enhancing our risk management; and (iv) supervising our implementation of risk control system in the aspects of application of fund, marketing, operation and compliance. Our Risk Management Committee has four members with an average of approximately six years of experience in the futures industry, and three of them had master’s or higher degrees and one of them is a senior accountant. Our Risk Management Committee is led by Mr. Li Xindan, who is one of our independent non-executive Directors.
Our Chief Risk Officer is responsible for ensuring the effective implementation of our internal policies and compliance with our business policy, evaluating and advising on the risks and compliance to our management in our Group’s major decisions making and main business activities, inspecting and investigating possible regulatory violations and risk concerns in our operation, reporting to the Board, the Shareholders and the regulatory authority independently on any non-compliance and enhancing our Group’s risk management through training, inspection and supervision. Mr. Jia Guorong is our Chief Risk Officer, and has approximately 16 years of experience in the financial industry. For details of Mr. Jia Guorong’s background, please see the section headed “Directors, Supervisors and Senior Management” in this prospectus.
Each business department’s officer responsible for the risk management shall be responsible for implementing the risk management policies.
Monitoring and Management of Major Risks
We focus on monitoring and managing five major risks, namely (i) operational risk, (ii) compliance risk, (iii) market risk, (iv) credit risk, and (v) investment risk.
(i) Operational Risk
Operational risk refers to the risk resulting from improper operation in transactional process.
Currently, most of our clients’ futures trading are conducted online. Any fire, flooding, earthquake and power shortage affecting any of our servers can severely affect the completeness and continuity of the data transmitted across such server. In view of this, we have made improvements to our transaction recovery system to enhance our ability to mitigate such risks. Our online trading platform only executes a futures order at prices quoted to our clients when such futures order is made by the client. We have also conducted disaster recovery simulations to test our effectiveness in minimising the time required to switch to our back-up system.
Another area of operation risk lies in the threat of illegal hacking and computer viruses. Online transaction security is also an important operation risk area that needs to be addressed as our clients want to know their futures trading are completed in a secure and safe manner. We have implemented measures to reduce the risk of technical irregularities and our Risk Management Committee will regularly evaluate the effectiveness of our risk management measures.
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(ii) Compliance Risk
Compliance risk refers to possible legal sanctions, prosecutions, litigation claims, penalties, financial loss as well as damages to our reputation as a result of our failure to comply with the legal rules and regulations, the requirements of supervisory authorities or agencies, the self-discipline code of conduct, or any guidelines concerning our business of futures brokerage. The major compliance risk areas lie in (i) our employees and (ii) our Introducing Brokers.
The compliance risks posed by our employees include managing our clients’ finances, opening accounts and trading on behalf of clients in the absence of the clients’ consents and authority. We have taken measures to reduce this risk by strengthening our internal control measures and implementing an effective accountability system to effectively locate such employees. At the same time, we re-emphasis on the importance of compliance by providing regular seminars and training to our employees.
In relation to Introducing Brokers, our compliance risk comes from: (i) our Introducing Brokers concealing their identity as Introducing Brokers representing to the referred clients that they are our employees and violating regulations, (ii) our Introducing Brokers infringing our clients’ interests, accepting unauthorised requests from clients and engaging in futures trading without our clients’ consent in order to earn more commission from the futures trading. We have taken measures to reduce this risk by (i) performing assessment on the creditworthiness of the Introducing Brokers before entering into the introductory brokerage agreements, (ii) exerting management control over the Introducing Brokers and their services after entering into the introductory brokerage agreements through continuous supervision of the Introducing Brokers’ performance. At the same time, we aim to reduce compliance risk from our Introducing Brokers by interviewing our referred clients to inform them of their rights as part of our account opening process, and obtaining their signed acknowledgement of our documents and check if the Introducing Brokers have any market misconduct.
(iii) Market Risk
Market risk refers to the possibility of loss or decrease in our income resulting from keener competition in the investment industry or change in the market such as changes in the interest rate or economic cycle.
There are three contributory reasons as to why the futures market is a high risk market. Firstly, due to the centralised dealing and the continuity of price fluctuations, it is possible for the futures market to condense the price fluctuations of the present market from a long period to a very short period of time, meaning that a sudden and major fluctuation in the price can trigger an enormous market risk. Secondly, the margin system imposed by the futures market makes futures a highly leveraged financial derivative. Just as the margin is the first perimeter of risk management against market risk, it is also the area where it creates market risk. Thirdly, the futures market permits speculators to enter, thus creating further uncertainty and risk in the market.
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We have adopted several risk management measures against risk, such as closely monitoring price fluctuations and price trends in the futures market, strengthening the monitoring process on change in long positions and short positions, as well as the level of margin, prompt margin calls to our clients, and taking prompt actions to liquidate our client’s positions should they fail to answer our margin calls before next day’s trading begins. We also monitor closely on less traded commodities and unusual trading to prevent any client from monopolising and manipulating that commodity in the futures market. We also emphasis education for our clients to minimise the effect of market risk on them as a result of them not being familiar with the inherent market risks in futures trading.
(iv) Credit Risk
When futures brokerage companies engage in futures trading on their clients’ behalf, the futures brokerage companies would incur losses if their clients are unable or refuse to fulfil their contractual obligations. There are two possible situations of credit risks from clients. The first one is the corporate client’s inability to fulfil its contractual obligation due to change in the legal representative, change in ownership, poor business performance and other force majeure events. The second credit risk comes from turbulence in the futures market, resulting in great price fluctuations, and also resulting in some clients being unable to fulfil their contractual obligations.
In order to control credit risk, we have stringent control in place during the account opening process. We will assess each of our new client’s identity, creditworthiness, and adequacy of funds that our new client will be using to fund the futures trading. We also conduct the necessary training and examination to ensure our clients are well aware of the risks involved in futures trading, as well as providing them with training on transaction skills so as to reduce the likelihood of a massive loss.
(v) Investment Risk
Investment risk refers to the risk of investment loss or decrease in our income resulting from developing our business through investment. Specifically, it refers to the following risks:
(a) Investment target risk: It refers to the uncertainties in the growth and development of the investment target, including but not limited to the technical risk, the operational risk and the financial risk;
(b) Investment analysis risk: It refers to the risk of loss resulting from improper or incomplete due diligence conducted in an investment project;
(c) Investment decision-making risk: It refers to the risk of loss resulting from imperfect decision-making process and bias before any decision making;
(d) Project management risk: It refers to the risk resulting from insufficient supervision or improper management after investment and failure to discover and exercise control of the problem in an investment project in a timely manner;
(e) Project exit risk: It refers to the risk resulting from exit from an investment project with losses or inability to exit from an investment project.
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We aim to minimise investment risk by adopting several measures such as introducing a series of reasonable procedures to be followed for making any investment, entering into comprehensive investment agreements to protect our legal rights, closely monitoring the investment project and strengthening the research for the investment project.
INTERNAL CONTROL MEASURES
Our Directors confirm that, during the Track Record Period, there have not been any material erroneous trades or departures from our internal control measures.
Futures Brokerage Business
We adopt the following internal control measures to manage the risks associated with our futures brokerage business:
Account management
Pursuant to the Rules on the Establishment of Adequacy System for Financial Futures Investors (《關於建立金融期貨投資者適當性制度的規定》) (the “Rules on Adequacy System”) promulgated by the CSRC in August 2013, a futures company shall strictly implement investors’ suitability assessment system and shall promptly report its investors’ suitability assessment system and other related management systems to the China Financial Futures Exchange and the local branch of the CSRC.
Our Company has complied with the Rules on Adequacy System and established its investors’ suitability assessment system.
During the account opening process, we have implemented strict rules to (i) verify the client’s identity, creditworthiness, and available funds of at least RMB500,000 to engage in financial futures trading; (ii) ensure that the client has a sufficient degree of understanding on the risks involved in, and the operation of, futures trading by way of examination; and (iii) review the signed documents such as explanation on risks of futures trading, client’s guide and futures brokerage contract as well as background diligence and keep proper records. Such account opening process is applicable to clients referred by Introducing Brokers and other clients.
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The following flowchart illustrates our account opening process for our futures brokerage’s individual clients:
Individual client
Verification of client’s identification documents
Disclosure of risks in futures trading and explanation on client mandate
Examination of understanding (for financial futures clients)
Assessment and evaluation (for financial futures clients)
Conduct background due diligence on client
Signing of risk disclosure statement and client mandate
Review signed documents
Submission of documentation to Audit and Legal Department for verification
Audit and Legal Department to review information and verify if client has more than RMB500,000 available to engage in financial futures trading (for financial futures clients)
Application for unique trading code from China Futures Market Monitoring Center Co., Ltd, and opening an account with client
Alignment with bank account
Account opening process completed. Client may begin futures trading
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The account opening process for an individual is as follows:
1. Firstly, the client will submit his/her personal identification document for our initial verification on the client’s identity.
2. We will then disclose to our clients the risks involved in futures trading, and explain the terms of our client mandate to our clients.
3. An examination will be conducted to ensure our client has sufficient understanding and awareness of the risks involved in, and the operation of, futures trading (for financial futures clients).
4. We will then review the examination results and only proceed further with clients who have passed (for financial futures clients). Those who have not passed our examination will need to undertake another training and examination process.
5. We will then conduct a background due diligence and verification on the client, such as his/her credit worthiness, financial position and futures trading experience.
6. We will then ask our client to sign the client mandate and the relevant risk disclosure statements.
7. The signed client mandate, risk disclosure statements, and background diligence and verification results will then be submitted to our Audit and Legal Department for review and verification. Only clients with more than RMB500,000 in available funds may proceed with account opening process to engage in financial futures trading as required by the China Financial Futures Exchange (for financial futures clients).
8. We will establish a trading account for our client, and apply for an unique trading code from China Futures Market Monitoring Center Co., Ltd (the third-party designated under PRC laws to issue such codes) on behalf of our client so that our client can use this unique trading code to engage in futures trading at any one of the four PRC Futures Exchanges.
9. We will then align our client’s trading account with our client’s bank account such that funds can be transmitted to our client’s trading account.
10. Once this process is completed, our client may begin using our futures brokerage services.
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The client account opening process for our futures brokerage business’s corporate clients is as follows:
Corporate client
Verification of client’s identification documents
Disclosure of risks in futures trading and explanation on client mandate
Verify if client has more than RMB500,000 available to engage in financial futures trading (for financial futures clients)
Verify if the client has implemented the necessary internal control and risk management policies for the corporate client to engage in futures trading (for financial futures clients)
Conduct background due diligence on client
Examination of understanding (for financial futures clients)
Signing of risk disclosure statement and client mandate
Review signed documents
Submission of documentation to Audit and Legal Department for verification
Audit and Legal Department to review information
Application for unique trading code from China Futures Market Monitoring Center Co., Ltd, and opening an account with client
Alignment with bank account
Account opening process completed. Client may begin futures trading
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1. Firstly, the client will submit its corporate identification information, such as their agent’s personal photograph and personal identification documents, their business licence certificate, organization code certificate, taxation certificate, and corporate authorisation documents for our initial verification on the client’s identity.
2. We will then disclose to our clients the risks involved in futures trading, and explain the terms of our client mandate to our clients.
3. We will then conduct a verification to ensure the client has more than RMB500,000 in available funds to engage in financial futures trading as required by the China Financial Futures Exchange (for financial futures clients).
4. We will then verify if the client has implemented the necessary internal control and risk management policies for the client to engage in futures trading (for financial futures clients).
5. We will then conduct a background diligence and verification on the client, such as its credit worthiness financial position and futures trading experience.
6. An examination will be conducted on the person designated by the client to engage in futures trading on behalf of the client to ensure our client’s designated person has sufficient understanding and awareness of the risks involved in, and the operation of, futures trading (for financial futures clients).
7. We will then review the examination results and only proceed further with clients who have passed. Those who have not passed our examination will need to undertake another training and examination process (for financial futures clients).
8. We will then ask our client to sign the client mandate and the relevant risk disclosure statements.
9. The signed client mandate, risk disclosure statements, and background diligence and verification results will then be submitted to our Audit and Legal Department for review and verification.
10. We will then establish a trading account for our client, and apply for an unique trading code from China Futures Market Monitoring Center Co., Ltd (the third-party designated under PRC laws to issue such codes) on behalf of our client so that our client can use this unique trading code to engage in futures trading at any one of the four PRC Futures Exchanges.
11. We will then align our client’s trading account with our client’s bank account such that funds can be transmitted to our client’s trading account.
12. Once this process is completed, our client may begin using our futures brokerage services.
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Client margin deposit management
We require client margin deposits to be segregated from our own funds and manage them in separate accounts. We may adjust the required margin deposit in a timely manner based on the client’s creditworthiness and market conditions. If a client fails to pay a margin call in a timely manner, we exercise our right to close out the position in accordance with the futures exchange contract.
Trading
We have established various policies to regulate futures trading. For example, we prohibit our employees from making any kind of non-compliant entrustment arrangements with customers (including prohibiting our employees from executing orders on behalf of customers on discretionary basis), providing profit guarantee to customers, or participating in futures trading. We have established staff code of conduct and provided training to our employees to enhance their awareness of the significant consequences for unauthorised trading. We maintain backups of our clients’ trading order records on a daily basis.
Real-time monitoring
We conduct real-time risk monitoring during the trading process, focusing on risky accounts and abnormal trading. In addition, we provide real-time warnings on unusual trading and other irregularities.
Abnormal trading generally may involve frequent cancellation of trading orders, cancellation of large trading orders, or trading with oneself or with a related or associated counterparty. With the assistance of our IT System, we endeavour to identify the suspected abnormal trading patterns. Once those clients who execute such suspected abnormal trading patterns are identified, we would conduct further investigation and make enquiry with the relevant clients. If our investigation confirms that the subject client is in fact carrying out abnormal trading, we would remind those clients of the relevant requirements and require them to provide a written undertaking not to further engage in such abnormal trading and if necessary, refuse to further carry out their trading orders and report the case to the relevant authorities.
We believe these measures could help us to timely identify relevant transactions and effectively mitigate the risk of processing trading orders carrying out by unauthorised personnels.
Segregation of businesses
We require our futures brokerage business to be segregated from other businesses with conflicts of interest such as asset management. Key functions, such as withdrawal and transfer of funds, accepting delegation from clients and clearing and settlement should be properly segregated. We separately handle and manage our clients’ funds and our own funds. Our IT systems for our futures brokerage business and other businesses with conflicts of interest are mutually independent or physically separated.
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Mechanism for client follow-up and handling client complaints
As part of our internal control mechanism to prevent misleading or fraudulent representations by our employees and business partners to our clients, and also to ensure that our employees are not carrying out futures trading orders for our clients which are outside their permitted scope of job duty, we have established a coordinated client service platform to follow-up with our clients. Meanwhile, we prominently display information about the hotlines and email addresses that handle client complaints at our website and our branches, to ensure the concerns of our clients are handled properly and in a timely manner.
Asset Management Services
Pursuant to the Procedures for the Adequacy Evaluation of Asset Management Business 《期貨( 公司資產管理業務投資者適當性評估程序》) (“Evaluation Procedures for Asset Management”) by Futures Companies issued by CFA in April 2015, a futures company shall strictly implement procedures for the adequacy evaluation of its asset management business.
Our Company has complied with the Evaluation Procedures for Asset Management and implemented procedures for the adequacy evaluation of our asset management business pursuant to the Evaluation Procedures for Asset Management.
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We adopt the following internal control measures in order to manage the risks associated with the asset management business:
Account Management
The client account opening process for our asset management business’s clients is as follows:
Gather the necessary information from the client for opening an account, explanation of the strategy and risk involved, signing the client mandate (applicable to clients of targeted asset management scheme as well as clients of collective asset management scheme)
Establish bank account for asset management
Filing the details of the basic bank account
Review account opening materials
Submit application to China Futures Market Monitoring Center Co., Ltd to apply for asset management trading code
Completion of asset management trading account opening and filing
1. Firstly, we will gather the necessary documentation from our client for the account opening process. Our individual clients are required to provide their identification documents and personal photographs, whilst our corporate clients are required to provide their agent’s personal photograph and personal identification documents, their business license certificate, organization code certificate, taxation certificate, and corporate authorisation documents. We will then make full and frank disclosure of the risks involved in the relevant asset management scheme, the relevant investment strategies involved, and client mandate provisions to our client. Our clients are also required to give an undertaking as to the legality of their funds.
2. We will then establish a bank account for our client to be used for asset management. Our minimum subscription amount is RMB1.0 million.
3. We will then make a filing report to China Futures Market Monitoring Center Co., Ltd concerning the bank account details within five working days of establishing that bank account for our client.
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4. Our Audit and Legal Department will then review the account opening materials.
5. If our Audit and Legal Department has approved the account opening materials, we will then submit an application to China Futures Market Monitoring Center Co., Ltd for an asset management trading code.
6. Once the asset management trading code has been obtained, the account opening process is complete.
Reporting Mechanism
We have implemented reporting mechanisms which require our asset management business involved personnel to report to the general manager and Chief Risk Officer immediately upon the occurrence of any one of the following events:
1. our client’s loss has exceeded 10% of the value of its asset under our management within the same day;
2. our client’s asset under our management is being investigated by any one of the futures exchanges or the relevant PRC authorities;
3. early termination of our asset management mandate by our client; and
4. any other circumstances that may adversely affect our client’s interest or the asset under our management.
Investment decision-making procedures
We have established a three-level management system for our futures asset management business, which comprises the Board, the asset management business decision committee and our asset management centre.
The asset management business decision committee, within the authorisation from the board, reviews the products, business scale, significant operation matters, assets allocation proposal, and significant risks associated with our futures asset management business. The asset management centre is responsible for the decision implementation and daily operation and management of our futures asset management business, including product design and evaluation, marketing, investment management and real-time monitoring of the risks associated with our futures asset management business.
Management of trading procedures
We assign different personnel to issue investment orders and to execute trades. Investment managers issue trading orders in accordance with the authorisation and instructions and the scope of investment specified in asset management agreements. Traders shall strictly follow such orders in executing trades and the risk control personnel shall oversee the risks. Both the issuance and the execution of trading orders are recorded.
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Segregation of business
We require the asset management business to be segregated from our brokerage business in order to prevent insider trading and avoid conflicts of interest. A senior executive is prohibited from managing both asset management business and futures brokerage business simultaneously. These two departments shall not be led by the same individual.
Risk disclosure
We require our product design personnel to fully disclose the information related to our products in our investment reports and transaction plans. We also require our personnel to explain the asset characteristics, monitor the risk arising in the investment and proactively disclose the risk to our clients.
Real-time risk monitoring
The risk control personnel in our asset management business are engaged in real-time monitoring of our asset management business with the IT system for our asset management business. We centralise the management of our clients’ assets and prohibit any other departments or branches from conducting asset management business without consent. If abnormal trading is identified in our asset management business (i.e. in the clients’ accounts managed by us), our risk control personnel will enquire with the relevant fund manager and report to our management where necessary.
Commodity Trading and Risk Management Business
We determine the overall investment scale and risk limits associated with our investments. Within such prescribed limits, we adjust our actual trading activities based on market conditions.
The following measures for our commodity trading and risk management business have been implemented:
Evaluation and Approval of Trading Strategies
Each trader is required to seek approval from the Board or the Risk Management Committee in respect of each type of proposed transaction. Such request shall contain market research, project plan, risk assessment and compliance checking. Prior approval by the relevant department and senior management shall be obtained before a particular type of transaction can be carried out.
Evaluating Client Creditworthiness
We perform credit assessment based on indicators such as business scale, financial condition and transaction history before commencing business with a particular client. Information submitted by a potential client, publicly available information and search reports prepared by independent agents are reviewed in the process of credit assessment. The management of Holly Capital will make decisions regarding the potential transaction based on credit assessment results.
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Segregation of business
Same as futures brokerage business and asset management business, we require our commodity trading and risk management business to be segregated from our other businesses in order to prevent insider trading and avoid conflicts of interest. A senior executive is prohibited from managing our commodity trading and risk management business and our other businesses simultaneously. The departments may not be led by the same individual. We also separately handle and manage the funds in commodity trading and risk management business from those in futures brokerage business or asset management business.
Detection and avoidance of fraud in warehouse receipts trading business
In warehouse receipts trading business, we emphasize on the credit check of our counter party and the security of the underlying commodities. In order to safeguard the underlying commodities, we perform physical inspection on the underlying commodities; we appoint warehouse supervisor or logistic service providers which are approved by the PRC Futures Exchanges with good reputation and national recognition; and we will not accept any warehouses or logistic service providers introduced by transaction counter parties. In transactions of purchase and re-sale of commodities, we only accept standard warehouse receipts which are qualified for being recognized by the PRC Futures Exchanges and the underlying commodities are stored and transacted in warehouses designated by the PRC Futures Exchanges. We also pay extra attention in evaluating clients creditworthiness and ongoing monitoring of the updated status of our counter parties by requiring our counter parties to provide updates on business and interim and annual financial statements to us; performing background search and follow-up search on our counter parties; and performing regular due diligence visits to our counter parties.
Chinese Walls
As a provider of different futures services, we inevitably face conflict of interests. We believe it is important to manage such conflict of interests in order to protect the interests of our clients and employees. Therefore, we have established Chinese Walls between businesses with conflicting interests to prevent and reduce the potential conflict of interests, control the flow of material non-public information, thereby ensuring compliance with relevant rules and regulations.
Segregation of Duties
To minimise the opportunity for collusion, misuse of information or improper trading, duties and functions within our various business departments are assigned to different teams of employees. The business operation and decision making of our futures brokerage, asset management and commodity trading and risk management businesses, as well as our research department, operate independently from one another, and no employees may work for two or more departments simultaneously.
No employees in our IT Department, Finance Department and Audit and Legal Department may work in any of the above-mentioned business departments simultaneously. The personnel responsible for the settlement of funds may not work in our IT Department or futures brokerage, asset management and commodity trading and risk management businesses. Employees who conduct questionnaires and
— 195 — BUSINESS quality control on the services provided to clients should not be the same persons who provide those services to the clients. Furthermore, employees from the sales department cannot be the examination officer examining on a potential client’s knowledge of the risks involved in futures trading. Without authorisation, futures brokerage employees may not set the authorisation limit of the trading system and may not lend their system operation authorisation to personnel of the IT Department or the Clearing Department. Our futures brokerage, asset management, and commodity trading and risk management businesses operate independently from each other and use separate trading desks and accounts.
Conflicts of Interest
Conflicts of interest may arise between (i) our various departments; (ii) our clients and us; (iii) our various clients; (iv) our employees and us; or (v) our clients and our employees.
We have implemented the following specific measures to prevent conflicts of interests:
• Research personnel should not provide false information that misleads clients; and
• Investment analyses, forecasts or recommendations provided to different clients for the same issue and at the same time may not contain contradicting views.
One of the fundamental objectives of Chinese Walls is to manage conflicts of interest. We have adopted a series of measures and methods to manage conflicts of interest based on the principles of prioritising client interests and treating clients fairly. We adopt measures of information segregation to avoid conflicts of interest. When we or our employees have a conflict of interest with any client, the client’s interests prevail. When a conflict of interest arises between clients, we are required to treat our clients fairly.
We have also given internal control manuals to our employees, and required them to learn and comply with our internal policies. We also require our employees to disclose any conflict of interest to the manager of the relevant departments in a timely manner.
Anti-Money Laundering
In order to comply with the rules and regulations set by the PRC government, and in order to prevent money laundering and terrorist financing, we have the appropriate policies and procedures in place. Money laundering activities refer to various activities intended to hide or change the source of money which is illegal in the first place. We have provided an anti-money laundering training program for our employees. Our employees are required to conduct stringent identification verification for clients applying to open new accounts, and to review and archive their identification documents and transaction records. We may restrict, suspend or terminate our business relationship with clients if we have reasonable grounds to suspect that our client is involved in money laundering. We are also authorised under the PRC laws and regulations to freeze any accounts that have the traits of money laundering. We are also required to notify The People’s Bank of China for any activities that match the characteristics of money laundering.
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We have also established reporting systems for large-size transactions as well as suspicious transactions. For example, an unusual large amount of futures trading for a client whose trading account has been inactive for some time, or clients who enter into futures contracts without justifiable commercial grounds, such as buying high and selling low. Our Chief Risk Officer is responsible for reporting to the Board from time to time the status of our money-laundering risk and anti-money laundering activities. We have also formulated specific policies on the training and promotion of anti-money laundering activities as well as reporting suspicious activities and assisting with the investigation of money laundering activities. We also submit reports about our money laundering information and activities in accordance with the relevant regulatory requirements.
As at the Latest Practicable Date, we have not received any administrative penalties from regulatory authorities as a result of violation of PRC laws and regulations related to anti-money laundering. We have never engaged in, or knowingly assisted, any money laundering activities. For risk regarding money laundering activities, please see the paragraph headed “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” in this prospectus.
Investment and Treasury Policies and Internal Controls for Financial Investment
To enhance the effectiveness of our internal control and risk management procedures and to identify and manage the risks which we may be exposed to in handling financial investment transactions, we established a two-level structure with a comprehensive risk management governance structure to manage the risks associated with our financial investments.
Under a two-level structure for approving our investment and treasury activities, namely the Board and the investment decision-making group, the Board ultimately oversees the investment decision-making group and is responsible for deciding on and approving (i) the annual investment limit for the annual investment plan, and (ii) any other important matters in relation to investment and treasury activities. The investment decision-making group, comprising of the chief investment officer, the investment manager and the Chief Risk Officer, is responsible for (i) approving any specific investment proposal prepared by our research personnel within the annual investment limit approved by the Board and (ii) formulating an annual investment plan in relation to the scope of pool of investment products and principles and asset allocation of our financial investments activities on an annual basis to the extent permitted under the PRC laws and regulatory requirements. Members of the investment decision-making group have an average working experience of 12 years in the securities and financial industries in China and are licensed to engage in futures businesses. Various officers, including (i) the investment manager, (ii) the risk control personnel and (iii) the research personnel, are responsible for implementing the investment decisions approved by the investment decision-making group in accordance with the annual investment plan, and is supervised by the investment decision-making group.
The investment manager, supervised by the chief investment officer, is responsible for executing the investment orders in accordance with the specific investment proposal and the stop-profit or stop-loss mechanism and monitoring and controlling the risk associated with our financial investment activities in the investment team. For the wealth management products, the finance department would prepare assessment report for consideration and approval by our senior management on a case-by-case basis.
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The risk control personnel, being accountable to the investment decision-making group, is responsible for managing any actual or potential risks arising in the process of financial investment, conducting risk assessment in the aspects of investment, research, securities trading and settlement, preparing reports on our risk management measures and making proposal to rectify any improprieties.
The research personnel, being accountable to the investment decision-making group, is responsible for preparing investment proposals in relation to daily investment operation activities.
We have also put in place the following investment and treasury policies and internal control measures to control the investment risks with respect to our financial investments:
• Setting the limit on any aggregage investment loss of equity securities or any other investment products to be not more than 20% of our total investment;
• Setting the limit on aggregate investment of equity securities to be not more than 80% of our total investment; if an amount being equivalent to more than 80% of our total investment has to be applied, the decision shall be collectively made by the investment decision-making group;
• Establishing stop-profit or stop-loss mechanisms to stop profit or loss on an overall basis or on each individual stock. For each individual stock, the investment decision-making group sets pre-determined points to stop profit or loss;
• Establishing a a portfolio for our financial investment at the beginning of the year and reviewing a portfolio from time to time during the year based on research;
• Monitoring our securities holdings on a real-time basis, including profit or loss on our account and on each individual stock by the Chief Risk Officer (being Mr. Jia Guorong) who will review the investment result on a daily-basis. For details of Mr. Jia Guorong, please see the section headed “Directors, Supervisors and Senior Management — Senior Management” in this prospectus;
• In case of vigorous fluctuation in financial market, our investment decision-making group would consider and decide the treatment of loss-making investments (if any);
• In respect of wealth management products, before making the investment decision, we evaluate the investment plan through understanding various aspects, primarily including (i) the expected return rates, (ii) the expected holding period; (iii) the total investment amounts needed, as well as other relevant risks and the general market condition according to the information from the public sources; and (iv) the investment direction; and
• There is only one overlapping member (being an investment manager) among the investment decision-making group and the investment team of the finance department, we believe that the potential conflict of interests between the two duties of the investment
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manager are low and the investment decision-making group and the investment team will function independently given that the majority of members in the investment decision-making group are in the roles of supervision and risk control monitoring who are not involved in the implementation and execution of the annual investment plan.
LAWS AND REGULATIONS
Licensing Requirements
We conduct our futures business in the PRC and are subject to the regulatory requirements of the PRC. Our Company is a trading member of the Shanghai Futures Exchange, the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange, and a general clearing member of the China Financial Futures Exchange. In addition, in November 2015, we were approved to act as the stock options trading participant by the Shanghai Stock Exchange. Our Directors and PRC legal advisers confirm that, during the Track Record Period and as at the Latest Practicable Date, we have obtained all material consents and licenses required for our operations in accordance with the PRC laws and regulations and as at the Latest Practicable Date, such licenses, approvals and permits remained in full effect, and had not been revoked or cancelled. During the Track Record Period and up to the Latest Practicable Date, these licences have not been suspended due to any material non-compliance matters.
To the best knowledge of our Directors after due enquiry, our Directors confirm that, as at the Latest Practicable Date, all of our employees have, where required, obtained the relevant qualifications for their business activities.
In relation to the futures market in Hong Kong, it is a highly regulated market. The principal regulatory bodies governing the Group’s businesses in Hong Kong are the SFC and the HKEx. The Group’s businesses in Hong Kong are subject to a number of legislations and regulations.
In addition, Holly Su Futures is required to be licensed with the SFC and apply as a participant of the HK Futures Exchange in order to carry on their activities. As at the Latest Practicable Date, Holly Su Futures held the following licences/trading rights which are required to carry on the activities of the Group in Hong Kong as described in this prospectus:
Licence/certificate/ participantship Date of issue/ holder Licence/certificate/participantship admission
Holly Su Futures Licence under the SFO to carry on Type 2 (dealing 29 June 2012 in futures contracts) regulated activities HK Futures Exchange Participant Certificate 1 August 2012 HKCC Participant Certificate 1 August 2012
Note: There are no expiry dates for the above licences, certificates or participantships. The issuing authority (i.e. the SFC or the HKEx) reserves the right of revoking these licences, certificates or participantships under relevant rules and regulations.
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Since its establishment, Holly Su Futures has not experienced any difficulties in renewing any of its licences and participantship or has any of such licences and participantship been revoked. The Directors confirm that Holly Su Futures has obtained all requisite licences, permits and certificates necessary to conduct its operations. Holly Su Futures has complied with all applicable laws and regulations in Hong Kong in material respects since its establishment.
All the staff of Holly Su Futures currently performing regulated activities, including staff members in handling clients’ orders, are properly registered under SFO as either Licensed Representatives or Responsible Officers.
Regulatory Non-compliance
We are subject to a number of regulatory requirements issued by the regulatory authorities in the PRC, including but not limited to the CSRC, the PRC Futures Exchanges and the CFA. For details, please see the section headed “Regulatory Overview” in this prospectus.
Our Directors and our PRC legal advisers confirm that, during the Track Record Period and up to the Latest Practicable Date, save as disclosed in this subsection and the subsection headed “Legal Proceedings” below, we have complied with the relevant PRC regulatory requirements in all material aspects, and there were no other material incidents of regulatory non-compliance that led to regulatory measures or fines imposed by any regulatory authorities in the PRC, or in which our employees were prosecuted or convicted.
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The table below sets out summaries of our major non-compliance with relevant applicable laws and regulations during the Track Record Period and up to the Latest Practicable Date.
Relevant laws and regulations and legal consequence(s) and maximum potential Non-compliance incidents penalty and other financial liabilities Explanation and our remedial measures
During the Track Record Period, we had been According to the Social Insurance Law of the We made social insurance and housing fund making social insurance and housing fund PRC《中華人民共和國社會保險法》and other contributions through third parties agency due contributions through third parties human relevant regulations, PRC companies are to two reasons, namely (1) certain employees resources agencies (instead of making required to register social insurance started working in certain futures branches contribution to the authorities directly by contributions for employees which shall cover and we needed to pay for their social ourselves) in respect of certain employees. basic pension insurance, unemployment insurance and housing fund before such insurance, basic medical insurance, workplace futures branches successfully registered In addition, during the Track Record Period, injury insurance and maternity insurance.The payment accounts directly with the we used to make social insurance competent PRC authority may order us to governmental authorities, and (2) some contributions for some of our employees with rectify such non-compliance within a employees employed by us in another city reference to basis other than their actual specified period, and if we fail to do so have worked in Nanjing. These employees salary amount, as a result of which, the within such time limit, the competent PRC prefer to have their insurance and competent social insurance authority might authority may, at its discretion, impose a fine contributions paid in Nanjing while our office demand for outstanding social insurance of up to three times of the amount of the outside Nanjing had not yet been able to approximately RMB2.4 million (“2012 overdue contributions. register payment account in Nanjing. Outstanding Social Insurance Payment”) for the six months ended 31 December 2012, According to the Administrative Regulations Once we were advised by our PRC legal to which we made full provisions. on the Housing Provident Fund of the PRC advisers that such arrangement is not (住房公積金管理條例) and other relevant appropriate, we immediately started to regulations, PRC companies are required to arrange registration and contribution of social register with the relevant housing provident insurance and housing fund contributions for fund authority and make housing provident our employees directly by ourselves in the fund contribution for employees. The relevant place of employment. To prevent competent PRC authority may order us to future recurrence of non-compliance rectify such non-compliance within a incidents, we have relevant corporate specified period, and if we fail to do so governance measures. For details, please see within such time limit, the competent PRC “Corporate governance measures” below. authority may, at its discretion, impose a fine up to approximately RMB50,000. As of the Latest Practicable Date, we have not received any order from the relevant PRC authorities in relation to the non-compliance of making social insurance and housing fund contribution through third party agency ordering rectification of such non-compliance. As we expect to rectify such non-compliance by December 2015, no provisions has been made by us in this regard.
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Relevant laws and regulations and legal consequence(s) and maximum potential Non-compliance incidents penalty and other financial liabilities Explanation and our remedial measures
According to Social Insurance Law of the As of the Latest Practicable Date, we have PRC《中華人民共和國社會保險法》 ( ), for not received any requests or instructions from delayed submission of social security the relevant PRC authorities in relation to insurance, the competent PRC authorities may payment of the 2012 Outstanding Social order us to make the entire amount of Insurance Payment. Regarding the 2012 outstanding contributions within a specified Outstanding Social Insurance Payment, we period and impose a late payment fee at the made a full provision of RMB2.4 million rate of 0.05% per day starting from the date (which does not take into account the of late payment. If we fail to make the potential late payment fee), to which we overdue contributions within such time limit, consider sufficient. The reasons for not the competent PRC authorities may, at its making provisions for the potential late discretion, impose a fine up to three times of payment fee or penalty mainly includes (1) the outstanding amount. SOHO Holdings has provided indemnities in respect of any and all liabilities in this connection; and (2) according to HKAS 37 — Provisions, contingent liabilities and contingent assets, the provisions would be made if “it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation”. According to the definition, the provisions would not be made if there is lack of supporting evidence showing that the late payment fee or penalty is probable to be imposed. We intend to make full payment of such amount immediately upon receiving such instruction. In addition, we have corrected the formula in calculating social security insurance payables in compliance with relevant laws and regulations since July 2012.
On 2 April 2015, Nanjing Social Insurance Management Centre (南京市社會保險管理中 心), being the competent PRC authority for social insurance in Nanjing City, issued a confirmation letter, in which it confirmed that the Company had no outstanding social insurance payment as at the end of March 2015. In addition, the Company and its PRC legal advisers have conducted a face-to-face interview with Nanjing Social Insurance Management Centre (南京市社會保險管理中 心), which confirmed that, mainly due to administrative reasons, it would not require the Company to make payment of the 2012 Outstanding Social Insurance Payment and the relevant late payment fee and impose any penalty on the relevant overdue contributions. Based on the aforesaid interview with and the confirmation dated 2 April 2015 issued by the competent PRC authority, our PRC legal advisers are of the view that the relevant PRC competent authority will not order us to make the payment of the 2012 Outstanding Social Insurance Payment and the relevant late payment fee or impose any penalty on the aforesaid overdue social insurance contributions.
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Employee non-compliance incidents
During the Track Record Period and up to the Latest Practicable Date, certain incidents involving employee non-compliance occurred and were discovered by the regulators. Details of each of these employee non-compliance, relevant laws and regulations and legal consequence(s) and maximum potential penalty and other financial liabilities and explanation and our remedial measures are set forth below.
Relevant laws and regulations and legal consequence(s) and maximum potential Non-compliance incidents penalty and other financial liabilities Explanation and our remedial measures
In September 2013, the CFA issued a According to articles 52 and 87 of Measures Such incident arose because our individual disciplinary reprimand to the Company for the Supervision and Administration of employees failed to close their accounts prior because individual employees opened futures Futures Companies《期貨公司監督管理辦 ( to their formal employments. trading accounts in the Company. 法》), a futures company’s employee and his or her spouse are prohibited from trading in We took remedial measures immediately after futures. Failure to comply could result in the receipt of the disciplinary reprimand, which CSRC issuing a reprimand and a warning included: (i) conducting background checking letter. Also, according to article 67 of of employees, in particular whether they have Administrative Regulations on Futures opened a futures trading account before the Trading《期貨交易管理條例》 ( ), a futures employment; (ii) monitoring with the company cannot accept the futures trading assistance of the “futures company employees order from prohibited persons (including the accounts opening enquiry (screening) system” futures company’s employees). If the futures established by the CFA and China Futures company fails to adhere to warning, its Market Monitoring Center Co., Ltd (中國期貨 profits made from such contravention could 市場監控中心); and (iii) providing additional be forfeited, and subject to a penalty up to 3 training to the employees to strengthen their times of the profits made from such professional ethics and compliance contravention, and a further fine up to awareness. To prevent future recurrence of RMB300,000. The license of the futures non-compliance incidents, we have company could also be suspended. The implemented relevant corporate governance personnel responsible (including the measures. For details, please see “Corporate responsible officers of the Company for governance measures” below. proper supervision) could be subject to a fine of RMB50,000, and suspension or revocation of his or her qualification to be employed in the futures industry.
We received the letter of reprimand from the CFA in September 2013. We noticed that such reprimand had been recorded in the internal system in the CSRC. Save for the aforesaid, we did not receive any other punishment from the CFA or the CSRC in relation to such incident, and we were still able to maintain our grading as “Class A of the A Category” in the CFA.
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Relevant laws and regulations and legal consequence(s) and maximum potential Non-compliance incidents penalty and other financial liabilities Explanation and our remedial measures
In January and February 2015, the relevant The CSRC found that the relevant employees We have been striving to control the work of local branches of the CSRC issued two had contravened Article 14 of the Measures our staff in compliance with the relevant warning letters and orders addressing directly for the Administration of Futures regulations by, among other things, (i) to two of our employees, alleging that, when Practitioners《期貨從業人員管理辦法》. reminding our employees not to trade or such employees worked in our Company, they According to Article 29 of the Measures for execute any trade orders on behalf of our conducted futures trading on behalf of certain the Administration of Futures Practitioners, clients; (ii) providing training to our clients. the relevant local branches of the CSRC employees; (iii) reminding our clients that issued warning letters to such employees (but our employees are not permitted to execute not us) and ordered to revoke their any trade for them, share any investment gain qualification for conducting futures related or loss, nor guarantee any investment results; business. We had terminated the employment and (iv) carrying out clients survey to check contract with such employees. with their feedback on our staff and our Company from time to time. We consider that In May 2015, two customers which one of this incident is an isolated case. The subject the employees took care of filed a lawsuit employees acted in his own personal capacity against us. Please see “Legal Proceedings” and out of their permitted scope of work below. duties. In order to reduce the chance of recurrence of similar kind of incident, (i) we emphasised to our employees again that they are not allowed to carry out futures trading for the clients and the importance of adherence to our staff code of conduct; (ii) we are carrying out clients’ survey more frequently; and (iii) we provide additional training to our staff.
Corporate governance measures
In order to prevent the recurrence of non-compliance incidents, we will adopt or have adopted the following measures:
• We have appointed legal advisers to provide legal services to us in relation to future compliance with relevant laws and regulations in the PRC and in Hong Kong;
• We have appointed Guotai Junan Capital Limited as our compliance advisory to advise us on certain compliance matters in relation to the Listing Rules;
• We have improved our internal control and risk management framework by updating the internal control and corporate governance system in accordance with the development of relevant laws and regulations;
• We have strengthened training for our employees on compliance awareness, professional ethnics and regulatory updates;
• Regarding our social insurance and housing fund non-compliance, we improved the human resource administration for employees to ensure making personal employment records for each of the employees and proper registration of the corresponding employment terms with the local authority and to make contributions in accordance with relevant regulations; and
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• Regarding our disciplinary reprimand and non-compliance with relevant futures regulations by our employees, we will (i) conduct background checks of our employees; (ii) provide additional training to our employees in relation to regulatory compliance and professional ethnics to enhance employee accountability; (iii) constantly remind our employees not to trade or execute any trade orders on behalf of our clients; and (iv) encourage our employees to report potential issues to the management; (v) randomly check the performance of our employees; and (vi) impose strict internal sanction mechanism on non-complying employees.
None of our Directors nor any member of our senior management was directly involved in the foregoing non-compliance incidents. Our Directors and our PRC legal advisers confirmed that the foregoing non-compliance incidents did not and will not have any material adverse effect on our business, financial position and results of operations. Given (a) the immateriality of our non-compliance incidents, (b) the internal control measures that we have enhanced and adopted, (c) the Company engaged an independent internal control consultant to perform a certain agreed-upon procedures in connection with the internal control for the Group between January 2015 and February 2015 based on the agreed scope among the Sole Sponsor and the Company, (d) based on the follow-up review in May 2015 by the internal control consultant, no material deficiency has been identified, and (e) the foregoing legal advice from our PRC legal advisers, our Directors are of the view that (i) we have adequate and effective internal controls; (ii) it is unnecessary to make any additional provision for these non-compliance incidents; and (iii) such incidents do not have any material impacts on the suitability of our Directors and our suitability for listing. After making reasonable inquiries, there is nothing that leads the Sole Sponsor to disagree with our view.
Legal Proceedings
As at the Latest Practicable Date, we are involved in the following legal proceeding arising in the ordinary course of our business, summarised as below:
(i) Dispute involving our customers of futures brokerage business, an ex-employee and our Company
On 8 May 2015, two of our customers (being Customer B and Customer B’s company) filed lawsuits against us, alleging that (i) one of our ex-employees (Mr. A) had carried out unauthorised futures trading by using the accounts of Customer B and Customer B’s company; and (ii) our Company had charged Customer B and Customer B’s company with brokerage commissions in excess of the rate as agreed in the respective clients’ brokerage service agreements. The aggregate amount of these two claims is approximately RMB46.8 million together with an aggregate interest of approximately RMB12.0 million.
In respect of this legal proceeding, we have reviewed our internal records and discussed with our PRC litigation lawyers. We consider that the relevant allegations have no merit because the incident arose from a personal arrangement between Mr. A and Customer B in which Customer B had entrusted Mr. A with all futures trading activities (including executing futures trading orders at Mr. A’s discretion) on behalf of Customer B. Such entrustment was outside the permitted scope of work of Mr. A as all of our employees are not permitted to place orders on behalf of clients on a discretionary basis
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(as opposed to executing orders made with client’s instructions). Such entrustment was also outside the agreed scope of services as set forth in our brokerage customer agreement with Customer B, which stated that our Company or our employees must not be entrusted with discretion for any kind of activities in relation to futures trading, and that customers must not request our Company or employees to engage in any kind of entrustment arrangements in connection with futures trading. Furthermore, our brokerage service fee charged and subsequent adjustment to such fees were in accordance with terms of our brokerage customer agreement as well as the trading rules of the PRC Futures Exchanges.
On 9 November 2015, we received the relevant first trial judgments dated 5 November 2015 (the “Trial Judgments”) and granted by the Intermediate People’s Court of Nanjing City, Jiangsu Province (the “Nanjing City People’s Court”). According to the Trial Judgments, the Nanjing City People’s Court ruled that, among other things, (i) the Company has not violated any of the relevant brokerage service agreements and the unauthorized futures trading activities of Mr. A through the use of the accounts of Customer B and Customer B’s company were the personal fault of Mr. A and as a result, consequences of such unauthorized trading activities should not be borne by the Company, and (ii) the adjustments to the brokerage commission rates made by the Company were in accordance with the terms of the relevant brokerage service agreements entered into by the Company with Customer B, and Customer B’s company respectively. On 23 November 2015, Customer B and Customer B’s company appealed to the Higher People’s Court of Jiangsu Province respectively, requesting that, among other things, the Higher People’s Court of Jiangsu Province revoke the Trial Judgments. As at the Latest Practicable Date, the legal proceedings with Customer B and Customer B’s company are still on-going.
After our internal investigation, we consider that this proceeding relates to an isolated incident of an employee and was not related to any failure in the Company’s internal control failure. It was because (i) all futures trading orders of Customer B were placed through our online trading platform. Each of our clients (including Customer B) is assigned with a unique log-in name and password. We have advised all of our clients (including Customer B) to change password from time to time and to safeguard their account password for security purposes. As the transactions were conducted on-line authorised with customer’s valid log-in identity and password, it is not possible for us to detect whether such transactions were conducted by Customer B or conducted by someone else entrusted by Customer B under private arrangement; and (ii) as one of our internal control measures for preventing any non-compliant arrangement between our clients and employees, we carry out surveys and telephone interviews with our clients. Based on our records of survey with Customer B, Customer B confirmed to us in repeated surveys that she did not entrust anyone to conduct trading for her on discretionary basis and all the transactions were executed by herself directly. Based on the above, we consider that this proceeding relates to an isolated incident and was not related to any failure in our internal control.
Nevertheless, in order to prevent the reoccurrence of similar kind of incident in the future, we (i) provided training and reminders to our employees emphasizing that they are not allowed to carry out futures trading for the clients outside the permitted scope of work, in particular, employees are not allowed to place orders on behalf of clients on discretionary basis and the importance of adherence to our staff code of conduct; (ii) established the schedule to carry out clients survey more frequently; and (iii) enhanced the monitoring capability of our IT system to ensure our employees are not carrying out our clients’ futures trading orders through unauthorised channels. For more details, please see “— Internal Control Measures — Futures Brokerage Business” above.
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On the basis of the Trial Judgments, our Directors consider that no provision in the financial statements is required. Our Directors also confirmed that this legal proceeding would not have material adverse effect on our business.
(ii) Contract dispute arising from our commodity trading and risk management business
This contract dispute was related to our warehouse receipts service. On 24 September 2014, Holly Capital entered into a purchase agreement (the “Purchase Agreement”) with a client (“Client X”) pursuant to which Holly Capital agreed to purchase rice crops from Client X. On the same date, Holly Capital and Client X entered into a repurchase agreement (the “Repurchase Agreement”) pursuant to which Client X agreed to repurchase the said rice crops from Holly Capital together with payment of interests prior to 15 September 2015. Holly Capital has also entered into a warehouse supervision agreement (the “Warehouse Supervision Agreement”), pursuant to which Holly Capital engaged and delegated Holly Logistics to supervise the warehouse of rice crops on behalf of Holly Capital during the period when the rice crops belonged to Holly Capital and before the repurchase by Client X. Subsequently, Holly Capital purchased 17,200 tons of rice crops pursuant to the Purchase Agreement for a consideration of RMB52.39 million, of which Client X repurchased 6,470 tons of rice crops pursuant to the Repurchase Agreement with full payment of RMB27.44 million.
In August 2015, Holly Capital found that Client X was in financial stress and approximately 8,500 tons of rice crops owned by Holly Capital had been removed without authorisation of neither Holly Logistics nor Holly Capital. Holly Capital also found that Client X was neither able to return the rice crops, nor repurchase the remaining rice crops. Accordingly, Holly Capital filed a lawsuit against Client X in August 2015, claiming for an aggregate amount of approximately RMB53.9 million, comprising (i) the outstanding repurchase obligation of approximately RMB24.95 million as at the date of the lawsuit filing; (ii) the interest accrued thereon in the amount of approximately RMB0.90 million; (iii) liquidated damages for the breach of the repurchase contract in the amount of RMB27.9 million as agreed in the Repurchase Agreement; and (iv) the warehouse supervision fee in the amount of RMB0.12 million.
At the same time, Holly Capital noted that an independent third party had also filed a lawsuit against Client X claiming the legal title on the approximately 2,000 tons of rice crops left in the warehouse rented by Holly Capital. As the independent third party’s lawsuit related to the rice crops owned by Holly Capital, Holly Capital joined in the independent third party’s lawsuit to assert and protect its legal title on the said approximately 2,000 tons of rice crops.
As at the Latest Practicable Date, the legal proceedings are still on-going.
On the other hand, pursuant to the Warehouse Supervision Agreement, among other things, (i) Holly Logistics was delegated with the obligation of supervising and monitoring any movement in and out of the relevant warehouses storing the rice crops on behalf of Holly Capital; (ii) any removal or shipping out of the said rice crops should be approved by Holly Logistics only with written authorization from Holly Capital, followed by telephone verification with the appointed representative of Holly Capital for confirmation; (iii) report to Holly Capital within 24 hours of the occurrence of any loss of the rice crops; (collectively “Warehouse Supervision Obligations”) and (iv) Holly
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Logistics should compensate the losses suffered by Holly Capital arisen from failure or oversight of Holly Logistics to perform its obligations properly. As Holly Logistics failed to fully perform the Warehouse Supervision Obligations, Holly Capital negotiated with Holly Logistics for compensation under the terms of the Warehouse Supervision Agreement.
For settling Holly Capital’s compensation claim against Holly Logistics, on 8 December 2015, Holly Capital entered into an agreement (the “Assignment Agreement”) with Holly Logistics pursuant to which, among other things, (i) Holly Capital agreed to forgo its legal right of suing Holly Logistics for the failure of fulfilling the Warehouse Supervision Obligations; (ii) Holly Capital agreed to assign its legal rights under the relevant agreements and the relevant goods titles related to this incident to Holly Logistics; (iii) Holly Capital agreed that in any related proceedings, any effective judgments and therein benefits or compensation that may be received by Holly Capital in the legal proceedings relating to this incident will be assigned to Holly Logistics; (iv) Holly Logistics agreed to be solely responsible for any further legal costs concerning the relevant legal proceedings against Client X; and (v) regardless of the outcome of the legal proceedings against Client X, Holly Logistics would not have any further recourse against Holly Capital in relation to this incident. In consideration for the aforesaid, Holly Logistics agreed to pay to Holly Capital in an amount of approximately RMB26.1 million, by instalments, within one year after the effective date of the Assignment Agreement or before Listing, whichever is earlier. Such consideration was determined with reference to mainly the outstanding repurchase obligation of Client X as at the date of the Assignment Agreement and the interest accrued thereon. After seeking PRC legal advice, the Company considers that it would spend much resources in going through the legal proceedings and negotiations with Client X and Holly Logistics. In addition, even if Holly Capital wins the case, there is no guarantee that the court will order Client X to pay us all of the claimed amount and that we could successfully enforce the court’s order (if any) given that Client X was in financial stress. Accordingly, the Company considers that the terms of the Assignment Agreement is in the interest of the Group and the shareholders as a whole.
Our Directors consider that such proceedings relate to an isolated case of contract dispute in our normal course of business pertaining to, primarily, the unlawful action and the breach of contracts by our counterparty (Client X in this case), coupled with the inadvertence of the outsourced warehouse supervisor.
Prior to undertaking this transaction and in the course of conducting this transaction with Client X, we had put efforts in mitigating the relevant risks by, among others, performing due diligence on the background and financial status of Client X; understanding the supervision procedures of Holly Logistics; performing site visit to the warehouses; and checking the performance of duties of Holly Logistics. Despite the above efforts, this incident happened and we believe that this was an isolated case.
Nevertheless, on reflection of the occurrence of this incident, we have adopted more stringent measures in conducting our commodities trading and risk management business which include but not limited to,
(i) we will no longer enter into purchase and re-sale of commodities involving non-standard warehouse receipts (“Non-Standard Warehouse Receipts Services”), and we will only accept standard warehouse receipts in our course of purchase and re-sale business. By
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means of standard warehouse receipts, they are qualified for being recognized by the PRC Futures Exchanges, and the underlying commodities would be stored and transacted in delivery warehouses designated by the PRC Futures Exchanges. According to the respective trading rules of the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange, if, due to the fault of the warehouses designated by the PRC Futures Exchange such that the legal owner of the standard warehouse receipts will not be able to exercise his/her/its rights (including the right of ownership to those goods), such designated warehouse shall be liable for compensation to this legal owner, and in the event that it is unable to compensate, the PRC Futures Exchange is required to compensate the legal owner first before recovering the compensated amount from such designated warehouse. By only accepting standard warehouse receipts in our purchase and re-sale of commedities business, we believe that the risks involved would be effectively reduced; and
(ii) we will appoint warehouses supervisor or logistic service providers which are approved by the PRC Futures Exchanges with good reputation and national recognition and will not engage Holly Logistics again for warehouses or logistic services in the near future. We will not accept any warehouses or logistic service providers introduced by transaction counter parties.
Our Directors believe that, with the aforesaid measures, we are able to avoid similar incidents in the future for our warehouse receipts services. For details, please refer to the section headed “—Internal Control Measures — Commodity Trading and Risk Management Business — Detection and avoidance of fraud in warehouse receipts trading business” in this prospectus. Given that Holly Logistics agreed to pay us approximately RMB26.1 million pursuant to the Assignment Agreement and the operating income contributed by purchase and re-sale of non-standard warehouse receipts in our risk management business had been immaterial during the Track Record Period, our Directors confirmed that the legal proceedings mentioned above would not have a material adverse effect on our business, financial condition or results of operations. During the Track Record Period, the Non-Standard Warehouse Receipts Services contributed nil, RMB0.1 million, RMB3.9 million, and RMB1.7 million to our operating income, representing approximately nil, 0.04%, 1.33%, and 0.98% of our total operating income during the relevant periods, respectively.
Save as disclosed above, as at the Latest Practicable Date, there was no litigation or arbitration proceeding pending or threatened against us or any of our Directors which could have a material adverse effect on our business, financial condition or results of operations.
Each of Holly Corporation and Holly Logistics have executed a unilateral undertakings in favour of our Group to provide indemnities, on a several basis and in proportion to their respective shareholdings in our Company, in respect of, among other things, any penalties imposed due to non-compliance with any applicable laws and regulations and actual or threatened litigation on or before the date when the Global Offering becomes unconditional (collectively, the “Triggering Events” and each, a “Triggering Event”). In addition, SOHO Holdings, our Controlling Shareholder, has also executed a set of unilateral undertakings in favour of our Group to provide indemnities on a joint and several basis in respect of any and all liabilities arising from occurrence of any of the Triggering Events.
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Regulatory Inspections
The CSRC and other regulatory agencies conduct regular and random inspections, examinations and inquiries in respect of our compliance with the PRC laws, regulations, guidelines and regulatory requirements. Although the inspections, examinations and inquiries have not revealed any material risks or non-compliance incidents and have not resulted in any fines or other administrative penalties, they revealed certain deficiencies with respect to our business operations, risk management and internal control. We immediately took rectification measures and improved our risk management and internal control systems based on the CSRC’s recommendations. The following summarised results of recent regulatory inspections:
1. In October 2013, CSRC’s local branch in Jiangsu Province conducted an on-site inspection of our Nanjing headquarter, and provided verbal comments to us, which identified the following issues: (i) inconsistent and inappropriate wordings in the provisions of our articles of association (ii) failure to pass board resolutions, conduct sensitivity analysis and stress testing in a timely manner before trading in financial products with our internal funds; (iii) the lack of an on-site person in charge of the sales team in the Suqian branch; (iv) inadequate conflicts check of whether the newly recruited staff holds trading accounts with us; (v) failure to maintain a clear delineation of business with our related parties; (vi) failure to maintain full record of our bank statements and accurate record of risk control statements; (vii) failure of the information technology department to take adequate measures against the sales team for accessing to trading system in the software without authorisation; (viii) failure to update the responsibilities of the chief risk officer based on the latest regulatory requirements and the organisational chart; (ix) failure to take adequate internal control measures for proper record keeping in our futures brokerage business and (x) certain deficiencies within the sales teams of various futures branches.
We took remedial measures by (i) amending certain provisions of our articles of association; (ii) requiring the personnel to strictly obtain board approval in accordance with our policy and carry out sensitivity analysis and stress testing in accordance with regulations before trading in financial products; (iii) assigning a new on-site person in charge of the sales team in the Suqian branch; (iv) conducting check of whether the newly employed staff holds trading accounts with us and requiring the newly employed staff to sign an undertaking of not engaging in any futures trading; (v) maintaining a clear delineation with our related parties in terms of business, personnel, assets, finance, and premises; (vi) requiring the finance department to keep a proper record of all bank statements and risk control statements and make timely reports to regulatory authority in accordance with the regulations; (vii) requiring the sales team to disable the access to the trading system in the software, to keep record and videotaping of any on-site trading at the branch offices and conducting periodic inspection through our audit and legal department and our information technology department; (viii) updating the responsibilities of the chief
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risk officer and the organisational chart; (ix) enhancing the internal control measures to ensure the information in relation to account opening, margin deposit, clients’ trading have been properly recorded and (x) rectifying the deficiencies within the sales team in accordance with the regulatory requirements and internal procedures.
In December 2013, we submitted a remedial report to the CSRC’s local branch in Jiangsu Province and as at the Latest Practicable Date, we have not received any objection from such authority on our remedial measures nor the remedial report.
2. In March 2014 and September 2014, CSRC’s local branch in Jiangsu Province conducted an on-site inspection of our branch in Yancheng and Huaian, respectively, and as at the Latest Practicable Date, we have not received any regulatory opinion from such authority.
Therefore, the Directors are of the view that our remedial measures were appropriate and effective, the aforementioned deficiencies identified in regulatory inspection have been rectified and such incident would not have any material adverse effect on our business, financial condition and results of operations, and the internal control measures in place after our rectification are effective and adequate.
INFORMATION TECHNOLOGY
Our IT system is fundamental to the effective operation and performance of our business and is critical to our success and future growth. We focus on developing our IT capabilities and possess a sound IT management infrastructure. In order to support our growing business operations and meet the developing needs of corporate governance and risk management, we have established an IT department comprising of, as at 30 June 2015, 23 employees who are responsible for the operation and maintenance of our IT systems, formulating and implementing IT policies, establishing IT standards, managing and supervising the IT functions of our various branches and providing technological support to them.
IT System
We have established the following principal IT systems and platforms for our business operations, risk control and management:
• Centralised trading system: our centralised trading system is our core business system. We launched the centralised trading system for our futures brokerage business online in 2001 and have continuously improved and upgraded our trading system since then. Our central server is supplied by the PRC arm of one of the world’s leading software and technology services companies, and our centralised trading system covers all of our futures branches within the PRC, and it has been tested to support 100,000 clients trading at the same time. Our centralised trading system provides timely and accurate data for our business management, risk monitoring and support for decision making;
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• Centralised account management system: our centralised account management system standardises the procedures for client’s account opening, consolidates client information, and enhances our client management;
• Comprehensive maintenance platform: we have established a comprehensive maintenance platform based on our IT infrastructure, in order to monitor the operations of our IT hardware and software, such as our networks, servers, databases and application systems;
• Online trading system: our online trading system is a business platform that provides online trading and market information services to our clients through the Internet and the mobile Internet. Through a third party supplier, we have made a smartphone application available to our clients to enter into futures trading on their smartphones;
• Centralised monitoring system, risk management system and off-site audit system: our central monitoring system monitors our clients’ trading activities and issues real-time risk warnings. Our risk management system monitors the trading activities of our headquarters and issues risk warnings in a timely manner;
• Data centre: our three data centres collect and process the business data of our entire Company in order to meet the data requests for various management and reporting purposes that support our decision-making and business operations.
IT Risk Management
We have established IT security management policies and procedures that handle our IT system’s physical security, network security, mainframe security, application security and data security, and other relevant matters such as backup recovery, personnel, research and development, operation maintenance, emergency response and outsourcing.
We have established a multi-tiered information security system covering border protection, network access, identity authentication, control of outbound access, intrusion detection, auditing and monitoring, terminal management and anti-virus protection. We have adopted various IT security measures, including firewalls, anti-virus measures, user authentication and authorisation, intrusion detection and infiltration tests, in order to improve our information security management capabilities with respect to defences, monitoring, warning, as well as response and recovery.
MARKET AND COMPETITION
The PRC futures industry is highly regulated and PRC futures firms are subject to extensive regulatory requirements applying on various perspectives, including business licenses, scope of services, financial position and internal control measures.
According to the Euromonitor Report, we are the largest futures firm headquartered in Jiangsu Province in terms of commission revenue, net profit for the years ended 31 December 2014 as well as the Net Capital as at 31 December 2014, and we are one of the leading futures firms in the PRC with diversified futures business and strong presence in the PRC.
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As at 31 December 2014, there were about 150 futures firms in the PRC. The total trading turnover in China’s futures market increased from approximately RMB138.0 trillion in 2011 to RMB292.0 trillion in 2014, representing a CAGR of approximately 28.5%. In 2014, despite the growth of trading turnover slowed down due to the declines in global commodity price, both futures trading volume and turnover achieved new record highs.
We were ranked 8th in the PRC in 2014 in terms of Net Capital and our commission and fee income from futures brokerage business ranked 16th in 2014 among all PRC futures brokerage firms. According to the Euromonitor Report, we ranked first among all futures firms headquartered in Jiangsu Province in terms of commission revenue, the number of futures branches, the net profit for the year ended 31 December 2014 and Net Capital of RMB1,026.9 million as at 31 December 2014, respectively.
For futures brokerage business, we compete primarily with other PRC futures firms, in terms of pricing and the range of services offered. For asset management business, we compete primarily with other PRC futures firms and financial institutions that offer similar products in terms of the range of products and services offered, investment returns and quality of customer service. For commodity trading and risk management business, we compete primarily with other futures firms in terms of brand recognition, service quality, execution capacity, financial strength, pricing and risk management ability.
Market share
According to the CFA, the total commission and fee income from futures brokerage business (including refunds of trading fees) of the futures firms in China in 2014 was approximately RMB10.0 billion. Our Company’s commission and fee income from futures brokerage business (including refunds of trading fees) amounted to RMB164.5 million in 2014, representing a market share of approximately 1.6%.
Industry ranking
Set out below is the industry ranking of our Company (not including Holly Su Futures) in terms of the following major indicators:
Our ranking Our ranking in Jiangsu Indicator Our position in the PRC Province
Number of futures branches as at 31 December 2014 43 futures branches 2nd 1st Commission and fee income (including refunds of trading fees from the PRC Futures Exchanges) for the year ended 31 December 2014 RMB164.5 million 16th 1st Net profit for the year ended 31 December 2014 RMB43.6 million 30th 1st Net Capital as at 31 December 2014 RMB1,027 million 8th 1st
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Level of competition in the industry
The PRC futures industry is highly competitive. We believe that the PRC futures firms primarily compete on, among other things, range and quality of services, reputation, pricing, IT system (reliability, speed and stability) and pricing.
On the other hand, there are high entry barriers including: regulatory requirement on internal control, background and qualification of shareholders and management, size of financial assets and financial position.
Growth drivers
We believe the growth drivers of our business include the followings:
Futures brokerage:
— Continuous growth in the commodity market
— Development of financial futures products
— Increasing risk management awareness of institution and rising rates of market participation
Asset management:
— Growing wealth and wealth management demands by Chinese residents
— Business transformation of futures companies under the opening-up policy
Commodity trading and risk management:
— Demands from investors
— Business qualifications released by supervision departments
— Futures companies seeking self-innovation
Market outlook
Market size is expected to continue to grow with an improving supervision system
In 2014, the State Council, CARC and China Futures Association issued a series of policies and regulations to support the development of the futures market and to improve market supervision. These policies and regulations include the State Council’s “Several Opinions on Further Promoting the Healthy Development of Capital Market”, CSRC’s “Opinions on Further Promoting Innovative Development of Futures Business Institutions” and its revision of “Measures for Supervising and
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Administrating Futures Companies”, and China Futures Association’s “Administration on Futures Companies’ Asset Management Business (Trial)” and its revision of “Guidelines on Futures Companies’ Establishment of Subsidiaries Operating Mainly Risk Management Businesses (Revised)”. These policies and regulations serve as important guidelines in the advancement of new futures products, the promotion of futures trading tool innovation and the promotion of the business innovation of futures companies, as well as the strengthening of market supervision. At the same time, according to the CSRC, the NPC Financial and Economic Committee has drawn up the second draft of Futures Law, indicating that the supervision of China’s futures market will continue to be strengthened, and providing the basis for the healthy development of the market. In the near future, market trends including the launch of new futures products, the business innovation of futures companies, the increase in futures companies’ registered capital, and the mergers and acquisitions and listing of futures companies will be expected, and the market size is expected to continue to grow steadily.
Cross-licensing and mixed operations of financial institutions
With the accelerating pace of financial institution innovation in China, the intercross and mutual penetration between financial business and the trend of collectivisation, integration, and diversification of financial institutions will be further strengthened. The separate supervision mode is gradually being diluted. In May 2014, the State Council issued “Several Opinions on Promoting the Healthy Development of Capital Market”, which proposed the relaxation of the entry barriers for futures business, to implement an open, transparent, and orderly securities and futures license management system, to explore cross-licensing among securities companies, fund management companies, futures companies, and securities investment advisory companies, to support other qualified financial institutions to apply for securities or futures licenses within controllable risks, to actively support the entry of private capital into securities and futures industries, and to support the exploring of comprehensive business operations between securities (or futures) companies and other financial institutions through mutual holdings.
In the long term, with the further introduction of more stock index futures, treasury bond futures and other financial futures, the futures market in China will be further connected with the stock exchange market and the bond market. The strategic cooperation between futures companies and other financial institutions will become increasingly closer. There is the potential of jointly established companies by a number of financial institutions to conduct independent asset management and other financial business. Those joint ventures could make full use of their partner resources, technology, and talent, providing one-stop financial services. The partners would be able to achieve mutual benefits through resource integration, cost reduction, expanding business areas and improving service quality.
EMPLOYEES
As at 31 December 2012, 2013 and 2014 and 30 June 2015, we had 527, 731, 713 and 663 employees, respectively, who had entered into employment contracts with us. The increase in the number of our employees from 2012 to 2013 was primarily due to the acquisition of certain business assets of Huazheng Futures Co., Ltd.
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The following table sets forth the breakdown of our employees by our department as at 30 June 2015:
Number of employees as Department at 30 June 2015
Futures brokerage business 498 Asset management business 19 Commodity trading and risk management business 23 Research 21 Audit and legal department, risk management 10 IT 23 Finance 12 Administration 49 Innovative business department 8 Total 663
The following table sets forth the breakdown of our employees by geographic location as at 30 June 2015:
Number of employees as Location at 30 June 2015
Jiangsu Province 447 Outside Jiangsu Province 216 Total 663
As a service provider, we believe the capability and loyalty of our employees are essential to the sustainability of our growth. We have adopted an incentive scheme that links employees’ remuneration with their performance. Our performance evaluation system provides the basis for making such personnel decisions as remuneration adjustment, bonus grant, career promotion, talent cultivation and employee incentive programmes. We primarily rely on job advertisements on the internet, internal recruitment, and recruitment fairs. In accordance with applicable PRC laws and regulations, we provide our employees with such benefits as basic pension insurance, basic medical insurance, workplace injury insurance, unemployment insurance, maternity insurance and housing provident funds, as well as supplementary medical insurance.
We are committed to recruiting, training and retaining skilled and experienced people throughout our operations. We intend to achieve this by offering competitive remuneration packages as well as by focusing on training and career development, including orientation for new employees, professional skill training, qualification training and professional specialty training.
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We have established a labour union that protects the labour rights and interests of our employees. We consider our relations with our employees to be good and have never had any interruption to our operations as a result of labour disputes. We believe that our senior management, labour union and employees will continue to maintain good relationships with each other.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of trade mark passing off, copyright, trade secret and fair business practice laws in the PRC and other jurisdictions to protect our proprietary technology, intellectual property rights and our brand. We will seek trade mark registration for our brands and marks from time to time when our management determines that it is competitively advantageous and cost effective for us to do so.
We commenced our business in 1995 under the name of “江蘇金陵期貨經紀有限公司”, which we changed the name to “江蘇弘業期貨經紀有限公司” in 1999, and changed to “江蘇弘業期貨有限公司” in June 2011, and further changed to our present name “弘業期貨股份有限公司” in November 2012 and registered 7 trademarks, including logo of “ ” and “ ” in the PRC. Details of our intellectual property rights are more particularly set out under the section headed “Intellectual property rights of our Group” in “Appendix VI — Statutory and General Information — B. Further Information about Our Business — 2. Intellectual Property Rights of our Group” in this prospectus.
We also applied to the Trade Marks Registry for the registration of , ,
as trademarks in Hong Kong. The latter two applications have been accepted by the Registrar of Trade Marks and are registered. For more details, please see the section headed “Appendix VI — Statutory and General Information — B. Further Information about Our Business — 2. Intellectual Property Rights of Our Group”).
Regarding our logo “ ”, on 26 November 2015, we received a letter from the
Trade Marks Registry informing us that our trademark is similar to an earlier trademark (the “Earlier Mark”). The services covered by the Earlier Mark were similar to the services applied for by the Company.
As advised by the legal adviser to the Company as to Hong Kong trademark matters, to the extent that the services registered under the Earlier Mark do not overlap with the services applied for in our application or are not considered similar services, that portion of our application should be acceptable to the Registrar of Trade Marks for registration. To the extent that the services registered under the Earlier Mark overlap with the services applied for in our application or are considered similar services, we will need to file submissions to the Registrar of Trade Marks with a view to distinguishing our mark from the Earlier Mark and to persuade the Registrar of Trade Marks to allow both our mark and the Earlier Mark to co-exist on the Hong Kong Trade Marks Register. This process is long and there is no certainty that we will be successful in the submission.
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In light of the above, we do not intend to use “弘業” to provide financial and related services in Hong Kong and all our business operations in Hong Kong relating to the provision of financial and related services has and will be undertaken through our subsidiary Holly Su Futures under the name of “弘蘇”. Holly Su Futures has applied to the Trade Marks Registry for the registration of “弘蘇 Holly Su” and “弘蘇期貨 Holly Su Futures” as trademarks in Hong Kong. We have also provided guidelines to our employees as well as employees of Holly Su Futures that when they introduce the financial and related services provided by our Company in Hong Kong, and in all external communications regarding our Company’s financial and related services provided in Hong Kong, they should only use the Chinese name of “弘蘇” without making reference to “弘業”. Our Company will not offer or supply financial and related services in Hong Kong under the mark “弘業”, and we and Holly Su Futures will not use the mark “弘業” on business papers or in advertising in Hong Kong insofar as financial and related services are concerned. Given the aforementioned measures implemented by the Company, the legal adviser to the Company as to Hong Kong trademark matters has advised us that we will not be committing any act of infringement of trademark in Hong Kong.
Please see the sections headed “Risk Factor — The use of our Chinese name in this prospectus and the use of it in the course of our business in Hong Kong may be challenged due to potential trademark infringement” and “Appendix VI — Statutory and General Information — B. Further Information about Our Business — 2. Intellectual Property Rights of our Group” in this prospectus for further information.
Our Directors confirm that, to the best of their knowledge, we have not infringed any other third-parties’ intellectual property rights during the Track Record Period and up to the Latest Practicable Date that would have a material and adverse impact to our operations and financial position and, as at the Latest Practicable Date, we did not have any pending or threatened claims against us or any of our subsidiaries relating to the infringement of any intellectual property rights owned by third parties.
INSURANCE
We maintain insurance coverage for our motor vehicles. Consistent with customary practice in the PRC, we do not maintain any business interruption insurance.
We believe that we have maintained insurance coverage we consider necessary and sufficient for our operations and customary for the industry in which we operate.
All of our insurance policies are underwritten with reputable insurance providers and we manage our insurance policies regularly.
PROPERTIES
As at the Latest Practicable Date, we did not own any property. We leased a total of 76 properties with an aggregate area of approximately 26,266.6313 m2 in the PRC and a property with a lettable area of approximately 96.62 m2 in Hong Kong. Such leased properties are used as our headquarters, futures
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Among our leased properties in the PRC,
- two of the leased properties, with a total gross floor area of about 562.75 m2, the lessors of which were unable to provide title certificates. We use these properties mainly as office. We understand from the lessors that although the property title certificates are yet to be obtained, the other major title proof of these properties (such as land use right certificate, construction and planning permits) are obtained;
- one of the leased properties, with a total gross floor area of about 287.2 m2, is used by us as office while it was specified in the relevant title documents that such premises are intended for residential usage. Our Company has obtained the consent of the members of the neighbourhood committee for our change of usage as operating office. Furthermore, the lessor of the premise has undertaken that the lessors will bear any risks resulting from the defective title to the properties;
- 10 of the lease agreements, with a total gross floor area of about 1,637.68 m2, which are mainly used as office and staff quarter are not registered with the competent authorities. According to our PRC legal advisers, the competent authorities may direct us to register the lease agreements, and in such events, if the entities fail to follow the direction of the competent authorities, the competent authorities may impose a fine of RMB1,000 to RMB10,000 in respect of each lease agreements. So far as our Directors are aware, there is no difference in rental we would have to pay due to the unregistered leases. If a dispute arises over the title of these leased properties, we may not be able to continue leasing these properties and will have to relocate. We believe these leased properties are not crucial to our operations and, in the event that these leases need to be terminated, we can find substitute premises on commercially reasonable terms.
Our Directors consider and our PRC legal advisers advise that the above defects will not have material adverse impact on our operations.
The following table sets forth our total rental expenses and average monthly rental expenses for the periods indicated:
Unit: RMB’000
For the six months ended For the year ended December 31 30 June 2012 2013 2014 2015
Total rental expenses 17,452 22,037 25,547 11,693 Average monthly rental expenses 1,454 1,836 2,129 1,949
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As at the Latest Practicable Date, as we have no single property with a carrying amount of 15% or more of our total assets, and on this basis, we are not required by Rule 5.01A of the Listing Rules to include in this prospectus any valuation report. Pursuant to section 6(2) of the Companies (Exemption of Companies and Prospectus from Compliance with Provisions) Notice, this prospectus is exempted from compliance with the requirements of section 342(1)(b) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance in relation to paragraph 34(2) of the Third Schedule to the Companies (Winding Up and Miscellaneous Provisions) Ordinance, which requires a valuation report with respect to all of our interests in land or buildings.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
We do not believe that the nature of our business involves substantial risks involving the environmental, health and safety matters. During the Track Record Period, we have complied in all material respects with all environmental, health and work safety laws and regulations applicable to us.
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OVERVIEW
SOHO Holdings, our Controlling Shareholder, is a limited liability company established under the laws of the PRC in April 1994 and a stated-owned enterprise wholly owned by Jiangsu SASAC. SOHO Holdings is an investment holding company principally engaged in (i) financial and industrial investment, authorised operation and management of state-owned assets; (ii) domestic and international trading; (iii) property leasing; and (iv) the production, R&D and sales of silk, textiles and garments.
As at the Latest Practicable Date, SOHO Holdings, directly held 292,992,674 Domestic Shares (representing approximately 43.09% of our total share capital) and, through its shareholding in Artall Culture Group which, pursuant to relevant PRC laws, in turn held the controlling stake in Holly Corporation and Holly Logistics, indirectly held 156,712,800 Domestic Shares (representing approximately 23.05% of our total share capital). For details, please see the section headed “Substantial Shareholders” in this prospectus. As such, as at the Latest Practicable Date, SOHO Holdings was directly and indirectly interested in, 449,705,474 Domestic Shares (representing approximately 66.14% of our total share capital) and constitutes our Controlling Shareholder as defined under the Listing Rules.
Immediately upon completion of the Global Offering (assuming the Over-allotment Option is not exercised), SOHO Holdings will be, directly and indirectly, interested in 431,642,122 Shares (representing approximately 47.59% of our enlarged total share capital) and will therefore continue to be our Controlling Shareholder as defined under the Listing Rules.
Apart from its interest in our Group as disclosed above, SOHO Holdings and/or its close associates and/or our Directors also hold minority interests in certain companies or are otherwise interested in a business apart from our Group, which are engaged in business that partially overlaps with our principal business, being futures brokerage, asset management, commodity trading and risk management (the “Non-Group Business”). Our Directors are of the view that the Non-Group Business does not and will not give rise to any direct or indirect competition between our Group and SOHO Holdings and/or its close associates and/or our Directors in light of the reasons set out in the subsection headed “— Delineation of Business” below.
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DELINEATION OF BUSINESS
The Non-Group Business
Apart from holding direct and indirect shareholding interests in our Company, SOHO Holdings and its close associates and/or our Directors also hold minority interests in a few securities and/or futures companies, or are otherwise interested in a business apart from our Group, the business scope of which partially overlaps with our principal business, i.e. the Non-Group Business. The following table sets forth the details of the Non-Group Business as at the Latest Practicable Date:
Name of Controlling Shareholder and/or its close Approximate associate, our Director or Relationship Number percentage of Management senior management with our Group Name of investee of shares shareholdings position
Jiangsu SOHO International Close associate of Donghai Futures 100,000,000 20.00% No Group Co., Ltd. (江蘇蘇豪 Controlling Co., Ltd. 國際集團股份有限公司) Shareholder (東海期貨有限責任 (“SOHO International”) 公司)(“Donghai Futures”)
SOHO Holdings Controlling Huatai Securities 256,587,644 3.58% Yes Shareholder Co., Ltd. (華泰証 劵股份有限公司) Mr. Zhou (“Huatai Yong, our Securities”) Chairman and an executive Director, is also a non-executive director of Huatai Securities.
SOHO Holdings Controlling Central China 28,651,425 1.09% No Shareholder Securities Co., Ltd. (中原証券股份有限 公司)(“Central China Securities”)
SOHO International Close associate of Huatai Securities 96,800,000 1.35% No Controlling Shareholder
Donghai Futures, Huatai Securities and Central China Securities, each being a state-owned enterprise established under the laws of the PRC, are collectively referred to as the “Non-Group Companies” and each is hereinafter referred to as a “Non-Group Company”.
(1) Donghai Futures
Donghai Futures is a limited liability company established under the laws of the PRC, the controlling shareholder of which is Donghai Securities Co., Ltd. (東海證券股份有限公司), a PRC securities company headquartered in Jiangsu Province. Donghai Futures is principally engaged in the
— 222 — RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDER business of, among other things, futures brokerage, commodity trading, asset management, risk management and investment consultancy. For the year ended 31 December 2014, based on the financial information disclosed on the CFA website, Donghai Futures’ revenue generated from its commission and fee income was RMB98.71 million, net profit for the year was RMB22.70 million and as at 31 December 2014 it had total assets of RMB579.41 million.
(2) Huatai Securities
Huatai Securities is a joint stock limited company established under the laws of the PRC, the A shares of which are listed on the Shanghai Stock Exchange (stock code: 601688) and the H shares of which are listed on the Stock Exchange (stock code: 6886). The single largest shareholder of Huatai Securities is Jiangsu Guoxin Investment Group Limited (江蘇省國信資產管理集團有限公司) holding approximately 17.46% equity interest in Huatai Securities, a state-owned enterprise in Jiangsu Province. Huatai Securities is a securities company providing, through Huatai Futures Co., Ltd. (華泰期貨有限公司)(“Huatai Futures”), a subsidiary of Huatai Securities, financial services which also include, among others, futures brokerage and asset management. For the year ended 31 December 2014, based on the financial information disclosed on the CFA website, Huatai Futures’ revenue generated from its commission and fee income was RMB193.18 million, net profit for the year was RMB85.76 million and as at 31 December 2014 it had total assets of RMB1,056.41 million.
(3) Central China Securities
Central China Securities is a joint stock limited company established under the laws of the PRC, the H shares of which are listed on the Stock Exchange (stock code: 01375). It is a securities firm in Henan province with a full-service business platform in China. Central China Securities, through Central China Futures Co., Ltd. (中原期貨有限公司)(“Central China Futures”), a subsidiary of Central China Securities, is also engaged in, among others, futures brokerage and asset management business. The controlling shareholder of Central China Securities is Henan Investment Group Co., Ltd. (河南投資集團有限公司), a company owned as to 100% by Henan Province Development and Reform Commission (河南省發展和改革委員會). For the year ended 31 December 2014, based on the financial information disclosed on the CFA website, Central China Futures’ revenue generated from its commission and fee income was RMB36.93 million, net profit for the year was RMB8.49 million and as at 31 December 2014 it had total assets of RMB120.15 million.
Reasons for Exclusion of the Non-Group Business
SOHO Holdings, our Controlling Shareholder, and its close associates, respectively, are investment holding companies, which have historically held minority interests in a number of companies including those with a business scope that may overlap with our principal business. We consider that it would be commercially justifiable to exclude the Non-Group Business from our Group for the following reasons:
(a) from a strategic perspective, equity investment is not the core type of business which our Group would like to focus on. Our Group’s strategy is to focus on the operation of our
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principal business, being futures brokerage, asset management, commodity trading and risk management, and to only invest in companies principally engaged in venture capital investment, as opposed to those engaging in futures-related financial services which may overlap with our principal business.
As at the Latest Practicable Date, we held a minority interest in Jiangsu Hong Rui New Era Venture Investment Co., Ltd. (江蘇弘瑞新時代創業投資有限公司) and Jiangsu Hong Rui Growth Venture Investment Co., Ltd. (江蘇弘瑞成長創業投資有限公司), each being an investment company established under the laws of the PRC which does not engage in any business activities that overlap with our principal business. We currently do not, and in a foreseeable future will not, have any plans to invest in other types of companies which engage in futures-related financial services. Please refer to Note 16 to the Accountants’ Report, the text of which is set out in Appendix I to this prospectus, for details of our equity investments.
(b) from an operational perspective, the expertise and resources required for the operation of our principal business are different from those required for equity investment. As such, we are of the view that the injection of the Non-Group Business into our Group is not in line with our continuing efforts to focus our resources on the operation of our principal business and to streamline our investment portfolio which only includes companies that principally engage in venture capital investment. Also, as advised by our PRC legal advisers, any sale or transfer of SOHO Holdings’ and its close associate’s shareholdings in the Non-Group Companies will require approval from the relevant PRC governmental authorities, which may not be obtained.
Notwithstanding the above, we are of the view that the Non-Group Business does not and, will not, give rise to any direct or indirect competition between our Group and SOHO Holdings and/or its close associates for the following reasons:
(a) SOHO Holdings and SOHO International, each being a passive investor holding minority interests in the Non-Group Companies, do not have effective control over the management and operation of the Non-Group Companies.
(b) In addition to the overlapping directorships of Mr. Zhou Yong as disclosed in the subsection headed “— Delineation of Business — Directors’ and Senior Management’s Interest in the Non-Group Business” below, only SOHO International has nominated one director in Donghai Futures, who is not and will not be involved in Donghai Futures’ daily management. Save as disclosed above, neither SOHO Holdings nor SOHO International is entitled to any representation on the board of any Non-Group Company.
(c) In order to further protect the interest of our Shareholders, SOHO Holdings has given a series of undertakings in favour of our Group under the Non-Competition Undertakings, which serve to mitigate the potential competition between SOHO Holdings (and its close associates) and our Group. For more details of the Non-Competition Undertakings, please see the subsection headed “— Non-Competition Undertakings” below.
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Our Directors’ and Senior Management’s Interest in the Non-Group Business
Mr. Zhou Yong, our Chairman and an executive Director, has been a non-executive director of Huatai Securities since January 2015. As a non-executive director, Mr. Zhou Yong is primarily responsible for participating in making decisions and giving advice on the corporate governance, connected transactions, compliance and risk management of Huatai Securities and is not involved in its daily management. Accordingly, we are of the view that such overlapping directorship does not and is unlikely to give rise to significant competition or conflict of interest between Mr. Zhou Yong and our Group.
Save as disclosed above, as at the Latest Practicable Date, apart from the business of our Group, none of the Controlling Shareholder or our Directors or their respective close associates or our senior management was engaged or had any interests in any business which, directly or indirectly, competes or is likely to compete with the business of our Group and which would require disclosure under Rule 8.10 of the Listing Rules.
INDEPENDENCE FROM OUR CONTROLLING SHAREHOLDER
Having considered the following factors, our Directors are satisfied that we are capable of carrying out our business independently of the Controlling Shareholder and its close associates after Listing.
Operational Independence
Our Group is not operationally dependent on our Controlling Shareholder and its close associates. We have full rights to make all decisions on, and to carry out, our own business operations independently of our Controlling Shareholder and its close associates and do not rely on the Controlling Shareholder or its close associates for our business development, staffing or marketing and sales activities. We have independent access to our customers, suppliers and our Directors and our senior management are responsible for handling our day-to-day operations and conducting our business. We are also in possession of all relevant licenses that are material to carrying on and operating our business and we have sufficient operational capacity in terms of capital and employees to operate independently. Our Directors are of the view that there is no operational dependence by us on our Controlling Shareholder and its close associates.
Intellectual property rights and licenses required for operation
We are not reliant on trademarks owned by our Controlling Shareholder or its close associates. In addition, we hold and enjoy the benefit of all relevant licenses and permits material to the operation of our business.
Operational facilities
As at the Latest Practicable Date, we leased and will, after Listing, continue to lease certain properties from certain close associates of our Controlling Shareholder and therefore our connected persons, with a total leaseable area of approximately 10,801 sq.m. as office premises. As we have been
— 225 — RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDER leasing such properties from the close associates of SOHO Holdings during the Track Record Period and up to the Latest Practicable Date, we currently do not, and in a foreseeable future will not, have any plan to relocate to alternative properties, which we believe is in the interests of our Company and the Shareholders as a whole in terms of cost, time and operational stability. Meanwhile, we believe that in the event that the abovementioned close associates of SOHO Holdings cease to lease the properties to us, we would be able to find suitable alternatives from lessors who are Independent Third Parties in the same locality without undue delay or inconvenience incurred to the operation of our business. Accordingly, our Directors are of the view that such lease arrangement does not, and will not, have any material adverse impact on our operational independence from our Controlling Shareholder and its close associates. For more details, please see the section headed “Connected Transactions—Non-Exempt Continuing Connected Transactions” in this prospectus. Save as disclosed above, all the properties and facilities necessary to our business operations are independent from our Controlling Shareholder and its close associates.
Employees
As at the Latest Practicable Date, substantially all of our full-time employees were recruited independently from our Controlling Shareholder and its close associates and primarily through recruitment websites, on-campus recruitment programmes, advertisements in newspapers, recruiting firms and internal referrals.
Connected transactions with our Controlling Shareholder
Save for the continuing connected transactions set out in the section headed “Connected Transactions” in this prospectus, our Directors do not expect that there will be any other transactions between our Group and our Controlling Shareholder or its close associates upon or shortly upon completion of the Global Offering.
Based on the above, our Directors are satisfied that we had been operating independently of our Controlling Shareholder and its close associates during the Track Record Period and up to the Latest Practicable Date and will continue to maintain such operational independence upon completion of the Global Offering.
Financial Independence
We have established our own finance department with a team of financial staff, who are responsible for financial control, accounting, reporting, group credit and internal control function of our Company, independent from our Controlling Shareholder and its close associates. We are able to make financial decisions independently and our Controlling Shareholder and its close associates do not intervene with our use of funds. We have also established an independent audit system, a standardised financial and accounting system and a complete financial management system. In addition, we have sufficient capital to operate our business independently and we have been and are capable of obtaining financing from Independent Third Parties without reliance on our Controlling Shareholder or its close associates.
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During the Track Record Period and up to the Latest Practicable Date, our Controlling Shareholder, together with its close associates, had provided a number of guarantees in respect of our bank borrowings amounting to RMB70,580,000 on an aggregate basis. For more details, please see Note 33 of the Accountants’ Report, the text of which is set forth in Appendix I to this prospectus. The abovementioned guarantees provided by our Controlling Shareholder and/or its close associates have been released or discharged in full prior to Listing through the repayment of the relevant bank loans.
Save as disclosed above, except receivables and payables arising under the continuing connected transactions as disclosed in the section headed “Connected Transactions” in this prospectus, as at the Latest Practicable Date, there were no other loans, advances or balances due to and from our Controlling Shareholder and its close associates which have not been fully settled, nor were there any pledges and guarantees provided by our Controlling Shareholder and its close associates on the Group’s borrowings which have not been fully released or discharged.
Based on the above, our Directors are satisfied that we are able to maintain financial independence from the Controlling Shareholder and its close associates.
Management Independence
The Board comprises two executive Directors, three non-executive Directors and four independent non-executive Directors. For more details of our Directors, please see the section headed “Directors, Supervisors and Senior Management” in this prospectus. The daily operation of our Group is carried out by an independent experienced management team, and we have the capabilities and personnel to perform all essential administrative functions, including finance, accounting, human resources and business management on a standalone basis. Three out of the nine Directors (the “Overlapping Directors”), namely Mr. Zhou Yong, Mr. Xue Binghai and Mr. Zhang Fasong, hold directorships or management positions in SOHO Holdings, our Controlling Shareholder, and/or its close associates.
The following table sets forth the directorships and management positions in our Company and the Controlling Shareholder held by the Overlapping Directors as at the Latest Practicable Date:
Position(s) held with our Position(s) held with SOHO Holdings Name Company and/or its close associates
ZHOU Yong Chairman and executive • president and director (SOHO Director Holdings) XUE Binghai non-executive Director • assistant to the president (SOHO Holdings) • general manager (Jiangsu SOHO Investment Group Company limited (江蘇蘇豪投資集團有限公司)) ZHANG Fasong non-executive Director • director (Holly Corporation) • general manager and director (Artall Culture Group)
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Our Directors are satisfied that the Board as a whole, together with our independent senior management team, is able to perform the managerial role in our Group independently on the following grounds:
(a) Mr. Zhou Yong is the president and director of SOHO Holdings. However, as our Chairman and an executive Director, Mr. Zhou Yong had been primarily responsible for and had spent more than half of his working hours on the management of strategic and significant business operations of our Group during the Track Record Period and up to the Latest Practicable Date. As such, although Mr. Zhou Yong holds a director and senior management position in SOHO Holdings, we are of the view that he will be able to function effectively and independently from SOHO Holdings while acting as our Chairman and an executive Director.
(b) Mr. Xue Binghai and Mr. Zhang Fasong, each being a non-executive Director, are merely involved in the high-level decision-making process of important strategic and policy matters of our Company. As such, they are not involved in the day-to-day management of our Company.
(c) In addition to Mr. Zhou Yong’s commitment to the management of our Group as disclosed above, during the Track Record Period and up to the Latest Practicable Date, Ms. Zhou Jianqiu, our executive Director and general manager, had not assumed and will not assume any management position involving day-to-day management or serve as a director of the Controlling Shareholder or any of its close associates. As such, Ms. Zhou Jianqiu will be able to devote her time to and focus on the management and day-to-day business operation of the Group.
(d) Our Board consists of four independent non-executive Directors, including Mr. Li Xindan, Ms. Zhang Jie, Mr. Zhang Hongfa and Mr. Lam Kai Yeung, which represents more than one-third of the members of the Board. Accordingly, there will be a sufficiently robust and independent voice within our Board to counter-balance any situation involving a conflict of interest and they will be able to protect the interests of our Company and the Shareholders as a whole.
(e) Our Board is supported by an experienced full time senior management team, which is principally responsible for the daily management of our business operation. We have the capabilities and personnel to perform all essential administrative functions, including financial and accounting, human resources, business management and R&D on a stand-alone basis.
(f) Each Director is aware of his or her fiduciary duties as a Director, which require, among other things, that he or she acts for the benefit and in the best interests of our Company and does not allow any conflict between his or her duties as a Director and his or her personal interests.
(g) In the event that there is a potential conflict of interest arising out of any transaction to be entered into between our Company and our Directors or their respective close associates, the interested Director(s) shall abstain from voting at the relevant Board meetings in respect of such transactions and shall not be counted in the quorum.
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NON-COMPETITION UNDERTAKINGS
SOHO Holdings, our Controlling Shareholder, as the covenantor (the “Covenantor”) has executed the Non-Competition Undertaking in favour of our Company on 8 December 2015. Pursuant to the Non-Competition Undertakings, the Covenantor and its close associates (other than members of our Group) have confirmed that as at the date of the Non-Competition Undertakings, save as disclosed in the subsection headed “— Delineation of Business” above, neither of the Convenantor or any of its close associates (other than members of our Group) has, in any form, engaged in, assisted or supported any third party in the operation of, participate, or has any interest in, any business that, directly or indirectly, competes or will compete or may compete with the business carried on or contemplated to be carried on by any member of our Group from time to time, namely futures-related financial services including futures brokerage, asset management and commodity trading and risk management business (the “Restricted Business”).
Pursuant to the Non-Competition Undertakings, the Covenantor has, unconditionally and irrevocably, undertaken to our Company, among other things, that save as disclosed in the subsection headed “—Delineation of Business” above, it would not and would use its best endeavours to procure its close associates (except any members of our Group) would not, directly or indirectly, at any time during the Relevant Period (as defined below), carry on, engage in, invest in, participate in, attempt to participate in, render any services to, provide any financial support to or otherwise be involved in or interested in, whether alone or jointly with another person and whether directly or indirectly or on behalf of or to assist or act in concert with any other person, any business which is the same as, similar to or in competition or will compete or may compete with the Restricted Business.
The above restrictions do not prohibit the Covenantor and its close associates (other than members of our Group) from holding securities of any company which conducts or is engaged in any Restricted Business, provided that the conditions set out in paragraphs (a), (b) and (c) below are satisfied:
(a) save for SOHO International’s interests in Donghai Futures as disclosed above, the aggregate number of shares or equity interest held by the Covenantor and its close associates (other than members of our Group) is less than 10% of any class of the issued shares or the entire equity interest of such company;
(b) the Covenantor or its close associates (other than members of our Group) does not own, by any means, any right to control the composition of the board of directors or managers of such Restricted Business nor any right to participate, directly or indirectly, in such Restricted Business; and
(c) none of the Covenantor and its close associates (other than members of our Group) is the controlling shareholder of such company.
In addition, where it is resolved by the Board or a Shareholders’ meeting that it is appropriate for the Covenantor and/or its close associates (other than members of our Group) and our Group to jointly invest in, conduct, operate or participate in any business opportunity relating to the Restricted Business (the “New Business Opportunity”), and if our Group gives written invitation, the Covenantor and/or its close associates (other than members of our Group) may together with our
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Group, jointly invest in, conduct, operate or participate in such New Business Opportunity subject to the provisions of the Listing Rules and any requirement from the Stock Exchange (including but not limited to the obtaining of approval from the independent non-executive Directors and/or independent Shareholders).
Further Undertakings from the Covenantor
Under the Non-Competition Undertakings, the Convenantor has further undertaken to us the following:
(a) It shall not, and shall procure its close associates (other than members of our Group) not to increase their equity interests in Donghai Futures during the Relevant Period (as defined below);
(b) it shall provide, and shall procure its close associates (other than members of our Group) to provide, during the Relevant Period (as defined below), where necessary and at least on an annual basis, all information necessary for the review by the independent non-executive Directors, subject to any relevant laws, rules and regulations or any contractual obligations, to enable them to review the Covenantor’s and its close associates’ (other than members of our Group) compliance with the Non-Competition Undertakings, and to enable the independent non-executive Directors to enforce the Non-Competition Undertakings, including but not limited to any decision described in paragraph (e) below or in relation to the pre-emptive right to restrict the transfer;
(c) without prejudicing the generality of paragraph (a) above, the Covenantor (and on behalf of its close associates (other than members of our Group) from time to time) shall provide to us annually with an annual declaration for inclusion in our annual report, in respect of compliance with the terms of the Non-Competition Undertakings;
(d) the Covenantor has agreed and authorised the Company to disclose decisions on matters reviewed by the independent non-executive Directors relating to the compliance and enforcement of the Non-Competition Undertakings, either through our annual report or by way of announcement;
(e) during the Relevant Period (as defined below), in the event that the Covenantor or its close associates (other than members of our Group) are given any business opportunity relating to the New Business Opportunity, the Covenantor shall, and shall procure that its close associates (other than members of our Group), inform us of such New Business Opportunity in writing with all available information as soon as practicable and shall use its best endeavour to assist us in obtaining such New Business Opportunity on the same or more favourable terms;
(f) when there is any New Business Opportunity, all independent non-executive Directors but excluding any independent non-executive Directors with conflicted interests will form a committee (the “Independent Board Committee”) and in the event that the Independent Board Committee decides that our Group should not take up such New Business Opportunity as referred to in paragraph (d) above within a commercially reasonable period
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and undertake by written notice, the Covenantor and its close associates (other than members of our Group) may take up such business opportunity and the involvement in the business derived from such New Business Opportunity shall not be regarded as a breach of the Non-Competition Undertakings; and
(g) since the effective date of the Non-Competition Undertakings, the Covenantor agrees to indemnify us from and against any and all losses, damages, claims, liabilities, costs and expenses (including legal costs and expenses) where we may suffer or incur as a result of any failure to comply with the terms of the Non-Competition Undertakings by the Covenantor or its close associates (other than members of our Group).
Where the Covenantor and/or its close associates (other than members of our Group) acquire the Restricted Business pursuant to paragraph (e) above, the Covenantor and/or its close associates (other than members of our Group) shall provide our Group with pre-emptive right (the “Pre-Emptive Right”) to acquire any such Restricted Business under the same circumstances. Where the Independent Board Committee decides to waive our Pre-Emptive Right by way of written notice, the Covenantor and/or its close associates (other than members of our Group) may offer to sell such Restricted Business (as defined below) to other third parties on such terms which are no more favourable than those made available to our Group.
Where the Covenantor and/or its close associates (other than members of our Group) acquire the Restricted Business pursuant to paragraph (e) above, the Covenantor and/or its close associates (other than members of our Group) has undertaken to grant us the option (the “Options for Acquisition”) which is exercisable at any time during the term of the Relevant Period (as defined below), to purchase at one or more times any equity interest, assets or other interests which form part/or all of such Restricted Business as described above, or to operate the Restricted Business by way of, including but not limited to, management outsourcing, lease or subcontracting. However, if a third party has the pre-emptive rights in accordance with applicable laws and regulations and/or any legally binding document, the Options of Acquisition shall be subject to such third-party rights. In these circumstances, the Covenantor will use its best endeavours to procure the third party to waive such pre-emptive rights.
The Covenantor and/or its close associates (other than members of our Group) have further unconditionally and irrevocably undertaken that it and/or its close associates (other than members of our Group) will not take advantage of his/her/its connections with our Group and/or our Shareholders, or his/her/its position as a shareholder of any member of our Group, to participate or be engaged in any activities which may be detrimental to the interests of our Group and our other Shareholders.
The Covenantor has further unconditionally and irrevocably undertaken that except with the prior written consent of our Group, the Covenantor shall not, and shall procure its close associates (other than members of our Group) will not, directly or indirectly:
(a) any time induce or attempt to induce any director, manager or consultant of any member of our Group to terminate his or her employment or consultancy (as applicable) with our Group, whether or not such act of that person would constitute a breach of that person’s contract of employment or consultancy (as applicable); or
(b) alone or jointly with any other person through or as director, manager, adviser, consultant, employee of or agent for or shareholder in any person, firm or company, in competition with
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any member of our Group, canvass, solicit or accept orders from or do business with any person with whom any member of our Group has done business or solicit or persuade any person who has dealt with our Group or is in the process of negotiating with our Group in relation to the Restricted Business to cease to deal with our Group or reduce the amount of business which the person would normally do with our Group or seek to improve their terms of trade with any member of our Group.
Our Company will disclose the decisions with basis on matters reviewed by the independent non-executive Directors relating to the compliance with and enforcement of the Non-Competition Undertakings either in the annual report of our Company or by way of announcement(s) to the public. For the purposes of the above, the “Relevant Period” means the period commencing from the date on which the Non-Competition Undertakings becomes effective and shall expire on the earlier of (a) the date when each of the Covenantor and, as the case may be, any of its close associates collectively, cease to hold, or otherwise hold, beneficially in aggregate whether directly or indirectly, 30% or more (or such other percentage of shareholding as stipulated in the Listing Rules to constitute a controlling shareholder) of the issued ordinary share capital of our Company and is not in a position to control the composition of a majority of the Board; or (b) the date on which the Shares cease to be listed on the Stock Exchange (except for temporary suspension of trading of the Shares).
CORPORATE GOVERNANCE
Our Directors recognise the importance of good corporate governance to protect the interest of our Shareholders. We would adopt the following corporate governance measures to manage potential conflict of interests between our Group and the Controlling Shareholder:
(i) where a Shareholders’ meeting is held for considering proposed transaction in which the Controlling Shareholder has a material interest, the Controlling Shareholder shall abstain from voting on the resolutions and shall not be counted in the quorum for the voting;
(ii) where a Board meeting is held for the matters in which a Director has a material interest, such Director shall abstain from voting on the resolutions and shall not be counted in the quorum for the voting;
(iii) The Independent Board Committee comprising all independent non-executive Directors will be responsible for deciding and given the authority to decide, without attendance by any Directors with beneficial or conflicting interest in the New Business Opportunities referred to our Group by our Controlling Shareholder (or its close associates other than members of our Group) and the exercise of the Pre-Emptive Right under the Non-Competition Undertakings. The Independent Board Committee comprising all independent non-executive Directors, taken as a whole, has the relevant expertise and experience in deciding the New Business Opportunities or the exercise of the Pre-Emptive Right. For more details of the biographies of our independent non-executive Directors, please see the section headed “Directors, Supervisors and Senior Management” in this prospectus. In addition, the Independent Board Committee may, at the costs of our Company and from time to time, engage independent financial advisers and other external professional advisers as they may consider necessary to advise them on the issues which relate to the above matters.
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(iv) Any transaction between (or proposed to be made between) our Group and the connected persons will be subject to the requirements under Chapter 14A of the Listing Rules, including, where applicable, the announcement, reporting, annual review, circular (including independent financial advice) and independent Shareholders’ approval requirements and with those conditions imposed by the Stock Exchange for the granting of waiver from strict compliance with relevant requirements under the Listing Rules.
(v) In the event that our independent non-executive Directors are requested to review any conflict of interests between our Group and the Controlling Shareholder, the Controlling Shareholder shall provide the independent non-executive Directors with all necessary information and our Company shall disclose the decisions of the independent non-executive Directors either in its annual report or by way of announcements to the public.
(vi) Our Company has appointed Guotai Junan Capital Limited as our compliance adviser, which will provide advice and guidance to our Group in respect of compliance with the applicable laws and Listing Rules including various requirements relating to Directors’ duties and corporate governance.
Based on the above, our Directors are satisfied that sufficient corporate governance measures have been put in place to manage conflicts of interest between our Group and our Controlling Shareholder and/or Directors to protect the minority Shareholders’ rights after Listing.
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CONNECTED PERSONS
We have entered into certain transactions with the following entities which will become connected persons of our Company upon Listing.
SOHO Holdings
Immediately after completion of the Global Offering (assuming the Over-allotment Option is not exercised), SOHO Holdings will, through itself and its shareholdings in Artall Culture Group which in turn holds the controlling stake in Holly Corporation and Holly Logistics pursuant to relevant PRC laws, be directly and indirectly interested in 431,642,122 Shares (representing approximately 47.59% of our enlarged total share capital) and will remain as our Controlling Shareholder. For details, please see the section headed “Substantial Shareholders” in this prospectus. Accordingly, SOHO Holdings will become our connected person upon Listing.
Holly Corporation
Immediately after completion of the Global Offering (assuming the Over-allotment Option is not exercised), Holly Corporation will directly hold 147,900,000 Shares (representing approximately 16.31% of our enlarged total share capital) and will remain as our Substantial Shareholder. Accordingly, Holly Corporation will become our connected person upon Listing.
SUMMARY OF CONTINUING CONNECTED TRANSACTIONS
On 8 December 2015, we entered into a financial services framework agreement (the “SOHO Financial Services Framework Agreement”) and a property lease framework agreement (the “SOHO Property Lease Framework Agreement”) with SOHO Holdings. In addition, on 1 December 2015, we entered into a property lease and management services agreement (the “Holly Property Lease and Management Services Agreement”, together with the SOHO Financial Services Framework Agreement and the SOHO Property Lease Framework Agreement, the “Connected Transaction Agreements” and each, a “Connected Transaction Agreement”) with Holly Corporation. Each of the SOHO Financial Services Framework Agreement and SOHO Property Lease Framework Agreement shall be effective from the Listing Date up to 31 December 2017. The term of the Connected Transaction Agreements may be renewed as the parties thereto mutually agree, subject to compliance with the requirements under Chapter 14A of the Listing Rules and all other applicable laws and regulations.
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A summary of our continuing connected transactions is set out as follows:
Applicable Waiver Proposed annual cap Nature of transaction Listing Rule sought for the year ending 2015 2016 2017 (RMB’000)
Fully-exempt continuing connected transaction
SOHO Financial Services 14A.76(1)(c) N/A 2,200 2,300 2,350 Framework Agreement
Non-exempt continuing connected transactions
SOHO Property Lease 14A.81 Waiver 650 695 745 Framework Agreement 14A.76(2)(a) from the announcement requirement Holly Property Lease and 5,663 5,663 5,663 Management Services Agreement TOTAL(1) 6,313 6,358 6,408
Note:
(1) Pursuant to Rule 14A.81 of the Listing Rules, the transactions contemplated under the SOHO Property Lease Framework Agreement and the Holly Property Lease and Management Services Agreement should be aggregated as the transactions are similar in nature, being leases of and services to various premises in which our Controlling Shareholder and/or its subsidiaries are lessor and/or property-related services provider and we are lessee and/or property-related services recipient. For more details of the implications under the Listing Rules regarding such transactions, please see the subsection headed “—Non-Exempt Continuing Connected Transactions—Implications under the Listing Rules” below.
FULLY-EXEMPT CONTINUING CONNECTED TRANSACTION
SOHO Financial Services Framework Agreement
Pursuant to the SOHO Financial Services Framework Agreement, our Group will provide a variety of financial services to SOHO Holdings and/or its subsidiaries, including futures brokerage services, asset management services and commodity trading and risk management services. The following sets forth certain particulars of the SOHO Financial Services Framework Agreement.
Parties
(a) SOHO Holdings (as services recipient); and
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(b) our Company (as services provider).
Types of services
Pursuant to the SOHO Financial Services Framework Agreement, our Group will provide the following financial services to SOHO Holdings and/or its subsidiaries:
(a) Futures brokerage. We will provide futures brokerage services to SOHO Holdings and/or its subsidiaries, through which we will receive commission and fee income in return.
(b) Asset management. We will provide asset management services to SOHO Holdings and/or its subsidiaries to manage their respective investment portfolios.
(c) Commodity trading and risk management. We will provide futures and commodity related cash management and risk management services to SOHO Holdings and/or its subsidiaries.
Reasons for and benefits of the transactions
The entering into of the SOHO Financial Services Framework Agreement can diversify our revenue streams and facilitate the long-term development of our business operation. We, as an intra-group financial services provider, generally has better and more efficient communication with SOHO Holdings and/or its subsidiaries and better understanding of their needs as compared to third parties. As such, SOHO Holdings and/or its subsidiaries tend to choose us as the services provider in the event that they require futures-related financial services. In addition, the long-term cooperation relationship between our Group and SOHO Holdings and/or its subsidiaries in turn provides us with business and operational convenience. In light of the above, the Directors are of the view that the transactions contemplated under the SOHO Financial Services Framework Agreement will, on one hand, enable financial resources within SOHO Holdings and/or its subsidiaries to be better utilised, and on the other hand, bring synergies to the operation and therefore, enhance the overall competitive strengths of our Group.
Historical transaction amount
The total service fees we received from SOHO Holdings and/or its subsidiaries, being the commission and fee income generated from the futures brokerage services and the management and performance fees generated from the asset management services, for each of the three years ended 31 December 2014 and the six months ended 30 June 2015 were RMB57,302, RMB535,687, RMB476,647 and RMB487,150, respectively. The relatively significant increase in historical transaction amounts from the year of 2013 was primarily due to the increase in trading volume of SOHO Holdings and/or its subsidiaries. We had not provided any commodity trading and risk management services to SOHO Holdings and/or its subsidiaries during the Track Record Period and therefore, no expenses were recognised by our Group in respect of the same.
Pricing policy
With respect to the futures brokerage services, the commission and fee income to be charged under the SOHO Financial Services Framework Agreement are determined with reference to, among
— 236 — CONNECTED TRANSACTIONS other things, the trading volume of SOHO Holdings and/or its subsidiaries, geographic location, types of futures products, handling fees charged by the relevant PRC Futures Exchanges and commission rate charged by our Group to clients who are Independent Third Parties.
With respect to the asset management services, the management and/or performance fees to be charged under the SOHO Financial Services Framework Agreement are determined with reference to one or more of the following items, depending on the particulars of the relevant asset management scheme:
(i) the annual management fees equivalent to 0.2% to 1.5% of the AUM, determined with reference to the particulars of the specific asset management scheme;
(ii) the performance fees calculated with reference to a pre-determined rate of return in respect of asset management schemes other than those which are fixed income based; and
(iii) with regard to the fixed income based schemes, the custodian fees charged by the relevant commercial bank.
With respect to the commodity trading and risk management services, the services fees to be charged under the SOHO Financial Services Framework Agreement are determined after arms’ length negotiations between the parties thereto with reference to a variety of factors such as our performance, investment return and relevant market conditions and movements in respect of the same or similar services, depending on the particulars of commodity trading and risk management services concerned.
Our Directors are of the view that (i) the abovementioned pricing policies are in line with the pricing policies we have adopted for our other clients who are Independent Third Parties; and (ii) the relevant financial services agreements currently in force between our Group and SOHO Holdings and/or its subsidiaries have been entered into in the ordinary and usual course of our business and are on normal commercial terms and that the terms thereof are fair, reasonable and in the interest of our Company and our Shareholders as a whole.
Proposed annual caps and basis
The following table sets forth the proposed annual caps of the financial services contemplated under the SOHO Financial Services Framework Agreement for each of the three years ending 31 December 2017:
Proposed annual cap for the year ending 31 December 2015 2016 2017 (RMB’000)
TOTAL 2,200 2,300 2,350
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The proposed annual caps set out above for the three years ending 31 December 2017 are determined with reference to (i) the historical transaction amounts between our Group and SOHO Holdings and/or its subsidiaries; (ii) the potential increase in the trading volume of SOHO Holdings and/or its subsidiaries in the next three years; and (iii) the potential launch of new future products and asset management schemes, which results in the relatively significant increase as compared to the historical transaction amounts of our Group. In addition, although we had not provided any commodity trading and risk management services to SOHO Holdings and/or its subsidiaries during the Track Record Period, we expect to start to do so after Listing as our business continues to expand.
For more details of our futures brokerage business, asset management business and commodity trading and risk management business, please see the section headed “Business — Our Business” in this prospectus.
Implications under the Listing Rules
As our Directors currently expect each of the applicable percentage ratios (other than the profits ratio) calculated pursuant to Rule 14.07 of the Listing Rules will be less than 5% and the total consideration will be less than HK$3,000,000, the transactions contemplated under the SOHO Financial Services Framework Agreement qualify under Rule 14A.76(1)(c) of the Listing Rules as a de minimis transaction exempt from the reporting, annual review, announcement and independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.
NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS
SOHO Property Lease Framework Agreement
Pursuant to the SOHO Property Lease Framework Agreement, our Group will lease certain properties from SOHO Holdings and/or its subsidiaries for offices and/or other business uses. The following sets forth certain particulars of the SOHO Property Lease Framework Agreement.
Parties
(a) SOHO Holdings (as lessor); and
(b) our Company (as lessee).
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Existing leases
During the Track Record Period and up to the Latest Practicable Date, our Group had been leasing certain properties from the relevant subsidiaries of SOHO Holdings, details of which are set out below:
Use of Date of agreement Lessor Location of properties Leaseable area Term Annual rental properties
15 August 2014 Kunshan SOHO Room1710, Building 1, 302.7 sq.m. Two years RMB110,486.40 office premises Investment Co., No.199 Shangwu Road, of our Kunshan Ltd. (昆山蘇豪投資 Huaqiao County, futures branch 有限公司) Kunshan, Jiangsu Province (江蘇省昆山市 花橋鎮商務大道199號1 棟1710室)
1 January 2015 SOHO Hong Kong Room C, 20/F, Fortis 1,040 square One year(1) HK$660,000 office premises Bank Tower, No.77-79, feet (equivalent of Holly Su Gloucester Road, to approximately Futures Wanchai Hong Kong 96.62 sq.m.) (香港灣仔告士打 道77-79號華比富通大 廈20樓C室)
Note:
(1) We have entered into a renewed lease agreement with SOHO Hong Kong on 27 November 2015. The term of the renewed lease is from 1 January 2016 until 31 December 2017.
Reasons for and benefits of the transaction
We had been leasing the abovementioned properties for use as our office premises from the relevant subsidiaries of SOHO Holdings. As disclosed above, such property lease agreements will expire in August 2016 and January 2016, respectively, and are subject to renewal as the parties thereto may mutually agree. We currently do not, and in a foreseeable future will not, have any plan to relocate to alternative properties, which we believe is in the interest of our Company and the Shareholders as a whole in terms of cost, time and operational stability. The relevant lessors have also agreed in principle to renew the abovementioned property lease agreements, subject to compliance with the requirements under Chapter 14A of the Listing Rules and all other applicable laws and regulations. The annual rentals under the property lease agreements governing the existing leases referenced above were determined after arms’ length negotiations between the parties thereto with reference to the prevailing market rates in respect of the same or similar properties in the same locality. The Directors are of the view that the property lease agreements previously entered into between our Group and relevant subsidiaries of SOHO Holdings have been entered into in the ordinary and usual course of our business on normal commercial terms and that the terms thereof are fair, reasonable and in the interest of our Company and our Shareholders as a whole.
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Historical transaction amounts
The total rentals incurred by our Group in relation to the properties leased from the relevant subsidiaries of SOHO Holdings for each of the three years ended 31 December 2014 and the six months ended 30 June 2015 were RMB536,844, nil, RMB46,036 and RMB316,103, respectively. As confirmed by the Directors and evidenced by a letter of confirmation signed by SOHO Hong Kong on 23 June 2015, to facilitate the business development of Holly Su Futures and ensure its working capital sufficiency, the annual rentals payable by our Group for the two years ended 31 December 2014 in relation to the office premises leased by Holly Su Futures were waived by SOHO Hong Kong. The historical transaction amount incurred by us in 2013 was purely for leasing the office premises of our Kunshan futures branch located in Kunshan, Jiangsu Province.
Pricing policy
The annual rentals for the properties to be leased under the SOHO Property Lease Framework Agreement are determined after arms’ length negotiations between the parties thereto with reference to: (i) the leaseable area, geographic locations and neighborhood profile of the properties concerned; and (ii) the market rates of the same or similar properties to be leased by an Independent Third Party in the locality.
Proposed annual caps and basis
The estimated amounts of annual rental payable by our Group to SOHO Holdings and/or its subsidiaries for each of the three years ending 31 December 2017 are as follows:
Proposed annual cap for the year ending 31 December 2015 2016 2017 (RMB’000)
Total rental 650 695 745
The proposed annual caps for the three years ending 31 December 2017 above are determined with reference to: (i) the historical transaction amounts between our Group and SOHO Holdings and/or its subsidiaries taking into account the pricing policy referred to above; (ii) the prevailing market rates of the same or similar properties in the same locality; and (iii) the potential fluctuation of such prevailing market rates and the exchange rate between Renminbi and Hong Kong dollars in the next three years. We have also consulted Jones Lang LaSalle Corporate Appraisal and Advisory Limited, an independent property valuer, regarding the fairness and reasonableness of such proposed annual caps. For more details, please see the subsection headed “—Confirmation from the Independent Property Valuer” below.
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Holly Property Lease and Management Services Agreement
Pursuant to the Holly Property Lease and Management Services Agreement, (i) our Group will lease from Holly Corporation the office located at 3-10/F, Holly Tower, No. 50 Zhonghua Road, Nanjing, Jiangsu Province, and (ii) Holly Corporation will provide us with property management services (including but not limited to cleaning, security, repair and maintenance services). The following sets forth certain particulars of the Holly Property Lease and Management Services Agreement.
Parties
(a) Holly Corporation (as lessor, services provider and seller); and
(b) our Company (as lessee, services recipient and buyer).
Lease and services provided
During the Track Record Period and up to the Latest Practicable Date, our Group had been leasing the following property from Holly Corporation, details of which are set out below:
Date of Location of Leaseable Use of agreement Lessor properties area Term Annual rental properties (sq.m.)
1 December Holly Corporation 3-10/F, Holly Tower, 10,372.99 1 January RMB5,041,273.20 office premises 2015 No.50 Zhonghua 2016 to Road, Nanjing, 31 December Jiangsu Province (江 2017 蘇省南京市中華路50 號弘業大廈3-10層)
Reasons for and benefits of the transactions
We have been leasing the abovementioned property from Holly Corporation and Holly Corporation has provided us with property management services. The abovementioned properties have been used as our headquarters and such property lease arrangement will expire on 31 December 2017 as disclosed above. We currently do not, and in a foreseeable future will not, have any plan to relocate to alternative properties, which we believe is in the interest of our Company and the Shareholders as a whole in terms of cost, time and operational stability. The lessor has also agreed in principle to renew the abovementioned property lease agreement, subject to compliance with the requirements under Chapter 14A of the Listing Rules and all other applicable laws and regulations. The annual rentals and management service fees charged under the relevant agreement currently in force between our Group and Holly Corporation were determined after arms’ length negotiations between the parties thereto with reference to the prevailing market rates in respect of the same or similar properties, services or office supplies in the locality.
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Accordingly, the Directors are of the view that the relevant agreement currently in force between our Group and Holly Corporation have been entered into in the ordinary and usual course of our business and are on normal commercial terms and that the terms thereof are fair, reasonable and in the interest of our Company and our Shareholders as a whole.
Historical transaction amounts
The following table sets for the total rental and service fees incurred by our Group in respect of the abovementioned property leased and property management services during the Track Record Period:
Historical transaction amounts For the six For each of the months ended three years ended 31 December 30 June 2012 2013 2014 2015 (RMB’000)
Total rental 3,443 3,620 5,777 2,547 Total property management fees 794 962 715 20 TOTAL 4,237 4,582 6,492 2,567
Pricing policy
The pricing of the properties to be leased are determined with reference to (i) the leaseable area, geographic location and neighborhood profile of the relevant properties; and (ii) the prevailing market rates of the same of similar properties to be leased by an Independent Third Party in the same locality.
The property management fees to be charged under the Holly Property Lease and Management Services Agreement are determined with reference to (i) the leaseable area, geographic location and neighborhood profile of the relevant properties; and (ii) the prevailing market rates of the property management fees for similar properties in the same locality.
Proposed annual caps and basis
Proposed annual cap for the year ending 31 December 2015 2016 2017 (RMB’000)
Total rental 5,041 5,041 5,041 Total property management fees 622 622 622 TOTAL 5,663 5,663 5,663
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The proposed annual caps set out above for the three years ending 31 December 2017 in respect of the properties to be leased from Holly Corporation are determined with reference to: (i) the historical transaction amounts between our Group and Holly Corporation taking into account the pricing policies referred to above; and (ii) the prevailing market rates of the same or similar properties in the same locality. We have also consulted Jones Lang LaSalle Corporate Appraisal and Advisory Limited, an independent property valuer, regarding the fairness and reasonableness of such proposed annual caps. For more details, please see the subsection headed “—Confirmation from the Independent Property Valuer” below.
The proposed annual caps set out above for each of the three years ending 31 December 2017 in respect of the property management services to be provided by Holly Corporation are determined with reference to: (i) the historical transaction amounts between our Group and Holly Corporation; and (ii) the potential expansion of the business scale of our Group and the corresponding increase in our demand for the office renovation, property management services and the quantity of office supplies needed.
Implications under the Listing Rules
As the SOHO Property Lease Framework Agreement and the Holly Property Lease and Management Services Agreement were entered into by our Group with SOHO Holdings and Holly Corporation, an associate and indirect controlled corporation of SOHO Holdings, respectively, the continuing connected transactions contemplated thereunder should be aggregated pursuant to Rule 14A.81 of the Listing Rules as the transactions are similar in nature, being leases of and services to various premises in which our Controlling Shareholder and/or its subsidiaries are lessor and/or property-related services provider and we are lessee and/or property-related services recipient. As our Directors currently expect each of the applicable percentage ratios (other than the profits ratio) calculated pursuant to Rule 14.07 of the Listing Rules, on an aggregate basis, will exceed 0.1% but are all less than 5% on an annual basis. Under Rule 14A.76(2)(a) of the Listing Rules, the transactions contemplated under the SOHO Property Lease Framework Agreement and the Holly Property Lease and Management Services Agreement will be subject to the reporting, announcement and annul review requirements but will be exempt from the circular (including independent financial advice) and independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.
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PRINCIPAL TERMS OF THE SOHO FINANCIAL SERVICES FRAMEWORK AGREEMENT AND THE SOHO PROPERTY LEASE FRAMEWORK AGREEMENT (THE “FRAMEWORK AGREEMENTS”)
The following sets forth the common principal terms of the Framework Agreements:
(a) the expenditures incurred and payable by our Group to SOHO Holdings and/or their respective subsidiaries or vice versa under the Framework Agreements shall be agreed after arm’s length negotiations between the parties thereto with reference to the prevailing market rates in respect of the same or similar properties leased in the locality, services or office supplies provided and shall be in compliance with all applicable laws and regulations;
(b) relevant members of our Group and SOHO Holdings and/or their respective subsidiaries shall enter into definitive agreements setting out all specifications which may be relevant to the transactions contemplated under the governing Framework Agreement;
(c) the definitive agreements shall only contain provisions which are, in all material aspects, consistent with the binding principles, guidelines, terms and conditions set out in the relevant Framework Agreement;
(d) any previous agreement entered into between relevant members of our Group and SOHO Holdings and/or their respective subsidiaries in relation to any property leases and/or services shall be superseded and replaced in its entirety by the relevant Framework Agreement and that all provisions or rights granted and covenants made in such previous agreement shall be superseded in their entirety and shall have no further force or effect; and
(e) during the term of the relevant Framework Agreement, each of the parties can serve not less than three months prior written notice to the other party to terminate the relevant Framework Agreement.
WAIVER FROM STRICT COMPLIANCE WITH THE LISTING RULES
The transactions described under the subsection headed “—Non-Exempt Continuing Connected Transactions” above constitute our continuing connected transactions under the Listing Rules, which are subject to the reporting, annual review and announcement requirements but are exempt from the circular (including independent financial advice) and independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.
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As described above, we expect the non-exempt continuing connected transactions to be carried out on a continuing basis and to extend over a period of time. Our Directors therefore consider that strict compliance with the announcement requirement under the Listing Rules would be impractical and unduly burdensome and would impose unnecessary administrative costs upon the Group.
Accordingly, in respect of such continuing connected transactions, pursuant to Rule 14A.105 of the Listing Rules, we have applied for, and the Stock Exchange has granted, a waiver exempting us from strict compliance with the announcement requirement under Chapter 14A of the Listing Rules, subject to the conditions that:
(i) the aggregate values of the continuing connected transactions for each financial year not exceeding the relevant annual cap set forth above; and
(ii) we will fully comply with the requirements under Chapter 14A of the Listing Rules for transactions conducted after 31 December 2017 and before the expiry of the Framework Agreements unless a further waiver from strict compliance with the relevant requirements under the Listing Rules in respect of such non-exempt continuing connected transactions is granted to our Company.
In the event of any future amendments to the Listing Rules imposing more stringent requirements than those applicable as at the Latest Practicable Date on the non-exempt continuing connected transactions referenced above, we will take immediate steps to ensure compliance with such new requirements within reasonable time.
CONFIRMATION FROM THE INDEPENDENT PROPERTY VALUER
Jones Lang LaSalle Corporate Appraisal and Advisory Limited, an independent property valuer, is of the view that (i) the rentals paid under the existing lease agreements entered into between our Group and relevant subsidiaries of SOHO Holdings and Holly Corporation, respectively, in respect of the properties referred to in the subsection headed “— Non-Exempt Continuing Connected Transactions” above are fair and reasonable and reflect the then prevailing market rates for similar premises in similar locations in the PRC and Hong Kong and (ii) the proposed annual caps for the rental payable by our Group to SOHO Holdings, Holly Corporation and/or their respective subsidiaries under the SOHO Property Lease Framework Agreement and/or the Holly Property Lease and Management Services Framework Agreement are fair, reasonable and are consistent with the prevailing market rates for similar premises in similar locations as at the commencement date of the tenancies.
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DIRECTORS’ VIEWS
Having taken into account the information set out above, the Directors (including our independent non-executive Directors) are of the view that the continuing connected transactions described in this section, which have been and shall be entered into in the ordinary and usual course of business of our Group, are on normal commercial terms or better to the Group and are fair and reasonable and in the interests of our Company and our Shareholders as a whole. The Directors (including the independent non-executive Directors) are also of the view that the proposed annual caps for the continuing connected transaction described under the subsection headed “—Non-Exempt Continuing Connected Transactions” above are fair and reasonable and in the interests of our Company and our Shareholders as a whole.
Our Directors with conflicted interest in the continuing connected transactions described in this section shall be required to abstain from voting on relevant Board resolutions in relation to such continuing connected transactions.
CONFIRMATION FROM THE SOLE SPONSOR
Having taken into account the information set out above, the Sole Sponsor is of the view that the continuing connected transactions as described in the subsection headed “—Non-Exempt Continuing Connected Transactions” above have been entered into: (i) in the ordinary and usual course of our business; (ii) on normal commercial terms or better to the Group; and (iii) in accordance with the Connected Transaction Agreements governing them on terms that are fair and reasonable and in the interests of our Company and our Shareholders as a whole. The Sole Sponsor is also of the view that the proposed annual caps for such non-exempt continuing connected transactions are fair and reasonable and in the interests of our Company and our Shareholders as a whole.
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DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
The following table sets forth certain information regarding our Directors, Supervisors and members of the senior management.
Directors
Relationship with other Directors, Supervisors Time of or members Date of joining our Brief descriptions of of senior Name Age Position appointment(1) Company(2) roles and responsibilities management
ZHOU Yong 48 — Chairman 15 January May 1998 Overall management and N/A (周勇) — Executive 2001 supervision of our Director Company, taking strategic plans and organising our Board meetings
ZHOU Jianqiu 46 — Executive 9 June 2015 March 1999 Management and N/A (周劍秋) Director operation of our Company and responsible for our asset management centre, finance department and human resources department
XUE Binghai 45 — Non-executive 30 June 2012 June 2012 Providing strategic advice N/A (薛炳海) Director on corporate developments and making recommendations on major operational and managerial decisions of our Company
ZHANG 52 — Non-executive 24 August August 1998 Providing strategic advice N/A Fasong Director 1998 on corporate (張發松) developments and making recommendations on major operational and managerial decisions of our Company
SUN Changyu 45 — Non-executive 28 November November Providing strategic advice N/A (孫昌宇) Director 2015 2015 on corporate developments and making recommendations on major operational and managerial decisions of our Company
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Relationship with other Directors, Supervisors Time of or members Date of joining our Brief descriptions of of senior Name Age Position appointment(1) Company(2) roles and responsibilities management
LI Xindan 49 — Independent 30 June 2012 June 2012 Supervising and providing N/A (李心丹) non-executive independent advice on the Director operation and management of our Company
ZHANG Jie 39 — Independent 30 June 2012 Jnue 2012 Supervising and providing N/A (張捷) non-executive independent advice on the Director operation and management of our Company
ZHANG 51 — Independent 8 July 2013 July 2013 Supervising and providing N/A Hongfa non-executive independent advice on the (張洪發) Director operation and management of our Company (in particular in regards to financial affairs)
LAM Kai 46 — Independent 9 June 2015 June 2015 Supervising and providing N/A Yeung non-executive independent advice on the (林繼陽) Director operation and management of our Company
Notes:
(1) For the purpose of ascertaining the appointment date of each of our Directors, reference to our Company includes Jiangsu Holly, the predecessor of our Company.
(2) For the purpose of ascertaining the joining time of each of our Directors, reference to our Company includes Jiangsu Holly, the predecessor of our Company.
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Supervisors
Relationship with other Directors, Supervisors Time of or Members Date of joining our Brief descriptions of of Senior Name Age Position appointment Company(1) roles and responsibilities Management
XU Yingying 31 — Chairlady of the 22 November July 2007 Supervising the N/A (徐瑩瑩) Supervisory 2012 performance of duties by Committee the Directors and — Employee members of the senior representative management Supervisor PU Xuenian 52 — Supervisor 22 November November Supervising the N/A (濮學年) 2012 2006 performance of duties by the Directors and members of the senior management WANG 49 — Supervisor 25 December December Supervising the N/A Jianying 2014 2014 performance of duties by (王健英) the Directors and members of the senior management
Note:
(1) For the purpose of ascertaining the joining time of each of our Supervisors, reference to our Company includes Jiangsu Holly, the predecessor of our Company.
Senior Management
Relationship with other Directors, Supervisors Time of or Members Time of joining our Brief descriptions of of Senior Name Age Position appointment(1) Company(2) roles and responsibilities Management
ZHOU Jianqiu 46 — General May 2015 March 1999 Management and N/A (周劍秋)(3) manager operation of our Company and responsible for our asset management centre, finance department and human resources department
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Relationship with other Directors, Supervisors Time of or Members Time of joining our Brief descriptions of of Senior Name Age Position appointment(1) Company(2) roles and responsibilities Management
ZHAO 39 — Executive May 2015 July 1999 Our company secretarial Mr. Zhao Weixiong deputy general matters and responsible Weixiong is (趙偉雄)(3) manager for our securities the spouse of — Board secretary January 2008 department, international Ms. Wang Min — Joint company July 2015 business department, a secretary part of our futures branches as well as matters relating to Holly Capital
DING Jiunian 49 — Deputy general September March 2006 Overseeing the audit and N/A (丁久年)(3) manager 2010 legal department and discipline inspection department, dealing with administrative matters
ZHENG 50 — Deputy general May 2002 September Responsible for our N/A Peiguang manager 1999 brokerage business (鄭培光)(3) management department, option department as well as several business departments of our head office
JIA Guorong 45 — Chief Risk March 2009 January 1999 Our compliance and risk N/A (賈國榮)(3) Officer management matters and responsible for our labor union
ZHAO Dong 45 — Deputy general March 2014 March 2014 Responsible for a part of N/A (趙東)(3) manager our futures branches WANG Min 38 — Supervisor of July 2015 July 1999 Finance and accounting Ms. Wang Min (王敏)(3) finance work is the spouse of Mr. Zhao Weixiong
Notes:
(1) For the purpose of ascertaining the date of appointment of each of the members of the senior management, reference to our Company includes Jiangsu Holly, the predecessor of our Company.
(2) For the purpose of ascertaining the joining time of each of the members of the senior management, references to our Company includes Jiangsu Holly, the predecessor of our Company.
(3) The business addresses of all the members of our senior management are the registered address of our headquarters, that is, No.50 Zhonhua Road, Nanjing, the PRC.
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DIRECTORS
Our Board currently consist of nine Directors, comprising two executive Directors, three non-executive Directors and four independent non-executive Directors. Pursuant to the Articles of Association, our Directors are elected and appointed by our Shareholders at a Shareholders’ meeting for a term of three years, which is renewable upon re-election and re-appointment.
Pursuant to our Articles of Association, the functions and powers of the Board include, among other things:
• convening Shareholders’ meetings and reporting the Board’s work at the Shareholders’ meetings;
• implementing the resolutions passed at Shareholders’ meetings;
• determining our business plans and investment plans;
• formulating our annual financial budget and financial accounts;
• formulating our profit distributions plans and plans on making up losses;
• formulating our proposals for the increase or reduction of registered capital and issue and listing of bonds or other securities of our Company; and
• exercising other powers, functions and duties and conferred by our Articles of Association.
We have entered into a service contract with each of our executive Directors, non-executive Directors and independent non-executive Directors. Pursuant to our Articles of Association, the term of office of the Directors shall be three years. Each of the service contracts with our Directors is for a term commencing from the relevant effective date of appointment until the day on which the next general meeting of the Shareholders for re-election of Directors is held.
The following sets forth the biographies of our Directors.
Executive Directors
Mr. Zhou Yong (周勇), aged 48, has been appointed as the Chairman and a Director of our Company since January 2001 (he was re-designated as an executive Director in July 2015) and is primarily responsible for the overall management and supervision of our Company, making strategic plans and organising our Board meetings. Mr. Zhou Yong was the general manager of Jiangsu Holly International Group Investment Management Co., Ltd. (江蘇弘業國際集團投資管理有限公司) (“Holly Investment”) from February 1999 to June 2006. He had also been engaged with Artall Culture Group from June 2006 to July 2010 as its vice president. Mr. Zhou Yong has served as the chairman of the board of directors of Jiangsu Artall Cultural Industries Company Limited (江蘇愛濤文化產業
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有限公司), a company principally engaged in design, exhibition trading and investment in handicraft articles, since July 2011, the chairman of the board of directors of Jiangsu Cultural Assets and Equity Exchange (江蘇省文化產權交易所) since October 2012, and the director and president of SOHO Holdings since May 2013.
In addition, Mr. Zhou Yong currently holds or had held directorship in the following listed companies:
Name of stock Name Principal business exchange/stock code Position Period of time
Holly Corporation A leading manufacturer and Shanghai Stock Director From January 2010 trader in Jiangsu Province, Exchange/stock code: to March 2015 for details, please refer to 600128 the paragraph headed “History and Development — our Company — our Existing Shareholders — Holly Corporation ” in “History, Development and Corporate Structure” section
Aerosun Corporation Equipment manufacturing Shanghai Stock Director Since May 2011 (航天晨光股份有限公司) Exchange/stock code: 600501
Huatai Securities Co., Ltd. a securities company A shares: Shanghai Non-executive Since January 2015 (華泰證券股份有限公司) Stock Exchange/stock director (“Huatai Securities”) code: 601688; H shares: the Stock Exchange/stock code: 6886
Mr. Zhou Yong has been a member of the second, third and fourth sessions of CFA since June 2006, the president of Jiangsu Futures Association (江蘇省期貨業協會) since October 2007 and a member of the fifth session of Zhengzhou Commodity Exchange (鄭州商品交易所) since January 2011, respectively. Mr. Zhou Yong graduated from Sichuan University (四川大學) located in Chengdu, Sichuan Province in July 1987 with a bachelor degree in physics, from Fudan University (復旦大學) located in Shanghai in January 1998 with a master degree in politics and economics and from Nanjing University (南京大學) located in Nanjing, Jiangsu Province in January 2005 with a doctor degree in philosophy. He is a senior economist (正高級經濟師) and a senior international commerce economist (高級國際商務師) as credentialed by the Human Resources Department of Jiangsu Province (江蘇省人事廳) (now known as the Department of Human Resources and Social Security of Jiangsu Province (江蘇省人力資源和社會保障廳)). He is also a research fellow as credentialed by the Department of Human Resources and Social Security of Jiangsu Province.
Save as disclosed above, Mr. Zhou Yong has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
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Ms. Zhou Jianqiu (周劍秋), aged 46, was appointed as a Director in June 2015 (she was re-designated as an executive Director in July 2015) and the general manager of our Company in May 2015. She is primarily responsible for the management and operation of our Company and is responsible for our asset management centre, finance department and human resources department. Ms. Zhou Jianqiu has been engaged with Jiangsu Holly, our predecessor company, and our Company since March 1999, working at various times as the deputy manager and manager of its finance department, supervisor of finance, deputy general manager and executive deputy general manager. She has also been a director of Holly Capital, our wholly-owned subsidiary, since January 2014. Ms. Zhou Jianqiu graduated from Fudan University (復旦大學) located in Shanghai in June 2012 with a master degree in business administration for senior management.
Ms. Zhou Jianqiu has not held any directorships in any listed companies in Hong Kong or overseas in the past three years.
Non-executive Directors
Mr. Xue Binghai (薛炳海), aged 45, was appointed as a Director in June 2012 (he was re-designated as a non-executive Director in July 2015) and is primarily responsible for providing strategic advice on corporate developments and making recommendations on major operational and managerial decisions of our Company. Mr. Xue Binghai had served in various positions including a staff, the assistant to the general manager and the deputy general manager of the asset and finance department and the chief financial officer of Jiangsu SOHO International Group Co., Ltd. (江蘇蘇豪 國際集團股份有限公司), a company principally engaged in the import and export trading business of silk products, from July 1995 to June 2007 and from June 2008 to March 2013. He had been the deputy general manager of the asset and finance department of Jiangsu Silks Group Co., Ltd. (江蘇省絲綢集團有限公司), the previous company name of SOHO Holdings, from June 2007 to December 2007 and the general manager of the asset and finance department of SOHO Holdings from January 2008 to March 2013. He had also been the director and general manager of both Jiangsu Soho Venture Capital Investment Co., Ltd. (江蘇蘇豪創業投資有限公司), a company principally engaged in equity investment business, and Jiangsu Soho Investment Management Co., Ltd. (江蘇蘇豪投資管理 有限公司), a company principally engaged in asset management business, from February 2008 to March 2013. He has been the assistant to the president of SOHO Holdings as well as the general manager of Jiangsu SOHO Investment Group Co., Ltd. (江蘇蘇豪投資集團有限公司), a company principally engaged in asset investment business since March 2013. In addition, Mr. Xue Binghai was a director of Huatai Securities from February 2010 to January 2015. Mr. Xue Binghai graduated from Nanjing College of Finance (南京經濟學院) (now known as Nanjing University of Finance &Economics (南京財經大學)) located in Nanjing, Jiangsu Province in June 1995 with a bachelor degree in accounting from Peking University (北京大學) located in Beijing in June 2005 with a master degree in public management, respectively. He is a senior accountant as credentialed by the Human Resources Department of Jiangsu Province (江蘇省人事廳).
Save as disclosed above, Mr. Xue Binghai has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
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Mr. Zhang Fasong (張發松), aged 52, was appointed as a Director in August 1998 (he was re-designated as a non-executive Director in July 2015) and is primarily responsible for providing strategic advice on corporate development and making recommendations on major operational and managerial decisions of our Company. Prior to joining our Group, Mr. Zhang Fasong had been a staff of Jiangsu Crafts Import & Export Company Limited (江蘇省工藝品進出口公司), a company principally engaged in import and export trading business of crafts, from August 1980 to February 1996 and the assistant to the general manager of Jiangsu Crafts Import and Export Group Co., Ltd. (江 蘇省工藝品進出口集團公司), a company principally engaged in import and export trading business, from March 1996 to March 1999. Mr. Zhang Fasong had also been engaged with Holly Corporation from March 1999 to April 2015, working at various times as its deputy general manager, general manager and director. He currently serves as the general manager of Artall Culture Group since April 2015. Mr. Zhang Fasong graduated from the University of International Business and Economics (對外經濟貿易大學) located in Beijing in July 1988 with an associate degree in foreign trade by attending long distance learning courses. He is also a senior international commerce economist (高級國際商務師) as credentialed by the Human Resources Department of Jiangsu Province (江蘇省 人事廳).
Save as disclosed above, Mr. Zhang Fasong has not held any directorships in any other listed companies in Hong Kong or overseas in the past three years.
Mr. Sun Changyu (孫昌宇), aged 45, was appointed as a non-executive Director in November 2015 and is primarily responsible for providing strategic advice on corporate development and making recommendations on major operational and managerial decisions of our Company. Mr. Sun Changyu joined Beijing Hony Yuanfang Investment consultancy Co., Ltd. (北京弘毅遠方投資顧問有限公司), an investment company, in November 2011 and he currently serves as the investment director of the department of modern service industry. He had also served as a senior manager in the investment management department of China Life Insurance Company Limited (中國人壽保險股份有限公司), an insurance company, from August 2005 to November 2011 and he was primarily responsible for the management of utilization of insurance funds. In addition, Mr. Sun Changyu has been a supervisor of Chengdu Bank Co., Ltd. (成都銀行股份有限公司) since September 2013.
Mr. Sun Changyu graduated from Tsinghua University (清華大學) in Beijing, the PRC with his Bachelor of Science degree in July 1993, from Zhongnan University of Econimics (中南財經大學, now known as Zhongnan University of Economics and Law (中南財經政法大學)) in Hubei province, the PRC with his Master of Business Administration degree in June 1998 and from Zhongnan University of Economics and Law (中南財經政法大學) with his doctor’s degree in Industrial Economics in June 2004. He is an engineer as credentialed by China Construction Bank, Hainan Branch (中國建設銀行海南省分行).
Save as disclosed above, Mr. Sun Changyu has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
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Independent non-executive Directors
Mr. Li Xindan (李心丹), aged 49, was appointed as an independent non-executive Director in June 2012 and is primarily responsible for supervising and providing independent advice on the operation and management of our Company. Mr. Li Xindan had been an associate professor in Southeast University (東南大學) since 1993 and was promoted to a professor in 1999. Mr. Li Xindan served as the vice president of the school of management and engineering of Nanjing University (南京大學) from January 2001 to June 2009 and became the president since June 2009. He has been an independent director of Narui Technology Co., Ltd. (國電南瑞科技股份有限公司, a company listed on the Shanghai Stock Exchange (stock code: 600406)), a leading provider of power and automation technologies in the PRC, since May 2010. He has also been an independent non-executive director of C.banner International Holdings Limited (千百度國際控股有限公司, a company listed on the Stock Exchange (stock code: 1028)), a retailer of mid-to-premium women’s formal and casual footwear in the PRC, since August 2011. Mr. Li Xindan graduated from Fudan University (復旦大學) located in Shanghai in July 1988 with a bachelor degree in international economics and management science and a doctor degree in economics in July 1999, respectively. He was recognised as a Zhao Shiliang Chair Professor (趙士良講座教授) by Nanjing University in 2014.
Save as disclosed above, Mr. Li Xindan has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
Ms. Zhang Jie (張捷), aged 39, was appointed as an independent non-executive Director in June 2012 and is primarily responsible for supervising and providing independent advice on the operation and management of our Company. Ms. Zhang Jie has been engaged with the College of Economics and Management of Nanjing University of Aeronautics and Astronautics (南京航空航天大學經濟與管理學 院) since April 2001, working at various times as a lecturer, associate professor and research fellow. She has been an independent director and independent non-executive director of Huatai Securities from November 2013 to December 2015. Ms. Zhang Jie graduated from Nanjing University of Aeronautics and Astronautics (南京航空航天大學) located in Nanjing, Jiangsu Province with a bachelor degree in economics in July 1998 and a master degree in management science in March 2001, respectively. She graduated from Nanjing University (南京大學) in June 2008 with a doctor degree in management science. She has been a researcher as credentialed by the Evaluation Committee of Research-based Senior Positions (研究系列高級職務評審委員會) of Nanjing University of Aeronautics and Astronautics since May 2014.
Save as disclosed above, Ms. Zhang Jie has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
Mr. Zhang Hongfa (張洪發), aged 51, was appointed as our independent non-executive Director in July 2013 and is primarily responsible for supervising and providing independent advice on the operation and management of our Company, in particular in regards to financial affairs. Mr. Zhang Hongfa has worked in the Jiangsu Institute of Certified Public Accountants (江蘇省註冊會計師協會) from May 1998 to July 2014. He has also been the deputy secretary-general of Jiangsu Province Appraisal Society (江蘇省資產評估協會) since August 2014. Mr. Zhang Hongfa had been a lecturer at Jiangsu Radio & Television University (江蘇廣播電視大學, now known as Jiangsu Open University
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(江蘇開放大學)) from September 1986 to September 1993 and performed social audit work for Jiangsu Provincial Firm of Accountants (江蘇省會計師事務所) from October 1993 to May 1998. Furthermore, Mr. Zhang Hongfa currently holds or had held directorships in the following entities, most of which are listed companies:
Name of stock exchange/stock Name Principal business code Position Period of time
Jiangsu Hongbao Hardware Manufacture and sale of Shenzhen Stock Independent December 2007 Company Limited (江蘇宏寶五金 hardware tools Exchange/002071 director to May 2014 股份有限公司) (now known as Great Wall Movie and Television Company Limited (長城影視股份 有限公司))
Jiangsu Wiscom System Company Electrical power Shenzhen Stock Independent April 2010 to Limited automation and IT Exchange/002090 director present (江蘇金智科技股份有限公司) services
Jiangsu Hoperun Software Company Provision of software Shenzhen Stock Independent December 2009 Limited (江蘇潤和軟件股份有限 outsourcing services Exchange/300339 director to October 2014 公司)
Wuxi Weifu High-technology Group Development, Shenzhen Stock Independent March 2012 to Company Limited (無錫威孚高科 manufacture and sale of Exchange/000581 director March 2015 技集團股份有限公司) automobile components
Guolian Futures Company Limited Commodity futures N/A Independent April 2007 to (國聯期貨股份有限公司) brokerage and financial director present futures brokerage
Shuangliang Eco-energy Systems Manufacture and sale of Shanghai Stock Independent March 2004 to Company Limited (雙良節能系統 chemical products and Exchange/600481 director May 2007 股份有限公司) mechanical products
Jinling Pharmaceutical Company Manufacture and sale of Shenzhen Stock Independent June 2014 to Limited (金陵藥業股份有限公司) pharmaceutical products Exchange/000919 director April 2015
Jiangsu Guotai International Group Trading business Shenzhen Stock Independent December 2004 Guomao Company Limited (江蘇 Exchange/002091 director to December 國泰國際集團國貿股份有限公司) 2007
Mr. Zhang Hongfa graduated from Soochow University (蘇州大學) located in Suzhou, Jiangsu Province in July 1986 with a bachelor degree in economics. He is a senior accountant as credentialed by the Department of Human Resources and Social Security of Jiangsu Province (江蘇省人力資源和 社會保障廳) and a Certified Public Accountant as credentialed by the Department of Finance of Jiangsu Province (江蘇省財政廳).
Save as disclosed above, Mr. Zhang Hongfa has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
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Mr. Lam Kai Yeung (林繼陽), aged 46, was appointed as an independent non-executive Director in June 2015. Mr. Lam Kai Yeung had been the company secretary and qualified accountant of Hunan Nonferrous Metals Corporation Limited, a company delisted from the Stock Exchange in March 2015 (original stock code: 2626), from July 2006 to August 2013. Mr. Lam Kai Yeung had been an independent non-executive director of Northeast Tiger Pharmaceutical Company Limited (stock code: 8197), a company listed on the Growth Enterprise Market of the Stock Exchange, from August 2008 to June 2015 and an non-executive director of Ping Shan Tea Group Limited, a company listed on Main Board of the Stock Exchange from December 2014 to May 2015. He has also been an independent non-executive director of Silverman Holdings Limited (a company listed on the Main Board of the Stock Exchange, stock code: 1616) since June 2012, an independent non-executive director of Highlight China IoT International Limited (formerly known as Ford Glory Group Holdings Limited, a company listed on the Main Board of the Stock Exchange, stock code: 1682) since August 2014, an independent non-executive director of Sunway International Holdings Limited (a company listed on the Main Board of the Stock Exchange, stock code: 58) since May 2015, an independent non-executive director of Finsoft Financial Investment Holdings Limited (a company listed on Growth Enterprise Market of the Stock Exchange, stock code: 8018) since June 2015 and an independent non-executive director of Kong Shum Union Property Management (Holding) Limited (a company listed on Growth Enterprise Market of the Stock Exchange, stock code: 8181) since October 2015.
Mr. Lam Kai Yeung is a fellow of the Association of Chartered Certified Accountants and a fellow of the Hong Kong Institute of Certified Public Accountants. He is also a licensed person for type 4 (advising on securities) and type 9 (asset management) regulated activities under the SFO. Mr. Lam Kai Yeung obtained a bachelor degree of accounting from Xiamen University (廈門大學) in July 1990 and a master degree in business administration from Oxford Brookes University in the U.K. in July 2010.
Save as disclosed above, Mr. Lam Kai Yeung has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
SUPERVISORS
The PRC Company Law requires a joint stock company with limited liability to establish a supervisory committee. Our Supervisory Committee currently consists of three members. Pursuant to our Articles of Association, at least one-third of our Supervisors must be employee representatives elected by our employees. Except for the employee representative Supervisor, the other Supervisors are elected and appointed by our Shareholders at a Shareholders’ meeting for a term of three years, which is renewable upon re-election and re-appointment.
Pursuant to our Articles of Association, the functions and powers of the Supervisory Committee include, among other things:
• examining the financial affairs of our Company;
• supervising the performance of the Directors and members of the senior management, and monitoring as to whether they had acted in violation of the law, administrative stipulations, Articles of Association and the resolutions passed at Shareholders’ meetings in the performance of their duties;
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• requesting the Directors and members of the senior management to rectify actions which are detrimental to the Company’s interests; and
• exercising other powers, functions and duties as conferred by the law, administrative stipulations and our Articles of Association.
The following sets forth the biographies of our Supervisors.
Ms. Xu Yingying (徐瑩瑩), aged 31, was appointed as the chairlady of the Supervisory Committee and an employee representative Supervisor in November 2012 and is primarily responsible for supervising the performance of duties by the Directors and members of the senior management. Ms. Xu Yingying has been engaged with Jiangsu Holly, our predecessor company and our Company since July 2007 and worked at various times as a staff, person-in-charge and assistant to manager of the administration and human resource department. She has served as the deputy general manager of the human resources department of our Company since February 2012. Ms. Xu Yingying graduated from Nanjing University (南京大學) located in Nanjing, Jiangsu Province in June 2007 with a bachelor degree in Chinese language and literature.
Ms. Xu Yingying has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
Mr. Pu Xuenian (濮學年), aged 52, was appointed as a Supervisor in November 2012 and is primarily responsible for supervising the performance of duties by the Directors and members of the senior management. Mr. Pu Xuenian had served in various positions including, among others, the manager of financial department in Jiangsu Crafts Import and Export Group Co., Ltd. (江蘇省工藝品 進出口集團公司) from May 1988 to February 2005. He had also assumed various positions in Artall Culture Group, a company primarily engaged in culture and arts communication business and import and export trading business, including the deputy general manager of the audit and legal department from March 2005 to January 2008, and a supervisor as well as the general manager of the audit and legal department from January 2008 to August 2010. He had also been the head of the supervision office of SOHO Holdings from August 2010 to February 2015. In addition, Mr. Pu Xuenian has served as the chairman of Jiangsu SOHO Construction Group. Co., Ltd. (江蘇蘇豪建設集團有限公司), a company principally engaged in real estate development and property management business, since February 2015. Mr. Pu Xuenian graduated from Jiangsu Radio & Television University (江蘇廣播電視大學) (now known as Jiangsu Open University (江蘇開放大學)) located in Nanjing, Jiangsu Province in July 1986 with an associate degree in industrial accounting.
Mr. Pu Xuenian has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
Ms. Wang Jianying (王健英), aged 49, was appointed as a Supervisor in December 2014 and is primarily responsible for supervising the performance of duties by the Directors and members of the senior management. Ms. Wang Jianying served as the deputy general manager and the general manager of the audit department of Jiangsu Skyrun International Group Co., Ltd. (江蘇開元國際集團有限公 司), a company principally engaged in import and export trading business of commodities, from December 2000 to January 2003 and from January 2003 to July 2007, respectively. She has also been the chief accountant and the general manager of the corporate management department of High Hope
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International, a company principally engaged in the import and export trading business of commodities, from July 2007 to April 2014 and since April 2014, respectively. Ms. Wang Jianying graduated from the University of International Business and Economics (對外經濟貿易大學) located in Beijing in July 1986 with an associate degree in accounting. She is a senior accountant as credentialed by the Human Resource Department of Jiangsu Province (江蘇省人事廳).
Ms. Wang Jianying has not held any directorships in other listed companies in Hong Kong or overseas in the past three years.
SENIOR MANAGEMENT
Our senior management is responsible for the day-to-day management and operation of our business. The following sets forth the biographies of the members of our senior management.
Ms. Zhou Jianqiu (周劍秋), for details of Ms. Zhou Jianqiu, please see the sub-section headed “— Directors — Executive Directors” above.
Mr. Zhao Weixiong (趙偉雄), aged 39, was appointed as our executive deputy general manager in May 2015, our deputy general manager in January 2010 and Board secretary in January 2008 and joint company secretary in July 2015, respectively. He is primarily responsible for our company secretarial matters and our securities department, international business department, a part of our futures branches as well as matters relating to Holly Capital. Mr. Zhao Weixiong has been engaged with Jiangsu Holly, our predecessor company and our Company since July 1999, working at various times as its manager of futures branch, office head, chief operation officer, board secretary and deputy general manager. Mr. Zhao Weixiong has also been a director of Holly Capital since June 2013 (he had been the chairman of the board of directors from June 2013 to April 2015). Mr. Zhao Weixiong had been the assistant to general manager as well as the deputy general manager of Holly Investment from July 2006 to September 2010. Mr. Zhao Weixiong graduated from Southeast University (東南大學) located in Nanjing, Jiangsu Province in November 2011 with a doctor degree in management science and engineering and is currently an senior economist (高級經濟師) as credentialed by the Department of Human Resources and Social Securities of Jiangsu Province. He is also a member of the disciplinary committee of the third and fourth executive committees of CFA (中國期貨業協會第三屆及第四屆理 事會紀律委員會) and a member of Jiangsu Chamber of International Commerce (江蘇省國際商會). Mr. Zhao Weixiong is currently the vice president of Jiangsu Financial Youth Federation (江蘇省金 融青年聯合會) and an external tutor of professional postgraduate of Southeast University (東南大學 專業學位研究生校外指導教師).
Mr. Zhao Weixiong has not held any directorships in any listed companies in Hong Kong or overseas in the past three years.
Mr. Ding Jiunian (丁久年), aged 49, was appointed as our deputy general manager in September 2010 and is primarily responsible for overseeing audit and legal department and discipline inspection department and dealing with administrative matters. Mr. Ding Jiunian has been engaged with Jiangsu Holly, our predecessor company and our Company since March 2006, working at various times as head of department, assistant to general manager and deputy general manager. He has also served as a supervisor of Holly Capital, our wholly-owned subsidiary, since March 2013. He served as the deputy
— 259 — DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT general manager of Holly Motors Company Limited (弘業汽車發展有限公司), a company principally engaged in auto sales and manufacture of vehicle appliances from April 2002 to January 2004. Mr. Ding Jiunian graduated from Jiangsu Provincial Party Committee of the Communist Party of China (中共江蘇省委黨校) located in Nanjing, Jiangsu Province in July 2010 with his postgraduate diploma.
Mr. Ding Jiunian has not held any directorships in any listed companies in Hong Kong or overseas in the past three years.
Mr. Zheng Peiguang (鄭培光), aged 50, was appointed as our deputy general manager in May 2002 and is primarily responsible for our brokerage business management department, option department as well as several business departments of our head office. Mr. Zheng Peiguang has been engaged with Jiangsu Holly, our predecessor company and our Company since September 1999, working at various times as deputy general manager of the marketing development department, deputy manager and manager of futures branch and our deputy general manager. Mr. Zheng Peiguang graduated from Jiangsu Provincial Cadres College (江蘇省省級機關幹部業餘大學) (now known as Jiangsu Provincial Management Cadres College (江蘇省省級機關管理幹部學院)) located in Nanjing, Jiangsu Province in July 1992 with an associate degree in administrative management.
Mr. Zheng Peiguang has not held any directorships in any listed companies in Hong Kong or overseas in the past three years.
Mr. Jia Guorong (賈國榮), aged 45, was appointed as our Chief Risk Officer in March 2009 and is primarily responsible for our compliance and risk management matters and our labor union. Mr. Jia Guorong has been engaged with Jiangsu Holly, our predecessor company, and our Company since January 1999, working at various times as the deputy manager and manger of the settlement department, risk director, deputy general manager and Chief Risk Officer. He has also been a director of Holly Capital, our wholly-owned subsidiary, since November 2013. Mr. Jia Guorong graduated from Hohai University (河海大學) located in Nanjing, Jiangsu Province in December 2012 with a master degree in business administration.
Mr. Jia Guorong has not held any directorships in any listed companies in Hong Kong or overseas in the past three years.
Mr. Zhao Dong (趙東), aged 45, was appointed as our deputy general manager in March 2014 and is primarily responsible for a part of our futures branches. Prior to joining our Group, Mr. Zhao Dong had been the manager of marketing department of Wuxi Lida Futures Brokerage Co., Ltd. (無 錫利大期貨經紀有限公司) from September 1999 to May 2000 and the manager of marketing division of Yixing Huazheng Futures Brokerage Co., Ltd. (宜興華證期貨經紀有限公司) from May 2000 to October 2003, respectively. Mr. Zhao Dong had been engaged with Huazheng Futures Brokerage Co., Ltd. (華證期貨經紀有限公司) from October 2003 to August 2011, working at various times as its manager of marketing department, deputy general manager and general manager. He had also been the general manager of Huazheng Futures Co., Ltd. (華證期貨有限公司) from August 2011 to May 2013. Mr. Zhao Dong graduated from the Officer Correspondence School of Jiangsu Provincial Party Committee of the Communist Party of China (中共江蘇省委黨校幹部函授學院) located in Nanjing, Jiangsu Province with an associate degree in economics and management in July 2001.
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Mr. Zhao Dong has not held any directorships in any listed companies in Hong Kong or overseas in the past three years.
Ms. Wang Min (王敏), aged 38, was appointed as our supervisor of finance in July 2015 and is primarily responsible for our finance and accounting work. Ms. Wang Min has been engaged with Jiangsu Holly, our predecessor company, and our Company since July 1999, working at various times as, including but not limited to, deputy manager and manager of the finance department. From September 2003 to October 2009, She had served as the assistant to manager and deputy manager of the finance department of Holly Investment. Ms. Wang Min holds the professional certificates of accounting, statistics and futures and she has been an intermediate accountant since 2002. She received the award Women’s pacesetter (巾幗標兵崗) from Jiangsu Federation of Labor (江蘇省總工 會) in May 2014. Ms. Wang Min graduated from Yangzhou University (揚州大學) located in Yangzhou, Jiangsu Province in June 1999 with a bachelor degree in accounting.
Ms. Wang Min has not held any directorships in any listed companies in Hong Kong or overseas in the past three years.
JOINT COMPANY SECRETARIES
We have appointed Mr. Zhao Weixiong as one of the joint company secretaries of our Company in July 2015. For details of Mr. Zhao Weixiong’s biography, please see the subsection headed “— Senior Management” above.
We have appointed Ms. Leung Wing Han Sharon as the other joint company secretary of our Company in July 2015, which will take effect on the Listing Date, to assist Mr. Zhao Weixiong in discharging his duties as a company secretary including compliance matters relating to the Listing Rules and other Hong Kong regulatory requirements for a period of three years commencing from the Listing Date.
Ms. Leung Wing Han Sharon (梁穎嫻) was appointed as one of our joint company secretaries in July 2015, which will take effect on the Listing Date. Ms. Leung Wing Han Sharon has been a vice president of SW Corporate Services Group Limited (信永方圓企業服務集團有限公司) and has more than 10 years’ experience in finance, accounting and company secretary. Ms. Leung Wing Han Sharon graduated from the Hong Kong University of Science and Technology (located in Hong Kong, the PRC) with a bachelor’s degree of business administration in accounting. She also obtained a bachelor’s degree of laws from the Manchester Metropolitan University (located in Manchester, the United Kingdom) and a master’s degree of laws in international corporate and financial law from the University of Wolverhampton (Wolverhampton, the United Kingdom). Ms. Leung Wing Han Sharon has also been a fellow member of the Hong Kong Institute of Chartered Secretaries, a fellow member of the Institute of Chartered Secretaries and Administrators, a fellow member of the Association of Chartered Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants.
MANAGEMENT PRESENCE IN HONG KONG
Rules 8.12 and 19A.15 of the Listing Rules require that a listing applicant applying for a primary listing on the Stock Exchange must have a sufficient management presence in Hong Kong. This
— 261 — DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT normally means that at least two of its executive directors must be ordinarily resident in Hong Kong. Our headquarters and our principal business operations are located, managed and conducted in the PRC, and Mr. Zhou Yong and Ms. Zhou Jianqiu, our executive Directors, currently reside in the PRC. As a result, our Company does not, and will not, in the foreseeable future, have sufficient management presence in Hong Kong as required under Rules 8.12 and 19A.15 of the Listing Rules. Furthermore, it would be impractical and commercially unnecessary for our Company to appoint additional executive Directors who are ordinarily resident in Hong Kong or to relocate our existing PRC based executive Directors to Hong Kong.
Our Company has applied to the Stock Exchange for a waiver from strict compliance with the requirements under Rules 8.12 and 19A.15 of the Listing Rules. For more details, please see the section headed “Waivers from Strict Compliance with the Listing Rules — Management Presence in Hong Kong” in this prospectus.
BOARD COMMITTEES
Audit Committee
We have established an audit committee pursuant to the Articles of Association and a resolution of our Board of Directors. The primary duties of the audit committee include, among other things:
• proposing to the Board of Directors the appointment and replacement of external audit firms;
• supervising the implementation of our internal audit system;
• liaising between our internal audit department and external auditors;
• reviewing our financial information and related disclosures; and
• other duties conferred by the Board of Directors.
Our audit committee consists of Mr. Lam Kai Yeung, as chairman, Mr. Xue Binghai and Mr. Zhang Hongfa.
Remuneration Committee
We have established a remuneration committee pursuant to our Articles of Association and a resolution of our Board of Directors. The primary duties of the remuneration committee include, among other things:
• establishing, reviewing and making recommendations to our Directors on our policy and structure concerning remuneration of our Directors and senior management;
• determining the terms of the specific remuneration package of each Director and members of senior management;
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• reviewing and approving performance-based remuneration by reference to corporate goals and objectives resolved by our Directors from time to time; and
• other duties conferred by the Board of Directors.
Our remuneration committee consists of Ms. Zhang Jie, as chairlady, Mr. Sun Changyu and Mr. Li Xindan.
Nomination Committee
We have established a nomination committee pursuant to our Articles of Association and a resolution of our Board of Directors. The primary duties of the remuneration committee include, among other things:
• reviewing the structure, size and composition of our Board on a regular basis and make recommendations to the Board regarding any proposed changes;
• identifying, selecting or making recommendations to our Board on the selection of individuals nominated for directorships;
• assessing the independence of our independent non-executive Directors;
• making recommendations to the Board on relevant matters relating to the appointment, re-appointment and removal of our Directors; and
• other duties conferred by the Board of Directors.
Our nomination committee consists of Mr. Zhou Yong, as chairman, Ms. Zhang Jie and Mr. Zhang Hongfa.
Risk Management Committee
We have established a risk management committee pursuant to relevant PRC laws and regulations and a resolution of our Board of Directors. The primary duties of the risk management committee include, among other things:
• regularly identifying current and emerging risks in our business operations;
• reviewing and assessing the risk management strategies and making recommendations;
• establishing precautionary risk management and internal control systems and providing mitigating solutions; and
• other duties as conferred by the Board of Directors.
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Our risk management committee consists of Mr. Li Xindan, as chairman, Mr. Xue Binghai, Mr. Zhang Fasong and Ms. Zhou Jianqiu.
REMUNERATION POLICY
The compensation and remuneration of our Directors, Supervisors and members of the senior management are determined by our Shareholders’ meetings and Board of Directors, as appropriate in the form of salaries and bonuses. We also reimburse them for expenses which are necessary and reasonably incurred in providing services to us or discharging their duties in relation to our operations. When reviewing and determining the specific remuneration packages for our Directors, Supervisors and members of the senior management, our Shareholders’ meetings and Board of Directors take into consideration factors such as salaries paid by comparable companies, time commitment, level of responsibilities, employment elsewhere in our Group and desirability of performance-based remuneration. As required by PRC laws and regulations, we also participate in various defined contribution plans organised by relevant provincial and municipal government authorities and welfare schemes for our employees, including medical insurance, injury insurance, unemployment insurance, pension insurance, maternity insurance and housing provident fund.
COMPENSATION OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT
Our Directors, Supervisors and members of the senior management receive compensation from our Company in the form of salaries, bonuses, allowances and other benefits in kind such as contributions to pension plans.
The aggregate remuneration of the Directors and Supervisors (including fees, salaries, contributions to pension schemes, discretionary bonuses, housing and other allowances and other benefits in kind) incurred by our Group for the three years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015 was approximately RMB331,000, RMB312,000, RMB403,000 and RMB328,000, respectively, which included the aggregate contributions we paid to the pension schemes for our Directors and Supervisors during the same periods. During the Track Record Period, we had not paid any remuneration to our Directors nominated by our Shareholders to take up the directorships for their services as our Directors, being part of their job duties whilst working with our Shareholders.
The aggregate amount of remuneration of the Group’s five highest paid individuals (including fees, salaries, contributions to pension schemes, discretionary bonuses, housing and other allowances and other benefits in kind) incurred by our Group for the three years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015 was approximately RMB4.87 million, RMB5.30 million, RMB4.93 million and RMB1.57 million, respectively, which included the aggregate contributions we paid to pension schemes for the members of our senior management during the same periods.
No remuneration was paid by us to our Directors, Supervisors or the five highest paid individuals as inducement to join or upon joining us or as a compensation for loss of office in respect of the three years ended 31 December 2012, 2013 and 2014. Furthermore, none of our Directors nor Supervisors had waived or agreed to waive any remuneration during the same periods.
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Pursuant to the arrangements currently in force as at the date of this prospectus, the aggregate amount of remuneration (inclusive of benefits in kind but exclusive of discretionary bonuses) payable to our Directors and Supervisors by our Company for the year ending 31 December 2015 is estimated to be approximately RMB800,460 in aggregate.
Our Board will review and determine the remuneration and compensation packages of our Directors, Supervisors and members of the senior management which, following the Listing, will receive recommendation from the remuneration committee of our Company which will take into account salaries paid by comparable companies, time commitment and responsibilities of our Directors, Supervisors and members of the senior management and performance of our Group.
COMPLIANCE ADVISER
Our Company has appointed Guotai Junan Capital Limited as our compliance adviser pursuant to Rules 3A.19 and 19A.05 of the Listing Rules. Pursuant to Rule 3A.23 of the Listing Rules, as our compliance adviser, Guotai Junan Capital Limited will advise us in the following circumstances:
• before the publication of any regulatory announcement, circular or financial report;
• where a transaction, which might be a notifiable or connected transaction under the Listing Rules, is contemplated, including share issues and share repurchases;
• where we propose to use the proceeds of the Global Offering in a manner different from that detailed in this prospectus or where our Group’s business activities, developments or results of operation deviate from any forecast, estimate or other information in this prospectus; and
• where the Stock Exchange makes an inquiry of our Company regarding unusual movements in the price or trading volume of the Shares or any other matters under Rule 13.10 of the Listing Rules.
The term of appointment shall commence on the Listing Date and is expected to end on the date on which we distribute our annual report in respect of the financial results for the first full financial year commencing after the Listing Date.
CORPORATE GOVERNANCE CODE
As at the Latest Practicable Date and to the best of the knowledge, information and belief of our Directors, having made all reasonable enquiries, the Directors are not aware of any deviation from provisions in the Corporate Governance Code as set out in Appendix 14 to the Listing Rules.
— 265 — SUBSTANTIAL SHAREHOLDERS
So far as our Directors are aware, immediately following completion of the Global Offering (assuming the Over-allotment Option is not exercised), the following persons will have an interest or short position in the Shares or underlying Shares which will be required to be disclosed to our Company and the Stock Exchange pursuant to the provisions of Divisions 2 and 3 of Part XV of the SFO or will be, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of our Company:
As at submission of this prospectus Immediately after the Global Offering Approximate Approximate Approximate Approximate percentage of percentage percentage of percentage shareholdings in of the shareholdings in of the the relevant shareholdings in the relevant shareholdings in class of share the total share class of share the total share Number of capital of our capital of our Number of capital of our capital of our Name Nature of Interest Domestic Shares Company(1) Company(1) Domestic Shares Company(2) Company(3)
Holly Corporation Beneficial owner 147,900,000 21.75% 21.75% 147,900,000 22.50% 16.31% Artall Culture Group(4) Interest in controlled 156,712,800 23.05% 23.05% 156,185,345(7) 23.76% 17.22% corporation SOHO Holdings (5) Beneficial owner and 449,705,474 66.14% 66.14% 431,642,122(8) 65.67% 47.59% interest in controlled corporation Holly Su Industrial Beneficial owner 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% Hony Capital Industrial Phase I Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% Fund (Tianjin) (Limited corporation Partnership) (弘毅投資產業 一期基金(天津)(有限合夥)) (6)
Hony Capital Management Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% (Tianjin) (Limited corporation Partnership) (弘毅投資管理 (天津)(有限合夥)) (6) Hony Tongren Consulting Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% (Tianjin) (Limited corporation Partnership) (弘毅同人顧問 (天津)(有限合夥)) (6) Hony Capital (Tianjin) Co., Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% Ltd. (弘毅投資(天津)有限公 corporation 司) (6) Hony Capital (Beijing) Co., Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% Ltd. (弘毅投資(北京)有限公 corporation 司) (6) Beijing Hony Capital Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% Management Co., Ltd. corporation (北京弘毅資產管理有限 公司) (6) XU Minsheng (徐敏生) (6) Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% corporation CAO Yonggang (曹永剛) (6) Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% corporation WANG Lijie (王立界) (6) Interest in controlled 143,548,000 21.11% 21.11% 143,548,000 21.84% 15.83% corporation High Hope Corporation Beneficial owner 68,000,000 10.00% 10.00% 63,930,134(9) 9.73% 7.03%
— 266 — SUBSTANTIAL SHAREHOLDERS
Notes:
(1) The calculation is based on the total number of 680,000,000 Domestic Shares in issue as at the Latest Practicable Date.
(2) The calculation is based on the total number of 657,300,000 Domestic Shares in issue immediately after the Global Offering (assuming the Over-allotment Option is not exercised).
(3) The calculation is based on the total number of 907,000,000 Shares in issue immediately after the Global Offering (assuming the Over-allotment Option is not exercised).
(4) As at the Latest Practicable Date, Artall Culture Group (i) was the beneficial owner of approximately 24.02% equity interests in Holly Corporation, which in turn held 147,900,000 Domestic Shares, and (ii) was the beneficial owner of approximately 89.66% of the equity interests in Holly Logistics, which in turn held 8,812,800 Domestic Shares. As disclosed in the 2014 annual report of Holly Corporation, Artall Culture Group is regarded as the controlling shareholder of Holly Corporation under the relevant PRC laws. Accordingly, Holly Corporation is a deemed controlled corporation of Artall Culture Group under the SFO, and Artall Culture Group is therefore deemed to be interested in the 147,900,000 Domestic Shares and 8,812,800 Domestic Shares directly held by Holly Corporation and Holly Logistics, respectively.
(5) As at the Latest Practicable Date, SOHO Holdings (i) directly held 292,992,674 Domestic Shares, and (ii) was the beneficial owner of 100% equity interests in Artall Culture Group, a company deemed to be interested in the 147,900,000 Domestic Shares and 8,812,800 Domestic Shares directly held by Holly Corporation and Holly Logistics, respectively. Accordingly, SOHO Holdings is deemed to be interested in the 156,712,800 Domestic Shares indirectly held by Artall Culture Group and is therefore interested in, directly and indirectly, 449,705,474 Domestic Shares.
(6) As at the Latest Practicable Date, (i) Hony Capital Industrial Phase I Fund (Tianjin) (Limited Partnership) (弘毅投資產 業一期基金(天津)(有限合夥)) (“Hony Capital Phase I”) was the beneficial owner of 99.9955% equity interests in Holly Su Industrial, which in turn held 143,548,000 Domestic Shares; (ii) Hony Capital Management (Tianjin) (Limited Partnership) (弘毅投資管理(天津)(有限合夥)) was the general partner of Hony Capital Phase I; (iii) Hony Capital (Tianjin) Co., Ltd. (弘毅投資(天津)有限公司)(“Hony Tianjin”) was the general partner of Hony Capital Management (Tianjin) (Limited Partnership); (iv) Hony Tongren Consulting (Tianjin) (Limited Partnership) (弘毅同人顧問(天津)(有 限合夥)) (“Hony Tonren”) was the limited partner of Hony Capital Management (Tianjin) (Limited Partnership) holding 99% of its registered capital; (v) Hony Capital (Beijing) Co., Ltd. (弘毅投資(北京)有限公司) was the beneficial owner of 1% equity interests in Hony Tianjin and the general partner of Hony Tonren, which in turn holds 99% equity interests in Hony Tianjin; (vi) Beijing Hony Capital Management Co., Ltd. (北京弘毅資產管理有限公司) was the beneficial owner of 80% equity interests in Hony Capital (Beijing) Co., Ltd.; and (vii) each of Mr. Xu Minsheng (徐敏生), Mr. Cao Yonggang (曹永剛) and Mr. Wang Lijie (王立界) was a beneficial owner of one third of the equity interests in Beijing Hony Capital Management Co., Ltd. Accordingly, each of Hony Capital Phase I, Hony Capital Management (Tianjin)(Limited Partnership), Hony Tongren, Hony Tianjin, Hony Capital (Beijing) Co., Ltd., Beijing Hony Capital Management Co., Ltd., Mr. Xu Minsheng, Mr. Cao Yonggang and Mr. Wang Lijie is deemed to be interested in the 143,548,000 Domestic Shares directly held by Holly Su Industrial.
(7) Pursuant to the Global Offering and assuming the Over-allotment Option is not exercised, Holly Logistics, a state-owned Shareholder, will sell 527,455 Domestic Shares for the benefit of the NSSF and will therefore hold 8,285,345 Domestic Shares. As such, Artall Culture Group is deemed to be interested in an aggregate of 156,185,345 Domestic Shares directly held by Holly Corporation and Holly Logistics. For more details of the relationship among Artall Culture Group, Holly Logistics and Holly Corporation, please see Note (4) above.
(8) Pursuant to the Global Offering and assuming the Over-allotment Option is not exercised, SOHO Holdings, a state-owned Shareholder, will sell 17,535,897 Domestic Shares for the benefit of the NSSF and will therefore directly hold 275,456,777 Domestic Shares. As such, SOHO Holdings is deemed to be interested in an aggregate of 431,642,122 Domestic Shares held, directly and indirectly, by Artall Culture Group and itself. For more details of the relationship among SOHO Holdings, Artall Culture Group, Holly Logistics and Holly Corporation, please see Note (5) above.
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(9) Pursuant to the Global Offering and assuming the Over-allotment Option is not exercised, High Hope Corporation, a state-owned Shareholder, will sell 4,069,866 Domestic Shares for the benefit of the NSSF and will therefore directly hold 63,930,134 Domestic Shares.
Save as disclosed above and in the section headed “Statutory and General Information — C. Further Information about Our Directors, Supervisors and Substantial Shareholders” in Appendix VI to this prospectus, our Directors are not aware of any person who will, immediately following completion of the Global Offering and assuming that the Over-allotment Option is not exercised, have an interest or short position in the Shares or underlying Shares which are required to be disclosed to our Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, directly or indirectly, be interested in 10% or more of the nominal value of any class of share capital carrying the rights to vote in all circumstances at the general meeting of our Company.
We are not aware of any arrangement which may result in any change of control in our Company at any subsequent date.
— 268 — SHARE CAPITAL
OUR SHARE CAPITAL
As at the Latest Practicable Date, the registered capital of our Company was RMB680,000,000, divided into 680,000,000 Domestic Shares with a nominal value of RMB1.00 each.
Assuming the Over-allotment Option is not exercised, the share capital of our Company immediately after the Global Offering will be as follows:
Approximate Number of percentage of Shares share capital
Domestic Shares 657,300,000 72.47% H Shares converted from Domestic Shares and offered by the Selling Shareholders under the Global Offering(1) 22,700,000 2.50% H Shares to be issued under the Global Offering 227,000,000 25.03% Total 907,000,000 100.00%
Assuming the Over-allotment Option is exercised in full, the share capital of our Company immediately after the Global Offering will be as follows:
Approximate Number of percentage of Shares share capital
Domestic Shares 653,895,000 69.49% H Shares converted from Domestic Shares and offered by the Selling Shareholders under the Global Offering(1) 26,105,000 2.77% H Shares to be issued under the Global Offering 261,050,000 27.74% Total 941,050,000 100.00%
(1) In accordance with relevant PRC regulations regarding the reduction of state-owned shares, the Selling Shareholders are required to transfer to NSSF such number of Domestic Shares as in aggregate would be equivalent to 10% of the number of the new Shares to be issued by the Company under the Global Offering, or pay the equivalent cash at the Offer Price under the Global Offering to NSSF, or a combination of both. NSSF issued a letter on 14 August 2015 to instruct us to arrange for the sale of the Sale Shares and remit the proceeds therefrom to the account designated by NSSF. Please also see the section headed “Share Capital — Transfer of State-owned Shares” below for more details.
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PUBLIC FLOAT REQUIREMENTS
Rules 8.08(1)(a) and (b) of the Listing Rules require there to 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 one class of securities or more 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 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 capitalisation at the time of listing of not less than HK$50 million.
Based on the information in the above tables, our Company will meet the public float requirement under the Listing Rules after completion of the Global Offering (whether or not the Over-allotment Option is exercised in full). We will make appropriate disclosure of our public float and confirm the sufficiency of our public float in successive annual reports after Listing.
The above tables assume the Global Offering becomes unconditional and is completed.
OUR SHARES
Our Domestic Shares and H Shares are both ordinary Shares in the share capital of our Company, ranking pari passu in all respects, and will qualify and rank equally for all dividends or other distributions declared, made or paid. However, the transfer of the Domestic Shares is subject to such restrictions as PRC laws may impose from time to time. H Shares may only be subscribed for and traded in Hong Kong dollars. Domestic Shares, on the other hand, may only be subscribed for and transferred in Renminbi. We must pay all dividends in respect of H Shares in Hong Kong dollars and all dividends in respect of Domestic Shares in Renminbi.
As at the Latest Practicable Date, our promoters, namely SOHO Holdings, Holly Corporation, Holly Su Industrial, High Hope International, Holly Logistics, Hongrui Venture Capital and Shanghai Mingda, collectively held 680,000,000 Shares as promoter shares (as defined in the PRC Company Law). Under the PRC Company Law, promoter shares may not be sold within a period of one year from 29 November 2012, on which our Company was converted into a joint stock limited company. The lock-up period expired on 29 November 2013. The PRC Company Law further provides that in relation to the public share offering of a company, the shares of the company which have been issued prior to the offering shall not be transferred within one year from the date of the listing. Accordingly, the Shares issued by our Company prior to the Listing Date shall be subject to this statutory restriction and shall not be transferred for a period of one year from the Listing Date.
Except as described in this prospectus and in relation to the dispatch of notices and financial reports to our Shareholders, dispute resolution, registration of Shares in different parts of our register of members, the method of share transfer and the appointment of dividend receiving agents, which are all provided for in the Articles of Association and summarised in Appendix V to this prospectus, Domestic Shares and H Shares shall rank pari passu with each other and in all aspects and, in
— 270 — SHARE CAPITAL particular, shall rank equally for all dividends or distributions declared, paid or made after the date of this prospectus. Save for the Global Offering, we do not propose to carry out any public or private issue or to place securities simultaneously with the Global Offering or within the next six months from the Listing Date. We have not approved any share issue plans other than the Global Offering.
CONVERSION OF OUR DOMESTIC SHARES INTO H SHARES
Conversion of Domestic Shares
Upon completion of the Global Offering, we will have two classes of ordinary Shares, H Shares and Domestic Shares. All of our Domestic Shares are unlisted Shares which are not listed or traded on any stock exchange.
According to the stipulations by the State Council’s securities regulatory authority and the Articles of Association, our Domestic Shares may be converted into H Shares, and such converted H Shares may be listed or traded on an overseas stock exchange, provided that prior to the conversion and trading of such converted Shares any requisite internal approval processes shall have been duly completed and the approval from the relevant PRC regulatory authorities, including the CSRC, shall have been obtained. In addition, such conversion, trading and listing shall in all respects comply with the regulations prescribed by the State Council’s securities regulatory authorities and the regulations, requirements and procedures prescribed by the relevant overseas stock exchange.
Approval of the Stock Exchange is required if any of our Domestic Shares are to be converted into and traded as H Shares on the Stock Exchange. Based on the methodology and procedures for the conversion of our Domestic Shares into H Shares as described in this section, we can apply for the listing of all or any portion of our Domestic Shares on the Stock Exchange as H Shares in advance of any proposed conversion to ensure that the conversion process can be completed promptly upon notice to the Stock Exchange and delivery of Shares for entry on the H Share register of members. As any listing of additional shares after our Listing on the Stock Exchange is ordinarily considered by the Stock Exchange to be a purely administrative matter, it does not require such prior application for listing at the time of our Listing in Hong Kong.
No Shareholder voting by class is required for the listing and trading of the converted Shares on an overseas stock exchange. Any application for listing of the converted Shares on the Stock Exchange after our Listing is subject to prior notification by way of announcement to inform our Shareholders and the public of any proposed conversion.
Mechanism and Procedures for Conversion
After all the requisite approvals have been obtained, the following procedures will need to be completed in order to effect the conversion: the relevant Domestic Shares will be withdrawn from the Domestic Share register of members and we will re-register such Shares on our H Share register of members maintained in Hong Kong and instruct our H Shares Registrar to issue H Share certificates. Registration of our H Shares register will be conditional on (a) our H Shares Registrar lodging with the Stock Exchange a letter confirming the proper entry of the relevant H Shares on the H Share
— 271 — SHARE CAPITAL register of members and the due dispatch of H Share certificates; and (b) the admission of the H Shares to trade on the Stock Exchange in compliance with the Listing Rules, the General Rules of CCASS and the CCASS Operational Procedures in force from time to time. Until the converted Shares are re-registered on our H Share register of members, such Shares would not be listed as H Shares.
So far as our Directors are aware, except for the Domestic Shares to be converted and transferred by our state-owned Shareholders to the NSSF in connection with the Global Offering and pursuant to the relevant PRC laws regarding the transfer/reduction of state-owned assets, none of our Shareholders currently proposes to convert any of the Domestic Shares held by it into H Shares.
TRANSFER OF SHARES ISSUED PRIOR TO THE LISTING DATE
The PRC Company Law provides that in relation to a Hong Kong public offering of a company, the shares issued by a company prior to the Hong Kong public offering shall not be transferred within a period of one year from the date on which the publicly offered shares are traded on any stock exchange. Accordingly, the Shares issued by our Company prior to the Listing Date shall be subject to this statutory restriction and not be transferred within a period of one year from the Listing Date. However, the Shares to be transferred by our four state-owned Shareholders, namely SOHO Holdings, High Hope Corporation, Hongrui Venture Capital and Holly Logistics, to the NSSF in accordance with relevant PRC regulations regarding the disposal of state-owned shares are not subject to such statutory restriction.
TRANSFER OF STATE-OWNED SHARES
In accordance with the Provisional Measures on Reducing State-owned Shares to Raise Social Security Fund《減持國有股籌集社會保障資金暫行管理辦法》 ( ) issued by the State Council, our four state-owned Shareholders, namely SOHO Holdings, High Hope Corporation, Hongrui Venture Capital and Holly Logistics, are required to transfer to the NSSF, in aggregate, such number of Domestic Shares to be converted to H Shares equivalent to 10% of the number of the Offer Shares to be issued under the Global Offering (being 22,700,000 Shares assuming the Over-allotment Option is not exercised and 26,105,000 Shares assuming the Over-allotment option is fully exercised), or pay the equivalent amount of cash at the Offer Price after deducting the relevant listing expenses under the Global Offering to the NSSF, or a combination of both.
On 2 June 2015, the transfer of state-owned Shares to the NSSF by our state-owned Shareholders was approved by the SASAC. Such transfer was approved by the CSRC on 18 August 2015. Pursuant to a letter dated 14 August 2015 that issued by NSSF (Shebaojijinfa [2015] No. 133), we are instructed by NSSF to (i) arrange for the sale of the Sale Shares, which shall represent 10% of the Offer Shares to be offered pursuant to the Global Offering; and (ii) remit the proceeds from the sale of the Sale Shares (after deducting the SFC transaction levy and the Stock Exchange trading fee) to an account designated by the NSSF. For more details, please see the section headed “Structure of the Global Offering—the Selling Shareholders” in this prospectus. Our Company will not receive any proceeds from the transfer of state-owned Shares by the state-owned Shareholders to NSSF.
— 272 — SHARE CAPITAL
We have been advised by our PRC legal advisers, Jingtian & Gongcheng, that the conversion of the Domestic Shares into H Share and the sale of the same as described above have been approved by the competent PRC authorities and is legal and valid under the relevant PRC laws.
REGISTRATION OF SHARES NOT LISTED ON OVERSEAS STOCK EXCHANGE
According to the Notice of Centralised Registration and Deposit of Non-overseas Listed Shares of Companies Listed on an Overseas Stock Exchange《關於境外上市公司非境外上市股份集中登記 ( 存管有關事宜的通知》) issued by the CSRC on 28 March 2007, an overseas listed company is required to register its shares that are not listed on the overseas stock exchange with China Securities Depository and Clearing Corporation Limited within 15 Business Days upon listing.
CONVENTION OF GENERAL MEETING AND CLASS MEETING
According to the Articles of Association, general meetings or class meetings are required under the following circumstances: (i) increase or reduction of the share capital, repurchase of Shares by our Company and issue of Shares of any class, stock warrants or other similar securities; (ii) the division, merger, dissolution, liquidation or change of corporate forms of our Company; (iii) issuance of bonds or other securities; and (iv) amendments to the Articles of Association.
For more details, please see the section headed “Summary of Articles of Association — Shareholders and the General Meeting” as set out in Appendix V to this prospectus.
— 273 — CORNERSTONE INVESTOR
THE CORNERSTONE PLACING
We have entered into a cornerstone investor agreement with the Sole Global Coordinator and Coastal Capital Limited (“Coastal Capital”) pursuant to which Coastal Capital or its investor subsidiary, who Coastal Capital may elect, who is a wholly-owned subsidiary of Coastal Capital that is a “professional investor” as defined in the cornerstone investor agreement (“Investor Subsidiary”) has agreed to subscribe for such number of our H Shares (rounded down to the nearest whole board lot of 1,000 H Shares) which may be purchased with an aggregate amount of HK$116.25 million at the Offer Price.
Assuming the Offer Price of HK$2.43, being the low-end of the Offer Price range set out in this prospectus, the total number of H Shares that Coastal Capital would subscribe for would be 47,839,000 H Shares, representing approximately 19.2% of our Offer Shares, or approximately 5.3% of our issued Shares immediately following completion of the Global Offering and the Capitalization Issue (assuming the Over-allotment Option is not exercised)(1).
Assuming the Offer Price of HK$2.70, being the mid-point of the Offer Price range set out in this prospectus, the total number of H Shares that Coastal Capital would subscribe for would be 43,055,000 H Shares, representing approximately 17.2% of our Offer Shares, or approximately 4.7% of our issued Shares immediately following the completion of the Global Offering and the Capitalization Issue (assuming the Over-allotment Option is not exercised).
Assuming the Offer Price of HK$2.98, being the high-end of the Offer Price range set out in this prospectus, the total number of H Shares that Coastal Capital would subscribe for would be 39,010,000 H Shares, representing approximately 15.6% of our Offer Shares, or approximately 4.3% of our issued Shares immediately following the completion of the Global Offering and the Capitalization Issue (assuming the Over-allotment Option is not exercised).
OUR CORNERSTONE INVESTOR
Coastal Capital is a company incorporated in Hong Kong and is a wholly-owned subsidiary of Shanghai Chuang Ji Investment Center (Limited Partnership) (上海創驥投資中心 (有限合夥)), which in turn is owned as to 1% and 99% by Jiangsu Coastal Innovation Capital Management Limited (江 蘇沿海創新資本管理有限公司) (“Jiangsu Coastal Innovation”) and Jiangsu Coastal Industrial Investment Fund (Limited Partnership) (江蘇沿海產業投資基金 (有限合夥)) (“Jiangsu Coastal Fund”), respectively. Jiangsu Coastal Fund is managed by Jiangsu Coastal Innovation. The limited partners of Jiangsu Coastal Fund include Shenzhen Ping An Decheng Investment Co., Ltd. (深圳市平 安德成投資有限公司), Jiangsu Coast Development Group Co., Ltd. (江蘇省沿海開發集團有限公司), SOHO Holdings, Jiangsu Hi-tech Investment Group Company Limited (江蘇高科技投資集團有限公 司), Nanjing Hexi Central Commercial District Investment Development Company Limited (南京河西 中央商務區投資發展有限公司) and Jiangsu Coastal Venture Capital Management Company Limited
Note:
(1) In the event that the Offer Price is set at the low-end, the number of H Shares subscribed by Coastal Capital will be 44,443,000 H Shares at the aggregate price of approximately HK$108.0 million.
— 274 — CORNERSTONE INVESTOR
(江蘇沿海創新資本管理有限公司). Jiangsu Coastal Fund was established in April 2015 with a subscribed capital contribution of RMB5.02 billion, and currently it is one of the largest equity investment funds in Jiangsu Province. It aims to speed up the industrial development of Jiangsu coastal area and to boost the transformation and upgrade of Jiangsu Province with its major focus on strategic emerging industries, state-owned enterprise reform projects, merger and acquisition projects and coastal industries.
SOHO Holdings directly and indirectly (through Jiangsu Coastal Innovation) holds approximately 9.4% of Coastal Capital and Jiangsu Hi-tech Investment Group Company Limited indirectly holds approximately 9.3% in Coastal Capital and directly holds approximately 57.2% of Hongrui Venture Capital (one of our promoters and a Shareholder of our Company as to 1.39%).
To the best knowledge of our Company, Coastal Capital is an Independent Third Party, not our connected person, not an existing shareholder and/or close associate as defined under the Listing Rules of our Company. Details of the actual number of Offer Shares to be allocated to Coastal Capital will be disclosed in the allocation results announcement to be issued by our Company on Tuesday, 29 December 2015.
Coastal Capital will acquire the Offer Shares pursuant to, and as part of, the International Placing. The Offer Shares to be subscribed for by Coastal Capital will rank pari passu with our total Shares in issue and to be issued as mentioned in this prospectus and will be counted towards the public float of our Company. Coastal Capital will not have any representation on the Board or be a substantial Shareholder of our Company and will not subscribe for any Offer Shares under the Global Offering other than pursuant to the cornerstone investor agreement referred to above. The Offer Shares to be subscribed for Coastal Capital will not be affected by any reallocation of the Offer Shares between the International Placing and the Hong Kong Public Offering described in “Structure of the Global Offering- Hong Kong Public Offering”.
CONDITIONS PRECEDENT
The subscription obligation of Coastal Capital is subject to, among other things, the following conditions precedent:
a) the Hong Kong Underwriting Agreement and the International Underwriting Agreement being entered into by, inter alia, our Company, the Sole Global Coordinator and the Underwriters (and the Selling Shareholders, in the case of the International Underwriting Agreement) and having become effective and unconditional by no later than the time and date as specified in those underwriting agreements in accordance with their respective original terms, or as subsequently varied by agreement of the parties thereto or waived, to the extent it may be waived, by the relevant parties and not having been terminated;
b) the Offer Price having been agreed by the Sole Global Coordinator (on behalf of the Underwriters) and us in connection with the Global Offering;
— 275 — CORNERSTONE INVESTOR
c) the Listing Committee of the Stock Exchange having granted the approval for the listing of, and permission to deal in, the H Shares and that such approval or permission not having been revoked prior to the commencement of dealings in the H Shares on the Stock Exchange;
d) the respective representations, warranties, undertakings, confirmations and acknowledgements of Coastal Capital, and our Company under the cornerstone investor agreement are (as at the date of the cornerstone investor agreement) and will be (as of the Listing Date or such later time or date as the Sole Global Coordinator may notify Coastal Capital by not less than two business days’ prior written notice) accurate and true in all material respects and not misleading and there being no material breach of the cornerstone investor agreement on the part of Coastal Capital;
e) no laws shall have been enacted or promulgated by any governmental authority which prohibit the consummation of the transactions contemplated in the Hong Kong Public Offering, the International Placing or in the cornerstone investor agreement and no orders or injunctions from a court of competent jurisdiction in effect precluding or prohibiting consummation of such transactions.
RESTRICTIONS ON DISPOSAL OF H SHARES BY COASTAL CAPITAL
Coastal Capital has undertaken and agreed that without the prior written consent of each of our Company and the Sole Global Coordinator, it will not, and will procure that its Investor Subsidiary will not, at any time during the period of 6 months from and inclusive of the Listing Date (the “Lock-up Period”) whether directly or indirectly, (i) dispose of any of the Shares they have purchased pursuant to the cornerstone investor agreement (the “Investor Shares”) and any Shares or other securities of our Company which are derived from the Investor Shares, including (a) any convertibles, equity-linked securities and derivatives with underlying assets being the Investor Shares (pursuant to any rights issue, capitalisation issue or other form of capital reorganisation) (the “Relevant Shares”) whether such other transaction is to be settled by delivery of the Relevant Shares or other securities in cash or otherwise; or (b) any interest in any company or entity holding (directly or indirectly) any of the Relevant Shares, including any securities convertible into or exchangeable or exercisable for or that represent the right to receive any of the forgoing securities; (ii) agree not contract to, or publicly announce any intention to enter into any such transactions described in (i) above; or (iii) allow itself to undergo a change of control (as defined in the Codes on Takeovers and Mergers and Share Buy-backs promulgated by the SFC) at the level of its ultimate beneficiary owner, or (iv) enter into any transactions directly or indirectly with the same economic effect as any aforesaid transactions.
After the expiry of the Lock-up Period, Coastal Capital (including the Investor Subisidary shall be free to dispose of any Relevant Shares, provided that Coastal Capital will (i) first notify and consult our Company and the Sole Global Coordinator in writing prior to the proposed disposal and will use its best endeavours to ensure that no such disposal will create a disorderly or false market in the Shares and is otherwise in compliance with all applicable laws and regulations and rules of securities exchange of all competent jurisdictions including the Companies Ordinance, the Companies (Winding Up and Miscellaneous Provisions) Ordinance, SFO and the Listing Rules and such other applicable
— 276 — CORNERSTONE INVESTOR laws and (ii) not enter into any such transaction with a person who engages directly or indirectly in a business that competes or potentially competes with the business of our Company or with any other entity that is a holding company, subsidiary or associate (as defined in the Listing Rules) of such person without the prior written consent of each of our Company and the Sole Global Coordinator.
— 277 — FINANCIAL INFORMATION
The following discussion and analysis should be read in conjunction with our combined financial statements as at and for the year ended 31 December 2012, 2013 and 2014, and the six months ended 30 June 2014 and 2015 and the accompanying notes included in the Accountant’s Report in Appendix I to this prospectus. The combined financial statements have been prepared in accordance with HKFRSs.
The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. These statements are based on assumptions and analysis made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. However, our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ significantly from those projected in the forward-looking statements include, but are not limited to, those discussed elsewhere in this prospectus, particularly in “Risk Factors” and “Forward-looking Statements.”
OVERVIEW
We principally engage in futures brokerage, asset management, commodity trading and risk management businesses through which we derive commission and fee income. Our principal business lines include:
1. Futures Brokerage: Our Company, Holly Futures, provides futures brokerage service in the PRC in respect of all futures products available at the PRC Futures Exchanges, including commodity futures and financial futures. Since January 2013, Holly Su Futures has been providing futures brokerage services in Hong Kong, in respect of a wide range of futures products available in HK Futures Exchange and other major global futures exchanges.
2. Asset Management: We provide asset management service by way of targeted asset management schemes, in which each assets management scheme is an investment portfolio that we select and/or manage for relevant individual client, comprising primarily investment in futures and other financial products. Besides, we have also launched seven collective asset management schemes since May 2015, in which we manage assets for groups of clients.
3. Commodity Trading and Risk Management: We provide futures and commodity related cash management and risk management service that is tailor-made for our clients, where we derive our net investment gain through cooperative hedging activity together with our clients, commission and fee income from providing commodities trading services or interest income from purchase and re-sale of commodities. We believe this service can meet the risk management needs of our clients while allowing us to take advantage of hedging and arbitrage opportunities to manage our own risks and realise gains.
To better utilise our cash, we have engaged in financial investment activities like investing in listed and unlisted equity securities, wealth management products issued by banks, funds and asset management plans for our own account. Gains from our financial investment activities (comprising net realised investment gains as shown in our combined statements of comprehensive income) amounted to approximately RMB5.2 million, RMB10.3 million, RMB14.7 million and RMB19.0 million, representing approximately 1.4%, 3.1%, 5.1% and 10.7% of our total operating income for the years ended 31 December 2012, 2013, 2014 and the six months ended 30 June 2015, respectively.
— 278 — FINANCIAL INFORMATION
As at 31 December 2012, 2013 and 2014 and 30 June 2015, we had total assets of RMB2,944.9 million, RMB3,300.7 million, RMB3,367.6 million and RMB3,750.1 million, respectively, and we had total equity of RMB1,175.4 million, RMB1,240.1 million, RMB1,254.0 million and RMB1,278.6 million, respectively.
RECENT DEVELOPMENTS
Our recent business performance
Our operating income increased in the ten months ended 31 October 2015 as compared to the same period in 2014. It was mainly brought by the increase in our net investment gain, increase in our commission and fee income, client balances and interest income.
Our trading volume increased by 74.1% to RMB3,953 billion in the ten months ended 31 October 2015 as compared to RMB2,270 billion in the same period in 2014. For the ten months ended 31 October 2015, our average brokerage commission rate in the PRC was 0.11 bps for financial futures and 0.57 bps for commodities futures, as compared to 0.13 bps for financial futures and 0.64 bps for commodities futures in the same period in 2014. As of 31 October 2015, our clients’ balance in the PRC increased to RMB2,273 million from RMB2,253 million as of 30 June 2015. As of 31 October 2015, AUM in our asset management business increased to RMB242.5 million as compared to RMB173.6 million as of 30 June 2015.
Based on our unaudited management accounts, our revenue for the four months ended 31 October 2015 remained relatively stable at about RMB86.9 million, while our net investment gains decreased by 41.5% to RMB7.5 million, mainly due to the decrease in fair value gain on investment. For the ten months ended 31 October 2015, our revenue amounted to about RMB237.9 million, representing an increase of about 11.1% as compared to the same period in 2014; our net investment gains amounted to about RMB34.2 million, representing an increase of about 144.8% as compared to the same period in 2014; and our total operating expenses increased by 7.7% to RMB187.3 million, mainly due to the increase in staff cost and warehouse cost for our commodity trading.
As of 31 October 2015, our position of financial investment (including equity securities, funds, wealth management products and asset management plans) decreased to RMB122.5 million from RMB188.9 million as of 30 June 2015. For the ten months ended 31 October 2015, our income from financial investment (including realized gains and unrealized fair value gain and interest income) decreased to RMB14.4 million as compared to RMB19.0 million for the six months ended 30 June 2015.
The financial information for the ten months ended 31 October 2015 disclosed above has been derived from our unaudited interim financial statements for the ten months ended 31 October 2015, which have been reviewed by our reporting accountants in accordance with the Hong Kong Standard on Review Engagement 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Hong Kong Institute of Certified Public Accountants.
— 279 — FINANCIAL INFORMATION
Market turbulence
Since mid-2015, it is noted that there has been significant fluctuation in the stock market in the PRC. Nevertheless, given that (i) investors’ demand for futures trading would generally increase for the purposes of risk management and portfolio management at times of economics fluctuation; (ii) the futures business of our Group in the PRC focuses more on commodity futures rather than financial futures, and that commodity futures often provide alternative investment opportunities at times of pessimistic or uncertain stock market sentiment; and (iii) commodity futures trading volume fluctuates depending more on climate, demand and supply of the commodity products rather than stock market fluctuation, our Directors believe that the recent stock market turbulence in the PRC would not materially affect the positive business outlook of our Group in the long run. In the short run, we do exercise special caution in monitoring our clients’ margin deposit level as well as other risks connected with our asset management business, commodity trading and risk management business, and our financial investment.
Accompanied with the recent market turbulence, the PRC government has undertaken various market-stablisation measures. For more details, please refer to the section headed “Industry Overview — Overview of the PRC Economy” of this prospectus. In addition, The China Financial Futures Exchange announced in August and September 2015 certain new regulatory requirements with a view to curb market speculation, including increasing the margin requirement for trading of stock index futures and transaction fees for position clearing. For further details, please refer to the section headed “Regulatory Overview — Regulatory Measures relating to Stock Index Futures” of this prospectus. Our Directors consider that these policies may affect our financial futures trading volume but would not materially and adversely affect our commodity futures trading volume (which contributed about 85.8% of our commission and fee income in the PRC during the Track Record Period).
On the other hand, stock market turbulence may affect the value of our financial investment portfolio. Our financial investment includes listed and unlisted equity securities, wealth management products issued by banks, funds and asset management plans for our own account. For the years ended 31 December 2012, 2013, 2014 and the six months ended 30 June 2015, we recorded gains from financial investment of RMB5.2 million, RMB10.3 million, RMB14.7 million and RMB19.0 million respectively.
For details of the risk relating to market volatility, please refer to the section headed “Risks relating to our business and industry” in the Risk Factor section of this prospectus.
BASIS OF PRESENTATION
As described in the section headed “History, Development and Corporate Structure — History and Development — Our Company — Reorganisation” in this prospectus, the Company entered into a share purchase agreement with SOHO Hong Kong and Holly International (H.K.), each being a subsidiary of SOHO Holdings on 7 January 2015 to acquire the entire equity interests of Holly Su Futures at considerations of HK$28,075,000 (equivalent to RMB22,171,000). There was a continuation of risks and benefits to SOHO Holdings as the Company and the Holly Su Futures were controlled by SOHO Holdings during the entire reporting period both before and after the Reorganisation. Therefore, merger accounting under common control is adopted for the Reorganisation. For the purpose of preparation of the Financial Information of our Group, the net assets of combining entities are combined using the existing book values from SOHO Holding’s
— 280 — FINANCIAL INFORMATION perspective. The total considerations of HK$28,075,000 in connection with the acquisition of Holly Su Futures from SOHO Holdings were recorded within equity as deemed distributions arising from the Reorganisation on 30 September 2015 and the consideration payable was capitalised on the same date.
The combined income statements and statements of comprehensive income, the combined statements of changes in equity and the combined cash flow statements of our Group as set out in Section A of the Accountant’s Report, the text of which is set out in Appendix I to this prospectus, include the results of operation of the entities now comprising our Group for each of the years ended 31 December 2012, 2013 and 2014 and for the six months ended 30 June 2015 (the “Relevant Periods”) as if the Reorganisation was completed at the beginning of the Relevant Periods. The combined statements of financial position of our Group as at 31 December 2012, 2013 and 2014 and 30 June 2015 as set out in Section A of the Accountant’s Report in Appendix I to this prospectus have been prepared to present the combined state of affairs of the entities now comprising our Group as at the respective dates as if the Reorganisation was completed at the beginning of the Relevant Periods.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
The following factors are the principal factors that have affected and which we expect will continue to affect our business, financial condition, results of operations and prospects.
Economic and Market Conditions
Our financial performance is highly dependent on the business environment in which our business operates. A favourable business environment is generally characterised by, among other factors, high GDP growth, liquid and efficient capital markets, reasonable inflation, high investor confidence, stable geopolitical conditions and strong business earnings. Volatility of commodities and securities, trading volume and size of funds available for investment in securities would also affect our business performance. Unfavourable or uncertain economic and market conditions can be characterised by declines in economic growth, business activities or investor confidence; and decreases in the availability of or increases in the cost of credit and capital.
Competition
The PRC futures industry is highly competitive and we face intense competition in most of our business lines.
We compete with about 150 futures companies in the PRC in terms of pricing, products and services, geographic coverage, innovation, reputation, experience and knowledge of our staff and employee compensation.
In the PRC futures market, the pricing of our products and services (particularly our futures brokerage business) has been largely driven by market competition. Pricing has been a principal factor affecting our business, financial condition and results of operations, as our brokerage commission and fee income accounted for a substantial portion of our revenue, which was further influenced by commission rates and trading volume. For the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, our average brokerage commission rate was 0.56 bps, 0.55 bps, 0.43
— 281 — FINANCIAL INFORMATION bps and 0.28 bps, respectively. Consistent with industry trends, intensified price competition in the futures brokerage business with other futures brokerage firms has resulted in reduced commission rates and may force us to charge lower rates to stay competitive going forward. See “Risk Factors — Risks Relating to Our Business and Industry — We face intense competition in the PRC futures industry.” We will continue to monitor the pricing of our products and services in relation to our competitors and adjust commission rates and other fee structures to enhance our competitive position while maintaining our profitability.
Business Lines and Product Mix
Our principal business lines include futures brokerage, asset management, and commodity trading and risk management business. Our product and service mix and changes to such mix due to our business strategy, market conditions, customer demand and other factors may affect our revenue and profitability over time.
Our commission and fee income from the futures brokerage business accounted for a significant portion of our operating income, and as a result, our profitability is closely related to the operating margin and profit contribution from this segment. While we strive to increase our commission and fee income from the futures brokerage business which is our major source of revenue, we seek to optimise our product and service mix by increasing our revenue contribution from other products and services with relatively higher profit margins, such as asset management and commodity trading and risk management businesses, which we believe have high growth potential.
With a view to maximizing our revenue and profitability, we intend to regularly monitor and adjust our product mix across our different business lines and further expand our product offerings.
Interest Rates
In addition to our cash and bank balances, we earn interest income on, among other things, clients’ settlement reserve funds and our own settlement reserve funds, which we deposit with futures exchanges and commercial banks in China. For the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, our net interest income was RMB81.1 million, RMB83.1 million, RMB106.5 million and RMB58.4 million, respectively.
Interest rate changes will impact our interest income from our interest-earning assets, and therefore impact our business and results of operations.
Gains from Financial Investment Activities
Gains from our financial investment activities (comprising net investment gains shown in our combined statements of comprehensive income, excluding those attributable to derivative financial
— 282 — FINANCIAL INFORMATION instruments related to commodities trading and risk management business) amounted to RMB5.2 million, RMB10.3 million, RMB14.7 million and RMB19.0 million, representing approximately 1.4%, 3.1%, 5.1% and 10.7% of our operating income for the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, respectively.
Our gains from financial investment activities are subject to (i) market volatility, and (ii) our investment decisions and judgments based on our assessments of existing and future market conditions. If our decision-making process fails to minimize losses effectively while capturing gains, or our forecasts do not conform to actual changes in market conditions, or the market risks from holding particular types of products materialize, our investments may not achieve the returns we anticipate, and we could suffer material losses, any of which would materially and adversely affect our business, financial condition and results of operations.
Refunds from PRC Futures Exchanges
The PRC Futures Exchanges may, in determining the amount of refunds, at their discretion consider various factors, such as but not limited to trading volume of futures products, the types of future products and market conditions.
We recognize refunds of trading fees as our revenue upon receipt of such from the futures exchanges. For the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, trading fees refunded by the futures exchanges to us amounted to RMB61.0 million, RMB31.8 million, RMB24.3 million and RMB10.2 million, representing 16.1%, 9.4%, 8.3% and 5.8% of our operating income during those periods, respectively.
However, none of the futures exchanges in China has published any definitive guidance on the determination of the amount of trading fees refunds, and it is therefore difficult for us to predict or estimate the refund amount we may receive in the future. There is also no assurance that the futures exchanges will not cease to pay or reduce such refunds in the future.
Regulatory Environment
Our results of operations, financial condition and prospects are subject to regulatory developments in the PRC and economic measures undertaken by the PRC government. In particular, we believe that our ability to expand our business and broaden the scope of our product and service offerings has been, and will continue to be, materially affected by changes in the policies, laws and regulations governing the PRC futures industry, including the extent to which we can engage in certain businesses or adopt certain business models or fee structures.
The regulatory regime of the PRC futures industry has been evolving. The CSRC and other regulatory authorities have been broadening the scope of new products and services that futures firms can offer. For example, the CSRC launched stock index futures and treasury bond futures, and permitted futures firms to conduct new businesses, such as asset management, commodity risk management and options on futures. The CSRC also encouraged futures firms to diversify their
— 283 — FINANCIAL INFORMATION product and service offerings and issued specific guidelines on product and service innovation for futures firms. We believe the new products and services which the CSRC may approve in the future will enable us to further expand and diversify our business and revenue streams as well as increase our profitability.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
We have identified certain accounting policies and estimates significant to the preparation of the financial information in accordance with HKFRSs. The Accountant’s Report in Appendix I to this prospectus sets forth these significant accounting policies in note 1 in Section B thereof, which are important for an understanding of our financial condition and results of operations.
Some of our accounting policies involve subjective assumptions, estimates and judgments that are discussed in note 1 in Section B of the Accountant’s Report in Appendix I to this prospectus. In the application of our accounting policies, our management is required to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our estimates and associated assumptions are based on historical experience and other factors that are considered to be reasonable under the circumstances. Actual results may differ from these estimates. Our estimates and underlying assumptions are reviewed by our management on an ongoing basis.
Our Directors believe that the estimates and judgments were accurate during the Track Record Period by comparing with actual results, and we confirm that there was no material change in our accounting policies, estimates and underlying assumptions during the Track Record Period, and as at the Latest Practicable Date, we did not expect to make any changes to such estimates and underlying assumptions in light of our current business operations and future plans.
Our management has identified below the accounting policies, estimates and judgments that they believe are critical to the preparation of the Financial Information.
Significant Accounting Policies
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to our Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows: a. Commission and fee income
Brokerage commission income is recognised on a trade date basis when the relevant transactions are executed. Exchange refund is recognised when our Group receives the refunds from the PRC Futures Exchanges. Asset management fees are recognised when our Group is entitled to receive the income under the asset management agreement.
— 284 — FINANCIAL INFORMATION b. Interest income
Interest income is recognised as it accrues using the effective interest method. c. Investment gain
Trading gains from financial assets at fair value through profit or loss is recognised on a trade date basis whilst the unrealised profits or losses are recognised from valuation at the end of reporting period.
Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity investments. d. Other income
Other income is recognised on an accrual basis.
Financial instruments a. Recognition and measurement of financial assets and financial liabilities
A financial asset or financial liability is recognised in the statements of financial position when our Group becomes a party to the contractual provisions of a financial instrument.
Our Group classifies financial assets and liabilities into different categories at initial recognition based on the purpose of acquiring assets or assuming liabilities, including financial assets and financial liabilities at fair value through profit or loss, trade and other receivables, available-for-sale financial assets and other financial liabilities.
Financial assets and financial liabilities are measured initially at fair value. For financial assets and financial liabilities at fair value through profit or loss, any directly attributable transaction costs are charged to profit or loss; for other categories of financial assets and financial liabilities, any attributable transaction costs are included in their initial costs.
Financial assets and financial liabilities are categorised as follows:
Financial assets and financial liabilities at fair value through profit or loss (including financial assets held for trading).
A financial asset or financial liability is classified at fair value through profit or loss if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term, a financial instrument managed in a pattern of short-term profit taking, a derivative, or if it is designated at fair value through profit or loss.
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Financial assets and financial liabilities are designated at fair value through profit or loss upon initial recognition in either of the following circumstances:
— the financial assets or financial liabilities are managed, evaluated and reported internally on a fair value basis;
— the designation eliminates or significantly reduces the discrepancies in the recognition or measurement of relevant gains or losses arising from the different basis of measurement of the financial assets or financial liabilities;
— the financial assets or financial liabilities contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract; or
— the separation of the embedded derivatives from the financial instruments is prohibited.
Subsequent to initial recognition, financial assets and financial liabilities at fair value through profit or loss are measured at fair value, without any deduction for transactions costs that may occur on sale, and changes therein are recognised in profit or loss.
Receivables
Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, receivables are measured at amortised cost using the effective interest method, less any impairment losses.
Available-for-sale financial assets
Available-for-sale financial assets include non-derivative financial assets that are designated as available-for-sale or are not classified as another category of financial assets. Available-for-sale investments mainly comprise equity securities. Unquoted equity securities whose fair value cannot be measured reliably are carried at cost. All other available-for-sale investments are measured at fair value after initial recognition.
Interest income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when our Group becomes entitled to the dividend. Impairment losses are recognised in profit or loss.
Other fair value changes, other than impairment losses, are recognised in other comprehensive income and presented in the fair value reserve within equity. When the investment is derecognised, the gain or loss accumulated in equity is reclassified to profit or loss.
— 286 — FINANCIAL INFORMATION
Other financial liabilities
Financial liabilities other than the financial liabilities at fair value through profit or loss are classified as other financial liabilities.
Subsequent to initial recognition, other financial liabilities are measured at amortised cost using the effective interest method. b. Fair value measurement
If there is an active market for a financial asset or financial liability, the quoted price in the active market without adjusting for transaction costs that may be incurred upon future disposal or settlement is used to establish the fair value of the financial asset or financial liability. For a financial asset held or a financial liability to be assumed, the quoted price is the current bid price. For a financial asset to be acquired or a financial liability assumed, the quoted price is the current asking price. Quoted prices from an active market are prices that are readily and regularly available from an exchange, dealer, broker, industry group or pricing service agency, and represent actual and regularly occurring market transactions on an arm’s length basis.
If no active market exists for a financial instrument, a valuation technique is used to establish the fair value. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. Where discounted cash flow technique is used, future cash flows are estimated based on management’s best estimates and the discount rate used is the prevailing market rate applicable for instrument with similar terms and conditions at the end of the Relevant Periods. Where other pricing models are used, inputs are based on market data at the end of the Relevant Periods.
In estimating the fair value of a financial asset and financial liability, our Group considers all factors including, but not limited to, risk-free interest rate, credit risk, price risk, foreign exchange rate and market volatility, that are likely to affect the fair value of the financial asset and financial liability.
Our Group obtains market data from the same market where the financial instrument was originated or purchased. c. Impairment of financial assets
The carrying amounts of financial assets other than those at fair value through profit or loss are reviewed by our Group at the end of the Relevant Periods to determine whether there is objective evidence of impairment. If any such evidence exists, impairment losses are provided. Objective evidence of impairment in the financial asset represents events that occur after the initial recognition of the financial assets and have impact on the estimated future cash flows of the asset, which can be estimated reliably.
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Objective evidence that financial assets are impaired includes, but not limited to:
— significant financial difficulty of the borrower or issuer;
— a breach of contract by the borrower, such as a default or delinquency in interest or principal payments;
— it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
— disappearance of an active market for financial assets because of financial difficulties of the issuer;
— significant changes in the technological, market, economic or legal environment that have an adverse effect on the borrower; and
— a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.
Receivables
The impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.
Available-for-sale financial assets
Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost net of any principal repayment and amortisation and the current fair value, less any impairment loss recognised previously in profit or loss. Changes in cumulative impairment losses attributable to application of the effective interest method are reflected as a component of interest income.
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For the available-for-sale equity investment, objective evidence would include a significant or prolonged decline in the fair value of an investment below its cost. The determination of what is “significant” or “prolonged” requires judgment. “Significant” is evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. A significant or prolonged decline in the fair value of an equity investment is an indicator of impairment in such investments where a decline in the fair value of equity investment below its initial cost by 20% or more, or fair value below cost for nine months or longer, upon which impairment loss is recognised.
If, in a subsequent period, the fair value of an impaired available-for-sale debt investments increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity investment is recognised in other comprehensive income. d. Derecognition of financial assets and financial liabilities
Financial assets (or a part of a financial asset or group of financial assets) are derecognised when the financial assets meet one of the following conditions:
— the contractual rights to the cash flows from the financial asset expire; or
— our Group transfers substantially all the risks and rewards of ownership of the financial assets or where substantially all the risks and rewards of ownership of a financial asset are neither retained nor transferred, the control over that asset is relinquished.
If our Group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, but retains control, our Group continues to recognise the financial asset and relevant liability to the extent of its continuing involvement in the financial asset.
The financial liability (or part of it) is derecognised only when the underlying present obligation (or part of it) specified in the contracts is discharged, cancelled or expired. An agreement between our Group and an existing lender to replace the original financial liability with a new financial liability with substantially different terms, or a substantial modification of the terms of an existing financial liability is accounted for as an extinguishment of the original financial liability and recognition of a new financial liability. The difference between the carrying amount of the derecognised financial liability and the consideration paid is recognised in profit or loss. e. Offsetting
Financial assets and financial liabilities are offset and the net amount is reported in the statements of financial position when our Group has a legally enforceable right to set off the recognised amounts and the transactions are intended to be settled on a net basis, or by realising the asset and settling the liability simultaneously.
— 289 — FINANCIAL INFORMATION f. Equity instruments
An equity instrument is a contract that proves the ownership interest of the residual assets after deducting all liabilities of our Group. Considerations received from issuance of equity instruments net of transaction costs are recognised in equity. Considerations and transaction costs paid by our Group for repurchasing its own equity instruments are deducted from equity. g. Derivative financial instruments
Derivative financial instruments are initially measured at fair value at the date a derivative contract is entered into and are subsequently measured at fair value. Changes in fair value of these derivative financial instruments other than those designed as hedge instrument are recognised in profit or loss. Fair values are obtained from quoted market prices in active market or are determined using valuation techniques, including discounted cash flow model and options pricing model as appropriate.
All derivatives are recognised as assets when the fair value is positive and as liabilities when the fair value is negative.
Derivative embedded in non-derivative host contracts are treated as separate derivative when their characteristics and risks are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. These embedded derivatives are separately accounted for at fair value, with changes in fair value recognised in profit or loss.
Financial assets held under resale agreements
Financial assets held under resale agreements are transactions where our Group acquires financial assets which will be resold at a predetermined price at a future date under resale agreements.
The cash advanced is recognised as amounts held under resale agreements in the statements of financial position. Assets held under resale agreements are recorded in memorandum accounts as off-balance sheet items.
The difference between the purchase and resale consideration is amortised over the period of the transaction using the effective interest method and is included in interest income.
Impairment of non-financial assets
Internal and external sources of information are reviewed at the end of each Relevant Periods to identify indications that the following assets may be impaired or, an impairment loss previously recognised no longer exists or may have decreased:
— property, plant and equipment;
— goodwill;
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— intangible assets;
— investments in subsidiaries in the Company’s statement of financial position;
— interest in associates; and
— other current assets.
If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment. a. Calculation of recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a CGU). b. Recognition of impairment loss
An impairment loss is recognised in profit or loss if the carrying amount of an asset, or the CGU to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable). c. Reversals of impairment loss
In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.
— 291 — FINANCIAL INFORMATION
Significant accounting judgment and estimates
Impairment of available-for-sale financial assets
In determining whether there is any objective evidence that impairment has occurred on available-for-sale financial assets, we assess periodically whether there has been a significant or prolonged decline in the fair value of the investments below its cost or carrying amount, or whether other objective evidence of impairment exists based on the investee’s financial conditions and business prospects, including industry outlook, technological changes as well as operating and financing cash flows. This requires a significant level of management judgment which would affect the amount of impairment losses.
Impairment of non-financial assets
Non-financial assets are reviewed regularly to determine whether the carrying amount exceeds the recoverable amount of the assets. If any such indication exists, an impairment loss is provided. Since the market price of an asset (the asset group) cannot be obtained reliably, the fair value of the asset cannot be estimated reliably. In assessing the present value of future cash flows, significant judgments are exercised over the asset’s selling price, related operating expenses and discounting rate to calculate the present value. All relevant materials which can be obtained are used for estimation of the recoverable amount, including the estimation of the selling price and related operating expenses based on reasonable and supportable assumption. For the year ended 31 December 2013, we recognised an impairment of goodwill of approximately RMB9.8 million relating to the asset of Huazheng Futures acquired in June 2013. For details, please see “— Results of Operation — Operating Expenses — Impairment Losses” of this section.
Fair value of financial instruments
There are no quoted prices from an active market for certain financial instruments. The fair value for these financial instruments are established by using valuation techniques. These techniques include using recent arm’s length market transactions by referring to the current fair value of similar instruments, discounted cash flow analysis and option pricing models. Our Group has established a work flow to ensure that the valuation techniques are constructed by qualified personnel and are validated and reviewed by independent personnel. Valuation techniques are certified and calibrated before implementation to ensure the valuation result reflects the actual market conditions. Valuation models established by our Group make maximum use of market input and rely as little as possible on our Group’s specific data. However, it should be noted that some input, such as credit and counterparty risk, and risk correlations require management’s estimates. Our Group reviews the above estimations and assumptions periodically and makes adjustment if necessary.
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Income tax
Determining income tax provisions involves judgment on the future tax treatment of certain transactions. Our Group carefully evaluates the tax implications of transactions and sets up tax provisions accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislations. Deferred tax assets are recognised for tax losses not yet used and deductible temporary differences. As those deferred tax assets can only be recognised to the extent that it is probable that future taxable profits will be available against which the unused tax credits can be utilised, management’s judgment is required to assess the probability of future taxable profits. Management’s assessment is constantly reviewed and additional deferred tax assets are recognised if it becomes probable that future taxable profits will allow the deferred tax assets to be recovered.
PRINCIPAL COMPONENTS OF COMBINED INCOME STATEMENTS
Operating income
Our operating income primarily consists of (a) revenue; and (b) net investment gains. a. Revenue
Our revenue primarily consists of (i) commission and fee income; and (ii) interest income.
Commission and fee income
Our commission and fee income mainly consists of (i) commission and fee income generated from our futures brokerage business; (ii) refunds from the PRC Futures Exchanges; (iii) commission and fee income generated from our asset management business; and (iv) commission and fee income generated from our commodity trading and risk management business.
We generate commission and fee income on commodity futures brokerage and financial futures brokerage by trading futures on behalf of our clients.
We also receive refunds from the PRC Futures Exchanges, which have implemented the handling fee refund practice to promote the development of futures markets in the PRC. The PRC Futures Exchanges adjust the refund policies on a continuous basis at their discretion, and the calculation of refunds are based on various factors, such as trading volume, the type of futures products and market conditions.
We also generate management and performance fees in our asset management business by managing our customers’ asset portfolios.
Interest income
Our interest income includes (i) interest income from deposits in financial institutions, including our own balance and a portion of clients’ settlement reserve funds, (ii) the remaining portion of
— 293 — FINANCIAL INFORMATION clients’ settlement reserve funds and our own settlement reserve funds deposited with PRC Futures Exchanges, (iii) interest income related to purchase and re-sale of commodities in our commodity trading and risk management business, and (iv) interest income from other interest-bearing financial assets. b. Net investment gains
Our net investment gains mainly consist of (i) gains or losses from our financial assets at fair value through profit or loss, (ii) gains from our available-for-sale financial assets, (iii) gains or losses from derivatives and (iv) dividend income.
Our financial assets at fair value through profit or loss consist of (i) equity securities and funds held for trading; and (ii) financial assets designated at fair value through profit or loss — receivables and asset management plans arising from cooperative hedging activities. Our net investment gains from financial assets at fair value through profit or loss mainly consist of (i) net realised gains from disposal of these financial assets, (ii) dividends from these financial assets, and (iii) net unrealised fair value increase in these financial assets, partially offset by the decrease in these financial assets and net unrealised fair value increase in financial liabilities.
Our available-for-sale financial assets refer to our investments in listed securities, wealth management products issued by banks, unlisted equity securities and unlisted funds. Our net investment gains from available-for-sale financial assets mainly consist of (i) net realised gains from disposal of these assets, and (ii) dividends from these financial assets.
Our net investment gains from derivatives, primarily commodity futures, consist of (i) net realised gains from disposal of derivative financial instruments, and (ii) net unrealised fair value increase in derivative financial assets, partially offset by the net unrealised fair value increase in derivative financial liabilities.
Other income
Our other income primarily includes government grants and subsidies received from the PRC Futures Exchanges.
Operating expenses
Our operating expenses mainly include staff costs, commission expenses, impairment losses, operating lease charges and office expenses.
Profit from operations
Profit from operations is calculated as our operating income less operating expenses.
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Income tax expense
We are subject to income tax on an entity basis on profits arising in or derived from the jurisdictions in which members of our Group are domiciled and operate. During the Track Record Period, statutory EIT rate in the PRC is 25% and Hong Kong profit tax rate is 16.5%. Our effective income tax rate was 23.5%, 28.9%, 23.8% and 24.0% for the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, respectively. As primarily due to (i) the effect of underprovision of tax in respect of prior year of approximately RMB2.0 million which together with a surcharge of approximately of RMB0.8 million has been paid in 2013; and (ii) the effect of the unrecognised deductible temporary differences relating to the goodwill impairment related to Huazheng Futures Co., Ltd amounted to RMB9.8 million in 2013, our effective income tax rate was higher than the statutory rate of 25% during the year of 2013. As at the Latest Practicable Date and during the Track Record Period, we fulfilled all our tax obligations in all material respects, we have made sufficient tax provision where necessary in our financial statements and did not have any unresolved tax disputes.
RESULTS OF OPERATIONS
The following table sets forth our summary results of operations for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000)
Revenue 375,642 325,398 273,875 133,074 151,006 Net investment gains 4,244 11,523 17,246 1,088 26,635 Operating income 379,886 336,921 291,121 134,162 177,641 Other income 5,045 5,672 4,366 2,436 2,436 Operating expenses (258,560) (252,963) (218,586) (99,342) (106,411) Profit from operations 126,371 89,630 76,901 37,256 73,666 ------
Share of (losses)/gains of associates (154) (598) (519) (80) (49) Profit before taxation 126,217 89,032 76,382 37,176 73,617 ------
Income tax expense (29,681) (25,753) (18,178) (9,094) (17,641) Profit for the year/period 96,536 63,279 58,204 28,082 55,976
The following discussion compares the major components of our operating results for the periods indicated.
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Operating income
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000)
Revenue Commission and fee income 294,582 242,312 167,389 78,758 92,644 Interest Income 81,060 83,086 106,486 54,316 58,362 Sub-total 375,642 325,398 273,875 133,074 151,006 Net investment gains 4,244 11,523 17,246 1,088 26,635 Operating income 379,886 336,921 291,121 134,162 177,641
Revenue
Commission and fee income
The following table sets forth our commission and fee income for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000)
Futures brokerage business 233,541 210,340 141,975 72,686 79,977 Refunds from the PRC Futures Exchanges 61,041 31,835 24,261 5,882 10,237 Asset management business(1) — 137 401 190 470 Commodity trading and risk management business — — 752 — 1,960 Total commission and fee income 294,582 242,312 167,389 78,758 92,644
Note:
(1) Our asset management business commenced in February 2013 and therefore no information was shown for the year ended 31 December 2012.
— 296 — FINANCIAL INFORMATION a. Commission and fee income on futures brokerage
Comparisons between the six months ended 30 June 2015 and 2014
Our commission and fee income on futures brokerage increased by 10.0% to RMB80.0 million in the six months ended 30 June 2015 as compared to RMB72.7 million in the six months ended 30 June 2014, mainly due to the increase in our brokerage trading volume of futures, primarily attributable to financial futures, in the first half of 2015. Our brokerage trading volume of futures in the PRC increased by 81.9% to RMB3,116 billion in the six months ended 30 June 2015 as compared to RMB1,713 billion in the six months ended 30 June 2014. Our average futures brokerage commission rate in the PRC decreased to 0.28 bps in the six months ended 30 June 2015 as compared to 0.46 bps in the six months ended 30 June 2014, due to the increase in the proportion of our brokerage trading volumes of financial futures with lower commission rate.
Comparisons between 2014 and 2013
Our commission and fee income on futures brokerage decreased by 32.5% to RMB142.0 million in 2014 as compared to RMB210.3 million in 2013, primarily due to (i) the decrease in our average brokerage commission rate in the PRC from 0.55 bps in 2013 to 0.43 bps in 2014 mainly caused by increased market competition, and (ii) a decrease in our futures brokerage trading volume in 2014. Our futures brokerage trading volume in the PRC decreased by 14.7% to RMB3,775 billion in 2014 from RMB4,426 billion in 2013 primarily due to increased market competition and partly attributed to the decrease in our utilization of Introducing Brokers.
By the end of 2013, we reduced the number of our Introducing Brokers from 1,080 as at 31 December 2013 to 270 as at 31 December 2014. By doing so, we aimed at optimising our marketing strategy, reducing our reliance on Introducing Brokers, establishing more direct client relationship by our own sales staff and retaining high quality clientele. As a result of our strategy, while our commission income decreased by 32.5% in 2014, our commission expenses paid to Introducing Brokers decreased more significantly by 57.8%, and our client balances in the PRC only decreased slightly by 4.9%. Commission expenses as a percentage to commission income of brokerage business reduced from 31.2% in 2013 to 19.5% in 2014.
Comparisons between 2013 and 2012
Our commission and fee income on futures brokerage decreased by 9.9% to RMB210.3 million in 2013 compared to RMB233.5 million in 2012, due primarily to the decrease of futures brokerage trading volume. Our futures brokerage trading volume in the PRC decreased by 16.2% to RMB4,426 billion in 2013 from RMB5,284 billion in 2012 due to the intensive market competition.
As at the year end of 2012, we lowered the commission rate of some Introducing Brokers when we renewed the relevant contracts. As such, some Introducing Brokers ceased to cooperate with us and the relevant clients referred to by such Introducing Brokers ceased to trade in our futures brokerage platform.
— 297 — FINANCIAL INFORMATION b. Refund from the PRC Futures Exchanges
The following table sets forth our refund from the PRC Futures Exchanges for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000)
Refunds from the PRC Futures Exchanges 61,041 31,835 24,261 5,882 10,237
The PRC Futures Exchanges may, in determining the amount of refunds, at their discretion consider various factors, including but not limited to trading volume of futures products, the types of futures products and market conditions. The increase in refunds from the PRC Futures Exchanges by 74.0% to RMB10.2 million in the six months ended 30 June 2015 compared to RMB5.9 million in the six months ended 30 June 2014 was primarily due to the increase in trading volume. The decrease in refunds from 2012 to 2013 as well as from 2013 to 2014 was primarily due to (i) the decrease in our futures brokerage trading volume; and (ii) the decrease in the commission rate charged by the PRC Futures Exchanges which thinned out the amount refundable. c. Asset management business
Comparisons between the six months ended 30 June 2015 and 2014
Our commission and fee income on asset management business increased to RMB0.47 million in the six months ended 30 June 2015 as compared to RMB0.19 million in the six months ended 30 June 2014, primarily due to an increase in asset management fees we received in the six months ended 30 June 2015 as a result of increased scale of our asset management business in terms of AUM from RMB68.5 million in the six months ended 30 June 2014 to RMB173.6 million in the six months ended 30 June 2015.
Comparisons between 2014 and 2013
Our commission and fee income on asset management business increased to RMB0.40 million in 2014, primarily due to an increase in scale of our asset management business in terms of AUM from RMB49.8 million in 2013 to RMB209.2 million in 2014. The number of outstanding targeted asset management schemes increased to 24 as at 31 December 2014 from 8 as at 31 December 2013.
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Comparisons between 2013 and 2012
Our commission and fee income from asset management business was RMB0.14 million in 2013. We launched our asset management business by providing targeted asset management schemes to clients in February 2013. The AUM of our asset management business was RMB49.8 million, and the number of outstanding targeted asset management schemes was 8 as at 31 December 2013. d. Commodity trading and risk management
Our commodity trading and risk management business, which generates net investment gains, interest income and commission and fee income, is conducted by our wholly-owned subsidiary, namely, Holly Capital, which commenced operation since mid 2013.
Our commission and fee income on our commodity trading and risk management business was nil in the year ended 31 December 2013, RMB0.8 million in the year ended 31 December 2014, and nil and RMB2.0 million in the six months ended 30 June 2014 and 30 June 2015, respectively, upon the continuous growth in the business scale.
Interest income
The following table sets forth our interest income for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000)
Bank deposits 61,823 67,022 86,248 45,093 47,303 Futures Exchanges 18,280 15,560 9,405 6,989 2,590 Wealth management products 957 — 5,008 — 4,707 Resale agreements for commodity trading and risk management business — 134 3,872 1,800 1,797 Other interest-bearing financial assets — 370 1,953 434 1,965 Total interest income 81,060 83,086 106,486 54,316 58,362
Our interest income mainly includes (i) interest income from our own deposits, and a portion of our client settlement reserve funds deposited with financial institutions, (ii) interest income from the remaining portion of clients’ settlement reserve funds and our own settlement reserve funds deposited with PRC Futures Exchanges, (iii) interest income from our own investment in wealth management products issued by banks for our own account, (iv) interest income related to purchase and re-sale of commodities in our commodity trading and risk management business, and (v) interest income from other interest-bearing financial assets.
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Comparisons between the six months ended 30 June 2015 and 2014
Our interest income increased by 7.4% to RMB58.4 million in the six months ended 30 June 2015 compared to RMB54.3 million in the six months ended 30 June 2014, due primarily to (i) the increase in our interest income from financial institutions in which we received a higher interest rate than PRC Futures Exchanges; and (ii) increase in interest income from other interest-bearing financial assets, mainly generated from the initial deposit for warehouse receipts services in our commodity trading and risk management business.
Comparisons between 2014 and 2013
Our interest income increased by 28.2% to RMB106.5 million in 2014 as compared to RMB83.1 million in 2013, due primarily to the increase in our interest income from financial institutions in which we increased the amount of deposits to financial institutions which offered a higher interest rate.
Our interest income from resale agreements in the commodity trading and risk management business increased by 3,800% to RMB3.9 million in 2014 compared to RMB0.1 million in 2013, such interest income was arising from the purchase and resale of commodities in our commodity trading and risk management business which recorded a rapid growth in 2014.
Comparisons between 2013 and 2012
Our interest income increased by 2.5% to RMB83.1 million in 2013 as compared to RMB81.1 million in 2012, primarily due to the increase in interest from financial institutions in which we increased the amount of deposits to financial institutions which offered a higher interest rate.
Holly Capital was established in June 2013 and principally engaged in the commodity trading and risk management business. Our interest income from Holly Capital in 2013 was RMB0.5 million.
— 300 — FINANCIAL INFORMATION
Net investment gains
The following table sets forth the breakdown of our other net investment income for the periods indicated:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Net realised gains from: Disposal of financial assets at fair value through profit or loss - Trading securities 820 1,253 7,773 1,207 6,478 - Funds — — 50 — 428 - Receivables ————(192) Disposal of financial liabilities at fair value through profit or loss - Payables ————(1,919) Disposal of derivative financial instruments — — 5,172 1,585 15,924 Disposal of available-for-sale financial assets - Listed securities — 452 585 — 3,246 - Wealth management products issued by banks 3,709 7,423 1,109 544 800 - Unlisted equity investments — 1,200 — — — Subtotal 4,529 10,328 14,689 3,336 24,765 ------
— 301 — FINANCIAL INFORMATION
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Net unrealised fair value changes of: Trading securities (502) 977 (677) (2,765) 3,844 Funds — — 98 — (656) Financial assets designated at fair value through profit or loss — — (1,115) (575) 1,486 Financial liabilities designated at fair value through profit or loss — — (2,140) 575 318 Derivative financial assets — 195 11,345 — (2,551) Derivative financial liabilities — (195) (5,728) — (717) Subtotal (502) 977 1,783 (2,765) 1,724 ------Dividend income from: Financial assets at fair value through profit or loss 57 84 571 371 16 Available-for-sale financial assets 160 134 203 146 130 Subtotal 217 218 774 517 146 ------Total 4,244 11,523 17,246 1,088 26,635
Set out below is the further analysis of the nature of net investment gains as set out in note 4 to the Accountants Report:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Net investment gains arisen from financial investment activities(1) 4,244 10,323 9,712 (497) 14,286 Net investment gains arisen from commodity trading and risk management business(2) — — 7,534 1,585 12,349 Other(3) — 1,200 — — — Total net investment gains (included in operating income) 4,244 11,523 17,246 1,088 26,635
— 302 — FINANCIAL INFORMATION
Notes:
1. Net investment gains arisen from financial investment activities comprised (i) net realized gains from disposal of financial assets at fair value through profit or loss (trading securities and funds); (ii) net realized gains from disposal of available- for-sale financial assets (listed securities and wealth management products issued by banks); (iii) net unrealized fair value changes of trading securities and funds; and (iv) dividend income from financial assets at fair value through profit or loss and available-for sale-financial assets, as disclosed in note 4 to the Accountants’ Report as set out in Appendix I.
2. Net investment gains arisen from commodity trading and risk management business comprised (i) net realised gains from disposal of financial assets at fair value through profit or loss (receivables); (ii) net realised gains from disposal of financial liabilities at fair value through profit or loss (payables) and disposal of derivative financial instruments; and (iii) net unrealised fair value changes of financial assets designated at fair value through profit or loss, financial liabilities designated at fair value through profit or loss, derivative financial assets and derivative financial liabilities, as disclosed in note 4 to the Accountants’ Report as set out in Appendix I.
3. Other comprised net realized gains from disposal of available-for-sale financial assets (unlisted equity investments), as disclosed in note 4 to the Accountants’ Report as set out in Appendix I. As at 31 December 2012, we had an investment of unlisted equity securities which amounted to RMB10.6 million and was accounted for as an available-for sale financial assets. During 2013, when we disposed of such investment, we recorded a gain of RMB1.2 million.
Comparisons between the six months ended 30 June 2015 and 2014
Our net investment gains increased vigorously to RMB26.6 million in the six months ended 30 June 2015 as compared to RMB1.1 million in the six months ended 30 June 2014, primarily due to significant increase in our net realised gains from (i) disposal of financial assets at fair value through profit or loss (trading securities); (ii) disposal of derivative financial instruments; (iii) disposal of available-for-sale financial assets arising from listed securities; (iv) increase in net unrealised fair value changes of trading securities, mainly due to the bullish PRC stock market in the first half of 2015. As compared to 2014, we had increased scale of financial investments activities and we had increased gains from commodity trading and risk management business as a result of increased scale of arbitrage activities.
Comparisons between 2014 and 2013
Our net investment gains increased by 49.6% to RMB17.2 million in 2014 as compared to RMB11.5 million in 2013, primarily due to the significant increase in our net realised gains from (i) disposal of financial assets at fair value through profit or loss (trading securities); (ii) disposal of derivative financial instruments; and (iii) net unrealised fair value changes of derivative financial instruments as a result of increased scale of arbitrage activities since Holly Capital was in operation in mid 2013.
Comparisons between 2013 and 2012
Our net investment gains increased by 173.8% to RMB11.5 million in 2013 as compared to RMB4.2 million in 2012, primarily arising from the increase in net realised gains from disposal of available-for-sale financial assets due to our increased investments in non-principal guaranteed wealth management products issued by banks in 2013. According to the relevant accounting standards, the
— 303 — FINANCIAL INFORMATION return which reflects the time value or the interest component plus the risk borne by us are accounted for as net realised gains from disposal of available-for-sale financial assets. In 2012, the wealth management products that we purchased were principal guaranteed in majority, according to the relevant accounting standards, income therefrom was accounted for as interest income.
Other income
The following table sets forth the breakdown of our other income for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000)
Government grants 3,317 3,575 3,154 2,153 2,333 Others(1) 1,728 2,097 1,212 283 103 Total 5,045 5,672 4,366 2,436 2,436
Note:
(1) Primarily include subsidies received from the PRC Futures Exchanges in relation to qualified meetings and seminars sponsored by our Company.
Comparisons between the six months ended 30 June 2015 and 2014
Our other income remains stable during the six months ended 30 June 2015 and 2014. There was slight increase in government grants and subsidies received from PRC Futures Exchanges in the six months ended 30 June 2015.
Comparisons between 2014 and 2013
Our other income decreased by 22.8% to RMB4.4 million in 2014 as compared to RMB5.7 million in 2013, primarily due to decrease in both government grants and subsidies received from PRC Futures Exchanges in 2014.
Comparisons between 2013 and 2012
Our other income increased by 14.0% to RMB5.7 million in 2013 as compared to RMB5.0 million in 2012, primarily due to increase in both subsidies received from PRC Futures Exchanges and government grants in 2013.
— 304 — FINANCIAL INFORMATION
Operating expenses
The following table sets forth the breakdown of our operating expenses for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000)
Staff costs 79,597 85,478 104,240 44,056 50,206 Commission expenses 90,778 65,610 27,660 15,520 11,072 Impairment losses 82 10,104 — — — Other items: Operating lease charges 17,452 22,037 25,547 12,081 11,693 Office expenses 24,177 24,304 22,556 9,091 11,740 Business tax and surcharges 16,648 13,981 9,813 4,385 5,456 Depreciation and amortisation 4,970 6,342 7,935 4,096 3,968 Repair and maintenance expenses 6,229 4,236 3,366 2,019 985 Investors protection funds 3,239 2,681 2,852 1,615 1,869 Property management expenses 2,539 3,271 2,730 1,025 998 Utilities 2,157 2,516 2,409 1,311 1,230 Interest expenses — — 1,103 — 1,682 IPO expenses — — 548 — 1,587 Auditors’ remuneration 141 270 348 330 414 Others 10,551 12,133 7,479 3,813 3,511 Operating expenses 258,560 252,963 218,586 99,342 106,411
Staff costs
Comparisons between the six months ended 30 June 2015 and 2014
Our staff costs increased by 14.0% to RMB50.2 million in the six months ended 30 June 2015 as compared to RMB44.1 million in the six months ended 30 June 2014, primarily due to (i) general increment to salaries levels of our staff; and (ii) increased commission paid to our employees upon the increased trading volume of the futures brokerage business.
Comparisons between 2014 and 2013
Our staff costs increased by 21.9% to RMB104.2 million in 2014 as compared to RMB85.5 million in 2013, primarily due to (i) hiring of employees with expertise in risk management; (ii) increment to salaries; and (iii) an increase in salaries, bonuses and allowances, contribution to pension schemes and other social welfare in 2014. This is in line with our efforts to expand its scope of quality
— 305 — FINANCIAL INFORMATION clientele and to optimise our client management by expanding our sales team to develop potential clients and reducing the number of Introducing Brokers, thereby enhancing both client and employee loyalty in the long run. We also increased the commission rate for our sales personnel from 10% to 20% to provide them more incentive.
Comparisons between 2013 and 2012
Our staff costs increased by 7.4% to RMB85.5 million in 2013 as compared to RMB79.6 million in 2012, primarily due to increase in the number of staff to 731 as at 31 December 2013 compared to 527 as at 31 December 2012, which was caused by the expansion of our business, partially contributed by the increase in the number of staff as a result of the acquisition of certain business assets of Huazheng Futures Co., Ltd in 2013.
Commission expenses
Comparisons between the six months ended 30 June 2015 and 2014
Our commission expenses decreased by 28.7% to RMB11.1 million in the six months ended 30 June 2015 as compared to RMB15.5 million in the six months ended 30 June 2014, primarily due to the reduction of number of Introducing Brokers as we tend to develop business through our sales team.
Comparisons between 2014 and 2013
Our commission expenses decreased by 57.8% to RMB27.7 million in 2014 as compared to RMB65.6 million in 2013, primarily due to reduction of number of Introducing Brokers from 1,080 as at 31 December 2013 to 270 as at 31 December 2014. By doing so, we aimed at optimising our marketing strategy, reducing our reliance on Introducing Brokers, establishing more direct customer relationship by our own sales staff, and retaining high quality clientele. We believe this would enhance both client and employee loyalty in the long run. As a result of our strategy, our commission expenses as a percentage to commission income of brokerage business reduced from 31.2% in 2013 to 19.5% in 2014.
Comparisons between 2013 and 2012
Our commission expenses decreased by 27.8% to RMB65.6 million in 2013 as compared to RMB90.8 million in 2012, which was in line with the decrease in the number of Introducing Brokers from 1,369 as at 31 December 2012 to 1,080 as at 31 December 2013.
Impairment losses
We recorded impairment losses of RMB10.1 million in 2013, primarily due to a RMB9.8 million impairment of the goodwill in connection with the acquisition of Huazheng Futures Co., Ltd. We acquired the relevant business, assets and liabilities of Huazheng Futures Co., Ltd (“Huazheng Futures”) in 2013 at the consideration of RMB60 million. Such consideration was determined based on a valuation report prepared by reference to cash-flow projection. We recognised the excess of
— 306 — FINANCIAL INFORMATION consideration paid over the fair value of the net identifiable assets acquired as the goodwill of the futures brokerage cash-generating unit in connection with Huazheng Futures. Such goodwill amounted to RMB43.3 million as at 31 December 2013 and 2014 and is subject to the annual goodwill impairment test.
As at 31 December 2013, we performed the annual goodwill impairment test and engaged an independent valuer to perform a valuation. It is noted that the post-acquisition operating performance of the relevant business and net assets acquired from Huazheng Futures in 2013 underperformed the abovementioned cash-flow projection. RMB9.8 million impairment was recognised for the goodwill related to the relevant business and net assets acquired from Huazheng Futures because the fair value was less than the carrying amount according to the valuation performed by the valuer.
The underlying reasons that the relevant business and net assets acquired from Huazheng Futures underperformed the abovementioned cash-flow projection was mainly because (i) it took more time than we expected for the business and assets (representing mainly the customer base, manpower and other assets) that we acquired from Huazheng Futures to merge with the business structure of our Group; (ii) it took more time than we expected for the original customers of Huazheng Futures to get used to the operating systems of our Group which is different from that of Huazheng Futures. As a result of the differences in the operating trading systems, the trading volume and number of customers reduced to an extent more than we expected; (iii) certain branches of Huazheng Futures were closed down and relocated, and it took more time than we expected to settle down, restart business and pick up business development; and (iv) market competition had become intensified.
As at 31 December 2014, our Group performed its annual goodwill impairment test. No further impairment of goodwill was considered necessary. As at 31 December 2013, 31 December 2014 and 30 June 2015, goodwill on the combined statements of financial position amounted to approximately RMB43.3 million.
Operating lease charges
Operating lease charges mainly represent the leasing expenses in relation to leased properties that we used as our headquarters, branches and staff quarters. For details on our leased properties, please also see the section headed “Business — Properties” in this prospectus.
Comparisons between the six months ended 30 June 2015 and 2014
Our operating lease charges remained stable during the six months ended 30 June 2015 and 2014.
Comparisons between 2014 and 2013
Our operating lease charges increased by 15.9% to RMB25.5 million in 2014 as compared to RMB22.0 million in 2013, due primarily to (i) increase in market rate of rental; and (ii) the increase of number of branches to 43 in 2014 as compared to 42 in 2013.
— 307 — FINANCIAL INFORMATION
Comparisons between 2013 and 2012
Our operating lease charges increased by 25.7% to RMB22.0 million in 2013 as compared to RMB17.5 million in 2012, due primarily to the increase of number of branches to 42 in 2013 compared to 34 in 2012.
Interest expenses
Comparisons between the six months ended 30 June 2015 and 2014
Our interest expenses increased to RMB1.7 million in the six months ended 30 June 2015 as compared to nil in the six months ended 30 June 2014, primarily due to the interest expense on a short-term bank loan of Holly Capital for general working capital.
Comparisons between 2014 and 2013
Our interest expenses increased to RMB1.1 million in 2014 as compared to nil in 2013, due primarily to the interest expense on a short-term bank loan of Holly Capital for general working capital.
Comparisons between 2013 and 2012
We did not incur any interest expenses in both 2013 and 2012, as we did not have any borrowing in 2013 and 2012.
Income tax expenses
The following table sets forth our profit before income tax, income tax expenses and effective tax rate for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000, except percentage)
Profit before taxation 126,217 89,032 76,382 37,176 73,617 Income tax expenses 29,681 25,753 18,178 9,094 17,641 Effective tax rate 23.5% 28.9% 23.8% 24.5% 24.0%
Comparisons between the six months ended 30 June 2015 and 2014
Our income tax expenses increased significantly by 93.4% to RMB17.6 million in the six months ended 30 June 2015 as compared to RMB9.1 million in the six months ended 30 June 2014, primarily due to an increase in our taxable income during the period. Our effective tax rate remained stable.
— 308 — FINANCIAL INFORMATION
Comparisons between 2014 and 2013
Our income tax expenses decreased by 29.5% to RMB18.2 million in 2014 as compared to RMB25.8 million in 2013, primarily due to the decrease in our taxable income. Our effective tax rate decreased to 23.8% in 2014.
Comparisons between 2013 and 2012
Our income tax expense decreased by 13.1% to RMB25.8 million in 2013 as compared to RMB29.7 million in 2012, due primarily to the decrease in our taxable income. Our effective tax rate increased to 28.9% in 2013 as compared to 23.5% in 2012 primarily due to (i) the effect of underprovision of tax in respect of prior year of approximately RMB2.0 million which together with a surcharge of approximately of RMB0.8 million has been paid in 2013; and (ii) the effect of the unrecognised deductible temporary differences relating to the goodwill impairment related to Huazheng Futures Co., Ltd amounted to RMB9.8 million in 2013, which did not exist in 2012.
Profit for the year and net margin
The following table sets forth the key measurements of our profitability for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB ’000, except percentages)
Profit from operations 126,371 89,630 76,901 37,256 73,666 Operating margin(1) 32.8% 26.2% 26.0% 27.3% 40.9% Profit for the year/period 96,536 63,279 58,204 28,082 55,976 Net margin(2) 25.1% 18.5% 19.7% 20.6% 31.1%
(1) Operating margin = Profit from operations / (operating income + other income)
(2) Net margin = Profit for the year or period / (operating income + other income)
Comparisons between the six months ended 30 June 2015 and 2014
Our profit for the period increased significantly by 99.3% to RMB56.0 million in the six months ended 30 June 2015 as compared to RMB28.1 million in the six months ended 30 June 2014 primarily due to the significant increase in our net investment gains, commission and fee income and interest income, with lower proportional increase in operating expenses brought by the increased scale of investing activities. Our operating margin and net margin increased accordingly due to the same reasons.
— 309 — FINANCIAL INFORMATION
Comparisons between 2014 and 2013
Our profit for the year decreased by 8.1% to RMB58.2 million in 2014 as compared to RMB63.3 million in 2013.
Our operating margin remained stable and net margin increased in 2014 due to (i) the decrease in operating expenses which include commission expenses paid to the Introducing Brokers; (ii) the absence of goodwill impairment related to Huazheng Futures Co., Ltd in 2013 which is one-off in nature; (iii) the increase in investment gains from our financial investments activities as well as net gains from our commodity trading and risk management business which was commenced in June 2013 and recorded a rapid growth in 2014; and (iv) decrease in income tax expense in 2014.
Comparisons between 2013 and 2012
Our profit for the year decreased by 34.4% to RMB63.3 million in 2013 compared to RMB96.5 million in 2012.
Our operating margin and net margin decreased in 2013 due primarily to (i) the impairment losses on goodwill in relation to Huazheng Futures Co., Ltd in 2013; and (ii) the decrease in commission and fee income from future brokerage business as a result of the decrease in the trading volume and commission rate in 2013.
SEGMENT RESULTS
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments.
We report financial results for our three principal business lines in two business segments, in a manner consistent with the way in which information is reported internally to our chief operating decision maker for the purposes of resource allocation and performance assessment. We may aggregate two or more business lines into a single operating segment if the relevant business lines have same or similar economic characteristics and are similar in respect of the nature of each products and services, the nature of production processes, the type or class of customers for the products and services, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. The following discussions of our segment operating income, segment operating expenses and segment results include our inter-segment operating income and inter-segment operating expenses.
— 310 — FINANCIAL INFORMATION
The following table sets forth our segment operating income for the periods indicated:
During the Track Record Period, we generated operating income primarily through (i) commission and fee income in managing all of our three principal business lines (including refunds from the PRC Futures Exchanges); (ii) interest income primarily generated from our own deposits, settlement reserve funds of us and clients and other transactions in relation to our operations; and (iii) net investment gains that we generated through conducting investment activities. The table below sets forth details of our operating income for the periods indicated.
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Commission and fee income Futures brokerage and asset management business segment Futures brokerage business 233,541 210,340 141,975 72,686 79,977 Refunds from PRC Futures Exchanges 61,041 31,835 24,261 5,882 10,237 Asset management business — 137 401 190 470 Futures brokerage business and asset management business segment 294,582 242,312 166,637 78,758 90,684 Commodity trading and risk management — — 752 — 1,960 Subtotal 294,582 242,312 167,389 78,758 92,644
Interest income Futures brokerage business and asset management business segment 81,060 82,582 99,942 52,082 54,600 Commodity trading and risk management — 504 6,544 2,234 3,762 Subtotal 81,060 83,086 106,486 54,316 58,362
—311— FINANCIAL INFORMATION
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Inter-segment revenue Futures brokerage business and asset management business segment — — 12 — 89 Commodity trading and risk management ————— Subtotal ——12—89
Other income and gains(1) Futures brokerage business and asset management business segment 9,289 17,195 11,691 (262) 13,084 Commodity trading and risk management - - 9,921 3,786 15,987 Subtotal 9,289 17,195 21,612 3,524 29,071
Segment operating income Futures brokerage business and asset management business segment 384,931 342,089 278,282 130,578 158,457 Commodity trading and risk management — 504 17,217 6,020 21,709 Total 384,931 342,593 295,499 136,598 180,166
Note:
1. Other income and gains represents the aggregate amount of net investment gains and other income.
— 312 — FINANCIAL INFORMATION
The following table sets forth our operating expenses for the periods indicated:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Operating Expenses Futures brokerage business and asset management (258,560) (252,648) (210,751) (97,057) (101,767) Commodity trading and risk management — (315) (7,835) (2,285) (4,644) Total (258,560) (252,963) (218,586) (99,342) (106,411)
The following table sets forth our segment operating profits for the periods indicated, which are calculated as segment revenue and other income (including inter-segment revenue) minus operating expenses.
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Futures brokerage business and asset management 126,371 89,441 67,531 33,521 56,690 Commodity trading and risk management — 189 9,382 3,735 17,065 Total 126,371 89,630 76,913 37,256 73,755
The following table sets forth our segment margins for the periods indicated, which are calculated by dividing the segment operating profit with the segment operating income.
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) % Futures brokerage business and asset management 32.8% 26.1% 24.3% 25.7% 35.8% Commodity trading and risk management — 37.5% 54.5% 62.0% 78.6% Overall 32.8% 26.2% 26.0% 27.3% 40.9%
— 313 — FINANCIAL INFORMATION
Futures brokerage business and asset management
Segment revenue and other income from our futures brokerage business and asset management business consists primarily of (i) commission and fee income on futures brokerage (net of commission and fees paid to the PRC Futures Exchanges) from futures brokerage business and asset management business; (ii) interest income from settlement reserves funds deposited with banks and the PRC Futures Exchanges; and (iii) net investment gains from our financial investment activities. Operating expenses consist primarily of staff costs, commission expense, operating lease charges, office expenses, business tax and surcharges, interet expenses, impairment losses and other operating expenses.
Comparison between the six months ended 30 June 2015 and 2014
Segment operating profit of our futures brokerage business and asset management business increased by 69.3% to RMB56.7 million in the six months ended 30 June 2015 as compared to RMB33.5 million in the six months ended 30 June 2014, due primarily to a 21.4% increase in segment revenue and other income from RMB130.6 million in the six months ended 30 June 2014 to RMB158.5 million in the six months ended 30 June 2015. Such increase in revenue was mainly brought by the increase in our net investment gain and in our commission and fee income from futures brokerage business as a result of the increased brokerage trading volume in the first half of 2015.
As a result, the segment margin of our futures brokerage business and asset management business increased to 35.8% in the six months ended 30 June 2015 from 25.7% in the same period in 2014.
Comparison between 2014 and 2013
Segment operating profit of our futures brokerage business and asset management business decreased by 24.5% to RMB67.5 million in 2014 as compared to RMB89.4 million in 2013, due primarily to a 18.6% decrease in segment operating income from RMB342.1 million in 2013 to RMB278.3 million in 2014, comprising:
• the decrease in our commission and fee income on futures brokerage as a result of our decreased brokerage trading volume and a decrease in our average brokerage commission fee rate;
• the decrease in refunds from the PRC Futures Exchange as a result of our decreased brokerage trading volume and a decrease in the commission rate charged by the PRC Futures Exchanges which thinned out the amount refundable;
• these decreases were partially offset by an increase in our interest income as a result of our treasury management practices and an increase in our net investment gains as a result of the increased scale of our financial investment activities.
— 314 — FINANCIAL INFORMATION
The decrease in the operating expenses of by 16.5% from RMB252.6 million in 2013 to RMB210.8 million in 2014 was primarily as a result of (i) decreased commission expenses in line with our strategy to optimise our client management and to reduce the number of our Introducing Brokers; and (ii) the impairment loss on goodwill in relation to Huazheng Futures Co., Ltd in 2013 did not happen again in 2014.
As a result, the segment margins of our futures brokerage business and asset management business decreased to 24.3% in 2014 from 26.1% in 2013.
Comparison between 2013 and 2012
Segment operating profit of our futures brokerage business and asset management business decreased by 29.3% to RMB89.4 million in 2013 as compared to RMB126.4 million in 2012, due primarily to 11.1% decrease in segment operating revenue and other income from RMB384.9 million in 2012 to RMB342.1 million in 2013, comprising:
• the decrease in our commission and fee income on futures brokerage as a result of our decreased brokerage trading volume due to intensified market competition;
• the decrease in refunds from the PRC Futures Exchange as a result of our decreased brokerage trading volume and a decrease in the commission rate charged by the PRC Futures Exchanges which thinned out the amount refundable;
The decrease in the operating expenses was primarily a result of decreased commission expenses in line with our strategy to optimize our client management and to reduce the number of our Introducing Brokers and partially offset by the impairment losses on goodwill in relation to Huazheng Futures Co., Ltd in 2013.
As a result, the segment margin of our futures brokerage business and asset management business decreased to 26.1% in 2013 from 32.8% in 2012.
Commodity trading and risk management
Our commodity trading and risk management business is conducted by our wholly-owned subsidiary, namely, Holly Capital, which commenced operation since mid 2013.
Segment operating profit in our commodity trading and risk management business consists primarily of commission and fee income from providing commodity trading and risk management services, interest income arising from resale agreements, and net investment gains from commodity trading and spot and futures arbitrage.
Segment operating profit of our commodity trading and risk management business was RMB0.19 million in the year ended 31 December 2013, RMB9.4 million in the year ended 31 December 2014, and RMB3.7 million and RMB17.1 million in the six months ended 30 June 2014 and 30 June 2015, respectively.
— 315 — FINANCIAL INFORMATION
LIQUIDITY AND CAPITAL RESOURCES
We have in the past funded our working capital and other capital requirements primarily by cash flows from our business operations and bank loans. We manage liquidity primarily by monitoring the maturities of our assets and liabilities in an effort to ensure that we have sufficient funds to meet payment obligations when they fall due, through the use of low-risk instruments such as bank deposits. We seek to maintain stable sources of funding and liquidity, but will vary our positions in such low-risk instruments, primarily on the basis of the interest rates offered or charges on different instruments at different times.
We prepare our annual budget to forecast our cash flows and cash balances and to estimate our working capital needs for business expansion and other investments. We have also established stringent treasury management measures based on our Net Capital and other regulatory risk control indicators, which require stress testing on overall liquidity and other financial indicators before we make any capital allocation and investments.
As at 30 June 2015, we had aggregate cash and bank balances of RMB806.1 million and bank loans of RMB70.6 million. See “— Indebtedness”. Save as disclosed in this prospectus, we do not expect to have any material external debt financing plan in the near future.
In addition to the net proceeds from the Global Offering, we intend to finance our future capital requirements through cash flows from operating activities.
Taking into account the net proceeds from the Global Offering and the financial resources available to us, including cash and bank balances, and cash flows from operating activities, our Directors believe that we have sufficient working capital for our present requirements, that is at least 12 months from the date of this prospectus.
— 316 — FINANCIAL INFORMATION
The following discussion of liquidity and capital resources principally focuses on our combined statements of cash flows, assets and liabilities and indebtedness.
Cash Flow
The following table sets forth a selected summary of our combined statements of cash flow for the periods indicated:
Six months ended Year ended 31 December 30 June 2012 2013 2014 2014 2015 (unaudited) (RMB’000)
Net cash (used in)/generated from operating activities (355,750) 71,008 160,588 252,949 236,704 Net cash generated from/(used in) investing activities 39,018 (60,750) 16,797 (11,471) (256,421) Net cash (used in)/generated from financing activities (33,858) 4,052 23,382 (46,466) (1,794) Net (decrease)/increase in cash and cash equivalents (350,590) 14,310 200,767 195,012 (21,511) Cash and cash equivalents at 1 January 367,811 17,222 31,285 31,285 232,033 Effect of foreign exchange rate changes 1 (247) (19) 63 (5) Cash and cash equivalents at 31 December 17,222 31,285 232,033 226,360 210,517
Operating activities
Our cash flows used in/generated from operating activities consist primarily of cash generated or paid in relation to our principle business, such as futures brokerage business, asset management business, commodity trading and risk management business. Net cash flow used in/generated from operating activities reflects (i) profit before taxation and adjusted for non-cash and non-operating items, such as depreciation and amortisation, impairment losses and net realised gains from financial instruments; (ii) the effects of movements in working capital, such as increases or decreases in refundable deposits, accounts payable to brokerage clients or cash held on behalf of brokerage clients due to the fluctuation of client balances; and (iii) other cash items such as income tax paid.
In the six months ended 30 June 2015, we had net cash generated from operating activities of RMB236.7 million brought by the cash inflows from movements in working capital. The cash inflows from movements in our working capital had been mainly brought by the net increase in client balances. Besides, we had decrease in term deposits with original maturity over three years as we conducted various other kinds of investment instead of making term deposits.
— 317 — FINANCIAL INFORMATION
In 2014, we had net cash generated from operating activities of RMB160.6 million brought by our profit before taxation excluding non-cash and non-operating items of RMB71.3 million and the cash inflow from movements in working capital. The cash inflows from movements in our working capital, apart from the fluctuation of client balances, were primarily due to (i) decrease in term deposits with original maturity over three months of RMB197.1 million mainly because we utilised excess cash for our financial investments. Such cash inflows from movements in working capital were partially offset by (ii) increase in financial assets held under resale agreement and increase in derivative financial assets by RMB32.2 million and RMB2.4 million respectively, arising from the commencement of commodity trading and risk management business in 2014; (iii) increase in financial assets designated at fair value through profit or loss and increase in other current assets and non-current assets by RMB19.0 million and RMB13.4 million respectively, arising from our increased scale of financial investment activities.
In 2013, we had net cash generated from operating activities of RMB71.0 million brought by our profit before taxation excluding non-cash and non-operating items and the cash inflow from movements in working capital. Our cash inflow from movements in working capital, apart from fluctuation of client balances, primarily reflected a (i) decrease of RMB98.2 million in term deposits with original maturity over three months. This was partially offset by a decrease of RMB11.5 million in other payables.
In 2012, we had net cash used in operating activities of RMB355.8 million brought by our cash outflows from movements in working capital exceeded our profit before taxation excluding non-cash and non-operating items. The cash outflows from movements in our working capital, apart from the fluctuation of the client balances, were primarily due to increase in term deposits with original maturity over three months of RMB448.2 million in 2012.
Investing activities
Our cash outflows in investing activities consist primarily of our purchases of available-for-sale financial assets, financial instrument at fair value through profit or loss, and purchase of property, plant and equipment and intangible assets. Our cash inflows from investing activities consist primarily of the proceeds from sale of available-for-sale financial assets, financial assets held for trading, and dividend received from investments in securities. The aforesaid financial assets mainly include listed and unlisted equity securities, unlisted funds and wealth management products issued by banks.
In the six months ended 30 June 2015, our net cash used in investing activities was RMB256.4 million, due primarily to (i) the purchase of wealth management products issued by banks, which were investments classified as receivables of RMB200.0 million; (ii) net increase in available-for-sale financial assets, which mainly represented a non-principal guaranteed wealth management product with floating return rate issued by a bank of RMB43.3 million; and (iii) net increase in financial assets held for trading, which mainly represented equity securities and funds.
In 2014, our net cash generated from investing activities was RMB16.8 million, due primarily to (i) RMB348.3 million proceeds from sale of financial assets held for trading, partially offset by purchase of financial assets held for trading of RMB340.6 million, and (ii) RMB42.4 million proceeds
— 318 — FINANCIAL INFORMATION from sale of available-for-sale financial assets, partially offset by a RMB21.1 million payment for purchase of available-for-sale financial assets; and (iii) partially offset by payment for purchases of property, plant and equipment and intangible assets of RMB6.4 million and RMB11.6 million respectively.
In 2013, our net cash used in investing activities was RMB60.8 million, due primarily to the acquistion of the futures brokerage business together with the relevant assets and liabilities of Huazheng Futures Co., Ltd at a consideration of RMB60.0 million.
In 2012, our net cash generated from investing activities was RMB39.0 million, due primarily (i) RMB88.7 million proceeds from sale of available-for-sale financial assets; and (ii) RMB41.0 million proceeds from investment classified as receivable, partially offset by RMB86.0 million used in the payment for purchase of available-for-sale financial assets.
Financing activities
Our cash flow used in/generated from financing activities consist primarily of deemed capital contributions before Reorganisation and dividends paid to our equity shareholders.
In the six months ended 30 June 2015, our net cash used in financing activities amounted to RMB1.8 million for interest expenses for the bank loan.
In 2014, our net cash from financing activities amounted to RMB23.4 million which included RMB70.6 million of proceeds from bank loans for our commodity trading and risk management business; and partially offset by RMB54.4 million of dividends paid to our equity shareholders.
In 2013, our net cash from financing activities amounted to RMB4.1 million which included deemed capital contributions before Reorganisation.
In 2012, our net cash used in financing activities amounted to RMB33.9 million which deemed included the dividends paid to our equity shareholders of RMB38.0 million, partially offset by capital contributions before Reorganisation of RMB4.1 million.
Assets and Liabilities
To ensure appropriate cash liquidity management and capital allocation, we monitor the scale and composition of our balance sheet and seek to maintain our balance sheet with sufficient liquidity. Given the highly liquid nature of our business, major portion of our balance sheet consists of current assets and liabilities.
— 319 — FINANCIAL INFORMATION
Current assets and liabilities
The following table sets forth a summary of our current assets and liabilities as at the dates indicated:
As at As at As at 31 December 30 June 31 October 2012 2013 2014 2015 2015 (unaudited) (RMB ’000)
Current assets Refundable deposits 1,467,738 1,553,980 805,667 1,065,348 985,169 Trade receivables — 6,793 17,719 38,594 6,037 Investment classified as receivables — — — 200,000 — Other receivables 11,603 9,590 18,167 35,126 36,201 Other current assets(1) 2,033 4,599 17,999 41,170 33,576 Available-for-sale financial assets 17,511 34,658 17,797 63,663 26,167 Financial assets held under resale agreements — 7,475 39,678 55,513 19,317 Financial assets at fair value through profit or loss 9,234 8,989 27,603 46,789 15,372 Derivative financial assets — — 2,415 36 — Cash held on behalf of brokerage clients 299,149 588,077 1,310,219 1,300,144 1,520,250 Cash and bank balances 1,080,433 996,285 1,010,509 806,104 926,798 Total current assets 2,887,701 3,210,446 3,267,773 3,652,487 3,568,887
Current liabilities Accounts payable to brokerage clients 1,721,762 2,033,065 1,962,840 2,296,884 2,358,369 Trade payables — — 26,491 5,480 977 Other payables(2) 35,030 23,570 29,437 71,548 27,769 Bank loans — — 70,580 70,580 — Financial liabilities at fair value through profit or loss — — 12,140 15,822 10,000 Derivative financial liabilities — 195 4,926 2,903 484 Current taxation 12,646 3,725 6,844 6,501 8,131 Total current liabilities 1,769,438 2,060,555 2,113,258 2,469,718 2,405,730
Net current assets 1,118,263 1,149,891 1,154,515 1,182,769 1,163,157
— 320 — FINANCIAL INFORMATION
(1) Other current assets mainly consist of deductible value added tax (待抵扣增值稅), prepaid rentals and IPO services fee.
(2) Other payables mainly consist of employee benefits payable, commission payable to brokers, business tax and surcharges payable, IPO services fee payable, and dividend payable.
Our current assets consist primarily of cash held on behalf of brokerage clients, cash and bank balances, refundable deposits, financial assets held under resale agreements, financial assets at fair value through profit or loss and available-for-sale financial assets. Our current liabilities consist primarily of accounts payable to brokerage clients, bank loans, and financial liabilities at fair value through profit or loss.
Deposits from clients in our futures brokerage business represent major components of our current assets and current liabilities. We include various client deposits as current assets, including cash held on behalf of brokerage clients and refundable deposits. We include accounts payable to brokerage clients as current liabilities. Client deposits fluctuate based on our clients’ trading activities, market conditions and other external factors beyond our control. As a result, client deposits in our brokerage business are not a meaningful indicator of our financial condition or results of operations. See “— Adjusted assets and liabilities” below for information on our assets and liabilities excluding customer deposits in our brokerage business.
Our net current assets, the difference between total current assets and total current liabilities, remained positive during the Track Record Period.
As at 31 October 2015, our net current assets decreased to RMB1,163.2 million as compared to RMB1,182.8 million as at 30 June 2015. The decrease was mainly brought by (i) the decrease in investment classified as receivable as we had not made such kind of investments subsequent to its maturity in July 2015; (ii) decrease in available-for-sale financial assets and financial assets at fair value through profit or loss as we reduced our position of financial investment subsequent to June 2015 due to unstable market sentiment; and (iii) the effect of the aforesaid was partially offset by the decrease in bank loans and decrease in other payables.
As at 30 June 2015, our net current assets slightly increased to RMB1,182.8 million as compared to RMB1,154.5 million as at 31 December 2014 due to the increased current asset from (i) the increase in refundable deposits; (ii) the increase in available-for-sales financial assets (mainly consisted of a non-principal guaranteed wealth management product with floating return rate issued by a bank); (iii) the increase in financial assets held under resale agreement for our commodity trading and risk management business; (iv) the increase in interest receivables (included in the other receivables) from the bank deposits and wealth management products; and (v) increased service fees in relation to the Listing in other current assets, while offset by the increase in current liabilities primarily due to the increased accounts payable to brokerage clients and the increase in other payables from (i) the increase in dividend payable, which was declared in June 2015 and subsequently distributed in August 2015; and (ii) the increased IPO services fee payable.
— 321 — FINANCIAL INFORMATION
As at 31 December 2014, our net current assets increased to RMB1,154.5 million as compared to RMB1,149.9 million as at 31 December 2013 due primarily to the increase in our current assets which mainly comprises of (i) increase in financial assets held under resale agreements; (ii) increase in financial assets at fair value through profit or loss; and (iii) increase in the trade receivable balance from commodity trading and risk management business. Such increases were primarily due to the increased scale of commodity trading and risk management business.
As at 31 December 2013, our net current assets increased to RMB1,149.9 million as compared to RMB1,118.3 million as at 31 December 2012, primarily due to the increase in our current assets which mainly comprises of (i) increase in investments in wealth management products from banks in 2013 which were classified as available-for-sale financial assets; and (ii) increase in financial assets under resale agreements, upon the commencement of commodity trading and risk management business in 2013.
Our Directors confirm that we did not have any material default in payment of trade and non-trade payables during the Track Record Period.
Adjusted assets and liabilities
As clients’ deposits held by us fluctuate based on our customers’ trading activities, market conditions and other external factors beyond our control, we have adjusted our current assets and liabilities to exclude accounts payable to brokerage clients to provide more meaningful indicators of our financial condition.
As at As at As at 31 December 30 June 31 October 2012 2013 2014 2015 2015 (unaudited) (RMB ’000)
Adjusted current assets(1) 1,120,814 1,068,389 1,151,887 1,286,995 1,063,468 Adjusted current liabilities(2) 47,676 27,490 150,418 172,834 47,361 Adjusted current ratio(3) 23.5 38.9 7.7 7.4 22.5
Notes:
(1) Adjusted current assets equal total current assets less refundable deposits and cash held on behalf of borkerage clients.
(2) Adjusted current liabilities equal total current liabilities less accounts payable to brokerage clients.
(3) Adjusted current ratio is calculated by dividing the adjusted current assets by the adjusted current liabilities.
We believe adjusted net current assets is a more meaningful indicator of our financial condition because it does not include the impact of deposits from brokerage clients, which as discussed above, is largely unrelated to our financial condition but reflected in our balance sheet. Therefore, current ratio is adjusted by excluding the effect of deposits from brokerage clients.
— 322 — FINANCIAL INFORMATION
After the adjustment, our adjusted current ratios as at 31 December 2012, 2013 and 2014, 30 June 2015 and 31 October 2015 were approximately 23.5, 38.9, 7.7, 7.4 and 22.5, respectively.
Our adjusted current ratio as at 30 June 2015 decreased to approximately 7.4 from approximately 7.7 as at 31 December 2014, primarily due to the increase in our current liabilities mainly attributable to the increase in dividend payable, which was declared in June 2015.
Our adjusted current ratio as at 31 December 2014 decreased to approximately 7.7 from approximately 38.9 as at 31 December 2013, primarily due to our drawdown of bank loans of RMB70.6 million during the year ended 31 December 2014 for our commodity trading and risk management business.
Our adjusted current ratio as at 31 December 2013 increased to approximately 38.9 from approximately 23.5 as at 31 December 2012, primarily due to the increase in our current assets which mainly comprises of (i) increase in our investments in wealth management products from banks in 2013 which were classified as available-for-sale financial assets; and (ii) increase in our financial assets under resale agreements, upon the commencement of our commodity trading and risk management business during the year ended 31 December 2013.
Non-current assets
The following table sets forth a summary of our non-current assets as at the dates indicated:
As at As at 31 December 30 June 2012 2013 2014 2015 (RMB ’000)
Property, plant and equipment 13,263 12,524 13,446 14,350 Goodwill — 43,322 43,322 43,322 Intangible assets 12,214 17,516 26,649 25,361 Interest in associates 14,433 13,835 13,316 13,267 Available-for-sale financial assets 10,600 — — — Deferred tax assets 5,445 1,874 1,951 127 Other non-current assets 1,216 1,179 1,183 1,183
Total non-current assets 57,171 90,250 99,867 97,610 ------
Our non-current assets mainly include property, plant and equipment, intangible assets, goodwill, available-for-sale financial assets and investment in associates. Our property, plant and equipment mainly consists of office equipment and electronic equipment used for operational purposes. Our intangible assets mainly consist of futures exchanges membership and customer relationship.
— 323 — FINANCIAL INFORMATION
Goodwill is consistent of the goodwill arisen from the acquisition of the futures brokerage business of Huazheng Futures Co., Ltd in 2013. Our non-current portion of available-for-sale financial assets primarily includes unlisted equity securities. Our investment in associates primarily includes interests in two unlisted corporate entities in the PRC with principal activities as venture investment.
Our non-current assets decreased to RMB97.6 million as at 30 June 2015 from RMB99.9 million as at 31 December 2014, due primarily to the decreased deferred tax assets balance from the changes in fair value of financial instruments at fair value through profit or loss, and partially offset by the addition of computer and network equipment. Our non-current assets increased to RMB99.9 million as at 31 December 2014 from RMB90.3 million as at 31 December 2013, due primarily to the increase in intangible assets by RMB9.1 million upon obtaining the general clearing membership of China Financial Futures Exchange in 2014. Our non-current assets increased to RMB90.3 million as at 31 December 2013 from RMB57.2 million as at 31 December 2012, due primarily to the increase in goodwill upon the acquisition of Huazheng Futures Co., Ltd in 2013.
INDEBTEDNESS
Bank loans
We do not rely on bank borrowings in the ordinary course of our futures brokerage business and did not incur any borrowing as at 31 December 2012 and 2013.
We obtained a Renminbi-denominated bank loan of RMB70.6 million in 2014 which will become due in September 2015. Our bank loan was secured by standby letter of credit, (the standby letter of credit was secured by pledged deposits amounting to RMB10.6 million) and guaranteed by Jiangsu Holly International Group Company Limited (江蘇弘業國際集團有限公司)(“Holly Group”) (amounting to RMB60.0 million). The guarantee by Holly Group was released upon the settlement of the bank loans in August 2015.
We incurred bank loans primarily to fund our commodity trading and risk management business. The following table sets forth the range of interest rates of our bank loans as at the dates indicated:
As at As at As at 31 December 30 June 31 October 2012 2013 2014 2015 2015 (unaudited) (RMB’000)
Bank loans — — 70,580 70,580 — Interest rates (per annum) — — 4.1% 4.1% —
As at 31 October 2015 (being the latest practicable date for the purpose of determining our liquidity), we had no bank borrowing.
— 324 — FINANCIAL INFORMATION
During the Track Record Period and up to the Latest Practicable Date, our Directors confirm that, to the best of their knowledge, they are not aware of any material defaults in the payment of trade and non-trade payables or bank borrowings or any defaults in material financial covenants. Our bank loan agreements do not contain any material covenants that will have a material adverse effect on our ability to make additional borrowings or issue debt or equity securities in the future.
Capital expenditures
Our capital expenditures principally comprise expenditures for the purchase of property, plant, equipment and intangible assets. The following table sets forth our capital expenditures for the periods indicated:
As at As at 31 December 30 June 2012 2013 2014 2015 (RMB’000)
Capital expenditures 4,620 10,917 18,046 3,585
Our capital expenditures were RMB4.6 million, RMB10.9 million, RMB18.0 million and RMB3.6 million in 2012, 2013 and 2014 and the six months ended 30 June 2015, respectively. During the six months ended 30 June 2015, we incurred capital expenditures primarily for acquisition of computer and network equipment. During the year ended 31 December 2014, we incurred capital expenditures primarily for obtaining the clearing membership of the China Financial Futures Exchange, and purchasing information technology equipment and software to upgrade and optimise our IT system. During the year ended 31 December 2013, we incurred capital expenditures primarily for acquisition of electronic equipment and computer software. We financed our capital expenditures primarily through our cash operating activities.
As at 30 June 2015, we estimated our capital expenditures for the second half of 2015 and 2016 to be approximately RMB3.3 million and RMB8.4 million, respectively, which we will use primarily for purchasing equipment and upgrading our IT system, including the electronic securities platform, our risk monitoring programmes and our software and computer programme structure. We intend to finance these capital expenditures by our operating cash flow and proceeds from the Global Offering. For the six months ended 30 June 2015, we incurred RMB3.5 million of capital expenditures for purchasing IT equipment and software.
— 325 — FINANCIAL INFORMATION
Capital Commitments
The following table below sets forth our capital commitments as at the dates indicated:
As at As at 31 December 30 June 2012 2013 2014 2015 (RMB’000)
Contract but not provide for — — — 22,171
We have funded a substantial portion of our capital commitments by cash generated from our operations. As at 30 June 2015, our capital commitment was solely attributable to the acquisition of the entire equity interests of Holly Su Futures.
Contingent Liabilities
Saved as disclosed in “Business — Laws and Regulations — Legal Proceedings”, as at 31 October 2015, we were not involved in any material legal, arbitration or administrative proceedings that, if adversely determined, we expect would materially and adversely affect our financial position and results of operations, although there can be no assurance that this will be the case in the future.
Apart from the foregoing, we did not have, as at 31 October 2015, any outstanding mortgages, charges, debentures, other issued debt capital, bank overdrafts, loans, liabilities under acceptance or other similar indebtedness, hire purchase and finance lease commitments, any guarantees or other material contingent liabilities.
Our Directors confirm that, other than disclosed in the prospectus, there has been no material change in our indebtedness and contingent liabilities since 31 October 2015 to the date of this prospectus.
OPERATING LEASE COMMITMENTS
We lease most of our office properties from third parties under non-cancellable operating leases. The following table sets forth our future minimum lease payments payable under non-cancellable operating leases as at the dates indicated:
As at As at 31 December 30 June 2012 2013 2014 2015 (RMB’000)
Within one year 13,118 12,653 12,680 14,251 One to three years 13,855 12,795 11,365 10,711 Over three years 7,443 6,192 2,711 1,649 Total 34,416 31,640 26,756 26,611
— 326 — FINANCIAL INFORMATION
RELATED PARTY TRANSACTIONS
We enter into transactions with our related parties from time to time. It is the view of our Directors that each of the related party transactions set out in note 41 in Section B to the Accountant’s Report in Appendix I to this prospectus were conducted in the ordinary course of business on an arm’s length basis and with normal commercial terms between the relevant parties. Our Directors are also of the view that our related parties transactions during the Track Record Period would not distort our track record results or make our historical results not reflective of our future performance.
OFF BALANCE SHEET ARRANGEMENTS
We had interests in unconsolidated asset management products which were classified as structured entities sponsored by our Group. As at 31 December 2012, 2013 and 2014, and 30 June 2015, the amounts of assets held by these unconsolidated asset management products, which are sponsored by our Group, are nil, RMB49.8 million, RMB209.2 million and RMB173.6 million respectively. They represented asset management products in which we manage assets on behalf of investors for a fee. Interest held by us only includes fees charged by us for provision of such asset management services. More details of these unconsolidated structured entities were set out in note 43(c) in Section B to the Accountants’ Report in Appendix I to this prospectus.
Saved as disclosed in this prospectus, as at the Latest Practicable Date, we do not have any outstanding off-balance sheet guarantees or foreign currency forward contracts.
CAPITAL ADEQUACY AND RISK CONTROL INDICATORS
According to the Administrative Measures for the Risk Control Indicators of Futures Companies in the PRC, we have established a dynamic Net Capital monitoring mechanism to comply with statutory Net Capital requirements and other regulatory standards to maintain capital adequacy. In addition, we also need to maintain a minimum amount of Net Capital necessary to engage our futures brokerage, asset management, commodity trading and risk management businesses. As at 31 December 2012, 2013 and 2014 and 30 June 2015, we were in compliance with all of our capital adequacy and risk control index requirements. As at 30 June 2015, our Net Capital amounted to RMB803.6 million.
The following table sets forth our Net Capital and key regulatory risk control indices that we prepared in accordance with PRC GAAP and relevant PRC regulatory requirements as at the dates indicated:
As at Minimum/ As at 31 December 30 June Warning Maximum 2012 2013 2014 2015 level(1) level
Net Capital(2) (RMB in million) 1,093.9 1,014.3 1,026.9 803.6 18 у15.0 Net Capital/total risk capital reserves (%) 683.3% 515.7% 512.8% 384.8% 120.0% у100.0% Net Capital/net assets (%) 100.1% 87.5% 89.8% 69.8% 48.0% у40.0% Current assets/Current liabilities(3) 991.8% 1,024.7% 891.1% 534.5% 120.0% у100.0% Total liabilities/net assets(4) (%) 10.6% 8.7% 10.4% 14.9% 120.0% р150.0% Proprietary settlement reserve funds(5) (RMB in million) 45.1 24.8 35.8 26.0 9.6 у8.0
— 327 — FINANCIAL INFORMATION
Notes:
(1) Warning level is set by the CSRC according to the Administrative Measures for the Risk Control Indicators of Futures Companies in the PRC if the risk control index is required to stay above a certain level, the warning level is 120% of the required minimum requirement, and if the risk control index is required to stay below a certain level, the warning is 80% of the required maximum requirement.
(2) Net Capital equals net assets minus asset adjustment value plus liability adjustment value minus the deposits which the clients fail to fully replenish minus/plus other adjustment items recognised or approved by the CSRC.
(3) For purposes of calculating the regulatory risk control index, current assets do not include refundable deposits with exchange-clearing organisations and cash held on behalf of brokerage clients; and current liabilities do not include accounts payable to brokerage clients.
(4) For purposes of calculating the regulatory risk control index, total liabilities exlude accounts payable to brokerage clients.
(5) As a member of the PRC Futures Exchanges, we are required to deposit a minimum of RMB2 million in settlement reserve funds in each of the four PRC Futures Exchanges.
During the Track Record Period, we had no non-compliances with these risk control indicators, nor had we received any warnings or penalties from the CSRC.
QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in foreign exchange rates, interest rates, equity prices and commodity prices and other changes in the economic environment. The market risk to which we are primarily exposed includes credit risk, interest rate risk, price risk and liquidity risk.
Credit Risk
Our Group’s credit risk is primarily attributable to other non-current assets, refundable deposits, trade receivables, other receivables, available-for-sale financial assets, derivative financial assets, financial assets held under resale agreements, cash held on behalf of brokerage clients and bank balances. Our management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis.
Other non-current assets are deposits with Hong Kong Futures Exchange required as the condition to provide brokerage service in Hong Kong. Refundable deposits are deposits with futures and commodity exchanges for the purpose of settlement on behalf of customers. The futures and commodity exchanges are supervised by relevant regulators and considered to have minimal credit risk.
Trade receivables are mainly receivables from rendering commodity trading and risk management business. Our Group monitors all receivables on an individual customer basis and calls for commodity collaterals when necessary. The receivables are related to a certain number of customers with no recent history of default. Thus, the credit risk is low.
— 328 — FINANCIAL INFORMATION
Other receivables are mainly rental deposits and interest receivables, which management assessed the credit risk to be insignificant.
Investments classified as receivables and available-for-sale financial assets represent the investment in wealth management products launched by commercial banks. Our Group emphasises proper investment operation and aims to achieve stable returns while minimizing risks. The invested products are launched by banks with good credit rating. Therefore, the credit risk is considered to be low.
Financial assets held under resale agreements are mainly resale agreements signed with clients. As clients of resale agreements have no recent history of default and all transactions are credit enhanced by pledged commodities, the credit risk is considered to be low.
Derivative financial assets are futures, forward and options agreements signed with clients traded through over-the-counter market. As the counterparties for the agreements have no recent history of default, the credit risk is considered to be low.
Substantially all of our Group’s cash held on behalf of brokerage clients and bank balances are deposited in PRC and HK banks with good reputation which management assessed the credit risk to be insignificant.
We do not provide any guarantees which would expose our Group to any credit risk.
Without taking into account of collaterals or other credit enhancements, the maximum credit exposure of our Group and our Company, which is net of impairment allowance, is listed as follows:
As at As at 31 December 30 June 2012 2013 2014 2015 (RMB’000)
Non-current assets Other non-current assets 1,216 1,179 1,183 1,183
Current assets Refundable deposits 1,467,738 1,553,980 805,667 1,065,348 Trade receivables — 6,793 17,719 38,594 Investments classified as receivables — — — 200,000 Other receivables 11,603 9,590 18,167 35,126 Available-for-sale financial assets — 20,207 — 44,320 Financial assets held under resale agreements — 7,475 39,678 55,513 Derivative financial assets — — 2,415 36 Cash held on behalf of brokerage clients 299,149 588,077 1,310,219 1,300,144 Bank balances 1,080,432 996,281 1,010,503 806,099 Total 2,860,138 3,183,582 3,205,551 3,546,363
— 329 — Interest Rate Risk
Interest rate risk refers to the likelihood of loss that may arise from adverse movements in the market interest rate. Our Group’s interest rate risk mainly arises from interest rate policy changes and the mismatch of interest-sensitive assets and liabilities.
Our Group mainly manages interest rate risk through structuring and adjusting its asset portfolio. Our Group’s asset portfolio management aims at mitigating risks and improving profitability by diversification of assets.
(i) Interest rate profile IACA INFORMATION FINANCIAL The following table details the interest rate profile of our Group’s interest-bearing financial instruments at the end of the Track Record Periods:
As at 31 December As at 30 June 2012 2013 2014 2015 3 — 330 — Effective Effective Effective Effective interest interest interest interest rate Amount rate Amount rate Amount rate Amount % (RMB’000) % (RMB’000) % (RMB’000) % (RMB’000)
Fixed rate instrument Refundable deposits 1.98% 1,467,738 1.98% 1,535,830 2.4% 776,020 2.4% 1,032,042 Trade receivable N/A — 10%-12.78% 6,646 N/A — 14.4% 34,245 Investments classified as receivables N/A — N/A — N/A — 4.8% 200,000 Financial assets held under resale agreements N/A — 16.58% 7,475 14%-22.5% 39,678 1.03%-22.5% 55,513 Cash held on behalf of brokerage clients 4.17%-4.58% 120,000 5.2%-6.5% 330,000 4.35%-6.8% 1,170,000 3.9%-5.5% 1,000,000 Bank balances 3.08-6.02% 1,063,211 3.5%-7.35% 965,403 0.84%-5.5% 981,227 3.3%-5.5% 762,009 Bank loans N/A — N/A — 4.1% (70,580) 4.1% (70,580)
Variable rate instrument Cash held on behalf of brokerage clients 0.35%-2.5% 179,149 0.001%-2.5% 258,077 0.001%-2.5% 140,219 0.001%-2.5% 300,144 Bank balances 0.001%-1.98% 17,221 0.001%-1.98% 30,878 0.001%-1.98% 29,276 0.001%-1.98% 44,090 FINANCIAL INFORMATION
(ii) Sensitivity analysis
- Fair value sensitivity analysis for fixed rate financial instruments
Our Group do not hold any fixed rate financial instruments measured at fair value. Therefore a change in interest rate at the end of the Track Record Periods would not affect our Group’s net profit or equity.
- Cash flow sensitivity analysis for variable rate financial instruments
Assuming all other variables remain constant, interest rate sensitivity analysis is as follows:
Sensitivity of net profit and equity As at As at 31 December 30 June 2012 2013 2014 2015 (RMB’000) Change in basis points Increase 100 basis points 1,473 2,167 1,271 3,442 Decrease 100 basis points (1,236) (1,859) (348) (1,436)
In respect of the exposure to cash flow interest rate risk arising from variable rate instruments held by our Group at the end of the Track Record Periods, the impact on our Group’s net profit and equity is estimated as an annualised impact on interest income of such a change in interest rates. The analysis is performed on the same basis at the end of the Track Record Periods.
Currency Risk
No material currency risk for our Group as the majority of the business activities are within China and settle in RMB.
Price Risk
Our Group is exposed to equity price changes and commodity price changes arising from the investments concluded in financial assets/liabilities at fair value through profit or loss (see note 25 and 34 in Section B of the Accountant’s Report in Appendix I to this prospectus), available-for-sale financial assets (see note 17 in Section B of the Accountant’s Report in Appendix I to this prospectus) and derivative financial assets/liabilities (see note 26 in Section B of the Accountant’s Report in Appendix I to this prospectus). Price risk our Group facing is mainly the proportionate fluctuation in our Group’s net profit and equity due to the price fluctuation of the financial assets/liabilities at fair value through profit or loss, available-for-sale financial assets and derivative financial assets/liabilities.
— 331 — FINANCIAL INFORMATION
Sensitivity analysis
The analysis below is performed to show the impact on our Group’s net profit and equity due to change in the prices of equity securities by 10% and the commodity prices by 10% with all other variables held constant.
Sensitivity of net profit As at As at 31 December 30 June 2012 2013 2014 2015 (RMB’000)
Changes in the equity price risk variable Increase by 10% 923 899 858 3,942 Decrease by 10% (1,028) (1,009) (858) (3,942)
Changes in the commodity price risk variable Increase by 10% — — 161 (14,403) Decrease by 10% — — (236) 14,919
Sensitivity of equity As at As at 31 December 30 June 2012 2013 2014 2015 (RMB’000)
Changes in the equity price risk variable Increase by 10% 2,675 2,344 2,637 5,876 Decrease by 10% (2,675) (2,344) (2,637) (5,876)
Changes in the commodity price risk variable Increase by 10% — — 161 (14,403) Decrease by 10% — — (236) 14,919
The sensitivity analysis indicates the instantaneous change in our Group’s net profit and equity that would arise assuming that the changes in the stock market index and commodity futures market had occurred at the end of the Track Record Periods and had been applied to re-measure those financial instruments held by our Group which expose our Group to equity and commodity price risk at the end of the Track Record Periods. It is also assumed that the fair values of our Group’s equity investments and hedging investments would change in accordance with the historical correlation with the relevant stock market index and relevant commodity futures price with all other variables remain constant. The analysis is performed on the same basis at the end of the Track Record Periods.
— 332 — FINANCIAL INFORMATION
Liquidity Risk
Individual operating entities within our Group are responsible for our own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by our Board when the borrowings exceed certain predetermined levels of authority.
Our Group’s policy is to regularly monitor its liquidity requirement and our compliance with lending covenants if any, to ensure that we maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and long term.
The following table shows the remaining contractual maturities at the end of the Track Record Periods of our Group’s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the end of the Track Record Periods) and the earliest date our Group, as applicable, can be required to pay:
As at 31 December 2012 Contractual undiscounted cash flow Carrying On Within 1 amount at demand year Total 31 December (RMB’000)
Accounts payable to brokerage clients 1,721,762 — 1,721,762 1,721,762 Other payables — 35,030 35,030 35,030 Total 1,721,762 35,030 1,756,792 1,756,792
As at 31 December 2013 Contractual undiscounted cash flow Carrying On Within 1 amount at demand year Total 31 December (RMB’000)
Accounts payable to brokerage clients 2,033,065 — 2,033,065 2,033,065 Other payables — 23,570 23,570 23,570 Derivative financial liabilities — 195 195 195 Total 2,033,065 23,765 2,056,830 2,056,830
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As at 31 December 2014 Contractual undiscounted cash flow Carrying On Within 1 amount at demand year Total 31 December (RMB’000)
Accounts payable to brokerage clients 1,962,840 — 1,962,840 1,962,840 Trade payables — 26,491 26,491 26,491 Other payables — 29,066 29,066 29,066 Bank loans — 73,159 73,159 70,580 Financial liabilities at fair value through profit or loss — 12,140 12,140 12,140 Derivative financial liabilities — 4,926 4,926 4,926 Total 1,962,840 145,782 2,108,622 2,106,043
As at 30 June 2015 Contractual undiscounted cash flow Carrying On Within 1 amount at demand year Total 30 June (RMB’000)
Accounts payable to brokerage clients 2,296,884 — 2,296,884 2,296,884 Trade payables — 5,480 5,480 5,480 Other payables — 71,289 71,289 71,289 Bank loans — 71,365 71,365 70,580 Financial liabilities at fair value through profit or loss — 15,822 15,822 15,822 Derivative financial liabilities — 2,903 2,903 2,903 Total 2,296,884 166,859 2,463,743 2,462,958
DIVIDEND POLICY
After the completion of the Global Offering, we may distribute dividends by way of cash or shares. Any proposed distribution of dividends shall be formulated by our Board and will be subject to our Shareholders’ approval. A decision to declare or to pay any dividends in the future, and the amount of any dividends, will depend on a number of factors, including our results of operations, cash flows, financial condition, capital adequacy ratio, payments by our subsidiaries of cash dividends to us, future prospects, statutory, regulatory and contractual restrictions on our declaration and payment of dividends and other factors that our Board may consider important.
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According to the PRC law and our Articles of Association, we will pay dividends out of our profit after tax only after we have made the following allocations:
• recovery of accumulated losses, if any;
• allocations to the statutory surplus reserve equivalent to 10% of our net profit as determined under the PRC GAAP, and, when the statutory reserve reaches and is maintained at or above 50% of our registered capital, no further allocations to this statutory surplus reserve will be required;
• 10% of our net profit is appropriated to the non-distributable general risk reserve; and
• appropriations to the non-distributable futures risk reserve according to the relevant regulations.
In accordance with our Articles of Association, dividends may be paid only out of distributable profits as determined under PRC GAAP or HKFRSs, whichever is a lower amount. Following the Global Offering, we plan to distribute about 10% to 30% of our distributable profits realised in that year as cash dividends in any fiscal year so long as we have profits after tax and accumulated undistributed profits in that year, except that we may decide not to distribute cash dividends because of a significant investment.
In 2014, we declared and distributed cash dividends in the amount of RMB54.4 million for the year ended 31 December 2013 out of our distributable profit. On 9 June 2015, we declared and subsequently distributed on 7 August 2015 a dividend in the amount of RMB34 million for the year ended 31 December 2014. We did not declare any dividend in 2013 and 2012. Following the Global Offering and such distribution, our Shareholders will have an equal right to the distributable profit in respect of the year ending 31 December 2015 and thereafter. Dividends paid in prior years shall not be indicative of future dividend payment.
DISTRIBUTABLE RESERVES
As at 30 June 2015, we had reserves of RMB52.5 million available for distribution to the shareholders of our Company.
UNAUDITED PRO FORMA ADJUSTED COMBINED NET TANGIBLE ASSETS
The following is an illustrative statement of our unaudited pro forma adjusted combined net tangible assets attributable to our Shareholders which has been prepared in accordance with Rule 4.29 of the Hong Kong Listing Rules for the purpose of illustrating the effect of the Global Offering as if the Global Offering had taken place on 30 June 2015.
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This unaudited pro forma statement of adjusted net tangible assets has been prepared for illustrative purposes only and, because of its hypothetical nature, it may not give a true picture of the combined net tangible assets of the Group attributable to the equity holders of the Company as at 30 June 2015 or any subsequent dates, including following the Global Offering.
Unaudited pro Audited forma combined net adjusted tangible assets combined net attributable to tangible assets the equity attributable to shareholders Estimated net the equity of the proceeds from shareholders Unaudited pro forma Company as at the Global of the adjusted combined net 30 June 2015 Offering Company tangible assets per share RMB’000(1) RMB’000(2)(5) RMB’000(4) RMB HK$(5)
Based on an offer price of HK$2.43 per share 1,209,921 408,527 1,618,448 1.78 2.15 Based on an offer price of HK$2.98 per share 1,209,921 507,771 1,717,692 1.89 2.29
Notes:
(1) The combined net tangible assets attributable to the equity shareholders of the Company as at 30 June 2015 is compiled based on the combined financial information included in the Accountants’ Report set out in Appendix I to this prospectus, which is based on the combined net assets attributable to the equity shareholders of the Company as at 30 June 2015 of RMB1,278.6 million after deducting intangible assets of RMB25.4 million and goodwill of RMB43.3 million.
(2) The estimated net proceeds from Global Offering are based on the indicative offer price of HK$2.43 per share (being the minimum offer price) and HK$2.98 per share (being the maximum offer price) and the assumption that there are 227 million newly issued shares in Global Offering, after deduction of the underwriting fees and other related expenses payable by the Company, without taking into account the exercise of the over-allotment option.
(3) The payment for the acquisition of Holly Su Futures (Hongkong) Co., Ltd. at a consideration of HK$28,075 thousands is not deducted in the unaudited pro forma adjusted combined net tangible assets.
(4) The unaudited pro forma adjusted combined net tangible assets per share is arrived at by dividing the unaudited pro forma adjusted combined net tangible assets by 907,000,000 shares, being the number of shares in issuing assuming that the Global Offering has been completed on 30 June 2015 but takes no account of the exercise of the over-allotment Option.
(5) For the purpose of estimated net proceeds from Global Offering and the calculation of the unaudited pro forma adjusted combined net tangible assets per share, the transaction between RMB and HK$ was made at the rate of HK$1.00 to RMB0.8268, the exchange rate set by the People’s Bank of China prevailing on 8 December 2015. No representation is made that Renminbi amounts have been, could have been or may be converted to Hong Kong dollars, or vice versa, at that rate.
(6) The unaudited pro forma adjusted combined net tangible assets do not take into account the financial results or other transactions of the Company subsequent to 30 June 2015, including the acquisition of Holly Su Futures (Hongkong) Co., Ltd.
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SUBSEQUENT EVENTS
(a) Completion of the Reorganisation
As a step of the Reorganisation, on January 2015, the Company entered into an agreement with SOHO Holdings to acquire the entire the equity interests of Holly Su Futures from SOHO Holdings at a consideration of HK$ 28.1 million (equivalent to RMB 22.2 million). The Reorganisation completed on 30 September 2015 and the consideration payable was recorded as deemed distributions to shareholder on the same date.
(b) Contract dispute
Since August 2015, Holly Capital has been involved in a contract dispute. Please see the section headed “Business — Laws and Regulations — Legal Proceedings” in this prospectus for further details.
NO MATERIAL ADVERSE CHANGE
Saved as disclosed in this prospectus, our Directors have confirmed, after performing all the due diligence work which the Directors consider appropriate, that there is no material adverse change in our financial or trading position or prospects of the Group since 30 June 2015 (being the date on which our most recent audited financial statements were prepared) and no event had occurred since 30 June 2015 that would materially and adversely affect the information in the Accountant’s Report set out in Appendix I to this prospectus.
DISCLOSURE REQUIRED UNDER THE HONG KONG LISTING RULES
Our Directors confirm that, as at the Latest Practicable Date, there was no circumstance which would give rise to a disclosure requirement under Rule 13.13 to 13.19 of the Hong Kong Listing Rules.
LISTING EXPENSES
The total listing expenses (including professional fees, underwriting commissions and other fees incurred in connection with the Listing and Global Offering) payable by our Company are estimated to be approximately RMB51.6 million until completion of the Global Offering, assuming the Over-allotment Option is not exercised and based on an Offer Price of HK$2.7 per H Share (being the mid-point of our Offer Price range of HK$2.43 and HK$2.98 per H Share), among which, RMB2.1 million was reflected in our combined statements of comprehensive income and RMB21.4 million was capitalised during the Track Record Period; and RMB1.0 million is expected to be reflected in our combined statements of comprehensive income subsequent to the Track Record Period and RMB27.1 million will be capitalized. The listing expenses above are the latest practicable estimate for reference only and the actual amount may differ from this estimate. We do not expect these listing expenses to have a material impact on our results of operations in 2015.
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FUTURE PLANS
Please see the section headed “Business — Our Business Strategies” in this prospectus for details of our future plans.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the Global Offering of approximately HK$550.4 million after deducting the underwriting fees and expenses payable by us in the Global Offering, assuming no Over-allotment Option is exercised and an Offer Price of HK$2.7 per H Share, being the mid-point of the indicative Offer Price range of HK$2.43 to HK$2.98 per H Share in this prospectus. We intend to use the net proceeds we will receive from this offering for the following purposes:
• approximately 32%, or HK$176.1 million, will be applied to further develop our Hong Kong and global futures business by, among other things, pursuing acquisition when we deem appropriate, trying to apply for additional licenses to conduct other regulated securities and futures related activities in Hong Kong and offering a wider range of futures related products and services;
• approximately 25%, or HK$137.6 million, will be applied to further develop our asset management business by, among other things, expanding the variety of our asset management schemes and products offering, providing seed money of collective asset management schemes to be established by our Group and developing our own investment advisory team;
• approximately 20%, or HK$110.1 million, will be applied to further develop our commodity trading and risk management business by providing additional capital to Holly Capital;
• approximately 10%, or HK$55.0 million, will be applied to further develop and strengthen our existing futures brokerage business by, among other things, optimizing our branch coverage network and geographical coverage, conducting more internet (on-line) related services and sales and hiring more sales and marketing staff as well as client managers;
• approximately 5%, or HK$27.5 million, will be applied to purchase IT equipments and software for upgrading and improving our IT infrastructure and capacities, including our on-line trading platform, our risk monitoring programmes and our software and computer programme structure for the provision of personalised trading and risk management functions; and
• approximately 8%, or HK$44.1 million, will be applied to general working capital of our Group.
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In the event that the Over-allotment Option is exercised in full and assuming an Offer Price of HK$2.7 per H Share (being the mid-point of the Offer Price range stated in this prospectus), we will receive additional net proceeds of approximately HK$88.4 million. We intend to use such additional proceeds to increase the net proceeds applied to the same purposes above on a pro rata basis.
In the event that the Offer Price is set at HK$2.98 per H Share, being the high-end of the proposed Offer Price range, the net proceeds from the Global Offering will increase (i) by approximately HK$61.1 million, assuming the Over-allotment Option is not exercised, and (ii) by approximately HK$70.3 million, assuming the Over-allotment Option is exercised in full. We intend to use such additional proceeds to increase the net proceeds applied to the same purposes above on a pro rata basis.
In the event that the Offer Price is set at HK$2.43 per H Share, being the low-end of the proposed Offer Price range, the net proceeds from the Global Offering will decrease by approximately HK$58.9 million, assuming the Over-allotment Option is not exercised. Under such circumstances, we intend to reduce the net proceeds applied to the same purposes on a pro rata basis.
To the extent that our net proceeds are not sufficient to fund the purpose set out above, we intend to fund the balance through a variety of means including cash generated from operations and bank financing.
To the extent that the net proceeds of the Global Offering are not immediately used for the purposes described above, they will be placed on deposit with banks or other financial institutions or held in other treasury instruments.
In each of the above scenarios, we will not receive any of the proceeds from the sale of the Sale Shares by the Selling Shareholders in the Global Offering. Please see the section headed “Share Capital — Transfer of State-owned Shares”.
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HONG KONG UNDERWRITERS
SOLE GLOBAL COORDINATOR, SOLE BOOKRUNNER AND SOLE LEAD MANAGER
Guotai Junan Securities (Hong Kong) Limited
CO-LEAD MANAGERS
Ever-Long Securities Company Limited
RHB Securities Hong Kong Limited
UNDERWRITING ARRANGEMENTS AND EXPENSES
Hong Kong Underwriting Agreement
Pursuant to the Hong Kong Underwriting Agreement, we are offering our Hong Kong Offer Shares for subscription by members of the public in Hong Kong on and subject to the terms and conditions of this prospectus and the Application Forms.
The Hong Kong Underwriting Agreement is conditional upon and subject to, amongst others, the International Underwriting Agreement becoming unconditional and not having been terminated. Subject to the listing of and permission to deal in our H Shares in issue and to be issued as mentioned in this prospectus being granted by the Listing Committee of the Stock Exchange and to certain other conditions set out in the Hong Kong Underwriting Agreement, the Hong Kong Underwriters have severally agreed to subscribe or procure subscribers, for our Hong Kong Offer Shares.
Grounds for termination
The obligations of the Hong Kong Underwriters under the Hong Kong Underwriting Agreement are subject to the termination by the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters) by notice (orally or in writing) given to our Company prior to 8:00 a.m. (Hong Kong time) on the Listing Date if any of the following events shall occur prior to such time:
(a) there shall develop, occur or come into force:
(i) any new law or regulation or any change in existing laws or regulations or any change in the interpretation or application thereof by any court or other competent authority in Hong Kong, Macau, the PRC, the United States, the United Kingdom, the European Union (or any member thereof), Japan, Singapore or Australia (each a “Relevant Jurisdiction”); or
(ii) any change (whether or not permanent) in national, regional, international, financial, military, industrial or economic conditions or prospects, stock market, fiscal or political conditions, regulatory or market conditions and matters and/or disasters in the Relevant Jurisdiction(s); or
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(iii) without prejudice to sub-paragraph (i) above, the imposition of any moratorium, suspension or restriction on trading in securities generally on the Stock Exchange due to exceptional financial circumstances or otherwise; or
(iv) any event, or series of events, in the nature of force majeure (including, without limitation, acts of government, strikes, lock-outs, fire, explosion, flooding, civil commotion, acts of war or acts of God) in or affecting the Relevant Jurisdictions; or
(v) any adverse change or development involving an adverse prospective change in taxation or in exchange control in the Relevant Jurisdiction(s) to which our Group is subject or the implementation of any exchange controls; or
(vi) any litigation or claim of material importance to the business, financial or operations of our Group being threatened or instituted against any member of our Group; or
(vii) the imposition of economic sanctions, in whatever form, directly or indirectly, in the Relevant Jurisdiction(s) relevant to the Company and its subsidiaries; or
(viii) any governmental or regulatory commission, board, body, authority or agency, or any stock exchange, self-regulatory organisation or any court, whether national, central, federal, provincial, state, regional, municipal, local, domestic or foreign, in any Relevant Jurisdiction commencing any investigation or announcing an intention to investigate or take other action against any member of our Group or Director; or
(ix) order or petition for the winding up of any member of our Group or any composition or arrangement made by any member of our Group with its creditors or a scheme of arrangement entered into by any member of our Group or any resolution for the winding up of any member of our Group or the appointment of a provisional liquidator, receiver or manager over all or part of the material assets or undertaking of any member of our Group or anything analogous thereto occurring in respect of any member of our Group; or
(x) there is any adverse change or prospective adverse change in the business or in the financial or trading position or prospects of our Group; which, individually, or in the aggregate, in the reasonable opinion of the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters), (i) has or is likely to have a material adverse effect on the success of the Global Offering, or the level of applications under the Hong Kong Public Offering or the level of interest under the International Placing; or (ii) has or will or is likely to have a material adverse effect; or (iii) makes it inadvisable or impracticable to proceed with the Global Offering; or (iv) has or will or is likely to have the effect of making any part of the Hong Kong Underwriting
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Agreement (including underwriting) incapable of performance in accordance with its terms or preventing the processing of applications and/or payments pursuant to the Global Offering or pursuant to the underwriting thereof.
(b) there comes to the notice of the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters):
(i) any matter or event showing any of the representations and warranties contained in the Hong Kong Underwriting Agreement to be untrue or inaccurate or, if repeated immediately after the occurrence thereof, would be untrue or inaccurate in any material respect or showing any of the obligations or undertakings expressed to be assumed by or imposed on our Company or the Controlling Shareholder under the Hong Kong Underwriting Agreement not having been complied with in any material respect; or
(ii) any breach on the part of our Company or the Controlling Shareholder of any provisions of the Hong Kong Underwriting Agreement in any respect which is considered by the Sole Global Coordinator, (for itself and on behalf of the Hong Kong Underwriters) in its reasonable opinion to be material; or
(iii) any statement contained in this prospectus, the Application Forms and the formal notice, the documents or information provided to the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters), the Stock Exchange, the legal adviser to the Sole Global Coordinator and the Underwriters and any other parties involved in the Global Offering which has become or been discovered to be untrue, incorrect, incomplete or misleading in any material respect; or
(iv) matters have arisen or have been discovered which would, if this prospectus constitutes a material omission of such information and such omission was failed to be amended by our Company in line with relevant regulations; or
(v) our Company withdraws this prospectus or the the post hearing information pack (and/or any other documents issued or used in connection with the Global Offering) or the Global Offering; or
(vi) any information, matter or event which in the reasonable opinion of the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters) is inconsistent in any material respect with any information contained in the declaration and undertaking with regard to Directors (Form H) given by any Directors pursuant to the Global Offering.
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Undertakings to the Stock Exchange Pursuant to the Listing Rules
Undertakings by the Company
Pursuant to Rule 10.08 of the Listing Rules, we have undertaken to the Stock Exchange that, no further Shares or securities convertible into equity securities of our Company (whether or not of a class already listed) may be issued by us or form the subject of any agreement to such an issue by us within six months from the Listing Date (whether or not such issue of Shares or our securities will be completed within six months from the commencement of dealing), except pursuant to the Global Offering or in the circumstances prescribed by Rule 10.08 of the Listing Rules.
Undertakings by the Controlling Shareholder
Pursuant to Rule 10.07 of the Listing Rules, the Controlling Shareholder has undertaken to the Stock Exchange and to the Company that, except pursuant to the Global Offering (including the Over-allotment Option), it will not and will procure that the relevant registered holder(s) will not, without the prior written consent of the Stock Exchange and unless in compliance with the requirements of the Listing Rules:
(a) in the period commencing on the date by reference to which disclosure of its shareholdings in the Company is made in this Prospectus and ending on the date which is six months from the Listing Date, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any Shares in respect of which it is shown by this Prospectus to be the beneficial owners; and
(b) in the period of six months commencing on the date on which the period referred to in paragraph (a) above expires, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any Shares referred to in paragraph (a) above if, immediately following such disposal or upon the exercise or enforcement of such options, rights, interests or encumbrances, it would then cease to be a Controlling Shareholder of the Company for the purposes of the Listing Rules.
Pursuant to Note (3) to Rule 10.07(2) of the Listing Rules, the Controlling Shareholder has further undertaken to the Stock Exchange and to the Company that within the period commencing on the date by reference to which disclosure of his shareholdings is made in this Prospectus and ending on the date which is 12 months from the Listing Date, it will:
(a) when it pledges or charges any Shares beneficially owned by him in favour of an authorized institution (as defined in the Banking Ordinance, Chapter 155 of the Laws of Hong Kong) for a bona fide commercial loan, immediately inform the Company of such pledge or charge together with the number of securities so pledged or charged; and
(b) when it receives indications, either verbal or written, from the pledgee or chargee that any of the pledged or charged Shares will be disposed of, immediately inform the Company of such indications.
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We will also inform the Stock Exchange as soon as we have been informed of the matters mentioned in (a) and (b) above by the Controlling Shareholder and disclose such matters by way of an announcement which is published in accordance with Rule 2.07C of the Listing Rules as soon as possible.
Undertakings pursuant to the Hong Kong Underwriting Agreement
The Controlling Shareholder has given an undertaking to each of our Company, the Sole Sponsor, the Sole Global Coordinator and the Hong Kong Underwriters that, without the prior written consent of the Sole Global Coordinator (on behalf of the Hong Kong Underwriters) and unless in compliance with the requirements of the Listing Rules, none of the Controlling Shareholder will, and will procure that none of its close associates will:
(i) during the period commencing on the date of the Hong Kong Underwriting Agreement and ending on, and including, the date that is six months after the Listing Date (the “First Six Month Period”), (a) sell, offer to sell, contract or agree to sell, mortgage, charge, pledge, hypothecate, lend, grant or sell any option, warrant, contract or right to purchase, grant or purchase any option, warrant, contract or right to sell, or otherwise transfer or dispose of or create an encumbrance over, or agree to transfer or dispose of or create an encumbrance over, either directly or indirectly, conditionally or unconditionally, any Shares or any other securities of our Company or any interest therein (including, without limitation, any securities convertible into or exchangeable or exercisable for or that represent the right to receive, or any warrants or other rights to purchase, any Shares, as applicable) (the foregoing restriction is expressly agreed to include the Controlling Shareholder from engaging in any hedging or other transactions which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of any Shares even if such Shares would be disposed of by someone other than the Controlling Shareholder, respectively. Such prohibited hedging or other transactions would include without limitation any put or call option with respect to any Shares or with respect to any security that includes, relates to or derives any significant part of its value from such Shares), or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Shares or any other securities of our Company or any interest therein (including, without limitation, any securities convertible into or exchangeable or exercisable for or that represent the right to receive, or any warrants or other rights to purchase, any Shares), or (c) enter into any transaction with the same economic effect as any transaction specified in (a) or (b) above, or (d) offer to or agree to or publicly announce any intention to effect any transaction specified in (a), (b) or (c) above, in each case, whether any of the transactions specified in (a), (b) or (c) above is to be settled by delivery of Shares or such other securities of our Company or shares or other securities of such other members of our Group, as applicable, or in cash or otherwise (whether or not the issue of Shares or such other securities will be completed within the aforesaid period);
(ii) during the period of six months commencing on the date on which the First Six Month Period expires and including, the date that is six months after the end of the First Six Month Period (the “Second Six Month Period”), enter into any of the transactions specified in (a),
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(b) or (c) under paragraph (i) above or offer to or agree to or announce any intention to effect any such transaction if, immediately following any sale, transfer or disposal or upon the exercise or enforcement of any option, right, interest or encumbrance pursuant to such transaction, he, she or it will cease to be a “controlling shareholder” (as the term is defined in the Listing Rules) of our Company or cease to hold, directly or indirectly, a controlling interest of over 30% or such lower amount as may from time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer, in any of the companies controlled by him, her or it and/or any of his, her or its close associate which owns such Shares or interests as aforesaid; and
(iii) until the expiry of the Second Six Month Period, in the event that he, she or it enters into any of the transactions specified in (a), (b) or (c) under paragraph (i) above or offers to or agrees to or announces any intention to effect any such transaction, he, she or it will take all reasonable steps to ensure that it will not create a disorderly or false market in the securities of our Company.
Except for the offer and sale of the Offer Shares pursuant to the Global Offering (including the Shares to be offered by the Selling Shareholders as required by the relevant PRC law, regulations and rules regarding the reduction of state-owned shares and the Shares to be issued and/or sold pursuant to the Over allotment Option), during the First Six Month Period, our Company hereby undertakes to each of the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager, the Sole Sponsor and the Hong Kong Underwriters not to, and to procure each member of our Group not to (except pursuant to any transaction contemplated in this prospectus, or any issuance or allotment of shares by the members of our Group (other than our Company) or any change in the shareholdings of the members of our Group which does not result in a change of control, or any pledge or charge over shares in the members of our Group (other than our Company) created in the ordinary course of our business), without the prior written consent of the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager (on behalf of the Hong Kong Underwriters) and unless in compliance with the requirements of the Listing Rules:
(i) allot, issue, sell, accept subscription for, offer to allot, issue or sell, contract or agree to allot, issue or sell, mortgage, charge, pledge, hypothecate, lend, grant or sell any option, warrant, contract or right to subscribe for or purchase, grant or purchase any option, warrant, contract or right to allot, issue or sell, or otherwise transfer or dispose of or create an encumbrance over, or agree to transfer or dispose of or create an encumbrance over, either directly or indirectly, conditionally or unconditionally, any Shares or any other securities of our Company or any shares or other securities of such other members of our Group, as applicable, or any interest in any of the foregoing (including, without limitation, any securities convertible into or exchangeable or exercisable for or that represent the right to receive, or any warrants or other rights to purchase, any Shares or any shares of such other members of our Group, as applicable); or
(ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Shares or any other securities of our Company or any shares or other securities of such other members of our Group, as
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applicable, or any interest in any of the foregoing (including, without limitation, any securities convertible into or exchangeable or exercisable for or that represent the right to receive, or any warrants or other rights to purchase, any Shares or any shares of such members of our Group, as applicable); or
(iii) enter into any transaction with the same economic effect as any transaction specified in paragraphs (i) or (ii) above; or
(iv) offer to or agree to or publicly announce any intention to effect any transaction specified in paragraphs (i), (ii) or (iii) above, in each case, whether any of the transactions specified in paragraphs (i), (ii) or (iii) above is to be settled by delivery of Shares or such other securities of our Company or shares or other securities of such members of our Group, as applicable, or in cash or otherwise (whether or not the issue of Shares or such other securities will be completed within the aforesaid period). In the event that, during the Second Six Month Period, our Company enters into any of the transactions specified in paragraphs (i), (ii) or (iii) above or offers to or agrees to or announces any intention to effect any such transaction, our Company shall take all reasonable steps to ensure that it will not create a disorderly or false market in the securities of our Company. Each of our Company, our Controlling Shareholder and executive Directors undertakes to each of the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager, the Sole Sponsor and the Hong Kong Underwriters to procure our Company to comply with the undertakings in this paragraph.
Each of our Company, our Controlling Shareholder and executive Directors undertakes to and covenants with the Sole Sponsor, the Sole Bookrunner and the Sole Lead Manager and the Hong Kong Underwriters that save with the prior written consent of the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager (for itself and on behalf of the Hong Kong Underwriters), no company in our Group will during the First Six Month Period purchase any securities of our Company.
Without prejudice to the above, our Controlling Shareholder undertakes and covenants with our Company, the Sole Sponsor, the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager and the Hong Kong Underwriters that:
(i) save with the prior written consent from the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager (for itself and on behalf of the Hong Kong Underwriters) and to the extent as allowed under the Listing Rules, during the period commencing on the date by reference to which disclosure of the shareholding of our Controlling Shareholder is made in this prospectus and ending on the date which is 12 months from the Listing Date, he, she or it shall not and shall procure that none of his, her or its close associates shall pledge or charge or create any other rights or encumbrances in any Shares or any interest therein owned by him, her or it or any of their close associates or in which he, she or it or any of their close associates is, directly or indirectly, interested immediately following completion of the Global Offering (or any other Shares or securities of or interest in our Company arising or deriving therefrom as a result of capitalisation issue or scrip dividend or otherwise) or any share or interest in any company controlled by him, her or it or any of
— 346 — UNDERWRITING
their close associates which is the beneficial owner (directly or indirectly) of such Shares or interest therein as aforesaid (or any other shares or securities of or interest in the company arising or deriving therefrom as a result of capitalisation issue or scrip dividend or otherwise); and
(ii) in the event that notification is given to the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters), when he, she or it or any of their close associates shall pledge, charge or create any encumbrance or other right or any of the Shares or interests referred to in (i) above, he, she or it shall give prior written notice of not less than two business days to the Stock Exchange, our Company, the Sole Sponsor and the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters) giving details of the number of Shares, shares in the company which is the beneficial owner of such Shares, or the interests as aforesaid, the identities of the pledgee or person (the “Mortgagee”) in favour of whom the pledge, charge, encumbrance or interest is created and further if he, she or it or any of their close associates is aware of or receives indications or notice, either verbal or written, from the Mortgagee that the Mortgagee will dispose of or transfer any of the Shares or interests referred to in (i) above, he, she or it will immediately notify the Stock Exchange, our Company, the Sole Sponsor and the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager (for itself and on behalf of the Hong Kong Underwriters) in writing of such indications and provide details of such disposal or transfer to the Stock Exchange, our Company, the Sole Sponsor and the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager (for itself and on behalf of the Hong Kong Underwriters) as they may require.
Our Company undertakes and covenants with the Sole Sponsor, the Sole Global Coordinator, the Sole Bookrunner and the Sole Lead Manager and the Hong Kong Underwriters that our Company shall forthwith inform the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters) and the Stock Exchange in writing immediately after our Company has been informed of the matters referred to in paragraph (ii) above and our Company shall, if so required by the Stock Exchange or the Listing Rules, disclose such matters by way of an announcement and shall comply with all requirements of the Stock Exchange.
International Placing
In connection with the International Placing, it is expected that our Company, the Selling Shareholders and the International Underwriters will enter into the International Underwriting Agreement. Under the International Underwriting Agreement, our Company, together with the Selling Shareholders, will offer our International Placing Shares for subscription by certain professional, institutional and other investors at the Offer Price payable in full on subscription, on and subject to the terms and conditions set out in the International Underwriting Agreement. It is expected that the International Underwriters will agree to severally underwrite for our International Placing Shares.
— 347 — UNDERWRITING
Commission
The Hong Kong Underwriters will receive a commission of 3.5% of the aggregate Offer Price of our Hong Kong Offer Shares subject to re-allocation, out of which they will pay any sub-underwriting commissions. The commissions payable to the Underwriters will be borne by the Company with respect to all the Offer Shares (including pursuant to the exercise of the Over-allotment Option).
The Sole Sponsor will in addition receive sponsorship and documentation fees. The underwriting commission, financial advisory and documentation fees, listing fees, the Stock Exchange trading fee, the SFC transaction levy, legal and other professional fees together with printing and other expenses relating to the Global Offering, assuming an Offer Price of HK$2.7 (being the mid-point of Offer Price range between HK$2.43 per Offer Share and HK$2.98 per Offer Share), are estimated to amount to approximately HK$62.5 million in total (assuming that the Over-allotment Option is not being exercised).
Activities by Syndicate members
The Underwriters of the Global Offering (the “Syndicate Members”) and their affiliates are diversified financial institutions with relationships in countries around the world. These entities engage in a wide range of commercial and investment banking, brokerage, funds management, trading, hedging, investing and other activities for their own accounts and for the account of others. In relation to our H Shares, other activities could include acting as agent for buyers and sellers of our H Shares, entering into transactions with other buyers and sellers in a principal capacity, proprietary trading in our H Shares, and entering into over-the-counter or listing derivative transactions or listed and unlisted securities transactions (including issuing securities such as derivative warrants listed on a stock exchange) which have as their underlying, assets including our H Shares. Those activities may require hedging activity by those entities involving, directly or indirectly, buying and selling our H Shares. All such activities could occur in Hong Kong and elsewhere in the world and may result in the Syndicate Members and their affiliates holding long and/or short positions in our H Shares, in baskets of securities or indices including our H Shares, in units of funds that may purchase our H Shares, or in derivatives related to any of the foregoing.
In relation to issues by Syndicate Members or their affiliates of any listed securities having our H Shares as their underlying, whether on the Stock Exchange or on any other stock exchange, the rules of the stock exchange may require the issuer of other securities (or one of its affiliates or agents) to act as a market maker or liquidity provider in the security, and these will also result in hedging activity in our H Shares in most cases.
These activities may affect the market price or value of our H Shares, the liquidity or trading volume in our H Shares, and the volatility of our Share price, and the extent to which this occurs from day to day cannot be estimated. It should be noted that when engaging in any of these activities, the Syndicate Members will be subject to certain restrictions, including the following:
— 348 — UNDERWRITING
(a) the Syndicate Members must not, in connection with the distribution of the Offer Shares, effect any transactions (including issuing or entering into any option or other derivative transactions relating to the Offer Shares), whether in the open market or otherwise, with a view to stabilising or maintaining the market price of any of the Offer Shares at levels other than those which might otherwise prevail in the open market; and
(b) the Syndicate Members must comply with all applicable laws and regulations, including the market misconduct provisions of the SFO, including the provisions prohibiting insider dealing, false trading, price rigging and stock market manipulation.
Hong Kong Underwriters’ interests in our Company
Guotai Junan Capital Limited will be appointed as the compliance adviser of our Company with effect from the Listing Date until the dispatch of our audited financial results for the first full financial year after the Listing Date, and we will pay an agreed fee to Guotai Junan Capital Limited for its provision of services with the scope required under the Listing Rules.
Save for their interests and obligations under the Underwriting Agreements, none of the Sole Sponsor, the Sole Global Coordinator or the Underwriters is interested beneficially or non-beneficially in any shares in any member of our Group or has any right (whether legally enforceable or not) or option to subscribe for or to nominate persons to subscribe for any shares in any member of our Group.
Minimum public float
Our Directors will ensure that there will be a minimum of 25% of the total H Shares in issue in public hands in accordance with Rule 8.08 of the Listing Rules after completion of the Global Offering.
— 349 — STRUCTURE OF THE GLOBAL OFFERING
DETERMINATION OF THE OFFER PRICE
The Offer Price is expected to be fixed by the Price Determination Agreement to be entered into between the Sole Global Coordinator (for itself and on behalf of the Underwriters) and our Company (for itself and on behalf of the Selling Shareholders) on or before the Price Determination Date, when the market demand for the Offer Shares will be ascertained. The Price Determination Date is currently expected to be Monday, 21 December 2015, and in any event, not later than Monday, 28 December 2015.
Prospective investors should be aware that the Offer Price to be determined on or before the Price Determination Date may be, but not expected to be, lower than indicative Offer Price range as stated in this prospectus. The Offer Price will not be more than HK$2.98 per Offer Share and is expected to be not less than HK$2.43 per Offer Share. The Offer Price will fall within the Offer Price range as stated in this prospectus unless otherwise announced, as further explained below, not later than the morning of the last day for lodging applications under the Hong Kong Public Offering.
The Sole Global Coordinator (for itself and on behalf of the Underwriters) may, where it considers appropriate, based on the level of interest expressed by prospective professional, institutional and private investors during a book-building process, and with the consent of our Company, reduce the indicative Offer Price range below that 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, the Company will, as soon as practicable following the decision to make such reduction, and in any event not later than the morning of the last day for lodging applications under the Hong Kong Public Offering, cause there to be published on the Company’s website at www.ftol.com.cn and the Stock Exchange’s website at www.hkexnews.hk notice of reduction in the indicative Offer Price range. Upon issue of such a notice, the revised Offer Price range will be final and conclusive and the Offer Price, if agreed upon with our Company (for itself and on behalf of the Selling Shareholders), will be fixed within such revised Offer Price range. Such notice will also include confirmation or revision, as appropriate, of the working capital statement, the Global Offering statistics as currently set out in “Summary” in this prospectus, and any other financial information which may change as a result of such reduction. In the absence of any notice being published in The Standard (in English) and The Hong Kong Economic Times (in Chinese) of a reduction in the indicative Offer Price range as stated in this prospectus on or before the morning of the last day for lodging applications under the Hong Kong Public Offering, the Offer Price, if agreed upon with our Company (for itself and on behalf of the Selling Shareholders), will under no circumstances be set outside the Offer Price range as stated in this prospectus.
If, for any reason, the Sole Global Coordinator (for itself and on behalf of the Underwriters) and our Company (on behalf of ourselves and the Selling Shareholders) are unable to enter into the Price Determination Agreement by the Price Determination Date, the Global Offering will not become unconditional and will not proceed and will lapse.
Announcement of the final Offer Price, together with indication of the level of interests in the International Placing and the results of application under the Hong Kong Public Offering and basis of allocation of the Hong Kong Offer Shares is expected to be published on Tuesday, 29 December 2015.
— 350 — STRUCTURE OF THE GLOBAL OFFERING
PRICE PAYABLE ON APPLICATION
The Offer Price will not be more than HK$2.98 per Offer Share and is expected to be not less than HK$2.43 per Offer Share, unless otherwise announced not later than the morning of the last day for lodging applications under the Hong Kong Public Offering as set out above. Prospective investors should be aware that the Offer Price as determined on the Price Determination Date may be lower than the indicative Offer Price as stated in this prospectus.
Applicants under the Hong Kong Public Offering should pay, on application, the maximum price of HK$2.98 per Offer Share plus brokerage of 1%, Stock Exchange trading fee of 0.005% and SFC transaction levy of 0.0027%. The H Shares will be traded in board lot of 1,000 H Shares each. That means a total of HK$3,010.03 is payable for every board lot of 1,000 H Shares. The Application Forms have tables showing the exact amount payable for certain multiples of Hong Kong Offer Shares. If the Offer Price, as finally determined in the manner as described above, is lower than the maximum price of HK$2.98 per Offer Share, appropriate refund payments (including the related brokerage, the Stock Exchange trading fee and the SFC transaction levy attributable to the excess application money) will be made to applicants, without interest. Further details are set out in the section headed “How to Apply for Hong Kong Offer Shares” in this prospectus.
CONDITIONS OF THE HONG KONG PUBLIC OFFERING
Acceptance of the application for the Offer Shares pursuant to the Hong Kong Public Offering is conditional upon:
1. Listing
The Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the H Shares in issue and to be issued as mentioned in this prospectus on the Stock Exchange and such approval not subsequently having been revoked prior to the commencement of dealings in the H Shares.
2. Underwriting Agreements
(i) The obligations of the Underwriters under the Underwriting Agreements becoming unconditional, and not being terminated in accordance with the terms thereof; and
(ii) the execution and delivery of the International Underwriting Agreement prior to or on the Price Determination Date.
3. Price determination
The Offer Price having been determined and the execution of the Price Determination Agreement on or around the Price Determination Date.
— 351 — STRUCTURE OF THE GLOBAL OFFERING
Global Offering will lapse and the application money will be returned to the applicants, without interest. The terms on which the application money will be returned to the applicants are set out in the paragraph headed “Refund of application monies” in the relevant Application Forms.
In the meantime, the application money will be held in one or more separate bank accounts with the receiving banker or other bank(s) in Hong Kong, licensed under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong).
THE GLOBAL OFFERING
The Global Offering comprises the International Placing and the Hong Kong Public Offering. A total of initially 249,700,000 Offer Shares will be made available under the Global Offering. Among these Offer Shares, 224,730,000 International Placing Shares (consisting 202,030,000 new H Shares to be issued by the Company and 22,700,000 H Shares to be converted from Domestic Shares held by Selling Shareholders, subject to re-allocation and the Over-allotment Option), representing 90% of the Offer Shares, will initially be conditionally placed with selected professional, institutional and private investors under the International Placing. The remaining 24,970,000 Hong Kong Offer Shares (subject to re-allocation), representing 10% of the Offer Shares, will initially be offered to the public in Hong Kong under the Hong Kong Public Offering.
The Hong Kong Public Offering is open to all members of the public in Hong Kong as well as to institutional and professional investors. The Hong Kong Underwriters have severally agreed to underwrite the Hong Kong Offer Shares under the terms of the Hong Kong Underwriting Agreement. The International Underwriter will underwrite the International Placing Shares pursuant to the terms of the International Underwriting Agreement. Further details of the underwriting are set out in the section headed “Underwriting” in this prospectus.
Investors may apply for the Offers Shares under the Hong Kong Public Offering or indicate an interest for Offer Shares under the International Placing, but may not do both.
International Placing
Our Company is expected to offer initially 224,730,000 International Placing Shares (consisting 202,030,000 new H Shares to be issued by the Company and 22,700,000 H Shares to be converted from Domestic Shares held by Selling Shareholders, subject to re-allocation and the Over-allotment Option) at the Offer Price under the International Placing. The number of International Placing Shares expected to be initially available for application under the International Placing represents 90% of the total number of Offer Shares being initially offered under the Global Offering. The International Placing is expected to be fully underwritten by the International Underwriters. Investors subscribing for the International Placing Shares are also required to pay the maximum Offer Price of HK$2.98 per H Share plus a brokerage of 1%, a Stock Exchange trading fee of 0.005% and a SFC transaction levy of 0.0027% of the Offer Price.
Pursuant to a letter dated 14 August 2015 that was issued by NSSF (Shebaojijinfa [2015] No.133), the NSSF instructed us, among other things, to (i) arrange for the sale of the Sale Shares, which shall represent 10% of the Offer Shares to be offered pursuant to the Global Offering; and (ii) remit the proceeds from the sale of the Sale Shares (after deducting the SFC transaction levy and the Stock Exchange trading fee) to an account designated by the NSSF.
— 352 — STRUCTURE OF THE GLOBAL OFFERING
It is expected that the International Underwriters, or selling agents nominated by it, on behalf of our Company, will conditionally place the International Placing Shares at the Offer Price with selected professional, institutional and private investors. Professional and institutional investors generally include brokers, dealers, companies (including fund managers) whose ordinary business involves dealing in shares and other securities and corporate entities which regularly invest in shares and other securities. Private investors applying through banks or other institutions who sought the International Placing Shares in the International Placing may also be allocated the International Placing Shares.
Allocation of the International Placing Shares will be based on a number of factors, including the level and timing of demand and whether or not it is expected that the relevant investor is likely to acquire further H Shares and/or hold or sell its H Shares after the Listing. Such allocation is intended to result in a distribution of the International Placing Shares on a basis which would lead to the establishment of a solid shareholder base to the benefit of the Company and its shareholders as a whole. Investors to whom International Placing Shares are offered will be required to undertake and confirm in the Application Form that he/she has not applied for H Shares under the Hong Kong Public Offering.
Our Company, our Directors, the Sole Sponsor and the Sole Global Coordinator (for itself and on behalf of the Underwriters) are required to take reasonable steps to identify and reject applications under the Hong Kong Public Offering from investors who receive H Shares under the International Placing, and to identify and reject indications of interest in the International Placing from investors who receive H Shares under the Hong Kong Public Offering.
The International Placing is expected to be subject to the conditions as stated in “Conditions of the Hong Kong Public Offering” above.
Hong Kong Public Offering
Our Company is initially offering 24,970,000 Hong Kong Offer Shares for subscription (subject to re-allocation) by the public in Hong Kong under the Hong Kong Public Offering, representing 10% of the total number of Offer Shares offered under the Global Offering. The Hong Kong Public Offering is fully underwritten by the Hong Kong Underwriters. Applicants for the Hong Kong Offer Shares are required on application to pay the maximum Offer Price of HK$2.98 per H Share plus a 1% brokerage, a 0.005% Stock Exchange trading fee and a 0.0027% SFC transaction levy.
The Hong Kong Public Offering is open to all members of the public in Hong Kong. An applicant for H Shares under the Hong Kong Public Offering will be required to give an undertaking and confirmation in the Application Form submitted by him/her that he/she has not applied for nor taken up any H Shares under the International Placing nor otherwise participated in the International Placing. Applicants should note that if such undertaking and/or confirmation given by an applicant is breached and/or is untrue (as the case may be), such applicant’s application under the Hong Kong Public Offering is liable to be rejected.
For allocation purposes only, the number of the Hong Kong Offer Shares will be divided equally into two pools: 12,485,000 H Shares in pool A and 12,485,000 H Shares in pool B. The Hong Kong Offer Shares in pool A will be allocated on an equitable basis to applicants who have applied for the
— 353 — STRUCTURE OF THE GLOBAL OFFERING
Hong Kong Offer Shares in the value of HK$5 million (excluding the brokerage, the Stock Exchange trading fee and the SFC transaction levy thereon) or less. The Hong Kong Offer Shares in pool B will be allocated on an equitable basis to applicants who have applied for Hong Kong Offer Shares in the value of more than HK$5 million (excluding the brokerage, the Stock Exchange trading fee and the SFC transaction levy) and up to the value of pool B.
Investors should be aware that the allocation ratios for applications in the two pools, as well as the allocation ratios for applications in the same pool, are likely to be different. Where one of the pool is under-subscribed, the surplus Hong Kong Offer Shares will be transferred to satisfy demand in the other pool and be allocated accordingly. Applicants can only receive an allocation of Hong Kong Offer Shares from any one pool but not from both pools and can only make applications to either pool A or pool B. Any application made for more than 100% of the Hong Kong Offer Shares initially available under pool A or pool B will be rejected.
Allocation of the Hong Kong Offer Shares to investors under the Hong Kong Public Offering will be based solely on the level of valid applications received under the Hong Kong Public Offering. When there is over-subscription under the Hong Kong Public Offering, allocation of the Hong Kong Offer Shares may involve balloting, which would mean that some applicants may be allotted more Hong Kong Offer Shares than others who have applied for the same number of the Hong Kong Offer Shares, and those applicants who are not successful in the ballot may not receive any Hong Kong Offer Shares.
REALLOCATION AND CLAWBACK MECHANISM
The allocation of the Offer Shares between the International Placing and the Hong Kong Public Offering is subject to re-allocation on the following basis:
(a) if the number of H Shares validly applied for under the Hong Kong Public Offering represents 15 times or more but less than 50 times the number of H Shares initially available for subscription under the Hong Kong Public Offering, then H Shares will be allocated to the Hong Kong Public Offering from the International Placing, so that the total number of H Shares available for subscription under the Hong Kong Public Offering will be increased to 74,910,000 H Shares, representing 30% of the Offer Shares;
(b) if the number of H Shares validly applied for under the Hong Kong Public Offering represents 50 times or more but less than 100 times the number of H Shares initially available for subscription under the Hong Kong Public Offering, then H Shares will be reallocated to the Hong Kong Public Offering from the International Placing, so that the number of H Shares available for subscription under the Hong Kong Public Offering will be increased to 99,880,000 H Shares, representing 40% of the Offer Shares; and
(c) if the number of H Shares validly applied for under the Hong Kong Public Offering represents 100 times or more the number of H Shares initially available for subscription
— 354 — STRUCTURE OF THE GLOBAL OFFERING
under the Hong Kong Public Offering, then H Shares will be reallocated to the Hong Kong Public Offering from the International Placing, so that the number of H Shares available for subscription under the Hong Kong Public Offering will be increased to 124,850,000 H Shares, representing 50% of the Offer Shares.
In all cases, the additional H Shares reallocated to the Hong Kong Public Offering will be allocated equally between pool A and pool B and the number of Offer Shares allocated to the International Placing will be correspondingly reduced.
If the Hong Kong Public Offering is not fully subscribed, the Sole Global Coordinator have the authority to reallocate all or any of the unsubscribed Hong Kong Offer Shares originally included in the Hong Kong Public Offering to the International Placing in such proportions as it deems appropriate. In addition to any mandatory reallocation which may be required, the Sole Global Coordinator may, at its discretion, reallocate Shares initially allocated for the International Placing to the Hong Kong Public Offering to satisfy in whole or in part the valid applications in the Hong Kong Public Offering.
OVER-ALLOTMENT OPTION
In connection with the Global Offering, our Company and the Selling Shareholders are expected to grant to the Sole Global Coordinator the Over-allotment Option which will expire on a date which is 30 days from the date of the last day of lodging application under the Hong Kong Public Offering. Pursuant to the Over-allotment Option, our Company may be required by the Sole Global Coordinator to allot and issue and the Selling Shareholders to sell up to and not more than 37,455,000 additional H Shares (representing 15% of the total number of the Offer Shares initially available under the Global Offering) at the Offer Price to cover over-allocations in the International Placing. The Sole Global Coordinator may also cover such over-allocations by, among other means, purchasing H Shares in the secondary market as may be permitted under the applicable laws and regulatory requirements. Any such secondary market purchases will be made in compliance with all application laws, rules and regulations. If the Over-allotment Option is exercised in full, the additional 37,455,000 H Shares will represent approximately 3.98% of our Company’s enlarged issued share capital immediately after completion of the Global Offering and the exercise of the Over-allotment Option in full. In the event that the Over-allotment Option is exercised, an announcement will be made.
STABILISATION
Stabilisation is a practice used by underwriters in some markets to facilitate the distribution of securities. To stabilise, the underwriters may bid for, or purchase, the newly issued securities in the secondary market, during a specified period of time, to retard and, if possible, prevent a decline in the market price of the securities below the Offer Price. In Hong Kong, the price at which stabilization is effected is not permitted to exceed the Offer Price.
In connection with the Global Offering, the Sole Global Coordinator, as the stabilizing manager, or its affiliates or any person acting for it, on behalf of the Underwriters, may over-allocate or effect transactions which stabilise or maintain the market price of the H Shares at levels above those which might otherwise prevail for a limited period after the Listing Date. The number of H Shares that may be over-allocated will be up to, but not more than, an aggregate of 37,455,000 additional H Shares, being the number of the H Shares that may be issued under the Over-allotment Option. Such
— 355 — STRUCTURE OF THE GLOBAL OFFERING stabilizing actions may include over-allocating International Placing Shares and covering such over-allocations by exercising the Over-allotment Option or by making purchases in the secondary market. However, there is no obligation on the Sole Global Coordinator to do this. Such stabilisation action, if commenced, may be discontinued at any time, and is required to be brought to an end after a limited period. Such transactions may be effected in all jurisdictions where it is permissible to do so, in each case in compliance with all applicable laws and regulatory requirements.
Subject to and under the Securities and Futures (Price Stabilizing) Rules of the SFO, the Sole Global Coordinator (for itself and on behalf of the Underwriters) may take all or any of the following actions (“primary stabilizing action”) with respect to any H Shares during the stabilisation period, which should end on Wednesday, 20 January 2016:
(1) purchase, or agree to purchase, any of the H Shares;
(2) offer or attempt to do anything as described in paragraph (1), for the sole purpose of preventing or minimising any reduction in the market price of the H Shares. The Sole Global Coordinator (for itself and on behalf of the Underwriters) may also, in connection with any primary stabilizing action, take all or any of the following actions:
(a) for the purpose of preventing or minimising any reduction in the market price of the H Shares;
(i) allocate a greater number of H Shares than the number that is initially offered under the Global Offering; or
(ii) sell or agree to sell H Shares so as to establish a short position in them;
(b) pursuant to an option or other right to purchase or subscribe for H Shares, purchase or subscribe for or agree to purchase or subscribe for H Shares in order to close out any position established under paragraph (a);
(c) sell or agree to sell any H Shares acquired by it in the course of the primary stabilizing action in order to liquidate any position that has been established by such action; and/or
(d) offer or attempt to do anything as described in paragraphs (a)(ii), (b) or (c).
Investors should be aware that:
• the Sole Global Coordinator (for itself and on behalf of the Underwriters) may, in connection with the stabilizing action, maintain a long position in the H Shares;
• there is no certainty regarding the extent to which and the time period for which the Sole Global Coordinator will maintain such a long position;
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• liquidation of such a long position by the Sole Global Coordinator may have an adverse impact on the market price of our H Shares;
• stabilizing action cannot be taken to support the price of our H Shares for longer than the stabilizing period which begins on the Listing Date and ends on the 30th day after the last day for the lodging of applications under the Hong Kong Public Offering, that the stabilizing period is expected to expire on Wednesday, 20 January 2016, and that after this date, when no further stabilizing action may be taken, demand for our H Shares, and therefore its price could fall; and
• the price of our H Shares cannot be assured to stay at or above the Offer Price by the taking of any stabilizing action; and that stabilizing bids may be made or transactions effected in the course of the stabilizing action at any price at or below the Offer Price, which means that stabilizing bids may be made or transactions effected at a price below the price the investor has paid for our H Shares.
Our Company will ensure or procure that an announcement in compliance with the Securities and Futures (Price Stabilising) Rules of SFO will be made within seven days of the expiration of the stabilisation period.
DEALING ARRANGEMENTS
Assuming the Hong Kong Public Offering becomes unconditional at or before 8:00 a.m. in Hong Kong on Wednesday, 30 December 2015, it is expected that dealings in the H Shares on the Stock Exchange will commence on Wednesday, 30 December 2015.
The H Shares will be traded in board lots of 1,000 H Shares each. The stock code of the Company is 3678.
— 357 — HOW TO APPLY FOR HONG KONG OFFER SHARES
1. HOW TO APPLY
If you apply for Hong Kong Offer Shares, then you may not apply for or indicate an interest for International Placing Shares.
To apply for Hong Kong Offer Shares, you may:
• use a WHITE or YELLOW Application Form;
• apply online via the White Form eIPO service at www.eipo.com.hk;or
• electronically cause HKSCC Nominees to apply on your behalf.
None of you or your joint applicant(s) may make more than one application, except where you are a nominee and provide the required information in your application. Our Company, the Sole Global Coordinator, the White Form eIPO Service Provider and their respective agents may reject or accept any application in full or in part for any reason at their discretion.
2. WHO CAN APPLY
You can apply for Hong Kong Offer Shares on a WHITE or YELLOW Application Form if you or the person(s) for whose benefit you are applying:
• are 18 years of age or older;
• have a Hong Kong address;
• are outside the United States, and are not a United States Person (as defined in Regulation S under the U.S. Securities Act); and
• are not a legal or natural person of the PRC (unless permitted by the relevant rules and regulations).
If you apply online through the White Form eIPO service, in addition to the above, you must also: (i) have a valid Hong Kong identity card number and (ii) provide a valid e-mail address and a contact telephone number.
If you are a firm, the application must be in the individual members’ names. If you are a body corporate, the Application Form must be signed by a duly authorised officer, who must state his or her representative capacity, and stamped with your corporation’s chop.
If an application is made by a person under a power of attorney, the Sole Global Coordinator may accept it at its discretion, and on any conditions it thinks fit, including evidence of the attorney’s authority.
— 358 — HOW TO APPLY FOR HONG KONG OFFER SHARES
The number of joint applicants may not exceed four and they may not apply by means of White Form eIPO service for the Hong Kong Offer Shares.
Unless permitted by the Listing Rules, you cannot apply for any Hong Kong Offer Shares if you are:
• an existing beneficial owner of Shares in our Company and/or any of its subsidiaries;
• a Director or chief executive officer of our Company and/or any of its subsidiaries;
• a connected person (as defined in the Listing Rules) of our Company or will become a connected person of our Company immediately upon completion of the Global Offering;
• an associate (as defined in the Listing Rules) of any of the above; and
• have been allocated or have applied for any International Placing Shares or otherwise participate in the International Placing.
3. APPLYING FOR HONG KONG OFFER SHARES
Which Application Channel to Use
For Hong Kong Offer Shares to be issued in your own name, use a WHITE Application Form or apply online through www.eipo.com.hk.
For Hong Kong Offer Shares to be issued in the name of HKSCC Nominees and deposited directly into CCASS to be credited to your or a designated CCASS Participant’s stock account, use a YELLOW Application Form or electronically instruct HKSCC via CCASS to cause HKSCC Nominees to apply for you.
Where to Collect the Application Forms
You can collect a WHITE Application Form and a prospectus during normal business hours from 9:00 a.m. on Wednesday, 16 December 2015 until 12:00 noon on Monday, 21 December 2015 from:
(1) any of the following offices of the Hong Kong Underwriters:
Guotai Junan Securities (Hong Kong) Limited 27th Floor, Low Block Grand Millennium Plaza 181 Queen’s Road Central Hong Kong
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Ever-Long Securities Company Limited 18th Floor, Dah Sing Life Building 99-105 Des Voeux Road Central Hong Kong
RHB Securities Hong Kong Limited 12th Floor, World-Wide House 19 Des Voeux Road Central Hong Kong
(2) any of the following branches of:
(a) Bank of China (Hong Kong) Limited
Branch Name Address
Hong Kong Island North Point 193-209 King’s Road, (King’s Centre) Branch North Point
Aberdeen Branch 25 Wu Pak Street, Aberdeen
Kowloon Yau Ma Tei Branch 471 Nathan Road, Yau Ma Tei
East Point City Branch Shop 101, East Point City, Tseung Kwan O
New Territories Castle Peak Road 162 Castle Peak Road, (Yuen Long) Branch Yuen Long
(b) Wing Lung Bank Limited
Branch Name Address
Hong Kong Island Head Office 45 Des Voeux Road Central, Central
Johnston Road Branch 118 Johnston Road, Wanchai
Kennedy Town Branch 28 Catchick Street, Kennedy Town
Kowloon Tsim Sha Tsui Branch 4 Carnarvon Road, Tsim Sha Tsui
New Territories Shatin Plaza Branch 21 Shatin Centre Street, Shatin
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You can collect a YELLOW Application Form and a prospectus during normal business hours from 9:00 a.m. on Wednesday, 16 December 2015 until 12:00 noon on Monday, 21 December 2015 from:
• the Depository Counter of HKSCC at 1/F, One & Two Exchange Square, 8 Connaught Place, Central, Hong Kong; or
• your stockbroker, who may have such Application Forms and prospectus available.
Time for Lodging Application Forms
Your completed WHITE or YELLOW Application Form, together with a cheque or a banker’s cashier order attached and marked payable to Bank of China (Hong Kong) Nominees Limited — Holly Futures Public Offer for the payment, should be deposited in the special collection boxes provided at any of the branches of the receiving bank listed above, at the following times:
Wednesday, 16 December 2015 — 9:00 a.m. to 5:00 p.m. Thursday, 17 December 2015 — 9:00 a.m. to 5:00 p.m. Friday, 18 December 2015 — 9:00 a.m. to 5:00 p.m. Saturday, 19 December 2015 — 9:00 a.m. to 1:00 p.m. Monday, 21 December 2015 — 9:00 a.m. to 12:00 noon
The application lists will be open from 11:45 a.m. to 12:00 noon on Monday, 21 December 2015, the last application day or such later time as described in “10. Effect of Bad Weather on the Opening of the Applications Lists” below.
4. TERMS AND CONDITIONS OF AN APPLICATION
Follow the detailed instructions in the Application Form carefully; otherwise, your application may be rejected.
By submitting an Application Form or applying through the White Form eIPO service, among other things, you:
(i) undertake to execute all relevant documents and instruct and authorise our Company and/or the Sole Global Coordinator (or their agents or nominees), as agents of our Company, to execute any documents for you and to do on your behalf all things necessary to register any Hong Kong Offer Shares allocated to you in your name or in the name of HKSCC Nominees as required by the Articles of Association;
(ii) agree to comply with the Companies Ordinance, the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the PRC Company Law, the Special Regulations and the Articles of Association;
(iii) confirm that you have read the terms and conditions and application procedures set out in this prospectus and in the Application Form and agree to be bound by them;
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(iv) confirm that you have received and read this prospectus and have only relied on the information and representations contained in this prospectus in making your application and will not rely on any other information or representations except those in any supplement to this prospectus;
(v) confirm that you are aware of the restrictions on the Global Offering in this prospectus;
(vi) agree that none of our Company, the Sole Sponsor, the Sole Global Coordinator, the Underwriters, their respective directors, officers, employees, partners, agents, advisers and any other parties involved in the Global Offering is or will be liable for any information and representations not in this prospectus (and any supplement to it);
(vii) undertake and confirm that you or the person(s) for whose benefit you have made the application have not applied for or taken up, or indicated an interest for, and will not apply for or take up, or indicate an interest for, any Offer Shares under the International Placing nor participated in the International Placing;
(viii) agree to disclose to our Company, our H Share Registrar, receiving bank, the Sole Sponsor, the Sole Global Coordinator, the Underwriters and/or their respective advisers and agents any personal data which they may require about you and the person(s) for whose benefit you have made the application;
(ix) if the laws of any place outside Hong Kong apply to your application, agree and warrant that you have complied with all such laws and none of our Company, the Sole Sponsor, the Sole Global Coordinator and the Underwriters nor any of their respective officers or advisers will breach any law outside Hong Kong as a result of the acceptance of your offer to purchase, or any action arising from your rights and obligations under the terms and conditions contained in this prospectus and the Application Form;
(x) agree that once your application has been accepted, you may not rescind it because of an innocent misrepresentation;
(xi) agree that your application will be governed by the laws of Hong Kong;
(xii) represent, warrant and undertake that (i) you understand that the Hong Kong Offer Shares have not been and will not be registered under the U.S. Securities Act; and (ii) you and any person for whose benefit you are applying for the Hong Kong Offer Shares are outside the United States (as defined in Regulation S) or are a person described in paragraph (h)(3) of Rule 902 of Regulation S;
(xiii) warrant that the information you have provided is true and accurate;
(xiv) agree to accept the Hong Kong Offer Shares applied for, or any lesser number allocated to you under the application;
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(xv) authorise our Company to place your name(s) or the name of the HKSCC Nominees, on our Company’s register of members as the holder(s) of any Hong Kong Offer Shares allocated to you, and our Company and/or its agents to send any H Share certificate(s) and/or any refund cheque(s) to you or the first-named applicant for joint application by ordinary post at your own risk to the address stated on the application, unless you fulfill the criteria mentioned in “Personal Collection” section in the Prospectus to collect the H Share certificate(s) and/or refund cheque(s) in person;
(xvi) declare and represent that this is the only application made and the only application intended by you to be made to benefit you or the person for whose benefit you are applying;
(xvii) understand that our Company, the Sole Sponsor and the Sole Global Coordinator, will rely on your declarations and representations in deciding whether or not to make any allotment of any of the Hong Kong Offer Shares to you and that you may be prosecuted for making a false declaration;
(xviii) (if the application is made for your own benefit) warrant that no other application has been or will be made for your benefit on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or to the White Form eIPO service by you or by any one as your agent or by any other person; and
(xix) (if you are making the application as an agent for the benefit of another person) warrant that (i) no other application has been or will be made by you as agent for or for the benefit of that person or by that person or by any other person as agent for that person on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC; and (ii) you have due authority to sign the Application Form or give electronic application instructions on behalf of that other person as their agent.
Additional Instructions for Yellow Application Form
You may refer to the Yellow Application Form for details.
5. APPLYING THROUGH WHITE FORM eIPO SERVICE
General
Individuals who meet the criteria in “2. Who can apply” section, may apply through the White Form eIPO service for the Offer Shares to be allotted and registered in their own names through the designated website at www.eipo.com.hk.
Detailed instructions for application through the White Form eIPO service are on the designated website. If you do not follow the instructions, your application may be rejected and may not be submitted to our Company. If you apply through the designated website, you authorise the White Form eIPO Service Provider to apply on the terms and conditions in this prospectus, as supplemented and amended by the terms and conditions of the White Form eIPO service.
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Time for Submitting Applications under the White Form eIPO
You may submit your application to the White Form eIPO Service Provider at www.eipo.com.hk (24 hours daily, except on the last application day) from 9:00 a.m. Wednesday, 16 December 2015 until 11:30 a.m. Monday, 21 December 2015, and the latest time for completing full payment of application monies in respect of such applications will be 12:00 noon on Monday, 21 December 2015, or such later time under the “Effects of Bad Weather on the Opening of the Applications Lists” below.
No Multiple Applications
If you apply by means of White Form eIPO, once you complete payment in respect of any electronic application instruction given by you or for your benefit through the White Form eIPO service to make an application for Hong Kong Offer Shares, an actual application shall be deemed to have been made. For the avoidance of doubt, giving an electronic application instruction under White Form eIPO more than once and obtaining different application reference numbers without effecting full payment in respect of a particular reference number will not constitute an actual application.
If you are suspected of submitting more than one application through the White Form eIPO service or by any other means, all of your applications are liable to be rejected.
Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance
For the avoidance of doubt, the Company and all other parties involved in the preparation of this prospectus acknowledge that each applicant who gives or causes to give electronic application instructions is a person who may be entitled to compensation under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (as applied by Section 342E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
Environmental Protection
The obvious advantage of White Form eIPO is to save the use of papers via the self-serviced and electronic application process. Computershare Hong Kong Investor Services Limited, being the White Form eIPO Service Provider, will contribute HK$2.00 for each “Holly Futures Co., Ltd.” White Form eIPO application submitted via www.eipo.com.hk to support the funding of “Source of Dong Jiang — Hong Kong Forest” project initiated by Friends of the Earth (HK).
6. APPLYING BY GIVING ELECTRONIC APPLICATION INSTRUCTIONS TO HKSCC VIA CCASS
General
CCASS Participants may give electronic application instructions to apply for the Hong Kong Offer Shares and to arrange payment of the monies due on application and payment of refunds under their participant agreements with HKSCC and the General Rules of CCASS and the CCASS Operational Procedures.
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If you are a CCASS Investor Participant, you may give these electronic application instructions through the CCASS Phone System by calling 2979 7888 or through the CCASS Internet System (https://ip.ccass.com) (using the procedures in HKSCC’s “An Operating Guide for Investor Participants” in effect from time to time).
HKSCC can also input electronic application instructions for you if you go to:
Hong Kong Securities Clearing Company Limited Customer Service Centre 1/F, One & Two Exchange Square 8 Connaught Place, Central Hong Kong and complete an input request form.
You can also collect a prospectus from this address.
If you are not a CCASS Investor Participant, you may instruct your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give electronic application instructions via CCASS terminals to apply for the Hong Kong Offer Shares on your behalf.
You will be deemed to have authorised HKSCC and/or HKSCC Nominees to transfer the details of your application to our Company, the Sole Global Coordinator and our H Share Registrar.
Giving Electronic Application Instructions to HKSCC via CCASS
Where you have given electronic application instructions to apply for the Hong Kong Offer Shares and a WHITE Application Form is signed by HKSCC Nominees on your behalf:
(i) HKSCC Nominees will only be acting as a nominee for you and is not liable for any breach of the terms and conditions of the WHITE Application Form or this prospectus;
(ii) HKSCC Nominees will do the following things on your behalf:
• agree that the Hong Kong Offer Shares to be allotted shall be issued in the name of HKSCC Nominees and deposited directly into CCASS for the credit of the CCASS Participant’s stock account on your behalf or your CCASS Investor Participant’s stock account;
• agree to accept the Hong Kong Offer Shares applied for or any lesser number allocated;
• undertake and confirm that you have not applied for or taken up, will not apply for or take up, or indicate an interest for, any Offer Shares under the International Placing;
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• (if the electronic application instructions are given for your benefit) declare that only one set of electronic application instructions has been given for your benefit;
• (if you are an agent for another person) declare that you have only given one set of electronic application instructions for the other person’s benefit and are duly authorised to give those instructions as their agent;
• confirm that you understand that our Company, our Directors and the Sole Global Coordinator will rely on your declarations and representations in deciding whether or not to make any allotment of any of the Hong Kong Offer Shares to you and that you may be prosecuted if you make a false declaration;
• authorise our Company to place HKSCC Nominees’ name on our Company’s register of members as the holder of the Hong Kong Offer Shares allocated to you and to send H Share certificate(s) and/or refund monies under the arrangements separately agreed between us and HKSCC;
• confirm that you have read the terms and conditions and application procedures set out in this prospectus and agree to be bound by them;
• confirm that you have received and/or read a copy of this prospectus and have relied only on the information and representations in this prospectus in causing the application to be made, save as set out in any supplement to this prospectus;
• agree that none of our Company, the Sole Global Coordinator, the Sole Bookrunner, the Sole Lead Manager, the Underwriters, their respective directors, officers, employees, partners, agents, advisers and any other parties involved in the Global Offering, is or will be liable for any information and representations not contained in this prospectus (and any supplement to it);
• agree to disclose your personal data to our Company, our H Share Registrar, the receiving bank, the Sole Global Coordinator, the Underwriters and/or its respective advisers and agents;
• agree (without prejudice to any other rights which you may have) that once HKSCC Nominees’ application has been accepted, it cannot be rescinded for innocent misrepresentation;
• agree that any application made by HKSCC Nominees on your behalf is irrevocable before the fifth day after the time of the opening of the application lists (excluding any day which is a Saturday, Sunday or public holiday in Hong Kong), such agreement to take effect as a collateral contract with us and to become binding when you give the instructions and such collateral contract to be in consideration of our Company agreeing that it will not offer any Hong Kong Offer Shares to any person before the fifth day after the time of the opening of the application lists (excluding any day which is a Saturday, Sunday or public holiday in Hong Kong), except by means of one
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of the procedures referred to in this prospectus. However, HKSCC Nominees may revoke the application before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is a Saturday, Sunday or public holiday in Hong Kong) if a person responsible for this prospectus under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance gives a public notice under that section which excludes or limits that person’s responsibility for this prospectus;
• agree that once HKSCC Nominees’ application is accepted, neither that application nor your electronic application instructions can be revoked, and that acceptance of that application will be evidenced by our Company’s announcement of the Hong Kong Public Offering results;
• agree to the arrangements, undertakings and warranties under the participant agreement between you and HKSCC, read with the General Rules of CCASS and the CCASS Operational Procedures, for giving electronic application instructions to apply for Hong Kong Offer Shares;
• agree with our Company, for itself and for the benefit of each Shareholder (and so that our Company will be deemed by its acceptance in whole or in part of the application by HKSCC Nominees to have agreed, for itself and on behalf of each of the Shareholders, with each CCASS Participant giving electronic application instructions) to observe and comply with the Companies Ordinance, the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the PRC Company Law, the Special Regulation and the Articles of Association;
• agree with our Company, for itself and for the benefit of each Shareholder of our Company and each director, supervisor, manager and other senior officer of our Company (and so that our Company will be deemed by its acceptance in whole or in part of the application to have agreed, for itself and on behalf of each of the shareholders of our Company and each director, supervisor, manager and other senior officer of our Company, with each CCASS Participant giving electronic application instructions):
(a) to refer all differences and claims arising from the Articles of Association or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning the affairs of our Company to arbitration in accordance with the Articles of Association of our Company;
(b) that any award made in such arbitration shall be final and conclusive; and
(c) that the arbitration tribunal may conduct hearings in open sessions and publish its award;
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• agree with our Company (for our Company itself and for the benefit of each of the Shareholder of our Company) that H Shares in our Company are freely transferable by their holders;
• authorise our Company to enter into a contract on our behalf with each director and officer of our Company whereby each such director and officer undertakes to observe and comply with his obligations to shareholders stipulated in the Articles of Association of our Company; and
• agree that your application, any acceptance of it and the resulting contract will be governed by the Laws of Hong Kong.
Effect of Giving Electronic Application Instructions to HKSCC via CCASS
By giving electronic application instructions to HKSCC or instructing your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give such instructions to HKSCC, you (and, if you are joint applicants, each of you jointly and severally) are deemed to have done the following things. Neither HKSCC nor HKSCC Nominees shall be liable to our Company or any other person in respect of the things mentioned below:
• instructed and authorised HKSCC to cause HKSCC Nominees (acting as nominee for the relevant CCASS Participants) to apply for the Hong Kong Offer Shares on your behalf;
• instructed and authorised HKSCC to arrange payment of the maximum Offer Price, brokerage, SFC transaction levy and the Stock Exchange trading fee by debiting your designated bank account and, in the case of a wholly or partially unsuccessful application and/or if the Offer Price is less than the maximum Offer Price per Offer Share initially paid on application, refund of the application monies (including brokerage, SFC transaction levy and the Stock Exchange trading fee) by crediting your designated bank account; and
• instructed and authorised HKSCC to cause HKSCC Nominees to do on your behalf all the things stated in the WHITE Application Form and in this prospectus.
Minimum Purchase Amount and Permitted Numbers
You may give or cause your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give electronic application instructions for a minimum of 1,000 Hong Kong Offer Shares. Instructions for more than 1,000 Hong Kong Offer Shares must be in one of the numbers set out in the table in the Application Forms. No application for any other number of Hong Kong Offer Shares will be considered and any such application is liable to be rejected.
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Time for Inputting Electronic Application Instructions
CCASS Clearing/Custodian Participants can input electronic application instructions at the following times on the following dates:
Wednesday, 16 December 2015 — 9:00 a.m. to 8:30 p.m.(1) Thursday, 17 December 2015 — 8:00 a.m. to 8:30 p.m.(1) Friday, 18 December 2015 — 8:00 a.m. to 8:30 p.m.(1) Saturday, 19 December 2015 — 8:00 a.m. to 1:00 p.m.(1) Monday, 21 December 2015 — 8:00 a.m.(1) to 12:00 noon
Note:
(1) These times are subject to change as HKSCC may determine from time to time with prior notification to CCASS Clearing/Custodian Participants.
CCASS Investor Participants can input electronic application instructions from 9:00 a.m. on Wednesday, 16 December 2015 until 12:00 noon on Monday, 21 December 2015 (24 hours daily, except on the last application day).
The latest time for inputting your electronic application instructions will be 12:00 noon on Monday, 21 December 2015, the last application day or such later time as described in “Effect of Bad Weather on the Opening of the Application Lists” below.
No Multiple Applications
If you are suspected of having made multiple applications or if more than one application is made for your benefit, the number of Hong Kong Offer Shares applied for by HKSCC Nominees will be automatically reduced by the number of Hong Kong Offer Shares for which you have given such instructions and/or for which such instructions have been given for your benefit. Any electronic application instructions to make an application for the Hong Kong Offer Shares given by you or for your benefit to HKSCC shall be deemed to be an actual application for the purposes of considering whether multiple applications have been made.
Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance
For the avoidance of doubt, our Company and all other parties involved in the preparation of this prospectus acknowledge that each CCASS Participant who gives or causes to give electronic application instructions is a person who may be entitled to compensation under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (as applied by Section 342E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
Personal Data
The section of the Application Form headed “Personal Data” applies to any personal data held by our Company, the H Share Registrar, the receiving banks, the Sole Global Coordinator, the Sole Bookrunner, the Sole Lead Manager, the Underwriters and any of their respective advisers and agents about you in the same way as it applies to personal data about applicants other than HKSCC Nominees.
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7. WARNING FOR ELECTRONIC APPLICATIONS
The subscription of the Hong Kong Offer Shares by giving electronic application instructions to HKSCC is only a facility provided to CCASS Participants. Similarly, the application for Hong Kong Offer Shares through the White Form eIPO service is also only a facility provided by the White Form eIPO Service Provider to public investors. Such facilities are subject to capacity limitations and potential service interruptions and you are advised not to wait until the last application day in making your electronic applications. Our Company, the Directors, the Sole Bookrunner, the Sole Sponsor, the Sole Global Coordinator and the Underwriters take no responsibility for such applications and provide no assurance that any CCASS Participant or person applying through the White Form eIPO service will be allotted any Hong Kong Offer Shares.
To ensure that CCASS Investor Participants can give their electronic application instructions, they are advised not to wait until the last minute to input their instructions to the systems. In the event that CCASS Investor Participants have problems in the connection to CCASS Phone System/CCASS Internet System for submission of electronic application instructions, they should either (i) submit a WHITE or YELLOW Application Form, or (ii) go to HKSCC’s Customer Service Centre to complete an input request form for electronic application instructions before 12:00 noon on Monday, 21 December 2015.
8. HOW MANY APPLICATIONS CAN YOU MAKE
Multiple applications for the Hong Kong Offer Shares are not allowed except by nominees. If you are a nominee, in the box on the Application Form marked “For nominees” you must include:
• an account number; or
• some other identification code, for each beneficial owner or, in the case of joint beneficial owners, for each joint beneficial owner. If you do not include this information, the application will be treated as being made for your benefit.
All of your applications will be rejected if more than one application on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or through White Form eIPO service, is made for your benefit (including the part of the application made by HKSCC Nominees acting on electronic application instructions). If an application is made by an unlisted company and:
• the principal business of that company is dealing in securities; and
• you exercise statutory control over that company, then the application will be treated as being for your benefit.
“Unlisted company” means a company with no equity securities listed on the Stock Exchange.
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“Statutory control” means you:
• control the composition of the board of directors of the company;
• control more than half of the voting power of the company; or
• hold more than half of the issued share capital of the company (not counting any part of it which carries no right to participate beyond a specified amount in a distribution of either profits or capital).
9. HOW MUCH ARE THE HONG KONG OFFER SHARES
The WHITE and YELLOW Application Forms have tables showing the exact amount payable for H Shares.
You must pay the maximum Offer Price, brokerage, SFC transaction levy and the Stock Exchange trading fee in full upon application for H Shares under the terms set out in the Application Forms.
You may submit an application using a WHITE or YELLOW Application Form or through the White Form eIPO service in respect of a minimum of 1,000 Hong Kong Offer Shares. Each application or electronic application instruction in respect of more than 1,000 Hong Kong Offer Shares must be in one of the numbers set out in the table in the Application Form, or as otherwise specified on the designated website at www.eipo.com.hk.
If your application is successful, brokerage will be paid to the Exchange Participants (as defined in the Listing Rules), and the SFC transaction levy and the Stock Exchange trading fee are paid to the Stock Exchange (in the case of the SFC transaction levy, collected by the Stock Exchange on behalf of the SFC).
For further details on the Offer Price, see the section headed “Structure of the Global Offering — Determination of the Offer Price” in this prospectus.
10. EFFECT OF BAD WEATHER ON THE OPENING OF THE APPLICATION LISTS
The application lists will not open if there is:
• a tropical cyclone warning signal number 8 or above; or
• a “black” rainstorm warning, in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Monday, 21 December 2015. Instead they will open between 11:45 a.m. and 12:00 noon on the next business day which does not have either of those warnings in Hong Kong in force at any time between 9:00 a.m. and 12:00 noon.
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If the application lists do not open and close on Monday, 21 December 2015 or if there is a tropical cyclone warning signal number 8 or above or a “black” rainstorm warning signal in force in Hong Kong that may affect the dates mentioned in the section headed “Expected Timetable” in this prospectus, an announcement will be made in such event.
11. PUBLICATION OF RESULTS
Our Company expects to announce the final Offer Price, the level of indication of interest in the International Placing, the level of applications in the Hong Kong Public Offering and the basis of allocation of the Hong Kong Offer Shares on Tuesday, 29 December 2015 in The Standard (in English) and The Hong Kong Economic Times (in Chinese) on our Company’s website at www.ftol.com.cn, and the website of the Stock Exchange at www.hkexnews.hk.
The results of allocations and the Hong Kong identity card/passport/Hong Kong business registration numbers of successful applicants under the Hong Kong Public Offering will be available at the times and date and in the manner specified below:
• in the announcement to be posted on our Company’s website at www.ftol.com.cn and the Stock Exchange’s website at www.hkexnews.hk by no later than 8:00 a.m. on Tuesday, 29 December 2015;
• from the designated results of allocations website at www.iporesults.com.hk with a “search by ID” function on a 24-hour basis from 8:00 a.m. on Tuesday, 29 December 2015 to 12:00 midnight on Monday, 4 January 2016;
• by telephone enquiry line by calling 2862 8669 between 9:00 a.m. and 10:00 p.m. from Tuesday, 29 December 2015 to Friday, 1 January 2016; and
• in the special allocation results booklets which will be available for inspection during opening hours from Tuesday, 29 December 2015 to Thursday, 31 December 2015 at all the receiving bank branches.
If our Company accepts your offer to purchase (in whole or in part), which it may do by announcing the basis of allocations and/or making available the results of allocations publicly, there will be a binding contract under which you will be required to purchase the Hong Kong Offer Shares if the conditions of the Global Offering are satisfied and the Global Offering is not otherwise terminated. Further details are contained in the section headed “Structure of the Global Offering” in this prospectus.
You will not be entitled to exercise any remedy of rescission for innocent misrepresentation at any time after acceptance of your application. This does not affect any other right you may have.
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12. CIRCUMSTANCES IN WHICH YOU WILL NOT BE ALLOTTED HONG KONG OFFER SHARES
You should note the following situations in which the Hong Kong Offer Shares will not be allotted to you:
(i) If your application is revoked:
By completing and submitting an Application Form or giving electronic application instructions to HKSCC or to White Form eIPO Service Provider, you agree that your application or the application made by HKSCC Nominees on your behalf cannot be revoked on or before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is a Saturday, Sunday or public holiday in Hong Kong). This agreement will take effect as a collateral contract with our Company.
Your application or the application made by HKSCC Nominees on your behalf may only be revoked on or before such fifth day if a person responsible for this prospectus under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (as applied by Section 342E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance) gives a public notice under that section which excludes or limits that person’s responsibility for this prospectus.
If any supplement to this prospectus is issued, applicants who have already submitted an application will be notified that they have to confirm their applications. If applicants have been so notified but have not confirmed their applications in accordance with the procedure to be notified, all unconfirmed applications will be deemed revoked.
If your application or the application made by HKSCC Nominees on your behalf has been accepted, it cannot be revoked. For this purpose, acceptance of applications which are not rejected will be constituted by notification in the press of the results of allocation, and where such basis of allocation is subject to certain conditions or provides for allocation by ballot, such acceptance will be subject to the satisfaction of such conditions or results of the ballot respectively.
(ii) If our Company or its agents exercise their discretion to reject your application:
Our Company, the Sole Global Coordinator, the White Form eIPO Service Provider and their respective agents and nominees have full discretion to reject or accept any application, or to accept only part of any application, without giving any reasons.
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(iii) If the allotment of Hong Kong Offer Shares is void:
The allotment of Hong Kong Offer Shares will be void if the Listing Committee of the Stock Exchange does not grant permission to list the H Shares either:
• within three weeks from the closing date of the application lists; or
• within a longer period of up to six weeks if the Listing Committee notifies our Company of that longer period within three weeks of the closing date of the application lists.
(iv) If:
• you make multiple applications or suspected multiple applications;
• you or the person for whose benefit you are applying have applied for or taken up, or indicated an interest for, or have been or will be placed or allocated (including conditionally and/or provisionally) Hong Kong Offer Shares and International Placing Shares;
• your Application Form is not completed in accordance with the stated instructions;
• your electronic application instructions through the White Form eIPO service are not completed in accordance with the instructions, terms and conditions on the designated website;
• your payment is not made correctly or the cheque or banker ’s cashier order paid by you is dishonoured upon its first presentation;
• the Underwriting Agreements do not become unconditional or are terminated;
• our Company or the Sole Global Coordinator believe that by accepting your application, it would violate applicable securities or other laws, rules or regulations; or
• your application is for more than 50% of the Hong Kong Offer Shares initially offered under the Hong Kong Public Offering.
— 374 — HOW TO APPLY FOR HONG KONG OFFER SHARES
13. REFUND OF APPLICATION MONIES
If an application is rejected, not accepted or accepted in part only, or if the Offer Price as finally determined is less than the maximum offer price of HK$2.98 per Offer Share (excluding brokerage, SFC transaction levy and the Stock Exchange trading fee thereon), or if the conditions of the Hong Kong Public Offering are not fulfilled in accordance with the section headed “Structure of the Global Offering — Conditions of the Hong Kong Public Offering” in this prospectus or if any application is revoked, the application monies, or the appropriate portion thereof, together with the related brokerage, SFC transaction levy and the Stock Exchange trading fee, will be refunded, without interest or the cheque or banker’s cashier order will not be cleared.
Any refund of your application monies will be made on Tuesday, 29 December 2015.
14. DISPATCH/COLLECTION OF H SHARE CERTIFICATES AND REFUND MONIES
You will receive one H Share certificate for all Hong Kong Offer Shares allotted to you under the Hong Kong Public Offering (except pursuant to applications made on YELLOW Application Forms or by electronic application instructions to HKSCC via CCASS where the H Share certificates will be deposited into CCASS as described below).
No temporary document of title will be issued in respect of the H Shares. No receipt will be issued for sums paid on application. If you apply by WHITE or YELLOW Application Form, subject to personal collection as mentioned below, the following will be sent to you (or, in the case of joint applicants, to the first-named applicant) by ordinary post, at your own risk, to the address specified on the Application Form:
• H Share certificate(s) for all the Hong Kong Offer Shares allotted to you (for YELLOW application Forms, H Share certificates will be deposited into CCASS as described below); and
• refund cheque(s) crossed “Account Payee Only” in favour of the applicant (or, in the case of joint applicants, the first-named applicant) for (i) all or the surplus application monies for the Hong Kong Offer Shares, wholly or partially unsuccessfully applied for; and/or (ii) the difference between the Offer Price and the maximum Offer Price per Offer Share paid on application in the event that the Offer Price is less than the maximum Offer Price (including brokerage, SFC transaction levy and the Stock Exchange trading fee but without interest). Part of the Hong Kong identity card number/ passport number, provided by you or the first named applicant (if you are joint applicants), may be printed on your refund cheque, if any. Your banker may require verification of your Hong Kong identity card number/passport number before encashment of your refund cheque(s). Inaccurate completion of your Hong Kong identity card number/passport number may invalidate or delay encashment of your refund cheque(s).
— 375 — HOW TO APPLY FOR HONG KONG OFFER SHARES
Subject to arrangement on dispatch/collection of H Share certificates and refund monies as mentioned below, any refund cheques and H Share certificates are expected to be posted on Tuesday, 29 December 2015. The right is reserved to retain any H Share certificate(s) and any surplus application monies pending clearance of cheque(s) or banker’s cashier’s order(s).
H Share certificates will only become valid at 8:00 a.m. on Wednesday, 30 December 2015 provided that the Global Offering has become unconditional and the right of termination described in the section headed “Underwriting” in this prospectus has not been exercised. Investors who trade H Shares prior to the receipt of H Share certificates or the H Share certificates becoming valid do so at their own risk.
Personal Collection
(i) If you apply using a WHITE Application Form
If you apply for 1,000,000 or more Hong Kong Offer Shares and have provided all information required by your Application Form, you may collect your refund cheque(s) and/or H Share certificate(s), from Computershare Hong Kong Investor Services Limited at Shops 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 Tuesday, 29 December 2015 or such other date as notified by us in the newspapers.
If you are an individual who is eligible for personal collection, you must not authorise any other person to collect for you. If you are a corporate applicant which is eligible for personal collection, your authorised representative must bear a letter of authorisation from your corporation stamped with your corporation’s chop. Both individuals and authorised representatives must produce, at the time of collection, evidence of identity acceptable to the H Share Registrar.
If you do not collect your refund cheque(s) and/or H Share certificate(s) personally within the time specified for collection, they will be dispatched promptly to the address specified in your Application Form by ordinary post at your own risk.
If you apply for less than 1,000,000 Hong Kong Offer Shares, your refund cheque(s) and/or H Share certificate(s) will be sent to the address on the relevant Application Form on Tuesday, 29 December 2015, by ordinary post and at your own risk.
(ii) If you apply using a YELLOW Application Form
If you apply for 1,000,000 Hong Kong Offer Shares or more, please follow the same instructions as described above. If you have applied for less than 1,000,000 Hong Kong Offer Shares, your refund cheque(s) will be sent to the address on the relevant Application Form on Tuesday, 29 December 2015, by ordinary post and at your own risk.
— 376 — HOW TO APPLY FOR HONG KONG OFFER SHARES
If you apply by using a YELLOW Application Form and your application is wholly or partially successful, your H Share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for credit to your or the designated CCASS Participant’s stock account as stated in your Application Form on Tuesday, 29 December 2015, or upon contingency, on any other date determined by HKSCC or HKSCC Nominees.
• If you apply through a designated CCASS participant (other than a CCASS investor participant)
For Hong Kong Offer Shares credited to your designated CCASS participant’s stock account (other than CCASS Investor Participant), you can check the number of Hong Kong Offer Shares allotted to you with that CCASS participant.
• If you are applying as a CCASS investor participant
Our Company will publish the results of CCASS Investor Participants’ applications together with the results of the Hong Kong Public Offering in the manner described in “11. Publication of Results” above. You should check the announcement published by our Company and report any discrepancies to HKSCC before 5:00 p.m. on Tuesday, 29 December 2015 or any other date as determined by HKSCC or HKSCC Nominees. Immediately after the credit of the Hong Kong Offer Shares to your stock account, you can check your new account balance via the CCASS Phone System and CCASS Internet System.
(iii) If you apply through the White Form eIPO Service
If you apply for 1,000,000 Hong Kong Offer Shares or more and your application is wholly or partially successful, you may collect your Share certificate(s) from Computershare Hong Kong Investor Services Limited at Shops 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 Tuesday, 29 December 2015, or such other date as notified by the Company in the newspapers as the date of dispatch/collection of Share certificates e-Refund payment instructions/refund cheques.
If you do not collect your H Share certificate(s) personally within the time specified for collection, they will be sent to the address specified in your application instructions by ordinary post at your own risk.
If you apply for less than 1,000,000 Hong Kong Offer Shares, your H Share certificate(s) (where applicable) will be sent to the address specified in your application instructions on Tuesday, 29 December 2015 by ordinary post at your own risk.
If you apply and pay the application monies from a single bank account, any refund monies will be despatched to that bank account in the form of e-Refund payment instructions. If you apply and pay the application monies from multiple bank accounts, any refund monies will be despatched to the address as specified in your application instructions in the form of refund cheque(s) by ordinary post at your own risk.
— 377 — HOW TO APPLY FOR HONG KONG OFFER SHARES
(iv) If you apply via Electronic Application Instructions to HKSCC
Allocation of Hong Kong Offer Shares
For the purposes of allocating Hong Kong Offer Shares, HKSCC Nominees will not be treated as an applicant. Instead, each CCASS Participant who gives electronic application instructions or each person for whose benefit instructions are given will be treated as an applicant.
Deposit of H Share Certificates into CCASS and Refund of Application Monies
• If your application is wholly or partially successful, your H Share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for the credit of your designated CCASS Participant’s stock account or your CCASS Investor Participant stock account on Tuesday, 29 December 2015, or, on any other date determined by HKSCC or HKSCC Nominees.
• Our Company expects to publish the application results of CCASS Participants (and where the CCASS Participant is a broker or custodian, our Company will include information relating to the relevant beneficial owner), your Hong Kong identity card number/passport number or other identification code (Hong Kong business registration number for corporations) and the basis of allotment of the Hong Kong Public Offering in the manner specified in “11. Publication of Results” above on Tuesday, 29 December 2015. You should check the announcement published by our Company and report any discrepancies to HKSCC before 5:00 p.m. on Tuesday, 29 December 2015 or such other date as determined by HKSCC or HKSCC Nominees.
• If you have instructed your broker or custodian to give electronic application instructions on your behalf, you can also check the number of Hong Kong Offer Shares allotted to you and the amount of refund monies (if any) payable to you with that broker or custodian.
• If you have applied as a CCASS Investor Participant, you can also check the number of Hong Kong Offer Shares allotted to you and the amount of refund monies (if any) payable to you via the CCASS Phone System and the CCASS Internet System (under the procedures contained in HKSCC’s “An Operating Guide for Investor Participants” in effect from time to time) on Tuesday, 29 December 2015. Immediately following the credit of the Hong Kong Offer Shares to your stock account and the credit of refund monies to your bank account, HKSCC will also make available to you an activity statement showing the number of Hong Kong Offer Shares credited to your CCASS Investor Participant stock account and the amount of refund monies (if any) credited to your designated bank account.
• Refund of your application monies (if any) in respect of wholly and partially unsuccessful applications and/or difference between the Offer Price and the maximum Offer Price per Offer Share initially paid on application (including brokerage, SFC transaction levy and the Stock Exchange trading fee but without interest) will be credited to your designated bank account or the designated bank account of your broker or custodian on Tuesday, 29 December 2015.
— 378 — HOW TO APPLY FOR HONG KONG OFFER SHARES
15. ADMISSION OF THE H SHARES INTO CCASS
If the Stock Exchange grants the listing of, and permission to deal in, the H Shares and we comply with the stock admission requirements of HKSCC, the H Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the H Shares or any other date HKSCC chooses. Settlement of transactions between Exchange Participants (as defined in the Listing Rules) 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.
Investors should seek the advice of their stockbroker or other professional advisers for details of the settlement arrangement as such arrangements may affect their rights and interests.
All necessary arrangements have been made enabling the H Shares to be admitted into CCASS.
— 379 — APPENDIX I ACCOUNTANTS’ REPORT
The following is the text of a report, prepared for the purpose of incorporation in this prospectus, received from the Company’s reporting accountants, KPMG, Certified Public Accountants, Hong Kong.
8th Floor Prince’s Building 10 Chater Road Central Hong Kong
16 December 2015
The Directors Holly Futures Co., Ltd.
Guotai Junan Capital Limited
Dear Sirs,
INTRODUCTION
We set out below our report on the combined financial information relating to Holly Futures Co., Ltd. (弘業期貨股份有限公司) (the “Company”) and its subsidiaries (together the “Group”) comprising the combined statements of financial position of the Group and the statement of financial position of the Company as at 31 December 2012, 2013 and 2014 and 30 June 2015 and the combined income statements and statements of comprehensive income, the combined statements of changes in equity and the combined cash flow statements of the Group, for each of the years ended 31 December 2012, 2013 and 2014 and for the six months ended 30 June 2015 (the “Relevant Periods”), together with the explanatory notes thereto (the “Financial Information”), for inclusion in the prospectus of the Company dated 16 December 2015 (the “Prospectus”).
The Company was incorporated in Nanjing, Jiangsu Province, the People’s Republic of China (the “PRC”) on 31 July 1995 as an exempted company with limited liability under the Company Law of the PRC. Pursuant to a conversion completed on 21 November 2012 as detailed in the section headed “History, Development and Corporate Structure” in the Prospectus, the Company was converted into a joint stock limited liability company.
The Company has prepared its statutory financial statements in accordance with the Accounting Standards for Business Enterprise issued by the Ministry of Finance (the “MOF”) of the PRC and other relevant regulations (collectively known as the “PRC GAAP”). All subsidiaries of the Company have adopted 31 December as their financial year end date. Details of the Company’s subsidiaries are set out in Note 15 of Section B. The statutory financial statements of the Company’s subsidiaries were
— I-1 — APPENDIX I ACCOUNTANTS’ REPORT prepared in accordance with the relevant accounting rules and regulations applicable to entities in the countries in which they were incorporated. Details of the companies comprising the Group that are subject to audit during the Relevant Periods and the names of the respective auditors are set out in Note 45 of Section B.
The directors of the Company have prepared the combined financial statements for the Relevant Periods (the “Underlying Financial Statements”) on the same basis as used in the preparation of the Financial Information set out in Section B below. The Underlying Financial Statements for each of the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015 were audited by KPMG Huazhen LLP (畢馬威華振會計師事務所(特殊普通合夥)) in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
The Financial Information has been prepared by the directors of the Company for inclusion in the Prospectus in connection with the listing of shares of the Company on the Main Board of The Stock Exchange of Hong Kong Limited based on the Underlying Financial Statements, with no adjustments made thereon and in accordance with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).
DIRECTOR’S RESPONSIBILITY FOR THE FINANCIAL INFORMATION
The directors of the Company are responsible for the preparation of the Financial Information that gives a true and fair view in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the HKICPA and the applicable disclosure provisions of the Listing Rules, and for such internal control as the directors of the Company determine is necessary to enable the preparation of the Financial Information that is free from material misstatement, whether due to fraud or error.
REPORTING ACCOUNTANTS’ RESPONSIBILITY
Our responsibility is to form an opinion on the Financial Information based on our procedures performed in accordance with Auditing Guideline “Prospectuses and the Reporting Accountant” (Statement 3.340) issued by the HKICPA. We have not audited any financial statements of the Company, its subsidiaries or the Group in respect of any period subsequent to 30 June 2015.
OPINION
In our opinion, the Financial Information gives, for the purpose of this report and on the basis of preparation set out in Note 1(b) of Section B below, a true and fair view of the financial position of the Group and the Company as at 31 December 2012, 2013 and 2014 and 30 June 2015 and of the Group’s financial performance and cash flows for the Relevant Periods then ended.
— I-2 — APPENDIX I ACCOUNTANTS’ REPORT
CORRESPONDING FINANCIAL INFORMATION
For the purpose of this report, we have also reviewed the unaudited corresponding interim financial information of the Group comprising the combined income statement and statement of comprehensive income, the combined statement of changes in equity and the combined statement of cash flows for the six months ended 30 June 2014, together with the notes thereon (the “Corresponding Financial Information”), for which the directors are responsible, in accordance with Hong Kong Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the HKICPA.
The directors of the Company are responsible for the preparation of the Corresponding Financial Information in accordance with the same basis adopted in respect of the Financial Information. Our responsibility is to express a conclusion on the Corresponding Financial Information based on our review.
A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion on the Corresponding Financial Information.
Based on our review, for the purpose of this report, nothing has come to our attention that causes us to believe that the Corresponding Financial Information is not prepared, in all material respects, in accordance with the same basis adopted in respect of the Financial Information.
— I-3 — APPENDIX I ACCOUNTANTS’ REPORT
A COMBINED FINANCIAL INFORMATION
1 Combined income statements and statements of comprehensive income (Expressed in thousands of Renminbi, unless otherwise stated)
Six months Section B Year ended 31 December ended 30 June Note 2012 2013 2014 2014 2015 (Unaudited)
Revenue 3 375,642 325,398 273,875 133,074 151,006 Net investment gains 4 4,244 11,523 17,246 1,088 26,635 Operating income 379,886 336,921 291,121 134,162 177,641 Other income 5 5,045 5,672 4,366 2,436 2,436 Operating expenses (258,560) (252,963) (218,586) (99,342) (106,411) Profit from operations 126,371 89,630 76,901 37,256 73,666 ------Share of losses of associates (154) (598) (519) (80) (49) Profit before taxation 6 126,217 89,032 76,382 37,176 73,617 ------Income tax expense 7 (29,681) (25,753) (18,178) (9,094) (17,641) Profit for the year/period 96,536 63,279 58,204 28,082 55,976 Basic and diluted earnings per share (in Renminbi per share) 10 0.1420 0.0931 0.0856 0.0413 0.0823 Other comprehensive income for the year/period (after tax) Items that may be reclassified subsequently to profit or loss: Available-for-sale financial assets: Net change in fair value (526) (2,613) 2,027 (690) 1,927 Reclassified to profit or loss — 248 89 — 721 Exchange differences on translation of financial statements in foreign currencies 1 (259) (16) 70 (5) Total other comprehensive income for the year/period, net of tax 11 (525) (2,624) 2,100 (620) 2,643 Total comprehensive income for the year/period 96,011 60,655 60,304 27,462 58,619
The accompanying notes form part of the Financial Information.
— I-4 — APPENDIX I ACCOUNTANTS’ REPORT
2 Combined statements of financial position (Expressed in thousands of Renminbi, unless otherwise stated)
As at Section B As at 31 December 30 June Note 2012 2013 2014 2015
Non-current assets Property, plant and equipment 12 13,263 12,524 13,446 14,350 Goodwill 13 — 43,322 43,322 43,322 Intangible assets 14 12,214 17,516 26,649 25,361 Interest in associates 16 14,433 13,835 13,316 13,267 Available-for-sale financial assets 17 10,600 — — — Deferred tax assets 35(c) 5,445 1,874 1,951 127 Other non-current assets 18 1,216 1,179 1,183 1,183 Total non-current assets 57,171 90,250 99,867 97,610 ------
Current assets Refundable deposits 19 1,467,738 1,553,980 805,667 1,065,348 Trade receivables 20 — 6,793 17,719 38,594 Investments classified as receivables 21 — — — 200,000 Other receivables 22 11,603 9,590 18,167 35,126 Other current assets 23 2,033 4,599 17,999 41,170 Available-for-sale financial assets 17 17,511 34,658 17,797 63,663 Financial assets held under resale agreements 24 — 7,475 39,678 55,513 Financial assets at fair value through profit or loss 25 9,234 8,989 27,603 46,789 Derivative financial assets 26 — — 2,415 36 Cash held on behalf of brokerage clients 27 299,149 588,077 1,310,219 1,300,144 Cash and bank balances 28 1,080,433 996,285 1,010,509 806,104 Total current assets 2,887,701 3,210,446 3,267,773 3,652,487 ------
The accompanying notes form part of the Financial Information.
— I-5 — APPENDIX I ACCOUNTANTS’ REPORT
As at Section B As at 31 December 30 June Note 2012 2013 2014 2015
Current liabilities Accounts payable to brokerage clients 30 1,721,762 2,033,065 1,962,840 2,296,884 Trade payables 31 — — 26,491 5,480 Other payables 32 35,030 23,570 29,437 71,548 Bank loans 33 — — 70,580 70,580 Financial liabilities at fair value through profit or loss 34 — — 12,140 15,822 Derivative financial liabilities 26 — 195 4,926 2,903 Current taxation 35(a) 12,646 3,725 6,844 6,501 Total current liabilities 1,769,438 2,060,555 2,113,258 2,469,718 ------NET CURRENT ASSETS 1,118,263 1,149,891 1,154,515 1,182,769
TOTAL ASSETS LESS CURRENT LIABILITIES 1,175,434 1,240,141 1,254,382 1,280,379
Non-current liabilities Deferred tax liabilities 35(c) — — 403 1,781 Total non-current liabilities — — 403 1,781 ------NET ASSETS 1,175,434 1,240,141 1,253,979 1,278,598
Capital and reserves Share capital 36(c) 680,000 680,000 680,000 680,000 Reserves 36(d) 495,434 560,141 573,979 598,598 TOTAL EQUITY 1,175,434 1,240,141 1,253,979 1,278,598
The accompanying notes form part of the Financial Information.
— I-6 — APPENDIX I ACCOUNTANTS’ REPORT
3 Statement of financial position (Expressed in thousands of Renminbi, unless otherwise stated)
As at Section B As at 31 December 30 June Note 2012 2013 2014 2015
Non-current assets Property, plant and equipment 12 13,219 12,154 13,154 14,131 Goodwill 13 — 43,322 43,322 43,322 Intangible assets 14 11,809 17,050 26,207 24,930 Investment in subsidiaries 15 — 100,000 100,000 100,000 Interest in associates 16 14,433 13,835 13,316 13,267 Available-for-sale financial assets 17 10,600 — — — Deferred tax assets 35(c) 5,445 1,874 1,951 — Total non-current assets 55,506 188,235 197,950 195,650 ------
Current assets Refundable deposits 19 1,467,738 1,535,830 766,649 1,032,042 Trade receivables 20 — 147 — — Investments classified as receivables 21 — — — 200,000 Other receivables 22 11,557 9,378 16,879 32,441 Other current assets 23 2,033 2,558 7,534 26,686 Available-for-sale financial assets 17 17,511 34,658 17,797 19,343 Financial assets held under resale agreements 24 — — — 17,800 Financial assets at fair value through profit or loss 25 9,234 8,975 3,429 27,566 Cash held on behalf of brokerage clients 27 299,149 566,490 1,244,921 1,262,887 Cash and bank balances 28 1,076,300 991,260 986,403 773,035 Total current assets 2,883,522 3,149,296 3,043,612 3,391,800 ------
The accompanying notes form part of the Financial Information.
— I-7 — APPENDIX I ACCOUNTANTS’ REPORT
As at Section B As at 31 December 30 June Note 2012 2013 2014 2015
Current liabilities Accounts payable to brokerage clients 30 1,721,762 2,077,518 1,975,726 2,268,927 Other payables 32 34,965 23,513 27,734 70,648 Current taxation 35(a) 12,646 3,675 5,145 1,580 Total current liabilities 1,769,373 2,104,706 2,008,605 2,341,155 ------NET CURRENT ASSET 1,114,149 1,044,590 1,035,007 1,050,645 TOTAL ASSETS LESS CURRENT LIABILITIES 1,169,655 1,232,825 1,232,957 1,246,295
Non-current liabilities Deferred tax liabilities 35(c) — — — 1,456 Total non-current liabilities — — — 1,456 ------NET ASSETS 1,169,655 1,232,825 1,232,957 1,244,839
Capital and reserves Share capital 36(c) 680,000 680,000 680,000 680,000 Reserves 36(d) 489,655 552,825 552,957 564,839 TOTAL EQUITY 1,169,655 1,232,825 1,232,957 1,244,839
The accompanying notes form part of the Financial Information.
— I-8 — 4 Combined statements of changes in equity REPORT ACCOUNTANTS’ I APPENDIX (Expressed in thousands of Renminbi, unless otherwise stated)
Reserves
Share Capital Surplus General Fair value TranslationDistributable capital (Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36) reserve(Note 36) profits(Note 36) Total
As at 1 January 2012 380,000 467,043 28,136 78,643 9,187 (13) 112,285 1,075,281 ------
Change in equity for 2012 Profit for the year ————— —96,53696,536 Other comprehensive income ————(526) 1 — (525) Total comprehensive income ————(526) 1 96,536 96,011 ------
Deemed capital contribution before - — I-9 — Reorganisation — 4,142 — — — — — 4,142 ------
Appropriation of profits Appropriation to surplus reserve — — 8,264 — — — (8,264) — Appropriation to general reserve — — — 22,993 — — (22,993) — Conversion into joint stock limited liability company 300,000 (112,925) (29,399) — — — (157,676) — As at 31 December 2012 680,000 358,260 7,001 101,636 8,661 (12) 19,888 1,175,434
The accompanying notes form part of the Financial Information. Reserves REPORT ACCOUNTANTS’ I APPENDIX
Share Capital Surplus General Fair value TranslationDistributable capital (Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36) reserve(Note 36) profits(Note 36) Total
As at 1 January 2012 380,000 467,043 28,136 78,643 9,187 (13) 112,285 1,075,281 As at 1 January 2013 680,000 358,260 7,001 101,636 8,661 (12) 19,888 1,175,434 ------
Change in equity for 2013 Profit for the year ————— —63,27963,279 Other comprehensive income ————(2,365) (259) — (2,624) Total comprehensive income ————(2,365) (259) 63,279 60,655 ------
Deemed capital contribution before Reorganisation — 4,052 — — — — — 4,052 ------0— I-10 — Appropriation of profits Appropriation to surplus reserve — — 6,791 — — — (6,791) — Appropriation to general reserve — — — 18,868 — — (18,868) — As at 31 December 2013 680,000 362,312 13,792 120,504 6,296 (271) 57,508 1,240,141
The accompanying notes form part of the Financial Information. Reserves REPORT ACCOUNTANTS’ I APPENDIX
Share Capital Surplus General Fair value TranslationDistributable capital (Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36) reserve(Note 36) profits(Note 36) Total
As at 1 January 2012 380,000 467,043 28,136 78,643 9,187 (13) 112,285 1,075,281 As at 1 January 2014 680,000 362,312 13,792 120,504 6,296 (271) 57,508 1,240,141 ------
Change in equity for 2014 Profit for the year ————— —58,20458,204 Other comprehensive income ————2,116(16)—2,100 Total comprehensive income ————2,116(16)58,20460,304 ------
Deemed capital contribution before Reorganisation — 7,934 — — — — — 7,934 ------1— I-11 — Appropriation of profits Appropriation to surplus reserve — — 4,359 — — — (4,359) — Appropriation to general reserve — — — 12,536 — — (12,536) — Dividends approved in respect of the previous year ————— —(54,400) (54,400) As at 31 December 2014 680,000 370,246 18,151 133,040 8,412 (287) 44,417 1,253,979
The accompanying notes form part of the Financial Information. Reserves REPORT ACCOUNTANTS’ I APPENDIX
Share Capital Surplus General Fair value TranslationDistributable capital (Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36) reserve(Note 36) profits(Note 36) Total
As at 1 January 2012 380,000 467,043 28,136 78,643 9,187 (13) 112,285 1,075,281 As at 1 January 2014 680,000 362,312 13,792 120,504 6,296 (271) 57,508 1,240,141 ------
Change in equity for six months ended 30 June 2014 Profit for the period ————— —28,08228,082 Other comprehensive income ————(690) 70 — (620) Total comprehensive income ————(690) 70 28,082 27,462 ------
Deemed capital contribution before
Reorganisation — I-12 — — 7,934 — — — — — 7,934 ------
Appropriation of profits Appropriation to surplus reserve ————— — —— Appropriation to general reserve ————— — —— Dividends approved in respect of the previous year ————— —(54,400) (54,400) As at 30 June 2014 (Unaudited) 680,000 370,246 13,792 120,504 5,606 (201) 31,190 1,221,137
The accompanying notes form part of the Financial Information. Reserves REPORT ACCOUNTANTS’ I APPENDIX
Share Capital Surplus General Fair value TranslationDistributable capital (Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36)reserve(Note 36) reserve(Note 36) profits(Note 36) Total
As at 1 January 2012 380,000 467,043 28,136 78,643 9,187 (13) 112,285 1,075,281 As at 1 January 2015 680,000 370,246 18,151 133,040 8,412 (287) 44,417 1,253,979 ------
Change in equity for six months ended 30 June 2015 Profit for the period ————— —55,97655,976 Other comprehensive income ————2,648(5)—2,643 Total comprehensive income ————2,648(5)55,97658,619 ------
Deemed capital contribution before
Reorganisation — I-13 — ————— — —— ------
Appropriation of profits Appropriation to surplus reserve ————— — —— Appropriation to general reserve ————— — —— Dividends approved in respect of the previous year ————— —(34,000) (34,000) As at 30 June 2015 680,000 370,246 18,151 133,040 11,060 (292) 66,393 1,278,598
The accompanying notes form part of the Financial Information. APPENDIX I ACCOUNTANTS’ REPORT
5 Combined cash flow statements (Expressed in thousands of Renminbi, unless otherwise stated)
Six months Section B Year ended 31 December ended 30 June Note 2012 2013 2014 2014 2015 (Unaudited)
Operating activities Cash (used in)/generated from operations 29(b) (328,661) 102,848 176,027 259,226 252,369 Income tax paid 35(a) (27,089) (31,840) (15,439) (6,277) (15,665) Net cash (used in)/generated from operating activities ------(355,750) ------71,008 ------160,588 ------252,949 ------236,704 Investing activities Proceeds from sales of investments classified as receivables 40,957 — 205,008 — 4,707 Payment for purchases of investments classified as receivables — — (200,000) — (200,000) Proceeds from sales of available-for-sale financial assets 88,709 399,116 42,435 20,544 82,030 Payment for purchases of available-for-sale financial assets (86,003) (400,000) (21,059) (20,000) (120,320) Proceeds from sales of financial assets held for trading 7,740 309,524 348,275 154,106 410,452 Payment for purchases of financial assets held for trading (4,388) (307,049) (340,618) (165,703) (431,199) Proceeds from disposal of property, plant and equipment and intangible assets 6 — 28 4 2 Payment for purchases of property, plant and equipment 12 (3,639) (2,161) (6,430) (839) (2,239) Payment for purchases of intangible assets 14 (981) (398) (11,616) (100) — Payment for purchases of associates (3,600) ———— Payment for business combination 38 — (60,000) — — — Dividends received from investments in securities 4 217 218 774 517 146 Net cash generated from/(used in) investing activities ------39,018 ------(60,750) ------16,797 ------(11,471) ------(256,421) Financing activities Proceeds from bank loans 33 — — 70,580 — — Deemed capital contribution before Reorganisation 4,142 4,052 7,934 7,934 — Interest paid — — (732) — (1,794) Dividends paid to equity shareholders of the Company 36(b) (38,000) — (54,400) (54,400) — Net cash (used in)/generated from financing activities (33,858) 4,052 23,382 (46,466) (1,794) ------Net (decrease)/increase in cash and cash equivalents------(350,590) ------14,310 ------200,767 ------195,012 ------(21,511) Effect of foreign exchange rate changes 1 (247) (19) 63 (5) Cash and cash equivalents at 1 January 367,811 17,222 31,285 31,285 232,033 Cash and cash equivalents at 31 December/30 June 29(a) 17,222 31,285 232,033 226,360 210,517
The accompanying notes form part of the Financial Information.
— I-14 — APPENDIX I ACCOUNTANTS’ REPORT
B NOTES TO THE FINANCIAL INFORMATION (Expressed in thousands of Renminbi, unless otherwise stated)
1 Significant accounting policies
(a) Statement of compliance
The Financial Information set out in this report has been prepared in accordance with all applicable HKFRSs, which collective term includes all applicable individual HKFRSs, Hong Kong Accounting Standards and Interpretations issued by the HKICPA. Further details of the significant accounting policies adopted are set out in the remainder of this Section B.
The HKICPA has issued a number of new and revised HKFRSs. For the purpose of preparing this Financial Information, the Group has adopted all applicable new and revised HKFRSs to the Relevant Periods, except for any new standards or interpretations that are not yet effective for the accounting period ended 30 June 2015. The revised and new accounting standards and interpretations issued but not yet effective for the accounting period ended 30 June 2015 are set out in Note 44.
The Financial Information also complies with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).
The accounting policies set out below have been applied consistently to all periods presented in the Financial Information.
The Corresponding Financial Information for the six months ended 30 June 2014 has been prepared in accordance with the same basis and accounting policies adopted in respect of the Financial Information.
(b) Basis of preparation and presentation
The Financial Information comprises the Company and its subsidiaries and has been prepared using the merger basis of accounting as if the Group had always been in existence as further described below.
As described in the Reorganisation section headed “History, Development and Corporate Structure” in the Prospectus, the Company entered into a share purchase agreement with Jiangsu SOHO Holding Group Co., Ltd (江蘇省蘇豪控股集團有限公司) (“SOHO Holding”) on 7 January 2015 to acquire the entire equity interests of Holly Su Futures (Hongkong) Co., Ltd (弘蘇期貨(香港)有限 公司) (“Holly Su Futures”) at considerations of HKD28,075 thousands (equivalent to RMB22,171 thousands) subject to all required approvals and registrations. There was a continuation of risks and benefits to SOHO Holding as the Company and the Holly Su Futures were controlled by SOHO Holding during the entire Relevant Periods both before and after the Reorganisation. Therefore, the merger accounting under common control is adopted for the Reorganisation. For the purpose of preparation of the Financial Information of the Group, the net assets of combining entities are
— I-15 — APPENDIX I ACCOUNTANTS’ REPORT combined using the existing book values from SOHO Holding’s perspective. The total considerations of HKD28,075 thousands in connection with acquisition of Holly Su Futures from SOHO Holding are recorded within equity as deemed distributions arising from the Reorganisation on 30 September 2015 and the consideration payable is recognised on the same date.
The combined income statements and statements of comprehensive income, the combined statements of changes in equity and the combined cash flow statements of the Group as set out in Section A include the results of operation of the entities now comprising the Group for the Relevant Periods as if the Reorganisation was completed at the beginning of the Relevant Periods. The combined statements of financial position of the Group as at 31 December 2012, 2013 and 2014 and 30 June 2015 as set out in Section A have been prepared to present the combined state of affairs of the entities now comprising the Group as at the respective dates as if the Reorganisation was completed at the beginning of the Relevant Periods.
(c) Basis of measurement
The measurement basis used in the preparation of the Financial Information is the historical cost basis except that the following assets and liabilities are measured at their fair value: available-for-sale financial assets, financial assets / liabilities at fair value through profit or loss and derivative financial assets / liabilities. The measurement of fair value is stated in Note 1(j)(ii).
(d) Functional and presentation currency
The Financial Information is presented in Renminbi (“RMB”), rounded to the nearest thousands, which is the functional currency of the Company and its subsidiary established in the PRC. The functional currency of the Company’s subsidiary in Hong Kong is Hong Kong Dollar (“HKD”). The Group translates the financial statements of the Company’s subsidiary in Hong Kong from HKD into RMB.
(e) Use of estimates and judgments
The preparation of Financial Information in conformity with HKFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgments made by management in the application of HKFRSs that have significant effect on the Financial Information and major sources of estimation uncertainty are discussed in Note 2.
— I-16 — APPENDIX I ACCOUNTANTS’ REPORT
(f) Basis of consolidation
(i) Subsidiaries and non-controlling interests
Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Company, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meet the definition of a financial liability. For each business combination, the Group can elect to measure any non-controlling interests either at fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net identifiable assets.
Non-controlling interests are presented in the combined statement of financial position within equity, separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the combined income statements and statements of comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and the equity shareholders of the Company.
Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within combined equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.
When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see Note 1(j)(i)) or, when appropriate, the cost on initial recognition of an interest in an associate (see Note 1(g)).
In the Company’s statement of financial position, an investment in a subsidiary is stated at cost less impairment losses, unless the investment is classified as held for sale (or included in a disposal group that is classified as held for sale).
(ii) Business combinations involving entities under common control
The combined Financial Information incorporate the financial statements of the combining entities or businesses as if they had been combined from the date when the combining entities or business first came under the control of the controlling parties.
The net assets of the combining entities or business are recognised at the carrying values prior to the common control combination.
The combined Financial Information include the results of each of the combining entities or business from the earliest date presented or since the date when combining entities or business first came under the control of the controlling parties, where this is a shorter period, regardless of the date of the common control combination.
— I-17 — APPENDIX I ACCOUNTANTS’ REPORT
The comparative amounts in the combined Financial Information are presented as if the entities or businesses had been combined at the previous reporting date or when they first came under control of the controlling parties, whichever is shorter.
(g) Associates
An associate is an entity in which the Group or Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.
An investment in an associate is accounted for in the combined Financial Information under the equity method, unless it is classified as held for sale (or included in a disposal group that is classified as held for sale). Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Group’s share of the acquisition-date fair value of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post acquisition change in the Group’s share of the investee’s net assets and any impairment loss relating to the investment (see Note 1(o)). Any acquisition-date excess over cost, the Group’s share of the post-acquisition, post-tax results of the investees and any impairment losses for the year are recognised in profit or loss, whereas the Group’s share of the post-acquisition post-tax items of the investees’ other comprehensive income is recognised as other comprehensive income.
When the Group’s share of losses exceeds its interest in the associate, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee. For this purpose, the Group’s interest is the carrying amount of the investment under the equity method together with the Group’s long-term investments that in substance form part of the Group’s net investment in the associate.
Unrealised profits and losses resulting from transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the investee, except where unrealized losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in profit or loss.
If an investment in an associate becomes an investment in a joint venture or vice versa, retained investment is not remeasured. Instead, the investment continues to be accounted for under the equity method.
In all other cases, when the Group ceases to have significant influence over an associate, it is accounted for as a disposal of the entire interest in that investee, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former investee at the date when significant influence is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see Note 1(j)(i)).
In the Company’s statement of financial position, investments in associates are stated at cost less impairment losses (see Note 1(o)), unless classified as held for sale (or included in a disposal group that is classified as held for sale).
— I-18 — APPENDIX I ACCOUNTANTS’ REPORT
(h) Goodwill
Goodwill represents the excess of
(i) the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Group’s previously held equity interest in the acquiree; over
(ii) the net fair value of the acquiree’s identifiable assets and liabilities measured as at the acquisition date.
When (ii) is greater than (i), then this excess is recognised immediately in profit or loss as a gain on a bargain purchase.
Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit (“CGU”), or groups of CGUs, that is expected to benefit from the synergies of the combination and is tested annually for impairment (see Note 1(o)).
On disposal of a CGU during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.
(i) Foreign currency
When the Group receives capital in foreign currencies from investors, the capital is translated to RMB at the spot exchange rate on the date of receipt. Other foreign currency transactions are, on initial recognition, translated to RMB at the spot exchange rates or the rates that approximate the spot exchange rates on the dates of the transactions.
A spot exchange rate is an exchange rate quoted by the People’s Bank of China (the “PBOC”), the State Administrative of Foreign Exchange or a cross rate determined based on quoted exchange rates. A rate that approximates the spot exchange rate is a rate determined under a systematic and rational method, normally the average exchange rate of the current period.
Monetary items denominated in foreign currencies are translated to RMB at the spot exchange rate at the end of the Relevant Periods. The resulting exchange differences are recognised in profit or loss. Non-monetary items denominated in foreign currencies that are measured at historical cost are translated to RMB using the foreign exchange rate at the transaction date. Non-monetary items denominated in foreign currencies that are measured at fair value are translated using the foreign exchange rate at the date the fair value is determined; the resulting exchange differences are recognised in profit or loss, except for the differences arising from the translation of available-for-sale financial assets, which are recognised as other comprehensive income in capital reserve.
— I-19 — APPENDIX I ACCOUNTANTS’ REPORT
The assets and liabilities of foreign operation are translated to RMB at the spot exchange rate at the end of the Relevant Periods. The equity items, excluding “distributable profits”, are translated to RMB at the spot exchange rates at the transaction dates. The income and expenses of foreign operations are translated to RMB at the spot exchange rates or the rates that approximate the spot exchange rates at the transaction dates. The resulting translation differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. Upon disposal of a foreign operation, the cumulative amount of the translation differences recognised in shareholders’ equity which relates to that foreign operation is transferred to profit or loss in the period in which the disposal occurs.
(j) Financial instruments
(i) Recognition and measurement of financial assets and financial liabilities
A financial asset or financial liability is recognised in the statements of financial position when the Group becomes a party to the contractual provisions of a financial instrument.
The Group classifies financial assets and liabilities into different categories at initial recognition based on the purpose of acquiring assets or assuming liabilities: financial assets and financial liabilities at fair value through profit or loss, trade and other receivables, available-for-sale financial assets and other financial liabilities.
Financial assets and financial liabilities are measured initially at fair value. For financial assets and financial liabilities at fair value through profit or loss, any directly attributable transaction costs are charged to profit or loss; for other categories of financial assets and financial liabilities, any attributable transaction costs are included in their initial costs.
Financial assets and financial liabilities are categorised as follows:
Financial assets and financial liabilities at fair value through profit or loss (including financial assets held for trading)
A financial asset or financial liability is classified at fair value through profit or loss if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term, a financial instrument managed in a pattern of short-term profit taking, a derivative, or if it is designated at fair value through profit or loss.
Financial assets and financial liabilities are designated at fair value through profit or loss upon initial recognition in either of the following circumstances:
— the financial assets or financial liabilities are managed, evaluated and reported internally on a fair value basis;
— I-20 — APPENDIX I ACCOUNTANTS’ REPORT
— the designation eliminates or significantly reduces the discrepancies in the recognition or measurement of relevant gains or losses arising from the different basis of measurement of the financial assets or financial liabilities;
— the financial assets or financial liabilities contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract; or
— the separation of the embedded derivatives from the financial instruments is prohibited.
Subsequent to initial recognition, financial assets and financial liabilities at fair value through profit or loss are measured at fair value, without any deduction for transactions costs that may occur on sale, and changes therein are recognised in profit or loss.
Receivables
Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, receivables are measured at amortised cost using the effective interest method, less any impairment losses (see Note 1(j)(iii)).
Available-for-sale financial assets
Available-for-sale financial assets include non-derivative financial assets that are designated as available-for-sale or are not classified as another category of financial assets. Available-for-sale investments mainly comprise equity securities. Unquoted equity securities whose fair value cannot be measured reliably are carried at cost. All other available-for-sale investments are measured at fair value after initial recognition.
Interest income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Group becomes entitled to the dividend (see Note 1(u)(iii)). Impairment losses are recognised in profit or loss (see Note 1(j)(iii)).
Other fair value changes, other than impairment losses (see Note 1(j)(iii)), are recognised in other comprehensive income and presented in the fair value reserve within equity. When the investment is derecognised, the gain or loss accumulated in equity is reclassified to profit or loss.
Other financial liabilities
Financial liabilities other than the financial liabilities at fair value through profit or loss are classified as other financial liabilities.
Subsequent to initial recognition, other financial liabilities are measured at amortised cost using the effective interest method.
— I-21 — APPENDIX I ACCOUNTANTS’ REPORT
(ii) Fair value measurement
If there is an active market for a financial asset or financial liability, the quoted price in the active market without adjusting for transaction costs that may be incurred upon future disposal or settlement is used to establish the fair value of the financial asset or financial liability. For a financial asset held or a financial liability to be assumed, the quoted price is the current bid price. For a financial asset to be acquired or a financial liability assumed, the quoted price is the current asking price. Quoted prices from an active market are prices that are readily and regularly available from an exchange, dealer, broker, industry group or pricing service agency, and represent actual and regularly occurring market transactions on an arm’s length basis.
If no active market exists for a financial instrument, a valuation technique is used to establish the fair value. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. Where discounted cash flow technique is used, future cash flows are estimated based on management’s best estimates and the discount rate used is the prevailing market rate applicable for instrument with similar terms and conditions at the end of the Relevant Periods. Where other pricing models are used, inputs are based on market data at the end of the Relevant Periods.
In estimating the fair value of a financial asset and financial liability, the Group considers all factors including, but not limited to, risk-free interest rate, credit risk, price risk, foreign exchange rate and market volatility, that are likely to affect the fair value of the financial asset and financial liability.
The Group obtains market data from the same market where the financial instrument was originated or purchased.
(iii) Impairment of financial assets
The carrying amounts of financial assets other than those at fair value through profit or loss are reviewed by the Group at the end of the Relevant Periods to determine whether there is objective evidence of impairment. If any such evidence exists, impairment losses are provided. Objective evidence of impairment in the financial asset represents events that occur after the initial recognition of the financial assets and have impact on the estimated future cash flows of the asset, which can be estimated reliably.
Objective evidence that financial assets are impaired includes, but not limited to:
— significant financial difficulty of the borrower or issuer;
— a breach of contract by the borrower, such as a default or delinquency in interest or principal payments;
— I-22 — APPENDIX I ACCOUNTANTS’ REPORT
— it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
— disappearance of an active market for financial assets because of financial difficulties of the issuer;
— significant changes in the technological, market, economic or legal environment that have an adverse effect on the borrower; and
— a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.
Receivables
The impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.
If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.
Available-for-sale financial assets
Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost net of any principal repayment and amortisation and the current fair value, less any impairment loss recognised previously in profit or loss. Changes in cumulative impairment losses attributable to application of the effective interest method are reflected as a component of interest income.
For the available-for-sale equity investment, objective evidence would include a significant or prolonged decline in the fair value of an investment below its cost. The determination of what is “significant” or “prolonged” requires judgment. “Significant” is evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. A significant or prolonged decline in the fair value of an equity investment is an indicator of impairment in such investments where a decline in the fair value of equity investment below its initial cost by 20% or more, or fair value below cost for nine months or longer, upon which impairment loss is recognised.
— I-23 — APPENDIX I ACCOUNTANTS’ REPORT
If, in a subsequent period, the fair value of an impaired available-for-sale debt investments increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity investment is recognised in other comprehensive income.
(iv) Derecognition of financial assets and financial liabilities
Financial assets (or a part of a financial asset or group of financial assets) are derecognised when the financial assets meet one of the following conditions:
— the contractual rights to the cash flows from the financial asset expire; or
— the Group transfers substantially all the risks and rewards of ownership of the financial assets or where substantially all the risks and rewards of ownership of a financial asset are neither retained nor transferred, the control over that asset is relinquished.
If the Group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, but retains control, the Group continues to recognise the financial asset and relevant liability to the extent of its continuing involvement in the financial asset.
The financial liability (or part of it) is derecognised only when the underlying present obligation (or part of it) specified in the contracts is discharged, cancelled or expired. An agreement between the Group and an existing lender to replace the original financial liability with a new financial liability with substantially different terms, or a substantial modification of the terms of an existing financial liability is accounted for as an extinguishment of the original financial liability and recognition of a new financial liability. The difference between the carrying amount of the derecognised financial liability and the consideration paid is recognised in profit or loss.
(v) Offsetting
Financial assets and financial liabilities are offset and the net amount is reported in the statements of financial position when the Group has a legally enforceable right to set off the recognised amounts and the transactions are intended to be settled on a net basis, or by realising the asset and settling the liability simultaneously.
(vi) Equity instruments
An equity instrument is a contract that proves the ownership interest of the residual assets after deducting all liabilities of the Group. Considerations received from issuance of equity instruments net of transaction costs are recognised in equity. Considerations and transaction costs paid by the Group for repurchasing its own equity instruments are deducted from equity.
— I-24 — APPENDIX I ACCOUNTANTS’ REPORT
(vii) Derivative financial instruments
Derivative financial instruments are initially measured at fair value at the date a derivative contract is entered into and are subsequently measured at fair value. Changes in fair value of these derivative financial instruments other than those designed as hedge instrument are recognised in profit or loss. Fair values are obtained from quoted market prices in active market or are determined using valuation techniques, including discounted cash flow model and options pricing model as appropriate.
All derivatives are recognised as assets when the fair value is positive and as liabilities when the fair value is negative.
Derivative embedded in non-derivative host contracts are treated as separate derivative when their characteristics and risks are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. These embedded derivatives are separately accounted for at fair value, with changes in fair value recognised in profit or loss.
(k) Financial assets held under resale agreements
Financial assets held under resale agreements are transactions where the Group acquires financial assets which will be resold at a predetermined price at a future date under resale agreements.
The cash advanced is recognised as amounts held under resale agreements in the statements of financial position. Assets held under resale agreements are recorded in memorandum accounts as off-balance sheet items.
The difference between the purchase and resale consideration is amortised over the period of the transaction using the effective interest method and is included in interest income.
(l) Property, plant and equipment
The items of property, plant and equipment are stated at cost less accumulated depreciation and impairment loss (see Note 1(o)).
The cost of the purchased property, plant and equipment comprises the purchase price, related taxes, and any directly attributable expenditure for bringing the asset to working condition for its intended use.
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal. Any related revaluation surplus is transferred from the revaluation reserve to distributable profits and is not reclassified to profit or loss.
— I-25 — APPENDIX I ACCOUNTANTS’ REPORT
Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:
Estimated Estimated Depreciation useful lives residual rates rates
Motor vehicles 10 years 5% 9.5% Office equipment 4-5 years 0%-5% 19%-25% Electronic equipment 3-5 years 0%-5% 19%-31.66%
Where parts of items of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.
(m) Intangible assets (other than goodwill)
The intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (where the estimated useful life is finite) and impairment loss (see Note 1(o)).
Amortisation of intangible assets with finite useful lives is charged to profit or loss on a straight-line basis over the assets’ estimated useful lives. The following intangible assets with finite useful lives are amortised from the date they are available for use and their estimated useful lives are as follows:
Estimated useful lives
Computer software 2-4 years Customer relationship 3.5 years
Both the period and method of amortisation are reviewed annually.
Futures exchanges membership comprise the trading rights in futures and commodity exchanges in the PRC and Hong Kong. These rights allow the Group to trade financial and commodity futures contracts through these exchanges.
Futures exchanges membership are not amortised as their useful lives are assessed to be indefinite. Any conclusion that the useful life of an intangible asset is indefinite is reviewed annually to determine whether events and circumstances continue to support the indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite is accounted for prospectively from the date of change and in accordance with the policy for amortisation of intangible assets with finite lives as set out above.
— I-26 — APPENDIX I ACCOUNTANTS’ REPORT
(n) Operating lease charges
Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.
(o) Impairment of non-financial assets
Internal and external sources of information are reviewed at the end of each Relevant Periods to identify indications that the following assets may be impaired or, an impairment loss previously recognised no longer exists or may have decreased:
— property, plant and equipment;
— goodwill;
— intangible assets;
— investments in subsidiaries in the Company’s statement of financial position;
— interest in associates; and
— other current assets.
If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment.
— Calculation of recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a CGU).
— I-27 — APPENDIX I ACCOUNTANTS’ REPORT
— Recognition of impairment loss
An impairment loss is recognised in profit or loss if the carrying amount of an asset, or the CGU to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).
— Reversals of impairment loss
In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.
A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.
(p) Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between the amount initially recognised and redemption value being recognised in profit or loss over the period of the borrowings, together with any interest and fees payable, using the effective interest method.
(q) Cash and bank balances
Cash and bank balances comprise cash and cash equivalents and bank deposits with original maturity over three months. Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.
(r) Employee benefits
(i) Short term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
— I-28 — APPENDIX I ACCOUNTANTS’ REPORT
(ii) Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which related services are rendered by employees.
(iii) Termination benefits
Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting date, then they are discounted to their present value.
(s) Income tax
Income tax comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognised in other comprehensive income or directly in equity, respectively.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the Relevant Periods, and any adjustment to tax payable in respect of previous years.
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax loss and unused tax credits.
Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax loss and credit, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.
— I-29 — APPENDIX I ACCOUNTANTS’ REPORT
The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.
The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the end of the Relevant Periods. Deferred tax assets and liabilities are not discounted.
The carrying amount of a deferred tax asset is reviewed at the end of each Relevant Periods and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.
Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Group or the Company has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:
— in the case of current tax assets and liabilities, the Group or the Company intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
— in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
— the same taxable entity; or
— different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.
(t) Provisions and contingent liabilities
Provisions are recognised for other liabilities of uncertain timing or amount when the Group or the Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.
— I-30 — APPENDIX I ACCOUNTANTS’ REPORT
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
(u) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows:
(i) Commission and fee income
Brokerage commission income is recognised on a trade date basis when the relevant transactions are executed.
Exchange refund is recognised when the Group receives the refunds from futures exchanges.
Asset management fees are recognised when the Group is entitled to receive the income under the asset management agreement.
(ii) Interest income
Interest income is recognised as it accrues using the effective interest method.
(iii) Investment gain
Trading gains from financial assets at fair value through profit or loss is recognised on a trade date basis whilst the unrealized profits or losses are recognised from valuation at the end of Relevant Periods.
Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity investments.
(iv) Other income
Other income is recognised on an accrual basis.
(v) Borrowing costs
Borrowing costs are expensed in the period in which they are incurred.
— I-31 — APPENDIX I ACCOUNTANTS’ REPORT
(w) Dividend distribution
Dividends or profit distributions proposed in the profit appropriation plan, which will be authorised and declared after the end of the Relevant Periods, are not recognised as a liability at the end of the Relevant Periods but disclosed in the notes to the financial statements separately.
(x) Government grants
Government grants are recognised in the Financial Information initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognised as income in profit or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognised in profit or loss over the useful life of the asset by way of reduced depreciation expense.
(y) Related parties
(a) A person, or a close member of that person’s family, is related to the Group if that person:
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or the Group’s parent.
(b) An entity is related to the Group if any of the following conditions applies:
(i) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others);
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member);
(iii) Both entities are joint ventures of the same third party;
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third party;
(v) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group;
— I-32 — APPENDIX I ACCOUNTANTS’ REPORT
(vi) The entity is controlled or jointly controlled by a person identified in (a);
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.
(z) Segment reporting
Reportable segments are identified based on operating segments which are determined based on the structure of the Group’s internal organisation, management requirements and internal reporting system. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, whose financial performance are regularly reviewed by the Group’s management to make decisions about resource to be allocated to the segment and assess its performance, and for which financial information regarding financial position, financial performance and cash flows is available.
Two or more operating segments may be aggregated into a single operating segment if the segments have same or similar economic characteristics and are similar in respect of the nature of each products and services, the nature of production processes, the type or class of customers for the products and services, the methods used to distribute the products or provide the services, and the nature of the regulatory environment.
Inter-segment revenues are measured on the basis of actual transaction price for such transactions for segment reporting, and segment accounting policies are consistent with those for the combined financial statements.
2 Accounting judgment and estimates
In the process of applying the Group’s accounting policies, management has made the following accounting judgments:
— Impairment of available-for-sale financial assets
In determining whether there is any objective evidence that impairment has occurred on available-for-sale financial assets, the Group assess periodically whether there has been a significant or prolonged decline in the fair value of the investments below its cost or carrying amount, or whether other objective evidence of impairment exists based on the investee’s financial conditions and business prospects, including industry outlook, technological changes as well as operating and financing cash flows. This requires a significant level of management judgment which would affect the amount of impairment losses.
— I-33 — APPENDIX I ACCOUNTANTS’ REPORT
— Impairment of receivables
Receivables that are measured at amortised cost are reviewed at each end of the Relevant Periods to determine whether there is objective evidence of impairment. If any such evidence exists, impairment loss is provided. Objective evidence of impairment includes observable data that comes to the attention of the Group about loss events such as a significant decline in the estimated future cash flow of an individual debtor and other factors. If there is an indication that there has been a change in the factors used to determine the provision for impairment, the impairment loss recognised in prior years is reversed.
— Impairment of non-financial assets
Non-financial assets are reviewed regularly to determine whether the carrying amount exceeds the recoverable amount of the assets. If any such indication exists, an impairment loss is provided. Since the market price of an asset (the asset group) cannot be obtained reliably, the fair value of the asset cannot be estimated reliably. In assessing the present value of future cash flows, significant judgments are exercised over the asset’s selling price, related operating expenses and discounting rate to calculate the present value. All relevant materials which can be obtained are used for estimation of the recoverable amount, including the estimation of the selling price and related operating expenses based on reasonable and supportable assumption.
— Fair value of financial instruments
There are no quoted prices from an active market for certain financial instruments. The fair value for these financial instruments are established by using valuation techniques. These techniques include using recent arm’s length market transactions by referring to the current fair value of similar instruments, discounted cash flow analysis and option pricing models. The Group has established a work flow to ensure that the valuation techniques are constructed by qualified personnel and are validated and reviewed by independent personnel. Valuation techniques are certified and calibrated before implementation to ensure the valuation result reflects the actual market conditions. Valuation models established by the Group make maximum use of market input and rely as little as possible on the Group’s specific data. However, it should be noted that some input, such as credit and counterparty risk, and risk correlations require management’s estimates. The Group reviews the above estimations and assumptions periodically and makes adjustment if necessary.
— Classification of financial asset and liability
The Group’s accounting policies provide scope for assets and liabilities to be designated on inception into different accounting categories in certain circumstances:
• In classifying financial assets or liabilities as “trading”, the Group has determined that it meets the definition of trading assets and liabilities set out in Note 1(j)(i).
• In designating financial assets or liabilities at fair value through profit or loss, the Group has determined that it has met one of the criteria for this designation set out in Note 1(j)(i).
— I-34 — APPENDIX I ACCOUNTANTS’ REPORT
— Depreciation and amortisation
Property, plant and equipment and intangible assets with definite useful life are depreciated or amortised on a straight-line basis over the estimated useful lives of the assets, after taking into account their estimated residual value, if any. Management reviews the estimated useful lives and residual values of the assets annually in order to determine the amount of depreciation or amortisation expenses to be recorded in each of the Relevant Periods. The useful lives and residual values are determined based on the Group’s historical experience with similar assets and take into account anticipated technological changes. The depreciation or amortisation expenses for future periods are adjusted if there are significant changes from previous estimates.
— Determination of consolidation scope
All facts and circumstances must be taken into consideration in the assessment of whether the Group, as an investor, controls the investee. The principle of control includes three elements: (i) power over the investee; (ii) exposure, or rights, to variable returns from involvement with the investee; and (iii) the ability to use power over the investee to affect the amount of investors’ returns. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
For asset management schemes where the Group involves as the manager, the Group assesses whether the combination of investments it holds, if any, together with its remuneration creates exposure to variability of returns from the activities of the asset management schemes that is of such significance indicating that the Group is a principal. The asset management scheme shall be combined if the Group acts in the role of principal.
— Income tax
Determining income tax provisions involves judgment on the future tax treatment of certain transactions. The Group carefully evaluates the tax implications of transactions and sets up tax provisions accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislations. Deferred tax assets are recognised for tax losses not yet used and deductible temporary differences. As those deferred tax assets can only be recognised to the extent that it is probable that future taxable profits will be available against which the unused tax credits can be utilised, management’s judgment is required to assess the probability of future taxable profits. Management’s assessment is constantly reviewed and additional deferred tax assets are recognised if it becomes probable that future taxable profits will allow the deferred tax assets to be recovered.
— I-35 — APPENDIX I ACCOUNTANTS’ REPORT
3 Revenue
The Group is principally engaged in futures brokerage business, asset management business and commodity trading and risk management business. The amount of each significant category of revenue is as follows:
Six months Year ended 31 December ended 30 June Note 2012 2013 2014 2014 2015 (Unaudited)
Commission and fee income (a) 294,582 242,312 167,389 78,758 92,644 Interest income (b) 81,060 83,086 106,486 54,316 58,362 Total 375,642 325,398 273,875 133,074 151,006
(a) Commission and fee income
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Commission and fee income - Futures brokerage business 233,541 210,340 141,975 72,686 79,977 - Refund from futures exchanges 61,041 31,835 24,261 5,882 10,237 - Asset management business — 137 401 190 470 - Commodity trading and risk management business — — 752 — 1,960 Total 294,582 242,312 167,389 78,758 92,644
The Group’s customer base is diversified and no customer with whom transactions have exceeded 10% of the Group’s commission and fee income during the Relevant Periods. The Group’s single largest customer accounted for 3%, 2%, 1%, 4% and 1% of the Group’s commission and fee income for the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2014 and 2015 respectively; while the Group’s top 5 customers accounted for 6%, 5%, 3%, 10% and 5% of the Group’s commission and fee income for the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2014 and 2015 respectively.
— I-36 — APPENDIX I ACCOUNTANTS’ REPORT
(b) Interest income
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Interest income - Bank deposits 61,823 67,022 86,248 45,093 47,303 - Futures exchanges 18,280 15,560 9,405 6,989 2,590 - Wealth management products 957 — 5,008 — 4,707 - Resale agreements — 134 3,872 1,800 1,797 - Other interest-bearing financial assets — 370 1,953 434 1,965 Total 81,060 83,086 106,486 54,316 58,362
4 Net investment gains
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Net realized gains from: Disposal of financial assets at fair value through profit or loss - Trading securities 820 1,253 7,773 1,207 6,478 - Funds — — 50 — 428 - Receivables ————(192) Disposal of financial liabilities at fair value through profit or loss - Payables ————(1,919) Disposal of derivative financial instruments — — 5,172 1,585 15,924 Disposal of available-for-sale financial assets - Listed securities — 452 585 — 3,246 - Wealth management products issued by banks 3,709 7,423 1,109 544 800 - Unlisted equity investments — 1,200 — — — Subtotal 4,529 10,328 14,689 3,336 24,765 ------
— I-37 — APPENDIX I ACCOUNTANTS’ REPORT
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Net unrealized fair value changes of: Financial assets at fair value through profit or loss - Trading securities (502) 977 (677) (2,765) 3,844 - Funds — — 98 — (656) Financial assets designated at fair value through profit or loss — — (1,115) (575) 1,486 Financial liabilities designated at fair value through profit or loss — — (2,140) 575 318 Derivative financial assets — 195 11,345 — (2,551) Derivative financial liabilities — (195) (5,728) — (717) Subtotal (502) 977 1,783 (2,765) 1,724 ------
Dividend income from: Financial assets at fair value through profit or loss 57 84 571 371 16 Available-for-sale financial assets 160 134 203 146 130 Subtotal 217 218 774 517 146 ------Total 4,244 11,523 17,246 1,088 26,635
5 Other income
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Government grants 3,317 3,575 3,154 2,153 2,333 Others 1,728 2,097 1,212 283 103 Total 5,045 5,672 4,366 2,436 2,436
The government grants were received unconditionally by the Company and its subsidiaries from the local government where they reside.
— I-38 — APPENDIX I ACCOUNTANTS’ REPORT
6 Profit before taxation
Profit before taxation is arrived at after charging:
(a) Staff cost
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Salaries, bonuses and allowances 55,276 58,010 70,024 29,248 32,901 Contributions to pension schemes 7,700 8,189 9,971 4,526 5,371 Other social welfare 16,621 19,279 24,245 10,282 11,934 Total 79,597 85,478 104,240 44,056 50,206
The domestic employees of the Group in the PRC participate in social plans, including pension, medical, housing, and other welfare benefits, organized and administered by the governmental authorities. The Group also operates a Mandatory Provident Fund Scheme for all qualifying employees in Hong Kong under the Mandatory Provident Fund Schemes Ordinance. According to the relevant regulations, the premiums and welfare benefits contributions that should be borne by the Group are calculated on regular basis and paid to the labor and social welfare authorities. These social security plans are defined contribution plans and contributions to the plans are expensed as incurred.
(b) Commission expenses
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Commissions paid to brokers 90,778 65,610 27,660 15,520 11,072
Brokers are responsible to attract and refer customers to the Group. The Group pays commission expenses to the brokers based on a certain percentage of the commission income from these customers on a monthly basis.
— I-39 — APPENDIX I ACCOUNTANTS’ REPORT
(c) Impairment losses
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Impairment losses on goodwill — 9,845 — — — Impairment losses on available-for-sale financial assets 82 259 — — — Total 82 10,104 — — —
(d) Other items
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Operating lease charges 17,452 22,037 25,547 12,081 11,693 Office expenses 24,177 24,304 22,556 9,091 11,740 Business tax and surcharges 16,648 13,981 9,813 4,385 5,456 Depreciation and amortisation 4,970 6,342 7,935 4,096 3,968 Repair and maintenance expenses 6,229 4,236 3,366 2,019 985 Investors protection funds 3,239 2,681 2,852 1,615 1,869 Property management expenses 2,539 3,271 2,730 1,025 998 Utilities 2,157 2,516 2,409 1,311 1,230 Interest expenses — — 1,103 — 1,682 IPO expenses — — 548 — 1,587 Auditors’ remuneration 141 270 348 330 414 Other expenses 10,551 12,133 7,479 3,813 3,511 Total 88,103 91,771 86,686 39,766 45,133
— I-40 — APPENDIX I ACCOUNTANTS’ REPORT
7 Income tax expense
(a) Taxation in the combined income statements and statements of comprehensive income:
Six months Note Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Current tax — PRC corporate income tax Provision for the year/period 31,190 20,896 18,558 9,048 15,322 Under provision in respect of prior years — 2,023 — — — 31,190 22,919 18,558 9,048 15,322 ------
Current tax — Hong Kong profits tax Provision for the year/period ————— Subtotal 35(a) 31,190 22,919 18,558 9,048 15,322 ------
Deferred tax Origination and reversal of temporary differences 35(b) (1,509) 2,834 (380) 46 2,319 Total 29,681 25,753 18,178 9,094 17,641
(i) According to the PRC Corporate Income Tax (“CIT”) Law that took effect on 1 January 2008, the Company and the Group’s PRC subsidiaries are subject to CIT at the statutory tax rate of 25%.
(ii) Pursuant to the income tax rules and regulations of Hong Kong, the Group’s Hong Kong subsidiary is subject to the Hong Kong profits tax at the rate of 16.5%.
— I-41 — APPENDIX I ACCOUNTANTS’ REPORT
(b) Reconciliations between income tax expenses and accounting profit at applicable tax rates:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Profit before taxation 126,217 89,032 76,382 37,176 73,617
Notional tax on profit before taxation, calculated at the rates applicable to profits in the jurisdiction concerned 31,727 22,462 19,170 9,346 18,403 Tax effect of non-deductible expenses 1,414 1,280 934 355 367 Tax effect of non-taxable income (3,736) (3,069) (2,232) (1,079) (1,240) Unrecognised deductible temporary differences 38 2,611 127 20 12 Tax effect of unused tax losses not recognised 238 446 179 452 99 Recognition of tax effect of previously unused tax losses ————— Under provision in respect of prior years — 2,023 — — — Actual income tax expense 29,681 25,753 18,178 9,094 17,641
— I-42 — APPENDIX I ACCOUNTANTS’ REPORT
8 Directors’ and supervisors’ remuneration
The remuneration of directors and supervisors who held office during the Relevant Periods is as follows:
Year ended 31 December 2012 Salaries, Pension Director’s allowances Discretionary scheme Name fees and benefits bonuses contributions Total
Directors Zhou Yong ————— Xue Binghai ————— Zhang Fasong ————— GuoWen—————
Independent directors Dong Bing(1) 28———28 Zhang Jie 30———30 Li Xindan 30———30
Supervisors Xu Yingying — 197 34 12 243 Pu Xuenian ————— Wang Jianying ————— Song Yang ————— Total 88 197 34 12 331
— I-43 — APPENDIX I ACCOUNTANTS’ REPORT
Year ended 31 December 2013 Salaries, Pension Director’s allowances Discretionary scheme Name fees and benefits bonuses contributions Total
Directors Zhou Yong ————— Xue Binghai ————— Zhang Fasong ————— GuoWen—————
Independent directors Li Xindan 71———71 Zhang Jie 71———71 Zhang Hongfa(2) 18———18
Supervisors Xu Yingying — 126 8 18 152 Pu Xuenian ————— Wang Jianying ————— Song Yang ————— Total 160 126 8 18 312
— I-44 — APPENDIX I ACCOUNTANTS’ REPORT
Year ended 31 December 2014 Salaries, Pension Director’s allowances Discretionary scheme Name fees and benefits bonuses contributions Total
Directors Zhou Yong ————— Xue Binghai ————— Zhang Fasong ————— GuoWen—————
Independent directors Li Xindan 71———71 Zhang Jie 71———71 Zhang Hongfa 71———71
Supervisors Xu Yingying — 99 79 12 190 Pu Xuenian ————— Wang Jianying ————— Song Yang ————— Total 213 99 79 12 403
— I-45 — APPENDIX I ACCOUNTANTS’ REPORT
Six months ended 30 June 2014 (Unaudited) Salaries, Pension Director’s allowances Discretionary scheme Name fees and benefits bonuses contributions Total
Directors Zhou Yong ————— Xue Binghai ————— Zhang Fasong ————— GuoWen—————
Independent directors Li Xindan 36———36 Zhang Jie 36———36 Zhang Hongfa 36———36
Supervisors Xu Yingying — 49 19 9 77 Pu Xuenian ————— Wang Jianying ————— Song Yang ————— Total 108 49 19 9 185
— I-46 — APPENDIX I ACCOUNTANTS’ REPORT
Six months ended 30 June 2015 Salaries, Pension Director’s allowances Discretionary scheme Name fees and benefits bonuses contributions Total
Directors Zhou Yong ————— Zhou Jianqiu(3) —24775106 Xue Binghai ————— Zhang Fasong ————— GuoWen—————
Independent directors Li Xindan 36———36 Zhang Jie 36———36 Zhang Hongfa 36———36
Supervisors Xu Yingying — 54 49 11 114 Pu Xuenian ————— Wang Jianying ————— Song Yang ————— Total 108 78 126 16 328
(1) Resigned as independent director on 30 June 2012.
(2) Appointed as independent director on 8 July 2013.
(3) Appointed as executive director on 9 June 2015.
None of the non-independent directors or supervisors (except Xu Yingying and Zhou Jianqiu) received any fees or emoluments in respect of their services to the Group during the Relevant Periods as they were paid by the Group’s ultimate holding company SOHO Holding.
There were no amounts paid during the Relevant Periods to the directors and supervisors in connection with their retirement from employment or compensation for loss of office with the Company, or inducement to join. There was no arrangement under which a director or a supervisor waived or agreed to waive any remuneration during the Relevant Periods.
— I-47 — APPENDIX I ACCOUNTANTS’ REPORT
9 Individuals with highest emoluments
Of the five individuals with the highest emoluments, none are directors or supervisors except for Zhou Jianqin whose emolument is disclosed in Note 8. The aggregate of the emoluments are as follows:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Salaries, allowances and benefits 674 514 1,138 393 687 Discretionary bonuses 4,071 4,639 3,621 1,037 798 Pension scheme contributions 121 147 169 81 89 Total 4,866 5,300 4,928 1,511 1,574
The number of these individuals whose remuneration fell within the following bands is set out below:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 individuals individuals individuals individuals individuals (Unaudited)
HKD Nil to HKD 1,000,000 12255 HKD 1,000,001 to HKD 1,500,000 4 1 1 — — HKD 1,500,001 to HKD 2,000,000 — 2 2 — — Total 55555
No emoluments are paid or payable to these individuals as retirement from employment or as an inducement to join or upon joining the Group or as compensation for loss of office during the Relevant Periods.
10 Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the profit for the year/period attributable to shareholders of the Company by the weighted average number of ordinary shares in issue during the year/period.
— I-48 — APPENDIX I ACCOUNTANTS’ REPORT
(a) Weighted average number of ordinary shares
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Issued ordinary shares at 1 January (thousands) 380,000 680,000 680,000 680,000 680,000 Effect of conversion into joint stock limited liability company (thousands) 300,000 ———— Weighted average number of ordinary shares as at the Relevant Periods (thousands) 680,000 680,000 680,000 680,000 680,000
As detailed in the section headed “History, Development and Corporate Structure” in the Prospectus and Note 36(a), the Company was converted into a joint stock limited liability company on 21 November 2012. The RMB300,000 thousands of ordinary shares were issued due to the conversions from capital reserve, surplus reserve and distributable profits. Therefore, the RMB300,000 thousands of ordinary shares were deemed as already issued as at 1 January 2012.
(b) Calculations of basic and diluted earnings per share
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Profit attributable to shareholders of the Company 96,536 63,279 58,204 28,082 55,976
Weighted average number of ordinary shares issued (thousands) 680,000 680,000 680,000 680,000 680,000
Basic and diluted earnings per share attributable to equity shareholders (in RMB per share) 0.1420 0.0931 0.0856 0.0413 0.0823
During the Relevant Periods, there were no potential diluted ordinary shares, so the diluted earnings per share were the same as the basic earnings per share.
— I-49 — APPENDIX I ACCOUNTANTS’ REPORT
11 Other comprehensive income for the year/period, net of tax
Year ended 31 December 2012 Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value (701) 175 (526) - Reclassified to profit or loss — — — Exchange differences on translation of financial statements in foreign currencies 1 — 1 Total (700) 175 (525)
Year ended 31 December 2013 Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value (3,484) 871 (2,613) - Reclassified to profit or loss 331 (83) 248 Exchange differences on translation of financial statements in foreign currencies (259) — (259) Total (3,412) 788 (2,624)
Year ended 31 December 2014 Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value 2,703 (676) 2,027 - Reclassified to profit or loss 119 (30) 89 Exchange differences on translation of financial statements in foreign currencies (16) — (16) Total 2,806 (706) 2,100
Six months ended 30 June 2014 (Unaudited) Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value (920) 230 (690) - Reclassified to profit or loss — — — Exchange differences on translation of financial statements in foreign currencies 70 — 70 Total (850) 230 (620)
— I-50 — APPENDIX I ACCOUNTANTS’ REPORT
Six months ended 30 June 2015 Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value 2,569 (642) 1,927 - Reclassified to profit or loss 962 (241) 721 Exchange differences on translation of financial statements in foreign currencies (5) — (5) Total 3,526 (883) 2,643
12 Property, plant and equipment
The Group
Motor Office Electronic vehicles equipment equipment Total
Cost: As at 1 January 2012 5,132 1,790 16,611 23,533 Additions 400 216 3,023 3,639 Disposal — (67) (1,317) (1,384) As at 31 December 2012 5,532 1,939 18,317 25,788 ------As at 1 January 2013 5,532 1,939 18,317 25,788 Additions — 167 1,994 2,161 Acquisition through business combination 139 1,412 707 2,258 Disposal ———— Translation reserve — (1) (1) (2) As at 31 December 2013 5,671 3,517 21,017 30,205 ------As at 1 January 2014 5,671 3,517 21,017 30,205 Additions 150 169 6,111 6,430 Disposal — (30) (1,202) (1,232) Translation reserve — — 2 2 As at 31 December 2014 5,821 3,656 25,928 35,405 ------As at 1 January 2015 5,821 3,656 25,928 35,405 Additions — 46 3,539 3,585 Disposal — (24) (218) (242) Translation reserve ———— As at 30 June 2015 5,821 3,678 29,249 38,748 ------
— I-51 — APPENDIX I ACCOUNTANTS’ REPORT
Motor Office Electronic vehicles equipment equipment Total
Accumulated depreciation: As at 1 January 2012 (985) (486) (7,594) (9,065) Charge for the year (518) (356) (3,913) (4,787) Written back on disposal — 62 1,265 1,327 As at 31 December 2012 (1,503) (780) (10,242) (12,525) ------As at 1 January 2013 (1,503) (780) (10,242) (12,525) Charge for the year (525) (389) (4,244) (5,158) Written back on disposal ———— Translation reserve — — 2 2 As at 31 December 2013 (2,028) (1,169) (14,484) (17,681) ------As at 1 January 2014 (2,028) (1,169) (14,484) (17,681) Charge for the year (553) (867) (4,031) (5,451) Written back on disposal — 26 1,147 1,173 Translation reserve ———— As at 31 December 2014 (2,581) (2,010) (17,368) (21,959) ------As at 1 January 2015 (2,581) (2,010) (17,368) (21,959) Charge for the period (280) (515) (1,885) (2,680) Written back on disposal — 23 218 241 Translation reserve ———— As at 30 June 2015 (2,861) (2,502) (19,035) (24,398) ------Net book value: As at 31 December 2012 4,029 1,159 8,075 13,263 As at 31 December 2013 3,643 2,348 6,533 12,524 As at 31 December 2014 3,240 1,646 8,560 13,446 As at 30 June 2015 2,960 1,176 10,214 14,350
— I-52 — APPENDIX I ACCOUNTANTS’ REPORT
The Company
Motor Office Electronic vehicles equipment equipment Total
Cost: As at 1 January 2012 5,132 1,790 16,611 23,533 Additions 400 191 2,989 3,580 Disposal — (67) (1,317) (1,384) As at 31 December 2012 5,532 1,914 18,283 25,729 ------As at 1 January 2013 5,532 1,914 18,283 25,729 Additions — 154 1,554 1,708 Acquisition through business combination 139 1,412 707 2,258 Disposal ———— As at 31 December 2013 5,671 3,480 20,544 29,695 ------As at 1 January 2014 5,671 3,480 20,544 29,695 Additions 150 155 6,062 6,367 Disposal — (30) (1,202) (1,232) As at 31 December 2014 5,821 3,605 25,404 34,830 ------As at 1 January 2015 5,821 3,605 25,404 34,830 Additions — 46 3,539 3,585 Disposal — (24) (218) (242) As at 30 June 2015 5,821 3,627 28,725 38,173 ------Accumulated depreciation: As at 1 January 2012 (985) (486) (7,594) (9,065) Charge for the year (518) (350) (3,904) (4,772) Written back on disposal — 62 1,265 1,327 As at 31 December 2012 (1,503) (774) (10,233) (12,510) ------As at 1 January 2013 (1,503) (774) (10,233) (12,510) Charge for the year (525) (382) (4,124) (5,031) Written back on disposal ———— As at 31 December 2013 (2,028) (1,156) (14,357) (17,541) ------As at 1 January 2014 (2,028) (1,156) (14,357) (17,541) Charge for the year (553) (856) (3,899) (5,308) Written back on disposal — 26 1,147 1,173 As at 31 December 2014 (2,581) (1,986) (17,109) (21,676) ------
— I-53 — APPENDIX I ACCOUNTANTS’ REPORT
Motor Office Electronic vehicles equipment equipment Total
As at 1 January 2015 (2,581) (1,986) (17,109) (21,676) Charge for the period (280) (510) (1,817) (2,607) Written back on disposal — 23 218 241 As at 30 June 2015 (2,861) (2,473) (18,708) (24,042) ------Net book value: As at 31 December 2012 4,029 1,140 8,050 13,219 As at 31 December 2013 3,643 2,324 6,187 12,154 As at 31 December 2014 3,240 1,619 8,295 13,154 As at 30 June 2015 2,960 1,154 10,017 14,131
13 Goodwill
The Group and the Company
As at As at 31 December 30 June 2012 2013 2014 2015
Cost: — 53,167 53,167 53,167 ------
Accumulated impairment losses: As at 1 January — — (9,845) (9,845) Impairment loss for the year/period — (9,845) — — As at 31 December/30 June — (9,845) (9,845) (9,845) ------Carrying amount: — 43,322 43,322 43,322
Impairment testing on goodwill.
Goodwill is allocated to the Group’s CGU as follows:
As at As at 31 December 30 June 2012 2013 2014 2015
Futures brokerage — 43,322 43,322 43,322
— I-54 — APPENDIX I ACCOUNTANTS’ REPORT
The Group acquired the futures brokerage business together with the relevant assets and liabilities of Huazheng Futures Co., Ltd (華證期貨有限公司) (“Huazheng Futures”) in 2013. The Group recognised the excess of fair value of the consideration transferred over the fair value of the net identifiable assets acquired as the goodwill of the futures brokerage CGU.
The recoverable amount of the futures brokerage CGU is determined based on value-in-use calculation. This calculation uses cash flow projections based on financial budgets approved by management covering a five-year period. Cash-flows beyond the five-year period are extrapolated using an estimated annual growth rate of 3% based on industry growth forecasts. Management determined the budgeted gross margin based on past performance and its expectation for market development. The cashflows are discounted using a discount rate of 16%. The discount rate used is the CGU’s specific weighted average cost of capital, adjusted for the risks of the specific CGU.
As at 31 December 2013, the Group performed its annual goodwill impairment test. Impairment loss of RMB9,845 thousands was recognised for the goodwill related to futures brokerage CGU since the value-in-use was less than the carrying amount.
As at 31 December 2014, the Group performed its annual goodwill impairment test. No impairment was recognised for the goodwill related to futures brokerage CGU since the value-in-use was greater than its carrying amount.
14 Intangible assets
The Group
Futures Computer exchanges Customer software membership relationship Total
Cost: As at 1 January 2012 2,080 11,400 — 13,480 Additions 576 405 — 981 As at 31 December 2012 2,656 11,805 — 14,461 ------
As at 1 January 2013 2,656 11,805 — 14,461 Additions 398 — — 398 Acquisition through business combination — — 6,100 6,100 Translation reserve — (12) — (12) As at 31 December 2013 3,054 11,793 6,100 20,947 ------
— I-55 — APPENDIX I ACCOUNTANTS’ REPORT
Futures Computer exchanges Customer software membership relationship Total
As at 1 January 2014 3,054 11,793 6,100 20,947 Additions 1,616 10,000 — 11,616 Translation reserve — 1 — 1 As at 31 December 2014 4,670 21,794 6,100 32,564 ------
As at 1 January 2015 4,670 21,794 6,100 32,564 Additions — — — — Translation reserve — — — — As at 30 June 2015 4,670 21,794 6,100 32,564 ------
Accumulated amortisation: As at 1 January 2012 (2,064) — — (2,064) Charge for the year (183) — — (183) As at 31 December 2012 (2,247) — — (2,247) ------As at 1 January 2013 (2,247) — — (2,247) Charge for the year (313) — (871) (1,184) Translation reserve — — — — As at 31 December 2013 (2,560) — (871) (3,431) ------As at 1 January 2014 (2,560) — (871) (3,431) Charge for the year (741) — (1,743) (2,484) Translation reserve — — — — As at 31 December 2014 (3,301) — (2,614) (5,915) ------As at 1 January 2015 (3,301) — (2,614) (5,915) Charge for the period (416) — (872) (1,288) Translation reserve — — — — As at 30 June 2015 (3,717) — (3,486) (7,203) ------Net book value: As at 31 December 2012 409 11,805 — 12,214
As at 31 December 2013 494 11,793 5,229 17,516
As at 31 December 2014 1,369 21,794 3,486 26,649
As at 30 June 2015 953 21,794 2,614 25,361
— I-56 — APPENDIX I ACCOUNTANTS’ REPORT
The Company
Futures Computer exchanges Customer software membership relationship Total
Cost: As at 1 January 2012 2,080 11,400 — 13,480 Additions 576 — — 576 As at 31 December 2012 2,656 11,400 — 14,056 ------As at 1 January 2013 2,656 11,400 — 14,056 Additions 300 — — 300 Acquisition through business combination — — 6,100 6,100 As at 31 December 2013 2,956 11,400 6,100 20,456 ------As at 1 January 2014 2,956 11,400 6,100 20,456 Additions 1,616 10,000 — 11,616 As at 31 December 2014 4,572 21,400 6,100 32,072 ------As at 1 January 2015 4,572 21,400 6,100 32,072 Additions — — — — As at 30 June 2015 4,572 21,400 6,100 32,072 ------Accumulated amortisation: As at 1 January 2012 (2,064) — — (2,064) Charge for the year (183) — — (183) As at 31 December 2012 (2,247) — — (2,247) ------As at 1 January 2013 (2,247) — — (2,247) Charge for the year (288) — (871) (1,159) As at 31 December 2013 (2,535) — (871) (3,406) ------As at 1 January 2014 (2,535) — (871) (3,406) Charge for the year (716) — (1,743) (2,459) As at 31 December 2014 (3,251) — (2,614) (5,865) ------As at 1 January 2015 (3,251) — (2,614) (5,865) Charge for the period (405) — (872) (1,277) As at 30 June 2015 (3,656) — (3,486) (7,142) ------Net book value: As at 31 December 2012 409 11,400 — 11,809 As at 31 December 2013 421 11,400 5,229 17,050 As at 31 December 2014 1,321 21,400 3,486 26,207 As at 30 June 2015 916 21,400 2,614 24,930
— I-57 — APPENDIX I ACCOUNTANTS’ REPORT
Futures exchanges membership comprise the trading rights in Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange, China Financial Futures Exchange and Hong Kong Futures Exchange (the “HKFE”). These rights allow the Group to trade financial and commodity futures contracts through these exchanges. Futures exchanges membership are not amortised as their useful lives are assessed to be indefinite.
The Group’s customer relationship was recognised in June 2013 when the Group acquired the futures brokerage business together with the relevant assets and liabilities of Huazheng Futures.
15 Investment in subsidiaries
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Unlisted share, at cost — 100,000 100,000 100,000
The following list contains all the subsidiaries of the Group, which are held directly by the Company. The class of shares hold is ordinary unless otherwise stated.
Equity interest held by the Company Place of as at incorporation Issued and fully as at 31 December 30 June Principal Name of company and business paid-up capital 2012 2013 2014 2015 activities
Holly Capital PRC RMB100 million N/A 100% 100% 100% Commodity Management Co., Ltd.* trading and risk 弘業資本管理有限公司 management business
Holly Su Futures Hong Kong HKD 25 million 100% 100% 100% 100% Futures (Hongkong) Co., Ltd. brokerage 弘蘇期貨(香港)有限公 business 司
* The English translation of the name of the company is for reference only. The official name of the company is in Chinese.
— I-58 — APPENDIX I ACCOUNTANTS’ REPORT
16 Interest in associates
The Group and the Company
As at As at 31 December 30 June 2012 2013 2014 2015
Share of net assets 14,433 13,835 13,316 13,267
The following list contains all the associates, all of which are unlisted corporate entities whose quoted market prices are not available.
Proportion of ownership interest Form of Place of Group’s business incorporation Registered effective Held by the Principal Name of associate structure and business capital interest Company activities
Jiangsu Hong Rui New Limited PRC RMB10 22% 22% Venture Era Venture liability million investment, Investment Co., Ltd.* company etc. 江蘇弘瑞新時代創業 投資有限公司
Jiangsu Hong Rui Limited PRC RMB12.12 9.901% 9.901% Venture Growth Venture liability million investment, Investment Co., Ltd.* company etc. 江蘇弘瑞成長創業 投資有限公司
* The English translations of the names of the associates are for reference only. The official names of the associates are in Chinese.
All of the above associates are accounted for using the equity method in the combined financial statements.
— I-59 — APPENDIX I ACCOUNTANTS’ REPORT
Summarised financial information of the Group’s material associates, adjusted for any differences in accounting policies, and reconciled to the carrying amount in the combined financial statements, are disclosed below:
Jiangsu Hong Rui New Era Venture Investment Co., Ltd As at As at 31 December 30 June 2012 2013 2014 2015
Gross amounts of the associates: Current assets 19,037 13,563 13,351 13,353 Non-current assets 10,000 15,000 15,000 15,000 Current liabilities — (1,000) (2,463) (2,612) Equity 29,037 27,563 25,888 25,741 Revenue — — — — Loss for the year/period (301) (1,474) (1,675) (147) Total comprehensive income (301) (1,474) (1,675) (147) Dividend received from the associate — — — — Reconciled to the Group’s interests in the associates: Gross amounts of net assets of the associate 29,037 27,563 25,888 25,741 Group’s effective interest 22% 22% 22% 22% Group’s share of net assets of the associate 6,388 6,064 5,695 5,663 Carrying amount in the combined financial statements: 6,388 6,064 5,695 5,663
— I-60 — APPENDIX I ACCOUNTANTS’ REPORT
Jiangsu Hong Rui Growth Venture Investment Co., Ltd As at As at 31 December 30 June 2012 2013 2014 2015
Gross amounts of the associates: Current assets 59,268 42,116 32,405 28,239 Non-current assets 35,843 50,234 58,473 62,474 Current liabilities (13,861) (13,861) (13,911) (13,912) Equity 81,250 78,489 76,967 76,801 Revenue — — — — Loss for the year/period (886) (2,761) (1,522) (166) Total comprehensive income (886) (2,761) (1,522) (166) Dividend received from the associate — — — — Reconciled to the Group’s interests in the associates: Gross amounts of net assets of the associate 81,250 78,489 76,967 76,801 Group’s effective interest 9.901% 9.901% 9.901% 9.901% Group’s share of net assets of the associate 8,045 7,771 7,621 7,604 Carrying amount in the combined financial statements: 8,045 7,771 7,621 7,604
During the Relevant Periods, the Group and the Company hold 9.901% interest in Jiangsu Hong Rui Growth Venture Investment Co., Ltd (“Hong Rui Growth”). According to the articles of association of Hong Rui Growth, the Group and the Company can appoint a representative in the Board of Directors. As the Group and the Company have a representative in the Board of Directors and participate in all the decision-making processes, the Group and the Company have significant influence over Hong Rui Growth, even though the effective interest is less than 20%. Accordingly, Hong Rui Growth has been accounted for as an associate.
— I-61 — APPENDIX I ACCOUNTANTS’ REPORT
17 Available-for-sale financial assets
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Non-current At fair value: - Unlisted equity securities 10,600 — — —
Analysed as: Unlisted 10,600 — — —
Current At fair value: - Listed equity securities 12,530 9,458 11,848 10,553 Less: Impairment losses for listed equity securities (1,216) (1,475) (1,216) (338) Subtotal 11,314 7,983 10,632 10,215 ------
- Wealth management products issued by banks — 20,207 — 43,320 - Unlisted funds 6,197 6,468 7,165 9,128 - Asset management plan — — — 1,000 Total 17,511 34,658 17,797 63,663
Analysed as: Listed outside Hong Kong 11,314 7,983 10,632 10,215 Unlisted 6,197 26,675 7,165 53,448 Total 17,511 34,658 17,797 63,663
— I-62 — APPENDIX I ACCOUNTANTS’ REPORT
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Non-current At fair value: - Unlisted equity securities 10,600 — — —
Analysed as: Unlisted 10,600 — — —
Current At fair value: - Listed equity securities 12,530 9,458 11,848 10,553 Less: Impairment losses for listed equity securities (1,216) (1,475) (1,216) (338) Subtotal 11,314 7,983 10,632 10,215 ------
- Wealth management products issued by banks — 20,207 — — - Unlisted funds 6,197 6,468 7,165 9,128 Total 17,511 34,658 17,797 19,343
Analysed as: Listed outside Hong Kong 11,314 7,983 10,632 10,215 Unlisted 6,197 26,675 7,165 9,128 Total 17,511 34,658 17,797 19,343
As at 31 December 2012, 2013 and 2014, and 30 June 2015, certain of the Group and the Company’s listed available-for-sale equity securities were individually determined to be impaired on the basis of a material decline in their fair value below cost and adverse changes in the market in which these investees operated which indicated that the cost of the Group’s investment in them may not be recovered. Impairment losses on these investments were recognised in profit or loss in accordance with the policy set out in Note 1(j)(iii).
— I-63 — APPENDIX I ACCOUNTANTS’ REPORT
18 Other non-current assets
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Deposits with Hong Kong Futures Exchange Limited 1,216 1,179 1,183 1,183
19 Refundable deposits
The Group
Refundable deposits arising from futures brokerage business:
As at As at 31 December 30 June 2012 2013 2014 2015
Deposits with futures and commodity exchanges - Shanghai Futures Exchange 417,200 500,710 244,167 326,334 - Dalian Commodity Exchange 435,212 390,719 203,770 259,520 - China Financial Futures Exchange 335,261 312,994 186,564 297,770 - Zhengzhou Commodity Exchange 280,065 331,407 132,148 148,418 - Bohai Commodity Exchange — — 9,371 — Other futures brokers — 18,150 29,647 33,306 Total 1,467,738 1,553,980 805,667 1,065,348
— I-64 — APPENDIX I ACCOUNTANTS’ REPORT
The Company
Refundable deposits arising from futures brokerage business:
As at As at 31 December 30 June 2012 2013 2014 2015
Deposits with futures and commodity exchanges - Shanghai Futures Exchange 417,200 500,710 244,167 326,334 - Dalian Commodity Exchange 435,212 390,719 203,770 259,520 - China Financial Futures Exchange 335,261 312,994 186,564 297,770 - Zhengzhou Commodity Exchange 280,065 331,407 132,148 148,418 Total 1,467,738 1,535,830 766,649 1,032,042
20 Trade receivables
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Commodity trading and risk management business - Trade receivables arising from rendering agency services — — 17,719 — - Trade receivables arising from rendering financing services — 6,646 — 34,245 Others — 147 — 4,349 Total — 6,793 17,719 38,594
As at the end of the Relevant Periods, the ageing analysis of trade receivables, based on the trade date, is as follows:
As at As at 31 December 30 June 2012 2013 2014 2015
1 to 3 months — 6,646 17,719 37,430 3 months to 1 year — 147 — 1,164 Total — 6,793 17,719 38,594
— I-65 — APPENDIX I ACCOUNTANTS’ REPORT
The Group monitors all the receivables on an individual customer basis and calls for commodity collaterals when necessary. The receivables are related to a wide range of customers with no recent history of default.
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Others — 147 — —
As at the end of the Relevant Periods, the ageing analysis of trade receivables, based on the trade date, is as follows:
As at As at 31 December 30 June 2012 2013 2014 2015
3 months to 1 year — 147 — —
21 Investments classified as receivables
The Group and the Company
As at As at 31 December 30 June 2012 2013 2014 2015
Wealth management products issued by banks — — — 200,000
22 Other receivables
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Interest receivables 7,336 5,394 13,387 29,876 Rental deposits 3,111 3,153 3,275 3,253 Others 1,156 1,043 1,505 1,997 Total 11,603 9,590 18,167 35,126
— I-66 — APPENDIX I ACCOUNTANTS’ REPORT
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Interest receivables 7,336 5,202 12,749 27,487 Rental deposits 3,065 3,153 3,247 3,223 Others 1,156 1,023 883 1,731 Total 11,557 9,378 16,879 32,441
23 Other current assets
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Deductible value added tax — 2,041 10,465 14,484 Prepaid rentals 2,033 2,475 2,052 5,006 IPO service fees — — 5,482 21,447 Others — 83 — 233 Total 2,033 4,599 17,999 41,170
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Prepaid rentals 2,033 2,475 2,052 5,006 IPO service fees — — 5,482 21,447 Others — 83 — 233 Total 2,033 2,558 7,534 26,686
Except for the IPO service fees which will be debited to equity upon the issuance of H shares, all of the other assets were expected to be recovered or recognised as expense within one year.
— I-67 — APPENDIX I ACCOUNTANTS’ REPORT
24 Financial assets held under resale agreements
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Collateralized by - Commodities — 7,475 39,678 37,713 - Debt securities — — — 17,800 Total — 7,475 39,678 55,513
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Collateralized by - Debt securities — — — 17,800
25 Financial assets at fair value through profit or loss
The Group
(i) Analysed by type
As at As at 31 December 30 June 2012 2013 2014 2015
Held for trading - Equity securities 9,234 8,975 3,429 34,502 - Funds — 14 5,148 4,916 9,234 8,989 8,577 39,418 ------
Financial assets designated at fair value through profit or loss - Asset management plans — — — 7,371 - Receivables — — 19,026 — Total 9,234 8,989 27,603 46,789
— I-68 — APPENDIX I ACCOUNTANTS’ REPORT
Asset management plans and receivables held by the Group have been designated at fair value through profit or loss because they are managed, evaluated and reported internally on a fair value basis in accordance with its documented investment strategy.
(ii) Analysed as
As at As at 31 December 30 June 2012 2013 2014 2015
Listed outside Hong Kong 9,234 8,989 8,577 39,418 Unlisted — — 19,026 7,371 Total 9,234 8,989 27,603 46,789
The Company
(i) Analysed by type
As at As at 31 December 30 June 2012 2013 2014 2015
Held for trading - Equity securities 9,234 8,975 3,429 27,566
(ii) Analysed as
As at As at 31 December 30 June 2012 2013 2014 2015
Listed outside Hong Kong 9,234 8,975 3,429 27,566
— I-69 — APPENDIX I ACCOUNTANTS’ REPORT
26 Derivative financial assets / liabilities
The Group
As at 31 December 2012 Notional Fair value amount Assets Liabilities
Commodity derivatives - Futures — — —
Less: settlement — — ------Net position — —
As at 31 December 2013 Notional Fair value amount Assets Liabilities
Commodity derivatives - Futures 9,539 195 (195)
Less: settlement (195) — ------Net position — (195)
As at 31 December 2014 Notional Fair value amount Assets Liabilities
Commodity derivatives - Futures 261,575 11,540 (5,923)
Less: settlement (9,125) 997 ------Net position 2,415 (4,926)
— I-70 — APPENDIX I ACCOUNTANTS’ REPORT
The Group
As at 30 June 2015 Notional Fair value amount Assets Liabilities
Commodity derivatives - Futures 378,713 8,953 (4,343) - Forward 49,011 — (2,297) - Option 4,234 36 — Total 431,958 8,989 (6,640)
Less: settlement (8,953) 3,737 ------Net position 36 (2,903)
27 Cash held on behalf of brokerage clients
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Cash held on behalf of brokerage clients 299,149 588,077 1,310,219 1,300,144
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Cash held on behalf of brokerage clients 299,149 566,490 1,244,921 1,262,887
— I-71 — APPENDIX I ACCOUNTANTS’ REPORT
The Group and the Company maintain segregated deposit accounts with banks to hold clients’ monies arising from its normal course of brokerage business. The Group and the Company have classified their brokerage clients’ monies as cash held on behalf of brokerage clients under the current assets section of the combined statement of financial position and the statement of financial position, and recognised the corresponding accounts payable to the respective brokerage clients on the grounds that they are liable for any loss or misappropriation of their brokerage clients’ monies. In the PRC, cash held on behalf of brokerage clients for their transaction and settlement funds is restricted and governed by relevant third-party deposit regulations issued by the China Securities Regulatory Commission (the “CSRC”). In Hong Kong, cash held on behalf of brokerage clients is restricted and governed by the Securities and Futures (Client Money) Rules under the Securities and Futures Ordinance.
28 Cash and bank balances
The Group
As at Note As at 31 December 30 June 2012 2013 2014 2015
Bank deposits with original maturity over 3 months 1,063,211 965,000 767,889 585,000 Restricted bank deposits — — 10,587 10,587 Cash and cash equivalents 29 17,222 31,285 232,033 210,517 1,080,433 996,285 1,010,509 806,104
As at 31 December 2014 and 30 June 2015, there were deposits amounting to RMB10,587 thousands pledged in relation to bank loans amounting to RMB70,580 thousands (see Note 33).
The Company
As at Note As at 31 December 30 June 2012 2013 2014 2015
Bank deposits with original maturity over 3 months 1,063,211 965,000 760,000 585,000 Cash and cash equivalents 29 13,089 26,260 226,403 188,035 1,076,300 991,260 986,403 773,035
— I-72 — APPENDIX I ACCOUNTANTS’ REPORT
29 Cash and cash equivalents
(a) Cash and cash equivalents comprise
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Deposits with banks and other financial institutions 17,221 31,281 232,027 210,512 Cash on hand 1465 17,222 31,285 232,033 210,517
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Deposits with banks and other financial institutions 13,088 26,259 226,400 188,033 Cash on hand 1132 13,089 26,260 226,403 188,035
Cash and cash equivalents exclude bank deposits with original maturity of more than three months and bank deposits in relation to bank loans held by the Group.
— I-73 — APPENDIX I ACCOUNTANTS’ REPORT
(b) Reconciliation of profit before taxation to cash generated from operations:
Six months Section B Year ended 31 December ended 30 June Note 2012 2013 2014 2014 2015 (Unaudited)
Profit before taxation 126,217 89,032 76,382 37,176 73,617 Adjustments for: Depreciation and amortisation 6(d) 4,970 6,342 7,935 4,096 3,968 Impairment losses 6(c) 82 10,104 — — — Net unrealised fair value changes 4 502 (977) 579 2,765 (3,188) Share of losses of associates 154 598 519 80 49 Loss on disposal of property, plant and equipment 51 — 31 — — Dividend income from investments 4 (217) (218) (774) (517) (146) Net realised gains from financial instruments 4 (4,529) (10,328) (9,517) (1,751) (10,952) Interest income from investments classified as receivables 3(b) (957) — (5,008) — (4,707) Interest expenses 6(d) — — 1,103 — 1,682 Operating cash flows before movements in working capital 126,273 94,553 71,250 41,849 60,323 (Increase)/decrease in refundable deposits (14,773) (86,242) 748,313 564,584 (259,681) Increase in trade receivables — (6,793) (10,926) (11,580) (20,875) (Increase)/decrease in other receivables (4,768) 2,013 (8,577) (12,930) (16,959) (Increase)/decrease in other current assets and non-current assets (85) (2,529) (13,404) (20,382) (23,171) Increase in financial assets held under resale agreements — (7,475) (32,203) (45,421) (15,835)
— I-74 — APPENDIX I ACCOUNTANTS’ REPORT
Six months Section B Year ended 31 December ended 30 June Note 2012 2013 2014 2014 2015 (Unaudited)
(Increase)/decrease in financial assets designated at fair value through profit or loss — — (19,026) (28,175) 11,655 (Increase)/decrease in derivative financial assets — — (2,415) — 2,379 (Increase)/decrease in cash held on behalf of brokerage clients (2,128) (288,928) (722,142) (244,149) 10,075 (Increase)/decrease in term deposits with original maturity over three months (448,212) 98,211 197,111 245,000 182,889 Increase in restricted bank deposits — — (10,587) — — Increase/(decrease) in accounts payable to brokerage clients 14,467 311,303 (70,225) (251,407) 334,044 Increase/(decrease) in trade payables — — 26,491 — (21,011) Increase/(decrease) in other payables 565 (11,460) 5,496 12,607 6,877 Increase/(decrease) in derivative financial liabilities — 195 4,731 (195) (2,023) Increase in financial liabilities designated at fair value through profit or loss — — 12,140 9,425 3,682 Cash (used in)/generated from operations (328,661) 102,848 176,027 259,226 252,369
— I-75 — APPENDIX I ACCOUNTANTS’ REPORT
30 Accounts payable to brokerage clients
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Clients’ deposits for brokerage business 1,721,762 2,033,065 1,962,840 2,296,884
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Clients’ deposits for brokerage business 1,721,762 2,077,518 1,975,726 2,268,927
Accounts payable to brokerage clients represent the monies received from and repayable to brokerage clients, which are held at banks and at futures and commodity exchanges by the Group and the Company. Accounts payable to brokerage clients are non-interest bearing.
The majority of the accounts payable balance are repayable on demand except for certain balances relating to margin deposits and cash collateral received from clients for their trading activities under the normal course of business. Only the excess amounts over the required margin deposits and cash collateral are repayable on demand.
No aging analysis is disclosed as in the opinion of the directors of the Company, the aging analysis does not give additional value in view of the nature of these businesses.
31 Trade payables
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Prepayments for agency services — — 26,491 1,440 Payable to commodity exchanges — — — 4,040 Total — — 26,491 5,480
— I-76 — APPENDIX I ACCOUNTANTS’ REPORT
32 Other payables
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Employee benefits payables 22,250 14,297 17,688 9,885 Business tax and surcharges payables 3,023 3,375 3,523 2,466 Commission payable to brokers 8,686 5,227 3,551 3,467 Dividend payable — — — 34,000 IPO service fees payable — — 1,652 15,893 Payable to investors protection funds — — 719 1,679 Payable for acquisition of property, plant and equipment — — — 1,346 Interest expenses payable — — 371 259 Others 1,071 671 1,933 2,553 Total 35,030 23,570 29,437 71,548
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Employee benefits payables 22,215 14,294 16,907 9,871 Business tax and surcharges payables 3,023 3,375 3,403 2,456 Commission payable to brokers 8,686 5,227 3,467 3,467 Dividend payable — — — 34,000 IPO service fees payable — — 1,652 15,893 Payable to investors protection funds — — 719 1,679 Payable for acquisition of property, plant and equipment — — — 1,346 Others 1,041 617 1,586 1,936 Total 34,965 23,513 27,734 70,648
— I-77 — APPENDIX I ACCOUNTANTS’ REPORT
33 Bank loans
The Group
At 31 December, the bank loans were repayable as follows:
As at As at 31 December 30 June 2012 2013 2014 2015
Within one year — — 70,580 70,580
At 31 December, the bank loans were secured as follows:
As at As at 31 December 30 June 2012 2013 2014 2015
Secured by stand-by letter of credit (“SBLC”) — — 70,580 70,580
As at 31 December 2014 and 30 June 2015, the Group obtained banking facilities amounting to RMB100,000 thousands. The facilities were utilised to the extent of RMB70,580 thousands which were secured by a stand-by letter of credit issued by Bank of Jiangsu. The SBLC is secured by pledged deposits and guarantee, amounting to RMB10,587 thousands (see Note 28) and RMB59,993 thousands, respectively. The guarantee is issued by the Company’s major shareholder: Jiangsu Holly Group Co., Ltd (江蘇弘業國際集團有限公司). As at 31 December 2014 and 30 June 2015, the bank loans bear interest at 4.1% per annum.
The Company
During the Relevant Periods, no bank loans were obtained by the Company.
34 Financial liabilities at fair value through profit or loss
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Financial liabilities designated at fair value through profit or loss - Payables — — 12,140 15,822
— I-78 — APPENDIX I ACCOUNTANTS’ REPORT
Payables held by the Group have been designated at fair value through profit or loss because these payables are managed, evaluated and reported internally on a fair value basis in accordance with its documented investment strategy.
35 Income tax
(a) Current taxation
The Group
As at As at 31 December 30 June Note 2012 2013 2014 2015
At the beginning of the year/period 8,545 12,646 3,725 6,844 Provision for the year/period 7(a) - PRC corporate income tax 31,190 22,919 18,558 15,322 - Hong Kong profits tax ———— Tax paid - PRC corporate income tax (27,089) (31,840) (15,439) (15,665) - Hong Kong profits tax ———— At the end of the year/period 12,646 3,725 6,844 6,501
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
At the beginning of the year/period 8,545 12,646 3,675 5,145 Provision for PRC corporate income tax for the year/period 31,190 22,869 16,598 10,858 PRC corporate income tax paid (27,089) (31,840) (15,128) (14,423)
At the end of the year/period 12,646 3,675 5,145 1,580
— I-79 — (b) Deferred tax assets/liabilities recognised REPORT ACCOUNTANTS’ I APPENDIX
The Group
The components of deferred tax assets/(liabilities) recognised in the combined statements of financial position and the movements during the Relevant Periods are as follows:
Changes in fair value of Changes in financial Changes in Impairment fair value instruments fair value of of available- of available- Intangible Employee Commission at fair value derivative for-sale for-sale assets arising benefits payable to through financial financial financial from business Deferred tax arising from: payable brokers profit or loss instruments assets assets combination Total
As at 1 January 2012 3,753 2,521 265 — 284 (3,062) — 3,761 Credited/(charged) to profit or loss 1,713 (349) 125 — 20 — — 1,509 -0— I-80 — Credited to reserves —————175—175 As at 31 December 2012 5,466 2,172 390 — 304 (2,887) — 5,445 ------
As at 1 January 2013 5,466 2,172 390 — 304 (2,887) — 5,445 Addition arising from business combination (see Note 38) ——————(1,525) (1,525) Credited/(charged) to profit or loss (2,008) (865) (244) — 65 — 218 (2,834) Credited to reserves —————788—788 As at 31 December 2013 3,458 1,307 146 — 369 (2,099) (1,307) 1,874 ------
As at 1 January 2014 3,458 1,307 146 — 369 (2,099) (1,307) 1,874 Credited/(charged) to profit or loss 874 (419) 958 (1,404) (65) — 436 380 Charged to reserves —————(706) — (706) As at 31 December 2014 4,332 888 1,104 (1,404) 304 (2,805) (871) 1,548 ------
As at 1 January 2015 4,332 888 1,104 (1,404) 304 (2,805) (871) 1,548 Credited/(charged) to profit or loss (1,866) (21) (1,248) 817 (219) — 218 (2,319) Charged to reserves —————(883) — (883) As at 30 June 2015 2,466 867 (144) (587) 85 (3,688) (653) (1,654) The Company REPORT ACCOUNTANTS’ I APPENDIX
The components of deferred assets/(liabilities) recognised in the Company’s statements of financial position and the movements during the Relevant Periods are as follows:
Changes in fair value of Changes in financial Impairment fair value instruments of available- of available- Intangible Employee Commission at fair value for-sale for-sale assets arising benefits payable to through profit financial financial from business Deferred tax arising from: payable brokers or loss assets assets combination Total
As at 1 January 2012 3,753 2,521 265 284 (3,062) — 3,761 Credited/(charged) to profit or loss 1,713 (349) 125 20 — — 1,509 Credited to reserves ————175—175
-1— I-81 — As at 31 December 2012 5,466 2,172 390 304 (2,887) — 5,445 ------
As at 1 January 2013 5,466 2,172 390 304 (2,887) — 5,445 Addition arising from business combination (see Note 38) —————(1,525) (1,525) Credited/(charged) to profit or loss (2,008) (865) (244) 65 — 218 (2,834) Credited to reserves ————788—788
As at 31 December 2013 3,458 1,307 146 369 (2,099) (1,307) 1,874 ------
As at 1 January 2014 3,458 1,307 146 369 (2,099) (1,307) 1,874 Credited/(charged) to profit or loss 684 (440) 168 (65) — 436 783 Credited to reserves ————(706) — (706)
As at 31 December 2014 4,142 867 314 304 (2,805) (871) 1,951 ------
As at 1 January 2015 4,142 867 314 304 (2,805) (871) 1,951 Credited/(charged) to profit or loss (l,677) — (846) (2l9) — 2l8 (2,524) Credited to reserves ————(883) — (883)
As at 30 June 2015 2,465 867 (532) 85 (3,688) (653) (l,456) APPENDIX I ACCOUNTANTS’ REPORT
(c) Reconciliation to the statements of financial position
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Net deferred tax assets recognised in the combined statement of financial position 5,445 1,874 1,951 127 Net deferred tax liabilities recognised in the combined statement of financial position — — (403) (1,781) Total 5,445 1,874 1,548 (1,654)
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Net deferred tax assets recognised in the statement of financial position 5,445 1,874 1,951 — Net deferred tax liabilities recognised in the statement of financial position — — — (1,456) Total 5,445 1,874 1,951 (1,456)
(d) Recognised in other comprehensive income
The Group and the Company
Year ended 31 December 2012 Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value (701) 175 (526) - Reclassified to profit or loss — — — Total (701) 175 (526)
— I-82 — APPENDIX I ACCOUNTANTS’ REPORT
Year ended 31 December 2013 Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value (3,484) 871 (2,613) - Reclassified to profit or loss 331 (83) 248 Total (3,153) 788 (2,365)
Year ended 31 December 2014 Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value 2,703 (676) 2,027 - Reclassified to profit or loss 119 (30) 89 Total 2,822 (706) 2,116
Six months ended 30 June 2014 (Unaudited) Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value (920) 230 (690) - Reclassified to profit or loss — — — Total (920) 230 (690)
Six months ended 30 June 2015 Tax (expense)/ Before tax benefit Net of tax
Available-for-sale financial assets - Net changes in fair value 2,569 (642) l,927 - Reclassified to profit or loss 962 (24l) 72l Total 3,53l (883) 2,648
— I-83 — APPENDIX I ACCOUNTANTS’ REPORT
(e) Deferred tax assets not recognised
As at 31 December 2013, 31 December 2014 and 30 June 2015, temporary difference relating to the goodwill impairment of RMB9,845 thousands is not recognised. According to Implementation Regulations for the Corporate Income Tax Law of the People’s Republic of China, the expenditure incurred in externally purchased goodwill shall be deductible at the time of whole transfer or liquidation of the acquired assets and liabilities. As the Group is operating on the going concern basis and there is no plan of transfer or liquidation of the acquired assets and liabilities, the deferred tax assets arising from the goodwill impairment is not recognised.
As at 31 December 2012, 2013 and 2014, and 30 June 2015, in accordance with the accounting policy set out in Note 1(s), the Group has not recognised deferred tax assets in respect of cumulative tax losses of RMB1,765 thousands, RMB4,466 thousands, RMB5,548 thousands and RMB6,148 thousands respectively, as it is not probable that future taxable profits against which the losses can be utilised will be available in the relevant tax jurisdiction and entity. The tax losses do not expire under current tax legislation.
36 Share capital and reserves
(a) Movements in components of equity
The reconciliation between the opening and closing of each component of the Group’s combined equity for the Relevant Periods is set out in the combined statement of changes in equity.
Before 21 November 2012, the Company was an exempted company with limited liability. Pursuant to the conversion completed on 21 November 2012 as detailed in the section headed “History, Development and Corporate Structure” in the Prospectus, the Company was converted into a joint stock limited liability company.
During the conversion, capital reserve of RMB112,925 thousands, surplus reserve of RMB29,399 thousands and distributable profits of RMB157,676 thousands were converted into RMB300,000 thousands of equivalent share capital.
— I-84 — APPENDIX I ACCOUNTANTS’ REPORT
Details of the changes in the Company’s individual components of equity for the Relevant Periods are set out below:
Reserves
Share Capital Surplus General Fair value Distributable capital reserve reserve reserve reserve profits Total
As at 1 January 2012 380,000 463,050 28,136 78,643 9,187 112,607 1,071,623 ------
Change in equity for 2012 Profit for the year —————98,558 98,558 Other comprehensive income ————(526) — (526)
Total comprehensive income ————(526) 98,558 98,032 ------
Appropriation of profits Appropriation to surplus reserve — — 8,264 — — (8,264) — Appropriation to general reserve — — — 22,993 — (22,993) — Conversion into joint stock limited liability company 300,000 (112,925) (29,399) — — (157,676) — As at 31 December 2012 680,000 350,125 7,001 101,636 8,661 22,232 1,169,655
Reserves Share Capital Surplus General Fair value Distributable capital reserve reserve reserve reserve profits Total
As at 1 January 2013 680,000 350,125 7,001 101,636 8,661 22,232 1,169,655 ------
Change in equity for 2013 Profit for the year —————65,535 65,535 Other comprehensive income ————(2,365) — (2,365) Total comprehensive income ————(2,365) 65,535 63,170 ------
Appropriation of profits Appropriation to surplus reserve — — 6,791 — — (6,791) — Appropriation to general reserve — — — 18,868 — (18,868) — As at 31 December 2013 680,000 350,125 13,792 120,504 6,296 62,108 1,232,825
— I-85 — APPENDIX I ACCOUNTANTS’ REPORT
Reserves
Share Capital Surplus General Fair value Distributable capital reserve reserve reserve reserve profits Total
As at 1 January 2014 680,000 350,125 13,792 120,504 6,296 62,108 1,232,825 ------
Change in equity for 2014 Profit for the year —————52,416 52,416 Other comprehensive income ————2,116—2,116
Total comprehensive income ————2,11652,416 54,532 ------
Appropriation of profits Appropriation to surplus reserve — — 4,359 — — (4,359) — Appropriation to general reserve — — — 12,536 — (12,536) — Dividends approved in respect of the previous year —————(54,400) (54,400) As at 31 December 2014 680,000 350,125 18,151 133,040 8,412 43,229 1,232,957
Reserves Share Capital Surplus General Fair value Distributable capital reserve reserve reserve reserve profits Total
As at 1 January 2014 680,000 350,125 13,792 120,504 6,296 62,108 1,232,825 ------
Change in equity for six months ended 30 June 2014 Profit for the period —————25,890 25,890 Other comprehensive income ————(690) — (690) Total comprehensive income ————(690) 25,890 25,200 ------
Appropriation of profits Appropriation to surplus reserve ————— —— Appropriation to general reserve ————— —— Dividends approved in respect of the previous year —————(54,400) (54,400) As at 30 June 2014 (Unaudited) 680,000 350,125 13,792 120,504 5,606 33,598 1,203,625
— I-86 — APPENDIX I ACCOUNTANTS’ REPORT
Reserves
Share Capital Surplus General Fair value Distributable capital reserve reserve reserve reserve profits Total
As at 1 January 2015 680,000 350,125 18,151 133,040 8,412 43,229 1,232,957 ------
Change in equity for six months ended 30 June 2015 Profit for the period —————43,234 43,234 Other comprehensive income ————2,648 — 2,648
Total comprehensive income ————2,648 43,234 45,882 ------
Appropriation of profits Appropriation to surplus reserve ————— —— Appropriation to general reserve ————— —— Dividends approved in respect of the previous year —————(34,000) (34,000) As at 30 June 2015 680,000 350,125 18,151 133,040 11,060 52,463 1,244,839
(b) Dividends
(i) Dividends payable to equity shareholders of the Company attributable to the year
As at As at 31 December 30 June 2012 2013 2014 2015
Final dividend proposed after the end of the Relevant Periods — 54,400 34,000 —
The final dividend proposed after the end of the Relevant Periods has not been recognised as a liability at the end of the Relevant Periods.
(ii) Dividends payable to equity shareholders of the Company attributable to the previous financial year, approved and paid during the year
As at As at 31 December 30 June 2012 2013 2014 2015
Final dividend in respect of the previous financial year, approved and paid during the year/period — — 54,400 —
— I-87 — APPENDIX I ACCOUNTANTS’ REPORT
(c) Share capital
All shares issued by the Company are fully paid ordinary shares. The par value per share is RMB1. The Company’s number of shares issued and their nominal value are as follows:
As at As at 31 December 30 June 2012 2013 2014 2015
Number of shares registered, issued and fully paid (at RMB1 per share) 680,000 680,000 680,000 680,000
(d) Reserves
(i) Capital reserve
Capital reserve mainly includes share premium arising from investors’ capital injection at prices in excess of par value. Besides, the capital reserve also include the amount of issued capital of Holly Su Futures before the Reorganisation, as if the transfer of the entire equity interest, as a part of Reorganisation, was completed at the beginning of the Relevant Periods as mentioned in Note 1(b), and the deemed capital contribution before Reorganisation.
(ii) Surplus reserve
The surplus reserve represents statutory surplus reserve fund. The entities established in the PRC are required to appropriate 10% of its net profit as determined under the PRC GAAP issued by the MOF, to the statutory surplus reserve fund until the reserve fund balance reaches 50% of its registered capital.
Subject to the approval of equity holders of the entities established in the PRC, statutory surplus reserve may be used to net off with accumulated losses, if any, and may be converted into capital, provided that the balance of statutory surplus reserve after such capitalisation is not less than 25% of the registered capital.
(iii) General reserve
General reserve includes general risk reserve and futures risk reserve.
In accordance with the requirements of the Ministry of Finance Circular regarding the Implementation Guidance of Rules on the Accounting by Financial Enterprises (Caijin [2007] No. 23) issued on 30 March 2007, the Company appropriates 10% of its annual net profit as determined under PRC GAAP to the general risk reserve.
— I-88 — APPENDIX I ACCOUNTANTS’ REPORT
In accordance with the requirements of the Notice of the Ministry of Finance on Issuing the Tentative Provisions for the Financial Management of Commodities Futures Trading (Caishang [1997] No. 44) issued on 3 March 1997, the Company appropriates the futures risk reserve based on 5% of the commission and fee income from futures brokerage services net of relevant expenses payable to futures exchanges, for the purpose of covering potential losses from futures brokerage service. When actual losses occur, the loss amount is charged to the current profit or loss, with the same amount being transferred from futures risk reserve to retained earnings simultaneously. Appropriation for futures risk reserve is recorded as profit distribution, whilst the utilization of futures risk reserve is recorded as the opposite type of transaction.
(iv) Fair value reserve
The fair value reserve comprises the cumulative net changes in fair values of available-for-sale financial assets until the assets are derecognised or impaired.
(v) Translation reserve
The translation reserve mainly comprises foreign currency differences arising from the translation of the financial statements of foreign currencies.
(vi) Distributable profits
The Company’s distributable profits for equity shareholders are based on the distributable profits of the Company as determined under the PRC GAAP and HKFRS, whichever is lower.
37 Financial risk management and fair values of financial instruments
Exposure to credit, liquidity and interest rate risk arises in the normal course of the Group’s business. The Group is also exposed to price risk arising from equity securities and commodities. The Group also needs to comply with some risk control indicators under the PRC regulatory requirements in relation to capital management.
The Group’s exposure to these risks and the financial risk management policies and practice used by the Group to manage these risks are described as below:
(a) Credit risk
Credit risk represents the potential loss that may arise from the failure of a debtor or counterparty to meet its obligation or commitment to the Group.
— I-89 — APPENDIX I ACCOUNTANTS’ REPORT
The Group’s credit risk is primarily attributable to other non-current assets, refundable deposits, trade receivables, other receivables, available-for-sale financial assets, derivative financial assets, financial assets held under resale agreements, cash held on behalf of brokerage clients and bank balances. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis.
Other non-current assets are deposits with HKFE required as the condition to provide brokerage service in Hong Kong. Refundable deposits are mainly deposits with futures and commodity exchanges in the PRC for the purpose of settlement on behalf of customers. The futures and commodity exchanges are supervised by relevant regulators and considered to have minimal credit risk.
Trade receivables are mainly receivables from rendering commodity trading and risk management business. The Group monitors all receivables on an individual customer basis and calls for commodity collaterals when necessary. The receivables are related to a certain number of customers with no recent history of default. Thus, the credit risk is low.
Other receivables are mainly rental deposits and interest receivables, which management assessed the credit risk to be insignificant.
Investments classified as receivables and available-for-sale financial assets represent the investment in wealth management products launched by commercial banks. The Group emphasises proper investment operation and aims to achieve stable returns while minimizing risks. The invested products are launched by banks with good credit rating. Therefore, the credit risk is considered to be low.
Financial assets held under resale agreements are mainly resale agreements signed with clients. All transactions are credit enhanced by pledged commodities and debt securities, the credit risk is considered to be low.
Derivative financial assets are futures, forward and options agreements signed with clients traded through over-the-counter market. As the counterparties for the agreements have no recent history of default, the credit risk is considered to be low.
Substantially all of the Group’s cash held on behalf of brokerage clients and bank balances are deposited in PRC and HK banks with good reputation which management assessed the credit risk to be insignificant.
The Group and the Company do not provide any guarantees which would expose the Group or the Company to any credit risk.
— I-90 — APPENDIX I ACCOUNTANTS’ REPORT
Without taking into account of collaterals or other credit enhancements, the maximum credit exposure of the Group and the Company, which is net of impairment allowance, is listed as follows:
The Group
As at As at 31 December 30 June 2012 2013 2014 2015
Non-current assets Other non-current assets 1,216 1,179 1,183 1,183
Current assets Refundable deposits 1,467,738 1,553,980 805,667 1,065,348 Trade receivables — 6,793 17,719 38,594 Investments classified as receivables — — — 200,000 Other receivables 11,603 9,590 18,167 35,126 Available-for-sale financial assets — 20,207 — 44,320 Financial assets held under resale agreements — 7,475 39,678 55,513 Derivative financial assets — — 2,415 36 Cash held on behalf of brokerage clients 299,149 588,077 1,310,219 1,300,144 Bank balances 1,080,432 996,281 1,010,503 806,099 Total 2,860,138 3,183,582 3,205,551 3,546,363
The Company
As at As at 31 December 30 June 2012 2013 2014 2015
Current assets Refundable deposits 1,467,738 1,535,830 766,649 1,032,042 Trade receivables — 147 — — Investments classified as receivables — — — 200,000 Other receivables 11,557 9,378 16,879 32,441 Available-for-sale financial assets — 20,207 — — Financial assets held under resale agreements — — — 17,800 Cash held on behalf of brokerage clients 299,149 566,490 1,244,921 1,262,887 Bank balances 1,076,299 991,259 986,400 773,033 Total 2,854,743 3,123,311 3,014,849 3,318,203
— I-91 — APPENDIX I ACCOUNTANTS’ REPORT
(b) Liquidity risk
Individual operating entities within the Group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by the Board when the borrowings exceed certain predetermined levels of authority.
The Group’s policy is to regularly monitor its liquidity requirement and its compliance with lending covenants if any, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and long term.
The following table shows the remaining contractual maturities at the end of the Relevant Periods of the Group and the Company’s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the end of the Relevant Periods) and the earliest date the Group and the Company, as applicable, can be required to pay:
The Group
2012 Contractual undiscounted cash flow Carrying amount On Within at 31 demand 1 year Total December
Accounts payable to brokerage clients 1,721,762 — 1,721,762 1,721,762 Other payables — 35,030 35,030 35,030 Total 1,721,762 35,030 1,756,792 1,756,792
2013 Contractual undiscounted cash flow Carrying amount On Within at 31 demand 1 year Total December
Accounts payable to brokerage clients 2,033,065 — 2,033,065 2,033,065 Other payables — 23,570 23,570 23,570 Derivative financial liabilities — 195 195 195 Total 2,033,065 23,765 2,056,830 2,056,830
— I-92 — APPENDIX I ACCOUNTANTS’ REPORT
2014 Contractual undiscounted cash flow Carrying amount On Within at 31 demand 1 year Total December
Accounts payable to brokerage clients 1,962,840 — 1,962,840 1,962,840 Trade payables — 26,491 26,491 26,491 Other payables — 29,066 29,066 29,066 Bank loans — 73,159 73,159 70,580 Financial liabilities at fair value through profit or loss — 12,140 12,140 12,140 Derivative financial liabilities — 4,926 4,926 4,926 Total 1,962,840 145,782 2,108,622 2,106,043
2015 Contractual undiscounted cash flow Carrying On Within amount demand 1 year Total at 30 June
Accounts payable to brokerage clients 2,296,884 — 2,296,884 2,296,884 Trade payables — 5,480 5,480 5,480 Other payables — 71,289 71,289 71,289 Bank loans — 71,365 71,365 70,580 Financial liabilities at fair value through profit or loss — 15,822 15,822 15,822 Derivative financial liabilities — 2,903 2,903 2,903 Total 2,296,884 166,859 2,463,743 2,462,958
— I-93 — APPENDIX I ACCOUNTANTS’ REPORT
The Company
2012 Contractual undiscounted cash flow Carrying amount On Within at 31 demand 1 year Total December
Accounts payable to brokerage clients 1,721,762 — 1,721,762 1,721,762 Other payables — 34,965 34,965 34,965 Total 1,721,762 34,965 1,756,727 1,756,727
2013 Contractual undiscounted cash flow Carrying amount On Within at 31 demand 1 year Total December
Accounts payable to brokerage clients 2,077,518 — 2,077,518 2,077,518 Other payables — 23,513 23,513 23,513 Total 2,077,518 23,513 2,101,031 2,101,031
2014 Contractual undiscounted cash flow Carrying amount On Within at 31 demand 1 year Total December
Accounts payable to brokerage clients 1,975,726 — 1,975,726 1,975,726 Other payables — 27,734 27,734 27,734 Total 1,975,726 27,734 2,003,460 2,003,460
2015 Contractual undiscounted cash flow Carrying On Within amount demand 1 year Total at 30 June
Accounts payable to brokerage clients 2,268,927 — 2,268,927 2,268,927 Other payables — 70,648 70,648 70,648 Total 2,268,927 70,648 2,339,575 2,339,575
— I-94 — (c) Interest rate risk REPORT ACCOUNTANTS’ I APPENDIX
Interest rate risk refers to the likelihood of loss that may arise from adverse movements in the market interest rate. The Group’s interest rate risk mainly arises from interest rate policy changes and the mismatch of interest-sensitive assets and liabilities.
The Group mainly manages interest rate risk through structuring and adjusting its asset portfolio. The Group’s asset portfolio management aims at mitigating risks and improving profitability by diversification of assets.
(i) Interest rate profile
The following table details the interest rate profile of the Group and the Company’s interest-bearing financial instruments at the end of the Relevant Periods:
The Group -5— I-95 — As at 31 December As at 30 June 2012 2013 2014 2015 Effective Effective Effective Effective interest rate Amount interest rate Amount interest rate Amount interest rate Amount
Fixed rate instrument Refundable deposits 1.98% 1,467,738 1.98% 1,535,830 2.4% 776,020 2.4% 1,032,042 Trade receivable N/A — 10%-12.78% 6,646 N/A — 14.4% 34,245 Investments classified as receivables N/A — N/A — N/A — 4.8% 200,000 Financial assets held under resale agreements N/A — 16.58% 7,475 14%-22.5% 39,678 1.03%-22.5% 55,513 Cash held on behalf of brokerage clients 4.17%-4.58% 120,000 5.2%-6.5% 330,000 4.35%-6.8% 1,170,000 3.9%-5.5% 1,000,000 Bank balances 3.08%-6.02% 1,063,211 3.5%-7.35% 965,403 0.84%-5.5% 981,227 3.3%-5.5% 762,009 Bank loans N/A — N/A — 4.1% (70,580) 4.1% (70,580)
Variable rate instrument Cash held on behalf of brokerage clients 0.35%-2.5% 179,149 0.001%-2.5% 258,077 0.001%-2.5% 140,219 0.001%-2.5% 300,144 Bank balances 0.001%-1.98% 17,221 0.001%-1.98% 30,878 0.001%-1.98% 29,276 0.001%-1.98% 44,090 The Company REPORT ACCOUNTANTS’ I APPENDIX
As at 31 December As at 30 June 2012 2013 2014 2015 Effective Effective Effective Effective interest rate Amount interest rate Amount interest rate Amount interest rate Amount
Fixed rate instrument Refundable deposits 1.98% 1,467,738 1.98% 1,535,830 2.4% 766,649 2.4% 1,032,042 Investments classified as receivables N/A — N/A — N/A — 4.8% 200,000 Financial assets held under resale agreements N/A — N/A — N/A — 1.03% 17,800 Cash held on behalf of brokerage clients 4.17%-4.58% 120,000 5.2%-6.5% 330,000 4.35%-6.8% 1,170,000 3.9%-5.5% 1,000,000 Bank balances 3.08%-6.02% 1,063,211 3.5%-7.35% 965,403 3.3%-5.5% 973,338 3.3%-5.3% 762,009
Variable rate instrument
-6— I-96 — Cash held on behalf of brokerage clients 0.35%-2.5% 179,149 0.35%-2.5% 236,490 0.35%-2.5% 74,921 0.35%-2.5% 262,887 Bank balances 0.35%-1.98% 13,088 0.35%-1.98% 25,856 0.35%-1.98% 13,062 0.35%-1.98% 11,024 APPENDIX I ACCOUNTANTS’ REPORT
(ii) Sensitivity analysis
- Fair value sensitivity analysis for fixed rate financial instruments
The Group and the Company do not hold for any fixed rate financial instruments measured at fair value. Therefore a change in interest rate at the end of the Relevant Periods would not affect the Group and the Company’s net profit or equity.
- Cash flow sensitivity analysis for variable rate financial instruments
Assuming all other variables remain constant, interest rate sensitivity analysis is as follows:
The Group
Sensitivity of net profit and equity As at As at 31 December 30 June 2012 2013 2014 2015
Change in basis points Increase 100 basis points 1,473 2,167 1,271 3,442 Decrease 100 basis points (1,236) (1,859) (348) (1,436)
The Company
Sensitivity of net profit and equity As at As at 31 December 30 June 2012 2013 2014 2015
Change in basis points Increase 100 basis points 1,442 1,968 660 2,739 Decrease 100 basis points (1,236) (1,856) (314) (1,379)
In respect of the exposure to cash flow interest rate risk arising from variable rate instruments held by the Group and the Company at the end of the Relevant Periods, the impact on the Group and the Company’s net profit and equity is estimated as an annualized impact on interest income of such a change in interest rates. The analysis is performed on the same basis at the end of the Relevant Periods.
— I-97 — APPENDIX I ACCOUNTANTS’ REPORT
(d) Currency risk
No material currency risk for the Group as the majority of the business activities are within mainland China and settle in RMB.
(e) Price risk
The Group and the Company are exposed to equity price changes and commodity price changes arising from the investments concluded in available-for-sale financial assets (see Note 17), financial assets/liabilities at fair value through profit or loss (see Note 25 and 34) and derivative financial assets/liabilities (see Note 26). Price risk the Group and the Company facing is mainly the proportionate fluctuation in the Group and the Company’s net profit and equity due to the price fluctuation of the available-for-sale financial assets, financial assets/liabilities at fair value through profit or loss and derivative financial assets/liabilities.
Sensitivity analysis
The analysis below is performed to show the impact on the Group and the Company’s net profit and equity due to change in the prices of equity securities by 10% and the commodity prices by 10% with all other variables held constant.
The Group
Sensitivity of net profit As at As at 31 December 30 June 2012 2013 2014 2015
Changes in the equity price risk variable Increase by 10% 923 899 858 3,942 Decrease by 10% (1,028) (1,009) (858) (3,942)
Changes in the commodity price risk variable Increase by 10% — — 161 (14,403) Decrease by 10% — — (236) 14,919
— I-98 — APPENDIX I ACCOUNTANTS’ REPORT
Sensitivity of equity As at As at 31 December 30 June 2012 2013 2014 2015
Changes in the equity price risk variable Increase by 10% 2,675 2,344 2,637 5,876 Decrease by 10% (2,675) (2,344) (2,637) (5,876)
Changes in the commodity price risk variable Increase by 10% — — 161 (14,403) Decrease by 10% — — (236) 14,919
The Company
Sensitivity of net profit As at As at 31 December 30 June 2012 2013 2014 2015
Changes in the equity price risk variable Increase by 10% 923 897 343 2,757 Decrease by 10% (1,028) (1,008) (343) (2,757)
Sensitivity of equity As at As at 31 December 30 June 2012 2013 2014 2015
Changes in the equity price risk variable Increase by 10% 2,675 2,343 2,123 4,691 Decrease by 10% (2,675) (2,343) (2,123) (4,691)
The sensitivity analysis indicates the instantaneous change in the Group and the Company’s net profit and equity that would arise assuming that the changes in the stock market index and commodity futures market had occurred at the end of the Relevant Periods and had been applied to re-measure those financial instruments held by the Group and the Company which expose the Group and the Company to equity and commodity price risk at the end of the Relevant Periods. It is also assumed that the fair values of the Group and the Company’s equity investments and hedging investments would change in accordance with the historical correlation with the relevant stock market index and commodity futures price with all other variables remain constant. The analysis is performed on the same basis at the end of the Relevant Periods.
— I-99 — APPENDIX I ACCOUNTANTS’ REPORT
(f) Capital management
The Group and the Company’s objectives of capital management are:
(i) To safeguard the Group and the Company’s ability to continue as a going concern so that they can continue to provide returns for shareholders and benefits for other stakeholders;
(ii) To support the Group and the Company’s stability and growth;
(iii) To maintain a strong capital base to support the development of their business; and
(iv) To comply with the capital requirements under the PRC regulations.
According to the Notice of “Decision on Revising
(i) The Net Capital shall not be less than RMB15 million;
(ii) The ratio between Net Capital and the company’s risk capital provision shall not be less than 100%;
(iii) The ratio between Net Capital and net assets shall not be less than 40%;
(iv) The ratio between current assets and current liabilities shall not be less than 100%; and
(v) The ratio between liabilities and net assets shall not be higher than 150%.
Net Capital refers to net assets minus risk adjustments on certain types of assets and liabilities as defined in the Administrative Measures.
During the Relevant Periods, the Company has taken sufficient measures to maintain the above ratios in compliance with the relevant capital requirements.
The subsidiaries of the Group are not subject to capital requirements under the PRC and Hong Kong regulatory requirements. The subsidiaries do not need to comply with the relevant capital requirements during the Relevant Periods.
— I-100 — APPENDIX I ACCOUNTANTS’ REPORT
(g) Fair value measurement
Financial assets and liabilities measured at fair value - Fair value hierarchy
The following table presents the fair value of the Group and the Company’s financial instruments measured at the end of the Relevant Periods on a recurring basis, categorised into the three-level fair value hierarchy as defined in HKFRS 13, Fair value measurement. The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:
— Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
— Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available.
— Level 3 valuations: Fair value measured using significant unobservable inputs.
If there is a reliable market quote for financial instruments, the fair value of financial instruments is based on quoted market prices. If a reliable quoted market price is not available, the fair value of the financial instruments is estimated using valuation techniques. Valuation techniques applied include reference to the fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. The inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and foreign exchange rates. Where discounted cash flow analysis is used, estimated cash flows are based on management’s best estimates and the discount rate used is reference to another instrument that is substantially the same.
— I-101 — The table below analyses financial instruments, measured at fair value at the end of the Relevant REPORT ACCOUNTANTS’ Periods by the level in the fair value I APPENDIX hierarchy into which the fair value measurement is categorised. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value:
Fair value measurements Fair value measurements Fair value measurements Fair value measurements as at 31 December 2012 as at 31 December 2013 as at 31 December 2014 as at 30 June 2015 categorized into categorized into categorized into categorized into Fair value Fair value Fair value Fair value as at 31 as at 31 as at 31 as at December December December 30 June The Group 2012 Level 1 Level 2 Level 32013 Level 1 Level 2 Level 32014 Level 1 Level 2 Level 32015 Level 1 Level 2 Level 3
Assets: Available-for-sale financial assets : Equity instruments - Listed equity securities 11,314 11,314 — — 7,983 7,983 — — 10,632 10,632 — — 10,215 10,215 — — - Unlisted equity investments 10,600 — — 10,600 ———————————— Wealth management products ————20,207——20,207————43,320——43,320
-0 — I-102 — Unlisted funds 6,197 — 5,197 1,000 6,468 — 5,468 1,000 7,165 — 6,165 1,000 9,128 — 8,128 1,000 Asset management plan ————————————1,000——1,000 Financial assets at fair value through profit or loss: Equity securities 9,234 9,234 — — 8,975 6,528 — 2,447 3,429 2,308 — 1,121 34,502 34,502 — — Listed funds ————1414——5,1485,148——4,9164,916—— Receivables ————————19,026——19,026———— Asset management plans ————————————7,371——7,371 Derivative financial assets ————————2,415—2,415—36—36—
Liabilities: Financial liabilities at fair value through profit or loss: Payables ————————(12,140) — — (12,140) (15,822) — — (15,822) Derivative financial liabilities ————(195) — (195) — (4,926) — (4,926) — (2,903) — (2,903) — Fair value measurements Fair value measurements REPORT ACCOUNTANTS’ Fair value measurements Fair value I measurementsAPPENDIX as at 31 December 2012 as at 31 December 2013 as at 31 December 2014 as at 30 June 2015 categorized into categorized into categorized into categorized into Fair value Fair value Fair value Fair value as at 31 as at 31 as at 31 as at December December December 30 June The Company 2012 Level 1 Level 2 Level 32013 Level 1 Level 2 Level 32014 Level 1 Level 2 Level 32015 Level 1 Level 2 Level 3
Assets: Available-for-sale financial assets: Equity instruments - Listed equity securities 11,314 11,314 — — 7,983 7,983 — — 10,632 10,632 — — 10,215 10,215 — — - Unlisted equity investments 10,600 — — 10,600 ———————————— Wealth management products ————20,207——20,207———————— Unlisted funds 6,197 — 5,197 1,000 6,468 — 5,468 1,000 7,165 — 6,165 1,000 9,128 — 8,128 1,000 Financial assets at fair value through profit or loss: Equity securities 9,234 9,234 — — 8,975 6,528 — 2,447 3,429 2,308 — 1,121 27,566 27,566 — — -0 — I-103 — APPENDIX I ACCOUNTANTS’ REPORT
There were transfers between Level 1 and Level 3 during the year of 2013 and the six months ended 30 June 2015. The Group and the Company held the stock named ‘Chang Hang You Yun’ (code: 600087) which is an A-share listed company and was classified as Level 1 as at 31 December 2012. On 14 May 2013, the stock was suspended. The suspended period was from 14 May 2013 to 21 April 2014. Therefore, the Group and the Company transferred the stock amounting to a total of RMB2,447 thousands from Level 1 to Level 3 as at 31 December 2013. On 5 June 2014, the stock was officially delisted from the Shanghai Stock Exchange because the company had been loss making for more than four years. On 20 April 2015, the stock was relisted on the National Equities Exchange and Quotations (code: 400061) after the completion of its restructuring. Thus, the Group and the Company transferred the stock amounting to a total of RMB1,121 thousands from Level 3 to Level 1 as at 30 June 2015.
Other than the above, there were no transfers between Level 1 and Level 2, or transfer into or out of Level 3 during the Relevant Periods. The Group’s policy is to recognise transfers between levels of fair value hierarchy at the end of the Relevant Periods in which they occur.
(i) Financial instruments in Level 1
The fair value of financial instruments traded in active markets is based on quoted market prices at the date of the statement of financial position. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the closing price within bid-ask spread. These instruments are included in Level 1. Instruments included in Level 1 comprise securities traded on exchanges and funds investments traded through exchanges.
(ii) Financial instruments in Level 2
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2.
If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3.
(iii) Valuation methods
As at 31 December 2012, 2013 and 2014, and 30 June 2015, the Group and the Company’s valuation methods for specific investments are as follows:
(1) For listed equity securities, fair value is determined based on the closing price of the equity securities as at the end of the Relevant Periods, within bid-ask spread. If there is no quoted market price as at the reporting date and there have been significant changes in the economic environment after the most recent trading date, valuation techniques are used to determine the fair value.
— I-104 — APPENDIX I ACCOUNTANTS’ REPORT
(2) For exchange-listed investment funds, fair value is determined based on the closing price within bid-ask spread as at the end of the Relevant Periods or the most recent trading date. For unlisted open-end funds, fair value is determined by quoted price which is based on the net asset value as at the end of the Relevant Periods.
(3) For futures traded through exchanges, fair value is determined based on the closing price of the commodity futures as at the end of the Relevant Periods.
(4) For futures traded through over-the-counter market, fair values are determined using valuation techniques based on observable commodity futures market data with similar characteristics.
(iv) Financial instruments in Level 3
The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurement in Level 3 of the fair value hierarchy:
The Group
Financial Financial liabilities assets at at fair Available fair value value -for-sale through through financial profit or profit or assets loss loss Total
As at 1 January 2012 51,000 — — 51,000 Purchases 85,000 — — 85,000 Transfer to level 3 ———— Changes in fair value recognised in other comprehensive income 600 — — 600 Gains or losses for the year 3,709 — — 3,709 Sales and settlements (128,709) — — (128,709) As at 31 December 2012 11,600 — — 11,600
Total gains or losses for the year reclassified from other comprehensive income on disposal 3,709 — — 3,709
Total gains or losses for the year included in profit or loss for assets held at the end of Relevant Periods ————
— I-105 — APPENDIX I ACCOUNTANTS’ REPORT
Financial Financial liabilities assets at at fair Available fair value value -for-sale through through financial profit or profit or assets loss loss Total
As at 1 January 2013 11,600 — — 11,600 Purchases 400,000 — — 400,000 Transfer to level 3 — 3,374 — 3,374 Changes in fair value recognised in other comprehensive income 207 — — 207 Gains or losses for the year 8,023 (927) — 7,096 Sales and settlements (398,623) — — (398,623)
As at 31 December 2013 21,207 2,447 — 23,654
Total gains or losses for the year reclassified from other comprehensive income on disposal 8,623 — — 8,623
Total gains or losses for the year included in profit or loss for assets held at the end of Relevant Periods — (927) — (927)
— I-106 — APPENDIX I ACCOUNTANTS’ REPORT
Financial Financial liabilities assets at at fair Available fair value value -for-sale through through financial profit or profit or assets loss loss Total
As at 1 January 2014 21,207 2,447 — 23,654 Purchases 20,000 24,573 (10,000) 34,573 Transfer to level 3 ———— Changes in fair value recognised in other comprehensive income ———— Gains or losses for the year 902 (2,103) (2,140) (3,341) Sales and settlements (41,109) (4,770) — (45,879)
As at 31 December 2014 1,000 20,147 (12,140) 9,007
Total gains or losses for the year reclassified from other comprehensive income on disposal 1,109 — — 1,109
Total gains or losses for the year included in profit or loss for assets held at the end of Relevant Periods — (2,103) (2,140) (4,243)
— I-107 — APPENDIX I ACCOUNTANTS’ REPORT
Financial Financial liabilities assets at at fair Available fair value value -for-sale through through financial profit or profit or assets loss loss Total
As at 1 January 2015 1,000 20,147 (12,140) 9,007 Purchases 120,320 7,287 (14,000) 113,607 Transfer to level 3 ———— Transfer out of level 3 — (1,121) — (1,121) Changes in fair value recognised in other comprehensive income ———— Gains or losses for the period 800 (108) (1,60l) (909) Sales and settlements (76,800) (18,834) 11,919 (83,715)
As at 30 June 2015 45,320 7,371 (15,822) 36,869
Total gains or losses for the period reclassified from other comprehensive income on disposal 800 — — 800
Total gains or losses for the period included in profit or loss for assets held at the end of Relevant Periods — 84 (1,822) (1,738)
— I-108 — APPENDIX I ACCOUNTANTS’ REPORT
The Company
Financial Financial liabilities assets at at fair Available fair value value -for-sale through through financial profit or profit or assets loss loss Total
As at 1 January 2012 51,000 — — 51,000 Purchases 85,000 — — 85,000 Transfer to level 3 ———— Changes in fair value recognised in other comprehensive income 600 — — 600 Gains or losses for the year 3,709 — — 3,709 Sales and settlements (128,709) — — (128,709)
As at 31 December 2012 11,600 — — 11,600
Total gains or losses for the year reclassified from other comprehensive income on disposal 3,709 — — 3,709
Total gains or losses for the year included in profit or loss for assets held at the end of Relevant Periods ————
— I-109 — APPENDIX I ACCOUNTANTS’ REPORT
Financial Financial liabilities assets at at fair Available fair value value -for-sale through through financial profit or profit or assets loss loss Total
As at 1 January 2013 11,600 — — 11,600 Purchases 400,000 — — 400,000 Transfer to level 3 — 3,374 — 3,374 Changes in fair value recognised in other comprehensive income 207 — — 207 Gains or losses for the year 8,023 (927) — 7,096 Sales and settlements (398,623) — — (398,623)
As at 31 December 2013 21,207 2,447 — 23,654
Total gains or losses for the year reclassified from other comprehensive income on disposal 8,623 — — 8,623
Total gains or losses for the year included in profit or loss for assets held at the end of Relevant Periods — (927) — (927)
— I-110 — APPENDIX I ACCOUNTANTS’ REPORT
Financial Financial liabilities assets at at fair Available fair value value -for-sale through through financial profit or profit or assets loss loss Total
As at 1 January 2014 21,207 2,447 — 23,654 Purchases 20,000 — — 20,000 Transfer to level 3 ———— Changes in fair value recognised in other comprehensive income ———— Gains or losses for the year 902 (988) — (86) Sales and settlements (41,109) (338) — (41,447)
As at 31 December 2014 1,000 1,121 — 2,121
Total gains or losses for the year reclassified from other comprehensive income on disposal 1,109 — — 1,109
Total gains or losses for the year included in profit or loss for assets held at the end of Relevant Periods — (988) — (988)
— I-111 — APPENDIX I ACCOUNTANTS’ REPORT
Financial Financial liabilities assets at at fair Available fair value value -for-sale through through financial profit or profit or assets loss loss Total
As at 1 January 2015 1,000 1,121 — 2,121 Purchases ———— Transfer to level 3 ———— Transfer out of level 3 — (1,121) — (1,121) Changes in fair value recognised in other comprehensive income ———— Gains or losses for the period ———— Sales and settlements ————
As at 30 June 2015 1,000 — — 1,000
Total gains or losses for the period reclassified from other comprehensive income on disposal ————
Total gains or losses for the period included in profit or loss for assets held at the end of Relevant Periods ————
— I-112 — APPENDIX I ACCOUNTANTS’ REPORT
For financial instruments in Level 3, prices are determined using valuation methodologies such as discounted cash flow models and other similar techniques. Determinations to classify fair value measures within Level 3 of the valuation hierarchy are generally based on the significance of the unobservable inputs to the overall fair value measurement. The following table presents the related valuation techniques and inputs of the major financial instruments in Level 3.
Relationship of Valuation technique(s) Significant unobservable input(s) Financial instruments and key input(s) unobservable input(s) to fair value
Wealth management Discounted cash flow Risk adjusted discount The higher the risk products, asset model rate adjusted discount rate, management plans, the lower the fair value funds and unlisted equity securities
Equity securities with Market comparable Discount for lack of The higher the limited marketability companies marketability discount, the lower the fair value
Receivables and Futures price of Risk free discount rate The higher the risk payables comparable commodity free discount rate, the futures which will lower the fair value mature within one month as at 31 December/30 June
Fair value of financial assets and liabilities carried at other than fair value
For those financial assets and liabilities that are due within one year, their carrying amounts are close to their fair values. The carrying amounts of the Group and the Company’s financial assets and liabilities carried at cost or amortised cost are not materially different from their fair values during the Relevant Periods.
38 Acquisition of an asset group
During 2013, the Group completed the acquisition of the futures brokerage business together with the relevant assets and liabilities of Huazheng Futures. The Group’s intention of this acquisition was to acquire more clients and expand its scale of futures brokerage business. Accordingly, such acquisition was accounted for as an acquisition of the asset group of the futures brokerage business and the cash flows were included in “payment for business combination” within the investing activities in the combined cash flows statements.
— I-113 — APPENDIX I ACCOUNTANTS’ REPORT
The allocation of acquisition consideration is as follows:
At the date of Note acquisition
Property, plant and equipment 12 2,258 Intangible assets - Customer relationship 14 6,100 Current assets 115,500 Current liabilities (115,500) Deferred tax liabilities 35(b) (1,525) Net identified assets and liabilities 6,833 Goodwill on acquisition 13 53,167 Total consideration 60,000
Representing: Cash paid 60,000
39 Commitments
(a) Capital commitments
The Group and the Company
As at As at 31 December 30 June 2012 2013 2014 2015
Contract but not provide for — — — 22,171
— I-114 — APPENDIX I ACCOUNTANTS’ REPORT
(b) Operating lease commitments
At the end of the Relevant Periods, the total future minimum lease payments under non-cancellable operating leases are payables as follows:
The Group and the Company
As at As at 31 December 30 June 2012 2013 2014 2015
Within 1 year 13,118 12,653 12,680 14,251 After 1 year but not more than 2 years 8,508 7,578 6,789 6,299 After 2 years but not more than 3 years 5,347 5,217 4,576 4,412 After 3 years 7,443 6,192 2,711 1,649 Total 34,416 31,640 26,756 26,611
40 Contingencies
On 8 May 2015, an individual customer together with the company she owns (“customers”) filed lawsuits against the Company, alleging that (i) one of the Company’s former employees carried out unauthorized futures trading under their accounts and (ii) the Company had charged them brokerage commissions in excess of the rate as agreed under the brokerage service agreements. The aggregate amount of these two claims was approximately RMB46.8 million together with an aggregate interest of approximately RMB12.0 million.
On 9 November 2015, the Company received the relevant first trial judgments dated 5 November 2015 (the “Trial Judgments”) granted by the Intermediate People’s Court of Nanjing City, Jiangsu Province (the “Nanjing Court”). According to the Trial Judgments, the Nanjing Court ruled that, among other things, (i) the Company has not violated any of the relevant brokerage service agreements and the unauthorized futures trading activities of that former employee were personal dealings and as a result, consequences of such unauthorized trading activities should not be borne by the Company and (ii) the brokerage commission rates charged by the Company were in accordance with the terms of the relevant brokerage service agreements.
On 23 November 2015, the customers appealed to the Higher People’s Court of Jiangsu Province, requesting that, among other things, the Higher People’s Court of Jiangsu Province revoke the Trial Judgments. As at the date of this report, the legal proceedings with the customers are still on-going.
On the basis of the Trial Judgments, the directors consider that no provision is required during the Relevant Periods.
Except for the above, as at 31 December 2012, 2013 and 2014, and 30 June 2015, the Group were not involved in any material legal, arbitration or administrative proceedings which the Group expect would have significant adverse impact on the financial position and financial performance.
— I-115 — APPENDIX I ACCOUNTANTS’ REPORT
41 Material related party transactions
(a) Relationship of related parties
(i) Major shareholders
Major shareholders include shareholders of the Company with 5% or above ownership.
Share percentage in the Company
As at As at 31 December 30 June 2012 2013 2014 2015
Jiangsu SOHO Holding Group Co., Ltd. 43.09% 43.09% 43.09% 43.09% Jiangsu Holly Corporation* (江蘇弘業股份有限公司) 21.75% 21.75% 21.75% 21.75% Jiangsu Holly Su Industrial Co., Ltd.* (江蘇弘蘇實業有限公司) 21.11% 21.11% 21.11% 21.11% Jiangsu High Hope International Group Co., Ltd.* (江蘇匯鴻國際集團有限公司) 10.00% 10.00% 10.00% 10.00%
* The English translation of the name of the company is for reference only. The official name of the company is in Chinese.
During 2012, 21.75% of the Company’s shares were acquired by SOHO Holding from its subsidiary — Jiangsu Holly Group Investment Management Co., Ltd. (江蘇弘業國際集團投資管理有 限公司). As a result, SOHO Holding held directly 43.09% percentage of equity interest in the Company and became the largest shareholder. During the Relevant Periods, SOHO Holding is the parent of the Group.
(ii) Subsidiaries of the Company
Details of the Company’s subsidiaries are disclosed in Note 15.
(iii) Associates
Details of the Group’s associates are disclosed in Note 16.
(iv) Other related parties
Other related parties can be individuals or enterprises, which include: members of the Board of Directors, the Board of Supervisors and senior management, and close family members of such individuals.
— I-116 — APPENDIX I ACCOUNTANTS’ REPORT
(b) Related party transactions and balances
(i) Transactions between the Group and shareholders
As at As at 31 December 30 June 2012 2013 2014 2015
Balances at the end of the year/period Trade receivables — — 6,900 2,860 Derivative financial assets — — 1,395 — Accounts payable to brokerage clients 34 1 8,293 2,284 Trade payables — — 3 —
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Transactions during the year/period Commission and fee income 204 — 1 — 3 Operating lease charges 3,443 3,620 5,777 2,882 2,547 Office expenses 12321 Other expenses — — 226 — 240
(ii) Transactions between the Group and associates
As at As at 31 December 30 June 2012 2013 2014 2015
Balances at the end of the year/period Other payables — 85 85 85
— I-117 — APPENDIX I ACCOUNTANTS’ REPORT
(iii) Transactions between the Group and other related parties
As at As at 31 December 30 June 2012 2013 2014 2015
Balances at the end of the year/period Other receivables — — 18 18 Accounts payable to brokerage clients 18,047 49,063 75,188 84,809 Other payables 1 — 175 —
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Transactions during the year/period Commission and fee income 127 584 476 239 484 Operating lease charges 537 — 46 — 316 Repair and maintenance expenses 2,600 2,592 686 475 148 Property management expenses 794 962 715 340 20 Service fee charges 6,065 4,280 — — —
(iv) Transactions between the Company and subsidiaries
As at As at 31 December 30 June 2012 2013 2014 2015
Balances at the end of the year/period Accounts payable to brokerage clients — 83,595 107,742 38,498
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Transactions during the year/period Commission and fee income — — 12 — 89
— I-118 — APPENDIX I ACCOUNTANTS’ REPORT
(c) Guarantee issued by related parties
As at As at 31 December 30 June 2012 2013 2014 2015
Guarantee issued in relation to bank loans granted to the Group: — — 59,993 59,993
(d) Key management personnel remuneration
Remuneration for key management personnel of the Group, including amounts paid to the Company’s directors and supervisors as disclosed in Note 8 and certain of the five highest paid individuals as disclosed in Note 9, are as follows:
Six months Year ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Short-term employee benefits - Fees, salaries, allowances and bonuses 3,025 2,894 4,543 1,940 2,164 Post-employment benefits - Contributions to pension scheme 196 215 235 110 125 Total 3,221 3,109 4,778 2,050 2,289
42 Segment reporting
The Group manages and conducts its business activities by business segments. In a manner consistent with the way in which information is reported internally to the Group’s chief operating decision maker for the purposes of resource allocation and performance assessment, the Group has identified the following segments:
— The futures brokerage and asset management business segment engages in the trading of commodity futures and financial futures on behalf of clients, and also developing and selling asset management products and services based on the asset scale and clients’ needs. In addition, the activities of investing in wealth management product, listed and unlisted securities are included in this segment.
— The commodity trading and risk management business segment engages in providing the services of purchase and resale of commodities, futures arbitrage and hedging.
— I-119 — APPENDIX I ACCOUNTANTS’ REPORT
(a) Business segments
For the year ended 31 December 2012
Futures Commodity brokerage trading and asset and risk management management business business Total
Revenue - External 375,642 — 375,642 - Inter-segment — — — Other income and gains 9,289 — 9,289 Segment revenue and other income 384,931 — 384,931 Segment expenses (258,560) — (258,560) Segment operating profit 126,371 — 126,371 Share of losses of associates (154) — (154) Profit before taxation 126,217 — 126,217
Interest income 81,060 — 81,060 Interest expenses — — — Depreciation and amortisation (4,970) — (4,970) Impairment losses (82) — (82) Segment assets 2,944,872 — 2,944,872 Additions to non-current segment assets during the year 8,220 — 8,220 Segment liabilities (1,769,438) — (1,769,438)
— I-120 — APPENDIX I ACCOUNTANTS’ REPORT
For the year ended 31 December 2013
Futures Commodity brokerage trading and asset and risk management management business business Total
Revenue - External 324,894 504 325,398 - Inter-segment — — — Other income and gains 17,195 — 17,195 Segment revenue and other income 342,089 504 342,593 Segment expenses (252,648) (315) (252,963) Segment operating profit 89,441 189 89,630 Share of losses of associates (598) — (598) Profit before taxation 88,843 189 89,032
Interest income 82,582 504 83,086 Interest expenses — — — Depreciation and amortisation (6,342) — (6,342) Impairment losses (10,104) — (10,104) Segment assets 3,283,902 100,388 3,384,290 Additions to non-current segment assets during the year 64,074 10 64,084 Segment liabilities (2,143,899) (250) (2,144,149)
— I-121 — APPENDIX I ACCOUNTANTS’ REPORT
For the year ended 31 December 2014
Futures Commodity brokerage trading and asset and risk management management business business Total
Revenue - External 266,579 7,296 273,875 - Inter-segment 12 — 12 Other income and gains 11,691 9,921 21,612 Segment revenue and other income 278,282 17,217 295,499 Segment expenses (210,751) (7,835) (218,586) Segment operating profit 67,531 9,382 76,913 Share of losses of associates (519) — (519) Profit before taxation 67,012 9,382 76,394
Interest income 99,942 6,544 106,486 Interest expenses — (1,103) (1,103) Depreciation and amortisation (7,918) (17) (7,935) Impairment losses — — — Segment assets 3,250,635 224,348 3,474,983 Additions to non-current segment assets during the year 17,983 63 18,046 Segment liabilities (2,103,814) (117,190) (2,221,004)
— I-122 — APPENDIX I ACCOUNTANTS’ REPORT
Six months ended 30 June 2014 (Unaudited)
Futures Commodity brokerage trading and asset and risk management management business business Total
Revenue - External 130,840 2,234 133,074 - Inter-segment — — — Other income and gains (262) 3,786 3,524 Segment revenue and other income 130,578 6,020 136,598 Segment expenses (97,057) (2,285) (99,342) Segment operating profit 33,521 3,735 37,256 Share of losses of associates (80) — (80) Profit before taxation 33,441 3,735 37,176
Interest income 52,082 2,234 54,316 Interest expenses — — — Depreciation and amortisation (4,089) (7) (4,096) Impairment losses — — — Segment assets 2,932,173 130,621 3,062,794 Additions to non-current segment assets during the year 876 63 939 Segment liabilities (1,813,970) (27,687) (1,841,657)
— I-123 — APPENDIX I ACCOUNTANTS’ REPORT
Six months ended 30 June 2015
Futures Commodity brokerage trading and asset and risk management management business business Total
Revenue - External 145,284 5,722 151,006 - Inter-segment 89 — 89 Other income and gains 13,084 15,987 29,071 Segment revenue and other income 158,457 21,709 180,166 Segment expenses (101,767) (4,644) (106,411) Segment operating profit 56,690 17,065 73,755 Share of losses of associates (49) — (49) Profit before income tax 56,641 17,065 73,706
Interest income 54,600 3,762 58,362 Interest expenses — (1,682) (1,682) Depreciation and amortisation (3,958) (10) (3,968) Impairment losses — — — Segment assets 3,572,169 220,342 3,792,511 Additions to non-current segment assets during the year 3,585 — 3,585 Segment liabilities (2,413,443) (100,470) (2,513,913)
— I-124 — APPENDIX I ACCOUNTANTS’ REPORT
Reconciliations of segment revenues, profit or loss, assets and liabilities:
Six months Years ended 31 December ended 30 June 2012 2013 2014 2014 2015 (Unaudited)
Revenue Total revenue and other income for segments 384,931 342,593 295,499 136,598 180,166 Elimination of inter-segment revenue — — (12) — (89) Combined revenue and other income 384,931 342,593 295,487 136,598 180,077
Profit Total profit before tax for segments 126,217 89,032 76,394 37,176 73,706 Elimination of inter-segment profit — — (12) — (89) Combined profit before income tax 126,217 89,032 76,382 37,176 73,617
As at As at 31 December 30 June 2012 2013 2014 2015
Assets Total assets for segments 2,944,872 3,384,290 3,474,983 3,792,511 Elimination of inter-segment assets — (83,594) (107,343) (42,414) Combined total assets 2,944,872 3,300,696 3,367,640 3,750,097
Liabilities Total liabilities for segments (1,769,438) (2,144,149) (2,221,004) (2,513,913) Elimination of inter-segment liabilities — 83,594 107,343 42,414 Combined total liabilities (1,769,438) (2,060,555) (2,113,661) (2,471,499)
— I-125 — (b) Geographical segments REPORT ACCOUNTANTS’ I APPENDIX
The following table sets out information about the geographical location of (i) the Group’s revenue from external customers and (ii) the Group’s property, plant and equipment, intangible assets, goodwill and interest in associates (“specified non-current assets”). The geographical location of customers is based on the location at which the services were provided. The geographical location of the specified non-current assets is based on the physical location of the asset, in the case of property, plant and equipment, the location of the operation to which they are allocated, in the case of intangible assets and goodwill, and the location of operations, in the case of interest in associates.
Six months ended Year ended Year ended Year ended 30 June 2014 Six months ended 31 December 2012 31 December 2013 31 December 2014 (Unaudited) 30 June 2015 Mainland Hong Mainland Hong Mainland Hong Mainland Hong Mainland Hong China Kong Total China Kong Total China Kong Total China Kong Total China Kong Total
Segment revenue -2 — I-126 — Revenue from external customers 375,642 — 375,642 324,800 598 325,398 271,665 2,210 273,875 132,486 588 133,074 149,138 1,868 151,006 Other income and gains 9,289 — 9,289 17,195 — 17,195 21,612 — 21,612 3,524 — 3,524 29,071 — 29,071
Total 384,931 — 384,931 341,995 598 342,593 293,277 2,210 295,487 136,010 588 136,598 178,209 1,868 180,077
As at 31 December 2012 As at 31 December 2013 As at 31 December 2014 As at 30 June 2015 Mainland Hong Mainland Hong Mainland Hong Mainland Hong China Kong Total China Kong Total China Kong Total China Kong Total
Specified non-current assets 39,461 449 39,910 86,371 826 87,197 96,055 678 96,733 95,695 605 96,300 APPENDIX I ACCOUNTANTS’ REPORT
43 Interest in structured entities
(a) Interests in structured entities consolidated by the Group
Structured entities consolidated by the Group stand for the asset management schemes where the Group involves as manager and also as investor, the Group assesses whether the consolidation of investments it holds together with its remuneration creates exposure to variability of returns from the activities of the asset management product to a level of such significance that it indicates that the Group is a principal.
As at 31 December 2012, 2013 and 2014, and 30 June 2015, the total assets of the consolidated asset management schemes are nil, nil, RMB5,148 thousands and RMB12,287 thousands, respectively, and the carrying amount of interests held by the Group in the consolidated asset management schemes are nil, nil, RMB5,148 thousands and RMB12,287 thousands, respectively, which are accounted for financial assets at fair value through profit or loss.
(b) Structured entities sponsored by third party institutions in which the Group holds an interest
The types of structured entities that the Group does not consolidate but in which it holds an interest include funds and wealth management products issued by banks. The nature and purpose of these structured entities are to generate fees from managing assets on behalf of investors. These vehicles are financed through the issue of units to investors.
The carrying amount of the related accounts in the combined statements of financial position is equal to the maximum exposure to loss of interests held by the Group in the unconsolidated structured entities sponsored by third party institutions as at 31 December 2012, 2013 and 2014, and 30 June 2015, which are listed as below:
As at 31 December 2012 Financial assets Available- at fair value Investments for-sale through profit classified as financial assets or loss receivables Total
Funds 6,197 — — 6,197
— I-127 — APPENDIX I ACCOUNTANTS’ REPORT
As at 31 December 2013 Financial assets Available- at fair value Investments for-sale through profit classified as financial assets or loss receivables Total
Funds 6,468 14 — 6,482 Wealth management products 20,207 — — 20,207 Total 26,675 14 — 26,689
As at 31 December 2014 Financial assets Available- at fair value Investments for-sale through profit classified as financial assets or loss receivables Total
Funds 7,165 5,148 — 12,313
As at 30 June 2015 Financial assets Available- at fair value Investments for-sale through profit classified as financial assets or loss receivables Total
Funds 9,l28 4,9l6 — l4,044 Wealth management products 43,320 — 200,000 243,320 Asset management plans l,000 7,37l — 8,37l Total 53,448 l2,287 200,000 265,735
— I-128 — APPENDIX I ACCOUNTANTS’ REPORT
During the Relevant Periods, the comprehensive income from the unconsolidated structured entities held by the Group was as follows:
Six months ended Years ended 31 December 30 June 2012 2013 2014 2014 2015 (Unaudited)
Revenue 957 — 4,327 — 4,707 Net investment gains - Net realized gains 3,709 7,423 1,159 544 1,228 - Net unrealized fair value changes — — 98 — (656) - Dividend income 160 134 203 146 130 Other comprehensive income (360) 477 491 (90) 1,962 Total 4,466 8,034 6,278 600 7,371
The maximum exposure to loss for funds, wealth management products and asset management plans are the fair value as at 31 December 2012, 2013 and 2014, and 30 June 2015.
(c) Structured entities sponsored by the Group which the Group does not consolidate but holds an interest in
The types of unconsolidated structured entities sponsored by the Group include asset management products. The nature and purpose of these structured entities are to generate fees from managing assets on behalf of investors. Interest held by the Group only includes fees charged by providing asset management services.
As at 31 December, 2012, 2013 and 2014, and 30 June 2015, the amount of assets held by the unconsolidated asset management products, which are sponsored by the Group is nil, RMB49,812 thousands, RMB209,217 thousands and RMB173,596 thousands, respectively.
During the years ended 31 December, 2012, 2013 and 2014, and the six months ended 30 June 2015, the amount of fee and commission income received from the abovementioned structured entities sponsored by the Group is nil, RMB137 thousands, RMB401 thousands and RMB470 thousands, respectively.
— I-129 — APPENDIX I ACCOUNTANTS’ REPORT
44 Possible impact of amendments, new standards and interpretations issued but not yet effective for the Relevant Periods
Up to the date of issue of the Financial Information, the HKICPA has issued a few amendments and new standards which are not yet effective for the period ended 30 June 2015 and which have not been adopted in the Financial Information. These include the following which may be relevant to the Group.
Effective for accounting periods beginning on or after
Annual Improvements to HKFRSs 2012-2014 Cycle 1 January 2016 HKFRS 14, Regulatory deferral accounts 1 January 2016 Amendments to HKFRS 11, Accounting for acquisitions of interests in joint operations 1 January 2016 Amendments to HKAS 16 and HKAS 38, Clarification of acceptable methods of depreciation and amortisation 1 January 2016 Amendments to HKAS 16 and HKAS 41, Agriculture: Bearer plants 1 January 2016 Amendments to HKAS 27, Equity method in seperate financial statements 1 January 2016 Amendments to HKFRS 10 and HKAS 28, Sale or contribution of assets between an investor and its associate or joint venture 1 January 2016 Amendments to HKAS 1, Disclosure initiative 1 January 2016 HKFRS 15, Revenue from contracts with customers 1 January 2018 HKFRS 9, Financial instruments 1 January 2018
The Group is in the process of making an assessment of what the impact of these amendments is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the Financial Information.
— I-130 — APPENDIX I ACCOUNTANTS’ REPORT
45 Statutory audit
The financial statements of the Company and its subsidiaries which are subject to statutory audit during the Relevant Periods were audited by the following auditors:
Name of Company Financial Period/Year Name of Auditor
Holly Futures Co., Ltd.* Period from 1 January 2012 Talent Certified Public (弘業期貨股份有限公司) to 31 December 2014 Accountants (SGP)* 天衡會計師事務所 (特殊普通合夥) Holly Capital Management Period from 25 June 2013 Talent Certified Public Co., Ltd.* to 31 December 2014 Accountants (SGP)* (弘業資本管理有限公司) 天衡會計師事務所 (特殊普通合夥) Holly Su Futures (Hongkong) Period from 20 October 2011 VISION A.S. Limited Co., Ltd. to 31 December 2012 泓信會計師行有限公司 (弘蘇期貨(香港)有限公司) Holly Su Futures (Hongkong) Period from 1 January 2013 K.Y.NG & Company Limited Co., Ltd to 31 December 2014 吳潔瑤會計師事務所 (弘蘇期貨(香港)有限公司) 有限公司
* The English translations of the names of the companies and the auditors are for reference only. The official names of the companies and the auditors are in Chinese.
46 Subsequent events
(a) Completion of Reorganisation
As a step of Reorganisation, on 7 January 2015, the Company entered into an agreement with SOHO Holding to acquire the entire equity interests of Holly Su Futures from SOHO Holding at a consideration of HKD28,075 thousands (equivalent to RMB22,171 thousands). The Reorganisation was completed on 30 September 2015 and the consideration payable was recorded as deemed distributions to shareholder on the same date.
(b) Contract dispute
On 24 September 2014, Holly Capital Management Co., Ltd. (“Holly Capital”) entered into a purchase and repurchase agreement with a third party client. As at 30 June 2015, the transaction is accounted as financial assets held under resale agreements with the amount of RMB20,824 thousands collateralized by rice crops. Meanwhile, Holly Capital entered into a warehouse supervision agreement (the “Warehouse Supervision Agreement”) to engage Jiangsu Holly International Logistics Corporation (“ Holly Logistics”), one of the Company’s shareholders and a subsidiary of SOHO Holding, as the supervisor of the rice crops warehouse storage. In August 2015, the third party client
— I-131 — APPENDIX I ACCOUNTANTS’ REPORT was in financial stress and removed the rice crops without the authorisation of either Holly Capital or Holly Logistics. Pursuant to the Warehouse Supervision Agreement, Holly Logistics should compensate the losses suffered by Holly Capital as it failed to fully perform the supervision obligations. On 8 December 2015, Holly Capital entered into an agreement to assign its legal rights of suing the third party client to Holly Logistics (the “Assignment Agreement”), and accordingly all outstanding principals, interest, deductible value added tax and legal expenses in respect of the purchase and repurchase agreement should be paid by Holly Logistics to Holly Capital as compensation. In accordance with the Assignment Agreement, Holly Logistics will pay to Holly Capital in an amount of approximately RMB26.1 million within one year from 8 December 2015 or before the Group is listed on the Main Board of the Stock Exchange of Hong Kong Limited, whichever is earlier.
C SUBSEQUENT FINANCIAL STATEMENTS AND DIVIDENDS
No audited financial statements have been prepared by the Company and its subsidiaries comprising the Group in respect of any period subsequent to 30 June 2015. No dividend or distribution has been declared or made by any companies comprising the Group in respect of any period subsequent to 30 June 2015.
Yours faithfully, KPMG Certified Public Accountants Hong Kong
— I-132 — APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
The information set forth in this Appendix does not form part of the Accountants’ Report from KPMG, Certified public accountants, Hong Kong, the reporting Accountants of the Company, as set forth in Appendix I to this prospectus, and is included herein for illustrative purposes only.
The unaudited pro forma financial information should be read in conjunction with the section headed” Financial Information” in this prospectus and the Accountants’ Report set forth in Appendix I to this prospectus.
A. UNAUDITED PRO FORMA ADJUSTED COMBINED NET TANGIBLE ASSETS
The following statement of unaudited pro forma adjusted combined net tangible assets attributable to the equity shareholders of the Company has been prepared in accordance with the Rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”), and is set out below to illustrate the effect of the proposed offering of the ordinary shares of the Company (the “Global Offering”) on the combined net tangible assets attributable to the equity shareholders of the Company as at 30 June 2015 as if the Global Offering had taken place on 30 June 2015.
The unaudited pro forma statement of adjusted combined net tangible assets has been prepared for illustrative purposes only and because of its hypothetical nature, it may not give a true picture of the financial position of the Group had Global Offering been completed as at 30 June 2015 or at any future date.
Unaudited pro Audited forma combined net adjusted tangible assets combined net attributable to tangible assets the equity attributable to shareholders Estimated net the equity of the proceeds from shareholders Unaudited pro forma Company as at the Global of the adjusted combined net 30 June 2015 Offering Company tangible assets per share RMB’000(1) RMB’000(2)(5) RMB’000(4) RMB HK$(5)
Based on an offer price of HK$2.43 per share 1,209,921 408,527 1,618,448 1.78 2.15 Based on an offer price of HK$2.98 per share 1,209,921 507,771 1,717,692 1.89 2.29
Notes:
(1) The combined net tangible assets attributable to the equity shareholders of the Company as at 30 June 2015 is compiled based on the combined financial information included in the Accountants’ Report set out in Appendix I to this prospectus, which is based on the combined net assets attributable to the equity shareholders of the Company as at 30 June 2015 of RMB1,278.6 million after deducting intangible assets of RMB25.4 million and goodwill of RMB43.3 million.
— II-1 — APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
(2) The estimated net proceeds from Global Offering are based on the indicative offer price of HK$2.43 per share (being the minimum offer price) and HK$2.98 per share (being the maximum offer price) and the assumption that there are 227 million newly issued shares in Global Offering, after deduction of the underwriting fees and other related expenses payable by the Company, without taking into account the exercise of the over-allotment option.
(3) The payment for the acquisition of Holly Su Futures (Hongkong) Co., Ltd. at a consideration of HK$28,075 thousands is not deducted in the unaudited pro forma adjusted combined net tangible assets.
(4) The unaudited pro forma adjusted combined net tangible assets per share is arrived at by dividing the unaudited pro forma adjusted combined net tangible assets by 907,000,000 shares, being the number of shares in issuing assuming that the Global Offering has been completed on 30 June 2015 but takes no account of the exercise of the over-allotment Option.
(5) For the purpose of estimated net proceeds from Global Offering and the calculation of the unaudited pro forma adjusted combined net tangible assets per share, the transaction between RMB and HK$ was made at the rate of HK$1.00 to RMB0.8268, the exchange rate set by the People’s Bank of China prevailing on 8 December 2015. No representation is made that Renminbi amounts have been, could have been or may be converted to Hong Kong dollars, or vice versa, at that rate.
(6) The unaudited pro forma adjusted combined net tangible assets do not take into account the financial results or other transactions of the Company subsequent to 30 June 2015, including the acquisition of Holly Su Futures (Hongkong) Co., Ltd.
— II-2 — APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
B. INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE COMPILATION OF PRO FORMA FINANCIAL INFORMATION
The following is the text of a report received from the reporting accountants, KPMG, Certified Public Accountants, Hong Kong, in respect of the Group’s unaudited pro forma financial information for the purpose of incorporation in this prospectus.
8th Floor Prince’s Building 10 Chater Road Central Hong Kong
16 December 2015
TO THE DIRECTORS OF HOLLY FUTURES CO., LTD
We have completed our assurance engagement to report on the compilation of pro forma financial information of Holly Futures Co., Ltd (the “Company”) and its subsidiaries (collectively the “Group”) by the directors of the Company (the “Directors”) for illustrative purposes only. The unaudited pro forma financial information consists of the unaudited pro forma statement of adjusted net tangible assets as at 30 June 2015 and related notes as set out in Part A of Appendix II to the prospectus dated 16 December 2015 (the “Prospectus”) issued by the Company. The applicable criteria on the basis of which the Directors have compiled the pro forma financial information are described in Part A of Appendix II to the Prospectus.
The pro forma financial information has been compiled by the Directors to illustrate the impact of the proposed offering of the ordinary shares of the Company (the “Global Offering”) on the Group’s financial position as at 30 June 2015 as if the Global Offering had taken place at 30 June 2015. As part of this process, information about the Group’s financial position as at 30 June 2015 has been extracted by the Directors from the Group’s historical financial statements included in the Accountants’ Report as set out in Appendix I to the Prospectus.
Directors’ Responsibilities for the Pro Forma Financial Information
The Directors are responsible for compiling the pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” (“AG 7”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).
— II-3 — APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
Reporting Accountants’ Responsibilities
Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.
We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements (“HKSAE”) 3420 “Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus” issued by the HKICPA. This standard requires that the reporting accountants comply with ethical requirements and plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the pro forma financial information in accordance with paragraph 4.29 of the Listing Rules, and with reference to AG 7 issued by the HKICPA.
For purpose of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the pro forma financial information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the pro forma financial information.
The purpose of pro forma financial information included in an investment circular is solely to illustrate the impact of a significant event or transaction on unadjusted financial information of the Group as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of events or transactions as at 30 June 2015 would have been as presented.
A reasonable assurance engagement to report on whether the pro forma financial information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the pro forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:
• the related pro forma adjustments give appropriate effect to those criteria; and
• the pro forma financial information reflects the proper application of those adjustments to the unadjusted financial information.
The procedures selected depend on the reporting accountants’ judgment, having regard to the reporting accountants’ understanding of the nature of the Group, the event or transaction in respect of which the pro forma financial information has been compiled, and other relevant engagement circumstances.
— II-4 — APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
The engagement also involves evaluating the overall presentation of the pro forma financial information.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Our procedures on the pro forma financial information have not been carried out in accordance with attestation standards or other standards and practices generally accepted in the United States of America, auditing standards of the Public Company Accounting Oversight Board (United States) or any overseas standards and accordingly should not be relied upon as if they had been carried out in accordance with those standards and practices.
We make no comments regarding the reasonableness of the amount of net proceeds from the issuance of the Company’s shares, the application of those net proceeds, or whether such use will actually take place as described in the section headed “Future Plans and Use of Proceeds” in the Prospectus.
Opinion
In our opinion:
a) the pro forma financial information has been properly compiled on the basis stated;
b) such basis is consistent with the accounting policies of the Group; and
c) the adjustments are appropriate for the purposes of the pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.
KPMG Certified Public Accountants Hong Kong
— II-5 — APPENDIX III TAXATION AND FOREIGN EXCHANGE
TAXATION APPLICABLE TO SHAREHOLDERS
The following is a summary of certain PRC and Hong Kong tax consequences of the ownership of our H Shares by an investor that purchases such H Shares in connection with the Global Offering and holds the H Shares as capital assets. This summary does not purport to address all material tax consequences of the ownership of our H Shares, and does not take into account the specific circumstances of any particular investors, some of which may be subject to special rules. This summary is based on the tax laws of the PRC and Hong Kong as in effect on the date hereof, all of which are subject to changes (or changes in interpretation), possibly with retroactive effect.
This summary does not address any aspects of Hong Kong or PRC taxation other than income tax, capital gains tax, stamp duty and estate duty. Prospective investors are urged to consult their tax advisers regarding the PRC, Hong Kong and other tax consequences of owning and disposing of our H Shares.
THE PRC
Taxation on Dividends
Pursuant to the Notice on Matters Concerning the Levy and Administration of Individual Income Tax After the Repeal of Guo Shui Fa [1993] No. 045 (Guo Shui Han [2011] No. 348)《關於國稅發 ( [1993]045號文件廢止後有關個人所得稅徵管問題的通知》) promulgated by the State Administration of Taxation, when non-foreign invested enterprises have had their public offering in Hong Kong, its foreign resident individual shareholders are entitled to enjoy relevant preferential tax treatments in accordance with the taxation treatment arrangements entered into between their own countries of residency and the PRC.
Individual Investors
According to the Individual Income Tax Law of the PRC 《中華人民共和國個人所得稅法》( ) (the “Individual Income Tax Law”), as enacted by the fifth National People’s Congress on 10 September 1980 and as last amended on 30 June 2011 and effective on 1 September 2011 and the Provisions for Implementation of Individual Income Tax Law of the PRC 《中華人民共和國個人所得稅法實施條例》( ) (the “Implementation Rules”), as last amended by the State Council on 19 July 2011 and effective on 1 September 2011, dividends paid by PRC companies are ordinarily subject to a PRC withholding tax levied at a flat rate of 20.0%. For a foreign individual who is not a resident of the PRC, dividends received from a PRC company is normally subject to an individual income tax at a rate of 20.0% unless specifically exempted by the tax authority of the State Council or reduced in accordance with an applicable tax treaty.
Generally, individual holders of H shares who are non-PRC nationals are entitled to an individual income tax rate of 10.0% to dividends paid by non-foreign invested enterprises which have had their public offering in Hong Kong and there is no need to apply for relevant approvals with the taxation
— III-1 — APPENDIX III TAXATION AND FOREIGN EXCHANGE
bureaus in the PRC. In case that the 10.0% tax rate is not applicable, (i) for individual holders of H shares who are citizens of countries that have entered into income tax treaties with the PRC enjoying tax rates lower than 10.0%, non-foreign invested enterprises which have had their public offering in Hong Kong shall apply on behalf of such holders to seek entitlement of the lower preferential tax treatments, and upon approval by the tax authorities, the amounts which are over the withheld tax will be refunded; (ii) for individual holders of H shares who are citizens of countries that entered into income tax treaties with the PRC enjoying tax rates higher than 10.0% but lower than 20.0%, non-foreign invested enterprises which have had their public offering in Hong Kong are required to withhold the individual income tax at the agreed rates under the treaties, and no application procedures are required; and (iii) for individual holders of H shares who are citizens from countries without taxation agreements with the PRC or are under other situations, non-foreign invested enterprises which have had their public offering in Hong Kong are required to withhold the individual income tax at the rate of 20.0%.
According to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion （《內地和香港特別行政區關於對所得避免雙重徵稅和防止偷漏稅的安排》） with respect to income taxes signed on 21 August 2006, the PRC government may impose tax on dividends payable by a PRC company to a Hong Kong resident, but such tax shall not exceed 10.0% of the gross amount of dividends payable, and in the case where a Hong Kong resident holds at least 25.0% equity interest in a PRC company, such tax shall not exceed 5.0% of the gross amount of dividends payable by the PRC company.
Enterprises
According to the new PRC EIT Law and the Provision for Implementation of PRC EIT Law 《中( 華人民共和國企業所得稅法實施條例》), both of which became effective on 1 January 2008, the non-resident enterprises shall be subject to enterprise tax for the income originated from the PRC at the rate of 10.0% provided that the non-resident enterprises do not establish offices or premises in the PRC, or where there are offices and premises established in the PRC, there is no connection between the dividends and bonuses received and the offices or premises established by the non-resident enterprises. Such withholding tax may be reduced pursuant to an applicable double taxation treaty.
According to the Notice Regarding Questions on Withholding Enterprise Income tax When PRC Resident Enterprises Distribute Dividends to Non-resident Enterprise Shareholders of H Shares (Guo Shui Han [2008] NQ. 897) 《關於中國居民企業向境外( H股非居民企業股東派發股息代扣代繳企業所 得稅有關問題的通知》) issued by the State Administration of Taxation, which became effective on 6 November 2008, PRC resident enterprises should withhold enterprise income tax at a rate of 10.0% when they distribute dividends to non-resident enterprise shareholders of H shares from the year of 2008. Such withholding tax may be reduced pursuant to an applicable double taxation treaty.
— III-2 — APPENDIX III TAXATION AND FOREIGN EXCHANGE
Tax Treaties
Investors who do not reside in the PRC and reside in countries that have entered into double taxation treaties with the PRC may be entitled to a reduction of the withholding tax imposed on dividends paid to them by our Company. The PRC currently has double taxation treaties with many countries in the world, which include but not limited to: Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore and the United States.
Taxation on Capital Gains
In accordance with the Implementation Rules, individuals are subject to individual income tax at the rate of 20.0% on gains realised on the sale of equity interests in PRC resident enterprises. The Implementation Rules also provide that the MOF shall draft measures for collection of individual income tax on income from the transfer of shares, and such measures are subject to the approval of the State Council. However, as at the Latest Practicable Date, no such measures have been drafted and enacted. Under the Circular Declaring That Individual Income Tax Continues to Be Exempted over Income of Individuals from Transfer of Shares 《關於個人轉讓股票所得繼續暫免徵收個人所得稅的( 通知》) issued by the MOF and the State Administration of Taxation on 30 March 1998, effective from 1 January 1997, income received by individuals from the transfer of shares in listed enterprises continues to be exempted from individual income tax. After the latest amendment to the Individual Income Tax Law on 30 June 2011 and its Implementation Rules on 19 July 2011, the State Administration of Taxation has not stated whether it will continue to exempt individual income tax on income derived by individuals from the transfer of listed shares. However, on 31 December 2009, MOF, State Administration of Taxation and CSRC jointly issued the Circular on Related Issues on Collection of Individual Income Tax over the Income Received by Individuals from Transfer of Listed Shares Subject to Sales Limitation 《關於個人轉讓上市公司限售股所得徵收個人所得稅有關問題的( 通知》) which states that individuals’ income from transferring listed shares on certain domestic exchanges shall continue to be exempted from the individual income tax, except for the shares of certain specified companies under certain situations which are subject to sales limitations (as defined in such Circular and its supplementary notice issued on 10 November 2010). As at the Latest Practicable Date, no legislation has expressly provided that individual income tax shall be collected from non-PRC resident individuals on the income from sale of shares in PRC resident enterprises listed on overseas stock exchanges, and in practice no such tax has been collected by the PRC tax authorities.
Additional Chinese Tax Considerations
PRC Stamp Duty
Pursuant to the Provisional Regulations of China Concerning Stamp Duty 《中華人民共和國印( 花稅暫行條例》) (the “Provisional Regulations”), which became effective on 1 October 1988, PRC stamp duty imposed on the transfer of shares of PRC publicly traded companies should not apply to the acquisition and disposal by non-PRC investors of H shares outside of the PRC. According to the Provisional Regulations, PRC stamp duty is imposed only on documents executed or received within the PRC that are legally binding in the PRC and are protected under PRC law.
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Estate Tax
Under China’s current legal environment, no liability for estate tax under PRC law will arise from a non-PRC residents’ holding of H shares.
Tax Policies for Shanghai-Hong Kong Stock Connect
On 10 November 2014, the CSRC and the Securities and Futures Commission granted their approvals to Shanghai Stock Exchange, The Stock Exchange, China Securities Depository and Clearing Company Limited, Hong Kong Securities Clearing Company Limited for formal launch of the Shanghai- Hong Kong Stock Connect pilot programme. Trading in shares under the Shanghai-Hong Kong Stock Connect kicked off formally on 17 November 2014.
Pursuant to the Notice on Tax Policies for Shanghai-Hong Kong Stock Connect Pilot Programme 《關於滬港股票市場交易互聯互通機制試點有關稅收政策的通知》( ) (the “Tax Policies for Shanghai-Hong Kong Stock Connect”):
• From 17 November 2014 to 16 November 2017, gains on transfer of shares derived by mainland individual investors through investment into shares listed on the Stock Exchange via the Shanghai-Hong Kong Stock Connect are temporarily exempt from individual income tax. Gains on price difference derived by mainland individual investors through trading in shares listed on the Stock Exchange via the Shanghai-Hong Kong Stock Connect are exempt from business tax levying pursuant to current policies. Dividends derived by mainland individual investors through investment into H shares listed on the Stock Exchange via the Shanghai-Hong Kong Stock Connect are subject to 20% of withholding income tax by H shares companies. Individual investors who have paid withholding taxes overseas, with effective taxation certificates, can apply to competent taxation authorities under the China Securities Depository and Clearing Company Limited for tax credit. Dividends derived by mainland securities investment funds through investment into shares listed on the Stock Exchange via the Shanghai-Hong Kong Stock Connect are subject to individual income tax pursuant to provisions above.
• Pursuant to the Tax Policies for Shanghai-Hong Kong Stock Connect, gains on transfer of shares derived by mainland corporate investors through investment into shares listed on the Stock Exchange via the Shanghai-Hong Kong Stock Connect are credited to their total income and subject to corporate income tax in accordance with laws. Gains on price difference derived by mainland corporate investors through trading in shares listed on the Stock Exchange via the Shanghai-Hong Kong Stock Connect are exempt from business tax pursuant to current policies. Dividends derived by mainland corporate investors through investment into shares listed into the Stock Exchange via the Shanghai-Hong Kong Stock Connect are credited to their total income and subject to corporate income tax in accordance with laws. Among them, dividends derived by mainland resident enterprises or holding H shares up to 12 consecutive months are subject to corporate income tax in accordance with laws. For dividends derived by mainland resident enterprises, there will be no withholding
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tax payable by H shares companies, and these enterprises are liable for tax reporting and payment. For the withholding tax on dividends payable by companies of non-H shares listed on the Stock Exchange, mainland corporate investors can apply for tax credit when reporting and paying corporate income tax.
• Pursuant to the Tax Policies for Shanghai-Hong Kong Stock Connect, mainland investors who transfer shares listed on the Stock Exchange via the Shanghai-Hong Kong Stock Connect are subject to stamp duties in accordance with current taxation requirements in Hong Kong. China Securities Depository and Clearing Company Limited and Hong Kong Securities Clearing Company Limited are authorised to levy stamp duties above on behalf of each other.
Hong Kong
Tax on Dividends
Under the current practice of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in respect of dividends paid by us.
Taxation on Capital Gains
No tax is imposed in Hong Kong in respect of capital gains from the sale of H shares. However, trading gains generated from the sale of H shares by persons carrying on a trade, profession or business in Hong Kong will be subject to Hong Kong profits tax, if such gains are derived from or arise in Hong Kong from such trade, profession or business. Currently, the profits tax is imposed at the rate of 16.5% on corporations, and at a maximum rate of 15% on unincorporated businesses. Certain categories of taxpayers (for examples, financial institutions, insurance companies and securities dealers) are likely to be regarded as deriving trading gains rather than capital gains unless these taxpayers can prove that the investment securities are held for long-term investment. Trading gains from sales of H shares effected on the Stock Exchange will be considered to be derived from or arising in Hong Kong. Therefore, persons engaged in securities trading or dealing businesses in Hong Kong are liable to paying Hong Kong profits tax for trading gains received from sales of H shares on the Stock Exchange.
Stamp Duty
Hong Kong stamp duty, currently charged at the ad valorem rate of 0.1% on the higher of the consideration for, or the market value of, the H shares, will be payable by the purchaser on every purchase, and by the seller on every sale, of the H shares. In other words, a total of 0.2% is currently payable on a typical sale and purchase transaction involving H shares. In addition, a fixed duty of HK$5.00 is currently payable on each instrument of transfer of H shares (if required). Where one of the parties to a transfer is resident outside Hong Kong and does not pay the ad valorem duty due by it, the duty not paid will be assessed on the instrument of transfer (if any) and will be payable by the transferee. If stamp duty is not paid on or before the due date, a penalty of up to ten times the duty payable may be imposed.
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Estate Duty
The Revenue (Abolition of Estate Duty) Ordinance 2005 came into effect on 11 February 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holders of H shares whose deaths occur on or after 11 February 2006.
MAJOR TAXATION APPLICABLE TO THE COMPANY
Income Tax
In accordance with the new EIT Law, the enterprise income tax rate applicable to enterprises and other institutions which derive revenues in the PRC is 25.0%.
Business Tax
Pursuant to the Provisional Regulations of the PRC on Business Tax 《中華人民共和國營業稅( 暫行條例》) as last amended on 5 November 2008 and effective on 1 January 2009 and the relevant implementation rules, a business tax is imposed on enterprises which provide taxable services, transfer intangible property or sell real estate in the PRC. The business tax is levied at a rate of 5.0% on finance and insurance enterprises.
FOREIGN EXCHANGE CONTROL IN THE PRC
The lawful currency of the PRC is the Renminbi, which is subject to foreign exchange controls and is not freely convertible at this time. SAFE, under the authority of the PBOC, is empowered with the functions of administering all matters relating to foreign exchange, including the enforcement of foreign exchange control regulations.
On 29 January 1996, the State Council promulgated new Regulations of Foreign Exchange of the PRC 《中華人民共和國外匯管理條例》( ) (the “Foreign Exchange Regulations”), which was last amended and took effect on 5 August 2008. The Foreign Exchange Regulations classifies all international payments and transfers into current account items and capital account items. Most of the current account items are no longer subject to approval of SAFE while capital account items still are.
On 20 June 1996, the PBOC promulgated the Regulations for Administration of Settlement, Sale and Payment of Foreign Exchange 《結匯、售匯及付匯管理規定》( ) (the “Settlement Regulations”), which took effect on 1 July 1996, pursuant to which, the PRC has abolished the restrictions on convertibility of foreign exchange in respect of current account items while retaining the existing restrictions on foreign exchange transactions in respect of capital account items.
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On 25 October 1998, the PBOC and SAFE jointly promulgated the Notice Concerning Closure of the Foreign Exchange Swap Business Activities 《關於停辦外匯調劑業務的通知》( ) pursuant to which and with effect from 1 December 1998, all foreign exchange swapping business in the PRC for foreign-invested enterprises shall be discontinued, and the trading of foreign exchange by foreign-invested enterprise shall come under the banking system for the settlement and sale of foreign exchange.
On 21 July 2005, the PBOC announced that from the same date, the PRC would implement a managed floating exchange rate system based on market supply and demand and with reference to a basket of currencies. Therefore, the Renminbi was no longer only pegged to the U.S. dollar. The PBOC would publish the closing price of a foreign currency such as the U.S. dollar against the Renminbi in the inter-bank foreign exchange market after the closing of the market on each business day, which would be the middle price for quoting the Renminbi exchange rate on the following business day.
Since 4 January 2006, the PBOC improved the method of generating the middle price for quoting the Renminbi exchange rate by introducing an enquiry system while keeping the match-making system in the inter-bank spot foreign exchange market. In addition, the PBOC introduced the market-making system in the inter-bank foreign exchange market which provided liquidity in the foreign exchange market. After the introduction of the enquiry system, the PBOC authorised the China Foreign Exchange Trading System to determine and publish the middle price for quoting the Renminbi against the U.S. dollar, based on the enquiry system, at 9:15 am on each business day.
Any foreign exchange income under the current account items may be reserved or sold to financial institutions operating sale and settlement of foreign exchange business. Before reserving such foreign exchange income under the capital account items or selling it to any financial institution operating sale and settlement of foreign exchange business, approval from competent foreign exchange administrative authorities should be obtained, unless otherwise provided by the State.
PRC enterprises (including foreign-invested enterprises) which require foreign exchange to conduct transactions relating to current account items, may, without the approval of SAFE, effect payment from their foreign exchange account or convert and pay at designated foreign exchange banks, with valid trading receipts and evidence. Foreign-invested enterprises, which need foreign exchange for the distribution of profits to their shareholders and PRC enterprises, which in accordance with relevant regulations are required to pay dividends to shareholders in foreign currencies, may effect payment from their foreign exchange account or convert and pay at designated foreign exchange banks in accordance with the resolutions of shareholders’ meeting or board resolutions of such enterprises on distributions of profits.
Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to restrictions and prior approval from SAFE and its relevant branches must be obtained.
Dividends to holders of our H Shares are calculated in Renminbi but paid in Hong Kong dollars. We prepare our combined financial statements in Renminbi.
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The PBOC sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against the U.S. dollar in the market during the previous day. The PBOC also takes into account other factors such as the general conditions existing in the international foreign exchange markets. Although the PRC government introduced policies in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currencies for current account items, conversion of Renminbi into foreign currencies for capital account items, such as foreign direct investment, loans or security, still requires the approval of SAFE and other relevant authorities.
On 26 December 2014, SAFE issued the Circular on Relevant Issues of Foreign Exchange Management of Overseas Listing《關於境外上市外匯管理有關問題的通知》 ( , “SAFE Circular 54”), which came into effect on 31 December 2014. According to SAFE Circular 54, a domestic issuer shall, within 15 business days after its overseas listing, register with SAFE’s local branches at the place of its incorporation. The SAFE branches shall issue a certificate of overseas listing, based on which the domestic issuer can open a special foreign exchange account for a domestic company listing overseas with a local bank for its further offering, reduction or transfer of the shares of the domestic issuer to handle the exchange, remittance and transfer of funds in connection with related business. The proceeds from an overseas listing may be remitted to domestic accounts or deposited in an overseas account, but the use of the proceeds shall be consistent with the prospectus and other publicly disclosed documents. The conversion of proceeds remitted to domestic accounts into Renminbi shall be approved by the local SAFE branches.
— III-8 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
This appendix sets forth summaries of certain aspects of PRC law and regulations which are relevant to the Company’s operations and business. Laws and regulations relating to taxation in the PRC are discussed separately in “Appendix III — Taxation and Foreign Exchange” to this prospectus. This appendix also contains a summary of certain Hong Kong legal and regulatory provisions, including summaries of certain of the material differences between PRC and Hong Kong company law, certain requirements of the Hong Kong Listing Rules and additional provisions required by the Stock Exchange for inclusion in the articles of association of the PRC issuers.
PRC LEGAL SYSTEM
The PRC legal system is composed of the Constitution (as defined below), laws, administrative regulations, local regulations, rules and regulations of departments, rules and regulations of local governments, autonomy regulations and separate rules of autonomous regions and international treaties of which the PRC government is a signatory. Court judgments do not constitute legally binding precedents, although they may be used for the purpose of judicial reference and guidance. The PRC Constitution《中華人民共和國憲法》 ( ) (the “Constitution”), enacted by the National Peoples’ Congress of the PRC (the “NPC”), is the basis of the PRC legal system and has supreme legal authority.
The NPC and the Standing Committee of the NPC are empowered to exercise the legislative power of the State. The NPC has the power to formulate and amend the basic laws governing criminal and civil matters, State organs and other matters. The Standing Committee of the NPC is empowered to formulate and amend laws other than those required to be enacted by the NPC and to supplement and amend any parts of laws enacted by the NPC during its adjournment, provided that such supplements and amendments shall not be in conflict with the principles of such laws.
The State Council shall formulate administrative regulations according to the Constitution and laws.
People’s congresses of provinces, autonomous regions and municipalities and their respective standing committees may formulate local regulations based on the specific circumstances and requirements of the local administrations, provided that such local regulations shall not be in conflict with the Constitution, laws and administrative regulations. People’s congresses of large cities and their respective standing committees may enact local regulations based on the specific circumstances and requirements of the local administrations, which shall come into effect upon approval from the respective standing committees of the people’s congresses of the provinces and autonomous regions, provided that such local regulations shall not be in conflict with the Constitution, laws and administrative regulations.
People’s congresses of autonomous regions may enact autonomy regulations and separate rules in the light of the political, economic and cultural characteristics of the local nationalities, which shall come into effect upon approval from the Standing Committee of the NPC.
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Adaptations of provisions of laws and administrative regulations may be introduced to the autonomy regulations and separate rules so long as they do not contravene the basic principles of the laws or administrative regulations, provided that no adaptations shall be made to provisions in the constitutions and national region autonomy law and specific provisions on national autonomous areas contained in other relevant laws and administrative regulations.
The ministries, commissions, PBOC, Audit Office and institutions with administrative functions directly under the State Council may formulate rules and regulations within the jurisdiction of their respective departments based on the laws and the administrative regulations, decisions and rulings of the State Council. Provisions of departmental rules and regulations shall be formulated for the purpose of the enforcement of the laws and administrative regulations, decisions and rulings of the State Council. The people’s governments of provinces, autonomous regions, municipalities and larger cities may formulate rules and regulations based on the laws, administrative regulations and relevant local regulations.
According to the Constitution, the authority of the interpretation of laws shall be vested to the Standing Committee of the NPC. According to the Decision of the Standing Committee of the NPC Regarding the Strengthening of Interpretation of Laws passed on 10 June 1981, interpretation on the application of laws and decrees in court trials and the procuratorial work of the procuratorates shall be given by the Supreme People’s Court and the Supreme People’s Procuratorate, respectively. Interpretation of the laws and decrees unrelated to trials and proceratorial work shall be given by the State Council and the competent ministries and commissions. In the case that clarification or additional provisions shall be made for the local regulations, the standing committees of the people’s congresses of provinces, autonomous regions and municipalities which enacted such regulations shall give the interpretation or formulate the additional provisions. Interpretation on the application of local regulations shall be given by the competent departments under the people’s government of the respective provinces, autonomous regions and municipalities.
PRC JUDICIAL SYSTEM
Under the Constitution and the Law of the PRC of Organisation of the People’s Courts（《中華 人民共和國人民法院組織法》）which was enacted on 1 July 1979 and last amended and took effect on 31 October 2006, the judicial system in PRC is made up of the Supreme People’s Court, the local people’s courts, military courts and other special people’s courts. The local people’s courts are comprised of the basic people’s courts, the intermediate people’s courts and the higher people’s courts. The basic people’s courts may be organised into civil, criminal, and economical divisions. The intermediate people’s courts may be organised into divisions similar to those of the basic people’s courts, and may be further organised into other special divisions, such as the intellectual property division. The people’s courts at lower levels are subject to supervision of the people’s courts at higher levels. The Supreme People’s Court is the highest judicial organ of the PRC and has the power to supervise the administration of justice by the local people’s courts at all levels and all special people’s courts. The people’s procuratorates also have the right to exercise legal supervision over the trial activities of the people’s courts.
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The people’s courts adopt a “second instance as final” appellate system in the trial of the cases. A party to the case concerned may appeal against the judgment and ruling of the first instance by the local people’s courts to the people’s courts at the next higher level in accordance with the legal procedures. The people’s procuratorate may appeal to the people’s court at the next higher level in accordance with the legal procedures. In the absence of any appeal by any parties to the case concerned or any appeal by the people’s procuratorate within the stipulated period, the judgment and ruling of the first instance by the local people’s courts shall be final and legally binding. Judgments and rulings of the second instance of the intermediate people’s courts, the higher people’s courts and Supreme People’s Court and the judgments and rulings of the first instance of the Supreme People’s Court shall be the final judgments and rulings. The death penalty shall be reported to the Supreme People’s Court for approval unless it is otherwise adjudged by the Supreme People’s Court.
The Civil Procedure Law of the PRC 《中華人民共和國民事訴訟法》( ) (the “PRC Civil Procedure Law”), which was adopted on 9 April 1991 and last amended on 31 August 2012 and became effective on 1 January 2013, sets forth the criteria for instituting a civil case, the jurisdiction of the people’s courts, the procedures to be followed for conducting a civil action and the procedures for enforcement of a civil judgment or order. All parties to a civil action conducted within the PRC must comply with the PRC Civil Procedure Law. Generally, a civil case is initially heard by a local court of the municipality or province in which the defendant resides. The parties to a contract may, by an express agreement, select a competent court where civil actions may be brought, provided that the competent court has jurisdiction over either the plaintiff’s or the defendant’s place of residence, the place of execution or implementation of the contract, the object of the action or other locations which have substantial connections with the dispute. However, such selection cannot violate the stipulations of grade jurisdiction and exclusive jurisdiction in any case.
A foreign individual or enterprise generally has the same litigation rights and obligations as a citizen or legal person of the PRC. If a foreign country’s judicial system limits the litigation rights of PRC citizens and enterprises, the PRC courts may impose the same limitations to the citizens and enterprises of that foreign country within the PRC. If any party to a civil action refuses to comply with a judgment or order made by a people’s court or an award granted by an arbitration panel in the PRC, the other party may apply to the people’s court to request for enforcement of the judgment, order or award. There are time limits imposed on the right to apply for such enforcement and the time limit is two years. If a person fails to satisfy a judgment made by the court within the stipulated time, the court will, upon application by either party, mandatorily enforce the judgment.
A party seeking to enforce a judgment or order of a people’s court against a party who is not located within the PRC and does not own any property in the PRC, may apply to a foreign court with proper jurisdiction for recognition and enforcement of the judgment or order. In the case of an application or request for recognition and enforcement of a legally effective judgment or order of a foreign court, the people’s court shall, after having examined it in accordance with the international treaties entered into or acceded to by the PRC or with the principle of reciprocity and having arrived at the conclusion that it does not contravene the primary principles of the laws of the PRC nor violates
— IV-3 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS its sovereignty, security or social and public interests, recognise the validity of the judgment or order, and, if required, issue a writ of enforcement and enforce it in accordance with the relevant regulations. If the application or request contravenes the primary principles of the laws of the PRC or violates its sovereignty, security or social and public interests, the people’s court shall not recognise and enforce it.
THE PRC COMPANY LAW, SPECIAL REGULATIONS AND MANDATORY PROVISIONS
The PRC Company Law which was promulgated on 29 December 1993 by the Standing Committee of the NPC, last amended on 28 December 2013 and came into effect on 1 March 2014, regulates the organisation and operation of companies and protects the legitimate rights and interests of companies, shareholders and creditors. The latest amendment to the PRC Company Law in 2013 has cancelled the restrictions on the minimum registered capital and replaced the registered paid-up share capital system by the registered subscribed capital system.
The Special Regulations of the State Council on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies 《國務院關於股份有限公司境外募集股份及上市的特別規定》( ) (the “Special Regulations”) were promulgated by the State Council, and took effect on 4 August 1994. The Special Regulations are formulated according to the old PRC Company Law (1993) in respect of the overseas share subscription and listing of joint stock limited companies. The Mandatory Provisions for Articles of Association of Companies to be Listed Overseas 《到境外上市公司章程必備條款》( ) (the “Mandatory Provisions”) were issued jointly by the former Securities Commission of the State Council and the former State Economic Restructuring Commission on 27 August 1994, prescribing provisions which must be incorporated into the articles of association of joint stock limited companies to be listed overseas. Accordingly, the Mandatory Provisions have been incorporated in the Articles of Association (which are summarised in the appendix headed “Appendix V — Summary of Articles of Association” to this prospectus).
Copies of the Chinese text of the PRC Company Law, Special Regulations and the Mandatory Provisions together with copies of their unofficial English translations thereof are available for inspection as mentioned in the appendix headed “Appendix VII — Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection” to this prospectus.
Set out below is a summary of the major provisions of the PRC Company Law, the Special Provisions and the Mandatory Provisions applicable to our Company.
General
A “joint stock limited liability company” (hereinafter referred to as “company”) is a corporate legal person incorporated under the PRC Company Law, whose registered capital is divided into shares of equal nominal value. The liability of its shareholders is limited to the extent of the shares held by them, and the liability of the company is limited to the full amount of all the assets owned by it.
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A state-owned enterprise that is restructured into a company must comply with the conditions and requirements specified by laws and administrative regulations, for the modification of its operation mechanisms, the systematic handling and evaluation of the company’s assets and liabilities and the establishment of internal management organs.
Incorporation
A company may be incorporated by promotion or subscription. A company may be incorporated by two to 200 promoters, but at least half of the promoters must reside in the PRC.
Companies incorporated by promotion are companies with the registered capital entirely subscribed for by the promoters. Where companies are incorporated by subscription, the promoters are required to subscribe for not less than 35.0% of the total number of shares of a company unless otherwise stipulated by laws and regulations, and the remaining shares can be offered to the public or specific persons, unless otherwise required by law.
For companies incorporated by promotion, the registered capital has to be the total capital subscribed for by all promoters as registered with the company registration authority. The company shall not raise capital from others before the promoters fully pay the capital subscribed by them; for companies established by public subscription, the registered capital is the amount of total paid-up capital as registered with the company registration authority.
The promoters shall convene an inaugural meeting within 30 days after the issued shares have been fully paid up, and shall 15 days before the meeting give notice to all subscribers or make a public announcement of the date of the inaugural meeting.
The inaugural meeting may be convened only with the presence of shareholders holding shares representing more than 50.0% of the total issued shares of the company. At the inaugural meeting, matters including the adoption of draft articles of association proposed by the promoter(s) and the election of the board of directors and the supervisory committee of the company will be dealt with. All resolutions of the meeting require the approval of subscribers with more than half of the voting rights present at the meeting.
Within 30 days after the conclusion of the inaugural meeting, the board of directors shall apply to the company registration authority for registration of the establishment of the company. The company is formally established and has the status of a legal person after the approval for registration has been given and a business license has been issued.
Share Capital
The promoters of a company can make capital contributions in cash or in kind that can be valued in currency and transferable according to laws, such as intellectual property rights or land use rights based on their appraised value.
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If capital contribution is made other than in cash, valuation and verification of the property contributed must be carried out and converted into shares according to the laws.
A company may issue registered or bearer shares. However, shares issued to promoter(s) or legal person(s) shall be in the form of registered shares and shall be registered under the name(s) of such promoter(s) or legal person(s) and shall not be registered under a different name or the name of a representative.
The Special Regulations and the Mandatory Provisions provide that shares issued to foreign investors and listed overseas shall be issued in registered form and shall be denominated in Renminbi and subscribed for in foreign currencies.
Under the Special Regulations and the Mandatory Provisions, shares issued to foreign investors and investors from the territories of Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan and listed overseas are known as overseas listed foreign invested shares, and those shares issued to investors within the PRC other than the territories specified above are known as domestic shares.
A company may offer its shares to the public overseas with approval by the securities administration department of the State Council. Specific provisions shall be specifically formulated by the State Council. Under the Special Regulations, upon approval of CSRC, a company may agree, in the underwriting agreement in respect of an issue of overseas listed foreign invested shares, to retain not more than 15.0% of the aggregate number of overseas listed foreign invested shares proposed to be issued after accounting for the number of underwritten shares.
The share offering price may be equal to or greater than nominal value, but shall not be less than nominal value.
Increase in Share Capital
Under the PRC Company Law, an increase in the capital of a company by means of an issue of new shares must be approved by shareholders in general meeting.
Save for the above-mentioned shareholder approval requirement, for a public offering of new shares, the PRC Securities Law《中華人民共和國證券法》 ( ) provides that the company shall: (i) have a sound organisational structure with satisfactory operating record; (ii) have the capability of continuing profitability and a healthy financial position; (iii) have no false statements and other material breaches in the financial and accounting documents of the last three years; (iv) fulfill other conditions required by the securities administration department of the State Council as approved by the State Council.
Public offer requires the approval of the securities administration department of the State Council.
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After payment in full for the new shares issued, a company must change its registration with the company registration authority and issue a public notice accordingly.
Reduction of Share Capital
A company may reduce its registered capital in accordance with the following procedures prescribed by the PRC Company Law:
(i) the company shall prepare a balance sheet and an inventory of the assets;
(ii) the reduction of registered capital must be approved by shareholders in general meeting;
(iii) the company shall inform its creditors of the reduction in capital within ten days and publish an announcement of the reduction in the newspaper within 30 days after the resolution approving the reduction has been passed;
(iv) the creditors of the company may within the statutory prescribed time limit require the company to pay their debts or provide guarantees covering the debts; and
(v) the company must apply to the company registration authority for registration of the reduction in registered capital.
Repurchase of Shares
A company may not purchase its own shares other than for the purpose of:
(i) reducing its capital by canceling its shares or merging with another company holding its shares;
(ii) granting shares as a reward to the staff of the company; or
(iii) purchasing the company’s own shares upon request of its shareholders who vote against the resolution regarding the merger or division of the company in a general meeting.
The shares of the company to be repurchased by itself as a reward to its staff shall not exceed 5.0% of the total number of its issued shares. Any funds for such purpose shall be paid out of after-tax profits of the company, and the shares so purchased shall be transferred to the company’s staff within one year.
Transfer of Shares
Shares may be transferred in accordance with the relevant laws and regulations.
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The transfer of shares by shareholders should be conducted via the legally established stock exchange or in accordance with other methods as stipulated by the State Council. Transfer of registered shares by a shareholder must be made by means of an endorsement or by other means stipulated by laws or administrative regulations. Bearer shares are transferred by delivery of the share certificates to the transferee.
Shares held by a promoter of a company shall not be transferred within one year after the date of the company’s incorporation. Shares issued by a company prior to the public offer of its shares shall not be transferred within one year from the date of listing of the shares of the company on a stock exchange. Directors, supervisors and senior management of a company shall not transfer over 25.0% of the shares held by each of them in the company each year during their term of office and shall not transfer any share of the company held by each of them within one year after the listing date. There is no restriction under the PRC Company Law as to the percentage of shareholding a single shareholder may hold in a company.
Transfers of shares may not be entered in the register of shareholders within 20 days before the date of a shareholders’ meeting or within five days before the record date set for the purpose of distribution of dividends.
Shareholders
Shareholders have such rights and obligations as set forth in the articles of association of the company. The articles of association of a company are binding on each shareholder. Under the PRC Company Law and the Mandatory Provisions, the rights of a shareholder include:
(i) to attend in person or appoint a proxy to attend shareholders’ general meetings, and to vote in respect of the number of shares held;
(ii) to transfer his shares in accordance with applicable laws and regulations and the articles of association of the company;
(iii) to inspect the company’s articles of association, shareholders’ registers, records of debentures, minutes of shareholders’ general meetings, board resolutions, supervisors resolutions, financial and accounting reports and put forward proposals or raise questions about the business operations of the company;
(iv) if any directors or senior officers damages the shareholder’s interests by violating laws or administrative regulations or article of association, the shareholders may lodge an action in the people’s court;
(v) to receive dividends and other distributions in respect of the number of shares held;
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(vi) to obtain surplus assets of the company upon its termination in proportion to his or her shareholding; to claim against other shareholders who abuse their shareholders’ rights for the damages; and
(vii) any other shareholders’ rights specified in the company’s articles of association.
The obligations of a shareholder include the obligation to abide by the company’s articles of association, to pay the subscription monies in respect of the shares subscribed for, to be liable for the company’s debts and liabilities to the extent of the amount of subscription monies agreed to be paid in respect of the shares taken up by him/her, not to abuse shareholders’ rights to damage the interests of the company or other shareholders of the company; not to abuse the independent status of the company as a legal person and the limited liability to damage the interests of the creditors of the company and any other shareholders’ obligations specified in the company’s articles of association.
Shareholders’ General Meetings
The shareholders’ general meeting is the organ of authority of the company, which exercises its powers in accordance with the PRC Company Law.
The shareholders’ general meeting exercises the following principal powers:
(i) to decide on the company’s operational policies and investment plans;
(ii) to elect or replace the directors, supervisors who are not representatives of the employees and decide on matters relating to the remuneration of directors and supervisors;
(iii) to consider and approve reports of the board of directors;
(iv) to consider and approve reports of the supervisory committee or the supervisors;
(v) to consider and approve the company’s proposed annual financial budget and financial accounts;
(vi) to consider and approve the company’s proposals for profit distribution and for recovery of losses;
(vii) to decide on any increase or reduction in the company’s registered capital;
(viii) to decide on the issue of bonds by the company;
(ix) to decide on issues such as merger, division, dissolution, liquidation or change of the form of the company and other matters;
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(x) to decide on the appointment, resignation or dismissal of the accounting firm;
(xi) to amend the articles of association of the company; and
(xii) other powers specified in the articles of association of the company.
A shareholders’ general meeting is required to be held once every year. An extraordinary shareholders’ general meeting is required to be held within two months after the occurrence of any of the following circumstances:
(i) the number of directors is less than the number provided for in the PRC Company Law or less than two-thirds of the number specified in the company’s articles of association;
(ii) the losses of the company which are not made up reach one-third of the company’s total paid-up share capital;
(iii) a request by a shareholder that holds, or by shareholders that hold in aggregate, 10.0% or more of the company’s shares;
(iv) when deemed necessary by the board of directors;
(v) when the supervisory committee proposes convening it; or
(vi) other matters required by the company’s articles of association.
Shareholders’ general meetings shall be convened by the board of directors, and presided over by the chairman of the board of directors. In the event that the chairman is incapable of performing or not performing his duties, the meeting shall be presided over by the vice chairman. In the event that the vice chairman is incapable of performing or not performing his duties, a director nominated by more than half of directors shall preside over the meeting. Where the board of directors is incapable of performing or not performing its duties of convening the shareholders’ general meeting, the supervisory committee shall convene and preside over such meeting in a timely manner. In case the supervisory committee fails to convene and preside over such meeting, shareholders alone or in aggregate holding more than 10.0% of the total shares of the company for ninety days consecutively may unilaterally convene and preside over such meeting.
Notice of the shareholders’ general meeting shall be given to all shareholders 20 days before the meeting under the PRC Company Law and 45 days under the Special Regulations and the Mandatory Provisions, stating the matters to be considered at the meeting. Under the Special Regulations and the Mandatory Provisions, shareholders wishing to attend are required to give the company written confirmation of their attendance 20 days prior to the meeting.
Shareholders present at a shareholders’ general meeting have one vote for each share they hold, but the company shall have no vote for any of its own shares the company holds.
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Resolutions proposed at the shareholders’ general meeting shall be adopted by more than half of the voting rights cast by shareholders present (including those represented by proxies) at the meeting, with the exception of matters relating to merger, division, dissolution, increase or reduction in registered capital, change in the form of the company or amendments to the articles of association which shall be adopted by shareholders with two-thirds or more of the voting rights cast by shareholders present (including those represented by proxies) at the meeting.
A shareholder may entrust a proxy to attend shareholders’ general meetings on his or her behalf by a power of attorney which sets forth the scope of exercising the voting rights.
There is no specific provision in the PRC Company Law regarding the number of shareholders constituting a quorum in a shareholders’ meeting. However, the Special Regulations and the Mandatory Provisions provide that a company’s annual general meeting may be convened when replies to the notice of that meeting from shareholders holding shares representing 50.0% or more of the voting rights in the company have been received 20 days before the proposed date, or if that 50.0% level is not achieved, the company shall within five days of the last day for receipt of the replies notify shareholders by public announcement of the matters to be considered at the meeting and the date and place of the meeting and the annual general meeting may be held thereafter. The Mandatory Provisions require class meetings to be held in the event of a variation or derogation of the class rights of a class. Holders of domestic invested shares and holders of overseas listed foreign invested shares are deemed to be different classes of shareholders for this purpose.
Directors
A company shall have a board of directors, which shall consist of five to 19 members and there can be staff representatives of the company. Under the PRC Company Law, each term of office of a director shall not exceed three years. A director may serve consecutive terms if re-elected.
Meetings of the board of directors shall be convened at least twice a year. Notice of meeting shall be given to all directors and supervisors at least ten days before the meeting. The board of directors may provide for a different method of giving notice and notice period for convening an extraordinary meeting of the board of directors.
Under the PRC Company Law, the board of directors exercises the following powers:
(i) to convene the shareholders’ general meeting and report on its work to the shareholders;
(ii) to implement the resolutions of the shareholders’ general meeting;
(iii) to decide on the company’s business plans and investment plans;
(iv) to formulate the company’s proposed annual financial budget and final accounts;
(v) to formulate the company’s proposals for profit distribution and for recovery of losses;
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(vi) to formulate proposals for the increase or reduction of the company’s registered capital and the issue of corporate bonds;
(vii) to prepare plans for the merger, division, dissolution or change of the form of the company;
(viii) to decide on the company’s internal management structure;
(ix) to appoint or dismiss the company’s president, and based on the president’s recommendation, to appoint or dismiss vice presidents and financial officers of the company and to decide on their remuneration;
(x) to formulate the company’s basic management system; and
(xi) any other power given under the articles of association of the company.
In addition, the Mandatory Provisions provide that the board of directors is also responsible for formulating the proposals for amendment of the articles of association of a company.
Meetings of the board of directors shall be held only if more than half of the directors are present. Resolutions of the board of directors require the approval of more than half of all directors.
If a director is unable to attend a board meeting, he may appoint another director by a written power of attorney specifying the scope of the authorisation to attend the meeting on his behalf.
If a resolution of the board of directors violates the laws, administrative regulations or the company’s articles of association as a result of which the company sustains serious losses, the directors participating in the resolution are liable to compensate the company. However, if it can be proven that a director expressly objected to the resolution when the resolution was voted on, and that such objections were recorded in the minutes of the meeting, such director may be relieved of that liability.
Under the PRC Company Law, the following persons may not serve as a director of a company:
(i) persons without civil capacity or with restricted civil capacity;
(ii) persons who have committed the offense of corruption, bribery, taking of property, misappropriation of property or destruction of the social economic order, and have been sentenced to criminal punishment, where less than five years have elapsed since the date of completion of the sentence; or persons who have been deprived of their political rights due to criminal offense, where less than five years have elapsed since the date of the completion of implementation of this deprivation;
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(iii) persons who are former directors, factory managers or managers of a company or enterprise which has become bankrupt and been liquidated due to mismanagement and who are personally liable for the bankruptcy of such company or enterprise, where less than three years have elapsed since the date of the completion of the bankruptcy and liquidation of the company or enterprise;
(iv) persons who were legal representatives of a company or enterprise which had its business license revoked or business operation shut down due to violation of the law and who are personally liable, where less than three years have elapsed since the date of the revocation of the business license;
(v) persons who have a relatively large amount of debt due and outstanding; or
(vi) other circumstances under which a person is disqualified from acting as a director of a company as set out in the Mandatory Provisions.
The board of directors shall appoint a chairman, who is elected with approval of more than half of all the directors. The chairman of the board of directors exercises, among others, the following powers:
(i) to preside over shareholders’ general meetings and convene and preside over meetings of the board of directors; and
(ii) to check on the implementation of the resolutions of the board of directors.
The legal representative of a company in accordance with the Mandatory Provisions, is the chairman. The Special Regulations provide that a company’s directors, supervisors, managers and other officers bear fiduciary duties and the duty to act diligently. They are required to faithfully perform their duties, protect the interests of the company and not to use their positions for their own benefit. The Mandatory Provisions contain further elaborations of such duties.
Supervisors
A company shall have a supervisory committee composed of not less than three members. Each term of office of a supervisor is three years and he may serve consecutive terms if re-elected. A supervisor shall continue to perform his duties in accordance with the laws, administrative regulations and articles of association until a re-elected supervisor takes office, if re-election is not conducted in a timely manner upon the expiry of his term of office or if the resignation of supervisors results in the number of supervisors being less than the quorum. The supervisory committee is made up of shareholders representatives and an appropriate proportion of the company’s staff representatives; and the percentage of the number of the company’s staff representatives shall not be less than one-third. Directors and senior management shall not act as supervisors.
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Requirements in relation to the power of the supervisory committee under the PRC Company Law are as follows:
(i) to examine the company’s financial affairs;
(ii) to supervise the directors and senior management in their performance of their duties and to propose the removal of any director or senior management who violates the laws, regulations, articles of association or shareholders’ resolutions;
(iii) to require any director or senior management whose act is detrimental to the company’s interests to rectify such act;
(iv) to propose the convening of extraordinary shareholders’ general meetings and, in the event that the board of directors fails to perform the duties of convening and presiding shareholders’ meetings to convene and preside over shareholders’ meetings;
(v) to propose any bills to shareholders’ general meetings;
(vi) to commence any action against any directors or senior management; and
(vii) other powers specified in the company’s articles of association.
The circumstances under which a person is disqualified from being a director of a company described above apply mutatis mutandis to supervisors of a company.
Supervisors may be in attendance at board meetings and make enquiries or proposals in respect of board resolutions. The supervisory committee or (where there is no supervisory committee) the supervisors of a company may initiate investigations into any irregularities identified in the operation of the company and, where necessary, may engage an accountant to assist in their work. All expenses incurred by the supervisory committee to exercise their powers shall be borne by the company.
Meetings of the supervisory committee shall be convened at least every six months. Interim meetings of the supervisory committee can be convened by the supervisors. Resolutions of the supervisory committee require the approval of more than half of all supervisors. Each supervisor shall have one vote for resolutions to be approved by the supervisory committee. Minutes shall be prepared in respect of matters considered at the meeting of the supervisory committee and supervisors attending the meeting shall sign to endorse such minutes.
Managers and other Senior Officers
A company shall have a manager who shall be appointed or removed by the board of directors. The manager is accountable to the board of directors and may exercise the following powers:
(i) in charge of the production, operation and management of the company and arrange for the implementation of resolutions of the board of directors;
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(ii) arrange for the implementation of the company’s annual business and investment plans;
(iii) formulate plans for the establishment of the company’s internal management structure;
(iv) formulate the basic administration system of the company;
(v) formulate the company’s internal rules;
(vi) recommend the appointment and dismissal of deputy managers and any financial officer and appoint or dismiss other senior administration officers (other than those required to be appointed or dismissed by the board of directors);
(vii) attend board meetings as a non-voting attendant; and
(viii) other powers conferred by the board of directors or the company’s articles of association.
The Special Regulations and the Mandatory Provisions provide that the other senior management officers of a company includes the financial officer, secretary of the board of directors and other executives as specified in the article of association of the company.
The circumstances under which a person is disqualified from being a director of a company described above apply mutatis mutandis to managers and officers of the company.
The articles of association of a company shall have binding effect on the shareholders, directors, supervisors, managers and other senior management of the company. Such persons shall be entitled to exercise their rights, apply for arbitration and issue legal proceedings according to the articles of association of the company. The provisions of the Mandatory Provisions regarding the senior management of a company have been incorporated in the Articles of Association, a summary of which is set out in the appendix headed “Appendix V — Summary of Articles of Association” to this prospectus.
Duties of Directors, Supervisors and Senior Officers
A director, supervisor and senior officer of a company are required under the PRC Company Law to comply with the relevant laws, regulations and the company’s articles of association, carry out their duties honestly and protect the interests of the company. They are also prohibited from abusing their powers to accept bribes or other unlawful income and from misappropriating the company’s properties. Directors and senior management are prohibited from:
(i) misappropriation of company funds;
(ii) deposit of company funds into accounts under their own name or the name of other individuals;
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(iii) loaning company funds to others or providing guarantees in favour of others supported by the company properties in violation of the articles of association or without prior approval of the shareholders’ general meeting or board of directors;
(iv) entering into contracts or deals with the company in violation of the articles of association or without prior approval of the shareholders’ general meeting or board of directors;
(v) using their positions to procure business opportunities for themselves or others that should have otherwise been available to the company or operating for their own benefit or managing on behalf of others businesses similar to that of the company without prior approval of the shareholders’ general meeting;
(vi) accepting for their own benefit commissions from other parties dealing with the company;
(vii) unauthorised divulgence of confidential information of the company; or
(viii) other acts in violation of their duty of loyalty to the company.
A director, supervisor and senior officer of a company is also under a duty of confidentiality to the company.
A director, supervisor and senior officer who contravenes any law, regulation or the company’s articles of association in the performance of his duties which results in any loss to the company shall be personally liable to the company.
The Special Regulations and the Mandatory Provisions provide that a director, supervisor and senior officer of a company owe fiduciary duties to the company and are required to perform their duties faithfully and to protect the interests of the company and not to make use of their positions in the company for their own benefit.
Where the attendance of a director, supervisor, manager or other senior officer is requested by the shareholders’ general meeting, such director, supervisor, manager or other senior officer shall attend the meeting as requested and answer enquiries of shareholders. Directors and senior officers shall furnish with all truthfulness facts and information to the supervisory committee without obstructing the discharge of duties by the supervisory committee.
A company shall not directly, or through its subsidiaries, provide loans to any director, supervisor or senior management and shall regularly disclose to the shareholders any information regarding remunerations received by the directors, supervisors or senior management of the company.
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Finance and Accounting
A company shall establish its financial and accounting systems according to laws, administrative regulations and the provisions of the responsible financial department of the State Council and at the end of each financial year, prepare a financial report which shall be audited and verified as provided by law.
A company shall deposit its financial statements at the company for inspection by the shareholders at least 20 days before the convening of the annual general meeting of shareholders. A company incorporated by public subscription must publish its financial statements.
The common reserve of a company comprises the statutory surplus reserve, the discretionary common reserve and the capital common reserve.
When distributing each year’s after-tax profits, the company shall set aside 10.0% of its after-tax profits for the company’s statutory surplus reserve (except where the reserve has reached 50.0% of the company’s registered capital). After a company has made an allocation to its statutory surplus reserve from its after-tax profits, subject to a resolution of the shareholders’ general meeting, the company may make an allocation to a discretionary common reserve.
When the company’s statutory surplus reserve is not sufficient to make up for the company’s losses of the previous years, current year profits shall be used to make up for the losses before allocations are set aside for the statutory surplus reserve.
After the company has made up for its losses and make allocations to its statutory surplus reserve the remaining profits could be available for distribution to shareholders in proportion to the number of shares held by the shareholders except as otherwise provided in the articles of association of such company limited by shares.
The capital common reserve of a company is made up of the premium over the nominal value of the shares of the company on issue and other amounts required by the relevant governmental authority to be treated as the capital common reserve.
The common reserve of a company shall be applied for the following purposes:
(i) to make up the company’s losses other than the capital common reserve;
(ii) to expand the business operations of the company; and
(iii) to increase the registered capital of the company by the issue of new shares to shareholders in proportion to their existing shareholdings in the company or by increasing the nominal value of the shares currently held by the shareholders provided that if the statutory surplus reserve is converted into registered capital, the balance of the statutory surplus reserve after such conversion shall not be less than 25.0% of the registered capital of the company before such conversion.
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The company shall have no other accounting books except the statutory accounting books. The company’s assets shall not be deposited in any accounts opened in the name of an individual.
Appointment and Retirement of Auditors
The Special Regulations require a company to employ an independent PRC qualified accounting firm to audit the company’s annual report and to review and check other financial reports.
The auditors are to be appointed for a term commencing from the close of an annual general meeting and ending at the close of the next following annual general meeting.
If a company removes or ceases to continue to appoint the auditors, it is required by the Special Regulations to give prior notice to the auditors and the auditors are entitled to make representations before the shareholders in general meeting. The appointment, removal or non re-appointment of auditors shall be decided by the shareholders at shareholders’ general meetings and shall be filed with the CSRC for record.
Distribution of Profits
The PRC Company Law provides that a company is restricted from distributing profits before accumulated losses have been made up and statutory surplus reserve have been drawn. The Special Regulations provide that the dividends and other distributions to be paid to holders of overseas listed foreign invested shares shall be declared and calculated in Renminbi and paid in foreign currency. Under the Mandatory Provisions, the payment of foreign currency to shareholders shall be made through a receiving agent.
Amendments to Articles of Association
Any amendments to the company’s articles of association must be made in accordance with the procedures set forth in the company’s articles of association. Any amendment of provisions incorporated in the articles of association in connection with the Mandatory Provisions will only be effective after approval by the companies approval department authorised by the State Council and the CSRC. In relation to matters involving the company’s registration, its registration with the authority must also be changed.
Dissolution and Liquidation
Under the Company Law, a company shall be dissolved in any of the following events:
(i) the term of its operations set down in its articles of association has expired or events of dissolution specified in its articles of association have occurred;
(ii) the shareholders in general meeting have resolved to dissolve the company;
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(iii) the company is dissolved by reason of its merger or demerger;
(iv) the company is subject to the revocation of business license, a closure order or elimination in accordance with laws; or
(v) in the event that the company encounters substantial difficulties in its operation and management and its continuance shall cause a significant loss, in the interest of shareholders, and where this cannot be resolved through other means, shareholders who hold more than 10.0% of the total shareholders’ voting rights of the company may present a petition to the people’s court for the dissolution of the company.
Where the company is dissolved in the circumstances described in (i), (ii), (iv) and (v) above, a liquidation committee must be formed within 15 days after the occurrence of the cause of dissolution so as to carry out liquidation. Members of the liquidation committee shall be composed of the directors or people as determined by the shareholders’ meeting.
If a liquidation committee is not established within the stipulated period, the company’s creditors can apply to the people’s court for its establishment.
The liquidation committee shall notify the company’s creditors within ten days after its establishment, and issue a public notice in the newspapers within 60 days. A creditor shall lodge his claim with the liquidation committee within 30 days after receiving notification, or within 45 days of the public notice if he did not receive any notification. The liquidation committee shall exercise the following powers during the liquidation period:
(i) to handle the company’s assets and to prepare a balance sheet and an inventory of the assets;
(ii) to notify creditors or issue public notices;
(iii) to deal with and settle any outstanding business of relevant company;
(iv) to pay any tax overdue;
(v) to settle the company’s financial claims and liabilities;
(vi) to handle the surplus assets of the company after its debts have been paid off; and
(vii) to represent the company in civil lawsuits.
If the company’s assets are sufficient to meet its liabilities, they shall be applied towards the payment of the liquidation expenses, wages owed to the employees and labor insurance expenses, tax overdue and debts of the company. Any surplus assets shall be distributed to the shareholders of the company in proportion to the number of shares held by them.
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During the liquidation period, a company shall not engage in operating activities unrelated to the liquidation.
If the liquidation committee becomes aware that the company does not have sufficient assets to meet its liabilities, it must immediately apply to the people’s court for a declaration for bankruptcy according to the laws. Following such declaration, the liquidation committee shall hand over all affairs of the liquidation to the people’s court.
Upon completion of the liquidation, the liquidation committee shall submit a liquidation report to the shareholders’ general meeting or the people’s court for confirmation. Thereafter, the report shall be submitted to the companies registration authority in order to cancel the company’s registration, and a public notice of its termination shall be issued.
Members of the liquidation committee are required to discharge their duties honestly and in compliance with relevant laws. A member of liquidation committee is liable to indemnify the company and its creditors in respect of any loss arising from his willful or material default.
Loss of Share Certificates
A shareholder may apply, in accordance with the relevant provisions set out in the PRC Civil Procedure Law, to a people’s court in the event that share certificates in registered form are either stolen or lost, for a declaration that such certificates will no longer be valid. After such a declaration has been obtained, the shareholder may apply to the company for the issue of replacement certificates.
The Mandatory Provisions provide for a separate procedure regarding loss of H share certificates, and have been incorporated in the Articles of Association, a summary of which is set out in “Appendix V — Summary of Articles of Association.”
Merger and Demerger
Companies may merge through merger by absorption or through the establishment of a newly merged entity. If it merges by absorption, the company which is absorbed shall be dissolved. If it merges by forming a new corporation, both companies will be dissolved.
As for a corporate merger, both parties to the merger shall conclude an agreement with each other and formulate balance sheets and checklists of properties. The companies involved shall, within ten days as at making the decision of merger, notify the creditors, and shall make a public announcement in a newspaper within thirty days. The creditors may, within thirty days as at the receipt of the notice or within forty five days as at the issuance of the public announcement if it fails to receive a notice, require the company to clear off its debts or to provide corresponding guarantees. In the case of a merger, the credits and debts of the companies involved shall be succeeded by the company that survives the merger or by the newly established company.
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As for the division of a company, the properties thereof shall be divided accordingly, and balance sheets and checklists of properties shall be worked out. The company shall, within ten days as at the day when the decision of division is made, notify the creditors and make a public announcement in a newspaper within thirty days. The post-division companies shall bear joint liabilities for the debts of the former company before it is divided, unless it is otherwise prescribed by the company and the creditors before the division with regard to the clearance of debts in written agreement.
SECURITIES LAW AND REGULATIONS
The PRC has promulgated a number of regulations that relate to the issue and trading of shares and disclosure of information. In October 1992, the State Council established the Securities Committee and the CSRC. The Securities Committee was responsible for coordinating the drafting of securities regulations, formulating securities-related policies, planning the development of securities markets, directing, coordinating and supervising all securities-related institutions in the PRC and administering the CSRC. The CSRC was the regulatory body of the Securities Committee and responsible for the drafting of regulatory provisions of securities markets, supervising securities companies, regulating public offers of securities by PRC companies in the PRC or overseas, regulating the trading of securities, compiling securities-related statistics and undertaking research and analysis. In 1998, the State Council dissolved the Securities Committee and assigned its function to the CSRC. The CSRC is also responsible for the regulation and supervision of the national stocks and futures market according to laws, regulations and authorisations.
The PRC Securities Law took effect on 1 July 1999 and was revised on 27 October 2005, 29 June 2013 and 31 August 2014. This is the first national securities law in the PRC, and it is divided into 12 chapters and 240 articles regulating, among other things, the issue and trading of securities, takeovers by listed companies, securities exchanges, securities companies and the duties and responsibilities of the State Council’s securities regulatory authorities. The PRC Securities Law comprehensively regulates activities in the PRC securities market. Article 238 of the PRC Securities Law provides that a PRC company must obtain prior approval from the State Council’s regulatory authorities to list its shares outside the PRC. Article 239 of the PRC Securities Law provides that specific provisions in respect of shares of companies in the PRC which are to be subscribed and traded in foreign currencies shall be separately formulated by the State Council. Currently, the issue and trading of foreign issued shares (including H shares) are still mainly governed by the rules and regulations promulgated by the State Council and the CSRC.
Regulation on Anti-money Laundering
The Anti-money Laundering Law of the PRC 《中華人民共和國反洗錢法》( ) effective on 1 January 2007 provides for the duties of the relevant financial regulatory authorities in anti-money laundering, which includes monitoring the capital of anti-money laundering, formulating rules and regulations on anti-money laundering of the financial institutions, supervising and reviewing the fulfillment of anti-money laundering obligations by financial institutions and investigating suspicious transactions within the scope of responsibilities. Heads of financial institutions shall be responsible
— IV-21 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS for the effective implementation of anti-money laundering internal control system. Financial institutions shall establish a client identification system and a system for keeping clients’ identity information and transaction record, and report large-sum transactions and doubtful transactions according to applicable requirements.
According to the Provisions on Anti-money Laundering of Financial Institutions 《金融機構反( 洗錢規定》) which was enacted by the PBOC and came into effect on 1 January 2007, financial institutions and their branches shall establish comprehensive anti-money laundering internal control systems, an anti-money laundering department or designated internal department responsible for anti-money laundering pursuant to applicable laws. Anti-money laundering internal procedures and control measures shall be formulated. Specific training shall be offered to the staff in order to strengthen the anti-money laundering work.
According to the Measures on Administration of Identification of Clients and Preservation of Client Identities Information and Trading Records of Financial Institutions 《金融機構客戶身份識別( 和客戶身份資料及交易記錄保存管理辦法》) which was jointly enacted by the PBOC, China Banking Regulatory Commission, the CSRC and China Insurance Regulatory Commission and came into effect on 1 August 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 《金融機構大額交易和可疑交易報告管理辦法》( ) which was enacted by the PBOC and came into effect on 1 March 2007, the headquarter of the financial institution or the department appointed by the headquarter, shall report to China Anti-money Laundering Monitoring and Analysis Centre electronically after identifying large-sum transactions and doubtful transactions.
The CSRC also formulated the Implementing Rules of Anti-money Laundering for Securities and Futures Industry 《證券期貨業反洗錢工作實施辦法》( ) which effective from 1 October 2010 and further formulates the anti-money laundering rules for securities and futures industry, and the anti-money laundering liabilities for the institutions carrying on funds sales business in their funds sales activities, and the securities and futures operating institutions should establish anti-money laundering internal control system.
Overseas Listing
The shares of a company shall only be listed overseas after obtaining approval from the securities regulatory authority of the State Council and the listing must be arranged in accordance with procedures specified by the State Council.
According to the Special Regulations, a company’s plan to issue overseas listed foreign invested shares and domestic invested shares which has been approved by the securities regulatory authority of the State Council may be implemented by the board of directors of a company by way of separate issues, within 15 months after approval is obtained from the CSRC.
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ARBITRATION AND ENFORCEMENT OF ARBITRAL AWARDS
The Arbitration Law of the PRC 《中華人民共和國仲裁法》( ) (the “Arbitration Law”) was passed by the Standing Committee of the NPC on 31 August 1994 and the latest version was amended on 27 August 2009 with immediate effect. It is applicable to contract disputes and other property disputes between natural persons, legal persons and other organisations where the parties have entered into a written agreement to refer the matter to arbitration before an arbitration committee constituted in accordance with the Arbitration Law. Under the Arbitration Law, an arbitration committee may, before the promulgation by the PRC Arbitration Association of arbitration regulations, formulate provisional arbitration rules in accordance with the Arbitration Law and the PRC Civil Procedure Law. Where the parties have by agreement provided arbitration as the method for dispute resolution, the people’s court will refuse to handle the case.
The Hong Kong Listing Rules and the Mandatory Provisions require an arbitration clause to be included in the Articles of Association and, in the case of the Hong Kong Listing Rules, also in contracts with each of the Directors and Supervisors, to the effect that whenever any disputes or claims arise between holders of the H Shares and us; holders of the H Shares and the Directors, Supervisors or officers; or holders of the Shares, in respect of any disputes or claims in relation to our affairs or as a result of any rights or obligations arising under the Articles of Association, the PRC Company Law or other relevant laws and administrative regulations, such disputes or claims shall be referred to arbitration.
Where a dispute or claim of rights referred to in the preceding paragraph is referred to arbitration, the entire claim or dispute must be referred to arbitration, and all persons who have a cause of action based on the same facts giving rise to the dispute or claim or whose participation is necessary for the resolution of such dispute or claim, if they are Shareholders, Directors, Supervisors, officers of us, shall be subject to the arbitration. Disputes in respect of who is the Shareholder and disputes in relation to our register of Shareholders need not be resolved by arbitration.
A claimant may elect for arbitration to be carried out at either the China International Economic and Trade Arbitration Commission (“CIETAC”) in accordance with its rules or the Hong Kong International Arbitration Centre (“HKIAC”) in accordance with its securities arbitration rules. Once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. If the claimant elects for arbitration to be carried out at the HKIAC, any party to the dispute or claim may apply for a hearing to take place in Shenzhen in accordance with the securities arbitration rules of the HKIAC.
Under the Arbitration Law and the PRC Civil Procedure Law, an arbitral award is final and binding on the parties. If a party fails to comply with an award, the other party to the award may apply to the people’s court for enforcement. A people’s court may refuse to enforce an arbitral award made by an arbitration tribunal if there is any procedural or membership irregularity specified by law or the award exceeds the scope of the arbitration agreement or is outside the jurisdiction of the arbitration tribunal.
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A party seeking to enforce an arbitral award of PRC arbitration panel against a party who, or whose property, is not within the PRC, may apply to a foreign court with jurisdiction over the case for enforcement. Similarly, an arbitral award made by a foreign arbitration body may be recognised and enforced by the PRC courts in accordance with the principles of reciprocity or any international treaty concluded or acceded to by the PRC. The PRC acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (承認及執行外國仲裁裁決公約) (the “New York Convention”) adopted on 10 June 1958 pursuant to a resolution of the Standing Committee of the NPC passed on 2 December 1986. The New York Convention provides that all arbitral awards made in a state which is a party to the New York Convention shall be recognised and enforced by other parties to the New York Convention, subject to their right to refuse enforcement under certain circumstances, including where the enforcement of the arbitral award is against the public policy of the State to which the application for enforcement is made. It was declared by the Standing Committee of the NPC simultaneously with the accession of the PRC that (i) the PRC will only recognise and enforce foreign arbitral awards on the principle of reciprocity and (ii) the PRC will only apply the New York Convention in disputes considered under PRC laws to arise from contractual and non-contractual mercantile legal relations.
In June 1999, an arrangement was made between Hong Kong and the Supreme People’s Court of the PRC for the mutual enforcement of arbitral awards. This new arrangement was approved by the Supreme People’s Court of the PRC and the Hong Kong Legislative Council, and became effective on 1 February 2000. The arrangement is made in accordance with the spirit of the New York Convention. Under the arrangement, awards made by PRC arbitration bodies pursuant to the Arbitration Law can be enforced in Hong Kong. Hong Kong arbitral awards pursuant to the Arbitration Ordinance of Hong Kong are also enforceable in the PRC.
ESTABLISHMENT OF OVERSEAS OPERATIONS RULES AND REGULATIONS
Pursuant to the Provisions for Overseas Investment Management 《境外投資管理辦法》( ) promulgated by the MOFCOM on 6 September 2014 which became effective on 6 October 2014, enterprises shall obtain approval from the MOFCOM for conducting overseas investments involving sensitive countries and regions and/or sensitive sectors, or otherwise, file the investments with the MOFCOM and provincial commerce administrative authorities. In case of a change in overseas investment after being approved or filed, the enterprise shall complete the procedures for the change with the authority by which the investment was approved or filed.
Pursuant to the Measures for the Administration of Confirmation and Recordation of Overseas Investment Projects 《境外投資項目核准和備案管理辦法》( ), promulgated by the NDRC which became effective on 8 May 2014 and the Catalogue of Government-endorsed Investment Projects (version 2014)（《政府核准的投資項目目錄（2014年本）》） published by the State Council on 31 October 2014 with immediate effect, enterprises shall obtain approval from the NDRC for conducting overseas investments involving sensitive countries and regions and/or sensitive sectors. Investments by enterprises under central government not applicable to the preceding requirements and investments by local enterprises with Chinese investment amounting US$300 million or above shall be filed with the NDRC, and investments by local enterprises with Chinese investment below US$300 million shall be filed with investment administrative authorities of provincial government.
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Pursuant to the Regulations on Foreign Exchange Administration of the Overseas Direct Investment of Domestic Institutions 《境內機構境外直接投資外匯管理規定》( ) promulgated by the SAFE which became effective on 1 August 2009, upon obtaining approval for overseas investment, a PRC enterprise shall apply for foreign exchange registration for its overseas direct investments with the foreign exchange administrative authorities. Pursuant to the Notice on Further Simplifying and Improving Foreign Exchange Control Policies on Direct Investment 《關於進一步簡化和改進直接投( 資外匯管理政策的通知》) promulgated by the SAFE on 13 February 2015 with effect from 1 June 2015, the SAFE shall cancel administrative approval requirements on foreign exchange registration under overseas direct investment, which shall instead be directly reviewed and handled by banks in accordance with the notice and the Guides on Foreign Exchange Business Operation attached thereto whilst indirectly supervised by the SAFE and its branches through banks.
ANTI-MONEY LAUNDERING REGULATIONS
The Anti-money Laundering Law of the PRC 《中華人民共和國反洗錢法》( ), which became effective on 1 January 2007, sets out the responsibilities of the relevant financial regulatory authorities regarding anti-money laundering, including supervision over anti-money laundering, formulation of rules and regulations regarding anti-money laundering activities of financial institutions, monitoring and inspection of the anti-money laundering practice of financial institutions and investigations on suspicious transactions within their respective scope of authority. The persons in charge of the financial institutions shall be responsible for the effective implementation of internal control system regarding anti-money laundering Financial institutions shall establish sound systems for distinguishing clients’ identities, preserve the data for clients’ identities and records of transactions, and a report system for transactions involving large sums of money and for dubious transactions.
Pursuant to the Anti-money Laundering Regulations for Financial Institutions 《金融機構反洗( 錢規定》) promulgated by the PBOC which became effective on 1 January 2007, financial institutions and their branches are required to establish a comprehensive internal control system for anti-money laundering and keep improving it, and set up a special anti-money laundering department or designate an internal department to implement the anti-money laundering measures, formulate internal anti-money laundering policies and procedures and organise anti-money laundering training for staff to enhance their anti-money laundering capability.
Pursuant to the Administrative Measures on Client Identification and Maintenance of Client Identity Materials and Transaction Records of Financial Institutions 《金融機構客戶身份識別和客戶( 身份資料及交易記錄保存管理辦法》) promulgated jointly by the PBOC, CBRC, CSRC and CIRC which became effective on 1 August 2007, financial institutions are required to establish a client identification system, maintain records for the identities and relevant transactions of all clients and keep all retail transaction documents and books.
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Pursuant to the Administrative Measures on Reporting Large-sum Transactions and Dubious Transactions Financial Institutions 《金融機構大額交易和可疑交易報告管理辦法》( ) promulgated by the PBOC which became effective on 1 March 2007, upon the detection of any transactions involving large sums of money or dubious transactions, the head office or the designated department of the financial institution shall report such transactions to the China Anti-money Laundering Monitoring and Analysis Centre.
HONG KONG LAWS AND REGULATIONS
Summary of Material Differences between Hong Kong and PRC Company Law
The Hong Kong law applicable to a company with share capital incorporated in Hong Kong is based on the Companies (Winding Up and Miscellaneous Provisions) Ordinance, and the Companies Ordinance, and is supplemented by common law and rules of equity applicable in Hong Kong. The Company, which is a joint stock limited liability company established in the PRC, is governed by the PRC Company Law and all other rules and regulations promulgated pursuant to the PRC Company Law applicable to a joint stock limited liability company established in the PRC issuing overseas listed foreign shares to be listed on the Stock Exchange.
Set out below is a summary of the material differences between the Hong Kong company law applicable to a company incorporated in Hong Kong and the PRC Company Law applicable to a joint stock limited liability company established and existing under the PRC Company Law. This summary is, however, not intended to be an exhaustive comparison.
Ongoing concern
Under Hong Kong company law, a company having a share capital is incorporated and will subsist as an independent body corporate after the Registrar of Companies in Hong Kong has issued a certificate of incorporation. A company may be incorporated as a public company or a private company. Pursuant to the Companies Ordinance, the articles of association of a private company incorporated in Hong Kong shall contain certain pre-emptive provisions. A public company’s articles of association does not contain such pre-emptive provisions.
Under the PRC Company Law, a joint stock limited liability company may be incorporated by either the promotion method or the subscription method. The PRC Company Law stipulates that for a joint stock limited liability company, the total share capital subscribed for by all promoters or the total amount of paid-up share capital raised shall comply with the requirements of the company’s articles of association. A joint stock limited company has no minimum capital requirement except for the special provisions of any other laws, administrative regulations and decisions of the State Council.
Hong Kong law does not prescribe any minimum capital requirement for a Hong Kong company. There is no minimum monetary contribution restriction on a Hong Kong company under Hong Kong law.
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Share capital
Under Hong Kong law, the concept of the nominal value (also known as par value) of shares of a Hong Kong company has been abolished, and a Hong Kong company can alter its shares capital by (i) increasing its share capital; (ii) capitalizing its profits; (iii) allotting and issuing bonus shares with or without increasing its share capital; (iv) concerting its shares into larger or smaller number of shares; and (v) cancelling its shares. The concept of authorised capital no longer applies to a Hong Kong company formed on or after 3 March 2014 as well. Hence, the directors of a Hong Kong company may, with the prior approval of the shareholders, if required, cause the company to issue new shares.
The PRC Company Law does not recognise the concept of authorised share capital. The registered capital of a joint stock limited liability company incorporated by promotion method is the total amount of its share capital denominated by all promoters and registered at the company registration authority; the registered capital of a joint stock limited liability company incorporated by subscription method is the received total amount of its share capital that have been registered at the company registration authority. The PRC Company Law provides that any increase in the registered capital of a joint stock limited company must be approved by the shareholders at a general meeting and by the relevant PRC governmental and regulatory authorities in the PRC (if required).
Under the PRC Securities Law, a company which is authorised by the relevant securities administration authority to list its shares on a stock exchange must have a registered capital of not less than RMB30 million. Hong Kong law does not prescribe any minimum capital requirements for companies incorporated in Hong Kong.
Under the PRC Company Law, the capital contributions may be in the form of money or non-monetary assets (other than assets not entitled to be used as capital contributions under the relevant laws and regulations) that may be valued in cash and lawfully transferable. For non-monetary assets to be used as capital contributions, appraisals and verification must be carried out according to the law to ensure no over-valuation or under-valuation of the assets.
Restrictions on shareholding and transfer of shares
Under PRC law, the domestic shares (“domestic shares”) in the share capital of a joint stock limited liability company which are denominated and subscribed for in Renminbi may only be subscribed or traded by the State, PRC legal and natural persons. The overseas listed foreign shares (“foreign shares”) issued by a joint stock limited liability company which are denominated in Renminbi and subscribed for in a currency other than Renminbi, except as otherwise permitted under the Trial Measures for the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors (合格境內機構投資者境外證券投資管理試行辦法), may only be subscribed for, and traded by, investors from Hong Kong, Macau Special Administrative Region of the PRC, Taiwan or any country and territory outside the PRC, as well as other qualified institutions.
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Under the PRC Company Law, shares in a joint stock limited liability company held by its promoters cannot be transferred within one year after the date of establishment of the company. Shares in issue prior to the company’s public offering cannot be transferred within one year from the listing date of the shares on the Stock Exchange. Shares in a joint stock limited liability company held by its directors, supervisors and managers and transferred each year during their term of office shall not exceed 25% of the total shares they held in the company, and the shares they held in the company cannot be transferred within one year from the listing date of the shares, and also cannot be transferred within half a year after the said personnel has left office. The articles of association may set other restrictive requirements on the transfer of the company’s shares held by its directors, supervisors and officers. There are no such restrictions on shareholdings and transfers of shares under Hong Kong law apart from the six-month lock up on the company’s issue of shares and the 12-month lock up on controlling shareholders’ disposal of shares, as illustrated by the undertakings given by the Company to the Stock Exchange as described in the section headed “Underwriting” in this prospectus.
Financial assistance for acquisition of shares
Although the PRC Company Law does not contain any provision prohibiting or restricting a joint stock limited liability company or its subsidiaries from providing financial assistance for the purpose of an acquisition of its own or its holding company’s shares, the Mandatory Provisions contain certain restrictions on a company and its subsidiaries providing such financial assistance similar to those under Hong Kong company law.
Variation of class rights
The PRC Company Law makes no specific provision relating to variation of class rights. However, the PRC Company Law states that the State Council can promulgate regulations relating to other kinds of shares. The Mandatory Provisions contain detailed provisions relating to the circumstances which are deemed to be variations of class rights and the approval procedures required to be followed regarding variations of class rights. These provisions have been incorporated in the Company’s Articles of Association, which are summarised in Appendix V to this prospectus.
Under the Companies Ordinance, no rights attached to any class of shares can be varied except (i) with the approval of a special resolution of the holders of the relevant class at a separate general meeting, (ii) with the written consent of the holders representing at least 75% of the total voting rights of holders of shares in the class in question, or (iii) if there are provisions in the articles of association relating to the variation of those rights, then in accordance with those provisions.
The Company (as required by the Hong Kong Listing Rules and the Mandatory Provisions) has adopted in the Articles of Association provisions protecting class rights in a similar manner to those found in Hong Kong law. Holders of overseas listed foreign Shares and Domestic Shares are defined in the Articles of Association as different classes of Shareholders, provided however that the special procedures for approval by separate class Shareholders shall not apply to the following circumstances: (i) the Company issues Domestic Shares and overseas listed foreign Shares separately or
— IV-28 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS simultaneously once every 12-month period, pursuant to a Shareholders’ special resolution, of not more than 20% of each of the issued Domestic Shares and issued overseas listed foreign Shares that exist as at the date of the Shareholders’ special resolution; (ii) the Company’s plan (made at the time of its establishment) for the issue of Domestic Shares and overseas listed foreign Shares is completed within 15 months following the date of approval by the CSRC; and (iii) upon approval by CSRC, the unlisted Shares held by our Shareholders become listed or traded on an overseas stock exchange.
Directors
The PRC Company Law, unlike Hong Kong company law, does not contain any requirements relating to the declaration made by directors of the interests in material contracts, restrictions on directors’ authority in making major dispositions, restrictions on companies providing certain benefits such as guarantees in respect of directors’ liability and prohibition against compensation for loss of office without shareholders’ approval. The PRC Company Law provides restrictions on interested directors voting on a resolution at a meeting of the board of directors when such resolution relates to an enterprise which the director is interested in or connected with. The Mandatory Provisions, however, contain requirements and restrictions on major dispositions and specify the circumstances under which a director may receive compensation for loss of office, all of which have been incorporated in the Articles of Association, a summary of which is set out in Appendix V to this prospectus.
Supervisory Committee
Under the PRC Company Law, the board of directors and managers of a joint stock limited liability company is subject to the supervision and inspection of the supervisory committee, but there is no mandatory requirement for the establishment of a supervisory committee for a company incorporated in Hong Kong. The Mandatory Provisions provide that each supervisor owes a duty, in the exercise of his/her powers, to act in good faith and honestly in what he/she considers to be in the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise under comparable circumstances.
Derivative action by minority shareholders
Hong Kong law permits minority shareholders to start a derivative action on behalf of a company against directors for their misconduct committed against the company, if such directors control a majority of votes at a general meeting and thereby effectively preventing a company from suing the directors for their misconduct against the company in its own name. The PRC Company Law gives shareholders of a joint stock limited liability company the right to initiate proceedings in the people’s court to restrain the implementation of any resolution passed by the shareholders in a general meeting, or by the board of directors, that violates any law or damages the lawful rights and interests of the shareholders. The PRC Company Law also provides that a shareholder can initiate proceedings if the director or senior management of the company violates the laws, administrative regulations or articles of association of the company and thus damage the shareholder’s interests. The Mandatory Provisions further provide remedies to the company against directors, supervisors and senior management in
— IV-29 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS breach of their duties to the company. In addition, every director and supervisor of a joint stock limited liability company applying for a listing of its foreign shares on the Stock Exchange is required to give an undertaking in favour of the company to comply with the company’s articles of association. This allows minority shareholders to act against the directors and supervisors in default.
Protection of minorities
Under Hong Kong law, a shareholder who complains that the affairs of a company incorporated in Hong Kong are conducted in a manner unfairly prejudicial to his/her/its interests may make a petition to court to either wind up the company or seek an appropriate order regulating the affairs of the company. In addition, on the application of a specified number of members, the Financial Secretary of the Hong Kong Government may appoint inspectors who are given extensive statutory powers to investigate the affairs of a company incorporated in Hong Kong. The PRC Company Law provides that where a company encounters any serious difficulty in its operations or management so that the shareholders will sustain serious loss of their interests if the company continues to exist and such difficulty cannot be resolved by any other means, the shareholders holding 10% or more of the voting rights of all the issued shares of the company may apply to the people’s court to dissolve the company. The Mandatory Provisions, however, contain provisions to the effect that a controlling shareholder may not exercise its voting rights to relieve a director or supervisor of his/her duty to act honestly in the best interests of the company, or to approve the expropriation by a director or supervisor of the company’s assets or the individual rights of other shareholders, which is prejudicial to the interests of the shareholders generally or of some part of the shareholders of a company.
Notice of shareholders’ meetings
Under the PRC Company Law, notice of a shareholders’ general meeting must be given not less than 20 days before the meeting, while notice of an extraordinary general meeting must be given 15 days before the meeting or, in the case of a company having bearer shares, a public announcement of a shareholders’ general meeting must be made at least 30 days prior to the meeting. Under the Special Regulations and the Mandatory Provisions, 45 days’ written notice must be given to all shareholders and shareholders who wish to attend the meeting must reply in writing 20 days before the date of the meeting. For a company incorporated in Hong Kong, the minimum notice periods of a general meeting convened for passing an ordinary resolution and a special resolution are 14 days and 21 days, respectively. The notice period for an annual general meeting is 21 days.
Quorum for shareholders’ meetings
Under Hong Kong law, the quorum for a general meeting is two members unless the articles of association of the company otherwise provide. For one member companies, one member will be a quorum. The PRC Company Law does not specify any quorum requirement for a shareholders’ general meeting, but the Special Regulations and the Mandatory Provisions provide that a company’s general meeting can be convened when replies to the notice of that meeting have been received from shareholders whose shares represent 50% of the voting rights in the company at least 20 days before the proposed date of the meeting. If that 50% level is not achieved, the company shall within five days notify its shareholders by public announcement and the shareholders’ general meeting may be held thereafter.
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Voting
Under Hong Kong law, an ordinary resolution of the members (or of a class of members) of a company means a resolution that is passed by a simple majority and a special resolution of the members (or of a class of members) means a resolution that is passed by a majority of at least 75%. In the event that the resolution is passed at a general meeting on a show of hands, it is out of the number of members who vote in person and the number of persons who vote on the resolution as duly appointed proxies. In the event that the resolution is passed at a general meeting on a poll, it is out of the total voting rights of all the members who (being entitled to do so) vote in person or by proxy on the resolution. Under the PRC Company Law, the passing of any resolution requires more than one half of the votes cast by shareholders present in person or by proxy at a shareholders’ general meeting except in cases of proposed amendments to the articles of association, increase or reduction in share capital, and merger, demerger or dissolution of a joint stock limited liability company or changes to the company’s status, which require two-thirds or more of votes cast by shareholders present at a shareholders’ general meeting.
Financial disclosure
A joint stock limited liability company is required under the PRC Company Law to make available at its office for inspection by shareholders its annual balance sheet, profit and loss account, statements of changes in financial position and other relevant annexes 20 days before the annual general meeting of shareholders. In addition, a company established by way of public subscription under the PRC Company Law must publish its financial position. The annual balance sheet has to be verified by registered accountants. The Companies Ordinance requires a company to send to every shareholder a copy of its financial statements, auditors’ report and directors’ report, which are to be laid before the company in its annual general meeting, not less than 21 days before such meeting.
A joint stock limited liability company is required under the PRC law to prepare its financial statements in accordance with the PRC accounting standards. The Mandatory Provisions require that the company must, in addition to preparing accounts according to the PRC GAAP, have its accounts prepared and audited in accordance with international accounting standards or Hong Kong accounting standards and its financial statements must also contain a statement of the financial effect of the material differences (if any) from the financial statements prepared in accordance with the PRC GAAP.
The Special Regulations require that there should not be any inconsistency between the information disclosed within and outside the PRC and that, to the extent that there are differences in the information disclosed in accordance with the relevant PRC and overseas laws, regulations and requirements of the relevant stock exchanges, such differences should also be disclosed simultaneously.
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Information on directors and shareholders
The PRC Company Law gives the shareholders of a company the right to inspect the articles of association, minutes of the shareholders’ general meetings and financial and accounting reports. Under the Articles of Association, Shareholders of our Company have the right to inspect and copy (at reasonable charges) certain information on Shareholders and on Directors similar to that available to shareholders of Hong Kong companies under Hong Kong law.
Receiving agent
Under both the PRC Company Law and Hong Kong law, dividends once declared become debts payable to shareholders. The limitation period for debt recovery action under Hong Kong law is six years, while that under the PRC law is two years. The Mandatory Provisions require that the company should appoint a trust company registered under the Hong Kong Trustee Ordinance (Chapter 29 of the Laws of Hong Kong) as a receiving agent to receive on behalf of holders of foreign shares dividends declared and all other monies owed by a joint stock limited liability company in respect of such foreign shares.
Corporate reorganisation
Corporate reorganistion involving a company incorporated in Hong Kong may be effected in a number of ways, such as a transfer of the whole or part of the business or property of the company in the course of being wound up voluntarily to another company pursuant to section 237 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance or a compromise or arrangement between the company and its creditors or between the company and its members pursuant to Division 2 of Part 13 of the Companies Ordinance which requires the sanction of the court. Under PRC Company Law, the merger, demerger, dissolution, liquidation or change to the forms of a joint stock limited liability company has to be approved by shareholders at general meeting.
Arbitration of disputes
In Hong Kong, disputes between shareholders and a company incorporated in Hong Kong or its directors may be resolved through the courts. The Mandatory Provisions provide that such disputes should be submitted to arbitration at either the HKIAC or the CIETAC at the claimant’s choice.
Mandatory deductions
Under the PRC Company Law, a company shall allocate 10% of the profits to its statutory surplus reserve before it declares any dividends after taxation until the aggregate amount of the statutory surplus reserve has accounted for 50% of the company’s registered capital. After the company has made allocations to the statutory surplus reserve from the after-tax profits, it may, upon a resolution made by the shareholders, make further allocations from after-tax profit to the discretionary common reserve. There are no such requirements under Hong Kong law.
— IV-32 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Remedies of a company
Under the PRC Company Law, if a director, supervisor or manager in carrying out his duties infringes any law, administrative regulation or the articles of association of a company, which results in damages to the company, that director, supervisor or manager should be responsible to the company for such damages. In addition, such remedies of the company are similar to those available under the Hong Kong law (including rescission of the relevant contract and recovery of profits made by a director, supervisor or officer) have been in compliance with the Hong Kong Listing Rules.
Dividends
Pursuant to the relevant PRC laws and regulations, the company shall withhold and pay to the relevant tax authorities, any tax payable under PRC law on any dividends or other distributions payable to a shareholder. Under Hong Kong law, the limitation period for an action to recover a debt (including the recovery of dividends) is six years, whereas under PRC laws, the relevant limitation period is two years. A company shall not exercise its powers to forfeit any unclaimed dividend in respect of its listed foreign shares until after the expiry of the applicable limitation period.
Fiduciary duties
In Hong Kong, there is the common law concept of the fiduciary duty of directors. Under the PRC Company Law and the Special Regulations, directors, supervisors, senior management owe a fiduciary duty towards a company and are not permitted to engage in any activities which compete with or damage the interests of the company.
Closure of register of shareholders
The Companies Ordinance requires that the register of shareholders of a company must not generally be closed for the registration of transfers of shares for more than 30 days (extendable to 60 days in certain circumstances) in a year, whereas the articles of association of a company provide, as required by the PRC Company Law and the Mandatory Provisions, that share transfers may not be registered within 30 days before the date of a shareholders’ meeting or within five days before the record date set for the purpose of distribution of dividends.
Hong Kong Listing Rules
The Hong Kong Listing Rules provide additional requirements which apply to an issuer incorporated in the PRC as a joint stock limited liability company and seeking a primary listing or whose primary listing is on the Stock Exchange. Set out below is a summary of such principal additional requirements which apply to our Company:
Compliance adviser
A company seeking listing on the Stock Exchange is required to appoint a compliance adviser acceptable to the Stock Exchange for the period from its listing date up to the date of the publication
— IV-33 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS of its first full year’s financial results, to provide the company with professional advice on continuous compliance with the Hong Kong Listing Rules and all other applicable laws, regulations, rules, codes and guidelines, and to act at all times, in addition to the company’s two authorised representatives, as the principal channel of communication with the Stock Exchange. The appointment of the compliance adviser may not be terminated until a replacement acceptable to the Stock Exchange has been appointed.
If the Stock Exchange is not satisfied that the compliance adviser is fulfilling its responsibilities adequately, it may require the company to terminate the compliance adviser’s appointment and appoint a replacement. The compliance adviser must keep the company informed on a timely basis of changes in the Hong Kong Listing Rules and any new or amended laws, regulations or codes in Hong Kong applicable to the company. It must act as the company’s principal channel of communication with the Stock Exchange if the authorised representatives of the company are expected to be frequently outside Hong Kong.
Accountants’ report
An accountants’ report for a PRC issuer will not normally be regarded as acceptable by the Stock Exchange unless the relevant accounts have been audited to a standard comparable to that required in Hong Kong or under International Standards on Auditing or China Auditing Standards. Such report will normally be required to conform to Hong Kong or international accounting standards or China Accounting Standards for Business Enterprises.
Process agent
The Company is required to appoint and maintain a person authorised to accept service of process and notices on its behalf in Hong Kong throughout the period during which its securities are listed on the Stock Exchange and must notify the Stock Exchange of his/her/its appointment, the termination of his/her/its appointment and his/her/its contact particulars.
Public shareholdings
If at any time there are existing issued securities of a PRC issuer other than foreign shares which are listed on the Stock Exchange, the Hong Kong Listing Rules require that the aggregate amount of such foreign shares held by the public must constitute not less than 25% of the issued share capital and that such foreign shares for which listing is sought must not be less than 15% of the total issued share capital if the company has an expected market capitalisation at the time of listing of not less than HK$50,000,000. The Stock Exchange may, at its discretion, accept a lower percentage of between 15% and 25% if the Company has an expected market capitalisation at the time of listing of over HK$10,000,000,000.
— IV-34 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Independent non-executive directors and supervisors
The independent non-executive directors of a PRC issuer are required to demonstrate an acceptable standard of competence and adequate commercial or professional expertise to ensure that the interests of the general body of shareholders will be adequately represented. The supervisors of a PRC issuer must have the character, expertise and integrity and be able to demonstrate a standard of competence commensurate with their position as supervisors.
Restrictions on purchase and subscription of its own securities
Subject to governmental approvals and the provisions of the Articles of Association, our Company may repurchase its own H Shares on the Stock Exchange in accordance with the provisions of the Hong Kong Listing Rules. Approval by way of special resolutions of the holders of Domestic Shares and the holders of H Shares at separate class meetings conducted in accordance with the Articles of Association is required for share repurchases. In seeking approvals, our Company is required to provide information on any proposed or actual purchases of all or any of its equity securities, whether or not listed or traded on the Stock Exchange. The Directors must also state the consequences of any purchases which will arise under either or both of the Takeovers Code and any similar PRC law of which the Directors are aware, if any. Any general mandate given to the Directors to repurchase H Shares must not exceed 10% of the total amount of existing issued H Shares.
Mandatory provisions
With a view to increasing the level of protection afforded to investors, the Stock Exchange requires the incorporation, in the articles of association of a PRC company whose primary listing is on the Stock Exchange, of the Mandatory Provisions and provisions relating to the change, removal and resignation of auditors, class meetings and the conduct of the supervisory committee of the company. Such provisions have been incorporated into the Articles of Association, a summary of which is set out in Appendix V to this prospectus.
Redeemable shares
The Company must not issue any redeemable Shares unless the Stock Exchange is satisfied that the relative rights of the holders of the H Shares are adequately protected.
Pre-emptive rights
Except in the circumstances mentioned below, the directors of a company are required to obtain the approval by a special resolution of shareholders in general meeting, and the approvals by special resolutions of the holders of domestic shares and H shares (each being otherwise entitled to vote at general meetings) at separate class meetings conducted in accordance with the company’s articles of association, prior to (i) authorizing, allotting, issuing or granting shares or securities convertible into
— IV-35 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS shares, or options, warrants or similar rights to subscribe for any shares or such convertible securities; or (ii) any major subsidiary of the company making any such authorisation, allotment, issue or grant so as to materially dilute the percentage equity interest of the company and its shareholders in such subsidiary.
No such approval will be required, but only to the extent that, the existing shareholders of the company have by special resolution in general meeting given a mandate to the directors, either unconditionally or subject to such terms and conditions as may be specified in the resolution, to authorise, allot or issue, either separately or concurrently once every 12 months, not more than 20% of the existing domestic shares and H shares as at the date of the passing of the relevant special resolution or of such shares that are part of the company’s plan at the time of its establishment to issue domestic shares and H shares and which plan is implemented within 15 months from the date of approval by the CSRC; or where upon approval by securities supervision or administration authorities of State Counsel, the shareholders of domestic shares of the company transfer its shares to overseas investors and such shares are listed and traded in foreign markets.
Supervisors
Our Company is required to adopt rules governing dealings by its Supervisors in securities of the Company in terms no less exacting than those of the model code (set out in Appendix 10 to the Hong Kong Listing Rules) issued by the Stock Exchange.
The Company is required to obtain the approval of its Shareholders in a general meeting (at which the relevant Supervisor and his associates shall not vote on the matter) prior to the Company or any of its subsidiaries entering into a service contract of the following nature with a Supervisor or proposed Supervisor of the Company or its subsidiary: (i) the term of the contract may exceed three years; or (ii) the contract expressly requires the Company to give more than one year’s notice or to pay compensation or make other payments equivalent to more than one year’s emoluments.
The remuneration committee of the Company or an independent board committee must form a view in respect of service contracts that require Shareholders’ approval and advise Shareholders (other than Shareholders with a material interest in the service contracts and their associates) as to whether the terms are fair and reasonable, advise whether such contracts are in the interests of the Company and its Shareholders as a whole and advise Shareholders on how to vote.
Amendment to the Articles of Association
Our Company is required not to permit or cause any amendments to be made to its Articles of Association which would cause the same to cease to comply with the mandatory provisions of the Hong Kong Listing Rules and the Mandatory Provisions or the PRC Company Law.
— IV-36 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Documents for inspection
Our Company is required to make available at a place in Hong Kong for inspection by the public and its Shareholders free of charge, and for copying by Shareholders at reasonable charges the following:
(i) a complete duplicate register of Shareholders;
(ii) a report showing the state of the issued share capital of the Company;
(iii) the Company’s latest audited financial statements and the reports of the Directors, auditors and Supervisors (if any) thereon;
(iv) special resolutions of the Company;
(v) reports showing the number and nominal value of securities repurchased by the Company since the end of the last financial year, the aggregate amount paid for such securities and the maximum and minimum prices paid in respect of each class of securities repurchased (with a breakdown between Domestic Shares and H Shares);
(vi) a copy of the latest annual return filed with the relevant branches of the State Administration for Industry & Commerce or other competent PRC authority; and
(vii) for Shareholders only, copies of minutes of meetings of Shareholders.
Receiving agents
Our Company is required to appoint one or more receiving agents in Hong Kong and pay to such agent(s) dividends declared and other monies owing in respect of the H Shares to be held, pending payment, in trust for the holders of such H Shares.
Statements in listing documents and H share certificates
Our Company is required to ensure that all of its listing documents and H share certificates include the statements stipulated below and to instruct and cause each of its share registrars not to register the subscription, purchase or transfer of any of its Shares in the name of any particular holder unless and until such holder delivers to such share registrar a signed form in respect of such Shares bearing statements to the following effect that the acquirer of the Shares:
(i) agrees with the Company and each Shareholder of the Company, and the Company agrees with each Shareholder of the Company, to observe and comply with the PRC Company Law, the Special Regulations, the Articles of Association and other relevant laws and administrative regulations;
— IV-37 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
(ii) agrees with the Company, each Shareholder, Director, Supervisor, manager and officer of the Company, and the Company acting for itself and for each Director, Supervisor, manager and officer of the Company agrees with each Shareholder, to refer all differences and claims arising from the Articles of Association or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning the affairs of the Company to arbitration in accordance with the Articles of Association, and any reference to arbitration shall be deemed to authorise the arbitration tribunal to conduct open hearings and to publish its award. Such arbitration shall be final and conclusive;
(iii) agrees with the Company and each Shareholder of the Company that the H Shares are freely transferable by the holder thereof; and
(iv) authorises the Company to enter into a contract on his/her/its behalf with each Director, Supervisor, manager and officer of the Company whereby each such Director, Supervisor, manager and officer undertakes to observe and comply with his/her obligations to Shareholders as stipulated in the Articles of Association.
Compliance with the PRC Company Law, the Special Regulations and the Articles of Association
The Company is required to observe and comply with the PRC Company Law, the Special Regulations and the Articles of Association.
Contract between the Company and its Directors, Supervisors and officers
The Company is required to enter into a contract in writing with every Director, Supervisor and officer containing at least the following provisions:
(i) an undertaking by the Director or officer to the Company to observe and comply with the PRC Company Law, the Special Regulations, the Articles of Association, the Takeovers Code and an agreement that the Company shall have the remedies provided in the Articles of Association and that neither the contract nor his/her office is capable to be assigned;
(ii) an undertaking by the Director or officer, acting as agent for each Shareholder, to the Company to observe and comply with his/her obligations to Shareholders as stipulated in the Articles of Association;
(iii) an arbitration clause which provides that whenever any differences or claims arise from that contract, the Articles of Association or any rights or obligations conferred or imposed by the PRC Company Law or other relevant laws and administrative regulations concerning the affairs of the Company between the Company and its Directors or officers and between a holder of H Shares and a Director or officer of the Company, such differences or claims will be referred to arbitration at either the CIETAC in accordance with its rules or the HKIAC in accordance with its Securities Arbitration Rules, at the election of the claimant and that once a claimant refers a dispute or claim to arbitration, the other party must submit to the arbitral body elected by the claimant. Such arbitration will be final and conclusive;
— IV-38 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
(iv) disputes over who is a Shareholder and over the register of shareholders do not have to be resolved through arbitration;
(v) if the party seeking arbitration elects to arbitrate the dispute or claim at HKIAC, then either party may apply to have such arbitration conducted in Shenzhen according to the Securities Arbitration Rules of HKIAC;
(vi) PRC laws shall govern the arbitration of disputes or claims referred to above, unless otherwise provided by law or administrative regulations;
(vii) the award of the arbitral body is final and shall be binding on the parties thereto;
(viii) the agreement to arbitrate is made by the Director or officer with the Company on its own behalf and on behalf of each Shareholder; and
(ix) any reference to arbitration shall be deemed to authorise the arbitral tribunal to conduct open hearings and to publish its award.
The Company is also required to enter into a contract in writing with every Supervisor containing statements in substantially the same terms.
Subsequent listing
Our Company must not apply for the listing of any of the H Shares on a PRC stock exchange unless the Stock Exchange is satisfied that the relative rights of the holders of foreign Shares are adequately protected.
English translation
All notices or other documents required under the Hong Kong Listing Rules to be sent by the Company to the Stock Exchange or to holders of H Shares are required to be in English language, or accompanied by a certified English translation.
General
If any change in the PRC law or market practices materially alters the validity or accuracy of any of the basis upon which the additional requirements have been prepared, then the Stock Exchange may impose additional requirements or make listing of the equity securities of a PRC issuer, including the Company, subject to special conditions as the Stock Exchange considers appropriate. Whether or not any such changes in the PRC law or market practices occur, the Stock Exchange retains its general power under the Hong Kong Listing Rules to impose additional requirements and make special conditions in respect of the Company’s Listing.
— IV-39 — APPENDIX IV SUMMARY OF PRINCIPAL LEGAL AND REGULATORY PROVISIONS
Other Legal and Regulatory Provisions
Upon the Company’s Listing, the provisions of the SFO, the Takeovers Code and such other relevant ordinances and regulations as may be applicable to companies listed on the Stock Exchange will apply to our Company.
Securities Arbitration Rules
The Articles of Association provide that certain claims arising from the Articles of Association or the PRC Company Law shall be arbitrated at either the CIETAC or the HKIAC in accordance with their respective rules. The Securities Arbitration Rules of the HKIAC contain provisions allowing an arbitral tribunal to conduct a hearing in Shenzhen for cases involving the affairs of companies incorporated in the PRC and listed on the Stock Exchange so that PRC parties and witnesses may attend. Where any party applies for a hearing to take place in Shenzhen, the tribunal shall, where satisfied that such application is based on bona fide grounds, order the hearing to take place in Shenzhen conditional upon all parties, including witnesses and the arbitrators, being permitted to enter Shenzhen for the purpose of the hearing. Where a party, other than a PRC party, or any of its witnesses or any arbitrator is not permitted to enter Shenzhen, then the tribunal shall order that the hearing be conducted in any practicable manner, including the use of electronic media. For the purpose of the Securities Arbitration Rules, a PRC party means a party domiciled in the PRC other than the territories of Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan.
Any person wishing to have detailed advice on PRC law or the laws of any jurisdiction is recommended to seek independent legal advice.
— IV-40 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
Set out herein is a summary of the Articles of Association, the principal objective of which is to provide potential investors with an overview of the Articles of Association. As the information contained herein is in summary form, it may not contain all the information that is important to potential investors.
SCOPE OF BUSINESS
The business scope of the Company is: commodity futures brokerage business, financial futures brokerage business, futures investment consulting business and asset management business.
SHARES
Shares and Registered Capital
The Company shall have ordinary shares at all times; with the approval of the department authorised by the State Council, the Company may have other forms of shares when needed.
The Shares of the Company shall take the form of stock. All Shares issued by the Company shall have par values, with each Share having a par value of RMB1.
The Company shall issue Shares in an open, fair and just manner, and each Share of the same class shall have the same right. All Shares of the same class issued at the same time shall be issued under the same conditions and at the same price.
Upon approval by CSRC or other relevant regulatory authorities, the Company may offer its Shares to both domestic and foreign investors, and the Board of the Company may make arrangement for separate offering of Shares. If the Company separately issues overseas listed foreign Shares and Domestic Shares within the total number specified in the issue scheme, the said Shares shall be issued respectively at one time; if it is impossible for the Shares to be issued at one time for special reasons, the Shares may be issued by several times upon approval by CSRC.
Share Transfer
Subject to the approval of the securities regulatory authority of the State Council, holders of our Domestic Shares may transfer their Domestic Shares to overseas investors, and such transferred shares may be listed or traded on an overseas stock exchange. Any listing or trading of such transferred shares on an overseas stock exchange shall also comply with the regulatory procedures, rules and requirements of such overseas stock exchange. The listing or trading of transferred shares on an overseas stock exchanged is not subject to the resolution of the class meeting.
Save as otherwise specified by laws, administrative regulations and the Listing Rules, Shares of the Company may be transferred freely and without any liens. Transfer of overseas listed foreign Shares listed in Hong Kong shall be registered with the Hong Kong-based share registry designated by the Company.
The Company shall not accept its own Shares as pledge object.
— V-1 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
The Shares of the Company held by the promoters shall not be transferred within one year after incorporation of the Company. Shares already issued by the Company before public offering shall not be transferred within one year after the Shares of the Company are listed on the stock exchange. The Directors, Supervisors and senior management shall report to the Company about their shareholdings and changes thereof and shall not transfer more than 25.0% of their Shares per annum during their terms of office; the Shares they hold in the Company shall not be transferred within one year after the Shares of the Company are listed. The aforesaid persons shall not transfer their Shares in the Company within half a year after they terminate service with the Company.
DECREASE AND BUYBACK OF SHARES
According to the Articles of Association, the Company may decrease the registered capital.
The Company shall decrease its registered capital pursuant to the Company Law, other relevant regulations, and the Articles of Association.
The Company shall prepare a balance sheet and a list of property inventory when decreasing its registered capital. The Company shall notify all creditors within 10 days after adoption of the resolution to decrease the registered capital and shall make announcements in newspapers within 30 days at least 3 times. The creditors shall be entitled to require the Company to repay debts or provide corresponding guarantees for debt repayment within 30 days after the receipt of the notice, or within 45 days after the announcement for creditors if the creditors haven’t received the notice. The Company’s registered capital shall not, upon the decrease of capital, be less than the statutory minimum limit.
The Company may, in the following circumstances, buy back its Shares pursuant to laws, regulations and Articles of Association:
• Decreasing the registered capital of the Company;
• Merging with other companies holding Shares of the Company;
• Awarding Shares to employees of the Company;
• Shareholders objecting to resolutions of the general meeting concerning merger or division of the Company, requiring the Company to buy their Shares; and
• Other circumstances specified by laws and regulations.
The Company shall not trade its Shares unless in the aforesaid circumstances.
The Company may buy back its Shares in any of the following ways upon approval by relevant competent authority of the State:
• Offering to buy back Shares from all Shareholders according to the proportion of Shares they hold;
— V-2 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• Buying back through open transaction in the stock exchange;
• Buying back through agreement outside the stock exchange; and
• In other forms approved by laws, regulations, rules, normative documents and relevant competent authorities.
In buying back Shares through agreement outside the stock exchange, the Company shall obtain prior approval at a general meeting in accordance with the Articles of Association.
After buying back its Shares according to the laws, the Company shall cancel the said Shares before the deadline specified by laws and administrative regulations, and register the change of the registered capital with the original company registration authority. The total par value of the cancelled Shares shall be reduced accordingly from the registered capital of the Company.
FINANCIAL ASSISTANCE OF PURCHASE OF SHARES
The Company or its subsidiaries shall not at any time or in any form provide any financial assistance to purchasers or potential purchasers of the Company’s Shares. The aforesaid purchasers include persons who, directly or indirectly, undertake obligations as a result of the purchase of the Company’s Shares.
The Company or its subsidiaries shall not at any time or in any form provide any financial assistance to the aforesaid obligors for the purpose of reducing or discharging their obligations unless in the following circumstances:
• The Company provides the relevant financial assistance in the interest of the Company in good faith, and the main purpose of the said financial assistance is not to purchase the Company’s Shares, or the said financial assistance is a part of a master plan of the Company;
• The Company distributes its properties as dividends in accordance with the law;
• The Company distributes dividends by means of Shares;
• The Company decreases its registered capital, repurchases its Shares and adjusts the equity structure in accordance with the Articles of Association;
• The Company provides a loan for its normal business operations within its business scope (but such financial assistance shall not give rise to a decrease in the net assets of the Company, or, despite of a decrease, such financial assistance is deducted from the distributable profit of the Company); and
• The Company provides a loan for employee share option plan (but such financial assistance shall not give rise to a decrease in the net assets of the Company, or, despite of a decrease, such financial assistance is deducted from the distributable profit of the Company).
— V-3 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
SHARES AND SHAREHOLDERS’ REGISTER
The share certificates of the Company shall be in registered form. Matters specified in the share certificates shall include other matters required by the stock exchange with which the Company is listed, as well as those specified in the Company Law.
The Company shall establish a Shareholders’ register according to credentials provided by securities depository agencies and recording the following matters:
• Names (titles), addresses (domiciles), occupations or nature of each Shareholder;
• Type and number of Shares held by the Shareholders;
• The amount paid or payable for the Shares held by the Shareholders;
• Serial numbers of the Shares held by each Shareholder;
• Date on which each Shareholder is registered as Shareholder; and
• Date on which each Shareholder ceases to be a Shareholder.
The Shareholders’ register is a sufficient evidence of the Shareholders’ shareholdings in the Company unless there is evidence to the contrary.
The Company may keep overseas the register of holders of overseas listed foreign Shares and entrust it to the care of an overseas agency in accordance with the understanding and agreement reached between the securities regulatory authority under the State Council and the overseas securities regulatory authority. The original of the register of holders of overseas listed foreign Shares listed in Hong Kong shall be kept in Hong Kong. The Company shall keep at its domicile a copy of the register of holders of overseas listed foreign Shares; the entrusted overseas agency shall always ensure that the original and copies of the register of holders of overseas listed foreign Shares are consistent. Where the original and copies of the register of holders of overseas listed foreign Shares are inconsistent, the original shall prevail.
Change of the Shareholders’ register arising from Share transfer shall not be registered within 30 days before convening of a general meeting or within five days prior to the benchmark date on which the Company decides to distribute dividends.
If any person objects to the Shareholders’ register and asks to have his name (title) recorded in or deleted from the Shareholders’ register, the said person may apply to the court with jurisdiction to correct the Shareholders’ register.
If any Shareholder in the Shareholders’ register or any person requesting to have his name (title) recorded in the Shareholders’ register has lost his shares (i.e. “the Original Shares”), the said Shareholder or person may apply to the Company to reissue new shares for the said shares (i.e. “the Relevant Shares”).
— V-4 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
SHAREHOLDERS AND THE GENERAL MEETING
Shareholders
Shareholders of the Company are persons lawfully holding Shares of the Company, with names (titles) recorded in Shareholders’ register.
The Shareholders enjoy rights and fulfil obligations as per the Shares they hold; the same class of Shares represents the same rights and the same obligations.
The ordinary Shareholders of the Company shall be entitled to the following rights:
• To receive dividends and other distributions in proportion to the Shares they hold;
• To attend general meetings either in person or by proxy and exercise the corresponding voting right;
• To supervise, present suggestions on or make inquiries about the business operations of the Company;
• To transfer, donate or pledge their Shares in accordance with laws, administrative regulations and Articles of Association;
• To gain relevant information in accordance with the Articles of Association, including:
(1) Receiving the Articles of Association after payment of production cost; and
(2) Being entitled to consult and copy all the parts of Shareholders’ register; personal data of Directors, Supervisors, general manager and other senior management of the Company; share capital of the Company; report of the total par value, quantity, the highest and lowest price of each class of Shares bought back by the Company from the last fiscal year, and the total amount paid by the Company for this purpose; minutes of general meetings; resolutions of the Board meetings; resolutions of meetings of the Supervisory Committee; counterfoils of corporate bonds and financial statements;
• To participate in the distribution of the remaining properties of the Company as per their Shares in the event of the termination or liquidation of the Company;
• To require the Company to buy their Shares in the event of objection to resolutions of the general meeting concerning merger or division of the Company; and
• To enjoy other rights stipulated by laws, administrative regulations and Articles of Association.
— V-5 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
The ordinary Shareholders of the Company shall have the following obligations:
• To abide by laws, administrative regulations and Articles of Association;
• To pay subscription funds as per the Shares subscribed and the method of subscription;
• Not to exit shares unless in the circumstances stipulated by laws and regulations;
• Not to abuse rights of Shareholder to the detriment of the interests of the Company or other Shareholders, or abuse the Company’s independent legal person status or the limited liability of Shareholder, to the detriment of the interests of the creditors of the Company. In the event of any damage caused to the Company or other Shareholders arising from any abuse of the Shareholder’s right, such Shareholder shall be liable for compensation in accordance with laws. In the event of any material damage caused to the interest of the creditors of the Company arising from any abuse of the Company’s independent legal person status and the limited liability of the Shareholders by any Shareholder to evade from debts, such Shareholder shall be jointly and severally liable for the Company’s debts; and
• To fulfil other obligations as stipulated by laws, administrative regulations and Articles of Association.
The Company shall promptly notify Shareholders in writing or make an announcement, and report to the local office of the CSRC at its domicile in any of the following circumstances:
• The Company, or its Directors, Supervisors or senior management are put on file for investigation or subject to compulsory measures by competent authorities due to alleged violations of laws and regulations;
• The Company, or its Directors, Supervisors or senior management have been subject to administrative or criminal penalties due to violations of laws and regulations;
• The risk regulatory indicators of the Company fail to meet the prescribed requirements;
• Customers of the Company experience huge overdrafts or blow up their positions, which may affect operation of the Company as a going concern;
• The Company is in any emergency that has materially and adversely affected, or may materially and adversely affect, the interests of the Company or its customers; and
• Other circumstances as may affect the operations of the futures company as a going concern.
— V-6 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
If Shareholders holding 5.0% or more Shares or de facto controllers of the Company shall notify the Company within three working days in any of the following circumstances:
• Equity of the Company they hold has been frozen, sealed up or under enforcement measures;
• Equity of the Company they hold is pledged;
• They decide to transfer equity of the Company they hold;
• Shareholders are unable to properly exercise the rights or assume the obligations thereof as Shareholders, which may cause significant deficiencies in the governance of the Company;
• They are under investigation or being subject to compulsory measures taken by competent authorities for alleged grave violations of laws and regulations;
• They receive administrative penalty or are investigated for criminal responsibility due to serious violations of laws and regulations;
• Names are changed;
• They are involved in merger, division or major asset or debt restructuring;
• They are subject to regulatory measures including suspension of operation for recertification, cancellation, takeover or custody, or enter into dissolution, bankruptcy or closure procedure; and
• They are involved in other circumstances that may affect equity changes of the Company or operation of the Company as a going concern.
Shareholders holding 5.0% or more Shares of the Company fall under any of the circumstances prescribed in the preceding paragraph, the Company shall report the relevant information to the local office of the CSRC at its domicile within three working days upon receipt of the notice given by the said Shareholders. De facto controllers of the Company fall under any of the circumstances listed in items 5 to 9 of the preceding paragraph, the Company shall report the relevant information to the local office of the CSRC at its domicile within three working days upon receipt of the notice given by the effective controllers.
The Controlling Shareholders, de facto controllers and other affiliated parties of the Company shall not abuse their rights, shall not occupy the assets of the Company or misappropriate the assets of its customers, and shall not prejudice the legitimate rights and interests of the Company and its customers. The Controlling Shareholders, de facto controllers, Directors, Supervisors or senior management of the Company shall not use the connected relations to damage the interests of the Company; otherwise, they shall make compensation for the loss incurred to the Company.
— V-7 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
GENERAL PROVISIONS FOR GENERAL MEETINGS
The general meeting shall be the authority of power of the Company and shall exercise the following functions and powers according to law:
• To decide the business operation guidelines and investment plans for the Company;
• To elect and change Directors and Supervisors who are not employees’ representatives, and resolve on the remunerations of Directors and Supervisors;
• To examine and approve reports of the Board;
• To examine and approve reports of the Supervisory Committee;
• To examine and approve the annual financial budgets and final accounting plans of the Company;
• To examine and approve the Company’s profit distribution plan and loss recovery plan;
• To resolve on increase or decrease of the registered capital of the Company, and buy-back of Shares of the Company;
• To resolve on the merger, division, dissolution, liquidation or transformation of the Company;
• To resolve on issuance of bonds of the Company;
• To appoint, dismiss or no longer re-appoint the accounting firms;
• To amend the Articles of Association;
• To resolve proposals of Shareholders representing more than 3.0% of the voting Shares of the Company;
• To consider the Company’s purchase or disposal of major assets within one year with the transaction amount exceeding 30.0% of the latest audited total assets of the Company;
• To decide on major long-term investment, acquisition and disposal of assets, asset exchange, connected transactions, pledge loan, etc. of the Company within the authority granted by the general meeting;
• To approve connected transactions which required to be approved by the general meeting in accordance with the listing rules where our Company is listed;
• To examine and approve matters relating to the changes in the use of proceeds from Share offerings;
— V-8 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• To consider equity incentive scheme; and
• To consider other matters which, in accordance with laws, administrative regulations, department rules or Articles of Association, shall be approved at a general meeting.
The Company shall not provide financing for Shareholders, de facto controllers or any other affiliate, and shall not provide any external guarantees.
General meetings are classified into annual general meetings and extraordinary general meetings. General meetings shall be convened by the Board. The annual general meeting of Shareholders shall be held once every year within six months after the end of the previous fiscal year. In any of the following circumstances, the Company shall convene an extraordinary general meeting within two months from the date upon which the circumstance occurs:
• The number of Directors falls short of the quorum stipulated in Company Law or is less than two thirds of the number specified in the Articles of Association;
• The unrecovered losses of the Company amount to one third of the total amount of its share capital;
• Shareholder(s) severally or jointly holding more than 10.0% of the Company’s voting Shares request(s) the convening of an extraordinary general meeting;
• The Board deems necessary;
• The Supervisory Committee proposes to convene such meeting;
• Half of the independent Directors proposes to convene such meeting; and
• Other circumstances stipulated by laws, administrative regulations, department rules or Articles of Association.
CONVENING OF GENERAL MEETINGS
Where the Company convenes a general meeting, a written notice shall be given 45 days prior to the date of the meeting to notify all the Shareholders in the Shareholders’ register of the issues to be considered at the meeting, and the date and venue of the meeting. Any Shareholder who intends to attend the meeting shall deliver to the Company a written reply stating his or her intention to attend 20 days prior to the meeting.
Where the Company convenes a general meeting, the Board, the Supervisory Committee and Shareholder(s) severally or jointly holding 3.0% or more Shares are entitled to submit written new proposals to the Company. Matters mentioned in proposals which are within the scope of the powers of the general meeting shall be included in the meeting agenda.
— V-9 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
Shareholder(s) severally or jointly holding more than 3.0% Shares of the Company may submit written provisional proposals to the convener 10 days before a general meeting is convened. The convener shall serve a supplementary notice of general meeting to other Shareholders within two days after receipt of a proposal, and announce the contents of provisional proposals.
The Company shall calculate the number of Shares with voting power represented by the Shareholders planning to attend the general meeting in accordance with the written replies received 20 days before the meeting is convened. Where the number of voting Shares represented by Shareholders intending to attend the meeting amounts to more than one half of the Company’s voting Shares, the Company may convene the general meeting; if not, the Company shall, within five days, notify Shareholders again of the issues to be considered, date and venue of the meeting in the form of public announcements. The Company may then convene the general meeting after such announcements.
Any Shareholder entitled to attend and vote at a general meeting shall be entitled to appoint one or more persons (who need not be a Shareholder or Shareholders) as his proxies to attend and vote on his behalf. The said proxy may exercise the following rights as granted by the said Shareholder:
• To exercise the said Shareholder’s right to speak at the general meeting;
• To severally or jointly request to vote by ballot; and
• To exercise the right to vote by a show of hand or ballot; where there are more than one proxy, the said proxies shall only vote by ballot, unless otherwise prescribed by applicable securities listing rules or other securities laws and regulations.
The power of attorney shall be in writing under the hand of the principal or his proxy duly authorised in writing or, if the principal is a legal person, it shall be under seal or under the hand of a Director or a proxy duly authorised.
The procedures for convening an extrodinary general meeting or a class meeting upon requisition of the Shareholders shall be as follows:
• Two or more than two Shareholders who separately or jointly hold 10.0% or more of the Shares carrying voting rights may request the Board to convene an extraordinary general meeting or class meeting by signing a written requirement or several copies with the same format and to illustrate the subject of the meetings. The Board shall convene an extraordinary general meeting or class meeting as soon as practicable upon receipt of the aforesaid written requirement. The aforesaid number of shareholding is calculated as at the date of the submission of the written requirement by the Shareholders; and
• If the Board fails to issue the notice to convene the meeting within 30 days after it received the aforesaid request, the Shareholders proposing the request may convene the meeting at its own discretion within four months after the Board has received the request. The convene process shall be conducted in a manner which is as similar as possible to that of general meeting convened by the Board.
— V-10 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
If the Shareholders call and convene a meeting by themselves as a result of the Board’s failure to convene a meeting in accordance with the foresaid requirement, the expenses reasonably resulted therefrom shall be borne by the Company and be deducted from the amounts due to the Directors of the Company who neglect his duties.
The chairman shall preside over and act as chairman of the general meeting. If the chairman cannot attend the general meeting, a Director shall be elected by the Board to preside over and act as chairman of the meeting. If no chairman is elected by the Board, the Shareholders attending the meeting shall elect the chairman. If for any reason the Shareholders cannot elect a person to act as chairman, the Shareholder (including agent thereof) holding the most Shares among the attending Shareholders shall act as chairman of the meeting. Where the general meeting is convened by the Supervisory Committee itself, the chairman of the Supervisory Committee shall preside over and act as chairman of the meeting. If the chairman of the Supervisory Committee cannot or does not fulfill the duty thereof, more than half of the Supervisors may jointly elect a Supervisor to preside over and act as chairman of the meeting. Where the general meeting is convened by the Shareholders themselves, the convener shall elect a representative to preside over the meeting. Where a general meeting is held and the chairman of the meeting violates the rules of procedure which makes it difficult for the general meeting to continue, a person may be elected at the general meeting to act as chairman, subject to the approval of more than half of the attending Shareholders having the voting rights.
Minutes of a general meeting shall be led by the secretary of the Board. The Directors, the Supervisors, the secretary of the Board, the convener or representative thereof, and the chairman of the meeting shall sign on the minutes of the meeting. The minutes of meeting shall be kept together with the attendance register of the attending Shareholders, the power of attorney of the proxies, and other valid documentation for voting information through network and other means. The minutes of general meetings shall be kept for ten years.
RESOLUTIONS OF GENERAL MEETINGS
Resolutions of a general meeting shall be divided into ordinary resolutions and special resolutions. Ordinary resolutions shall be passed by votes representing more than half of the voting rights held by Shareholders (including proxies thereof) attending the general meeting. Special resolutions shall be passed by votes representing more than two thirds of voting rights held by Shareholders (including proxies thereof) attending the general meeting.
The following issues shall be approved by ordinary resolutions at a general meeting:
• Work report of the Board of Directors and the Supervisory Committee;
• Plans of profits distribution and loss make-up schemes proposed by the Board;
— V-11 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• Dismissal of the members of the Board and the Supervisory Committee who are not assumed by employees’ representatives, their remuneration and payment methods;
• Annual budget/final account report, balance sheet, income and other financial statements of the Company;
• Annual report of our Company; and
• Other issues in addition to those approved by special resolution stipulated in the laws, administrative regulations, the Listing Rules or the Articles of Association.
The following issues shall be approved by special resolutions at a general meeting:
• Increase or reduction in share capital of the Company, buy-back of Shares of the Company and the issue of Shares of any class, warrants and other similar securities;
• Issue of bonds of the Company;
• Merger, division, dissolution, liquidation or transformation of the Company;
• Amendment to the Articles of Association;
• The Company’s purchase or disposal of major assets within one year with the transaction amount exceeding 30.0% of the latest audited total assets of the Company;
• Equity incentive scheme; and
• Any other issue specified in the laws, administrative regulations, the Listing Rules or Articles of Association and confirmed by an ordinary resolution at a general meeting that it may have material impact on the Company and accordingly shall be approved by special resolutions.
The Company has no voting right for the Shares it holds, and such part of Shares shall be excluded from the total number of voting Shares represented by the Shareholders attending the general meeting. Shareholders (including proxies thereof) shall exercise their voting rights as per the voting Shares they represent. Each Share carries the right to one vote.
Other than the cumulative voting system, the general meeting shall vote on all proposals one by one. For different proposals in the same matter, voting shall be proceeded according to the time order of these proposals.
If ballots are counted at a general meeting, the counting result shall be recorded in the meeting minutes.
— V-12 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
SPECIAL VOTING PROCEDURES FOR CLASS SHAREHOLDERS
Holders of different classes of Shares are class Shareholders. Apart from holders of other classes of Shares, holders of Domestic Shares and overseas listed foreign Shares are deemed to be Shareholders of different classes. Any proposed change or annulment by the Company to the rights of class Shareholders shall not come into effect unless approved by special resolutions at a general meeting and a separate general meeting convened by the class Shareholders so affected in accordance with relevant provisions. The following circumstances shall be deemed as change or annulment of the rights of a certain class Shareholder:
• To increase or decrease the number of Shares of such class, or to increase or decrease the number of Shares of a class having voting rights, distribution rights or other privileges equal or superior to those of the Shares of such class;
• To change all or part of the Shares of such class into Shares of another class or to change all or part of the Shares of another class into Shares of that class or to grant relevant conversion rights;
• To cancel or reduce rights to accrued dividends or cumulative dividends attached to Shares of the said class;
• To reduce or cancel rights attached to the Shares of the said class to preferentially receive dividends or to receive distributions of assets in a liquidation of the Company;
• To add, cancel or reduce Share conversion rights, options, voting rights, transfer rights, pre-emptive placing rights, or rights to acquire securities of the Company attached to the Shares of the said class;
• To cancel or reduce rights to receive payments made by the Company in a particular currency attached to the Shares of the said class;
• To create a new class of Shares with voting rights, distribution rights or other privileges equal or superior to those of the Shares of the said class;
• To restrict the transfer or ownership of the Shares of the said class or to impose additional restrictions;
• To issue rights to subscribe for, or to convert into, Shares of the said class or another class;
• To increase the rights and privileges of the Shares of another class;
— V-13 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• To restructure the Company in such a way as to cause Shareholders of different classes to bear liabilities disproportionately during the restructuring; and
• To amend or cancel provisions in Shareholders and The General Meeting of the Articles of Association.
Where issues specified in (2) to (8), (11) to (12) above are involved, the affected class of Shareholders, whether or not they are entitled to vote at general meetings originally, shall have the right to vote at class meetings. However, interested Shareholder(s) shall not be entitled to vote at such class meetings. Resolutions of a class general meeting shall be approved by votes representing more than two thirds of the voting rights of Shareholders of that class present at the meeting who are entitled to vote at the meeting.
Special voting procedures for class Shareholders shall not apply in the following circumstances:
• With the approval by a special resolution at a general meeting, the Company issues and plans to issue, on one or more occasions, a total number of Shares not exceeding 20.0% of each of its existing issued and outstanding Domestic Shares and overseas listed foreign Shares in every 12 months;
• The Company’s plan to issue Domestic Shares and overseas listed foreign Shares at the time of its establishment is completed within 15 months from the date of approval of the securities regulatory authority under the State Council; and
• Upon the approval by the securities regulatory authority of the State Council, the Domestic Shares held by our Shareholders become listed or traded on an overseas stock exchange.
DIRECTORS AND THE BOARD
Directors
Directors of the Company are natural persons and need not hold Shares of the Company. Directors of the Company shall be elected at general meetings. A Director shall serve a term of three years, and may seek reelection upon expiry of the said term. The term of a Director shall be calculated from the date upon which the relevant resolution is passed at the general meeting to the expiry of the current Board. If the term of office of a Director expires but reelection is not made responsively, or the number of Directors of the Board falls below the quorum as a result of any resignation, the said Director shall continue fulfilling the duties as Director pursuant to laws, administrative regulations, department rules and Articles of Association until a new Director is elected.
Directors shall meet the following conditions:
• Have engaged in futures, securities and other financial business, or in legal, accounting operations for more than 3 years, or in economic management field for more than 5 years; and
• Have the educational background of graduate of junior college or above.
— V-14 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
Independent Directors
The Company shall establish an independent Director system. The number of independent Directors shall be at least three, and not less than one third of the total number of Directors.
Independent Directors shall be elected or replaced at general meetings and shall each serve a term of three years. The term of office of an independent Director is renewable upon reelection when it expires, but the renewed term shall not exceed six years.
An independent Director shall meet the following basic conditions:
• Have engaged in such financial business as futures or securities or in legal or accounting operations for more than 5 years, or have relevant senior academic title for teaching or researches;
• Have educational background of graduate of college or university or above in relevant field and holding a bachelor degree or above;
• Have passed the qualification test accepted by the CSRC;
• Have time and energy necessary to perform their duties; and
• Other conditions required by relevant laws, regulations and regulatory provisions at the location where the Company’s Shares are listed.
An independent Director is allowed to assume the positions of independent Director in not more than 2 futures companies.
The following persons shall not act as independent Director of the Company:
• Persons employed by the Company or its related parties and their immediate family members and major social connections;
• Natural person Shareholders directly or indirectly holding 1.0% or more of the Company’s equity or of top ten Shareholder of the Company and their immediate family members;
• Persons and their immediate family members and major social connections employed by the Shareholder entities which hold or control 5.0% or more of the Company’s equity or which are top five Shareholder entities of the Company, or by institutions which have business connection or interests relationship with the Company;
• Persons providing financial, legal or consulting services to the Company and its related parties and their immediate family members;
• Persons who belonged to categories (1) to (4) within the preceding year;
— V-15 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• Persons holding positions other than independent director in other futures companies; and
• Other persons specified in laws and regulations, or unfit to serve as independent directors upon confirmation by CSRC.
The Board
The Company shall have a Board, which shall be accountable to the general meeting. The Board shall consist of 9 Directors, including four independent Directors and one chairman.
The Board shall be accountable to the general meeting and exercise the following functions and powers:
• To convene general meetings and report to general meetings;
• To execute resolutions of general meetings;
• To resolve on the Company’s business plans and investment plans;
• To prepare the annual financial budgets and final accounting plans of the Company;
• To prepare the profit distribution plan and loss makeup plan of the Company;
• To prepare plans for the increase or decrease of the registered capital of the Company and for the issuance of corporate bonds and other securities and listing scheme;
• To formulate plans for material acquisitions, purchase of Shares of the Company, merger, division, dissolution or transformation of the Company;
• To decide on external investment, acquisition and disposal of assets, asset mortgage, consigned financial management, connected transactions, etc. of the Company within the authority granted by the general meeting;
• To resolve on the establishment of internal management organisations;
• To appoint or dismiss the Company’s general manager, Chief Risk Officer and secretary of the Board; to decide to appoint or dismiss the Company’s vice general manager, chief financial officer and other senior management as nominated by the chairman or the general manager, and to determine their remunerations and disciplinary matters;
• To set up the basic management system of the Company, including transaction margin management system and risk management system;
— V-16 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• To formulate the proposals for any amendment to the Articles of Association;
• To manage the disclosure of the Company’s information;
• To propose the appointment or replacement of an accounting firm that performs audits for the Company at the general meeting;
• To listen to the work report of the Chief Risk Officer and the general manager of the Company and examine on their work;
• To resolve on the setting up of business departments of the Company;
• To check and approve the Company’s any major transactions, very substantial disposals, very substantial acquisitions and reverse takeovers under the Listing Rules and submit it to Shareholder’s approval;
• To check and approve any transactions that shall be disclosed except the Company’s any major transactions, very substantial disposals, very substantial acquisitions or reverse takeovers under the Listing Rules;
• To approve the connected transactions that are not subject to approval or announcement of the general meeting under the Listing Rules;
• To check the connected transactions that shall be approve by the general meeting under the Listing Rules; and
• To exercise other functions and powers as stipulated by laws, administrative regulations, department rules or Articles of Association.
The Board may resolve on the issues specified in the preceding paragraph by approval of more than half of the Directors save for the issues specified in(6), (7), and (12), in which approval of two thirds of the Directors is required.
The chairman shall exercise the following functions and powers:
• To preside over general meetings and to convene and preside over the Board meetings;
• To examine the implementation of the resolutions of the Board;
• To sign the shares, bonds and other securities of the Company;
• To sign important documents of the Board and other documents which should be signed by the legal representative;
— V-17 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• To exercise the functions and powers as legal representative;
• In any emergent force majeure event, to exercise the special right of disposal in respect of the business of the Company in compliance with laws, regulations and in the interests of the Company, and report to the Board and the general meeting of the Company afterwards;
• To nominate the general manager and the Chief Risk Officer, and submit to the Board’s decision; and
• To exercise other functions and powers conferred by the Board or the Listing Rules.
Board meetings shall be held regularly at least four times every year, and shall be convened by the chairman, with the notice of meeting sent in writing to all the Directors 14 days in advance.
In any of the following circumstances, the chairman shall convene and preside over a Board meeting within 10 days after receipt of the proposal:
• When the chairman deems necessary;
• Proposed by Shareholders representing more than 10.0% of the voting rights;
• Jointly proposed by more than one third of the Directors;
• Proposed by the Supervisory Committee; and
• Required by the relevant regulatory authorities.
A Board meeting shall be attended by more than one half of the Directors. Every Director shall have one vote. Save as otherwise specified in laws, regulations or Articles of Association, resolutions made by the Board shall be passed by more than half of all Directors. If the pros and cons are the same, the chairman shall be entitled to an additional vote.
Directors shall attend Board meetings in person. If any Director cannot attend the meeting for any reason, he may authorise in writing another Director to act on his behalf.
Minutes shall be recorded for Board meetings and shall be signed by the attending Directors and the recorder.
The Directors shall be responsible for the resolutions passed at Board meetings. If any resolution runs counter to the laws, administrative regulations or Articles of Association, and causes any material losses to the Company, Directors who vote for the said resolution shall be liable for compensation to the Company. If any Director raises an objection to the resolution and the said objection is recorded in the minutes, the said Director may be exempt from any liability.
— V-18 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
Special Committees under the Board
The Board of the Company sets up special committees with regard to audit, nomination and remuneration. The audit committee must comprise a minimum of three members, at least one of whom is an independent Director with appropriate professional qualifications or accounting or related financial management expertise as required under the Listing Rules. The majority of the audit committee members, the remuneration committee members and the nomination committee members must be independent Directors of the Company. The audit committee and the remuneration committee must be chaired by an independent Director. The person in charge of the nomination committee shall be an independent Director or the chairman of the Board.
GENERAL MANAGER AND OTHER SENIOR MANAGEMENT
General
General manager and other senior management of the Company shall meet the following conditions:
• Have futures practitioner qualification;
• Have educational background of graduate of college or university or above in relevant field or holding a bachelor degree or above; and
• Have passed the qualification test accepted by the CSRC.
General manager and vice general manager of the Company shall, in addition to the conditions aforementioned, meet the following conditions:
• Have a minimum of 3 years’ experience in futures business, or a minimum of 4 years’ experience in other financial businesses, or a minimum of 5 years’ experience in legal or accounting practice;
• Have held the post of a person-in-charge of a department or above in such financial institutions as a futures company, a securities company etc. for more than 2 years or have experience of management of equivalent post.
Chief Risk Officer of the Company shall, in addition to the conditions as prescribed in first paragraph, have a minimum of 3 years’ experience in futures business and have held the post of a person-in-charge of trade, settlement and risk management or the position of a qualified person-in-charge in a futures company for more than 2 years; or have a minimum of 1 year ’s experience in futures business and a minimum of 3 years’ experience in risk management or approved operations of financial institutions such as a securities company.
— V-19 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
Chief financial officer shall meet the following conditions:
• Have futures practitioner qualifications;
• Have educational background of graduate of college or university or above in relevant field or holding a bachelor degree or above; and
• Have a professional accountant title or above or CPA qualifications.
Secretary of the Board
The Board shall have a secretary, who is a senior management of the Company. The secretary of the Board shall be a natural person with necessary professional knowledge and experience, and shall be appointed by the Board.
The main duties of the secretary of the Board are:
• To ensure that the Company has complete organisation documents and records;
• To ensure that the Company legally prepares and submits reports and documents as required by the competent authorities; and
• To ensure that the Shareholders’ register of the Company is established appropriately and that the persons who have the right of access to the relevant records and documents of the Company obtain the same in due time.
General Manager and Other Senior Management
The Company shall have one general manager, who shall be appointed or dismissed by the Board. The Board may decide that a Director serves concurrently as general manager, but the chairman of the Board shall not serve concurrently as general manager.
A general manager shall serve a term of three years and may serve consecutive terms upon reappointment.
The general manager shall be accountable to the Board and exercise the following functions and powers:
• To manage the business operations of the Company, organise execution of the Board’s resolutions, and report to the Board;
• To organise to execute the Company’s annual business plans and investment plans;
• To prepare the plan for the internal management setup of the Company;
— V-20 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• To draft the basic management system of the Company;
• To formulate the Company’s specific rules;
• To propose to the Board to appoint or dismiss the vice manager, chief financial officer;
• To decide to appoint or dismiss executives other than those appointed or dismissed by the Board; and
• To exercise other functions and powers conferred in the Articles of Association and by the Board.
Chief Risk Officer
A Chief Risk Officer is a member of the senior management of the Company who shall conduct supervision over and inspection on the legal compliance and risk management of the operations and management of the Company.
The Company shall have one Chief Risk Officer, who shall be appointed or dismissed by the Board and accountable to the Board. The nomination and appointment of a Chief Risk Officer shall be approved by all independent Directors.
The Chief Risk Officer shall interrogate and investigate the possible violation matters and hidden risk dangers in the process of operation and management of the Company and lay emphasis on the inspection whether or not the Company comply with laws and administrative regulations and establish sound and effective implementation of the following systems:
• Safe deposits system for margin deposits of clients;
• System for risk supervision factors management;
• Administration and internal control system of the Company;
• Transaction management rules, asset management business rules, transaction clearing rules, risk management system for clients and Information security system of the Company;
• Reporting system of the positions held by the relatives of the Company;
• Other system to ensure the security of client assets and transactions, which shall have a continuous important influence on the business of the Company, and other related business systems required by CSRC; and
• Other matters related to legal compliance and risk management which shall be supervised and inspected by the Chief Risk Officer in accordance with laws, regulations and rules.
— V-21 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
SUPERVISORS AND SUPERVISORY COMMITTEE
The Company shall have a Supervisory Committee. The Supervisory Committee shall supervise the legality and compliance of the fulfillment of duties of the Company’s Directors, general manager and other senior management, prevent them from abusing their rights to prejudice the legitimate rights and interests of the Shareholders and employees the Company and the Company itself.
The Supervisory Committee shall be composed of three members. The Supervisory Committee shall have one chairman, who shall be appointed or removed by the votes of more than two thirds of the members of the Supervisory Committee. A Supervisor shall serve a term of three years and be reelected for successive terms.
The position of Supervisor shall be assumed by 2 Shareholder representatives and 1 employee representative. Shareholder Supervisors shall be elected or replaced at general meetings, employee Supervisors shall be elected or removed democratically by employees of the Company.
The Supervisory Committee shall hold at least two meetings each year, and shall be convened by the chairman of the Supervisory Committee.
The Supervisory Committee of the Company shall be accountable to all general meeting and exercise the following functions and powers:
• To examine financial operations of the Company;
• To supervise the performance of duties by the Directors, general manager and senior management, and propose dismissal of Directors and senior management who have violated laws, administrative regulations, the Articles of Association or the resolutions of general meetings;
• To require Directors, general manager and senior management to make corrections if their conduct has damaged the interests of the Company;
• To review the financial reports, operating reports and profit distribution schemes to be submitted by the Board to the general meetings; to engage certified public accountants and practicing auditors to assist reviewing if there is any doubt;
• To propose the convening of extraordinary general meetings and, in case the Board does not perform the obligations to convene and preside over the general meetings in accordance with Company Law, to convene and preside over the general meetings;
• To coordinate with Directors and senior management on behalf of the Company or initiate legal proceedings against Directors and senior management in accordance with the laws;
— V-22 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• To propose motions to the general meeting;
• To propose to convene an interim meeting of the Board; and
• To exercise other functions and powers specified in the Articles of Association.
The Supervisors may attend Board meetings.
Meetings of Supervisory Committee shall not be held unless over half of Supervisors are present. Every Supervisor shall have the right to one vote. Resolutions made by the Supervisory Committee shall be approved by more than two thirds of the members of the Supervisory Committee.
The Company shall bear all reasonable fees incurred in the retaining of such professionals as lawyers, certified public accountants, and practicing auditors by the Supervisory Committee in the exercise of its functions and powers.
Qualifications and Obligations of Directors, Supervisors, General Manager and Other Senior Management
In any of the following circumstances, a person shall not serve as Director, Supervisor, general manager or other senior management of the Company:
• Without capacity or with limited capacity for civil conduct;
• Has been sentenced to criminal punishment due to corruption, bribery, embezzlement of property, misappropriation of property or disrupting the order of economy, and less than five years have elapsed since the punishment is fully executed; or has been deprived of political rights due to any criminal offences and less than five years have elapsed since the punishment is fully executed;
• Has served as a Director, factory manager or manager of a company or an enterprise that is bankrupt and liquidated, and is personally liable for the bankruptcy of the company or enterprise, and less than three years have elapsed since the date of completion of the bankruptcy liquidation of the company or enterprise;
• Has served as the legal representative of a company or an enterprise whose Business License was revoked due to illegal activities and was personally liable for such punishment, and less than three years has elapsed since the date of revocation of the business license of the company or enterprise;
• Has large amount of overdue debts;
• Is under investigation by the judiciary authority for violation of the criminal law;
• Is disqualified as corporate leader in laws and regulations;
— V-23 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• Is not a natural person;
• Was ruled by the relevant regulatory authority that he has violated the relevant securities regulations and committed any fraudulent or dishonest act, and less than five years have elapsed since such ruling was made;
• Has served as the person-in-charge of a futures exchange, securities exchange, or securities depository and clearing institution, or the Director, Supervisor or senior manager of a futures company or securities company who was dismissed from his position for violating laws or disciplines where not more than 5 years have elapsed since the date of his dismissal;
• Has served as a lawyer, a certified public accountant or a professional of an investment consultative agency, financial advisory organ, credit rating institution, assets assessment institution and verification institution, whose qualifications have been revoked for violating laws or disciplines, where not more than 5 years have elapsed since the date of the revocation;
• Has served as a business practitioner of a futures exchange, securities exchange, securities depository and clearing institution, securities service agency, futures company, or securities company or a state organ functionary who was expelled for violating laws or disciplines, where not more than 5 years have elapsed as at the date of his expulsion;
• Has served as a state organ functionary and those who are prohibited from assuming positions concurrently in a company according to laws and administrative regulations;
• Was given administrative sanction by the financial regulatory authority for violating laws or disciplines, where not more than 3 years have elapsed since the expiration of the enforcement period;
• Was determined to be an unsuitable candidate by the CSRC or its dispatched organ, where not more than 2 years have elapsed since the date of the decision;
• Has served as a person-in-charge who bears liability and other directly responsible persons of a financial institution and its branch which were ordered to suspend business for rectification, entrusted for custody, taken over or revoked by the regulatory body for violating laws or disciplines or for emergence of major risks, where not more than 3 years have elapsed since the date when the financial institution and its branch were ordered to suspend business for rectification, entrusted ,taken over or revoked by the regulatory body; and
• Was involved in other circumstances as prescribed by the CSRC.
The validity of an act of a Director, general manager or other senior management on behalf of the Company for a bona fide third person is not affected by any incompliance in the appointment, election or qualification thereof.
— V-24 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
In fulfilling duties, the Directors, Supervisors, the general manager and other senior management shall observe the principle of honesty and shall not set themselves in a position where their own interests conflict with their obligations. The said principle includes (but not limited to) the following obligations:
• To sincerely act in the best interest of the Company;
• To exercise their rights within their terms of reference;
• To exercise personally the discretion vested in them and not to allow themselves to be controlled by others and, save as permitted by laws or administrative regulations or with the informed consent of Shareholders given at a general meeting, not to transfer the exercise of their discretion to others;
• To be equitable towards Shareholders of the same class and fair towards Shareholders of different classes;
• Not to conclude any contract, conduct any transaction or make any arrangement with the Company saved as specified in the Articles of Association or with the informed consent of Shareholders given at a general meeting;
• Not to seek personal gains by using the property of the Company in any form without the informed consent of Shareholders given at a general meeting;
• Not to abuse official powers to accept bribes or other unlawful income, and not to expropriate the Company’s property in any form, including (but not limited to) opportunity favourable to the Company;
• Not to accept commissions in connection with the Company’s transactions without the informed consent of Shareholders given at a general meeting;
• To observe the Articles of Association, fulfil duties honestly, protect the interests of the Company, and not to seek personal gains by using their positions and powers in the Company;
• Not to compete with the Company in any form without the informed consent of Shareholders given at a general meeting;
• Not to appropriate the monies of the Company or lend the same to others, not to deposit the Company’s assets in the accounts of their own or others, and not to use the Company’s assets as security for the personal debts of the Shareholders of the Company or others; and
— V-25 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• Without the informed consent of the Shareholders at a general meeting, not to disclose any confidential information related to the Company acquired by them during the term of their office; not to use the said information save for the interest of the Company; however, they may disclose such information to a court or other governmental regulatory authorities in the following circumstances:
(1) As required by law;
(2) As required in the interests of the public; and
(3) As required for the interests of the said Directors, Supervisors, the general manager and other senior management.
The fiduciary duties of Directors, Supervisors, the general manager and other senior management shall not end with the expiry of their terms of office, and their confidentiality obligation in respect of any commercial secrets of the Company shall continue after expiry of their terms of office. Other duties may continue for such period as the principle of fairness may require depending on the amount of time which has lapsed between the termination and the act concerned and the specific circumstances under which the relationship between the Director and the Company was terminated.
If Directors, Supervisors, the general manager and other senior management of the Company have any direct or indirect material interests in any contract, transaction or arrangement already concluded or under planning with the Company (exclusive of appointment contracts with the Company), they shall responsively disclose the nature and extent of the said interests to the Board regardless whether the relevant matters are subject to approval by the Board in normal circumstances.
The Company shall not pay taxes for its Directors, Supervisors, the general manager and other senior management in any way.
The Company shall not directly or indirectly provide loan to the Directors, Supervisors, the general manager and other senior management of the Company or its parent company, or to the connected persons of the aforesaid persons. Except when:
• The Company provides loan for its subsidiaries;
• The Company, in accordance with the appointment contracts approved at the general meeting, provides loan to the Directors, Supervisors, the general manager and other senior management of the Company so that they may pay the expenses incurred for the Company or for fulfilling duties of the Company; and
• If the normal business scope of the Company includes provision of loan, the Company may provide loan to the relevant Directors, Supervisors, the general manager and other senior management and their connected persons, but the conditions for providing loan shall be normal business conditions.
— V-26 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
If the Company provides loan in violation of the said provision, the recipient of the loan shall return the same immediately regardless of the loan conditions.
If the Directors, Supervisors, the general manager or other senior management fail to fulfil the obligations to the Company, the Company shall be entitled to take the following actions in addition to the rights and remedial measures under the relevant laws and administrative regulations:
• Require the Directors, Supervisors, the general manager or other senior management to compensate the Company for the losses arising from their neglect of duty;
• Rescind the contracts or transactions concluded between the Company and the Directors, Supervisors, the general manager or other senior management of the Company, or between the Company and a third person (if the third person knows or is supposed to know that the Directors, Supervisors, the general manager or other senior management representing the Company have breached their obligations to the Company);
• Require the relevant Directors, Supervisors, the general manager or other senior management to surrender gains arising from breach of obligations;
• Recover monies, including (but not limited to) commissions, received by the relevant Directors, Supervisors, the general manager or other senior management but receivable by the Company; and
• Require the relevant Directors, Supervisors, the general manager or other senior management to surrender interests earned or likely to be earned from monies payable to the Company.
The Company shall conclude written contracts with Directors and Supervisors in relation to their remunerations, subject to prior approval at a general meeting. The Company shall specify in the contracts concluded with the Directors or Supervisors in relation to remunerations that if the Company is acquired, the Directors or Supervisors shall be entitled to seek compensations or other monies for losing their positions or for retirement under the conditions approved at the general meeting.
FINANCIAL AND ACCOUNTING SYSTEMS, PROFIT DISTRIBUTION AND AUDIT
Financial and Accounting Systems
The Company shall formulate its financial and accounting systems in accordance with laws, administrative regulations and PRC accounting standards formulated by the financial authority under the State Council.
The Board shall, at each annual general meeting, submit to the Shareholders the regulatory documents promulgated by relevant laws, administrative regulations, local governments and competent authorities, and the financial reports which shall be prepared by the Company as required by securities supervisory regulations at the listing place of the Company.
— V-27 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
The financial statements of the Company shall be prepared in accordance with not only PRC accounting standards and regulations, but also the international accounting standards or the accounting standards of the overseas listing place. If the financial statements prepared under the two accounting standards are discrepant significantly, such discrepancy shall be indicated in the notes to the financial statements. The Company shall distribute the after-tax profit of the relevant fiscal year as per the less of the after-tax profits in the aforesaid two financial statements.
The interim results or financial data announced or disclosed by the Company shall be prepared in accordance with the PRC accounting standards and regulations as well as the international accounting standards or the accounting standards of the overseas listing place.
The Company shall not establish account books other than the statutory account books. The assets of the Company shall not be deposited in any personal account.
Profit Distribution
When the Company distributes its after-tax profit of the current year, 10.0% of the profit shall be allocated to its statutory common reserve fund. The Company is not required to do so once the cumulative amount of the statutory common reserve fund reaches 50% or more of the Company’s registered capital.
If the statutory common reserve fund of the Company is not sufficient to cover its losses in previous years, the Company shall use the profit of the current year to cover the losses before accruing the statutory common reserve fund in accordance with the preceding term.
After the Company has accrued the statutory common reserve fund from its after-tax profit, it may, subject to a resolution of the general meeting, accrue discretionary common reserve fund from the after-tax profit.
After having been used to cover the losses and make allocation to the common reserve fund, the remaining after-tax profit shall be distributed in proportion to the Shares held by each Shareholder.
Where the general meeting violates the preceding terms and distributes profit to Shareholders before the Company covers the losses and accrues the statutory common reserve fund, the Shareholders shall return to the Company the profit distributed in violation.
The Company shall not distribute profits to its holdings of its own Shares.
Capital reserve fund includes the following:
• Premium arising from issue above the par value of the stock; and
• Other revenues required by the financial authority under the State Council to be stated as capital reserve.
— V-28 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
The common reserve fund of the Company shall be used to make up for the losses, enhance the operating scale or increase the capital of the Company. However, the capital reserve shall not be used to recover the losses of the Company.
When statutory common reserve fund is converted into capital stock, the amount of the said fund left shall not be less than 25.0% of the registered capital of the Company before the increase of the capital.
The Company may distribute dividends in cash or in Shares.
Monies paid for any Shares before the date specified by the Company for payment of Share shall have interests, but the holders of Shares are not entitled to dividends announced later for the said monies.
Subject to related laws and regulations, the Company shall be entitled to confiscate unclaimed dividend; however, such right shall not be exercised before the expiry of relevant applicable limitation period.
The Company’s power to cease sending dividend warrants to holders of overseas listed foreign Shares by post will not be exercised until such dividend warrants had been so left uncashed on two consecutive occasions. Such power may also be exercised after the first occasion on which such a dividend warrant is returned undelivered.
The Company is entitled to, as permitted by the law, sell the Shares held by Shareholders who are untraceable in an appropriate way approved by the Board, where: (1) dividends have been distributed for at least three times to such Shares within a period of 12 years, but no Shareholder has claimed any dividends; and (2) upon expiry of the 12-year period, the Company makes an announcement on one or more newspapers stating the intent to sell the Shares, and notifies the local securities regulatory authority at the place where the Company’s Shares are listed of the said intent.
The Company shall appoint collection agents for holders of overseas listed foreign Shares. The collection agents shall, on behalf of the related Shareholders, collect dividends and other payables distributed by the Company for the overseas listed foreign Shares. The collection agents appointed by the Company for holders of foreign Shares listed in Hong Kong shall be trust companies registered pursuant to the Trustee Ordinance of Hong Kong.
APPOINTMENT OF ACCOUNTING FIRM
The Company shall appoint a qualified independent accounting firm to audit the annual financial reports and to examine and verify other financial reports of the Company.
The term of appointment of the accounting firm for the Company shall be from conclusion of one annual general meeting at which they were appointed until the conclusion of the next annual general meeting.
— V-29 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
The accounting firm appointed by the Company shall have the following rights:
• To access the account books, records and vouchers, and to ask the Directors, general manager or other senior management of the Company to provide relevant documents and explanations at any time;
• To require the Company to take all reasonable steps to obtain from its subsidiaries any information and explanations necessary for the discharge of its duties; and
• To be present at general meetings, get notice of general meeting or other information relating to general meetings, and deliver speeches at general meetings in relation to the matters concerning the accounting firm of the Company.
Regardless of the terms in the contract concluded between the accounting firm and the Company, the general meeting may, through an ordinary resolution, dismiss the said accounting firm before expiry of the term thereof. In the event of any rights claimed by the accounting firm against the Company, the said rights shall not be affected.
The remuneration of the accounting firm or the method for determining the same shall be subject to the decision at the general meeting. The remuneration of the accounting firm appointed by the Board shall be determined by the Board. Appointment, dismissal or non-retention of the accounting firm shall be subject to decision at the general meeting and shall be filed with the securities regulatory authority under the State Council.
Where the Company dismisses or does not continue appointing the accounting firm, prior notice shall be given to the accounting firm, and the accounting firm shall be entitled to state its opinions to the general meeting. Where the accounting firm tenders its resignation, they shall state to the general meeting whether the Company has anything inappropriate.
The accounting firm may resign by placing a written notice of resignation at the legal address of the Company. The aforesaid notice shall include:
• A statement that its resignation does not involve any information to be disclosed to the Shareholders or creditors of the Company; or
• A statement that any information is to be disclosed.
If the notice of resignation of the accounting firm contains a statement that any information is to be disclosed, the accounting firm may require the Board to convene an extraordinary general meeting to listen to its explanation about the resignation.
— V-30 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
MERGER, DIVISION, DISSOLUTION AND LIQUIDATION
Merger and Division
In respect of the merger or division of the Company, the Board of the Company shall propose a plan and have it adopted following the procedure specified in the Articles of Association, and go through relevant examination and approval formalities pursuant to laws. Any Shareholder objecting to merger or division of the Company shall be entitled to require the Company or the Shareholders approving merger or division of the Company to buy his Shares at a fair price.
In the event of merger or division of the Company, the parties concerned shall conclude a merger or division agreement and prepare balance sheets and property inventories. The Company shall notify its creditors within 10 days and publish an announcement in a newspaper within 30 days after the date of the Company’s merger or division resolution for at least three times.
The credits and debts of the Company after merger shall be inherited by the company subsisting after merger or by the newly established company. The companies after division shall bear relevant liabilities for the debts of the Company before division according to the relevant contracts.
Change in registered particulars arising from merger or division of the Company shall be registered with the company registration authority according to law and subject to the approval of the competent authority if necessary. Where the company is dissolved, an application shall be made to register the cancellation in accordance with the law. If a new company is established, such establishment shall be registered according to law and approved by the CSRC.
Dissolution and Liquidation
In any of the following circumstances, the Company shall be dissolved and liquidated according to law upon approval by CSRC:
• The general meeting have resolved to dissolve the Company;
• Merger or division of the Company entails dissolution;
• The Company is legally declared bankrupt because it is unable to repay due debts;
• The Company is ordered to close down because of violation of laws or administrative regulations; and
• If the Company gets into serious trouble in operations and management and continuation may incur material losses of the interests of the Shareholders, and no solution can be found through any other channel, the Shareholders holding more than 10.0% of the total voting rights of the Company may request the people’s court to dissolve the Company according to law.
— V-31 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
If the Company is dissolved pursuant to (1) above, it shall establish a liquidation committee within 15 days after the dissolution circumstance arises, the members of which shall be determined by the general meeting through an ordinary resolution. If the Company is dissolved pursuant to (2) above, the liquidation shall be organised in accordance with the merger agreement or division agreement signed by each party. If the Company is dissolved pursuant to (3) and (5) above, the people’s court shall, in accordance with laws and administrative regulations, organise Shareholders, relevant authorities and relevant professionals to form a liquidation committee to conduct the liquidation. If the Company is dissolved pursuant to (4) above, the competent authority shall organise Shareholders, relevant authorities and relevant professionals to form a liquidation committee to conduct the liquidation.
Upon resolution of general meeting on liquidation is made, the powers of the Board shall cease forthwith.
The liquidation committee of the Company shall notify the creditors within 10 days upon its formation, and publish an announcement on newspapers at least 3 times within 60 days. The creditors shall declare their claims to the liquidation committee within 30 days upon receipt of the written notice or in the case of failure to receive the written notice, within 45 days since the first public announcement. The creditors who fail to declare their claims within the aforesaid time limit, the creditors shall be deemed to have waived their claims. When declaring the claims, the creditors shall clarify the matters related thereto and provide supporting materials. The liquidation committee shall register the claims.
The liquidation committee shall exercise the following functions and powers during liquidation:
• To examine and take possession of the Company’s assets and prepare the balance sheet and a property inventory;
• To inform creditors by notice or announcement;
• To deal with the outstanding businesses of the Company relating to liquidation;
• To pay outstanding taxes and the taxes arising during liquidation;
• To settle claims and debts;
• To dispose of the remaining assets of the Company after repayment of debts; and
• To represent the Company in civil proceedings.
After the liquidation committee has examined and taken possession of the assets of the Company and prepared a balance sheet and a property inventory, it shall formulate a liquidation proposal and submit it to the general meeting or the relevant competent authority for confirmation.
— V-32 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
The properties of the Company shall be distributed according to the following order:
• The liquidation expenses;
• The wages and basic social insurance expenses of the Company’s employees;
• The outstanding taxes; and
• The Company’s debts.
The Company shall, in proportion to the Shares held by the Shareholders, distribute the properties of the Company remaining after successive payment of the aforesaid expenses. The Company shall not conduct any new business operations during liquidation.
After the liquidation committee has examined and taken possession of the assets of the Company and prepared a balance sheet and a property inventory, if it discovers that the Company’s assets are insufficient to repay its debts in full, it shall immediately apply to the people’s court to declare the Company bankrupt. Following a ruling by the people’s court that the Company is bankrupt, the liquidation committee shall transfer to the people’s court all matters relating to the liquidation.
After completion of liquidation of the Company, the liquidation committee shall prepare liquidation reports, income and expenditure statements and account books in respect of the liquidation period and, after verification by the certified public accountants in the PRC, shall submit the same to the general meeting and CSRC for confirmation. The liquidation committee shall submit aforesaid documents to the company registration authority, apply for cancellation of company registration, and announce termination of the Company within 30 days after obtaining confirmation from the general meeting or relevant competent authority.
NOTICE AND ANNOUNCEMENT
The notice of the Company may be served as follows:
• By personal delivery;
• By post;
• By fax or e-mail;
• By announcement on the website designated by the Company and stock exchanges in accordance with laws, regulations, rules and the listing rules at the location where the Company’s Shares are listed;
• By bulletin;
— V-33 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• By other means agreed before between the Company and the recipient or approved by the recipient; and
• By other means approved by the regulatory authority at the location where the Company’s Shares are listed or specified in the Articles of Association.
Where a notice of the Company is served by announcement, the aforesaid notice shall be deemed as received by the relevant persons once it is announced, except for otherwise specified by the regulatory authority at the location where the Company’s Shares are listed.
Any notice sent by the Company to the holders of H Shares, if sent by bulletin, shall be submitted in electronic form to the Stock Exchange for real-time publication through the electronic publication system of Stock Exchange on the same date according to local listing rules, so as to be published on the websites of Stock Exchange and the Company. In addition, the aforesaid notice shall be sent by personal delivery or prepaid mail to the registered addresses in the register of holders of H Shares according to local listing rules, so that the Shareholders are fully informed and have enough time to exercise their rights or act in accordance with the notice.
The holders of H Shares of the Company may choose in written form to obtain (by e-mail or by post) the information about the Company that the Company shall send to the Shareholders, and may choose to receive either or both of the Chinese and English versions and may, in a reasonable period, also notify the Company in writing in advance to revise the means of receiving the aforesaid information and the relevant version thereof according to proper procedures.
Although the Company is required to provide written information to Shareholders according to the preceding paragraph, if the Company has obtained the Shareholders’ prior written consent or implied consent according to relevant laws and regulations and the Listing Rules amended from time to time, it may send information to Shareholders by e-mail or via publication on website of the Company.
The accidental omission to give notice of meeting to, or non-receipt of notice of meeting by, any person entitled to receive notice shall not invalidate the meeting and the resolutions adopted at the meeting.
AMENDMENT TO THE ARTICLES OF ASSOCIATION
The Company shall amend the Articles of Association in any of the following circumstances:
• After amendments are made to Company Law or other relevant laws and administrative regulations or the Listing Rules, the Articles of Association run counter to the said amendments;
— V-34 — APPENDIX V SUMMARY OF ARTICLES OF ASSOCIATION
• The Company’s conditions have changed, and such change is not covered in the Articles of Association; and
• The general meeting has resolved to amend the Articles of Association.
If the amendment to the Articles of Association involves any content of Mandatory Provisions, the said amendment shall become effective upon approval by the department in charge of company approval under the State Council and CSRC; if the amendment involves registration of the Company, the involved change shall be registered pursuant to law.
SETTLEMENT OF DISPUTES
In the event of any dispute or claim between a holder of overseas listed foreign Shares and the Company, between a holder of overseas listed foreign Shares and a Director, a Supervisor, the general manager or other senior management, and between a holder of overseas listed foreign Shares and a holder of Domestic Shares arising from rights and obligations specified in the Articles of Association, Company Law and other relevant laws and administrative regulations and relating to the affairs of the Company, the parties concerned shall submit the said dispute or claim for arbitration.
The aforesaid dispute or claim submitted for arbitration shall be the entire dispute or claim; all the persons who have a cause of action based on the same facts giving to the disputes or who are required to participate in the settlement of the dispute or claim shall accept the arbitration award if they are the Company or its Shareholders, Directors, Supervisors, the general manager, or other senior management.
Disputes relating to definition of Shareholders and Shareholders’ register may be settled other than through arbitration.
The applicant for arbitration may select China International Economic and Trade Arbitration Commission for arbitration following the arbitration rules thereof or select Hong Kong International Arbitration Centre (“HKIAC”) for arbitration following the securities arbitration rules thereof. After the applicant for arbitration submits the dispute or claim for arbitration, the other party shall accept arbitration at the arbitral institution selected by the applicant.
If the applicant for arbitration selects HKIAC for arbitration, either party may request that the arbitration be conducted in Shenzhen following the securities arbitration rules of HKIAC.
The arbitration award made by the arbitral institution shall be final and binding on both parties.
— V-35 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
A. FURTHER INFORMATION ABOUT OUR GROUP
1. Establishment of Our Company
Our predecessor, Jiangsu Holly, was established in the PRC as a limited liability company on 31 July 1995 (the “Predecessor”) under the PRC Company Law. It was known as Jiangsu Jinling Futures Brokerage Company Limited (江蘇金陵期貨經紀有限公司) upon its establishment and was subsequently renamed as Jiangsu Holly Futures Brokerage Company Limited (江蘇弘業期貨經紀有限 公司) and Jiangsu Holly Futures Company Limited (江蘇弘業期貨有限公司) in December 1999 and June 2011, respectively. In November 2012, our Company was converted into a joint stock limited company and was renamed as “Holly Futures Co., Ltd.” (弘業期貨股份有限公司). Our registered office is situated at No.50, Zhonghua Road, Nanjing, the PRC (中國南京市中華路50號). Our Company has established a principal place of business in Hong Kong at 18th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong and was registered with the Registrar of Companies in Hong Kong as a non-Hong Kong company under Part 16 of the Companies Ordinance on 3 August 2015. Ms. Leung Wing Han Sharon of 18/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong has been appointed as the authorised representative of our Company for the acceptance of service of process and notices in Hong Kong.
For the purpose of Rule 3.05 of the Listing Rules, our Company has appointed Ms. Zhou Jianqiu and Mr. Zhao Weixiong as its authorised representatives to act as our principal channel of communication with the Stock Exchange. Ms. Leung Wing Han Sharon has been appointed as the alternate authorised representative of our Company.
As we were established in the PRC, our corporate structure and Articles of Association are subject to the relevant laws and regulations of the PRC. A summary of certain provisions of the Articles of Association is set out in Appendix V to this prospectus. A summary of certain relevant aspects of the laws and regulations of the PRC is set out in Appendix IV to this prospectus.
2. Changes in the Share Capital of Our Company
As at the date of its establishment, the initial registered capital of our Predecessor was RMB10.0 million, which has been fully paid up. As at the date of its establishment, our Predecessor was owned by Jiangsu Metallurgy Commodities Trading Market (江蘇省冶金物資交易市場)(“Metallurgy Commodities”) and Jiangsu Nonferrous Metal Industrial Company Limited (江蘇省有色金屬工業公 司)(“Jiangsu Nonferrous”) as to 60% and 40%, respectively. The following sets out the changes in our registered capital since the date of the establishment of our Predecessor and up to the date of this prospectus:
(1) on 1 February 1999, Metallurgy Commodities transferred all its 60% equity interests in our Predecessor to Holly Corporation, and Jiangsu Nonferrous transferred 30% and 10% of its equity interest in our Predecessor to Holly Corporation and Holly Logistics, respectively;
— VI-1 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
(2) on 14 December 1999, the registered capital of our Predecessor was increased from RMB10.0 million to RMB30.0 million, the increased amount of which was fully subscribed and paid up by Holly Corporation and Holly Logistics; upon completion of the capital increase, our Predecessor was owned by Holly Corporation and Holly Logistics as to 94% and 6%, respectively;
(3) on 30 October 2001, Holly Corporation transferred 48% of its equity interests in our Predecessor to Jiangsu Holly International Group Investment Management Company Limited (江蘇弘業國際集團投資管理有限公司)(“Holly Investment”), upon completion of which our Predecessor was owned by Holly Investment, Holly Corporation and Holly Logistics as to 48%, 46%, and 6%, respectively;
(4) on 21 July 2006, the registered capital of our Predecessor was increased from RMB30.0 million to RMB38.0 million by the capitalisation of its retained profits, the increased amount of which was recognised by Holly Investment, Holly Corporation and Holly Logistics in proportion to their then shareholdings in our Predecessor;
(5) on 24 July 2007, the registered capital of our Predecessor was increased from RMB38.0 million to RMB50.0 million, the increased amount of which was fully subscribed and paid up by Holly Investment, Holly Corporation, Hongrui Venture Capital and Shanghai Mingda; upon completion of the capital increase, our Predecessor was owned by Holly Investment, Holly Corporation, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to approximately 42.87%, 42.87%, 4.90%, 4.80% and 4.56%, respectively;
(6) on 11 July 2008, the registered capital of our Predecessor was increased from RMB50.0 million to RMB108.0 million, the increased amount of which consists of (i) RMB4.92 million by transfer of capital surplus reserve, (ii) RMB15.08 million by capitalisation of retained profits, and (iii) RMB38.0 million fully subscribed and paid up by all the then shareholders in proportion to their shareholdings in our Predecessor;
(7) on 23 December 2009, the registered capital of our Predecessor was increased from RMB108.0 million to RMB138.0 million, the increased amount of which was fully subscribed and paid up by Holly Investment and Holly Corporation; upon completion of the capital increase, our Predecessor was owned by Holly Investment, Holly Corporation, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to 44.42%, 44.42%, 3.83%, 3.76% and 3.57%, respectively;
(8) on 27 April 2011, the registered capital of our Predecessor was increased from RMB138.0 million to RMB380.0 million, the increased amount of which was fully subscribed and paid up by Holly Investment, Holly Corporation, SOHO Holdings, Holly Su Industrial and High Hope International; upon completion of the capital increase, our Predecessor was owned by Holly Investment, Holly Corporation, SOHO Holdings, Holly Su Industrial, High Hope International, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to approximately 21.75%, 21.75%, 21.34%, 21.11%, 10.00%, 1.39%, 1.36% and 1.30%, respectively;
— VI-2 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
(9) on 21 November 2012, Holly Investment transferred 21.75% equity interests in our Company to SOHO Holdings, upon completion of which our Company was owned by SOHO Holdings, Holly Corporation, Holly Su Industrial, High Hope International, Hongrui Venture Capital, Shanghai Mingda and Holly Logistics as to approximately 43.09%, 21.75%, 21.11%, 10.00%, 1.39%, 1.36% and 1.30%, respectively; and
(10) on 29 November 2012, our Predecessor was converted into a joint stock limited company with a registered capital of RMB680 million.
Save as disclosed above, there has been no alteration in the registered capital of our Company since its establishment.
3. Changes in the Share Capital of Our Subsidiaries
Our subsidiaries (for the purpose of the Listing Rules) include Holly Capital and Holly Su Futures. Particulars of our subsidiaries are set forth in Note 3 to the Accountants’ Report, the text of which is set forth in Appendix I to this prospectus.
On 25 June 2013, Holly Capital was established in the PRC with a registered capital of RMB100.0 million, which was fully paid up by our Company as to 100% on the even date.
On 17 August 2015, the registered capital of Holly Capital was increased from RMB100.0 million to RMB150.0 million.
On 30 September 2015, our Company completed the Reorganisation and acquired Holly Su Futures by purchasing all its issued share capital, following which Holly Su Futures has become a wholly-owned subsidiary of our Company.
Save as disclosed above, there has been no alteration in the registered capital or share capital of our subsidiaries within the two years immediately preceding the date of this prospectus. For more details, please see the section headed “History, Development and Corporate Structure” in this prospectus.
4. Resolutions passed at our extraordinary Shareholders’ meetings in relation to the Listing held on 6 February 2015 and 13 April 2015
At the extraordinary Shareholders’ meetings held on 6 February 2015 and 13 April 2015, respectively, the following resolutions were, among other things, passed by our Shareholders:
(1) our Company approved and adopted the Articles of Association, which will come into effect upon Listing;
(2) conditional upon (i) the Listing Committee of the Stock Exchange granting the approval for the listing of, and permission to deal in, the H Shares (subject to the Over-allotment Option); and (ii) the obligations of the Underwriters under the Underwriting Agreements becoming unconditional (including, if relevant, as a result of the waiver of any condition(s)
— VI-3 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
by the Sole Global Coordinator (on behalf of the Underwriters)) and the Underwriting Agreements not being terminated in accordance with their terms or otherwise, the Global Offering and the Over-allotment Option were approved and our Directors were authorised to effect the same and to allot and issue new Shares pursuant to the Global Offering and the Over-allotment Option;
(3) approving the Board and its authorised representatives to handle all matters relating to, among other thing, the followings:
(i) the Global Offering and the Listing be approved;
(ii) our Directors be authorised to implement the Listing; and
(iii) the Over-allotment Option be approved and our Directors be authorised to effect the same and to allot and issue the Over-allotment Shares upon the exercise of the Over-allotment Option; and
(4) the validity period of all relevant resolutions passed at the extraordinary general meetings of our Company in relation to the Global Offering and the proposed Listing shall be 18 months from the date of approval and adoption of all such relevant resolutions, being 6 August 2016 and 13 October 2016, respectively.
5. Restrictions on Share Repurchase
Please refer to “Appendix IV — Summary of Principal Legal and Regulatory Provisions” and “Appendix V — Summary of Articles of Association” in this prospectus for details.
B. FURTHER INFORMATION ABOUT OUR BUSINESS
1. Summary of Material Contracts
The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members our Group within the two years preceding the date of this prospectus and are or may be material:
(1) the Holly Su Share Purchase Agreement;
(2) the Supplemental Share Purchase Agreement;
(3) a cornerstone investment agreement dated 11 December 2015 entered into among the Company, Coastal Capital Limited and Guotai Junan Securities (Hong Kong) Limited, pursuant to which Coastal Capital Limited agreed to subscribe for our H Shares in the amount of Hong Kong dollar 116.25 million; and
(4) the Hong Kong Underwriting Agreement.
— VI-4 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
2. Intellectual Property Rights of our Group
Trademarks
(1) Trademarks for which registration has been granted
As at the Latest Practicable Date, we had registered the following trademarks which are material to our business:
Registration Place of /Application No. Trademark Registration No. Class (1) Expiry Date
1. PRC 11630694 36 20 April 2024
2. PRC 11630697 36 20 March 2024
3. PRC 11630639 35 20 March 2024
4. PRC 11815817 36 13 May 2024
5. PRC 11630696 36 20 March 2024
6. PRC 11630695 36 20 March 2024
7. PRC 11630642 36 20 March 2024
8. Hong Kong 303430377 35, 36 2 June 2025
9. Hong Kong 303430386 35, 36 2 June 2025
Note:
(1) For details of the classification of goods for trademarks, please see the paragraph headed “B. Further Information about our Business — 2. Intellectual property rights of our Group — Trademarks — (2) Classification of services for trademarks” in this appendix.
— VI-5 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
As at the Latest Practicable Date, we had applied for the registration of the following trademarks which are material to our business:
Application Intended Place of No. Trademark Applicant No. Class (1) Application Date Registration
1. (2) our Company 303285063 35, 36 28 January 2015 Hong Kong
(3) 2. Holly Su Futures 303423302 35, 36 28 May 2015 Hong Kong
(3) 3. Holly Su Futures 303423311 36 28 May 2015 Hong Kong
Notes:
(1) For details of the classification of goods for trademarks, please see the paragraph headed “B. Further Information about our Business — 2. Intellectual property rights of our Group — Trademarks — (2) Classification of goods for trademarks” in this appendix.
(2) On 26 November 2015, we received a letter from the Trade Marks Registry informing us that our trademark is similar to an earlier trademark (the “Earlier Mark”). The services covered by the Earlier Mark were similar to the services applied for by the Company. As advised by the legal adviser to the Company as to Hong Kong trade mark matters, to the extent that the services registered under the Earlier Mark do not overlap with the services applied for in our application or are not considered similar services, that portion of our application should be acceptable to the Registrar of Trade Marks for registration. To the extent that the services registered under the Earlier Mark overlap with the services applied for in our application or are considered similar services, we will need to file submissions to the Registrar of Trade Marks with a view to distinguishing our mark from the Earlier Mark and to persuade the Registrar to allow both our mark and the Earlier Mark to co-exist on the Hong Kong Trade Marks Register. This process is long and there is no certainty that we will be successful in the submission. Please see the section headed “Risk Factor — The use of our Chinese name in this prospectus and the use of it in the course of our business in Hong Kong may be challenged due to potential trademark infringement” in the prospectus for further information.
(3) The applications have already been accepted for publication by the Trade Marks Registry and were published in the Hong Kong Intellectual Property Journal on 18 September 2015. As advised by the legal adviser to the Company as to Hong Kong trademark matters, if no opposition is filed against the registration of these marks on or before 17 December 2015, the applications will proceed to registration.
(2) Classification of services for trademarks
The table below sets out the classification of services for trademarks (the detailed classification in relation to the relevant trademarks depends on the details set out in the relevant trademark certificates and may differ from the list below):
Class Number Services 35 Advertising; business management; business administration; office functions. 36 Insurance; financial affairs; monetary affairs; real estate affairs.
— VI-6 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
Domain Names
As at the Latest Practicable Date, we have registered the following domain names:
Domain Name Registrant Expiry Date
弘業期貨.net our Company 1 March 2016 hollyfutures.com our Company 7 March 2016 弘業期貨.cn our Company 1 March 2016 hollyfutures.cn our Company 7 March 2016 hollyfutures.com.cn our Company 7 March 2016 ftol.com.cn our Company 21 July 2017
C. FURTHER INFORMATION ABOUT OUR DIRECTORS, SUPERVISORS AND SUBSTANTIAL SHAREHOLDERS
1. Directors
(1) Disclosure of interest — interests and short positions of our Directors, Supervisors and the chief executive of our Company in the Shares, underlying Shares and debentures of our Company and its associated corporations
Immediately following completion of the Global Offering (assuming the Over-allotment Option is not exercised), so far as our Directors are aware, none of the Directors, Supervisors or chief executive of our Company will have any interest or short position in the Shares, underlying shares and debentures of our Company or its associated corporations (within the meaning of Part XV of the SFO) which will be required to be notified to our Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest or short positions which they were taken or deemed to have under such provisions of the SFO) or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which will be required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to our Company and the Stock Exchange, once our H Shares are listed.
(2) Particulars of service contracts
Each of our Directors has entered into a service contract with our Company on 5 December 2015. The principal particulars of these service contracts are (a) for a term commencing from the Listing Date till the expiry date of the term of the Board; and (b) are subject to termination in accordance with their respective terms. The service contracts may be renewed in accordance with our Articles of Association and the applicable laws, rules and regulations.
Each of the Supervisors has entered into a service contract with our Company on 5 December 2015, in respect of, among others, compliance with relevant laws and regulations, observations of the Articles of Association and provision on arbitration.
— VI-7 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
Save as disclosed above, none of our Directors or Supervisors has or is proposed to have a service contract with any member of the Group (other than contracts expiring or determinable by the employer within one year without the payment of compensation (other than statutory compensation).
(3) Compensation of Directors and Supervisors
During the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, the aggregate amount of remuneration of the Directors and Supervisors, including fees, salaries, discretionary bonus, defined contribution plans, housing and other allowances, and other benefits in kind, incurred by our Group was approximately RMB331,000, RMB312,000, RMB403,000 and RMB328,000, respectively.
During the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, the aggregate amount of remuneration of the Group’s five highest paid individuals, including fees, salaries, discretionary bonus, defined contribution plans, housing and other allowances, and other benefits in kind, incurred by our Group was approximately RMB4.87 million, RMB5.30 million, RMB4.93 million and RMB1.57 million, respectively.
We have not paid any remuneration to our Directors, Supervisors or five highest-paid individuals as an inducement to join or upon joining us or as compensation for loss of office in respect of the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015.
Except as disclosed above, no other payments have been made or are payable, in respect of the years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015, by our Company to any of our Directors or Supervisors.
Under the arrangements currently in force, the aggregate amount of remuneration (inclusive of benefits in kind but exclusive of discretionary bonuses) payable by our Group to our Directors and Supervisors for the year ending 31 December 2015 will be approximately RMB800,460.
There was no arrangement under which a Director has waived or agreed to waive any emoluments for each of the three financial years immediately preceding the issue of this prospectus.
— VI-8 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
2. Substantial Shareholders
So far as our Directors are aware, immediately following completion of the Global Offering (but without taking into account the exercise of the Over-allotment Option), the following persons (other than our Directors and chief executive of our Company) will have or be deemed or taken to have an interest and/or short position in the Shares or the underlying Shares which would fall to be disclosed under the provisions of Division 2 and 3 of Part XV of the SFO, or are, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of our Company:
Approximate Approximate percentage of percentage of shareholdings in shareholdings in the relevant class the total share of Shares of our capital of our Company after Company after Number of the Global the Global Name Capacity Shares Offering(1) Offering(2)
Holly Corporation Beneficial owner 147,900,000 22.50% 16.31% Artall Culture Group (3) Interest in controlled 156,185,345(6) 23.76% 17.22% corporation SOHO Holdings (4) Beneficial owner and 431,642,122(7) 65.67% 47.59% interest in controlled corporation Holly Su Industrial Beneficial owner 143,548,000 21.84% 15.83% Hony Capital Industrial Phase I Fund Interest in controlled 143,548,000 21.84% 15.83% (Tianjin) (Limited Partnership) corporation (弘毅投資產業一期基金(天津) (有限合夥)) (5) Hony Capital Management (Tianjin) Interest in controlled 143,548,000 21.84% 15.83% (Limited Partnership) corporation (弘毅投資管理(天津)(有限合夥)) (5) Hony Tongren Consulting (Tianjin) Interest in controlled 143,548,000 21.84% 15.83% (Limited Partnership) corporation (弘毅同人顧問(天津)(有限合夥)) (5) Hony Capital (Tianjin) Co., Ltd. Interest in controlled 143,548,000 21.84% 15.83% (弘毅投資(天津)有限公司) (5) corporation Hony Capital (Beijing) Co., Ltd. Interest in controlled 143,548,000 21.84% 15.83% (弘毅投資(北京)有限公司) (5) corporation Beijing Hony Capital Management Co., Interest in controlled 143,548,000 21.84% 15.83% Ltd. (北京弘毅資產管理有限公司) (5) corporation XU Minsheng (徐敏生) (5) Interest in controlled 143,548,000 21.84% 15.83% corporation CAO Yonggang (曹永剛) (5) Interest in controlled 143,548,000 21.84% 15.83% corporation WANG Lijie (王立界) (5) Interest in controlled 143,548,000 21.84% 15.83% corporation High Hope Corporation Beneficial owner 63,930,134(8) 9.73% 7.03%
— VI-9 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
Notes:
(1) The calculation is based on the total number of 657,300,000 Domestic Shares in issue after the Global Offering (assuming the Over-allotment Option is not exercised).
(2) The calculation is based on the total number of 907,000,000 Shares in issue after the Global Offering (assuming the Over-allotment Option is not exercised).
(3) As at the Latest Practicable Date, Artall Culture Group (i) was the beneficial owner of approximately 24.02% equity interest in Holly Corporation, which in turn held 147,900,000 Domestic Shares, and (ii) was the beneficial owner of approximately 89.66% of the equity interest in Holly Logistics, which in turn held 8,812,800 Domestic Shares. As disclosed in the 2014 annual report of Holly Corporation, Artall Culture Group is regarded as the controlling shareholder of Holly Corporation under relevant PRC laws. Accordingly, Holly Corporation is a deemed controlled corporation of Artall Culture Group under the SFO, and Artall Culture Group is therefore deemed to be interested in the 147,900,000 Domestic Shares and 8,812,800 Domestic Shares directly held by Holly Corporation and Holly Logistics, respectively.
(4) As at the Latest Practicable Date, SOHO Holdings (i) directly held 292,992,674 Domestic Shares, and (ii) was the beneficial owner of 100% equity interests in Artall Culture Group, a corporation deemed to be interested in the 147,900,000 Domestic Shares and 8,812,800 Domestic Shares directly held by Holly Corporation and Holly Logistics, respectively. Accordingly, SOHO Holdings is deemed to be interested in the 156,712,800 Domestic Shares indirectly held by Artall Culture Group and is therefore interested in, directly and indirectly, 449,705,474 Domestic Shares.
(5) As at the Latest Practicable Date, (i) Hony Capital Industrial Phase I Fund (Tianjin) (Limited Partnership) (弘毅投資產 業一期基金(天津)(有限合夥)) (“Hony Capital Phase I”) was the beneficial owner of 99.9955% equity interests in Holly Su Industrial, which in turn held 143,548,000 Domestic Shares; (ii) Hony Capital Management (Tianjin) (Limited Partnership) (弘毅投資管理(天津)(有限合夥)) was the general partner of Hony Capital Phase I; (iii) Hony Capital (Tianjin) Co., Ltd. (弘毅投資(天津)有限公司)(“Hony Tianjin”) was the general partner of Hony Capital Management (Tianjin) (Limited Partnership); (iv) Hony Tongren Consulting (Tianjin) (Limited Partnership) (弘毅同人顧問(天津)(有 限合夥)) (“Hony Tonren”) was the limited partner of Hony Capital Management (Tianjin) (Limited Partnership) holding 99% of its registered capital; (v) Hony Capital (Beijing) Co., Ltd. (弘毅投資(北京)有限公司) was the beneficial owner of 1% equity interests in Hony Tianjin and the general partner of Hony Tonren, which in turn holds 99% equity interests in Hony Tianjin; (vi) Beijing Hony Capital Management Co., Ltd. (北京弘毅資產管理有限公司) was the beneficial owner of 80% equity interests in Hony Capital (Beijing) Co., Ltd.; and (vii) each of Mr. Xu Minsheng (徐敏生), Mr. Cao Yonggang (曹永剛) and Mr. Wang Lijie (王立界) was a beneficial owner of one third of the equity interests in Beijing Hony Capital Management Co., Ltd. Accordingly, each of Hony Capital Phase I, Hony Capital Management (Tianjin)(Limited Partnership), Hony Tongren, Hony Tianjin, Hony Capital (Beijing) Co., Ltd., Beijing Hony Capital Management Co., Ltd., Mr. Xu Minsheng, Mr. Cao Yonggang and Mr. Wang Lijie is deemed to be interested in the 143,548,000 Domestic Shares directly held by Holly Su Industrial.
(6) Pursuant to the Global Offering, and assuming the Over-allotment Option is not exercised, Holly Logistics, a state-owned Shareholder, will sell 527,455 Domestic Shares for the benefit of the NSSF and will therefore hold 8,285,345 Domestic Shares. As such, Artall Culture Group is deemed to be interested in an aggregate of 156,185,345 Domestic Shares directly held by Holly Corporation and Holly Logistics. For more details of the relationship among Artall Culture Group, Holly Logistics and Holly Corporation, please see Note (3) above.
(7) Pursuant to the Global Offering, and assuming the Over-allotment Option is not exercised, SOHO Holdings, a state-owned Shareholder, will sell 17,535,897 Domestic Shares for the benefit of the NSSF and will therefore directly hold 275,456,777 Domestic Shares. As such, SOHO Holdings is deemed to be interested in an aggregate of 431,642,122 Domestic Share held, directly and indirectly, by Artall Culture Group and itself. For more details of the relationship among SOHO Holdings, Artall Culture Group, Holly Logistics and Holly Corporation, please see Note (4) above.
(8) Pursuant to the Global Offering and assuming the Over-allotment Option is not exercised, High Hope Corporation, a state-owned Shareholder, will sell 4,069,866 Domestic Shares for the benefit of the NSSF and will therefore directly hold 63,930,134 Domestic Shares.
— VI-10 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
3. Agency fees or commissions received
Save as disclosed in this prospectus, no commissions, discounts, brokerages or other special terms were granted within the two years preceding the date of this prospectus in connection with the issue or sale of any capital of any member of our Group.
4. Disclaimers
Save as disclosed herein:
(1) none of our Directors or the chief executive of our Company has any interest or short position in the Shares, underlying Shares or debentures of our Company or any of its associated corporation (within the meaning of the SFO) which will have to be notified to our Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO or which will be required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which will be required to be notified to our Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies once the Shares are listed;
(2) none of our Directors or experts referred to under paragraph headed “D. Other Information — 11. Consents of Experts” in this appendix has any direct or indirect interest in the promotion of our Company, or in any assets which have within the two years immediately preceding the date of this prospectus been acquired or disposed of by or leased to any member of our Group, or are proposed to be acquired or disposed of by or leased to any member of our Group;
(3) none of our Directors is materially interested in any contract or arrangement subsisting at the date of this prospectus which is significant in relation to the business of our Group;
(4) none of our Directors has any existing or proposed service contracts with any member of our Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation));
(5) taking no account of Shares which may be taken up under the Global Offering, none of our Directors or chief executive knows of any person (not being a Director or chief executive of our Company) who will, immediately following completion of the Global Offering, have an interest or short position in the Shares or underlying Shares of our Company which would fall to be disclosed to our Company under the provisions of Divisions 2 and 3 of Part XV of SFO or be interested, directly or indirectly, in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of our Group; and
(6) so far as is known to our Directors, none of our Directors, their respective associates (as defined under the Listing Rules) or our Shareholders who are interested in more than 5% of the issued share capital of our Company has any interest in the five largest customers or the five largest suppliers of our Group.
— VI-11 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
D. OTHER INFORMATION
1. Personal Guarantees
Our Directors and Supervisors have not provided personal guarantees in favour of lenders in connection with banking facilities granted to us.
2. Estate Duty, Tax and Other Indemnities
(1) Estate Duty
Our Directors have been advised that no material liability for estate duty is likely to fall on our Company or any of our subsidiaries.
(2) Tax and Other Indemnity
Each of Holly Corporation and Holly Logistics has executed a set of unilateral undertakings in favour of our Group to provide indemnities, on a several basis and in proportion to their respective shareholding interests in our Company upon occurrence of any Triggering Event (as defined below), in respect of, among other things, any penalty and loss resulting from the historical failure to pay the housing security fund contributions in accordance with the applicable PRC laws and regulations during the Track Record Period or any and all tax liabilities resulting from profits or gains earned, accrued or received, as well as any penalties imposed due to non-compliance with any applicable laws and regulations and actual or threatened litigation on or before the date when the Global Offering becomes unconditional (collectively, the “Triggering Events” and each, a “Triggering Event”). In addition, SOHO Holdings, our Controlling Shareholder, has also executed a set of unilateral undertakings in favour of our Group to provide indemnities on a joint and several basis in respect of any and all liabilities arising from occurrence of any of the Triggering Events.
3. Litigation
During the Track Record Period and up to the Latest Practicable Date, save as disclosed in this prospectus and so far as our Directors are aware, we were not engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance is known to our Directors to be pending or threatened by or against any member of our Group, that would have a material adverse effect on our Group’s results of operations or financial condition, taken as a whole.
4. Sole Sponsor
The Sole Sponsor has declared its independence pursuant to Rule 3A.07 of the Listing Rules. The Sole Sponsor’s fees payable by us in respect of the Sole Sponsor’s services as sponsor for the Listing is HK$6,000,000.
— VI-12 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
5. Application for Listing
The Sole Sponsor has made an application on behalf of our Company to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Shares in issue and to be issued as mentioned in this prospectus. All necessary arrangements have been made to enable the securities to be admitted into CCASS.
6. No Material Adverse Change
Our Directors confirm that there has been no material adverse change in our financial or trading position since 30 June 2015 (being the date on which our latest audited combined financial statements was made up) up to the date of this prospectus.
7. Preliminary Expenses
Our preliminary expenses are estimated to be approximately HK$119,560 and are payable by our Company.
8. Promoters
The promoters of our Company are SOHO Holdings, Holly Corporation, Holly Su Industrial, High Hope International, Holly Logistics, Hongrui Venture Capital and Shanghai Mingda. Save as disclosed in this prospectus, within the two years immediately preceding the date of this prospectus, no cash, securities or other benefits have been paid, allotted or given nor are any proposed cash, securities or other benefits to be paid, allotted or given to any promoters.
9. Taxation of Holders of Shares
(1) Hong Kong
The sale, purchase and transfer of Shares registered with our Hong Kong branch register of members will be subject to Hong Kong stamp duty. The current rate charged on each of the purchaser and seller is 0.1% of the consideration of or, if higher, of the fair value of the Shares being sold or transferred. Profits from dealings in the Shares arising in or derived from Hong Kong may also be subject to Hong Kong profits tax. The Revenue (Abolition of Estate Duty) Ordinance 2005 came into effect on 11 February 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for a grant of representation in respect of holders of Shares whose death occurs on or after 11 February 2006.
(2) Consultation with professional advisers
Potential investors in the Global Offering are urged to consult their professional tax advisers if they are in any doubt as to the taxation implications of subscribing for, purchasing, holding or disposing of or dealing in our Shares (or exercising rights attached to them). None of us, the Sole
— VI-13 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
Sponsor, the Sole Global Coordinator, the Sole Bookrunner or any other person or party involved in the Global Offering accept responsibility for any tax effects on, or liabilities of, any person, resulting from the subscription, purchase, holding or disposal of, dealing in or the exercise of any rights in relation to our Shares.
10. Qualification of Experts
The following are the qualifications of the experts who have given opinion or advice which are contained in this prospectus:
Name Qualifications
Guotai Junan Capital Limited Licensed corporation to carry on type 6 (advising on corporate finance) regulated activity as defined under the SFO
KPMG Certified public accountants
Jingtian & Gongcheng Legal advisers of our Company as to PRC laws
Euromonitor International Independent industry consultant Limited
Jones Lang LaSalle Corporate Independent property valuer Appraisal and Advisory Limited
Jun He Law Offices Hong Kong legal advisers of our Company as to the acquisition of Holly Su Futures
Rebecca Lo & Co Legal adviser of our Company as to Hong Kong trademark matters
11. Consents of Experts
Each of Guotai Junan Capital Limited, KPMG, Jingtian & Gongcheng, Euromonitor International Limited, Jones Lang LaSalle Corporate Appraisal and Advisory Limited, Jun He Law Offices and Rebecca Lo & Co has given and has not withdrawn its written consent to the issue of this prospectus with the inclusion of its report and/or letter and/or certificates and/or legal opinion (as the case may be) and references to its name included herein in the form and context in which it respectively appears.
None of the experts named above has any shareholding interests in our Company or any of our subsidiaries or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in our Company or any of our subsidiaries.
— VI-14 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
12. Selling shareholders
The following table sets forth the details of the maximum number of the Sales Shares to be sold by each of the Selling Shareholders:
Number of Sale Number of Sale Shares (assuming Shares (assuming the Over-allotment the Over-allotment Option is not Option is exercised Name Description Address exercised) in full)
SOHO Holdings an investment holding company principally No. 48 Software 17,535,897 20,166,281 engaged in (i) financial and industrial Avenue, Nanjing, the investment, authorised operation and PRC management of state-owned assets; (ii) domestic and international trading; (iii) property leasing; and (iv) production and the R&D and sales of silk, textiles and garments High Hope Corporation a company principally engaged in self-operation No. 91 Baixia Road, 4,069,866 4,680,346 of and acting as agent for the import and export Nanjing, the PRC of various types of commodities and technologies, domestic trade, domestic and foreign investment, R&D, manufacturing, warehousing of textile raw materials and finished products, R&D, installation, leasing of electronic devices, computer software and hardware, electronic products and network engineering design, installation, consultation and technical services, real estate development, residential property leasing, property management services, warehousing, wholesale of dangerous chemicals (operated within the scope as set out in the license), wholesale of pre-packaged food products and bulk food products, milk products (including infant formula milk powder), sale of fuel oil, sale and procurement of grain Hongrui Venture Capital a company principally engaged in venture No. 50 Zhonghua 566,782 651,800 capital, corporate management, technology Road, Baixia development and transfer, investment District, Nanjing, the consulting, asset management and entrusted PRC asset management Holly Logistics a company principally engaged in (i) 24/F., Jiangsu 527,455 606,573 self-operated and commissioned import and International export trading business for various commodities Economics and and technologies; and (ii) domestic trading, Trading Plaza, No. undertaking ocean shipping, air transportation 50 Zhonghua Road, and international transportation business Nanjing, the PRC
13. Bilingual Prospectus
The English language and Chinese language versions of this prospectus are being published separately, in reliance upon the exemption provided under Section 4 of the Companies Ordinance (Exemption of Companies and Prospectus from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong).
— VI-15 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
14. Binding Effect
This prospectus shall have the effect, if an application is made in pursuance hereof, of rendering all persons concerned bound by all of the provisions (other than the penal provisions) of sections 44A and 44B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance so far as applicable.
15. Miscellaneous
(1) Save as disclosed in this prospectus, within the two years immediately preceding the date of this prospectus:
(i) no share or loan capital of our Company or any of our subsidiaries had been issued or agreed to be issued or proposed to be fully or partly paid either for cash or a consideration other than cash;
(ii) no commissions, discounts, brokerages or other special terms had been granted or agreed to be granted in connection with the issue or sale of any share or loan capital of our Company or any of our subsidiaries; and
(iii) no commission had been paid or payable for subscription, agreeing to subscribe, procuring subscription or agreeing to procure subscription of any share in our Company or any of our subsidiaries;
(2) save as disclosed in this prospectus, there are no founder, management or deferred shares nor any debentures in our Company or any of our subsidiaries;
(3) save as disclosed in this prospectus, no share or loan capital of our Company or any of our subsidiaries had been under option or agreed conditionally or unconditionally to be put under option;
(4) save as disclosed in this prospectus, none of the persons named in the paragraph headed “D. Other Information — 11. Consents of Experts” in this appendix is interested beneficially or otherwise in any shares of any member of our Group or has any right or option (whether legally enforceable or not) to subscribe for or nominate persons to subscribe for any securities in any member of our Group;
(5) there has not been any interruption in the business of our Group which may have or has had a significant effect on the financial position of our Group in the 12 months preceding the date of this prospectus;
— VI-16 — APPENDIX VI STATUTORY AND GENERAL INFORMATION
(6) no company within our Group is listed on any stock exchange or traded on any trading system and at present, and our Group is not seeking or proposing to seek any listing of, or permission to deal in, the Share or loan capital of our Company on any other stock exchange;
(7) our Company currently does not intend to apply for the status of a Sino-foreign investment joint stock limited company and does not expect to be subject to the Sino-Foreign Joint Venture Law of the PRC; and
(8) there is no arrangement under which future dividends are waived or agreed to be waived.
— VI-17 — APPENDIX VII DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION
DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES
The documents attached to the copy of this prospectus delivered to the Registrar of Companies in Hong Kong for registration were:
(a) a copy of each of the WHITE, YELLOW and GREEN Application Forms;
(b) the written consents referred to in the paragraph headed “Statutory and General Information — D. Other Information — 11. Consents of Experts” in Appendix VI to this prospectus; and
(c) a copy of each of the material contracts referred to in the paragraph headed “Statutory and General Information — B. Further Information about our Business — 1. Summary of Material Contracts” in Appendix VI to this prospectus; and
(d) the particulars of the Selling Shareholders including their names, description and address.
DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the office of Paul Hastings at 21-22/F, Bank of China Tower, 1 Garden Road, Hong Kong during normal business hours up to and including the date which is 14 days from the date of this prospectus:
(a) the Articles of Association;
(b) the Accountant’s Report prepared by KPMG, the text of which is set out in “Appendix I — Accountant’s Report”;
(c) the audited combined financial statements of the Group for each of the financial years ended 31 December 2012, 2013 and 2014 and the six months ended 30 June 2015;
(d) the letter relating to the unaudited pro forma financial information of the Group, the text of which are set out in “Appendix II — Unaudited Pro Forma Financial Information”;
(e) the PRC legal opinion issued by our PRC legal advisers in respect of the general matters of our Group;
(f) the legal opinion issued by Jun He Law Offices in respect of the acquisition of Holly Su Futures;
(g) the legal opinion issued by Rebecca Lo & Co in respect of the Company’s Hong Kong trademark matters;
(h) the rental opinion letter issued by Jones Lang LaSalle Corporate Appraisal and Advisory Limited in respect of the rental of various properties located in Jiangsu Province, the PRC and Hong Kong;
— VII-1 — APPENDIX VII DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION
(i) the material contracts referred to in the paragraph headed “Statutory and General Information — B. Further Information about our Business — 1. Summary of Material Contracts” in Appendix VI to this prospectus;
(j) the written consents referred to in the paragraph headed “Statutory and General Information — D. Other Information — 11. Consents of Experts” in Appendix VI to this prospectus;
(k) the service contracts referred to in the paragraph headed “Statutory and General Information — C. Further Information about our Directors, Supervisors and Substantial Shareholders — 1. Directors — (2) Particulars of service contracts” in Appendix VI to this prospectus;
(l) the industry report prepared by Euromonitor International Limited; and
(m) the Company Law and the Special Regulations and the Mandatory Provisions, together with the unofficial English translations thereof.
— VII-2 —