May 15, 2018 MSCI Q&A How do investors think about MSCI?

1. Does MSCI announcement meet expectation?

2. What did investors do after MSCI announced to include A-shares in June last year?

3. What implications we can find from foreign investors purchasing behavior?

4. Who will be the first adopter of A-shares after MSCI inclusion? When and what will they buy?

5. What are the major concerns of clients on MSCI inclusion and A-share market?

6. What can clients buy to allocate A-shares?

7. What are the differences between MSCI China A Inclusion Index and CSI 300 Index as they are both broad-based indexes with similar valuation?

1. Does MSCI announcement meet expectation?

On May 31, 2018, MSCI has announced to include 226 A-shares into EM Index by two steps. On June 1, MSCI will include A-shares with an inclusion factor of 2.5%. The factor will increase to 5% in September after MSCI’s next quarterly rebalance. The decision is in line with market expectation. Partial inclusion in June will bring around US$10.6 billion inflows, and another US$10.6 billion will come in the second half of this year. In the coming 5-10 years, there will be around 200-400 billion RMB inflows every year. Chart 1 shows the sector composition of MSCI China A Inclusion Index, based on our preliminary calculation. Chart 1 MSCI China A Inclusion Index Sector Composition

Financials 33.5% Industrials 13.3% Consumer Staples 11.7%

Consumer Discretionary 9.9% Information Technology 8.0% Materials 6.8% Real Estate 5.8% Health Care 5.7% Utilities 3.2% Energy 2.1% Telecommunication Services 0.1%

Source: Bloomberg, as of May 14 2018 1 2.What did investors do after MSCI announced to include A-shares in June last year?

• Stock Connect data shows northbound inflow increased sharply recently, despite the volatility and corrections in A-share market. In April alone there were 38.65 billion RMB inflows——the biggest monthly inflows since the beginning of 2017. • More than 75% northbound inflows since June 2017 went to MSCI-inclusion stocks.(Chart 2) The overlap ratio is even higher recently. • Financials, industrials, materials, IT, consumer staples attracted the most inflows in April (Chart 3). By the end of April, financials, consumer discretionary and consumer staples are the top three sector holdings under northbound connect, as well as under the QFII regime.

Chart 2 Northbound Flow by Sectors (RMB MM)

25,000 Telecommunication Services 20,000 Energy 15,000 Consumer Staples 10,000 Health Care 5,000 Utilities - Information Technology (5,000) Consumer Discretionary (10,000) Materials (15,000) Industrials Real Estate

Source: CCASS, Wind, Bloomberg, as of April 30, 2018 Financials

Chart 3 Northbound Inflow vs. MSCI-inclusion Stocks (RMB MM)

25,000 20,000 15,000 10,000 5,000 - (5,000) (10,000) (15,000)

Total Net Flow MSCI-Inclusion Net Flow Source: CCASS, Wind, Bloomberg, as of April 30, 2018 2 3. What implications we can find from foreign investors purchasing behavior?

Foreign investors have proved to be good at buying A-shares at right timing. Inflow was seen through channels like RQFII and Stock Connect, when A-share valuation became attractive. (Chart 4) MSCI China A Inclusion Index now also posts attractive valuations comparing with benchmarks in other emerging markets and developed markets (Chart 5). It is quite likely to attract value investors overseas.

Chart 4 The Launch of Major Market Opening Policies vs. A-share Valuation (RMB MM)

SHCOMP & SHCOMP CSI300 FTSE A50 2016.12.5 CSI300 Level FTSE A50 Shenzhen Level 2014.11.17 8000 2011.12.26 – HK Stock 25000

RQFII First Shanghai – HK Connect Stock Connect 20000 6000 2003.7.9 QFII First Introduced 15000 4000 Introduced 10000

Index Level Index 2000 5000 0 0 60

50 40

PE Level PE 30 20 10 0 10

8 6 4

PB Level PB 2 0

Source: Bloomberg, as of April 30, 2018.

Chart 5 Valuation Comparison of MSCI China A Inclusion Index

A-share Emerging Markets Developed Markets MSCI China A SENSEX S&P Dow Nikkei FTSE Indicator Inclusion Index KOSPI TWII 30 500 Jones 225 100 P/E 12.21 11.22 16.15 23.93 23.35 23.69 16.83 13.93 P/B 1.46 1.08 1.71 3.13 3.14 3.89 1.81 1.84

Source: Bloomberg, as of April 2018.

3 4.Who will be the first adopter of A-shares after MSCI inclusion? When and what will they buy?

The chart below is the feedback collected by our sales team, who interviewed more than 100 asset managers, advisors, private banks and distributors from different regions during March 1~ April 27, 2018.

To sum up, after MSCI’s official inclusion, we expect: • First mover: Southeast Asian sovereign wealth funds may be the first batch of big institutions to enter A-share market. Asia • Overweight: Institutions in Taiwan, Korea and Singapore already have overweight positions in A-shares vs. MSCI EM Index. But may watch the sentiment and ride on a MSCI rally.

• Passive first: Large-size foreign fund houses may take actions first with passive tools. Mid- Europe size houses will follow big houses. & US • Waiting for flows: Overseas family offices and independent asset managers will both “wait and see” if the market goes well after MSCI inclusion. • Interest heating up: PBs, ETF distributions see interest heating up but need more education. They believe it’s a passive play.

• Underweight: Initial inclusion too small for some US pensions while US market is resilient. Europe • Cautious: hedge funds are cautious against Sino-US trade disputes and prefer single stock & US allocation. Chart 6 Clients Sentiment on MSCI Inclusion Type Feedback • Already bought A-shares. The positions are even higher than A-share’s initial Asia: HK, weighting in MSCI EM Index. Taiwan, • They are cautious about market sentiment. Will allocate more if market sentiment Singapore, Korea turns up due to MSCI inclusion • Retail investors are more active as they want to catch up a MSCI rally Other South- • Large institutions, especially sovereign wealth funds, have started to look at China east Asian market. Although A-share will only make up 0.8% in MSCI EM Index after initial regions inclusion, it’s a large sum of money for SWF. (Thailand, • A-share liquidity is much better vs other Asian markets, and institutions appreciate Indonesia, this. etc.) • Looking for passive A-share strategies

Our view: We expect Asian investors to be the first adopters following MSCI inclusion, as they are more familiar with the nature of A-share market, as well as the access to the market and adoptable investment tools. Big South-east Asian Institutions may use ETFs to enter A-share market, and may react quickly following MSCI inclusion, because <1% A-share weighting in MSCI EM Index still means a large amount. Inflow from SWFs will inspire investors global wide. Investors from HK, Taiwan, Singapore and Korean are very flexible and may ride on MSCI rally.

4 Type Feedback Europe: • Starting to look for China Beta products Large-size fund • Expecting more clients to ask for an increased exposure to China houses Europe: • Looking to increase in-house capacity to “study” China Mid-size asset • Interest in China has been picking up especially since MSCI’s decision in June 2017, managers despite A-share turmoil in 2015 • Pension clients are still licking their wounds from two years ago • MSCI inclusion does provide a “jump start” effect on their interests in China but those big ticket buyers will only proceed with caution Europe & US: • Less prepared for the inclusion as they think the weighting is still small and US Pension funds domestic market is still resilient. • Top 3 concerns: RMB strength, potential reversal of current policies, lingering trade conflicts with US Our view: We expect European and US investors to take a “wait and see” attitude, but their interest in China has picked up obviously. MSCI inclusion also forces them to look into the market. Among them, big houses are likely to move first, and may start increasing A-share allocation with passive products such as ETFs. Active products will be followed as clients’ interest picks up further. Mid-size managers may closely watch the move of big fund houses and follow their steps. May try some niche products to seek alpha. Pension funds are very prudent and may not take actions at the early inclusion stage. They need more time to observe China market after MSCI inclusion .

Type Feedback • Cautions on Sino-US trade disputes. More interested in single stock allocation US hedge funds instead of broad index. • Education is most needed item to further convince European institutions to invest more in China Europe: • Interest in China is up by a large margin in the last 12 months Independent ETF • Evidence of net inflows, prominent funds loading up A-shares, continuous efforts distributors by the Chinese authorities to accommodate int’l investors are all key elements for A-shares to be a lock for European investors. • Looking into China now as it’s too big to ignore • Very positive investment sentiment on MSCI inclusion theme, due to lack of Europe: theme in Q1. Clients hold cash in Q1 as market was volatile and consider Private banks switching. • Believe this is a passive play rather than single stock or sector play Europe: Family offices/ • Looking for China A-share access on both active and passive space. Independent asset • Looking into investment vehicles from various angles. Will see how the managers institutional flow goes first. Similar approach when stock connect open.

Our view: Sentiment is good but such risk-averse institutions may not take actions until there are continuous net inflows to A-share market. They may need tailored solutions which cover both passive and active products. 5 5.What are the major concerns of clients on MSCI inclusion and A-share market?

Two questions are asked very frequently, when we talk about investing in China with clients this year. On the economic side, the US-China trade relations may deteriorate and damage China’s economic growth and development plan such as China Manufacturing 2025. On the regulation side, investors want to know whether China will continue to open its market. 5.1 Trade disputes may not drag down stock market --- a lesson from Japan in 1980s Since the inauguration of the second Reagan administration in January 1985, it had been widely anticipated the White House planned to weaken the dollars and narrow the trade deficit with other industrialized countries, especially Japan. The US Dollars Index corrected 48% during 1985-1987. During the same period, Japanese Yen appreciated more than 115% (Chart 7). A stronger currency hit the export-driven Japan badly and the year 1985 saw the country’s GDP plummeted from 6.33% in 1985 to 2.83% in 1986, according to the World Bank. In response to slower economy, Japan’s central bank, Bank of Japan, aggressively cut interest rate and the hot money flushed the country’s capital market, sending its key stock market benchmark to sky before finally bust .

Chart 7 Japanese Yen to US dollar (1980-1989)

Source: Bloomberg, data from 1980 to 1989

Chart 8 Bank of Japan Official Discount Rate (1980-1989)

Source: Bloomberg, data from 1980 to 1989 6 If history is any guide, Chinese currency would continue to appreciate against US dollars in the coming years. In the meanwhile, to cushion the slowdown of export growth due to stronger currency, China’s top policy makers would maintain a favorite monetary policy. Hot money influx is expected into onshore capital market, including equity market, in anticipation of the currency appreciation and favorite monetary environment.

Chart 9 Nikkei 225 Index Performance (1980 - 1990)

Source: Bloomberg, data from 1980 to 1990 5.2 China continues to open the financial market. What we’ve been seeing is that China is accelerating to open up the market. In April, China announced to allow 51% ownership of foreign firms in joint ventures of securities, futures and asset management businesses. In additional to the issue of new QDII quotas that worth 8.34B USD, China agreed to grant Japan 200B RMB RQFII quota. As MSCI is to include A-shares into its benchmarks, we believe Chinese government will take more actions to open up the market, enhance administrative efficiency and market supervision efficiency, to support the development of the financial market.

7 6.What can clients buy to allocate A-shares?

6.1 Liquidity first: CSOP FTSE China A50 ETF (2822.HK/82822.HK) is the most liquid A-share ETF* in HK, highly correlated to MSCI China A Inclusion Index.

Chart 10.1 2822.HK provides the largest liquidity for tactical allocation** 100% 90% 80% 70% 60% 50%

40% 30% 20% 10%

0% 01/03/2017 03/03/2017 05/03/2017 07/03/2017 09/03/2017 CSOP FTSE A50 ETF iShares FTSE A50 ETF ChinaAMC CSI300 ETF Source: *Data from April 30, 2017 to April 30, 2018 **Bloomberg, January 1, 2016 – September 30, 2017

Chart 10.2 Most actively traded ETFs/ETPs in Hong Kong*** Stock code Name Average daily turnover (1Y) (HKD) 1 2800 Tracker Fund of Hong Kong 1,292,693,508.50 2 2828 Hang Seng China Enterprises Index ETF 1,257,156,986.23

3 2822 CSOP FTSE China A50 ETF 815,178,319.03 4 2823 iShares FTSE A50 China Index ETF 580,222,601.17 5 3188 ChinaAMC CSI 300 Index ETF 493,852,660.16 CSOP Hang Seng Index Daily (-1x) Inverse 6 7300 67,978,003.27 Product CSOP Hang Seng China Enterprises Index Daily 7 7288 62,880,738.70 (2x) Leveraged Product 8 7228 Samsung HSCEI Daily (2x) Leveraged Products 61,506,861.65 CSOP Hang Seng Index Daily (2x) Leveraged 9 7200 55,034,831.21 Product Mirae Asset Horizons HSCEI Daily (2x) Leveraged 10 7230 31,712,140.58 Product

Source: ***Bloomberg, as of April 30, 2018 As of end-September, the correlation between FTSE China A50 Index and MSCI China A Inclusion Index was 98.21%. Apart from Inner Mongolia Yili (600887), the top 30 holdings of MSCI’s new inclusion scheme matches FTSE China A50, with different weightings. The constituents make up 81% of the market cap of FTSE China A50.

8 6.2 Exactly the one: CSOP MSCI China A Inclusion Index ETF (3149/83149.HK)

Following index change effective on May 3, 3149.HK now closely corresponds to the performance of MSCI China A Inclusion Index. The Index is designed to track the progressive partial inclusion of A-Shares in the China equity universe of the Index Provider’s MSCI China Index and the MSCI Emerging Markets Index over time. Prior to the initial inclusion of A-Shares in the MSCI China Index in June 2018, the constituents of the Index consist of large-capitalisation A-Shares accessible through Stock Connect derived from the MSCI China All Shares Index and, thereafter, the large -capitalization A-Share constituents derived from MSCI China Index at each index review.

7. What are the differences between MSCI China A Inclusion Index and CSI 300 Index as they are both broad-based indexes with similar valuation?

Compared to CSI300, MSCIA Inclusion Index significantly overweight Consumer Staples and underweight Consumer Discretionary Hong Kong Connect Northbound inflow went mostly to Consumer Staples while Consumer Discretionary saw little inflow or even outflow in the last 1 Month/3 Month period

Chart 11 CSI300 vs. MSCIA Inclusion Index by sectors

CSI300 Overweight Consumer Discretionary MSCIA Overweight Consumer Staples

11.50% 9.90% Consumer 8.00% Discretionary 11.50%

Consumer Staples

1M Net Inflow Mainly into Consumer Staples Same for 3M Net Inflow

3.55% -3.80% Consumer 22.73% Discretionary 34.70% Consumer Staples

Source：Bloomberg, MSCI, CSOP, as of May 10, 2018

9 As A-Shares plunged dramatically from June to September in 2015, many companies chose to apply for suspension at that time. During the 2 weeks from 06 July, 2015 to 17 July ,2015, over 1000 stocks were suspended***. Compared to CSI300, constituents of MSCIA are more likely to maintain their liquidity during the market crash.

Chart 12 Stock suspension comparison between CSI300 and MSCIA Inclusion Index

July 6-17 June 1 – Sep 30 MSCIA CSI300 MSCIA CSI300 # of suspended stocks* 59 99 # of suspended stocks* 91 136 As % of portfolio As % of portfolio market cap** 17.55% 21.80% market cap ** 30.78% 32.25%

6000 SHCOMP CSI300

5000

4000

3000

2000

Source： *Number of stocks which suspended trading during the period **The market cap of suspended stocks / index market cap, as of May 10, 2018; data from Bloomberg, MSCI, CSOP ***Source: WIND, MSCI, data from July 6-July 17, 2015; and from June 1-September 30, 2015

10 Disclaimer This document is prepared for the use of presentation, illustration and discussion. It is intended for professional investors only and is not legally binding. It should not be considered as an offer or solicitation to deal in any investment products. CSOP Asset Management Limited (“CSOP”) which prepared this document believes that information in this document is based upon sources that are believed to be accurate, complete, and reliable. However, CSOP does not warrant the accuracy and completeness of the information, and shall not be liable to the recipient or controlling shareholders of the recipient resulting from its use. CSOP is under no obligation to keep the information up-to-date. The provision of this document shall not be deemed as constituting any offer, acceptance, or promise of any further contract or amendment to any contract. This document should not be distributed to any parties without the written consent of CSOP. Nothing herein shall be construed as granting the recipient, explicit or implicit, any license or right to the information in this document.

Investment involves risk. Please refer to the offering documents for details of the risks of investing in the Fund. Future performance and the capital value of the Fund are not guaranteed. Past performance figures are not indicative of future performance. The value of units may rise as well as fall. Investors are reminded that in certain circumstances their right to redeem may be suspended. We recommend investors obtain and read a copy of the offering documents (including risk factors) before investing. Investor should not only base on this marketing material alone to make investment decisions. Investors should not make any investment decision solely based on this document. This material has not been reviewed by the Securities and Futures Commission (“SFC”) in Hong Kong.

IMPORTANT INFORMATION ABOUT THE CSOP FTSE CHINA A50 ETF • The CSOP FTSE China A50 ETF (“ETF”) aims to provide investment results that, before fees and expenses, closely correspond to the performance of FTSE China A50 Index, which is an index consisting the top 50 A-Share companies by market capitalization listed on the or the Shenzhen Stock Exchange. There is no assurance that the ETF will achieve its investment objective and investors may not get back part of or the entire amount they invest. • The ETF is one of the first RMB physical A-share exchange traded funds issued outside PRC to invest directly in the A- share market which is inherently a market with restricted access. Investing solely in China market may also subject the ETF to emerging market risk (such as greater economic, political, tax, foreign exchange, regulatory, volatility and liquidity risks) and concentration risk. • There is no assurance that the Manager will continue to maintain its RQFII status and make quota available for the ETF’s investment. • The market price on the SEHK of units traded in RMB and of units traded in HKD may deviate significantly due to different factors such as market liquidity, supply and demand in each counter and the exchange rate between RMB and HKD (in both onshore and offshore markets). • Investors without RMB accounts may buy and sell HKD traded units only. They will not be able to buy or sell RMB traded units and should note that distributions are made in RMB only. As such, investors may suffer a foreign exchange loss and incur foreign exchange associated fees and charges to receive their dividend. • Investors who bought units on the HKD counter may be subject to currency exchange risk as the assets of the ETF are denominated in RMB. • The liquidity and trading price of the ETF RMB traded units may be adversely affected by the limited availability of RMB outside the PRC and the restrictions on the conversion between foreign currency and RMB. • There are risks and uncertainties associated with the current Chinese tax laws applicable to investments made by an RQFII ETF. Provisions of PRC taxes may not be sufficient or may even be excessive. Any shortfall between the reserves and actual tax liabilities may have to be covered by the ETF's assets and may adversely affect the ETF's asset value. • The ETF is subject to tracking error risks due to factors such as fees and expenses of the ETF and the liquidity of the market, imperfect correlation of return and other factors such as the representative sampling strategy being used and investing in collective investment scheme under exceptional circumstances. • The units of the ETF are traded on the SEHK. Their prices on the SEHK are based on secondary market trading factors and may deviate significantly from the net asset value of the ETF and may trade at a substantial premium or discount to its NAV. • The Manager may, at its discretion, pay dividends out of capital. Payment of dividends out of capital or effectively out of the capital amounts to a return or withdrawal of part of an investor's original investment or from any capital gains attributable to that original investment. Any distributions involving payment of dividends out of the capital or effectively out of the capital of the ETF may result in an immediate reduction of the NAV per Unit

11 Disclaimer IMPORTANT INFORMATION ABOUT THE CSOP MSCI CHINA A INCLUSION INDEX ETFF • CSOP MSCI China A Inclusion Index ETF (the “Fund”) is a physical index tracking ETF and it aims to provide investment results that, before deduction of fees and expenses, closely correspond to the performance of MSCI China A Inclusion Index (“Underlying Index”). • The underlying index of the Sub-Fund was changed to the present index effective from 3 May 2018. During the rebalancing period from the previous index to the Underlying Index, which is anticipated to take up to 5 trading days from 3 May 2018, holdings of the Sub-Fund will be rebalanced from constituents of the previous index to the Underlying Index. Although there is a high degree of correlation between the previous index and new Underlying Index, there is a risk that the tracking error and tracking difference of the Sub-Fund during the rebalancing period may increase. Investors who deal with Units of the Sub-Fund during the rebalancing period should exercise caution. • The Underlying Index captures large and mid-cap representation and includes A-Shares constituents of the MSCI China All Shares Index. All of the constituents of the Underlying Index are listed on the SSE and the SZSE. • China is considered as an emerging market and investing in China market may subject to greater economic, political, tax, foreign exchange, regulatory, volatility and liquidity risks than investing in more developed countries. • The concentration of the Fund’s investments in a single geographical region (i.e. China) may subject it to greater volatility than portfolios which comprise broad-based global investments. • Retail investors can only buy or sell units of the Fund on the SEHK. The trading price on the SEHK is driven by market factors and may trade at a substantial premiums or discount to its net asset value. • Investors without RMB accounts may buy and sell HKD traded units only. They will not be able to buy or sell RMB traded units and should note that distributions are made in RMB only. As such, investors may suffer a foreign exchange loss. • The Manager may, at its discretion, pay dividends out of capital or effectively pay dividends out of the capital. Payment of dividends out of capital or effectively out of the capital amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment and may result in an immediate reduction of the NAV per unit. • The material has not been reviewed by the SFC.

12