Growth Enterprise Market in Hong Kong

1
Growth Enterprise Marketin Hong Kong

• Prof. Stephen Y. L. Cheung
• Department of Economics Finance
• City University of Hong Kong

2
Background

• Established in November 1999
• Intention of becoming a centre of science and
  technology
• Independent and alternative market, not a second
  tier market to the main board
• For enterprises that have good business idea and
  growth potential, but unable to obtain a listing
  in the Main Broad.

3
Market Performance
4
SP/HKEx GEM index

• SP/HKEx GEM index replaced Growth Enterprise
  Index (GEI) on 14 April,2003.
• Base point 1000 index point
• Base date is 31 December, 2002
• Weight of GEM stocks as of the base date
  January 2004

5
Characteristics of the GEM (I)

• Target at growth companies, big and small
• Reasonable prospect of significantly developing
  or expanding their business, such as
  telecom-related and Chinese IT firms
• Non-telecom-related Wah Sang Gas Holdings, Far
  Eastern Polychem Industries.

6
Characteristics of the GEM (II)

• Higher awareness of risk among investors
• Risky market more likelihood of business
  failure and insolvency
• Future performance is less predictable
• No proven profitable track record
• No obligation to forecast future profitability
• Target for sophisticated investors
• Risk Disclosure Statement

7
Characteristics of the GEM (III)

• Disclosure-based regime
• Buyer-beware philosophy
• Greater, more frequent and timely disclosure
• Quarterly, half yearly and annual accounts
• Half yearly comparison of the business progress
  with the business plan for the first 2 financial
  years
• Sponsor scheme
• Act as an adviser to assist the issuer to comply
  with the GEM Listing Rules
• The principal channel of communication between
  the Exchange and the issuer

8
Characteristics of the GEM (IV)

• Strong corporate governance requirements
• Reduce the risk of malpractice
• Companies properly fulfill the listing
  obligations
• Measures
• Appointment of a qualified accountant to
  supervise the finance and accounting functions
• Designating an executive director as the
  compliance officer
• 2 independent directors
• An audit committee

9
Listing Requirement
10
Regulatory Philosophy

• Buyers beware
• Investors should be aware of the risks involved
  in the market
• Measures
• Provide more risk warning to investors
• Sign risk disclosure statement
• Conduct more investor education programs
• Let the market decide
• Investors have to accept a high degree of
  responsibility for their investment decisions F
• Frequent and timely disclosures to enable
  investors to make appropriate investment decisions

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Role of HKEx and SFC (I)

• Role of HKEx
• Not carry out any assessment on the commercial
  viability of the applicants
• Simply check that the GEM Listing Rules have been
  complied with
• Frontline market regulator market surveillance
  of the stock market and the enforcement of the
  GEM listing rules
• Role of SFC
• Maintain a level playing field
• Regulate the trust relationships between issuers,
  investors, intermediaries like sponsors and
  market professionals

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Role of HKEx and SFC (II)

• Both
• Ensure adequate and timely disclosure of
  price-sensitive information
• Fair and equal treatment of public shareholders
• The Exchange Listing Rules
• Contractual and not backed by statutes
• Limit the investigative power of the Exchange
• Inability to impose fines or penalties if
  breaching the Listing Rules
• Composite Bill Strengthening corporate
  disclosure

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Key Successful Factors for GEM (I)

• Market distance
• No time difference from NASDAQ
• Same time zone and same geographic area in the
  region
• Quality listed companies
• How good the companies are?
• Whether the share price can be maintained?
• Market differentiation and segmentation with the
  Main Board
• Main difference trading record and profit
  requirement
• Build up a niche position

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Key Successful Factors for GEM (II)

• Market reputation
• Distinct markets for high-growth and h-tech
  regional plays
• Successful listing in the short term and
  successful innovative companies in the longer
  term
• Liquidity
• Following NASDAQ, stricter disclosure
  requirements than on the main board
• Fair and liquid market
• Lure big-time investors

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Key Successful Factors for GEM (II)

• Market infrastructure
• Efficient
• Well-constructed regulatory framework
• Attractive products
• Professional market practitioners
• Avoid tedious work for building financial
  infrastructure and better corporate governance
  practices

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NASDAQ in the US

• Established in 1971
• First electronic stock market in the world

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KOSDAQ in Korea

• Established in July 1996
• Stricter rules to stop spread of speculation fever

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On-Line Trading (I)

• KOSDAQ
• On-line trading represented about 61.7 of total
  trading volume in December 2002.
• Daily trading volume of KOSDAQ grew 646 times
  from January 1998 to January 2004.
• Market share of on-line trading rises from 5
  trillion Won in 1998 to 111 trillion Won in the
  first seven months of 1999
• On-line account percentages grew from 6 of total
  account at the end of 1998 to 66.4 by the end of
  2002.
• Annualized turnover is 11 times market
  capitalization as of November 1999, most actively
  traded market in the world

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On-Line Trading (II)
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On-Line Trading (III)

• NASDAQ
• On-line trading 25
• Average daily trades 95,500 ? 504,631 from the
  first quarter of 1997 to the third quarter of 1999

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On-Line Trading (IV)

• In 1999, Charles Schwab opened 1,481,000 new
  accounts.
• 6,600,000 active accounts
• Trading volume increased from 97,200 in 1998 to
  163,100 in 1999.
• 73 of total trading volume

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On-Line Trading (V)
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On-Line Trading (VI)

• Advantages
• Low transaction cost
• Lower commission charges
• Convenience and round-the-clock trading
• No time and geographical restriction
• 40 of online orders in the US come in after
  market hours

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On-Line Trading (VII)

• Advantages
• Best execution prompt confirmation
• Improve flexibility
• Reduce associated risks and advantages
• Availability of market information
• E.g. real time quotes, news, company information,
  research and analysis, and market commentary

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On-Line Trading (VIII)

• Commission fees ( of transaction value)
• Induce price competition
• Reduce the costs of executing transactions
• The US
• Online brokers 2.1
• Full service brokers 8.0
• South Korea
• Online brokers 0.029
• Traditional brokers 0.5
• Hong Kong
• Negotiable

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On-Line Trading (IX)

• Great potential for on-line trading in H.K.
  market
• Shortest settlement period in the region with a
  very low rate of settlement failure or delays
• Second largest market capitalization in Asia
• USD 616 billion as of September
• Fifth most active market in Asia
• Average daily turnover USD 1.8 billion for the
  first nine months of 2000
• AM3
• Allows investors to conduct trading activities
  through the internet or by mobile phone ð Boost
  trading volume

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On-Line Trading (X)

• On-line trading in Hong Kong
• Mainly focus in overseas securities, particularly
  US securities.
• From October 2001 to September 2002, online
  trading contributed 11 of total retail trading
  value, or 4 of total market trading value in
  HKEXs stock market.
• Close to 20 of brokers in Hong Kong offer online
  trading sevice.

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On-Line Trading (XI)
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Challenges Arising from the Internet (I)

• Applicability of regulation
• For a telephone- and paper-based environment
• Dissemination of false information
• Difficult to verify
• Issues of jurisdiction
• Difficult to define which legal jurisdiction
  should apply and how to apply
• Unregulated offshore jurisdiction

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Challenges Arising from the Internet (II)

• Reliability
• On-line service outages and delays
• Security
• Hackers attempt frequently to access company and
  customer information
• Privacy
• Only 10 of European sites post privacy policies

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Challenges Arising from the Internet (III)

• Regulatory responses
• The US
• No specific legislation governing internet-based
  investment activities
• Comply with federal and state protection
  provision
• SEC releases informal rules by way of policy
  statements

32
Challenges Arising from the Internet (IV)

• Regulatory responses
• Hong Kong
• Present law and regulatory structure does not
  fully accommodate internet operations
• Issued Guidance Note on Internet Regulation in
  March 1999
• Additional guidance for investor protection
• Suitable operational standards for on-line
  brokers
• Address new challenges

33
Challenges Arising from the Internet (V)

• Regulatory responses
• International efforts
• In 1997, the Technical Committee of the
  International Organization of Securities
  Commission (IOSCO) formed an Internet Task Force.
• Areas concerned Issuer disclosure, business
  transaction and record keeping

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Market Split of GEM and the Main Board (I)

• In-built relationship between GEM and the Main
  Broad
• GEM stocks are backed up by their parents in the
  Main Board, e.g. Tom.com and Sunevision Holdings
• Investors invest in GEM based on the parents in
  the Main Board
• Performance cycle
• Small market distinction
• Main Broad companies tend to invest in an
  internet partner
• Co-existence of old economy and new economy

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Market Split of GEM and the Main Board (II)

• Investment fever
• Investors shift their investments between two
  markets to chase for hot issues
• No constant investment in a single market
• Evolution of economy
• Economic life cycle
• Old economy ? Transitional period Old and new
  economies co-exist ? New economy

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Prospect of GEM (I)

• Competition in the Region
• Set up the alternative market in other countries,
  e.g. alternative markets in Shanghai and Shenzhen
• Ease the listing requirement
• Taiwan lowers minimum capital requirement for OTC
  listings from NTD50 million to NTD 30 million
• Singapore allows listings by foreign firms on
  SESDAQ

37
Prospect of GEM (II)

• Relaxation of listing rules
• Management shareholders moratorium
• The lock-up period for the initial management
  shareholders is reduced from two years to six
  months.
• Active business pursuits
• Change from 24 months to 12 months
• Accountants report
• Change 2 financial years to at least 12 months
• Share options provisions
• Relaxing the employee-share options schemes to
  represent 30 of the firms issued share capital,
  instead of 10

38
Prospect of GEM (III)

• Future strategies
• Cross-listing with NASDAQ in Hong Kong
• NASDAQ-Japan was established in 2000