INDUSTRY

Industry Overview

Hong Kong is one of the world’s largest securities markets by market capitalization. Hong Kong’s securities market is operated by the Hong Kong Stock Exchange and its futures market by the Hong Kong Futures Exchange (the “HKFE”), both being wholly-owned by subsidiaries of the Hong Kong Exchanges and Clearing Limited (the “HKEx”). According to Migo, as an international financial hub and gateway to China, over the years, Hong Kong’s securities market has experienced remarkable growth in market capitalization. As of June 30 2022, in terms of market capitalization, the Hong Kong Stock Exchange ranked the seventh largest securities market in the world, and the fourth largest stock market in Asia, with a total market capitalization of approximately US$ 4,979.0 billion. The following table sets out the market capitalization and ranking of the world’s top stock exchanges as of June 30, 2022.

Notes:

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(1)      Comprises Euronext Amsterdam, Euronext Brussels, Euronext Lisbon and Euronext Paris

(2)      Comprises Tokyo Stock Exchange and Osaka Securities Exchange

(3)      Includes GEM

(4)      Comprises London Stock Exchange and Borsa Italiana

(5)      Includes TSX Venture

(6)      Comprises Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius Stock Exchanges

(7)      Ranking is based on market capitalization. Market capitalization excludes investment funds. All World Federation of Exchanges (WFE) member stock exchanges, not solely the main exchange for each country, are included in the ranking. Ranking excludes Bombay Stock Exchange to avoid double counting with National Stock Exchange of India.

Sources: The Securities and Futures Commission (SFC) of Hong Kong

Hong Kong capital market has a high level of openness to and freedom of capital flow. There is no limit on foreign investments imposed in the Hong Kong stock market. Local investors can freely participate in investment in free capital markets overseas. There is also no foreign exchange control. According to Hong Kong Monetary Authority, such free flow of capital and barrier-free investment attracted overseas institutions and made significant contributions to the development of the Hong Kong capital market. This also allows the development of diversified financial instruments and mergers and acquisitions and financing activities to be conducted conveniently.

Total market capitalization and the number of Hong Kong listed companies

The Hong Kong Stock Exchange operates two markets, the Main Board is for more established companies that satisfy higher financial and track record requirements and Growth Enterprise Market (the “GEM”) is for a market with lower listing eligibility criteria but similar continuing obligations compared to the Main Board, serving the needs of small and mid-sized issuers.

The total market capitalization of the Stock Exchange (including the Main Board and GEM) increased from approximately HK$33,999 billion (approx.US$4,358.8 billion) as of December 31, 2017 to approximately HK$39,065 billion (approximately US$4,979.0 billion) as of June 30, 2022. In 2021, the market capitalization of the companies listed amounted to approximately HK$58,672 billion (approx. US$7,522.0 billion), with a CAGR of about 14.6% since 2017. In line with the general trend of market capitalization, the number of listed securities on the Stock Exchange also increased from 12,803 as of December 31, 2017 to 16,510 as of June 30, 2022.

Total market capitalization and aggregated number of listed securities(#) in Hong Kong from 2017-2022

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*        As of June 30, 2022

(#)      Listed securities include ordinary shares, preferred ordinary/preference shares, warrants, callable bull/bear contracts, equity instruments, debt securities and unit trust/mutual fund listed on the Stock Exchange.

Sources: HKEx

Securities Dealing and Brokerage Service

The licensed securities dealing and brokerage service industry comprises corporations conducting Type 1 (dealing in securities) regulated activity, and these corporations are generally referred to as brokerage firms or brokerage service providers. These corporations provide securities dealing and brokerage services to clients (including principals and investors) which may involve (i) trading and brokering securities in respect of trades for clients, (ii) marketing and distributing of securities (including mutual funds and unit trusts) to clients, and (iii) placing and underwriting of securities in respect of fundraisings and secondary offerings and sale. Some brokerage firms may also provide securities margin financing services to facilitate the acquisitions or holdings of securities by their clients if they can meet the more stringent financial resources requirements set out in the SFO. The main function of a Type 1 licensed corporation, as the securities brokerage service provider, is to act as an agent to facilitate securities trading activities for investors in respect of securities listed on the Stock Exchange and/or on overseas markets. The main revenue stream of brokerage firms is the commission fee charged to clients, as well as the interest income in the event that the clients fail to settle trades. A securities brokerage firm may also generate revenue from commission and fee income through placing and underwriting securities in respect of fundraisings and secondary offerings and sales, and interest income from the provision of securities margin financing services.

Secondary Market Turnover

According to Migo, the commission income of the securities brokerage firm is highly dependent on the performance of the stock market and the overall securities market turnover. According to the statistics of HKEx, the total annual trading turnover and average daily trading turnover grew significantly from approximately HK$21,709 billion (approx.US$2,783.2 billion) and approximately HK$88 billion (approx.US$11.3 billion) in 2017 to approximately HK$ 41,182 billion (approx.US$5,279.7 billion) and approximately HK$167 billion (approx.US$21.4 billion) in 2021, representing CAGRs of 17.4% and 17.4%.

However, according to Migo, the performance of Hong Kong’s securities and stock market has experienced fluctuation over 2017 to 2021. From 2017 to 2018, the trading turnover in Hong Kong stock market was driven by the launch and implementation of the Shenzhen-Hong Kong Stock Connect, with average daily trading turnover reaching a record high of approximately HK$26,423 billion (approx.US$3,387.5 billion) and approximately HK$107 billion (approx.US$13.7 billion) respectively in 2018. In 2019, the total annual turnover and average daily turnover dropped down to approximately HK$21,440 billion (approx.US$2,748.7 billion) and approximately HK$87 billion (approx.US$11.1 billion), which was affected by a series of negative factors including U.S.-China trade tension and prolonged local unrest and social incidents. Nonetheless, in 2020-2021, despite of the fact that the outbreak of COVID-19 has adversely impacted the economic development in Hong Kong, the securities market remained strong and active, with the total annual trading turnover and average daily trading turnover registering year-on-year growth rates of 28.3% and 29.5%, respectively.

Total turnover and average daily turnover from 2017 to 2021 of the Hong Kong securities market

Sources: HKEx

Competition Landscape of Securities Dealing and Brokerage Industry

To trade securities through the trading facilities of Hong Kong Stock Exchange, the participants must (among others) hold the Stock Exchange Trading Rights and be a Stock Exchange Participant. They should also be licensed corporations that can carry on Type 1 (dealing in securities) regulated activity under the SFO. They should also comply with the financial resources rules stipulated by the Financial Resources Rules (amendments) and the HKEx. As of June 30, 2022, there were 711 trading right holders registered in the Hong Kong Exchanges and Clearing Limited, which comprised 623 trading Exchange Participants, 74 non-trading Exchange Participants and 14 non-exchange participants. The participants are divided into 3 categories, ‘‘A’’, ‘‘B’’ and ‘‘C’, based on market share, by the Stock Exchange:

(a)     Category A (brokerage firms ranking 1st to 14th, by proportion to total turnover);

(b)    Category B (brokerage firms ranking 15th to 65th, by proportion to total turnover); and

(c)     Category C (brokerage firms ranking after 65th, by proportion to total turnover).

The following chart illustrates the respective market shares of different categories of Stock Exchange Participants from 2017 to 2022.

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*        For the six months ended June 30, 2022

Source: HKEx

Hong Kong’s securities dealing and brokerage market is dominated by the 14 Stock Exchange Participants under Category A that accounted for approximately 59% market share in terms of turnover for 2021. The market share of Stock Exchange Participants under Category A has experienced an increase and Category C has experienced an decrease from approximately 54.6% and 10.5%, respectively, in 2017 to approximately 59% and 7.2%, respectively, in 2021, while the market share the Stock Exchange Participants under Category B has recorded a decrease from approximately 34.9% in 2017 to approximately 33.8% in 2021. The number of Category C firms reached 637 in 2021, representing a CAGR of 7.4%.

For the year ended December 31, 2021, I Win Securities Limited, our wholly-owned subsidiary, was ranked as a Category C broker by the Stock Exchange.

Placing and Underwriting Services

The Placing and underwriting services are essential for fundraising activities in the capital market, and relevant service providers in Hong Kong are required to obtain an HKSFC license to carry on Type 1 regulated activity. Such placing and underwriting services providers are generally referred to as underwriters and placing agents. The main responsibility of both underwriters and placing agents is to act as an agent to identify potential investors to subscribe for securities of issuers and to acquire securities from selling shareholders, while underwriters are also involved in carrying out and organizing roadshows and other marketing activities during the book building process as well as involved in the pricing process of IPOs. The main revenue stream of the placing and underwriting services providers is the commission charged to clients from the provision of the placing and underwriting services which is calculated according to a predetermined commission rate that varies on a case-by-case basis and usually ranges from less than 1% to up to 20% of the value of securities being placed or underwritten.

According to the statistics of the HKSFC, in 2017, there were approximately 1,247 Type 1 financial institutions that provide the placing and underwriting services in Hong Kong. In 2021, the number of Type 1 financial institutions increased to 1,487, respectively, with a CAGR of about 4.5% since 2017. As of June 30, 2022, the licensed corporations that can carry on Type 1 regulated activity under the HKSFO increased to 1,509. The placing and underwriting services market in Hong Kong is consolidated and dominated by the top market players who provide a wide range of investment banking services in addition to the placing and underwriting services. The other players in the market, being Category B and C participants, operate on a boutique scale and focus on the provision of several services.

IPO and Fund Raising in Hong Kong

According to Migo, total revenue generated in the placing and underwriting service market in Hong Kong is positively correlated with IPO and funds raised on the Hong Kong Stock Exchange. Hong Kong is one of the world’s most active markets for IPO. According to the statistics of HKSFC, Hong Kong ranks fourth in total funds raised among the global IPO markets in 2021 and has been the world’s top five IPO markets in the past five years. The large number of listed and newly listed companies on the Hong Kong stock market has created significant demands for the placing and underwriting services in Hong Kong. Furthermore, the total funds raised from the equity markets in Hong Kong, through IPO and post-IPO, increased from approximately HK$580 billion (approx. US$74.3 billion) in 2017 to approximately HK$771 billion (approx. US$98.8 billion) in 2021, representing a CAGR of approximately 7.4%.

In 2021, there were 98 IPOs launched in Hong Kong, representing a decline CAGR of approximately 13.4% from 2017, when there were a total number of 174 IPOs launched in 2017. According to Migo, the reason for such a decrease is due to the fact that the Hong Kong IPO market has been hit by the COVID-19 pandemic, the U.S.-China trade tensions, China’s regulatory changes in relation to security concerns regarding Chinese companies listing overseas, and other geopolitical tension.

However, according to Migo, with reference to the Government press release in May 2022, in light of heightened geopolitical tensions, the uncertainty of the COVID-19 pandemics, inflation, and interest rate increase by major central banks, which cause uncertainty to the outlook for Hong Kong IPO markets, but the Hong Kong IPO market should remain resilient given its unique advantages as an international financial center. According to the statistics of HKEx Fact Book, despite the decline in the number of IPO, there has been an overall increase in the funds raised through IPO from 2017 to 2021, from approximately HK$129 billion (approx.US$16.5 billion) in 2017 to approximately HK$331 billion (approx.US$42.4 billion) in 2021, representing a CAGR of approximately 26.6%. In terms of post-IPO equity funds raised in Hong Kong, the amount decreased from approximately HK$452 billion in 2017 to approximately HK$346 billion in 2020, then rebounded to HK$442 billion in 2021.

Number of IPOs and the total funds raised through IPO in Hong Kong from 2017 to 2021

Source: HKEx Fact Book

Furthermore, according to the statistics of HKEx Fact Book, in 2020, there were 154 new IPO launched, raising approximately HK$400 billion, which is a record high since 2017 in terms of total funds raised; compared with 183 IPOs raising approximately HK$314 billion (approx. US$40.2 billion) in 2019 — despite a 15.8% drop in the number of IPOs, there was a 27.4% increase in terms of funds raised. With reference to the Government press release May 2022, the strong performance can be attributable to the launch of the Hang Seng Tech Index, the acceptance by the Hong Kong Stock Exchange of the Weighted Voting Rights (WVR) used by the tech giants based in Mainland China, and changes in market sentiments towards the U.S. securities market regulatory environment, which drives more Mainland Chinese companies to get listed on the Hong Kong Stock Exchange, instead in the U.S. For example, there were nine Chinese companies listed in the US having their secondary listing on the Hong Kong Stock Exchange in 2020, raising a total of HK$131 billion (approx. US$16.8 billion), representing approximately 34% of the total funds raised in 2020. According to Migo, although the geopolitical issues have triggered certain negative factors that affected Hong Kong’s capital market, as China’s most internationalized city with the free flow of capital, ample liquidity, and an ability to innovate and reform to embrace change, Hong Kong is certain to remain the most preferred overseas listing destination for the Mainland Chinese companies.

Asset Management Services

Asset management refers to the investment advisory and management of investment funds and securities by holding the licenses to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities.

Major market players engaging in the asset management business in Hong Kong comprise licensed corporations (such as securities firms or asset management companies licensed by the HKSFC), registered institutions (such as banks or deposit-taking companies engaging in the asset management business), and insurance companies.

According to the statistics of the HKSFC, 1,838 and 2,039 licensed corporations, 94 and 36 registered institutions, 5,010 and 4,962 responsible/approved officers for Type 4 (advising on securities) and Type 9 (asset management) regulated activity as of the end of June 30, 2022. The number of licensed responsible/approved officers to carry on Type 4 and Type 9 licenses increased from 3,513 and 3,576 in 2017 to 4,905 and 4,855 in 2021, at a CAGR of approximately 8.7% and 7.9%. As of June 30, 2022, the number of licensed corporations and licensed responsible/approved officers recorded an increase of 65 and 105 for Type 4 license, as well as 60 and 107 for Type 9 license. Recently, there has been an increase in the number of China asset management service firms. Investment funds manage assets of various asset classes (shares, bonds and derivatives) and other assets (e.g. real estate) in order to meet specified investment objectives for the benefit of the investors. Some investors may also authorise asset managers to manage the dealing and investments of securities in their securities trading account(s), and this is commonly referred to as discretionary account management. According to Migo, services and transactions under discretionary asset management are often tailored for professional, high-net-worth individuals or institutional investors, while products, such as pension fund, possess a relatively higher minimum investment requirement for investors. The main stream of revenue of licensed asset managers is the management fee, which is paid to the asset manager on an ongoing basis and is deducted from the net asset value of managed funds.

According to the Asset and Wealth Management Activities Survey (previously known as the Fund Management Activities Survey) 2021 published by the HKSFC in July 2022, the asset and wealth management business in Hong Kong amounted to increase from approximately HK$24,270 billion (approx.US$3,111.5 billion) in 2017 to approximately HK$35,546 billion (approx.US$4,557.2 billion) in 2021, representing a CAGR of approximately 10%. The following chart illustrates a breakdown of the asset and wealth management business’ assets related in Hong Kong by major market players from 2017 to 2021.

Source: HKSFC