Basics of Personal Financial Management –

Stock Trading as an Investment

Lesson 1: Stock Trading in Hong Kong and Stock Price (Part I)

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Why trading stocks?

• From Investor’s Perspective:-– Accumulation of wealth– Receiving dividend income– Asset allocation

• From Company’s Perspective:-– Raise funds

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Stocks

• Represent the share of ownership of a company and a claim on its assets and earnings

• Holders of stocks are called stockholders

Activity 1-Disadvantage of buying stock

• What are the disadvantages of buying stock instead of putting your money into savings accounts.

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HKEx

HKSCC

Investors

Placing order via phone or internet

Order confirmation

& settlement

Order execution

Trade data

Custody,

clearing &

settlement

Stock brokers

(Exchange Participants)

Flow of stock trading and settlement

Investor Participant A/C

(Optional)

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The stock trading system

• The Hong Kong Stock Exchange operates electronic stock trading system

• A matching system automatically matches bids (intended buyers of shares) with asks (intended sellers of shares) at the best possible prices (AMS/3)

• If the market works properly, the bid and ask price on a particular transaction will be as close to each other as possible

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The stock settlement system• Clearing and settlement via Central

Clearing And Settlement System (“CCASS”) operated by Hong Kong Securities Clearing Company Limited

• Settlement cycle : T+2 (within 2 working days from the trading day)

• Company Account or Investor Participant Account (optional)

Hang Seng Index• The Hang Seng Index ("HSI") is one of the

earliest stock market indexes in Hong Kong. Publicly launched on 24 November 1969, the HSI has become the most widely quoted indicator of the performance of the Hong Kong stock market

• The base of HSI points was set equivalent to the stocks' total value as of the market close on 31 July, 1964, when HSI was first published

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Activity 2-The Ups and Downs of Hang Seng Index

• The following chart shows the Hang Seng Index from 1 Jan 1993 to 9 Dec 2013.

• Do you know what makes the ups and downs of Hang Seng Index as shown on the chart ? 1- HSI downs from 1997 to 1998 2- HSI downs from 2000 to 2003 3- HSI ups from 2003 to 2007 4 - HSI downs from 2007 to 2008

(Hint: Think about the major events occurred in Hong Kong during the above period) 9

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Hang Seng Index from Jan. 1993 to Dec. 2013

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Importance of Hang Seng Index

• A general reflection of the performance of stock market

• A measure of the overall health of a sector

• A benchmark to compare a specific stock

• A basis for investment returns

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Stock Price • Stock price is determined by the price

which buyers are willing to pay and sellers are willing to sell–Buyers based on new market

information to buy the stock –Sellers based on new market

information to sell the stock

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Major factors affecting stock prices

• The following are major factors which affects stock prices– General economic condition – Political factors– Interest rates– Industry prospect – Company performance– Dividend policy– Speculation

General economic condition

• General economic condition is usually measured by Gross Domestic Product (GDP)

• GDP growth is an indicator of stock market prospects

• A strong (poor) growth in GDP indicates a strong (weak) stock market

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Example – Hong Kong GDP Vs. HSI

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GDP -2.8%

GDP +9.8%

HSI from 1.1. 2006 to 31.12.2009

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Example – Hong Kong GDP Vs. HSI

1. Strong economic growth rate -The HK GDP growth rate was 9.8% in 2007*

=> Hang Seng Index went up

2. Weak economic growth rate - The GDP growth rate was -2.8% in 2009*

=> Hang Seng Index went down

* source: Hong Kong Annual Digest of Statistics

General economic condition

• Examples of factors affecting general economic conditions:-– Employment rate– Statutory minimum wage– Consumption / consumers’ confidence– Investment in infrastructure

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Political factors• Stock price can also be affected by the

following political factors:– War– Terrorist activity– Election

• The above would pose high risk to the stock market, and the stock market index may fluctuate substantially

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Conclusion • Reasons for stock trading

• Stock trading and settlement system in Hong Kong

• The importance of Hang Seng Index

• Major factors affecting stock prices

• General economic condition Vs. stock price

• Political factors Vs. stock price

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The End

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Basics of Personal Financial Management –

Stock Trading as an Investment

Lesson 2: Stock Price (Part II)

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Interest rates

• Generally speaking:− Lowering interest rate could stimulate the

economy and hence the stock market− Raising interest rate could dampen the

economy and hence has negative impact on the stock market

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Interest rates

• Government intervention affects interest rates

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Activity 3-Interest rate and stock price

• The U.S. government has started to print money to buy government securities from banks since 2008. What would be the impact on the interest rate, and the stock market?

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Industry prospect

• If prospect for a particular business sector is good, the stock price of this type of shares will rise

• If the prospect for a particular business sector is poor, the price of this type of shares will drop

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Industry prospect• The prospect of the industry depends on

its Industrial cycle:1.Early stage2.Growth stage3.Mature stage4.Decline stage

• Usually, when there is new technology/products developed or new lifestyle/trends formed, its related industries will experience high growth rate

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Example – Tencent (stock code 700)

• Background information:• Nature of business: Provision of Internet value-added

services, mobile and telecommunication value-added services and online advertising services in the PRC etc.

• Field of industry: information technology- software & services

• Listing date : 16 June 2004

• Share prices in recent years: • In June 2004: $3.7• In July 2009: $100• In January 2011: $200• In September 2013: $400

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Company performance

• Company performance:– Earnings – Management

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Company performance- Earnings

• Higher earning growth will drive up a stock price

• The stock market is forward looking. That is, stock prices are established based on the expectations that prospective investors have in the future earning power of a company

Company performance- Earnings• The Price-earning ratio (P/E) is usually used

by investors to measure the performance of a company

• It is obtained by dividing the current stock price by the earning per share of a company

• For example, if a stock has a price-earnings ratio of 25, it means that investors are paying $25 for each $1 of earnings

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Company performance- Management

• Competency and quality of Management• Appropriate management strategies can

improve profitability and operating efficiency by:- – Increasing sales– Reducing costs

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Dividend policy

• Dividend policy is the policy used by a company to decide on how much it will pay out to shareholders as dividends

• Companies tend to maintain stable dividend policy

• Stock price may be affected by the unexpected change in dividend policy

Dividend policy

• Dividend payout ratio represents percentage of profit distributed as dividend

• Example: Hang Seng Bank distributed a HK$5.30 dividend per share in 2012 and the earnings per share was HK$10.16 in 2012

• The dividend payout ratio is $5.3/$10.16 X 100% = 52%

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Example: SmarTone (Stock code 315)

• Background information:– Nature of business: Provision of telecommunication

services in Hong Kong – Listing date : 31 Oct 1996

• Smartone used to adopt a high dividend policy by paying 100% of its earnings to shareholders in the form of cash dividends

• On 12 Sept 2013, the management announced to cut its dividend payout ratio from 100% to 60%

• Its share price dropped by about 13% on 12 Sept 2013

Activity 4-Computation of payout ratio and P/E of HSBC

• You are provided with the following information related to HSBC in 2012 (stock code 5):-– HK$3.488 dividend per share – Share price was $82.65– Earnings per share was HK$5.7357

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Activity 4

• Based on the above information: 1) Compute the P/E ratio of HSBC ; and 2) Compute the dividend paidout ratio of HSBC .

Speculation

• A speculator is willing to take high risks in view of making large amount of profits in a short period of time

• A speculator may ride on stock market sentiment to trade stock (bet a stock price trend to continue or reverse) and make stock prices volatile

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Learn more about stock price changes……unpredictable.

• Stock price will change in response to new information

• Since information arrives in a random fashion, stock prices react unpredictably

• There is an equal probability that the next price will move up, down or remain unchanged

• Therefore, from academic point of view, share price cannot be predicted

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Conclusion • The following are factors affecting stock

prices– Interest rates– Industry prospect – Company performance– Dividend policy– Speculation

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The End

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Basics of Personal Financial Management –

Stock Trading as an Investment Lesson 3: Main Board (MB) and

Growth Enterprises Market (GEM)

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How many stock exchange(s) is/are there in Hong Kong?

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Hong Kong Exchanges and Clearing Limited (HKEx)

• Leading global operator of exchanges and clearing houses based in Hong Kong

• One of the world’s largest exchange groups by market capitalisation.

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Source: HKEx’s website

Roles of HKEx

• Frontline regulator of central securities and derivatives

• Ensure orderly and fair securities and derivatives markets

44Source: HKEx’s website

Functions of HKEx • To investors

– Make investment – Gain protection– Receive information

• To listed companies– Raise capital – Gain credibility – Get valuation

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10 stock exchanges with largest market capitalisations at year-end 2011 and 2012

Exchange

2012US $

Billion

2011US $

Billion

Increase % of total market

capitalisation 2012 2011

1 NYSE Euronext (US) 14,086 11,796 19.4% 25.8% 24.9%

2 NASDAQ OMX (US) 4,582 3,845 19.2% 8.4% 8.1%

3 Tokyo Stock Exchange 3,479 3,325 4.6% 6.4% 7.0%

4 London Stock Exchange 3,397 3,266 4.0% 6.2% 6.9%

5 NYSE Euronext (Europe) 2,832 2,447 15.7% 5.2% 5.2%

6 Hong Kong Stock Exchange 2,832 2,258 25.4% 5.2% 4.8%

7 Shanghai Stock Exchange 2,547 2,357 8.1% 4.7% 5.0%

8 TMX Group (Toronto) 2,059 1,912 7.7% 3.8% 4%

9 Deutsche Borse (Germany) 1,486 1,185 25.4% 2.7% 2.5%

10 Australian Securities Exchange 1,387 1,198 15.8% 2.5% 2.5%

46Source: World Federation of Exchange 2012 Market highlights published on 22 January 2013

Two separate boards

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Main Board(MB)

Growth Enterprise

Market (GEM)

HKEx

Operates

Number of listed companies in MB

• At the end of 2012, there was 1,368* companies listed on the MB

48*source: FACT Book 2012 , HKEx

Characteristic of MB• The MB is a market for more established

business with the fulfillment of profits requirement of the Stock Exchange of Hong Kong

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Characteristic of MB• Most outstanding and famous Hong Kong and

Chinese companies’ stocks are traded through the MB

• As required by the MB Listing Rules, financial statements of listed companies are to be published on a half-yearly basis (i.e. two times per year)

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51Source: Fact Book 2012, HKEx

Market Capitalisation of MB from 1986 to 2012

10 leading companies in market capitalisation at 31 Dec 2012 (MB)

Ranking Stock Code

Company Market capitalisation (HK$ million)

1 941 China Mobile Limited 1,814,016.81

2 5 HSBC Holdings PLC 1,501,954.62

3 939 China Construction Bank Corporation – H shares

1,495,395.73

4 883 CNOOC Limited 749,165.01

5 1398 Industrial and Commercial Bank of China Ltd – H shares

477,367.25

6 2888 Standard Chartered PLC 472,557.51

7 700 Tencent Holdings Ltd 461,149.24

8 1299 AIA Group Ltd 364,331.00

9 13 Hutchison Wampoa Limited 344,906,70

10 16 Sun Hung Kai Properties Limited 308,716.5952

Source: Fact Book 2012, HKEx

Number of listed companies in GEM

• At the end of 2012, there was 179* companies listed on the GEM

• Source: Fact Book 2012, HKEx

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Characteristic of GEM• The GEM was established in November 2009• GEM is for growth companies that do not

meet the requirement of profitability or track record for Main Board

• Stocks traded in GEM are considered relatively riskier than Main Board due to its larger volatility in share prices

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Characteristic of GEM• GEM operates on the philosophy of “buyers

beware” and “let the market decide” based on a strong disclosure regime. Therefore, more frequent and timely disclosure is required

• As required by GEM Listing Rule, financial statements of listed companies are to be published on a quarterly basis (i.e. four times per year)

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Characteristic of GEM• In GEM, the future performance of growth

companies is susceptible to great uncertainty. Because of the higher risks involved, GEM is designed for professional and informed investors

56Source: HKEX website

Market capitalisation of GEM from 1986 to 2012

57Source: Fact Book 2012, HKEx

10 leading companies in market capitalisation as at 31 Dec 2012 (GEM) Ranking Stock

CodeCompany Market capitalisation

(HK$ million)

1 8137 Honbridge Holdings Limited 5,283.33

2 8008 Sunevision Holdings Limited 3,692.34

3 8122 Life Tech Scientific Corporation 3,000.00

4 8086 ePRO Limited 2,826.46

5 8035 Binhai Investment Limited 2,636.84

6 8-32 Viva China Holdings Limited 2,210.58

7 8167 Neo Telemedia Limited 1,861.54

8 8292 HC International, Inc. 1,742.69

9 8066 Phoenitron Holdings Limited 1,674.38

10 8090 China Assurance Finance Group Limited 1,651.01

58Source: Fact Book 2012, HKEx

Activities 5 - Invest in MB or GEM?

• Gary is planning to invest his money in stock market in Hong Kong. He does not know whether he should invest his money in the Main Board or Growth Enterprise Market. He does not have any prior experience investing in the stock market. He also does not have much money and prefers less risk. As an investment consultant, advise Gary on his investment choices.

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Activities 5 - Invest in MB or GEM?

• a) Complete the following table :-

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Items MB GEMNo. of listed companies as at 31/12/2012

Market capitalization as at 21/12/2012

Financial reporting Requirement

Types of listed companies

Types of investors

Activities 5 - Invest in MB or GEM?

• b) Which market should Gary invest in? Justify your advice

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Conclusion

• Functions and roles of the HKEx• Differences between the MB and GEM

– Numbers of companies– Characteristic– Market capitalisation

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The End

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Basics of Personal Financial Management – Stock Trading as

an Investment Lesson 4: Listing requirements of

MB and GEM

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Mr. Leung, the sole shareholder of ABC manufacturing company Ltd. , is considering to raise funds to finance the expansion of his business.

Go Public• When a company goes public for funds, its

shares are listed and traded on the stock exchange such as HKEx

• There are two boards in the HKEx for stock trading, namely the Main Board (MB) and the Growth Enterprise Market (GEM)

• Private limited companies are not allowed to sell their shares on the two boards unless they meet certain listing requirements

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Basic listing requirements - MB

• Operating history and management

• Financial requirements

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Operating history and management (MB)

• Must have a trading record period of at least 3 financial years with: – Management continuity for at least the 3

preceding financial years; and – Ownership continuity and control for at least the

most recent audited financial year

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Financial requirements (MB)

• Must satisfy one of the following three tests:– profit test; or– market capitalisation/revenue/cash flow test; or– market capitalisation/revenue test

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201320122011

Not less than HK$30 Million

Net

Pro

fits

Year

Profit test (MB)

Not less

than

HK$20 Million

• Profits of HK$20 million for most recent year and of aggregate of HK$30 million for the first two years

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Market capitalisation/revenue/cash flow test (MB)

• Revenue – At least HK$500 million for the most recent

audited financial year

• Cash flow– Positive cash flow from operating activities of at

least HK$100 million in aggregate for the three preceding financial years

• Minimum market capitalisation– At least HK$2 billion at the time of listing

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Market capitalisation/revenue test (MB)

• Revenue– At least HK$500 million for the most recent

audited financial year

• Minimum market capitalisation– At least HK$4 billion at the time of listing

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Number of newly-listed companies on the MB of HKEx

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Year

Number of New Companies

Source: Fact Book 2012, HKEx

Size of funds raised from newly-listed companies on the MB

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HK$ Billion

Source: Fact Book 2012, HKEx

Basic listing requirements -GEM

• Operating history and management

• Financial requirement

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Operating history and management (GEM)

• Must have a trading record of at least 2 full financial years with:– Substantially the same management throughout

the 2 full financial years; and– A continuity of ownership and control throughout

the full financial year immediately preceding the issue of the listing document

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Financial requirement (GEM)

• Must satisfy the cash flow test

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20132012

Not less than HK$20 Million

Po

siti

ve C

ash

flo

w f

rom

op

erat

ing

ac

tivi

ties

Year

Cash flow test (GEM)

• Cash flow from operating activities must be of at least HK$20,000,000 in aggregate for two financial years

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Number of newly-listed companies on the GEM of HKEx

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Number of New Companies

Year Source: Fact Book 2012, HKEx

Size of funds raised from newly-listed companies on the GEM

HK$ Million

80Year Source: Fact Book 2012, HKEx

Activities 6 - Differences in the Listing Requirements of MB and GEM

• Divide students into groups of four or five to discuss the differences in listing requirements of MB and GEM. Fill in the table on the students worksheet.

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Conclusion

• Fund raising through listing• Listing requirements of MB and GEM

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The End

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