Basics of Personal Financial Management

1
Basics of Personal Financial Management Stock
Trading as an Investment

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

2
Why trading stocks?

• From Investors Perspective-
• Accumulation of wealth
• Receiving dividend income
• Asset allocation
• From Companys Perspective-
• Raise funds

3
Stocks

• Represent the share of ownership of a company and
  a claim on its assets and earnings
• Holders of stocks are called stockholders

4
Activity 1-Disadvantage of buying stock

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

5
Flow of stock trading and settlement
Order execution
Placing order via phone or internet
Stock brokers (Exchange Participants)
Order confirmation settlement
Custody, clearing settlement
HKEx
Investors
Trade data
Investor Participant A/C (Optional)
HKSCC
6
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

7
The stock settlement system

• Clearing and settlement via Central Clearing And
  Settlement System (CCASS) operated by Hong Kong
  Securities Clearing Company Limited
• Settlement cycle T2 (within 2 working days
  from the trading day)
• Company Account or Investor Participant Account
  (optional)

8
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

9
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)

10
Hang Seng Index from Jan. 1993 to Dec. 2013
4
3
2
1
11
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

12
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

13
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

14
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

15
Example Hong Kong GDP Vs. HSI
GDP 9.8
GDP -2.8
HSI from 1.1. 2006 to 31.12.2009
16
Example Hong Kong GDP Vs. HSI

• Strong economic growth rate
• -The HK GDP growth rate was 9.8 in 2007
• gt Hang Seng Index went up
• Weak economic growth rate
• - The GDP growth rate was -2.8 in 2009
• gt Hang Seng Index went down
• source Hong Kong Annual Digest of Statistics

17
General economic condition

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

18
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

19
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
21
Basics of Personal Financial Management Stock
Trading as an Investment

• Lesson 2 Stock Price (Part II)

22
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

23
Interest rates

• Government intervention affects interest rates

24
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?

25
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

26
Industry prospect

• The prospect of the industry depends on its
  Industrial cycle
• Early stage
• Growth stage
• Mature stage
• Decline stage
• Usually, when there is new technology/products
  developed or new lifestyle/trends formed, its
  related industries will experience high growth
  rate

27
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

29
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

30
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

31
Company performance- Management

• Competency and quality of Management
• Appropriate management strategies can improve
  profitability and operating efficiency by-
• Increasing sales
• Reducing costs

32
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

33
Dividend policy

• Dividend payout ratio represents percentage of
  profit distributed as dividend
• Example Hang Seng Bank distributed a HK5.30
  dividend per share in 2012 and the earnings per
  share was HK10.16 in 2012
• The dividend payout ratio is 5.3/10.16 X 100
  52

34
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

35
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)-
• HK3.488 dividend per share
• Share price was 82.65
• Earnings per share was HK5.7357

36
Activity 4

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

37
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

38
Learn more about stock price changesunpredictabl
e.

• 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

39
Conclusion

• The following are factors affecting stock prices
• Interest rates
• Industry prospect
• Company performance
• Dividend policy
• Speculation

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The End
41
Basics of Personal Financial Management Stock
Trading as an Investment

• Lesson 3 Main Board (MB) and Growth Enterprises
  Market (GEM)

42
How many stock exchange(s) is/are there in Hong
Kong?
43
Hong Kong Exchanges and Clearing Limited (HKEx)

• Leading global operator of exchanges and clearing
  houses based in Hong Kong
• One of the worlds largest exchange groups by
  market capitalisation.

Source HKExs website
44
Roles of HKEx

• Frontline regulator of central securities and
  derivatives
• Ensure orderly and fair securities and
  derivatives markets

Source HKExs website
45
Functions of HKEx

• To investors
• Make investment
• Gain protection
• Receive information
• To listed companies
• Raise capital
• Gain credibility
• Get valuation

46
10 stock exchanges with largest market
capitalisations at year-end 2011 and 2012
Exchange 2012 US Billion 2011 US Billion Increase of total market capitalisation 2012 2011 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
Source World Federation of Exchange 2012 Market
highlights published on 22 January 2013
47
Two separate boards
HKEx
Operates
Main Board (MB)
Growth Enterprise Market (GEM)
48
Number of listed companies in MB

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

source FACT Book 2012 , HKEx
49
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

50
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)

51
Market Capitalisation of MB from 1986 to 2012
Source Fact Book 2012, HKEx
52
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 308,716.59
Source Fact Book 2012, HKEx
53
Number of listed companies in GEM

• At the end of 2012, there was 179 companies
  listed on the GEM
• Source Fact Book 2012, HKEx

54
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

55
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)

56
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

Source HKEX website
57
Market capitalisation of GEM from 1986 to 2012

Source Fact Book 2012, HKEx
58
10 leading companies in market capitalisation as
at 31 Dec 2012 (GEM)
Ranking Stock Code Company 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
Source Fact Book 2012, HKEx
59
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.

60
Activities 5 - Invest in MB or GEM?

• a) Complete the following table -

Items MB GEM
No. 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        
61
Activities 5 - Invest in MB or GEM?

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

62
Conclusion

• Functions and roles of the HKEx
• Differences between the MB and GEM
• Numbers of companies
• Characteristic
• Market capitalisation

63
The End
64
Basics of Personal Financial Management Stock
Trading as an Investment

• Lesson 4 Listing requirements of
• MB and GEM

65
Mr. Leung, the sole shareholder of ABC
manufacturing company Ltd. , is considering to
raise funds to finance the expansion of his
business.
66
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

67
Basic listing requirements - MB

• Operating history and management
• Financial requirements

68
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

69
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

70
Profit test (MB)

• Profits of HK20 million for most recent year and
  of aggregate of HK30 million for the first two
  years

Not less than HK20 Million
Not less than HK30 Million
Net Profits
Year
2013
2012
2011
71
Market capitalisation/revenue/cash flow test (MB)

• Revenue
• At least HK500 million for the most recent
  audited financial year
• Cash flow
• Positive cash flow from operating activities of
  at least HK100 million in aggregate for the
  three preceding financial years
• Minimum market capitalisation
• At least HK2 billion at the time of listing

72
Market capitalisation/revenue test (MB)

• Revenue
• At least HK500 million for the most recent
  audited financial year
• Minimum market capitalisation
• At least HK4 billion at the time of listing

73
Number of newly-listed companies on the MB of HKEx
Number of New Companies
Year
Source Fact Book 2012, HKEx
74
Size of funds raised from newly-listed companies
on the MB
HK Billion
Year
Source Fact Book 2012, HKEx
75
Basic listing requirements -GEM

• Operating history and management
• Financial requirement

76
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

77
Financial requirement (GEM)

• Must satisfy the cash flow test

78
Cash flow test (GEM)

• Cash flow from operating activities must be of at
  least HK20,000,000 in aggregate for two
  financial years

Not less than HK20 Million
Positive Cash flow from operating activities
2012
Year
2013
79
Number of newly-listed companies on the GEM of
HKEx
Number of New Companies
Year
Source Fact Book 2012, HKEx
80
Size of funds raised from newly-listed companies
on the GEM

• HK Million

Year
Source Fact Book 2012, HKEx
81
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.

82
Conclusion

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

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The End