HKEx Strategy From 2006 Onwards

Paul M Y Chow Chief Executive, HKEx

Presentation at the Hong Kong Securities Institute Roundtable Lunch on 1 December 2005

2

1. HKEx’s vision and strategies

2. Progress so far

3. Hong Kong’s relative performance

4. HKEx Plan for 2006

5. Challenges ahead

Agenda

3

Market quality is the key of market growth and sustainability

Market QualityMarket Quality

Investor Confidence

Investor Confidence

Order flowOrder flow

Market liquidity

Market liquidity

An open, secure, fair, orderly, efficient and

transparent marketplace

4

Focus on quality will lead to global success

Building a quality market

Becoming a Mainland Partner

Consolidation

A world-class marketplace for Hong Kong and Mainland China securities

HKEx’s VisionThree-pronged strategy

HKEx’s vision and strategy, 2004-2006

5

Market policies and developments must be driven by a slim, dedicated and efficient business entity.

Progress so far

HKEx will continue to improve its operations and offer greater values to its customers.

Consolidation

• Prudent cost controls

• Streamlined project portfolio

• Reorganisation and staff consolidation

• Staff training and career development

• Integrating business operations and policies

• Strengthening staff communication

2004/2005 highlights

6

IncomeTrading fees & trading tariffStock Exchange listing feesClearing & settlement feesDepository/custody/nominee feesIncome from sale of informationInvestment incomeOther income

Operating ExpensesStaff costs & related expensesIT & computer maintenance expensesPremises expensesProduct market & promotion expensesLegal & professional feesDepreciation & amortisationPayment to SFC under dual filingOther operating expenses

Operating Profit

4Q046571881079870775959

309157552033

445

31

346

3Q04570147887257729043

282129572022

475

20

288

1Q05574183979234794348

283141492023

445

19

292

3Q057332281081105882

10345

282142492024

405

20

450

HK$ mn 2Q056641709981

100837952

288141502044

415

22

376

Progress so far

7

Solid Foundation Leading to Record Profit Since Merger

Note: rounded to the nearest HK$1 million

Progress so far

2005 Q3 2004 2003 2002 2001 2000(HK$ Million)

Income 1,971 2,394 2,020 1,808 1,998 2,312

Operating expenses 853 1,156 1,224 1,165 1,179 1,331

Operating profit 1,118 1,238 796 643 819 981

Share of profits less losses of associates 13 13 9 5 - -

Profit before taxation 1,131 1,251 805 648 819 981

Taxation (171) (194) (112) (59) (85) (98)

Profit attributable to shareholders 960 1,057 693 589 734 883

Cost to income ratio 43% 48% 60% 64% 59% 58%

Return on equity* 24% 26% 12% 11% 14% 18%

* = based on total shareholders' funds at year-end; if no special dividend was paid for the financial year ended 2003, ROE for 2003 would have been slightly over 18%.

8

Hong Kong must offer attractive products and world-class market and regulatory infrastructures

Progress so far

Building a quality market

• H-shares Index futures and options

• FTSE/Xinhua China 25 Index futures and options

• New ETFs

• REITS

• CBBC (under development)

New products

• Revised connected transactions rules and initial listing criteria

• Enhanced regulation of sponsors and IFAs

• Improved Listing enforcement

• Revised Corporate Governance Best Practices

• Review of listing decision-making structure

• Enhanced delisting mechanism

• Review of GEM

• Launch of DCASS and PRiME

• Enhanced IP account services

• Enhanced nominee services

• Consolidation of market system networks

• Reduction in trading spreads (Phase 1)

• Revamp of HKEx website

• HKEx disaster recovery website

• Revamp of Trading Hall

Issuer regulationMarket infrastructures

2004/2005 highlights

9

Full Year 2003

27

46

73

1,037

59,011

10.4

21

49

70

1,096

80,533

16.0

184.6

97.2

281.8

54NumberNo. of new listings – equity

45NumberMain Board

154.6

59.1

213.8

171.7HK$bnFund raised by IPOs *

125.2HK$bnFund raised in secondary market

296.9HK$bnTotal fund raised

1,124NumberNo. of listed companies – equity

Number

Number

HK$bn

Unit

18.2Average daily turnover

102,789Average daily no. of derivatives contracts

9GEM

Full Year 2004

YTD 30 Nov

2005

Equity and derivatives markets continue to grow

Progress so far

* Include fund raised by The Link REIT

10

Mainland companies listed in Hong Kong

38 50 53 6490 101 111 127 152

198242

300 322

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

.10.

%

0

50

100

150

200

250

300

350

400

# of companies# of companies

% of Market Capitalisation

% of Equity Turnover

Mainland China offers historic opportunity to the securities market in Hong Kong.

Progress so far

We now serve Mainland issuers. In longer term, we hope to extend our services to Mainland investors.

Becoming a Mainland Partner

11

Progress so far

Mainland China enterprises contribute significantly to Hong Kong market

65%168.5260.8HK$bnTotal fund raised

45%6.714.8HK$bnAverage daily turnover – equity (excluding

warrants)

123.7

137.1

7,612

46

1,117

Total

39.5

129.0

2,863

23

322

Mainland enterprises

94%HK$bnFunds raised by IPOs

HK$bn

HK$bn

Number

Number

Unit

29%No. of listed issuers

50%No. of new listings – equity

38%Market capitalisation

32%Fund raised in secondary market

% of totalYTM Oct 2005

65%168.5260.8HK$bnTotal fund raised

45%6.714.8HK$bnAverage daily turnover – equity

warrants)

123.7

137.1

7,612

46

1,117

Total

39.5

129.0

2,863

23

322

Mainland enterprises

94%HK$bnFunds raised by IPOs

HK$bn

HK$bn

Number

Number

Unit

29%No. of listed issuers

50%No. of new listings – equity

38%Market capitalisation

32%Fund raised in secondary market

% of totalYTM Oct 2005

12

(2004/2005)4thNet incomeHKEx

(9/2005)22thTurnoverDerivatives market

(9/2005)

(9/2005)

(9/2005)

(10/2005)

9th

4th

16th

1st

Market capitalisation

Funds raised

Equity turnover

Derivative warrant turnover

Securities Market

World ranking

Hong Kong’s relative performance

Hong Kong’s securities market outperformance reflects the success of its Mainland China dimension

13

13,167

3,8543,525

3,0362,607

1,4791,198 1,048 982 881 821 778 775 560 435 292 248 120

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

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HKEx ranks 9th among global exchanges by market capitalisation

US$ 982 bn as of 30 Sept 2005

US$ 1,030 bn (HK$ 8 tr) as of 30 Nov 2005

US$ 982 bn as of 30 Sept 2005

US$ 1,030 bn (HK$ 8 tr) as of 30 Nov 2005

Source: World Federation of Exchanges

US$bn

Hong Kong’s relative performance

14

10,386

7,484

4,171

2,8092,168

1,421 1,192 974 787 737 690 647 510 438 417 351 231 189 122 890

2000

4000

6000

8000

10000

12000

14000

NY

SE

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HKEx ranks 16th among global exchanges by equity turnover

US$ 351 bn as of YTM Sept 2005

US$ 427 bn (HK$ 3.3 tr) as of YTM Nov 2005

US$ 351 bn as of YTM Sept 2005

US$ 427 bn (HK$ 3.3 tr) as of YTM Nov 2005

Source: World Federation of Exchanges

US$bn

Hong Kong’s relative performance

15

89.0

31.8 29.9

24.019.4 18.7 16.9

9.2 8.8 7.7 7.1 6.5 5.4 4.9 4.9 4.8 3.6 3.6

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

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SE

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HK

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HKEx ranks 4th among global exchanges by equity fund raised

US$ 24.0 bn as of YTM Sept 2005

US$ 35.6 bn (HK$ 277 bn) as of YTM Nov 2005

US$ 24.0 bn as of YTM Sept 2005

US$ 35.6 bn (HK$ 277 bn) as of YTM Nov 2005

Source: World Federation of Exchanges

US$bn

Hong Kong’s relative performance

16

1895.5

959.4

603.7

264.0 232.9 203.6169.2

135.9 120.9 87.6 84.5 81.0 80.9 64.8 46.3 35.2 34.8 28.1 26.6 20.0 19.5 19.3 16.00

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

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HKEx ranks 22nd among global exchanges by derivatives contracts traded

19.3 million contracts as of YTM Sept 2005

23.3 million contracts as of YTM Nov 2005

19.3 million contracts as of YTM Sept 2005

23.3 million contracts as of YTM Nov 2005

Source: World Federation of Exchanges

Mil contracts

Hong Kong’s relative performance

17

HKEx ranks 4th among listed exchanges by net income

Hong Kong’s relative performance

0

10076

8918

3881

27432217 2000

12991817

0

322

181.2136

111.480.3 78.9 63

219.6

0

2000

4000

6000

8000

10000

12000

DeutscheBorse

CME Euronext LSE TSX SGX ASX

0

100

200

300

400

500

600

700

800

900

1000

Market Capitalisation

Net Income

HKEX

Market Capitalisation and Net Income of Listed Exchanges *

Market Cap (US$ Mil) Net income (US$ Mil)

* Net income for their latest financial year (information gathered in July 2005). Market capitalisation as at 30 June 2005

18

HKEx Plan for 2006

Securities trading

• New Trading Hall / Exhibition Hall• Reduction of trading spreads (Phase 2)• Launch of CBBC• Review of derivative warrants market• Improving market surveillance

19

HKEx Plan for 2006

Derivatives trading

• Improving position limit regime • Review of market maker model• Exploring the market needs for tailor-made combo • Growing existing products and exploring new products• Improving market surveillance

20

HKEx Plan for 2006

Clearing services

• Enhancing CCASS nominee services

(e.g. electronic voting)• Implementing CCASS fees review• Exploring Third Party Clearing• Improving risk management

21

HKEx Plan for 2006

Market infrastructures

• Consolidation of market system networks (Phase 2: CCASS)

• Capacity upgrade of AMS/3, HKATS and DCASS

• Re-development of derivatives risk management systems

• Improving Issuer information dissemination framework

22

HKEx Plan for 2006

Business Development

• Continue to attract quality issuers for listing

• Conducting more road-shows and training in Mainland China

• Strengthening communication with CSRC, other regulatory bodies, issuers and potential issuers in Mainland China

23

HKEx Plan for 2006

Listing regulation

• Implementing abolition of paid announcements• Revamp of listing decision-making structure• Review of GEM • Enhancing corporate governance• Continue to review IPO vetting process• Automation of Listing MIS and internal process

24

HKEx Plan for 2006

Corporate

• Improving customer services• Empowering management by better Management

Information Systems• Review of remuneration structure and policies• Succession planning• Corporate citizenship

25

Challenges ahead

• Balance between investors protection and market development

• Shareholder empowerment and regulatory enforcement

• System development vs system stability and availability

• Business ethnics and integrity

• Hong Kong’s quality advantage in China dimension

• Growing competition in issuer listing and new products

• Increasing participation of hedge funds

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Thank you

www.hkex.com.hk