HKEx Strategy From 2006 Onwards

1. 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. Agenda 1. HKEx’s vision and strategies 2. Progress so far 3. Hong Kong’s relative performance 4. HKEx Plan for 2006 5. Challenges ahead

3. Market quality is the key of market growth and sustainability Market Quality An open, secure, fair, orderly, efficient and transparentmarketplace Market liquidity Investor Confidence Order flow

4. Becoming a Mainland Partner Building a quality market Consolidation HKEx’s vision and strategy, 2004-2006 Focus on quality will lead to global success Three-pronged strategy HKEx’s Vision A world-class marketplace for Hong Kong and Mainland China securities

5. Progress so far Market policies and developments must be driven by a slim, dedicated and efficient business entity. Consolidation 2004/2005 highlights • Prudent cost controls • Streamlined project portfolio • Reorganisation and staff consolidation • Staff training and career development • Integrating business operations and policies • Strengthening staff communication HKEx will continue to improve its operations and offer greater values to its customers.

6. 1Q05 2Q05 4Q04 3Q05 3Q04 664 170 99 81 100 83 79 52 657 188 107 98 70 77 59 59 574 183 97 92 34 79 43 48 733 228 108 110 58 82 103 45 570 147 88 72 57 72 90 43 309 157 55 20 3 3 44 5 31 346 288 141 50 20 4 4 41 5 22 376 283 141 49 20 2 3 44 5 19 292 282 142 49 20 2 4 40 5 20 450 282 129 57 20 2 2 47 5 20 288 Progress so far HK$ mn Income Trading fees & trading tariff Stock Exchange listing fees Clearing & settlement fees Depository/custody/nominee fees Income from sale of information Investment income Other income Operating Expenses Staff costs & related expenses IT & computer maintenance expenses Premises expenses Product market & promotion expenses Legal & professional fees Depreciation & amortisation Payment to SFC under dual filing Other operating expenses Operating Profit

7. Progress so far Solid Foundation Leading to Record Profit Since Merger 2005 Q3 2004 2003 2002 2001 2000 (HK$ Million) 1,971 2,394 2,020 1,808 1,998 2,312 Income 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%. Note: rounded to the nearest HK$1 million

8. Progress so far Building a quality market Hong Kong must offer attractive products and world-class market and regulatory infrastructures 2004/2005 highlights New products Market infrastructures Issuer regulation • H-shares Index futures and options • FTSE/Xinhua China 25 Index futures and options • New ETFs • REITS • CBBC (under development) • 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 • 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

9. Unit YTD 30 Nov 2005 Full Year 2004 Full Year 2003 Total fund raised HK$bn 296.9 281.8 213.8 Fund raised by IPOs * HK$bn 171.7 97.2 59.1 Fund raised in secondary market HK$bn 125.2 184.6 154.6 Average daily turnover HK$bn 18.2 16.0 10.4 Average daily no. of derivatives contracts Number 102,789 80,533 59,011 No. of listed companies – equity Number 1,124 1,096 1,037 No. of new listings – equity Number 54 70 73 Main Board Number 45 49 46 GEM Number 9 21 27 Equity and derivatives markets continue to grow Progress so far * Include fund raised by The Link REIT

10. Progress so far Becoming a Mainland Partner Mainland China offers historic opportunity to the securities market in Hong Kong. We now serve Mainland issuers. In longer term, we hope to extend our services to Mainland investors.

11. Mainland Mainland % of % of Total Total enterprises enterprises total total YTM Oct 2005 YTM Oct 2005 Unit Unit Number Number No. of listed issuers No. of listed issuers 1,117 1,117 322 322 29% 29% Number Number No. of new listings No. of new listings – – equity equity 46 46 23 23 50% 50% HK$bn HK$bn Market capitalisation Market capitalisation 7,612 7,612 2,863 2,863 38% 38% HK$bn HK$bn Total fund raised Total fund raised 260.8 260.8 168.5 168.5 65% 65% HK$bn HK$bn Funds raised by IPOs Funds raised by IPOs 137.1 137.1 129.0 129.0 94% 94% HK$bn HK$bn Fund raised in secondary market Fund raised in secondary market 123.7 123.7 39.5 39.5 32% 32% HK$bn HK$bn Average daily turnover Average daily turnover – – equity equity (excluding 14.8 14.8 6.7 6.7 45% 45% warrants) warrants) Progress so far Mainland China enterprises contribute significantly to Hong Kong market

12. Hong Kong’s relative performance Hong Kong’s securities market outperformance reflects the success of its Mainland China dimension Worldranking Securities Market Market capitalisation Funds raised Equity turnover Derivative warrant turnover 9th 4th 16th 1st (9/2005) (9/2005) (9/2005) (10/2005) Derivatives market Turnover 22th (9/2005) HKEx Net income 4th (2004/2005)

13. US$ 982 bn as of 30 Sept 2005 US$ 1,030 bn (HK$ 8 tr) as of 30 Nov 2005 HKEx ranks 9th among global exchanges by market capitalisation Hong Kong’s relative performance US$bn Source: World Federation of Exchanges

14. US$ 351 bn as of YTM Sept 2005 US$ 427 bn (HK$ 3.3 tr) as of YTM Nov 2005 HKEx ranks 16th among global exchanges by equity turnover Hong Kong’s relative performance US$bn Source: World Federation of Exchanges

15. HKEx ranks 4th among global exchanges by equity fund raised Hong Kong’s relative performance US$bn US$ 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

16. 19.3 million contracts as of YTM Sept 2005 23.3 million contracts as of YTM Nov 2005 HKEx ranks 22nd among global exchanges by derivatives contracts traded Hong Kong’s relative performance Mil contracts Source: World Federation of Exchanges

17. Market Capitalisation and Net Income of Listed Exchanges * Market Cap (US$ Mil) Net income (US$ Mil) 12000 1000 900 10076 Market Capitalisation 10000 800 8918 Net Income 700 8000 600 6000 500 400 3881 322 4000 300 2743 219.6 2217 181.2 2000 200 1817 136 2000 111.4 1299 80.3 78.9 63 100 0 0 0 0 Euronext HKEX Deutsche CME LSE TSX SGX ASX Borse HKEx ranks 4th among listed exchanges by net income Hong Kong’s relative performance * 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

26. Thank you www.hkex.com.hk