Vision Statement We are dedicated to adding value for customers, employees, shareholders and the community through the delivery of total quality finan

Transcription

1 With Haitong International, you can go anywhere! Stock Code:665

2 Vision Statement We are dedicated to adding value for customers, employees, shareholders and the community through the delivery of total quality financial services. Mission Statement We aim to be a global player in the financial services industry, and a leader in the Greater China region. To achieve this, we will always place the interests of our customers first; maintain the trust of our customers through our integrity, quality and professionalism; provide innovative solutions, using advanced technology, without losing sight of our traditional values; and develop a culture which fosters innovation, knowledge, communication and continuous improvement. ;

3 Contents 2 Corporate Information 6 Financial Highlights 7 Corporate Structure 9 Chairman s Statement 12 Managing Director s Review 17 Financial Review 22 Corporate Governance Report 34 Corporate Highlights In the endless sea of wealth opportunities from around the world, we always go on and beyond wholeheartedly to explore the best interest of our clients. Over the past 38 years, we have earned significant trust and confidence from our clients and received numerous accolades for quality service and innovation. Built on our solid foundation and unrivalled reputation, coupled with the strong support from our parent company, we are ready to spearhead towards the global financial arena, where enormous investment opportunities abound. With the rollout of our new brand, Haitong International, we are determined to pursue our ambitious goal of establishing a strong presence in the global financial market and becoming a leader in the Greater China region Board of Directors and Senior Management 77 Report of the Board of Directors 105 Independent Auditor s Report 108 Financial Statements 236 Ten Years Financial Summary Financial Calendar 16 March 2011 Announcement of the audited final results April 2011 by 4:30 p.m. Latest date for registration for entitlement to the final dividend 21 April to 29 April 2011 Book close dates April 2011 Record date for the final dividend May 2011 Payment date for the final dividend /2010 1

4 Corporate Information General Information Executive Directors WONG Shiu Hoi, Peter LI Jianguo LIN Yong LEE Yiu Wing, William CHAN Chi On, Derek POON Mo Yiu, Patrick Deputy Chairman and Managing Director Deputy Chairman Joint Managing Director Non-executive Directors LI Mingshan JI Yuguang WU Bin CHEN Chunqian CHENG Chi Ming, Brian Chairman Independent Non-executive Directors MAN Mo Leung TSUI Hing Chuen, William LAU Wai Piu, Bill Company Secretary LI Tung Wing, Mike Internal Auditor LAU Chi Keung, Sammy Place of Incorporation Incorporated in Bermuda with limited liability Registered Office Clarendon House Church Street, Hamilton HM 11 Bermuda Clarendon House Church Street, Hamilton HM 11 Bermuda Principal Place of Business 25th Floor, New World Tower Queen s Road Central Hong Kong Website Homepage: : 2 Haitong International Securities Group Limited Annual Report 2009/2010

5 Corporate Information External Auditors PricewaterhouseCoopers Legal Adviser in Hong Kong Woo, Kwan, Lee & Lo Legal Adviser on Bermuda Law Conyers Dill & Pearman Conyers Dill & Pearman Principal Share Registrars and Transfer Office HSBC Securities Services (Bermuda) Limited 6 Front Street, Hamilton HM 11 Bermuda HSBC Securities Services (Bermuda) Limited 6 Front Street, Hamilton HM 11 Bermuda Hong Kong Branch Share Registrars and Transfer Office Tricor Investor Services Limited 26th Floor, Tesbury Centre 28 Queen s Road East, Wanchai Hong Kong Principal Bankers Standard Chartered Bank (Hong Kong) Limited The Hongkong and Shanghai Banking Corporation Limited Bank of China (Hong Kong) Limited Hang Seng Bank Limited The Bank of East Asia, Limited China Construction Bank (Asia) Corporation Limited Industrial and Commercial Bank of China (Asia) Limited CITIC Bank International Limited Chong Hing Bank Limited Fubon Bank (Hong Kong) Limited Public Bank (Hong Kong) Limited Oversea-Chinese Banking Corporation Limited Wing Hang Bank, Limited DBS Bank (Hong Kong) Limited Dah Sing Bank, Limited Bank of Communications, Hong Kong Branch 2009/2010 3

6 Corporate Information Board Committees Audit Committee JI Yuguang MAN Mo Leung TSUI Hing Chuen, William LAU Wai Piu, Bill Credit Committee WONG Shiu Hoi, Peter LIN Yong LEE Yiu Wing, William POON Mo Yiu, Patrick HUI Yee, Wilson WU Kwok Leung, Edmond ZHANG Xinjun, Jeff SUN Tong, Tony LO Wai Ho, Kendy CHAN Wai Man, Cilla Executive Committee WONG Shiu Hoi, Peter LIN Yong LEE Yiu Wing, William CHAN Chi On, Derek POON Mo Yiu, Patrick HUI Yee, Wilson LAU Yiu Wai, Joseph YING Tak Sun, Nelson ZHANG Xinjun, Jeff SUN Jianfeng SUN Tong, Tony WU Kwok Leung, Edmond LO Wai Ho, Kendy Remuneration Committee LI Mingshan JI Yuguang MAN Mo Leung TSUI Hing Chuen, William LAU Wai Piu, Bill 4 Haitong International Securities Group Limited Annual Report 2009/2010

7 Corporate Information Strategic Development Committee LI Mingshan WONG Shiu Hoi, Peter JI Yuguang LI Jianguo LIN Yong LEE Yiu Wing, William CHENG Chi Ming, Brian Sub-committees Investment Committee WONG Shiu Hoi, Peter LEE Yiu Wing, William POON Mo Yiu, Patrick ZHANG Xinjun, Jeff LO Wai Ho, Kendy MAK Tak Kwong, Marco IT Steering Committee WONG Shiu Hoi, Peter LEE Yiu Wing, William POON Mo Yiu, Patrick YING Tak Sun, Nelson ZHANG Xinjun, Jeff WU Kwok Leung, Edmond LO Wai Ho, Kendy LO Yam Pui, Eric HUNG Kwok Ming, Adrian Operation Cost Committee LEE Yiu Wing, William POON Mo Yiu, Patrick YING Tak Sun, Nelson ZHANG Xinjun, Jeff WU Kwok Leung, Edmond LO Wai Ho, Kendy WONG Mei Lin, April Fiona HUI Chor Ho, Mixgo HUNG Kwok Ming, Adrian HUNG Chi Shuen, David 2009/2010 5

8 Financial Highlights 18 months ended 31 December months ended 30 June Percentage change increase For the period end Revenue (HK$ 000) 1,459,935 1,084, Net Profit (HK$ 000) 345, , At the period end Shareholders Funds (HK$ 000) 2,170,580 1,925, Total Assets (HK$ 000) 11,412,151 8,904, Number of Shares in Issue 715,032, ,448,228 1 Per share Basic Earnings Per Share (HK Cents) Diluted Earnings Per Share (HK Cents) Dividend Per Share (HK Cents) NAV Per Share (HK$) Share Price High (HK$) Low (HK$) Financial ratios Gearing Ratio Borrowing to Total Assets Borrowing to NAV Return on Total Assets (%) (%) Return on Shareholders Fund (%) (%) Haitong International Securities Group Limited Annual Report 2009/2010

9 Corporate Structure HAITONG INTERNATIONAL SECURITIES GROUP LTD. Major Subsidiaries Asset and Wealth Management Corporate Finance Financial Services Management and Consultancy Services Strategic and Other Investments Hai Tong Asset Management (HK) Ltd. Hai Tong Capital (HK) Ltd. Haitong International Bullion Ltd. Haitong International Information Systems Ltd. it Technology (Shenzhen) Co. Ltd. Haitong International Asset Management Ltd. Haitong International Capital Ltd. Haitong International Finance Co. Ltd. Taifook Investment Consultancy (Guangzhou) Co. Ltd. Prosper Ideal Ltd. Haitong International Consultants Ltd. Haitong International Futures Ltd. Taifook Investment Consultancy (Shanghai) Co. Ltd. Haitong International Immigration Consultants Ltd. Haitong International Investment Services Ltd. Haitong International Management Services Co. Ltd. Haitong International Investment Managers Ltd. Haitong International On-line Services Ltd. Haitong International Wealth Management Ltd. Haitong International Research Ltd. Haitong International Securities Co. Ltd. Haitong International Securities Nominees Ltd. Note: This chart is a simplified corporate structure chart, some intermediate companies are not shown. 2009/2010 7

10 2009/

11 , , , % , /2010

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20 ,740, ,740, ,223, ,246, / ,597, / ,032, , % 15,680,0004,843, () 10,026, ,920 34, % , , Haitong International (BVI) LimitedHaitong BVI Haitong BVI () 20,105, /

21 /2010

22 /

23 * # * 1 1/2 2 2/5 0/2 0/1 3 2/2 4 5/5 1/1 5 7/7 6/6 1/1 6/6 36/36 1/1 6 5/5 1/3 10/18 1/1 7/7 6/6 1/1 6/6 32/36 1/1 6/7 29/36 7/7 1/1 6/6 35/36 7 2/2 6/6 1/1 1/1 7 2/2 6/6 1/1 1/1 8 2/2 9 2/2 1/1 10 5/5 2/2 2/2 1/1 11 3/5 11 5/5 12 7/7 1/1 5/7 3/3 3/3 7/7 3/3 3/3 5/7 3/3 2/3 5/6 29/36 30/36 32/ /3 8/ / /0 4/5 5/6 33/36 6/6 35/ /11 6/6 17 1/1 89% 100% 100% 100% 92% 88% 80% 86% * # /2010

24 /

25 ( ): /2010

26 /

27 * 9 100% 17 98% * * ISO 25%1.2 25% /2010

28 30,000,000 30,000,000 60,000,000 10,000,000 20,000,000 30,000, , ,000 1,000, ,940 4, / /

29 /2010

30 2009/

31 /

32 / QFII QDII

33 / StarMine (CPT) (CIB)(CPD) ,308 12, % 164.4% % 243.8% 38 10

34 / (CUAAFA) QDII 17

35 / ACCA ACCA ISO ISO9001:2008 ISO27001:2005 CMMI

36 University of Guelph /

37 /2010

38 University College London Vision Values Holdings Limited Vision Values Holdings Limited /

39 Columbia Southern University University of Western Sydney 20 43Heriot- Watt University /2010

40 , /

41 ,717,000 57,203, ,472, % 5% /2010

42 /

43 XV 8,200, ,069, ,269, , , , , ,152, ,152, /2010

44 879, ,052, ,931, ,198, ,198, , , , , , , , , , , , , , , , , (i)2,071, (ii)1,998, /

45 (i)1,553, (ii)1,598, (i)1,553, (ii)1,498, XV /2010

46 % % 10% % 20021,687, % % % /

47 (i) (ii)5 (iii) * *** ** 2,073,242 (1,626) 1 2,071, ,000,000 (1,757) 2 1,998, ,000 (703) 2 799, ,000 (703) 2 799, ,554,931 (1,220) 1 1,553, ,600,000 (1,405) 2 1,598, ,554,931 (1,220) 1 1,553, ,500,000 (1,318) 2 1,498, ,200,000 (1,054) 2 1,198, ,000 (703) 2 799, ,000 (439) 2 499, ,000 (439) 2 499, /2010

48 * *** ** 500,000 (439) 2 499, ,000 (439) 2 499, ,000 (439) 2 499, ,000 (439) 2 499, ,000 (439) 2 499, ,183,104 12,200,000 (14,782) 17,368,322 21,509,884 (13,057) 1 (1,740,225) (2,980,071) 3 16,776, ,280,000 (18,165) 2 (600,000) 4 20,661, ,509,884 21,280,000 (31,222) (1,740,225) (3,580,071) 37,438,366 26,692,988 33,480,000 (46,004) (1,740,225) (3,580,071) 54,806,688 * 6 ** *** 2009/

49 (1) (2) (3) (4) ,726, ,791, % 8.5 (%) 5.61% (%) % /2010

50 (1) 433,249, ,249, ,249, ,249, Cheng Yu Tung Family (Holdings) Limited CYTF (2) 64,213,732 64,213, Centennial Success Limited CSL (2) 64,213,732 64,213, (2) 64,213,732 64,213, (2) 64,213,732 64,213, (2) 64,213,732 64,213, NWSSM (Cayman) (2) 64,213,732 64,213, /

51 NWS Service Management Limited NWSSM (BVI) (2) 64,213,732 64,213, NWS Financial Management Services LimitedNWSFM 64,213,732 64,213, (1) (2) CYTFCSL 51%CSL40.25% 59.16%NWSSM (Cayman) NWSSM (BVI)NWSSM (BVI)NWSFMCYTF CSL NWSSM (Cayman) NWSSM (BVI)NWSFM /2010

52 (i) 3 (ii) (iii) (iv) (v) (vi) (i)(ii) /

53 35 35(i) (ii)(iii) A % /2010

54 /

55 Consolidated Income Statement For the 18 months ended 31 December For the 18 months ended 31 December For the 18 months ended 30 June Note HK$ 000 HK$ 000 Revenue 5 1,459,935 1,084,604 Other income 5 55,018 66,369 1,514,953 1,150,973 Employee benefits costs: Salaries and allowances, bonuses 6 and pension scheme contributions (439,213) (349,099) Commission to accounts executives 6 (252,410) (223,347) Depreciation 13 (49,370) (42,295) Other operating expenses (339,962) (274,641) Gain/(loss) on re-measurement of assets/liabilities classified as held for sale 2,023 (24,132) (1,078,932) (913,514) Finance costs 6 (39,194) (35,401) Operating profit 396, ,058 Share of profit of an associate 18 1,718 6,324 Profit before taxation 6 398, ,382 Taxation expenses 9 (53,386) (20,054) Profit for the period 345, ,328 Attributable to: Equity holders of the Company , ,974 Non-controlling interests (636) (646) 345, ,328 Dividends 11 First interim dividend 70,896 34,818 Second interim dividend 42,538 Final dividend paid in respect of the previous year 388 Proposed final dividend 57,203 56, ,637 91,722 Earnings per share attributable to equity holders of the Company Basic HK48.80cents Diluted HK48.68cents HK27.61cents HK27.59cents The notes on pages 117 to 235 form an integral part of this consolidated financial information Haitong International Securities Group Limited Annual Report 2009/2010

56 Consolidated Statement of Comprehensive Income For the 18 months ended 31 December For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 Profit for the period 345, ,328 Changes in fair value of available-for-sale investments Impairment loss of available-for-sale investments charged to income statement 5,731 (58,584) 5,922 Other comprehensive income for the period 5,731 (52,662) Total comprehensive income for the period 350, ,666 Attributable to: Equity holders of the Company 351, ,312 Non-controlling interests (636) (646) 350, ,666 The notes on pages 117 to 235 form an integral part of this consolidated financial information /

57 Consolidated Balance Sheet As at 31 December December June Note HK$ 000 HK$ 000 ASSETS Non-current assets Fixed assets , ,036 Goodwill 14 9,854 9,854 Other intangible assets 15 6,609 4,609 Other assets 16 43,513 7,025 Interest in an associate 18 9,119 Available-for-sale investments 19 32,018 33,075 Deferred tax assets 28 2,343 10, , ,316 Current assets Advances to customers 20 4,375,589 1,726,668 Accounts receivable ,946 2,745,969 Prepayments, deposits and other receivables ,600 40,510 Tax prepaid 21,725 29,019 Assets classified as held for sale 80,374 Financial investments at fair value through profit or loss 23 92,251 22,628 Cash held on behalf of customers 24 5,158,603 3,661,886 Cash and bank balances 417, ,790 11,166,394 8,710,844 Total assets 11,412,151 8,904,160 EQUITY AND LIABILITIES Equity attributable to equity holders of the Company Issued capital 29 (71,503) (70,645) Reserves 31 (2,041,874) (1,798,303) Proposed final dividend 11 (57,203) (56,516) (2,170,580) (1,925,464) Non-controlling interests (6,758) (5,394) Total equity (2,177,338) (1,930,858) 110 Haitong International Securities Group Limited Annual Report 2009/2010

58 Consolidated Balance Sheet As at 31 December December June Note HK$ 000 HK$ 000 Liabilities Non-current liabilities Deferred tax liabilities 28 (19,832) (14,207) (19,832) (14,207) Current liabilities Accounts payable 24,25 (6,052,493) (4,694,069) Tax payable (51,429) (18,082) Other payables and accruals 26 (136,792) (52,933) Liabilities classified as held for sale (9,774) Loans and other borrowings 27 (2,974,267) (2,184,237) (9,214,981) (6,959,095) Total liabilities (9,234,813) (6,973,302) Total equity and liabilities (11,412,151) (8,904,160) Net current assets 1,951,413 1,751,749 Total assets less current liabilities 2,197,170 1,945,065 WONG Shiu Hoi, Peter Director LEE Yiu Wing, William Director The notes on pages 117 to 235 form an integral part of this consolidated financial information /

59 Balance Sheet As at 31 December December June Note HK$ 000 HK$ 000 ASSETS Non-current assets Fixed assets 13 15,120 16,769 Investment in subsidiaries , , , ,146 Current assets Amount due from subsidiaries 17 3,176,448 1,784,687 Prepayments, deposits and other receivables 22 5,994 2,985 Cash and bank balances 8,969 3,916 3,191,411 1,791,588 Total assets 3,311,908 1,913,734 EQUITY AND LIABILITIES Equity attributable to equity holders of the Company Issued capital 29 (71,503) (70,645) Reserves 31 (991,459) (922,766) Proposed final dividend 11 (57,203) (56,516) Total equity (1,120,165) (1,049,927) Current liabilities Amounts due to subsidiaries 17 (756,097) (804,009) Tax payable (6,590) (52) Other payables and accruals 26 (39,681) (12,246) Loans and other borrowings 27 (1,389,375) (47,500) Total liabilities (2,191,743) (863,807) Total equity and liabilities (3,311,908) (1,913,734) Net current assets 999, ,781 Total assets less current liabilities 1,120,165 1,049,927 WONG Shiu Hoi, Peter Director LEE Yiu Wing, William Director The notes on pages 117 to 235 form an integral part of this consolidated financial information Haitong International Securities Group Limited Annual Report 2009/2010

60 Consolidated Statement of Changes in Equity For the 18 months ended 31 December Issued capital Share premium account Share option reserve Capital redemption reserve Attributable to equity holders of the Company Contributed surplus Capital reserve Investment revaluation reserve Exchange reserve Proposed cash/scrip dividend Retained profits Total Noncontrolling interests HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (note 30) (note 31) (note 31) Total equity At 1 July , ,677 14,484 5, ,501 12,120 (30) 56, ,428 1,925,464 5,394 1,930,858 Profit for the period 345, ,795 (636) 345,159 Other comprehensive income for the period Changes in fair value of available-for-sale investments 5,731 5,731 5,731 Total comprehensive income 5, , ,526 (636) 350,890 Incorporation of a new subsidiary 2,000 2, final dividend declared and 2009 settled in shares and cash 124 5,599 (56,516) (50,793) (50,793) 2010 first and second interim dividend declared and settled in shares and cash ,243 (113,434) (78,631) (78,631) New share options granted to employees note ,791 12,791 12,791 Issue of new shares share option scheme note ,337 (1,288) 10,223 10,223 Share options lapsed 1,616 (1,616) Proposed 2010 final dividend note ,203 (57,203) At 31 December , , , , , ,851 1 (30) 1 57,203 1,001, ,170,580 6,758 2,177,338 1 These reserve accounts comprise the consolidated reserves of HK$2,041,874,000 (30 June 2009: HK$1,798,303,000) in the consolidated balance sheet. 1 2,041,874, ,798,303,000 The notes on pages 117 to 235 form an integral part of this consolidated financial information /

61 Consolidated Statement of Changes in Equity For the 18 months ended 31 December Issued capital Share premium account Share option reserve Capital redemption reserve Attributable to equity holders of the Company Contributed surplus Capital reserve Investment revaluation reserve Exchange reserve Proposed cash/scrip dividend Retained profits Total Noncontrolling interests HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (note 30) (note 31) (note 31) Total equity At 1 January , ,078 2,903 3,705 1,418 45,501 64,782 (30) 163, ,176 1,856,490 8,660 1,865,150 Profit for the period 188, ,974 (646) 188,328 Other comprehensive income for the period Changes in fair value of available-for-sale investments (58,584) (58,584) (58,584) Impairment loss of availablefor-sale investments charge to consolidated income statement 5,922 5,922 5,922 Total comprehensive income (52,662) 188, ,312 (646) 135,666 Dividends paid to non-controlling interests (2,620) (2,620) 2007 final and 2008 interim dividend declared and settled in shares and cash , ,476 (163,562) (35,206) (69,835) (69,835) New share options granted to employees note ,425 13,425 13,425 Issue of new shares share option scheme note ,688 1,878 1,878 Share options lapsed 1,844 (1,844) Purchase of shares (1,397) (11,409) 1,397 (1,397) (12,806) (12,806) Proposed 2009 final dividend ,516 (56,516) At 30 June , , , , , ,120 1 (30) 1 56, , ,925,464 5,394 1,930,858 The notes on pages 117 to 235 form an integral part of this consolidated financial information Haitong International Securities Group Limited Annual Report 2009/2010

62 Consolidated Statement of Cash Flows For the 18 months ended 31 December For the 18 months ended 31 December For the 18 months ended 30 June Note HK$ 000 HK$ 000 Cash flows from operating activities Profit before taxation 398, ,382 Adjustments for: Gain on disposal of an associate (4,843) Share of profit of an associate (1,718) (6,324) Interest income 5 (326,754) (245,728) Finance costs 6 39,194 35,401 Dividend income from listed investments 5 (2,564) (3,784) Loss on disposal of fixed assets Depreciation 13 49,370 42,295 Gain on disposal of available-for-sale investments, net 5 (11,267) Impairment loss on available-for-sale investments 5 5,922 (Gain)/Loss on re-measurement of assets/ liabilities classified as held for sale (2,023) 24,132 Equity-settled share option expense 12,791 13,425 Gain on disposal of assets/liabilities classified as held for sale 5 (2,950) (Increase)/decrease in advances to customers (2,648,921) 1,089,588 Decrease/(Increase) in accounts receivable 1,799,560 (2,071,329) (Increase)/decrease in prepayments, deposits and other receivables (73,820) 6,530 (Increase)/decrease in financial investments at fair value through profit or loss (69,623) 111,657 Increase in cash held on behalf of customers (1,496,717) (299,989) Increase in accounts payable 1,356, ,736 Increase/(decrease) in other payables and accruals 81,006 (96,418) Increase in loans and other borrowings (excluding bank overdraft) 807, ,740 Interest received 308, ,695 Finance costs paid (39,194) (35,401) Tax paid, net (219) (103,996) Dividends received from listed investments 2,564 3,784 Net cash inflow from operating activities 175, ,802 The notes on pages 117 to 235 form an integral part of this consolidated financial information /

63 Consolidated Statement of Cash Flows For the 18 months ended 31 December For the 18 months ended 31 December For the 18 months ended 30 June Note HK$ 000 HK$ 000 Net cash inflow from operating activities 175, ,802 Cash flows from investing activities Purchases of items of fixed assets 13 (80,228) (84,809) Proceeds from disposal of fixed assets Acquisition of subsidiaries 32 (369) Investment in other intangible assets 15 (2,000) (Increase)/decrease in other assets (36,488) 4,304 Dividend from an associate/ a jointly-controlled entity 450 Proceeds from disposal of available-for-sale investments 18,054 Proceeds from disposal of assets/liabilities classified as held for sale 59,157 9,769 Proceeds from disposal of an associate 18 15,680 Net cash outflow from investing activities (26,143) (69,838) Cash flows from financing activities Proceeds from issue of shares Proceeds from share options exercised 30 10,049 1,668 Contribution from non-controlling interests 2,000 Repurchase and cancellation of shares (12,806) Dividends paid to shareholders (129,424) (69,835) Dividends paid to non-controlling interests (2,620) Net cash outflow from financing activities (117,201) (83,383) Net increase/(decrease) in cash and cash equivalents 31,735 (50,419) Cash and cash equivalents at beginning of period 372, ,472 Cash and cash equivalents at end of period 403, ,053 Analysis of balances of cash and cash equivalents Cash and bank balances 417, ,790 Bank overdrafts 27 (13,892) (31,737) 403, ,053 The notes on pages 117 to 235 form an integral part of this consolidated financial information Haitong International Securities Group Limited Annual Report 2009/2010

64 1 Corporate information 1 Haitong International Securities Group Limited (formerly known as Taifook Securities Group Limited) is a limited liability company incorporated in Bermuda. The principal place of business of the Company is located at 25th Floor, New World Tower, Queen s Road Central, Hong Kong During the 18 months ended 31 December 2010, the Group was involved in the following principal activities: securities, futures and options contracts broking and trading the provision of margin and other financing the provision of corporate advisory, placing and underwriting services bullion contracts dealing and trading leveraged foreign exchange trading the provision of nominee and custodian services the provision of fund management the provision of financial planning and advisory services proprietary securities trading Change of financial year end date In prior period, the financial year end date of the Company and its subsidiaries apart from Haitong International Securities Company Limited (formerly known as Taifook Securities Company Limited) (collectively, the Group ) has been changed from 31 December to 30 June to conform with the financial year end date of its prior holding companies, NWS Holdings Limited and New World Development Company Limited. The prior financial period therefore covered a 18-month period from 1 January 2008 to 30 June During the period, NWS Holdings Limited disposed of its controlling interest to Haitong International Holdings Limited (formerly known as Hai Tong (HK) Financial Holdings Limited). As a result, to conform with the financial year end date of its holding companies, Haitong International Holdings Limited and Haitong Securities Co., Ltd., the financial year end date of the Company and its subsidiaries apart from Haitong International Securities Company Limited has been changed from 30 June to 31 December Accordingly, the current financial period covered a 18-month period from 1 July 2009 to 31 December 2010 and the comparatives also covered a 18-month period from 1 January 2008 to 30 June /

65 2 Summary of significant accounting policies 2 The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of Haitong International Securities Group Limited have been prepared in accordance with Hong Kong Financial Reporting Standards (HKFRS). They have been prepared under the historical cost convention, as modified by available-for-sale investments, financial investments at fair value through profit or loss and assets/liabilities classified as held for sale. 2.1 The preparation of financial statements in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3. 3 (a) Standards, amendments and interpretations effective for the period and relevant to the Group s operation HKFRS 7 Financial Instruments Disclosures (amendment). The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures, there is no impact on earnings per share. (a) Haitong International Securities Group Limited Annual Report 2009/2010

66 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (a) Standards, amendments and interpretations effective for the period and relevant to the Group s operation (Continued) HKAS 1 (revised), Presentation of financial statements. The revised standard prohibits the presentation of items of income and expenses (that is, non-owner changes in equity ) in the statement of changes in equity, requiring non-owner changes in equity to be presented separately from owner changes in equity in a statement of comprehensive income. As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share. 2.1 (a) 1 HKFRS 2 (amendment), Share-based payment. The amendment deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or valuation there of subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group has adopted this amendment to HKFRS 2 in relation to the share options granted to the employees in current 18-month period /

67 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (a) Standards, amendments and interpretations effective for the period and relevant to the Group s operation (Continued) HKFRS 8, Operating Segments. HKFRS 8 replaces HKAS 14, Segment Reporting. The new standard requires a management approach, under which segment information is presented on the same basis as that used for internal reporting purposes. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Executive Committee that makes strategic decisions. 2.1 (a) Amendment to HKFRS 8 Operating segments, effective for periods beginning on or after 1 January Disclosure of information about total assets and liabilities for each reportable segment is required only if such amounts are regularly provided to the chief operating decision maker. Early adoption is allowed. The Group has early adopted this amendment to HKFRS 8 for the period beginning 1 July Haitong International Securities Group Limited Annual Report 2009/2010

68 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (a) Standards, amendments and interpretations effective for the period and relevant to the Group s operation (Continued) HKFRS 3 (revised), Business combinations, and consequential amendments to HKAS 27, Consolidated and separate financial statements, HKAS 28, Investments in associates, and HKAS 31, Interests in joint ventures, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July (a) The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with HKFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. All acquisition-related costs are expensed. The revised standard does not result in a material impact on the Group s financial statements as the acquisitions in the current 18-month period do not involve any contingent payments and the Group acquired 100% interest in the acquirees. Note 32 to the consolidated financial statements includes further details on the Group s acquisitions of subsidiaries during the current 18-month period /

69 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (a) Standards, amendments and interpretations effective for the period and relevant to the Group s operation (Continued) As the Group has adopted HKFRS 3 (revised), it is required to adopt HKAS 27 (revised), consolidated and separate financial statements, at the same time. HKAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. HKAS 27 (revised) has had no impact on the Group s financial statement in the current 18-month period. 2.1 (a) HK(IFRIC) 13, Customer Loyalty Programmes. HK(IFRIC) Int 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple element arrangement, and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. HK(IFRIC) Int 13 is relevant to the Group s operation as the Group s companies operate some of the loyalty programmes Haitong International Securities Group Limited Annual Report 2009/2010

70 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (b) Standards, amendments and interpretations effective for the period but not relevant to the Group s operation HKAS 23 (amendment), Borrowing costs HK(IFRIC) Int 17, Distribution of non-cash assets to owners HK(IFRIC) Int 18, Transfer of assets from customers HK(IFRIC) Int 9, Reassessment of embedded derivatives and related amendments to HKAS 39, Financial instruments: Recognition and measurement HK(IFRIC) Int 16, Hedges of a net investment in foreign operation HKAS 38 (amendment), Intangible assets 2.1 (b) (c) Standards, amendments and interpretations that are not yet effective and have not been early adopted by the Group HKFRS 5 (amendment), Measurement of noncurrent assets (or disposal groups) classified as held for sale, effective for the periods beginning on or after 1 January The amendment is part of the HKICPA s annual improvements project published in May The amendment provides clarification that HKFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirement of HKAS 1 still apply, particularly paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of HKAS 1. The Group will apply HKFRS 5 (amendment) from 1 January It is not expected to have a material impact on the Group s financial statements. (c) /

71 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (c) Standards, amendments and interpretations that are not yet effective and have not been early adopted by the Group (Continued) HKAS 1 (amendment), Presentation of financial statements, effective for the periods beginning on or after 1 January The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. The Group will apply HKAS 1 (amendment) from 1 January 2011 but it is not expected to result any impact to the Group s financial statements as the Group has not issued convertible instruments. 2.1 (c) HKAS 36 (amendment), Impairment of assets, effective for the periods beginning on or after 1 January The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by HKFRS 8. The Group will apply HKAS 36 (amendment) from 1 January Haitong International Securities Group Limited Annual Report 2009/2010

72 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (c) Standards, amendments and interpretations that are not yet effective and have not been early adopted by the Group (Continued) HKFRS 9, Financial instruments, issued in November This standard is the first step in the process to replace HKAS 39, Financial instruments: recognition and measurement. HKFRS 9 introduces new requirements for classifying and measuring financial assets. Key features are as follows: 2.1 (c) Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and the asset s contractual cash flows represent only payments of principal and interest (that is, it has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss. 2009/

73 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (c) Standards, amendments and interpretations that are not yet effective and have not been early adopted by the Group (Continued) All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity instruments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit and loss. There is to be no recycling of fair value gains and losses to profit and loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit and loss, as long as they represent a return on investment. 2.1 (c) While adoption of HKFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted The Group is considering the implications of the standard, the impact on the Group and the timing of its adoption by the Group. HKAS 24 (Revised), Related party disclosures (issued in November 2009). It supersedes HKAS 24, Related party disclosures, issued in HKAS 24 (revised) is mandatory for periods beginning on or after 1 January Earlier application, in whole or in part, is permitted Haitong International Securities Group Limited Annual Report 2009/2010

74 2 Summary of significant accounting policies (continued) Basis of preparation (Continued) (c) Standards, amendments and interpretations that are not yet effective and have not been early adopted by the Group (Continued) The revised standard clarifies and simplifies the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities. The Group will apply the revised standard from 1 January When the revised standard is applied, the Group and the parent will need to disclose any transactions between its subsidiaries and its associates. The adoption of this standard will not have material impact to the Group s financial statements. 2.1 (c) There are also a number of standards, amendments and interpretation which are not yet effective and not yet early adopted by the Group. These standards, amendments and interpretations issued are unlikely to have a material impact on the Group s financial statements and are not disclosed in detail. Third improvements to Hong Kong Financial Reporting Standards (2010) were issued in May 2010 by the Hong Kong Institute of Certified Public Accountants. All improvements are effective in the financial period beginning from 1 January No material changes to accounting policies are expected as a result of these amendments /

75 2 Summary of significant accounting policies (continued) Basis of consolidation (a) Subsidiaries The consolidated financial statements include the financial statement of the Company and all its subsidiaries made up to the 31 December (a) Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisitionby-acquisition basis, the Group recognises any noncontrolling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividend and receivable. 128 Haitong International Securities Group Limited Annual Report 2009/2010

76 2 Summary of significant accounting policies (continued) Basis of consolidation (Continued) (a) Subsidiaries (Continued) The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income. 2.2 (a) Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Transactions with non-controlling interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. (b) When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. 2009/

77 2 Summary of significant accounting policies (continued) Basis of consolidation (Continued) (b) Transactions with non-controlling interests (Continued) If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. 2.2 (b) (c) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. (c) 20% 50% The Group s share of its associates post-acquisition profits or losses is recognised in the consolidated income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting polices of associates have been changed where necessary to ensure consistency with the polices adopted by the Group. 130 Haitong International Securities Group Limited Annual Report 2009/2010

78 2 Summary of significant accounting policies (continued) Basis of consolidation (Continued) (c) Associates (Continued) Dilution gains and losses arising in investments in associates are recognised in the consolidated income statement. 2.2 (c) In the Company s balance sheet the investments in associated companies are stated at cost less provision for impairment losses. The results of associated companies are accounted for by the Company on the basis of dividend received and receivable. (d) Goodwill Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of the business combination over the Group s interest in the net fair value of the acquirees identifiable assets acquired, and liabilities and contingent liabilities assumed as at the date of acquisition. (d) Goodwill on acquisitions for which the agreement date is on or after 1 January 2005 Goodwill arising on acquisition is recognised in the balance sheet as an asset, initially measured at cost and subsequently at cost less any accumulated impairment losses The carrying amount of goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cashgenerating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. 2009/

79 2 Summary of significant accounting policies (continued) Basis of consolidation (Continued) (d) Goodwill (Continued) Goodwill on acquisitions for which the agreement date is on or after 1 January 2005 (Continued) Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cashgenerating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period. 2.2 (d) Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Goodwill previously eliminated against consolidated reserves Prior to the adoption of the HKICPA s Statement of Standard Accounting Practice 30 Business Combinations ( SSAP 30 ) in 2001, goodwill arising on acquisition was eliminated against consolidated reserve in the year of acquisition. On the adoption of HKFRS 3, such goodwill remains eliminated against consolidated reserve and is not recognised in the income statement when all or part of the business to which the goodwill relates is disposed of or when a cash-generating unit to which the goodwill relates becomes impaired Haitong International Securities Group Limited Annual Report 2009/2010

80 2 Summary of significant accounting policies (continued) Impairment of non-financial assets other than goodwill Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than deferred tax assets, financial assets and goodwill), the asset s recoverable amount is estimated. An asset s recoverable amount is as the higher of the asset s or cash-generating unit s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case; the recoverable amount is determined for the cash-generating unit to which the asset belongs. 2.3 An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation), had no impairment loss been recognised for the asset in prior years. A reversal of such impairment loss is credited to the income statement in the period in which it arises. 2009/

81 2 Summary of significant accounting policies (continued) Related parties A party is considered to be related to the Group if: 2.4 (i) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group; (i) (i) (ii) (iii) (ii) the party is an associate; (ii) (iii) the party is a jointly-controlled entity; (iii) (iv) the party is a member of the key management personnel of the Group or its parent; (iv) (v) the party is a close member of the family of any individual referred to in (i) or (iv); (v) (i) (iv) (vi) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (iv) or (v); or (vi) (iv) (v) (iv) (v) (vii) the party is a post-employment benefit plan for the benefit of the employees of the Group, or of any entity that is a related party of the Group. (vii) 134 Haitong International Securities Group Limited Annual Report 2009/2010

82 2 Summary of significant accounting policies (continued) Fixed assets (a) Property, plant and equipment and depreciation Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. 2.5 (a) In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement. Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows: Leasehold land and buildings Leasehold improvements 20% Furniture, fixtures and 20% equipment Computer hardware 30% Over the shorter of the lease terms and 2.5% 20% 20% 30% 2.5% Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date. 2009/

83 2 Summary of significant accounting policies (continued) Fixed assets (continued) (a) Property, plant and equipment and depreciation (continued) An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset. 2.5 (a) (b) Computer software and system development Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognised as intangible assets when the following criteria are met: (b) (i) it is technically feasible to complete the software product so that it will be available for use; (i) (ii) management intends to complete the software product and use or sell it; (ii) (iii) there is an ability to use or sell the software product; (iii) (iv) it can be demonstrated how the software product will generate probable future economic benefits; (iv) (v) adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and (v) (vi) the expenditure attributable to the software product during its development can be reliably measured. (vi) Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads. 136 Haitong International Securities Group Limited Annual Report 2009/2010

84 2 Summary of significant accounting policies (continued) Fixed assets (continued) (b) Computer software and system development (continued) Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. 2.5 (b) Computer software development costs recognised as assets are amortised over their estimated useful lives, from three to five years. 2.6 Intangible assets (other than goodwill and computer software and system development) The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each balance sheet date. 2.6 The Group s intangible assets, representing eligibility rights to trade on or through the Stock Exchange and the Futures Exchange, with indefinite useful lives are tested for impairment annually either individually or at the cashgenerating unit level. Such intangible assets are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset are recognised in the income statement when the asset is derecognised. 2009/

85 2 Summary of significant accounting policies (continued) Other assets Other assets held on a long term basis are stated at amortised cost using the effective interest method Leases Leases where substantially all the rewards and risks of ownership of assets remain with the lessors are accounted for as operating leases. Rentals payable under the operating leases are charged to the income statement on the straightline basis over the lease terms. 2.8 Prepaid land lease payments under operating leases are initially stated at cost and subsequently recognised on the straight-line basis over the lease terms. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment. 2.9 Investments and other financial assets Financial assets in the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs The Group assesses whether a contract contains an embedded derivative when the Group first becomes a party to it and assesses whether an embedded derivatives is required to be separated from the host contract when the analysis shows that the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required under the contract. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date. 138 Haitong International Securities Group Limited Annual Report 2009/2010

86 2 Summary of significant accounting policies (continued) Investments and other financial assets (continued) All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. 2.9 (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Gains or losses on investments held for trading are recognised in the income statement. The net fair value or loss recognised in the income statement does not include any dividends on these financial assets, which are recognised in accordance with the policy set out for Revenue recognition below. (i) (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are subsequently carried at amortised cost using the effective interest method less any allowance for impairment. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. (ii) 2009/

87 2 Summary of significant accounting policies (continued) Investments and other financial assets (continued) (iii) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets in listed and unlisted equity securities that are designated as available for sale or are not classified in any of the other two categories. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement. Interest and dividends earned are reported as interest income and dividend income, respectively and are recognised in the income statement as Other income in accordance with the policies set out for Revenue recognition below. Losses arising from the impairment of such investments are recognised in the income statement as Impairment losses on availablefor-sale financial assets and are transferred from the available-for-sale investment revaluation reserve. 2.9 (iii) (iv) Fair value The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business at the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm s length market transactions; reference to the current market value of another instrument which is substantially the same and a discounted cash flow analysis. (iv) 140 Haitong International Securities Group Limited Annual Report 2009/2010

88 2 Summary of significant accounting policies (continued) Impairment of financial assets The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired (i) Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in the income statement. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery. (i) If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. In relation to advances to customers and accounts receivable, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor and significant changes in the technological, market economic or legal environment that have an adverse effect on the debtor) that the Group will not be able to collect all of the amounts due under the original terms of an invoice. The carrying amount of the receivables is reduced through the use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible. 2009/

89 2 Summary of significant accounting policies (continued) Impairment of financial assets (continued) (ii) Available-for-sale financial assets If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is transferred from equity to the income statement. A provision for impairment is made for available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires judgement. In addition, the Group evaluates other factors, such as the share price volatility. Impairment losses on equity instruments classified as available for sale are not reversed through the income statement (ii) 2.11 Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: 2.11 the rights to receive cash flows from the asset have expired; the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a passthrough arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. (a) (b) 142 Haitong International Securities Group Limited Annual Report 2009/2010

90 2 Summary of significant accounting policies (continued) Financial liabilities at amortised cost (including interest-bearing loans and borrowings) Financial liabilities including accounts payable, other payables and accruals and loans and other borrowings are initially stated at fair value less directly attributable transaction costs and are subsequently measured at amortised cost, using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost. The related interest expense is recognised within finance costs in the income statement Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process Financial guarantee contracts Financial guarantee contracts in the scope of HKAS 39 are accounted for as financial liabilities. A financial guarantee contract is recognised initially at its fair value less transaction costs that are directly attributable to the acquisition or issue of the financial guarantee contract, except when such contract is recognised at fair value through profit or loss. Subsequent to initial recognition, the Group measures the financial guarantee contract at the higher of: (i) the amount determined in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets; and (ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18 Revenue (i)37 (ii) Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the income statement. 2009/

91 2 Summary of significant accounting policies (continued) Cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group s cash management For the purpose of the balance sheets, cash and bank balances comprise cash on hand and at banks, including term deposits, which are not restricted as to use Income tax Income tax comprises current and deferred tax. Income tax is recognised in the income statement, or in equity if it relates to items that are recognised in the same or a different period directly in equity Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except: where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and 144 Haitong International Securities Group Limited Annual Report 2009/2010

92 2 Summary of significant accounting policies (continued) Income tax (continued) in respect of taxable temporary differences associated with investments in subsidiaries and jointly-controlled entity, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised, except: where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries and jointly-controlled entity, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. 2009/

93 2 Summary of significant accounting policies (continued) Income tax (continued) Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: 2.17 (i) from the profit and loss on sale of available-for-sale investments and equity investments at fair value through profit or loss, on the transaction dates when the relevant contract notes are executed; (i) (ii) commission on dealing in securities, futures, options and bullion contracts and the profit and loss on trading in securities, futures, options and bullion contracts, on the transaction dates when the relevant contract notes are executed; (ii) (iii) consultancy and financial advisory fees, placing, underwriting and sub-underwriting commissions, and commission income from financial planning, on an accrual basis in accordance with the terms of the underlying agreements; (iii) (iv) income from fund management, custodian and handling services, in the period in which such services are rendered; (iv) (v) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument, (v) (vi) income from leveraged foreign exchange transactions, on an accrual basis; and (vi) (vii) dividend income, when the shareholders right to receive payment has been established. (vii) 146 Haitong International Securities Group Limited Annual Report 2009/2010

94 2 Summary of significant accounting policies (continued) Share-based payment transactions The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments ( equity-settled transactions ) The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined with reference to the fair value estimated by external valuer under a valuation model commonly used in the market, further details of which are given in note 30 to the financial statements. 30 In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company ( market conditions ), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting date ). The cumulative expense recognised for equity-settled transactions at each balance sheet date until the vesting date reflects the extent to which the vesting period has expired and the Group s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in the cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. 2009/

95 2 Summary of significant accounting policies (continued) Share-based payment transactions (continued) Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share Other employee benefits (i) Paid leave carried forward The Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the period by the employees and carried forward (i) 148 Haitong International Securities Group Limited Annual Report 2009/2010

96 2 Summary of significant accounting policies (continued) Other employee benefits (continued) (ii) Pension scheme The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the MPF Scheme ) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group s employer contributions vest fully with the employees when contributed into the MPF Scheme, except for the Group s employer voluntary contributions, which are refunded to the Group when an employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the MPF Scheme. The refunded contribution is recognized in the consolidated income statement to offset the current period contribution made (ii) 2.20 Dividends Final dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of the balance sheets, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability Interim dividends are simultaneously proposed and declared, because the Company s memorandum of association and Bye-Laws grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised immediately as a liability when they are proposed and declared. 2009/

97 2 Summary of significant accounting policies (continued) Foreign currencies These financial statements are presented in Hong Kong dollars, which is the Company s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to the income statement. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined The functional currencies of certain overseas subsidiaries are currencies other than the Hong Kong dollars. As at the balance sheet date, the assets and liabilities of these entities are translated into the presentation currency of the Company at the exchange rates ruling at the balance sheet date, and their income statements are translated into Hong Kong dollars at the average exchange rates for the year. The resulting exchange differences are included in a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. For the purpose of the consolidated statement of cash flows, the cash flows of overseas subsidiaries are translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the period are translated into Hong Kong dollars at the average exchange rates for the year. 150 Haitong International Securities Group Limited Annual Report 2009/2010

98 2 Summary of significant accounting policies (continued) Non-current assets (or disposal groups) held for sale Non-current assets (or disposal groups) are classified as assets held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use The assets and liabilities of the disposal groups are classified as assets classified as held for sale and liabilities classified as held for sale, presented as current assets and current liabilities in the balance sheet. 3 Critical accounting estimates and judgements 3 Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. (i) Impairment of available-for-sale investments (i) The Group had available-for-sale investments which were stated at their fair values on the basis of their quoted market prices at the balance sheet date, on an individual basis. Any gains or losses are recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the consolidated income statement. Management has to assess whether objective evidence of significant impairment exists and consider whether it is appropriate to charge the cumulative loss to consolidated income statement. 2009/

99 3 Critical accounting estimates and judgements (continued) 3 (i) Impairment of available-for-sale investments (continued) In making its judgement, the Group considers if there has been a significant or prolonged decline in the fair value below its cost or whether other objective evidence of impairment exists. (i) For the 18 months ended 30 June 2009, impairment loss of HK$5,922,000 was recognised by the Group with the cumulative loss in equity charged to the consolidated income statement. Should there be no impairment loss, the profit of the Group for 18 months ended 30 June 2009 will increase by HK$5,922,000. No impairment loss is recognised for the 18 months ended 31 December 2010 as the fair value of the available-for-sale investments increase during the period ,922, ,922, (ii) Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2010 was HK$9,854,000 (30 June 2009: HK$9,854,000). No impairment is considered necessary as at 31 December 2010 as the prospect of the cash-generating units is favorable to the Company. More details are given in note 14. (ii) ,854, ,854, (iii) Impairment allowances on advances to customers The Group reviews its advances to customers to assess impairment at least on a monthly basis. In determining whether an impairment loss should be recorded in the consolidated income statement, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group. (iii) 152 Haitong International Securities Group Limited Annual Report 2009/2010

100 3 Critical accounting estimates and judgements (continued) 3 (iii) Impairment allowances on advances to customers (continued) Management uses estimates based on historical loss experience when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (iii) More details on the credit risk of the advances to customers are included in note (iv) Estimation of realisability of deferred tax assets Determining income tax provisions involves judgement on the future tax treatment of certain transactions. The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislations. Deferred tax assets are recognised for tax losses not yet used and temporary deductible differences arising from depreciation of fixed assets. As those deferred tax assets can only be recognised to the extent that it is probable that future taxable profit will be available against which the unused tax credits can be utilised. Management s judgement is required to assess the probability of future taxable profits. Management s assessment is constantly reviewed and additional deferred tax assets are recognised if it becomes probable that future taxable profits will allow the deferred tax asset to be recovered. (iv) As at 31 December 2010, the Group recognised deferred tax assets of approximately HK$2.3 million (30 June 2009: HK$10.6 million). Should future taxable profit become totally unavailable, the Group would need to decrease the deferred tax assets and increase its deferred tax expenses by approximately HK$2.3 million for the 18-month period (18 months ended 30 June 2009: HK$10.6 million). Furthermore, as at 31 December 2010, the Group has unrecognised deferred tax assets of approximately HK$23 million (30 June 2009: HK$29 million) arising from the subsidiaries of the Group which management consider that these subsidiaries are unlikely to generate available future taxable profit to utilise the deferred tax benefit ,300, ,600, ,300, ,600, ,000, ,000, /

101 3 Critical accounting estimates and judgements (continued) 3 (v) Equity-settled share option expense The fair value of the share options granted to the employees (including directors) of the Group at the date of grant of the respective share options is charged to the income statement over the vesting period, with a corresponding adjustment to the Group s share option reserve. A binomial option pricing model (the binomial model ) was used in estimating the fair value of the share options granted. The binomial model is one of the generally accepted valuation methodologies used to estimate the fair value of the share options. It requires the input of assumptions, including expected dividend yield, expected life of options and expected volatility. Any changes in these assumptions can affect on the estimated fair value of the share options granted. Details on the assumption used in estimating the fair value of the options granted during the period are included in note Segment information (v) 30 4 Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined the Executive Committee as its chief operating decision maker. All transactions between business segments are conducted on an arm s length basis, with intra-segment revenue and costs being eliminated. Income and expenses directly associated with each segment are included in determining business segment performance. According to HKFRS 8, the Group has the following segments: 8 (a) the broking segment engages in securities, futures, options and bullion contracts broking and dealing; (a) (b) the margin and other financing segment engages in the provision of margin financing to margin customers, and personal loans and commercial loans to individuals and corporate customers, respectively; (b) 154 Haitong International Securities Group Limited Annual Report 2009/2010

102 4 Segment information (continued) 4 (c) the corporate advisory, placing and underwriting segment engages in the provision of corporate advisory, placing and underwriting services; (c) (d) the trading and investment segment engages in investment holding, and proprietary trading of securities, futures, options, bullion contracts and leveraged foreign exchange trading; (d) (e) the financial planning and advisory services segment engages in the provision of financial planning and advisory services; and (e) (f) the others segment comprises fund management and the provision of custodian and handling services. (f) Segment information for the 18 months ended 30 June 2009 that is reported as comparative information for 18 months ended 31 December 2010 has been restated to conform to the requirements of HKFRS /

103 4 Segment information (continued) 4 The following table presents revenue and profit for the Group s business segments. Broking Margin and other financing Corporate advisory, placing and underwriting Trading and investment Financial planning and advisory services Others Eliminations Consolidated For the For the For the For the For the For the For the For the For the For the For the For the For the For the 18 months 18 months 18 months 18 months 18 months 18 months 18 months 18 months 18 months 18 months 18 months 18 months 18 months 18 months ended ended ended ended ended ended 31 ended ended ended ended ended ended ended ended 30 June 31 December 30 June 31 December 30 June December 30 June 31 December 30 June 31 December 30 June 31 December 30 June 31 December For the 18 months ended 31 December For the 18 months ended 30 June HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Segment revenue: Sales to external customers 803, , , , ,711 71,789 94,208 3,521 54,834 70,540 53,468 49,455 1,459,935 1,084,604 Intersegment sales ,807 41,644 (39,839) (42,445) Total 803, , , , ,711 71,789 94,208 3,521 54,834 70,540 53,468 49,455 (39,839) (42,445) 1,459,935 1,084,604 Other income 28,924 69,267 4, ,847 (5,922) 4,843 2,574 55,018 66,369 Less : Employee benefit costs (501,128) (341,851) (83,934) (89,460) (37,930) (36,028) (21,288) (31,738) (22,063) (40,079) (25,280) (33,290) (691,623) (572,446) Other expenses (131,573) (225,232) (169,378) (100,376) (58,554) (23,653) (32,863) (20,837) (34,059) (26,313) (39,021) (21,854) 39,839 42,445 (425,609) (375,820) Segment results 171, , ,249 97,536 63,631 12,558 56,904 (54,976) (1,288) 4,148 (5,990) (3,115) 397, ,707 Unallocated expenses Share of profit of an associate (894) (649) 1,718 6,324 Profit before taxation 398, ,382 Taxation expenses (53,386) (20,054) Profit for the period 345, , Haitong International Securities Group Limited Annual Report 2009/2010

104 5 Revenue and other income 5 An analysis of revenue (which is also the Group s turnover) and other income is as follows: For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 Revenue Securities dealing and broking: Commission on securities dealing and broking 591, ,757 Futures, options and commodities dealing and broking: Commission on futures, options and commodities dealing and broking 199, ,419 Margin and other financing: Interest income on margin and other financing activities 297, ,461 Corporate finance and advisory: Consultancy and financial advisory fee income Placing, underwriting and sub-underwriting commission 64,428 37,814 91,283 33,975 Bullion contracts dealing: Commission on bullion contracts dealing 12,342 12,662 Provision of nominee and custodian services: Custodian and handling service fees 29,049 22, /

105 5 Revenue and other income (continued) 5 For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 Revenue (continued) Fund management: Management fee income 23,910 22,916 Performance fee income 509 3,846 Income from proprietary trading: Profit/(loss) on financial investments at fair value through profit or loss, net 24,821 (67,488) Profit on futures, options, commodities and bullion contracts trading, net 36,911 40,368 Dividend income 2,564 3,784 Leveraged foreign exchange trading: Income from leveraged foreign exchange trading, net 29,912 26,857 Financial planning and advisory services: Commission on the provision of financial planning and advisory services 54,834 70,540 1,459,935 1,084,604 Other income Bank interest income 28,924 69,267 Impairment loss on available-for-sale investments (5,922) Gain on disposal of available-for-sale investments, net 11,267 Gain on disposal of assets/liabilities classified as held for sale 2,950 Gain on disposal of an associate (note) 4,843 Others 7,034 3,024 55,018 66,369 Note: The gain on disposal of an associate represents the disposal gain on the Group s interest in CMTF Asset management Limited (note 18) Haitong International Securities Group Limited Annual Report 2009/2010

106 6 Profit before taxation The Group s profit before taxation is arrived at after charging/ (crediting): 6 For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 The other operating expenses include: Minimum lease payments under operating leases: Land and buildings 80,576 78,349 Computer equipment 13,426 5,799 Auditors remuneration 4,940 4,955 Foreign exchange differences, net (3,467) 13 Net reversal of impairment losses on advances to customers (3,977) Loss on disposal of fixed assets Repair and maintenance (including system maintenance) 54,119 38,094 Quotemeter services 10,086 11,087 Marketing, advertising and promotion expense 49,313 25,724 Equipment rental and servicing 42,533 35,591 Employee benefits costs (including directors remuneration and five highest paid employees): Salaries and allowances (note 7 and 8) , ,195 Bonuses 114,715 44,553 Commission to accounts executives 252, ,347 Equity-settled share option expense (note 30) 30 12,791 13,425 Pension scheme contributions 10,581 16,453 Less: Forfeited contributions (952) (1,527) 691, ,446 Interest expense for securities broking and margin financing operations: bank loans and overdrafts 28,078 20,221 other loans 10,394 11,375 accounts payable to clients 722 3,802 others 3 39,194 35, /

107 7 Directors remuneration 7 Directors remuneration for the period, disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance, is as follows: 161 Group For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 Fees: Executive directors 1,554 2,250 Non-executive directors 1,780 1,500 Independent non-executive directors 1,050 1,050 4,384 4,800 Other emoluments: Executive directors: Salaries and allowances 15,615 16,338 Bonuses (note (a)) (a) 19,070 9,822 Employee share option benefits (b) (note (b)) 4,833 2,339 Pension scheme contributions Non-executive directors: Employee share option benefits (b) (note (b)) 1,713 Independent non-executive directors: Employee share option benefits (b) (note (b)) ,266 29,265 46,650 34, Haitong International Securities Group Limited Annual Report 2009/2010

108 7 Directors remuneration (continued) 7 (a) Bonuses include performance related bonuses, in which certain executive directors of the Company are entitled to bonus payments which are determined as a percentage of the profit after taxation of the Group. (a) (b) During the period, certain directors were granted share options, in respect of their services to the Group, under the share option scheme of the Company, further details on the share option scheme are set out in note 30 to the consolidated financial statements. The fair value of such options, which has been recognised in the consolidated income statement over the vesting period, was determined as at the date of grant and the amount in the financial statements for the current period is included in the directors remuneration disclosures. (b) 30 (a) Independent non-executive directors (a) Employee Fees Salaries and allowances Bonuses share option benefits Pension scheme contributions Total remuneration HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 For the 18 months ended 31 December Man Mo Leung Tsui Hing Chuen, William Lau Wai Piu, Bill , ,968 For the 18 months ended 30 June Man Mo Leung Tsui Hing Chuen, William Lau Wai Piu, Bill ,050 1, /

109 7 Directors remuneration (continued) (b) Executive directors and non-executive directors 7 (b) Fees Salaries and allowances Bonuses Employee share option benefits Pension scheme contributions Total remuneration HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 For the 18 months ended 31 December Executive directors: Cheng Kar Shun, Henry (note (a)) (a) Doo Wai Hoi, William (note (a)) (a) Li Jianguo (note (b)) (b) Lin Yong (note (c)) (c) Wong Shiu Hoi, Peter 4,815 7,130 1, ,187 Lee Yiu Wing, William 3,792 4, ,009 Chan Chi On, Derek 3,552 4, ,388 Poon Mo Yiu, Patrick (note (d)) (d) 3,456 2, ,028 Cheng Chi Ming, Brian (note (e)) (e) ,554 15,615 19,070 4, ,189 Non-executive directors: Wong Kwok Kin, Andrew (note (a)) (a) Lam Wai Hon, Patrick (note (a)) (a) To Hin Tsun, Gerald (note (a)) (a) Lee Ka Sze, Carmelo (note (a)) (a) Li Mingshan (note (b)) (b) ,069 Ji Yuguang (note (b)) (b) Wu Bin (note (b)) (b) Chen Chunqian (note (b)) (b) Cheng Chi Ming, Brian (note (e)) (e) ,780 1,713 3,493 3,334 15,615 19,070 6, ,682 (a) Resigned on 13 January (b) Appointed on 13 January (c) Appointed on 23 December (d) Appointed on 1 July (e) Appointed as executive director on 1 July 2009 and re-designated as non-executive director on 13 January (a) (b) (c) (d) (e) Haitong International Securities Group Limited Annual Report 2009/2010

110 7 Directors remuneration (continued) 7 (b) Executive directors and non-executive directors (continued) (b) Employee share Fees Salaries and allowances Bonuses option benefits Pension scheme contributions Total remuneration HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 For the 18 months ended 30 June Executive directors: Cheng Kar Shun, Henry 1, ,368 Lo Lin Shing, Simon 4,725 3, ,932 Doo Wai Hoi, William Wong Shiu Hoi, Peter 4,725 3, ,985 Lee Yiu Wing, William 3,522 1, ,170 Chan Chi On, Derek 3,366 1, ,142 2,250 16,338 9,822 2, ,515 Non-executive directors: Wong Kwok Kin, Andrew Lam Wai Hon, Patrick Cheung Wing Yui, Edward Ho Hau Chong, Norman To Hin Tsun, Gerald Lee Ka Sze, Carmelo ,500 1,500 3,750 16,338 9,822 2, ,015 There was no arrangement under which a director waived or agreed to waive any remuneration during the period. 2009/

111 8 Five highest paid employees 8 The five highest paid employees during the period included three (18 months ended 30 June 2009: two) directors, details of whose remuneration are set out in note 7 above. Details of the remuneration of the remaining two (18 months ended 30 June 2009: three) non-director, highest paid employees for the period are as follows: For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 Salaries and allowances 18,183 29,665 Pension scheme contributions Employee share option benefits ,219 29, Haitong International Securities Group Limited Annual Report 2009/2010

112 8 Five highest paid employees (continued) 8 The number of non-director, highest paid employees whose remuneration fell within the following bands is as follows: Number of employees For the For the 18 months 18 months ended ended 31 December 30 June HK$ 000 HK$ 000 HK$6,000,001 to HK$7,000,000 6,000,0017,000,000 1 HK$7,000,001 to HK$8,000,000 7,000,0018,000,000 1 HK$8,000,001 to HK$9,000,000 8,000,0019,000,000 1 HK$9,000,001 to HK$10,000,000 9,000,00110,000,000 1 HK$16,000,001 to HK$17,000,000 16,000,00117,000, /

113 9 Taxation expenses 9 Hong Kong profits tax has been provided at the rate of 16.5% (2009: 16.5%) on the estimated assessable profits arising in Hong Kong during the period. Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the jurisdictions in which the Group operates, based on existing legislation, interpretations and practices in respect thereof. 16.5% % For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 Current taxation Hong Kong Charge for the period 41,217 35,986 Over-provision in prior periods (3,239) (16,496) Current taxation overseas 1,528 1,295 Deferred taxation 13,880 (731) Total taxation charge for the period 53,386 20, Haitong International Securities Group Limited Annual Report 2009/2010

114 9 Taxation expenses (continued) 9 The tax on the Group s profit before taxation differs from the theoretical amount that would arise using the tax rate of Hong Kong as follows: For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 Profit before taxation 398, ,382 Tax calculated at 16.5% (2009: 16.5%) 16.5% % 65,760 34,383 Income not subject to tax (24,679) (13,899) Expenses not deductible for tax purposes 17,999 2,609 Over-provision in prior periods (3,239) (16,496) Tax losses not recognised ,136 Utilisation of previously unrecognised tax losses (6,912) (4,379) Effect of different overseas tax rates (367) (18) Others 4,620 3,718 Taxation charge for the period 53,386 20,054 The average effective tax rate of the Group was 13.4% for the 18-month period ended 31 December 2010 (18 months ended 30 June 2009: 9.6%) % % 10 Profit attributable to equity holders of the Company 10 The consolidated profit attributable to equity holders of the Company for the 18 months period ended 31 December 2010 includes a profit of HK$176,648,000 (18 months ended 30 June 2009: HK$89,526,000) which has been dealt with in the financial statements of the Company ,648, ,526, /

115 11 Dividends 11 For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 First interim dividend declared for the 6 months ended 31 December 2009 HK10 cents (6 months ended 30 June 2008: HK5 cents) per ordinary share ,896 34,818 Second interim dividend declared for 12 months ended 30 June 2010 HK6 cents (12 months ended 31 December 2008: Nil) per ordinary share ,538 Final dividend paid in respect of the previous year 388 Proposed final dividend for the 18 months ended 31 December 2010 HK8 cents (18 months ended 30 June 2009: HK8 cents) per ordinary share ,203 56, ,637 91,722 At a meeting of the Board of Directors held on 11 March 2010, the directors resolved to declare a first interim dividend of HK10 cents per share in cash for the 6 months ended 31 December 2009 (6 months ended 30 June 2008: HK5 cents per share in scrip form with a cash option), to shareholders whose names appear on the register of members of the Company on Friday, 16 April The first interim dividend was paid on Friday, 30 April 2010, with a total of HK$70,896,000 cash dividend paid to the shareholders ,896, Haitong International Securities Group Limited Annual Report 2009/2010

116 11 Dividends (continued) 11 At a meeting of the Board of Directors held on 19 August 2010, the directors resolved to declare a second interim dividend of HK6 cents per share in cash with a scrip option for the 12 months ended 30 June 2010 (12 months ended 31 December 2008: Nil), to shareholders whose names appear on the register of members of the Company on Tuesday, 28 September The second interim dividend was paid on Wednesday, 10 November 2010, with a total of HK$7,734,645 cash dividend paid to the shareholders and 5,597,393 shares were issued in scrip form ,734,645 5,597,393 On 16 March 2011, the directors recommended a final dividend of HK8 cents per share in cash for the 18 months ended 31 December 2010 (18 months ended 30 June 2009: HK8 cents per share in scrip form with a cash option) The proposed final dividend for the 18-month period is subject to the approval of the Company s shareholders at the forthcoming annual general meeting. 12 Earnings per share attributable to equity holders of the Company The calculation of basic earnings per share amounts is based on the profit for the 18-month period attributable to ordinary equity holders of the Company, and the weighted average number of ordinary shares in issue during the period. 18 The calculation of diluted earnings per share amounts is based on the profit for the period attributable to equity holders of the Company. The weighted average number of ordinary shares used in the calculation is the number of ordinary shares in issue during the period, as used in the basic earnings per share calculation, and the weighted average number of ordinary shares assumed to have been issued at no consideration on the deemed exercise or conversion of all dilutive potential ordinary shares into ordinary shares. 2009/

117 12 Earnings per share attributable to equity holders of the Company (continued) 12 (a) Basic earnings per share (a) For the 18 months ended 31 December For the 18 months ended 30 June Profit attributable to equity holders of the Company (HK$ 000) 345, ,974 Weighted average number of ordinary shares in issue (in thousands) 708, ,530 Basic earnings per share (HK cents per share) Haitong International Securities Group Limited Annual Report 2009/2010

118 12 Earnings per share attributable to equity holders of the Company (continued) 12 (b) Diluted earnings per share (b) For the 18 months ended 31 December For the 18 months ended 30 June Profit attributable to equity holders of the Company (HK$ 000) 345, ,974 Weighted average number of ordinary shares in issue (in thousands) Adjustments for share options (in thousands) 708, ,530 1, , ,960 Diluted earnings per share (HK cents per share) /

119 13 Fixed assets 13 Group Leasehold land and buildings Leasehold improvements Furniture, fixtures and equipment Computer hardware Computer software and system development Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ December At 1 July 2009: Cost 3,092 59,641 48,425 76, , ,806 Accumulated depreciation (945) (50,723) (38,673) (64,940) (61,489) (216,770) Net carrying amount 2,147 8,918 9,752 11,246 86, ,036 At 1 July 2009, net of accumulated depreciation ,147 8,918 9,752 11,246 86, ,036 Additions 4,094 4,081 6,132 65,921 80,228 Fixed assets acquired in business combination (note 32) ,655 2,029 Disposals (369) (102) (32) (503) Depreciation (116) (5,120) (5,676) (9,271) (29,187) (49,370) At 31 December 2010, net of accumulated depreciation ,031 7,523 8,176 8, , ,420 At 31 December 2010: Cost 3,092 62,694 52,298 81, , ,015 Accumulated depreciation (1,061) (55,171) (44,122) (73,564) (90,677) (264,595) Net carrying amount 2,031 7,523 8,176 8, , , Haitong International Securities Group Limited Annual Report 2009/2010

120 13 Fixed assets (continued) 13 Group (continued) Leasehold land and buildings Leasehold improvements Furniture, fixtures and equipment Computer hardware Computer software and system development Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ June At 1 January 2008: Cost 3,092 52,872 44,331 68,362 86, ,361 Accumulated depreciation (829) (45,959) (34,462) (55,239) (41,418) (177,907) Net carrying amount 2,263 6,913 9,869 13,123 45,286 77,454 At 1 January 2008, net of accumulated depreciation ,263 6,913 9,869 13,123 45,286 77,454 Additions 7,717 6,354 8,980 61,758 84,809 Disposals (364) (429) (139) (932) Depreciation (116) (5,348) (6,042) (10,718) (20,071) (42,295) At 30 June 2009, net of accumulated depreciation ,147 8,918 9,752 11,246 86, ,036 At 30 June 2009: Cost 3,092 59,641 48,425 76, , ,806 Accumulated depreciation (945) (50,723) (38,673) (64,940) (61,489) (216,770) Net carrying amount 2,147 8,918 9,752 11,246 86, , /

121 13 Fixed assets (continued) 13 Company Leasehold land and buildings Leasehold improvements Furniture, fixtures and equipment Computer hardware Computer software and system development Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ December At 1 July 2009: Cost 1,178 34,429 27, ,454 Accumulated depreciation (272) (26,465) (19,679) (207) (62) (46,685) Net carrying amount 906 7,964 7, ,769 At 1 July 2009, net of accumulated depreciation ,964 7, ,769 Additions 4,007 3, ,583 Disposals (329) (21) (350) Depreciation (44) (4,394) (4,405) (39) (8,882) At 31 December 2010, net of accumulated depreciation ,248 7, ,120 At 31 December 2010: Cost 1,178 37,625 31, ,117 Accumulated depreciation (316) (30,377) (24,010) (232) (62) (54,997) Net carrying amount 862 7,248 7, , Haitong International Securities Group Limited Annual Report 2009/2010

122 13 Fixed assets (continued) 13 Company (continued) Leasehold land and buildings Leasehold improvements Furniture, fixtures and equipment Computer hardware Computer software and system development Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ June At 1 January 2008: Cost 1,178 29,837 25, ,436 Accumulated depreciation (228) (23,617) (17,127) (190) (62) (41,224) Net carrying amount 950 6,220 8, ,212 At 1 January 2008, net of accumulated depreciation ,220 8, ,212 Additions 6,757 4, ,039 Disposals (323) (323) Transfer to a subsidiary (237) (58) (295) Depreciation (44) (4,453) (4,350) (17) (8,864) At 30 June 2009, net of accumulated depreciation ,964 7, ,769 At 30 June 2009: Cost 1,178 34,429 27, ,454 Accumulated depreciation (272) (26,465) (19,679) (207) (62) (46,685) Net carrying amount 906 7,964 7, , /

123 13 Fixed assets (continued) 13 The Group s leasehold land and buildings included above are situated in Hong Kong and are held under the following lease terms: Group 31 December HK$ June HK$ 000 At net carrying amount: Medium term leases 2,031 2, Goodwill 14 Group 31 December HK$ June HK$ 000 Goodwill 9,854 9, Haitong International Securities Group Limited Annual Report 2009/2010

124 14 Goodwill (continued) 14 Impairment testing of goodwill Goodwill acquired through business combinations have been allocated to the following cash-generating units, which are reportable segments, for impairment testing: Financial planning and advisory services cash-generating unit; and Asset and fund management services cash generating unit The carrying amount of goodwill allocated to each of the cashgenerating units is as follows: Financial planning and advisory services Asset and fund management services Total HK$ 000 HK$ 000 HK$ 000 Carrying amount of goodwill 854 9,000 9,854 (i) Financial planning and advisory services cash-generating (i) unit The recoverable amount of the financial planning and advisory services has been determined based on value in use calculation using cash flow projections covering a five- year period approved by senior management. The discount rate applied to the cash flow projections is 5% (30 June 5% % 2009: 5%) and cash flows are using a growth rate of 15% 15% (30 June 2009: 15%) which is determined based on past 15% performance and management s expectations for the market development. 2009/

125 14 Goodwill (continued) 14 Impairment testing of goodwill (continued) (ii) Asset and fund management services cash-generating unit The recoverable amount of the asset and fund management services cash-generating unit has been determined based on value in use calculation using cash flow projections covering a five-year period approved by senior management. The discount rate applied to the cash flow projections is 5% (30 June 2009: 5%) and cash flows are using a growth rate of 10% (30 June 2009: 10%) (for investment fund management) and 20% (30 June 2009: 20%) (for other fund management) which are determined based on past performance and management s expectation for the market development. (ii) 5% % 10% % 20% % Key assumptions were used in the value in use calculation of the financial planning and advisory services and asset and fund management services cash-generating units as at 31 December 2010 and 30 June The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill: Budgeted gross margins The basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the period immediately before the budget period, increased for expected efficiency improvements, and expected market development. Discount rates The discount rates used are before tax and reflect specific risks relating to the relevant units. 178 Haitong International Securities Group Limited Annual Report 2009/2010

126 15 Other intangible assets 15 Group 31 December HK$ June HK$ 000 Cost, net of accumulated amortisation 4,609 4,609 Addition 2,000 At the end of the period 6,609 4,609 Cost (gross carrying amount) 10,131 8,131 Accumulated amortisation (3,522) (3,522) Net carrying amount 6,609 4,609 Upon the adoption of HKAS 38 Intangible assets in 2005, the Group s eligibility rights to trade on or through the Stock Exchange of Hong Kong Limited and the Hong Kong Futures Exchange Limited of net carrying amount of HK$4,609,000 (30 June 2009: HK$4,609,000) are considered to have indefinite lives, which are not amortised, as the trading rights have no expiry date. The accumulated amortisation is brought forward from prior years before the adoption of HKAS 38 ( intangible assets ) ,609, ,609, The addition of HK$2,000,000 represents the Group s investment in additional throttle rate for trading order to be transmitted to the Automated Matching System of the Stock Exchange. This intangible asset has no expiry date. 2,000, /

127 16 Other assets 16 Group 31 December HK$ June HK$ 000 At cost: Deposits with the Stock Exchange: Compensation fund Fidelity fund Dealers deposit with the Securities and Futures Commission Stamp duty deposit Contributions to The Central Clearing and Settlement System Guarantee Fund Admission fee paid to Hong Kong Securities Clearing Company Limited Reserve fund with The SEHK Options Clearing House Limited 24,723 1,937 Deposit with HKFE Clearing Corporation Limited in contribution to the reserve fund 14,952 1,500 Cost of membership for a seat at The Chinese Gold and Silver Exchange Society Compensation fund paid to The Shenzhen Stock Exchange Co., Ltd Settlement Risk Fund paid to The Shanghai Securities Central Clearing & Registration Corporation Others ,513 7, Haitong International Securities Group Limited Annual Report 2009/2010

128 17 Investments in subsidiaries and amounts due from/ to subsidiaries 17 The investments in subsidiaries and the amounts due from/to subsidiaries are as follows: Company 31 December HK$ June HK$ 000 Unlisted shares/investments, at cost 105, ,377 Due from subsidiaries 3,176,448 1,784,687 Due to subsidiaries (756,097) (804,009) 2,525,728 1,086,055 The balances with subsidiaries are unsecured, interest-free and are repayable on demand. The carrying amounts of these amounts due from/to subsidiaries approximate their fair values. 2009/

129 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 The particulars of principal subsidiaries are as follows: Nominal value Percentage of Place of of issued equity attributable incorporation/ share capital/ to the Company registration amount of Name and operations paid-up capital Direct Indirect Principal activities Epro Global Services Limited* # Hong Kong HK$5,000, Provision of call centre * # 5,000,000 services E-wealth Club Limited Hong Kong HK$1,000, Club association 1,000,000 Grand Fortune Company Limited Cayman Islands HK$1 100 Investment 1 Hai Tong Asset Management Hong Kong HK$20,000, Provision of fund (HK) Limited 3 20,000,000 management services 3 Hai Tong Capital (HK) Limited 3 Hong Kong HK$10,000, Provision of corporate 3 10,000,000 advisory services Haitong International Asset Hong Kong HK$13,000, Investment holding and Management Limited 13,000,000 asset management (formerly known as Taifook Asset Management Limited) 182 Haitong International Securities Group Limited Annual Report 2009/2010

130 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 Nominal value Percentage of Place of of issued equity attributable incorporation/ share capital/ to the Company registration amount of Name and operations paid-up capital Direct Indirect Principal activities Haitong International Asset Hong Kong HK$6,000, Proprietary trading Management Nominees Limited 6,000,000 (formerly known as Taifook Asset Management Nominees Limited) Haitong International Bullion Hong Kong HK$7,000, Bullion contracts dealing Limited 7,000,000 and trading (formerly known as Taifook Bullion Limited) Haitong International (BVI) Limited British Virgin HK$11, Investment holding (formerly known as Taifook Islands 11,576 (BVI) Limited) Haitong International (BVI) Limited Taifook(BVI) Limited Haitong International Capital Hong Kong HK$20,000, Provision of corporate Limited 20,000,000 advisory services (formerly known as Taifook Capital Limited) 2009/

131 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 Nominal value Percentage of Place of of issued equity attributable incorporation/ share capital/ to the Company registration amount of Name and operations paid-up capital Direct Indirect Principal activities Haitong International Capital Management Limited (formerly known as Taifook Capital Management Limited and Tai Fook Fund Managers Limited) Haitong International Capital Management Limited Taifook Capital Management Limited British Virgin Islands US$ Investment holding Haitong International Consultants Limited (formerly known as Taifook Lexton Consultants Limited) # # Hong Kong HK$5,000,000 5,000, Provision of financial advisory services Haitong International E-wealth Club Inc. (formerly known as Taifook E-wealth Club Inc.) Haitong International E-wealth Club Inc. Taifook E-wealth Club Inc. British Virgin Islands US$ Investment holding Haitong International Finance Company Limited (formerly known as Taifook Finance Company Limited) Hong Kong HK$300,000,002 (Non-voting deferred 2 HK$100,700,001) 300,000, ,700, Investment holding, money lending and securities trading Haitong International Financial Management Consultancy (Macau) Limited (formerly known as Taifook Lexton Wealth Management Consultants (Macau) Limited) # # Macau MOP$500, , Provision of support services 184 Haitong International Securities Group Limited Annual Report 2009/2010

132 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 Nominal value Percentage of Place of of issued equity attributable incorporation/ share capital/ to the Company registration amount of Name and operations paid-up capital Direct Indirect Principal activities Haitong International Futures Limited (formerly known as Taifook Futures Limited) Hong Kong HK$50,000,000 50,000, Futures and options broking and trading Haitong International Immigration Consultants Limited (formerly known as Taifook Lexton Immigration Consultants Limited)* # * # Hong Kong HK$100, , Provision of immigration consultancy services Haitong International Information Systems Inc. (formerly known as Taifook Information Systems Inc.) Haitong International Information Systems Inc. Taifook Information Systems Inc. British Virgin Islands US$ Investment holding Haitong International Information Systems Limited (formerly known as Taifook Information Systems Limited) Hong Kong HK$11,000,000 11,000, Provision of information technology solutions Haitong International Information Technology Inc. (formerly known as Taifook Information Technology Inc.) Haitong International Information Technology Inc. Taifook Information Technology Inc. British Virgin Islands US$ Investment holding 2009/

133 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 Nominal value Percentage of Place of of issued equity attributable incorporation/ share capital/ to the Company registration amount of Name and operations paid-up capital Direct Indirect Principal activities Haitong Investment Management Inc. (formerly known as Taifook Investment Management Inc.) Haitong Investment Management Inc. Taifook Investment Management Inc. British Virgin Islands US$ Investment holding Haitong International Investment Managers Limited (formerly known as Taifook Investment Managers Limited) Hong Kong HK$47,000,000 47,000, Provision of asset and fund management services Haitong International Investment Services Limited (formerly known as Taifook Investment Services Limited) Hong Kong HK$42,500,000 42,500, Securities broking and dealing Haitong International Management Consultancy Limited (formerly known as Taifook Management Consultancy Limited) Hong Kong HK$ Provision of consultancy services Haitong International Management Services Company Limited (formerly known as Taifook Management Services Company Limited) Hong Kong HK$ Provision of management services 186 Haitong International Securities Group Limited Annual Report 2009/2010

134 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 Nominal value Percentage of Place of of issued equity attributable incorporation/ share capital/ to the Company registration amount of Name and operations paid-up capital Direct Indirect Principal activities Haitong International Net Inc. (formerly known as Taifook Net Inc.) Haitong International Net Inc. Taifook Net Inc. British Virgin Islands US$ Investment holding Haitong International Net Limited (formerly known as Taifook Net Limited) Hong Kong HK$1,000,000 1,000, Inactive Haitong International Nominees Company Limited (formerly known as Taifook Nominees Company Limited) Hong Kong HK$50,000,000 50,000, Securities trading Haitong International On-line Inc. (formerly known as Taifook On-line Inc.) Haitong International On-line Inc. Taifook On-line Inc. British Virgin Islands US$ Investment holding Haitong International On-line Services Limited (formerly known as Taifook On-line Services Limited) Hong Kong HK$6,000,000 6,000, Provision of electronic financial services Haitong International Reserarch Limited (formerly known as Taifook Research Limited) Hong Kong HK$1,000,000 1,000, Provision of research services 2009/

135 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 Nominal value Percentage of Place of of issued equity attributable incorporation/ share capital/ to the Company registration amount of Name and operations paid-up capital Direct Indirect Principal activities Haitong International Securities Company Limited (formerly known as Taifook Securities Company Limited) Hong Kong HK$600,000, ,000, Securities broking and dealing and leveraged foreign exchange trading Haitong International Securities Nominees Limited (formerly known as Taifook Securities Nominees Limited) Hong Kong HK$ Provision of nominee and custodian services Haitong International Wealth Management Group Limited (formerly known as Taifook Wealth Management Group Limited) Hong Kong HK$3,500,000 3,500, Provision of financial planning services Haitong International Wealth Management Limited (formerly known as Taifook Lexton Wealth Management Limited) # # Hong Kong HK$1,240,000 1,240, Provision of financial planning services and financial and insurance products brokerage Haitong PE Investment Management Ltd. (formerly known as Haitong Drilex Investment Management Ltd.) Haitong PE Investment Management Ltd. Haitong Drilex Investment Management Ltd. Cayman Islands US$ Investment management 188 Haitong International Securities Group Limited Annual Report 2009/2010

136 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 Nominal value Percentage of Place of of issued equity attributable incorporation/ share capital/ to the Company registration amount of Name and operations paid-up capital Direct Indirect Principal activities IB Capital Management Limited Cayman Islands US$50, Investment 50,000 it Technology Company Limited Hong Kong HK$2 100 Investment holding 2 it Technology Holdings Inc. British Virgin US$1 100 Investment holding Islands 1 it Technology (Shenzhen) People s HK$10,000, Provision of software Company Limited 1 Republic of 1,000,000 development services 1 China ( PRC ) Ocean Pilot Investments Limited British Virgin US$1 100 Investment holding Islands 1 Prosper Ideal Limited Hong Kong HK$2 100 Investment holding 2 Taifook Investment Consultancy PRC HK$2,000, Provision of investment (Guangzhou) Company Limited 1 2,000,000 consultancy services 1 Taifook Investment Consultancy PRC US$700, Provision of investment (Shanghai) Company Limited 1 700,000 consultancy services /

137 17 Investments in subsidiaries and amounts due from/ to subsidiaries (continued) 17 1 it Technology (Shenzhen) Company Limited, Taifook Investment Consultancy (Guangzhou) Company Limited and Taifook Investment Consultancy (Shanghai) Company Limited are registered as whollyforeign-owned enterprises under the People s Republic of China law. 2 The non-voting deferred shares carry no rights to dividends, attend or vote at general meetings and receive any surplus in a return of capital, winding-up or otherwise in respect of the first HK$100,000,000,000,000 thereof. 3 During the current 18-month period, the Group acquired the entire 100% equity interest in two subsidiaries, namely Hai Tong (HK) Asset Management Limited and Hai Tong Capital (HK) Limited from Haitong International Holdings Limited (formerly known as Hai Tong (HK) Financial Holdings Limited), the immediate holding company of the Company. Further details of this acquisition are included in note 32 to the financial statements. * Incorporated during the current 18-month period. # Subsidiaries not audited by PricewaterhouseCoopers. The aggregate net assets of subsidiaries not audited by PricewaterhouseCoopers approximates 1% (30 June 2009: 1%) of the Group s net assets ,000,000,000, * 18 # 1% % 190 Haitong International Securities Group Limited Annual Report 2009/2010

138 18 Interests in an associate 18 Group 31 December HK$ June HK$ 000 Share of net assets 9,119 During the period, the Group disposed of the entire 49% equity interest in CMTF Asset Management Limited to the other 51% equity holder for cash consideration of HK$15,680,000. The transaction has resulted in a gain of HK$4,843,000 in the consolidated income statement, calculated as follows: 15,680,000 49% 51% 4,843,000 HK$ 000 Proceeds of disposal 15,680 Less: carrying value as of the date of disposal (10,837) Gain recognised 4,843 The share of profit of an associate of HK$1,718,000 in the consolidated income statement represents the Group s share of profit from 1 July 2009 to the date of disposal. 1,718, /

139 19 Available-for-sale investments 19 Group 31 December HK$ June HK$ 000 At fair value (market value): Listed equity investments in Hong Kong 19,393 20,075 Unlisted equity investment in Mainland China (Note) 12,625 13,000 32,018 33,075 An analysis of the issuers of the available-for-sale investments is as follows: Equity investments : Corporate 32,018 33,075 Note: The balance represents the promoter foreign shares of Changmao Biochemical Engineering Company Limited ( Changmao ), a company listed on the Growth Enterprise Market Board of the Stock Exchange. Subject to certain restrictions on transfer and upon obtaining the requisite approvals from, among other bodies, the China Securities Regulatory Commission and the Stock Exchange, the promoter foreign shares may be convertible into listed H shares and shall thereafter carry the same rights and obligations of those listed H shares. Its fair value is based on the quoted market prices of the listed H shares. H HH 192 Haitong International Securities Group Limited Annual Report 2009/2010

140 19 Available-for-sale investments (continued) 19 The movement in available-for-sale investments is summarised as follow: Group 31 December HK$ June HK$ 000 At the beginning of the period 33, ,160 Disposal (6,788) Classified as assets/liabilities held for sale (104,501) Fair value changes transferred to the investment revaluation reserve 5,731 (52,662) Impairment loss on available-for-sale investments charged to consolidated income statement (5,922) At the end of the period 32,018 33, /

141 20 Advances to customers December HK$ June HK$ 000 Loans to margin clients 4,382,700 1,734,335 Less: Impairment allowance (7,111) (7,667) 4,375,589 1,726,668 (a) The movements in impairment allowance of advances to customers, all assessed individually, are as follows: (a) For the 18 months ended 31 December HK$ 000 For the 18 months ended 30 June HK$ 000 At the beginning of the period 7,667 11,829 Write-off of fully impaired advances to customers (556) (185) Reversal of impairment losses (4,120) Impairment losses recognised 143 At the end of the period 7,111 7, Haitong International Securities Group Limited Annual Report 2009/2010

142 20 Advances to customers (continued) 20 (a) (continued) (a) The credit facility limits granted to margin clients are determined by the discounted market value of the collateral securities accepted by the Group. The majority of the loans to margin clients are secured by the underlying pledged securities and are interest bearing. The Group maintains a list of approved stocks for margin lending at a specified loan to collateral ratio. Any excess in the lending ratio will trigger a margin call which the customers have to make good the shortfall. As at 31 December 2010, advances to customers of HK$4,376 million (30 June 2009: HK$1,727 million) was secured by securities pledged by the customers to the Group as collateral with undiscounted market value of HK$20,989 million (30 June 2009: HK$10,759 million) ,376,000, ,727,000,000 20,989,000, ,759,000,000 Advances to customers of HK$7,111,000 (30 June 2009: HK$7,667,000) was fully provided for impairment loss. 7,111, ,667,000 (b) The credit risk profiles of the advances to customers are as follows: (b) : 31 December HK$ June HK$ 000 Neither past due nor impaired 4,049,732 1,604,015 Past due but not impaired 325, ,653 Impaired 7,111 7,667 4,382,700 1,734,335 Advances to customers classified under past due but not impaired represent those receivables from customers who have outstanding unfilled margin call position. 2009/

143 20 Advances to customers (continued) 20 (b) (continued) (b) The ageing analyses of the overdue advances to customers are as follows: 31 December HK$ June HK$ 000 Overdue within 1 month 1 96,521 88,236 Between 2 to 3 months ,430 4,927 Over 3 months 3 68,906 29, , ,653 Majority of the overdue advances to customers are secured by listed securities held by the Group as collateral with undiscounted market value of HK$2,870 million (30 June 2009: HK$1,434 million). 2,870,000, ,434,000, Haitong International Securities Group Limited Annual Report 2009/2010

144 21 Accounts receivable December HK$ June HK$ 000 Accounts receivable from: Clients 51,757 47,534 Brokers, dealers and clearing house 872,513 1,043,292 Subscription of new shares in IPO 1,646,881 Others 42,676 8, ,946 2,745, /

145 21 Accounts receivable (continued) 21 There is no impaired accounts receivable as of the balance sheet dates. The ageing analysis of the accounts receivable is as follows: 31 December HK$ June HK$ 000 Current or overdue within 3 months 3 960,671 2,743,072 Between 4 and 6 months 4 6 2,791 2,099 Between 7 and 12 months , Over 1 year 1 2, ,946 2,745,969 Trading limits are set for customers. The Group seeks to maintain tight control over its outstanding accounts receivable in order to minimise credit risk. Overdue balances are regularly monitored by management. 198 Haitong International Securities Group Limited Annual Report 2009/2010

146 22 Prepayments, deposits and other receivables 22 Group Company 31 December June December June HK$ 000 HK$ 000 HK$ 000 HK$ 000 Prepayments, deposits and other receivables 133,600 40,510 5,994 2, ,600 40,510 5,994 2,985 None of the above balance is considered impaired. 23 Financial investments at fair value through profit or loss 23 Group 31 December HK$ June HK$ 000 Held for trading: Listed equity investments, at fair value: in Hong Kong 89,185 20,176 Unlisted investment funds, at fair value: in overseas (including Mainland China) 3,066 2,452 92,251 22, /

147 23 Financial investments at fair value through profit or loss (continued) 23 An analysis of issuers of financial investments at fair value through profit or loss is as follows: Group 31 December HK$ June HK$ 000 Equity securities: Bank and other financial institutions 3,912 Corporate entities 88,339 22,628 92,251 22, Cash held on behalf of customers 24 The Group maintains segregated trust accounts with authorized institutions to hold clients monies arising from its normal course of business. The Group has classified the clients monies as cash held on behalf of customers under the current assets section of the consolidated balance sheet and recognised the corresponding accounts payable (note 25) to respective clients on the grounds that it is liable for any loss or misappropriation of clients monies. The cash held on behalf of customers is restricted and governed by the Securities and Futures (Client Money) Rules under the Securities and Futures Ordinance Haitong International Securities Group Limited Annual Report 2009/2010

148 25 Accounts payable December HK$ June HK$ 000 Accounts payable to: Clients 6,045,387 4,647,021 Brokers, dealers and clearing house 6,307 43,834 Others 799 3,214 6,052,493 4,694,069 The majority of the accounts payable balances is repayable on demand except where certain accounts payable to clients represent margin deposits received from clients for their trading activities under normal course of business. Only the excess amounts over the required margin deposits stipulated are repayable on demand. The Group has a practice to satisfy all the requests for payments immediately within the credit period. There is no overdue accounts payable balance as of the balance sheet dates. Except for the accounts payable to clients which bear interest at 0.001% as at 31 December 2010 (30 June 2009: 0.001%), all the accounts payable are non-interest bearing % % Accounts payable to clients also include those payables placed in trust accounts with authorised institutions of HK$5,158,603,000 (30 June 2009: HK$3,661,886,000), Hong Kong Futures Exchange Clearing Corporation Limited, Stock Exchange Options Clearing House and other futures dealers totaling HK$592,514,000 (30 June 2009: HK$355,659,000). 5,158,603, ,661,886, ,514, ,659, /

149 26 Other payables and accruals 26 Group Company 31 December June December June HK$ 000 HK$ 000 HK$ 000 HK$ 000 Other payables and accruals 136,792 52,933 39,681 12,246 Other payables are non-interest bearing and are repayable within one year Loans and other borrowings 27 Group Company 31 December June December June HK$ 000 HK$ 000 HK$ 000 HK$ 000 Current Liabilities Secured borrowing: Bank overdrafts (note (a),(b)) (a),(b) 13,892 31,737 Bank loans (note (b),(c)) (b),(c) 1,421, ,000 Unsecured borrowing: Bank loans (note (c)) (c) 799,375 1,817, ,375 47,500 Other loans (note (c), (d)) (c),(d) 740, , ,000 2,974,267 2,184,237 1,389,375 47, Haitong International Securities Group Limited Annual Report 2009/2010

150 27 Loans and other borrowings (continued) 27 (a) The secured bank overdrafts are repayable on demand. (a) (b) Bank overdrafts and bank loans of HK$1,435 million (30 June 2009: HK$267 million) are secured by the listed shares held by the Group as security for advances to customers (with the customers consent) of HK$3,252 million (30 June 2009: HK$578 million). (b) 1,435,000, ,000,000 3,252,000, ,000,000 (c) Bank loans and other loans are repayable on demand or within 1 year. (c) 1 (d) The HK$100 million brought forward from prior period was an unsecured other loan obtained from an independent third party, charged at 4% per annum. Interest expense of HK$7,896,574 (18 months ended 30 June 2009: HK$3,579,589) was paid in the current 18-month period. (d) 100,000,000 4% 18 7,896, ,579,589 During the period, the Group newly obtained another HK$640 million unsecured other loan from Haitong International Holdings Limited (formerly known as Hai Tong (HK) Financial Holdings Limited), the immediate holding company of the Company charged at 1.10% to 1.28% per annum. Interest expense of HK$988,000 was paid. 640,000, % 1.28% 988,000 All the Group s bank borrowings bear interest at Hong Kong Interbank Offered Rate ( HIBOR ) plus 0.55% to 1% per annum (30 June 2009: HIBOR plus 0.675% to 0.90% per annum or at a fixed rate from 0.90% to 1.15% per annum). 0.55% 1% % 0.90% 0.90% 1.15% 2009/

151 28 Deferred tax assets/liabilities 28 Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet. Group 31 December HK$ June HK$ 000 Deferred tax assets to be settled after more than 12 months Deferred tax liabilities to be settled after more than 12 months 12 2,343 10, (19,832) (14,207) (17,489) (3,609) The Company does not have any significant deferred tax assets and liabilities as at 31 December 2010 and 30 June Haitong International Securities Group Limited Annual Report 2009/2010

152 28 Deferred tax assets/liabilities (continued) 28 The movements in deferred tax assets and liabilities of the Group during the period, without taking into consideration the offsetting of balances within the same tax jurisdiction, are as follows: Deferred tax assets Group Accelerated depreciation allowances Tax losses Total HK$ 000 HK$ 000 HK$ 000 At 1 January ,666 1,666 Deferred tax credited to the consolidated income statement during the period (note 9) 9 2,799 7,657 10,456 At 30 June 2009 and 1 July 2009 Deferred tax charged to the consolidated income statement during the period (note 9) ,465 7,657 12,122 9 (3,580) (5,073) (8,653) At 31 December ,584 3, /

153 28 Deferred tax assets/liabilities (continued) 28 Deferred tax liabilities Group Accelerated depreciation allowances HK$ 000 At 1 January ,006 Deferred tax charged to the consolidated income statement during the period (note 9) 9 9,725 At 30 June 2009 and 1 July ,731 Acquisition of subsidiaries (note 32) Deferred tax charged to the consolidated income statement during the period (note 9) 9 5,227 At 31 December ,378 Unrecognised deferred tax assets Deferred tax assets are recognised for tax loss carry-forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group did not recognise deferred tax assets of approximately HK$23 million (30 June 2009: HK$29 million) in respect of losses amounting to approximately HK$141 million (30 June 2009: HK$177 million) that can be carried forward against future taxable income. These tax losses have no expiry date. 141,000, ,000,000 23,000, ,000, Haitong International Securities Group Limited Annual Report 2009/2010

154 29 Share capital December HK$ June HK$ 000 Authorised: 2,000,000,000 (30 June 2009: 2,000,000, ,000,000,000) ordinary shares of HK$0.10 each 2,000,000, , ,000 Issued and fully paid: 715,032,706 (30 June 2009: 706,448,228) ordinary shares of HK$0.10 each 715,032, ,448, ,503 70,645 The movements in issued share capital were as follows: Number of shares in issue Share capital HK$ 000 As at 1 January ,949,699 65,395 New shares issued due to exercise of share options (a) (note (a)) 1,901, Scrip dividends issues (note (b)) (b) 64,564,699 6,457 Share buyback (note (c)) (c) (13,968,000) (1,397) As at 30 June ,448,228 70,645 As at 1 July ,448,228 70,645 New shares issued due to exercise of share options (a) (note (a)) 1,740, Scrip dividends issued (note (b)) (b) 6,844, As at 31 December ,032,706 71, /

155 29 Share capital (continued) 29 (a) During the 18 months ended 31 December 2010, 1,740,225 (18 months ended 30 June 2009: 1,901,830) share options were exercised at subscription prices from HK$5.874 per share to HK$5.879 per share (18 months ended 30 June 2009: HK$0.907 per share to HK$1.20 per share), resulting in the issue of 1,740,225 (18 months ended 30 June 2009: 1,901,830) new ordinary shares of HK$0.1 each for a total consideration of HK$10,223,000 (18 months ended 30 June 2009: HK$1,877,000). (a) ,740, ,901, ,223, ,877,000 1,740, ,901, (b) At the annual general meeting held on 29 May 2008, the shareholders of the Company have approved a final dividend of HK25 cents per share in scrip form with a cash option. 40,572,800 shares were issued on 17 July 2008 in scrip form. (b) ,572,800 At a meeting of the Board of Directors held on 11 September 2008, the directors resolved to declare a first interim dividend of HK5 cents per share in scrip form with a cash option. 23,991,899 shares were issued on 28 November 2008 in scrip form ,991,899 At the annual general meeting held on 1 December 2009, the shareholders of the Company have approved a final dividend of HK8 cents per share in cash with a scrip option. 1,246,860 shares were issued on 15 January 2010 in scrip form ,246,860 At a meeting of the Board of Directors held on 19 August 2010, the directors resolved to declare a second interim dividend of HK6 cents per share in scrip form with a cash option. 5,597,393 shares were issued on 10 November 2010 in scrip form ,597, (c) During the 18 months ended 30 June 2009, the Company bought back 13,968,000 shares from the market at an average price from HK$0.905 to HK$0.937 per share. (c) ,968, Haitong International Securities Group Limited Annual Report 2009/2010

156 30 Share option scheme On 23 August 2002, the shareholders of the Company approved the adoption of a share option scheme (the 2002 Share Option Scheme ). A summary of the principal terms of the 2002 Share Option Scheme, as disclosed in accordance with the Listing Rules, is set out as follows: The 2002 Share Option Scheme was adopted for the purpose of attracting, retaining and motivating talented employees to strive towards long term performance targets set by the Company and its subsidiaries and at the same time allowing the participants to enjoy the results of the Company attained through their effort and contribution. Under the 2002 Share Option Scheme, options may be granted to any full time employees, executive and nonexecutive directors of the Company or any of its subsidiaries or associates. The maximum number of shares which may be issued upon exercise of all options to be granted under the 2002 Share Option Scheme and any other share option schemes of the Company shall not in aggregate exceed 10% of the total number of shares in issue as at the date of adoption of the 2002 Share Option Scheme (the Scheme Mandate Limit ) but the Company may seek approval of its shareholders at general meetings to refresh the Scheme Mandate Limit, save that the maximum number of shares in respect of which options may be granted by directors of the Company under the 2002 Share Option Scheme and any other share option schemes of the Company shall not exceed 10% of the issued share capital of the Company as at the date of approval by the shareholders of the Company at general meetings where such limit is refreshed. Options previously granted under the 2002 Share Option Scheme and any other share option schemes of the Company (including those outstanding, cancelled, lapsed or exercised options) will not be counted for the purpose of calculating such 10% limit as refreshed. Notwithstanding the aforesaid in this paragraph, the maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the 2002 Share Option Scheme and any other share option schemes of the Company shall not exceed 30% (or such higher percentage as may be allowed under the Listing Rules) of the total number of shares in issue from time to time. As at 31 December 2010, the total number of shares available for issue under the 2002 Share Option Scheme was 1,687,426 shares, which represented approximately 0.236% of the issued share capital of the Company at that day. The maximum number of shares issued and to be issued upon exercise of the options granted to each participant under the 2002 Share Option Scheme and any other share option schemes of the Company (including both exercised and outstanding options) in any 12-month period shall not exceed 1% of the total number of the Company s shares in issue. Any further grant of share options in excess of this limit is subject to approval by the shareholders of the Company at a general meeting % % 10% % ,687, % % 2009/

157 30 Share option scheme (continued) 30 Share options granted to a director, chief executive or substantial shareholders of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors. In addition, any share options granted to a substantial shareholder or an independent non-executive director of the Company, or to any of their associates, in excess of 0.1% of the total number of shares of the Company in issue at the date on which such grant is proposed by the directors or with an aggregate value (based on the closing price of the Company s shares at the date on which such grant is proposed by the directors) in excess of HK$5 million, within any 12-month period, are subject to shareholders approval in advance at a general meeting of the Company % 5,000,000 The offer of a grant of share options may be accepted within 30 days from the date of the offer upon payment of a consideration of HK$1 by the grantee. The exercise period of the share options granted is determinable by the directors, and such period shall commence not earlier than 6 months from the date of grant of the options and expire not later than 10 years after the date of grant of the options. The vesting period of the share options is from the date of the grant until the commencement of the exercise period. All share options under the 2002 Share Option Scheme are subject to a 6-month vesting period The exercise price of the share options is determinable by the directors, and shall be at least the highest of (i) the closing price of the Company s shares as stated in the Stock Exchange s daily quotations sheet on the offer date; (ii) the average closing price of the Company s shares as stated in the Stock Exchange s daily quotations sheets for the 5 trading days immediately preceding the offer date; and (iii) the nominal value of the Company s shares. (i) (ii) 5 (iii) Share options do not confer rights on the holders to dividends or to vote at shareholders meetings. The 2002 Share Option Scheme shall be valid and effective for a period of 10 years commencing from the date on which it is conditionally adopted by resolution of the Company at a general meeting and will expire on 22 August Haitong International Securities Group Limited Annual Report 2009/2010

158 30 Share option scheme (continued) 30 Movements of share options outstanding under the 2002 Share Option Scheme during the period are as follows: 2002 For the 18 months ended 31 December Weighted average exercise price Number of options For the 18 months ended 30 June Weighted average exercise price Number of options HK$ per share 000 HK$ per share 000 At 1 July 2009/1 January , ,900 Granted during the period ,480 Adjusted during the period 5.24 (46) ,013 Exercised during the period 5.87 (1,740) 0.99 (1,902) Forfeited during the period 5.70 (3,580) 5.52 (3,318) At 31 December 2010/30 June , ,693 The weighted average share price at the date of exercise for share options exercised during the period was HK$6.93 (18 months ended 30 June 2009: HK$3.73) The exercise prices and exercise periods of the share options outstanding as at that balance sheet date are as follows: 31 December Number of options Exercise price 1 Exercise period HK$ per share 21, June 2008 to 31 May , March 2011 to 2 March , /

159 30 Share option scheme (continued) June Number of options Exercise price 1 Exercise period HK$ per share 26, June 2008 to 31 May ,693 1 The exercise price of the share option is subject to adjustment in case of rights, scrip dividend or bonus issues, or other similar changes in the Company s share capital. New share option granted in September 2010 On 3 September 2010, the Company granted 33,480,000 share options (of which 32,880,000 shares options were accepted) to its employees (including directors) under the 2002 Share Option Scheme pursuant to a board of directors resolution with a 6-month vesting period from 3 September 2010 to 2 March 2011 and exercisable from 3 March 2011 to 2 March ,480,000 32,880, The fair value of the equity settled share options granted above is estimated at the date of grant using the binomial model. The fair value of the share options granted above was HK$ 30,726,712 (HK$0.92 each) of which the Group recognised a share option expense of HK$12,791,000 during the current 18-month period. 30,726, ,791, Haitong International Securities Group Limited Annual Report 2009/2010

160 30 Share option scheme (continued) 30 New share option granted in September 2010 (continued) The following table lists the key inputs to the model used: Share price at the date of grant HK$4.85 Contractual option life 8.5 years Exercise price HK$4.85 Expected volatility 52.56% Expected option life 8.5 years Expected dividend yield (%) 5.61% Risk-free interest rate (%) (based on Exchange Fund Notes) % % 8.5 %) 5.61% %) % The expected volatility is based on the historic volatility, and calculated based on the contractual life of the share options. Expected dividend yield is based on historical dividends. Estimation of fair value could be materially affected due to the changes in the input assumptions disclose above. Outstanding share options The 1,740,225 (2009: 1,901,830) share options exercised during the current period resulted in the issue of 1,740,225 (2009: 1,901,830) ordinary shares of the Company and new share capital of HK$174,023 (2009: HK$190,183) and share premium of HK$10,048,559 (2009: HK$1,687,827) (before issue expenses), as further detailed in note 29 to the consolidated financial statements. 1,740, ,901,830 1,740, ,901, , ,183 10,048, ,687, At the balance sheet date, the Company had 54,806,688 (30 June 2009: 26,692,988) share options outstanding under the 2002 Share Option Scheme, which represented approximately 7.66 % (30 June 2009: 3.78%) of the Company s shares in issue as at that date. The exercise in full of the remaining share options would, under the present capital structure of the Company, result in the issue of 54,806,688 (30 June 2009: 26,692,988) additional ordinary shares of the Company and additional share capital of HK$5,480,669 (30 June 2009: HK$2,669,299) and share premium of HK$283,055,453 (30 June 2009: HK$154,152,006) (before issue expenses) ,806, ,692, % % 54,806, ,692,988 5,480, ,669, ,055, ,152,006 At the date of approval of these consolidated financial statements, the Company had 54,806,688 (30 June 2009: 24,412,422) share options outstanding under the 2002 Share Option Scheme, which represents approximately 7.66% (30 June 2009: 3.46%) of the Company s shares in issue at that date ,806, ,412, % % 2009/

161 31 Reserves 31 The amounts of the Group s reserves and the movements therein for the current period and prior period are presented in the consolidated statement of changes in equity. The amounts of the Company s reserves and the movements therein for the current and prior period are as follows: Company Share premium account Share option reserve Capital redemption reserve Contributed surplus Retained profits Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,078 2,903 3,705 4,094 8, ,782 Profit for the period note ,526 89,526 Share options exercised note ,688 1,688 New share options granted to 30 employees note 30 13,425 13, final and 2008 interim dividend declared and 2007 settled in shares and cash note ,476 (35,206) 87,270 Proposed final 2009 dividend note (56,516) (56,516) Share options lapsed 1,844 (1,844) Purchase of share note (11,409) 1,397 (1,397) (11,409) At 30 June ,677 14,484 5,102 2,697 5, ,766 Profit for the period note , ,648 Share options exercised note ,337 (1,288) 10,049 New share options granted to 30 employees note 30 12,791 12, final and 2010 first and second interim dividend declared and settled in shares and cash note ,842 (113,434) (73,592) Proposed final 2010 dividend note (57,203) (57,203) Share options lapsed 1,616 (1,616) At 31 December ,472 24,371 5,102 2,697 11, , Haitong International Securities Group Limited Annual Report 2009/2010

162 31 Reserves (continued) 31 The contributed surplus of the Group and the Company arose in 1996 as a result of the group reorganisation in preparation for the listing of the Company and represented the difference between the nominal value of the share capital issued by the Company and the aggregate net asset value of the subsidiaries acquired at the date of acquisition. Under the Companies Act 1981 of Bermuda (as amended), the Company may make distributions to its members out of the contributed surplus provided certain conditions are met The share option reserve of the Group and the Company comprises the fair value of share options granted which are yet to be exercised, as further explained in the accounting policy for share-based payment transactions in note 2.18 to the consolidated financial statements. The amount will be transferred to the share premium account when the related options are expired or forfeited Business combination 32 On 2 September 2010, the Group acquired the entire issued share capital in Hai Tong Asset Management (HK) Limited and its subsidiaries (collectively referred to as the Hai Tong Asset Group ) and Hai Tong Capital (HK) Limited ( Hai Tong Capital ) for an aggregate cash consideration of HK$30,132,276 from Haitong International Holdings Limited (formerly known as Hai Tong (HK) Financial Holdings Limited), the immediate holding company of the Company ,132,276 Hai Tong Asset Group is engaged in provision of assets and investment management services and Hai Tong Capital is engaged in provision of corporate finance and advisory services. As a result of the acquisition, the Group is expected to augment its business and resources by reorganising with certain subsidiaries of Haitong International Holdings Limited engaging in similar activities with companies within the Group. 2009/

163 32 Business combination (continued) 32 The following table summarises the consideration paid for the acquisitions and the amounts of the assets acquired and liabilities assumed recognised at the acquisition date. HK$ 000 Consideration Cash consideration paid to Haitong International Holdings Limited 30,132 Less: Cash and bank balances acquired (29,763) Net cash consideration transferred 369 Recognised amounts of identifiable assets acquired and liabilities assumed (excluding the cash and bank balances acquired) Fixed assets 2,029 Accounts receivable 2,071 Accounts payable (2,377) Tax payable (934) Deferred tax liabilities (420) Total identifiable net assets (excluding the cash and bank balances acquired) 369 The fair value of accounts receivable approximates its gross contractual amounts. No receivable is expected to be uncollectible. Since the acquisition on 2 September 2010, Hai Tong Asset Group contributed revenue and net profit of HK$5,517,553 and HK$133,812 respectively to the Group. Contribution from Hai Tong Capital is immaterial to the Group ,517, , Haitong International Securities Group Limited Annual Report 2009/2010

164 33 Operating lease arrangements 33 The Group leases certain of its office properties and computer equipment under operating lease arrangements. Leases for properties are negotiated for terms ranging from six months to six years, and those for computer equipment for terms of three to four years. As at 31 December 2010, the Group and the Company had total future minimum lease payments under non-cancellable operating leases falling due as follows: Group Company 31 December June December June HK$ 000 HK$ 000 HK$ 000 HK$ 000 Within one year 1 83,141 47, In the second to fifth years, inclusive 25 97,410 22, ,551 69,744 1, Other commitments 34 In addition to the operating lease commitments detailed in note 33 above, the Group had the following commitments at the balance sheet date: 33 Group 31 December HK$ June HK$ 000 Contracted, but not provided for: Computer equipment 10,764 1, /

165 35 Related party transactions 35 (a) In addition to the transactions and balances detailed elsewhere in these financial statements, the Group had the following material transactions with related parties during the period: (a) (i) During the period, the Group leased from New World Tower Company Limited, an indirect wholly-owned subsidiary of New World Development Company Limited ( NWD ), which was itself the ultimate holding company of the Company until 21 December 2009, certain office premises at New World Tower, Queen s Road Central, Hong Kong, at a monthly rental, including rates, management and air-conditioning fees, of approximately HK$1,855,956 (18 months ended 30 June 2009: HK$2,030,555) for a term of 3 years. During the period from 1 July 2009 to 21 December 2009, the Group paid total rentals of HK$11,135,736 (18 months ended 30 June 2009: HK$36,550,000). The rentals paid were calculated by reference to open market rentals as confirmed to the Group by an independent professional valuer. (i) ,855, ,030, ,135, ,550,000 (ii) During the period, the Group leased from New World First Bus Services Limited, an indirect jointly-controlled entity of Chow Tai Fook Enterprises Limited ( CTF ) (which is itself a company controlled by the family of Dr. Cheng Kar Shun, Henry, an executive director of the Company until 13 January 2010) and NWS Holdings Limited (which is itself a listed holding company of the Company until 21 December 2009), certain office premises at No. 8 Chong Fu Road, Chai Wan, Hong Kong. During the period from 1 July 2009 to 21 December 2009, the Group paid total rentals, including rates, management and air-conditioning fees of approximately HK$436,020 (18 months ended 30 June 2009: HK$342,000). (ii) , , Haitong International Securities Group Limited Annual Report 2009/2010

166 35 Related party transactions (continued) 35 (iii) During the period, the Group provided various corporate advisory services to International Entertainment Corporation ( IEC ), a subsidiary of CTF, which is itself a company controlled by the family of Dr. Cheng Kar Shun, Henry. Dr. Cheng Kar Shun, Henry and Mr. To Hin Tsun, Gerald, an executive director and a non-executive director of the Company respectively until 13 January 2010, are also executive directors of IEC. Mr. Tsui Hing Chuen, William and Mr. Lau Wai Piu, Bill, independent non-executive directors of the Company, are also independent non-executive directors of IEC. The income from these transactions amounted to HK$297,500 (18 months ended 30 June 2009: HK$818,000) for the period and was recognised in accordance with the terms of the underlying agreements. (iii) , ,000 (iv) During the period, the Group provided placing services to Vision Values Holdings Limited (formerly known as New World Mobile Holdings Limited). Mr. Tsui Hing Chuen, William and Mr. Lau Wai Piu, Bill, independent non-executive directors of the Company, are also independent non-executive directors of Vision Values Holdings Limited. The income from these transactions amounted to HK$974,925 (18 months ended 30 June 2009: Nil) for the period and was charged in accordance with the terms of the underlying agreement. (iv) Vision Values Holdings Limited Vision Values Holdings Limited 974, (v) During the period, the Group obtained an unsecured loan from Chow Tai Fook Jewellery Company Limited, a company controlled by the family of Dr. Cheng Kar Shun, Henry, who was an executive director of the Company until 13 January The loan was repaid during the period. The interest expense for such other loan amounted to HK$540,000 (18 months ended 30 June 2009: Nil) during the period which Dr. Cheng Kar Shun, Henry was an executive director of the Company and was charged at 0.75% to 1.1%. (v) , % 1.1% 2009/

167 35 Related party transactions (continued) 35 (vi) During the period, the Group obtained an unsecured loan from Haitong International Holdings Limited (formerly known as Hai Tong (HK) Financial Holdings Limited), the immediate holding company of the Company. Interest expense of HK$988,000 was paid during the period (18 months ended 30 June 2009: Nil). (vi) 988, (vii) During the period, the Group acquired Hai Tong Asset Management (HK) Limited and its subsidiaries and Hai Tong Capital (HK) Limited from Haitong International Holdings Limited (formerly known as Hai Tong (HK) Financial Holdings Limited), the immediate holding company of the Company. Details of the acquisitions have been disclosed in note 32 above. (vii) 32 (viii) On 2 September 2010, the Company entered into a master services agreement with Haitong Securities Co., Ltd., the ultimate holding company of the Company, which the Company and Haitong Securities Co., Ltd. has each agreed to provide services to companies of the Group or Haitong Securities Co., Ltd. and its subsidiaries. Services pursuant to the master services agreement include brokerage transactions, research transactions, investment management and advisory services transactions, seed injection or financing transactions, corporate finance transactions and information technology support transactions. The provisions of services pursuant to the master services agreement are subsequently approved by a special general meeting on 13 October The income and expenses from these transactions amounted to HK$9,000 (18 months ended 30 June 2009: Nil) and HK$275,000 (18 months ended 30 June 2009: Nil) respectively for the period in accordance with the terms of the master services agreement. (viii) , , The related party transactions disclosed in note 35(a)(i) to 35(a)(iii) and 35(a)(vi) to 35(a)(viii) above also constitute connected transactions or continuing connected transactions as defined in Chapter 14A of the Listing Rules. 35(a)(i) 35(a)(iii) 35(a)(vi) 35(a)(viii) 14A 220 Haitong International Securities Group Limited Annual Report 2009/2010

168 35 Related party transactions (continued) 35 (b) Compensation of key management personnel of the Group: (b) For the 18 months ended 31 December For the 18 months ended 30 June Short term employee benefits 58,742 46,171 Post-employment benefits 239 2,368 Share-based payments 11,564 5,239 Total compensation paid to key management personnel 70,545 53,778 Further details of directors emoluments are included in note 7 to the consolidated financial statements /

169 36 Maturity profile of assets and liabilities 36 An analysis of the maturity profile of certain assets and liabilities of the Group analysed by the remaining period at the balance sheet date to the contractual maturity date is as follows: Repayable on demand 3 months or less Total 3 HK$ 000 HK$ 000 HK$ December Assets Advances to customers 4,375,589 4,375,589 Cash held on behalf of customers 2,711,586 2,447,017 5,158,603 Cash and bank balances 244, , ,680 7,331,908 2,619,964 9,951,872 Liabilities Account payables to clients excluding payables to brokers, dealers and clearing house 5,915, ,614 6,045,387 Loans and other borrowings 113,892 2,860,375 2,974,267 6,029,665 2,989,989 9,019, Haitong International Securities Group Limited Annual Report 2009/2010

170 36 Maturity profile of assets and liabilities (continued) 36 Repayable on demand 3 months or less Total 3 HK$ 000 HK$ 000 HK$ June Assets Accounts receivable from subscription of new shares in IPO 1,646,881 1,646,881 Advances to customers 1,726,668 1,726,668 Cash held on behalf of customers 3,661,886 3,661,886 Cash and bank balances 224, , ,790 5,612,598 1,826,627 7,439,225 Liabilities Account payables to clients excluding payables to brokers, dealers and clearing house 4,295, ,357 4,647,021 Loans and other borrowings 131,737 2,052,500 2,184,237 4,427,401 2,403,857 6,831, Financial instruments by category 37 All the financial assets and financial liabilities (including advances to customers, accounts receivable/payable, deposits, cash, loans and other borrowings, other assets and payables) in the consolidated balance sheet are carried at amortised cost using the effective interest method as loans and receivables except for the available-for-sale investments and financial investments at fair value through profit or loss which are both carried at fair value. 2009/

171 38 Financial risk management objectives and policies 38 The Group s principal financial instruments comprise advances to customers, accounts receivable, accounts payable, cash and bank balances and loans and other borrowings. Advances to customers, accounts receivable and accounts payable mainly arise from the Group s operations while cash and bank balances and loans and other borrowings are to maintain liquidity or to raise financing for the Group s operations. The main risks arising from the Group s financial instruments are interest rate risk, foreign currency risk, credit risk, liquidity risk and equity price risk. The board reviews and agrees policies for managing each of these risks and they are summarised below. Interest rate risk The Group s exposure to the risk of changes in market interest rates relates primarily to the Group s bank deposits, advances to customers, loans and other borrowings as well as other interestbearing accounts receivables and payables. The Group s major interest-bearing asset is the advances to customers, whose financing and interest rate risk exposure are matched by the Group s loans and other borrowings. Management actively monitors the Group s net interest rate exposure through setting limits on the level of mismatch of interest rate repricing and duration gap and aims at maintaining an interest rate spread, such that the Group is always in a net interest-bearing asset position and derives net interest income. The Group s interest rate risk lies in fluctuations of HIBOR or Hong Kong Dollar Best Lending Rate, as the Group s interestbearing assets and liabilities are mainly Hong Kong dollar denominated. All the interest bearing financial assets and liabilities are subject to an interest re-pricing risk of 3 months or below. There is no concentration of interest risk exposure Haitong International Securities Group Limited Annual Report 2009/2010

172 38 Financial risk management objectives and policies (continued) 38 Interest rate risk (continued) At 31 December 2010, if market interest rates at that date had been 25 basis points (30 June 2009: 25 basis points) higher/lower with all other variables held constant, profit before taxation for the period would have been HK$6,620,000 higher/lower (30 June 2009: HK$817,000 higher/lower), mainly as a result of higher/ lower net interest income earned on floating rate bank balances, advances to customers, accounts receivables, accounts payable and loans and other borrowings ,620, ,000 The Company s interest rate risk exposure is considered insignificant. Foreign exchange risk The Group s foreign currency risk arises principally from its leveraged foreign exchange business as well as the Group s transactions denominated in currencies other than HKD. The Group hedges majority of its client trades in its leveraged foreign exchange business back-to-back with external counterparties, such that the Group is not exposed to significant foreign currency risk. Apart from this foreign exchange exposure, the majority of the Group s and the Company s assets and liabilities are denominated in Hong Kong dollars and United States dollars of which the exchange rates have remained relatively stable during the period. Credit risk The advances to customers, accounts and other receivables, cash and bank balances and other assets represent the Group s major exposure to the credit risk arising from the default of the counterparty, with a maximum exposure equal to the carrying amounts of these financial assets in the consolidated balance sheet. 2009/

173 38 Financial risk management objectives and policies (continued) 38 Credit risk (continued) The Credit Committee of the Group has appointed a group of authorised persons who are charged with the responsibility of approving credit limit of each customer. The Committee is responsible for approval of share acceptable for margin lending, setting stock margin ratio for each approved share. The approved share list is updated bimonthly, and will be revised as and when deemed necessary by the Committee. The Committee will prescribe from time to time lending limits on individual share or on any individual customer and his/her associates. The Credit Control Department of the Group is responsible for making margin calls to customers whose trades exceed their respective limits. Any such excess is required to be made good within two days for securities and the next day for futures of the deficiency report. The deficiency report will be monitored daily by the Group s finance director and responsible officers. Failure to meet margin calls may result in the liquidation of the customers positions. Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Group resulting from both its advances to customers (margin loan) and cash and bank balances based on the following: Advances to customers (margin loan) are backed by collateral. The Group only accepts collateral in the form of cash and liquid stocks. Majority of cash and balances with banks were deposited in reputable large commercial banks with credit rating of Baa3 or above issued by Moody s or BBB or above issued by Standard & Poor s. For accounts and other receivables, approximately HK$76 million (30 June 2009: HK$45 million) was receivables from clients arising from dealing in securities, which normally had a delivery-againstpayment settlement term of 2 days. There is no concentration of credit risk with respect to the receivables, as the Group has a large number of clients who are internationally dispersed. Most of the accounts and other receivables from clients with overdue more than 30 days are fully secured by listed securities with market value significantly higher than the carrying amount. The ageing analysis of the advances to customers and accounts receivable are included in note 20 and note 21 respectively. Baa3 BBB 76,000, ,000, Haitong International Securities Group Limited Annual Report 2009/2010

174 38 Financial risk management objectives and policies (continued) 38 Credit risk (continued) Accounts receivable from brokers, dealers and clearing house are placed with large international financial institutions which are governed by regulators including Hong Kong Securities and Futures Commission (the SFC ). The risk of default in repayment is considered to be minimal. As at 30 June 2009, accounts receivable of HK$1,647 million was arising from subscription of new shares in IPO. The amount has already been settled within one week in July There was no outstanding accounts receivable in IPO as at 31 December ,647,000, Other assets are mainly deposits placed with the regulators which are considered to have minimum credit risk. Other than the above, the Company s credit risk exposure mainly represents the amounts due from subsidiaries. These intercompany balances are considered to have minimum credit risk. Liquidity risk A number of the Group s activities are subject to various statutory liquidity requirements as prescribed by the Securities and Futures Commission in accordance with the Hong Kong Securities and Futures Ordinance (the HKSFO ). The Group has put in place monitoring system to ensure that it maintains adequate liquid capital to fund its business commitments and to comply with the relevant Financial Resources Rules under the HKSFO. As part of the measures to safeguard liquidity, the Group has maintained substantial long term and other stand-by banking facilities, diversifying the funding sources and spacing out the maturity dates. 2009/

175 38 Financial risk management objectives and policies (continued) 38 Liquidity risk (continued) The maturity profile of the Group s and Company s financial liabilities as at the balance sheet date, based on the contracted undiscounted payments, was as follows: Group 31 December On demand Less than 3 months 1 to 5 Years Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Loans and other borrowings 113,892 2,861,997 2,975,889 Accounts payable 5,922, ,614 6,052,493 Financial liabilities included in other payables and accruals 136, ,792 6,173,563 2,991,611 9,165, June On demand Less than 3 months 1 to 5 Years Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Loans and other borrowings 131,737 2,052,873 2,184,610 Accounts payable 4,342, ,357 4,694,069 Financial liabilities included in other payables and accruals 52,933 52,933 4,527,382 2,404,230 6,931, Haitong International Securities Group Limited Annual Report 2009/2010

176 38 Financial risk management objectives and policies (continued) 38 Liquidity risk (continued) Company 31 December On demand Less than 3 months 1 to 5 Years Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Loans and other borrowings 1,390,803 1,390,803 Financial liabilities included in other payables and accruals 39,681 39,681 Amounts due to subsidiaries 756, , ,778 1,390,803 2,186, June On demand Less than 3 months 1 to 5 Years Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Loans and other borrowings 47,543 47,543 Financial liabilities included in other payables and accruals 12,246 12,246 Amounts due to subsidiaries 804, , ,255 47, , /

177 38 Financial risk management objectives and policies (continued) 38 Equity price risk Equity price risk is the risk that the fair values of equity securities decrease as a result of changes in the levels of equity indices and the values of individual securities. The Group is exposed to equity price risk arising from individual equity investment classified as financial investment at fair value through profit or loss and available-for-sale investments as at 31 December 2010 and 30 June The Group s equity investments are listed on the Hong Kong stock exchanges and are valued at quoted market prices at the balance sheet date The table below summarises the impact of increases in the Hong Kong Hang Seng Index on the equity s profit before taxation for the period and on the investment revaluation reserve. The analysis is based on the assumption that the equity index had changed by 10% with all other variables held constant and all the equity instruments move according to the historical correlation with the index. 10% Hong Kong Hang Seng Index Impact on profit before taxation HK$ 000 Impact on the investment revaluation reserve in equity HK$ December Increase by 10% 10% 9,008 2,796 Decrease by 10% 10% (9,008) (2,796) 30 June Increase by 10% 10% 1,765 2,720 Decrease by 10% 10% (2,323) (2,162) 230 Haitong International Securities Group Limited Annual Report 2009/2010

178 38 Financial risk management objectives and policies (continued) 38 Fair value of financial instruments Apart from the financial investments at fair value through profit or loss and available-for-sale investments, which are carried at fair value, the carrying amounts of all other financial assets and liabilities approximated their fair value. The fair value hierarchy for the financial investments at fair value through profit or loss and available-for-sale investments is analysed as follows: Fair value hierarchy HKFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Company s market assumptions. These two types of inputs have created the following fair value hierarchy: 7 Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Hong Kong Stock Exchange) and exchanges traded derivatives like futures (for example, Nasdaq, S&P 500) Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). This level includes the majority of the OTC derivative contracts, traded loans and issued structured debts. The sources of input parameters like HIBOR yield curve or counterparty credit risk are Bloomberg and Reuters. 2 1 Level 3 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. 3 This hierarchy requires the use of observable market data when available. The Group considers relevant and observable market prices in its valuations where possible. 2009/

179 38 Financial risk management objectives and policies (continued) 38 Fair value of financial instruments (continued) Fair value hierarchy (continued) An analysis of the Group s financial assets measured at fair value as at 31 December 2010 and 30 June 2009 are as follows: Group 31 December Level 1 Level 2 Level 3 Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Available-for-sale investments 19,393 12,625 32,018 Financial investments at fair value through profit or loss 89,185 3,066 92, June Level 1 Level 2 Level 3 Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Available-for-sale investments 20,075 13,000 33,075 Financial investments at fair value through profit or loss 20,176 2,452 22,628 The Group did not have any level 3 financial instruments during the period Haitong International Securities Group Limited Annual Report 2009/2010

180 38 Financial risk management objectives and policies (continued) 38 Capital management The capital represents the Group s equity. The primary objective of the Group s capital management is to safeguard the Group s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the period. The Group is not subject to any externally imposed capital requirements except for certain subsidiaries engaged in securities and futures dealings and broking, corporate finance and advisory, nominee and custodian services, leveraged foreign exchange trading, and fund management, which are regulated entities under the Hong Kong Securities and Futures Commission ( SFC ) and subject to the respective minimum liquid capital requirements from HK$0.1 million to HK$15 million as at 31 December 2010 and 30 June ,00015,000,000 During the period, the subsidiaries of the Group, which are regulated by SFC, complied with all the minimum capital requirement. 2009/

181 38 Financial risk management objectives and policies (continued) 38 Capital management (continued) The Group monitors capital using a gearing ratio, which is total borrowings divided by the total shareholders equity. Total borrowings include interest-bearing bank and other borrowings. Total shareholders equity comprises all components of equity attributable to the equity holders. The Group s policy is to maintain the gearing ratio at a reasonable level. The gearing ratios as at the balance sheet dates were as follows: Group 31 December HK$ June HK$ 000 Total borrowings 2,974,267 2,184,237 Total shareholders equity 2,170,580 1,925,464 Gearing ratio 137% 113% The increase in gearing ratio as at 31 December 2010 is resulted from the unsecured loans from Haitong International Holdings Limited (formerly known as Hai Tong (HK) Financial Holdings Limited), the immediate holding company of the Company. Taking out the above unsecured loans, the Group s gearing ratio as at 31 December 2010 would have been 108% % 234 Haitong International Securities Group Limited Annual Report 2009/2010

182 39 Immediate holding company and ultimate holding company 39 At 30 June 2009, the immediate holding company and ultimate holding company are NWS Holdings Limited and New World Development Company Limited, which are incorporated in Bermuda and Hong Kong respectively On 21 December 2009, Haitong International Holdings Limited (formerly known as Hai Tong (HK) Financial Holdings Limited) acquired approximately 52.86% of the entire issued share capital of the Company from NWS Holdings Limited. Since then, Haitong International Holdings Limited, a company incorporated in Hong Kong, and Haitong Securities Co., Ltd., a company incorporated in PRC, become the immediate holding company and ultimate holding company of the Company respectively. 40 Approval of the financial statements % 40 The financial statements were approved by the board of directors on 16 March /

183 Ten Years Financial Summary For the 18 months ended 31 December /7/2009-1/1/2008-1/4/ /12/ /6/ /12/ /12/ /12/ /12/ /12/ /3/ /3/ /3/ /3/ /3/ HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 RESULTS Revenue 1,459,935 1,084,604 1,465, , , , , , , , , ,505 OPERATING PROFIT/(LOSS) 396, , , ,689 68,663 77,919 45,881 (40,092) (121,614) 99, ,576 46,251 Share of profits/(losses) of an associate and jointly-controlled entities 1,718 6, ,456 (4) (372) (48) PROFIT/(LOSS) BEFORE TAX 398, , , ,941 68,998 79,375 45,877 (40,464) (121,662) 99, ,117 47,027 Tax (charge)/credit (53,386) (20,054) (92,329) (22,971) (6,040) (9,095) (4,297) 1,033 15,860 2,601 (30,768) (7,591) PROFIT/(LOSS) FOR THE PERIOD/YEAR 345, , , ,970 62,958 70,280 41,580 (39,431) (105,802) 102, ,349 39,436 ATTRIBUTABLE TO: Equity holders of the Company 345, , , ,325 62,958 70,280 41,580 (39,431) (105,802) 103, ,554 39,738 Non-controlling Interests (636) (646) 5,384 2,645 (839) (1,205) (302) 345, , , ,970 62,958 70,280 41,580 (39,431) (105,802) 102, ,349 39,436 ASSETS, LIABILITIES AND NON- CONTROLLING INTERESTS: TOTAL ASSETS 11,412,151 8,904,160 7,771,610 4,405,092 3,152,524 2,793,151 2,883,828 2,146,237 2,032,843 2,185,873 2,506,861 1,909,245 TOTAL LIABILITIES (9,234,813) (6,973,302) (5,906,460) (3,221,400) (2,148,493) (1,806,194) (2,061,376) (1,380,096) (1,202,849) (1,225,574) (1,809,964) (1,415,030) NON-CONTROLLING INTERESTS (6,758) (5,394) (8,660) (4,476) (2,290) (1,099) SHAREHOLDERS FUNDS 2,170,580 1,925,464 1,856,490 1,179,216 1,004, , , , , , , , Haitong International Securities Group Limited Annual Report 2009/2010

184 Haitong International Securities Group Limited 25th Floor, New World Tower Queen s Road Central, Hong Kong