HTI MTN Update 2024_OC Publication Announcement (with OC annexed)_Chinese.pdf
HISG has been impacted by China economic downturn, deteriorating offshore financing environment and high global interest rates, among other unsatisfactory external factors, resulting in significant challenges and disruptions to its overall operations. Hong Kong IPO market continued to be weak with total fund raised dropped by 56%. Hang Seng Index saw a 13.82% drop at end 2023 which recorded a 4 consecutive decease. Those negative factors resulted in weaker investment demands and greater investment risks and in turn less stock brokerage transactions, asset management activities, IPO and security underwriting activities.
The situation did not get better in 2023 and HISG recorded a continued negative growth in its key revenue segments. Net commission income dropped 40.2% to USD117m. Investment loss was USD566m, slightly better than last year (2022: USD604m). The large loss was due to the unfavourable market movements and previous year significant investment loss.
<HISG reaction and plans this year>
On cost side, operating expenses contracted by 19% to USD198m (2022: USD244m) due to staff costs cut (-27% to USD108m, staff bonus and incentive cut) and other cost control measures. The volatile financial market and weak credit situations of margin clients led a bit higher impairment provisions (USD222m, +9.1%). Impairment charges on margin financing saw a large increase by 1.89x to USD159m. While the overall impairment provisions recorded a increase, the charges on investment securities measured at amortised cost saw a drop of 55% to USD24m. The impact from poor investment securities is releasing.
Other than that, the high interest rate in 2023 bit led to a 80% jump (to USD311m) in finance costs. As end 2023, HISG has TBB and debt securities in issue totalled USD5b, which put the company a strong interest cost pressure.
Overall, HISG did not get rid of the bleak market and previous difficulties in 2023, and incurred an annual loss of USD1038m. A stringent control on funding structure, risky asset exposure and business development is needed to avoid a further worsening financial condition.
As end 2023, the largest asset on balance sheet was investment securities (36% of assets), followed by advances to customers (19%), asset acquired for financial products issued (15%), clients’ money (13%). Similar to 2022, the total asset size was continues decreasing due to de-risk strategy on the investment portfolio and shrinking brokerage activities.
The above table presents investment held for proprietary investment as well as market making. As of end 2023, the largest holding in investment was unlisted investment funds and consolidated investment funds which composed 75% of the portfolio. <add fund portfolio details>. <debt portfolio details, 19% of the portfolio>
As of end 2023, total net loans were USD1,200m (-33%), about 80% of which were margin financing and the remaining term financing.
For margin financing, the impaired loan represented 32% of gross margin loans as of end 2023. The impaired loan amount was not disclosed in the annual report. Provisions was made against margin clients due to drop in market value of the listed securities pledged to HISG. The loss reserve represented 23% of gross margin loans (2022: 9%), the collateral coverage ratio was 2.68x (2022: 2.91x)
For term financing, loans are collateralised against listed and unlisted equities, investment portfolios, etc. And majority of these advances are also guaranteed by customers’ holding companies or beneficial owner. As of end 2023, 74% of gross term financing was classified as impaired loans. After considering the collaterals’ values, the management set aside a loss reserve equivalent to 26% of gross term financing as of end 2023 (2022: 17%).
HISG has a diversified funding sources from bank loans, debt and equity capital fund. It has a good banking network where it has maintained relationship with OCBC, Bank of Communications, HSBC, Agricultural Bank of China, ICBC Asia, China Everbright Bank, Standard Chartered Bank etc. In 2023, HISG has made an additional HKD7b revolving credit facility agreement which has tenors of 12 months with an extension option one month before the maturity date. HISG’s total banking facilities amounted to HKD39b. <get more info about the utilisation>. During 2023, HISG took several actions to replenish its working capital needs. Over 2023, HISG issued medium term notes under its USD5b Medium Term Note Programme in amounting USD182.5 m and issued subordinated perpetual securities of USD200m. Moreover, the company raised USD147.7m from the right issue.