CITIC Securities Company Limited - Proxy Solicitation & Information Statement 2016

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in CITIC Securities Company Limited , you should at once hand this circular together with the enclosed proxy form and reply slip for the EGM to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 6030)

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Independent Financial Adviser to the Independent Board Committee and Independent Shareholders

A notice convening the EGM of the Company to be held at Qing Room, 5/F, Four Seasons Hotel, No. 48 Liangmaqiao Road, Chaoyang District, Beijing, the PRC at 10:30 a.m. on Thursday, 19 January 2017 is set out on pages 74 to 76 of this circular.

Whether or not you are able to attend the EGM, you are requested to read the notice of the EGM carefully and complete the accompanying proxy form in accordance with the instructions printed thereon and return it as soon as possible. The proxy form is required to be returned in person or by post not less than 24 hours before the time appointed for the EGM or any adjournment thereof to the H Share Registrar of the Company, Computershare Hong Kong Investor Services Limited (for H Shareholders) and the Board Office of the Company (for A Shareholders). Completion and return of the proxy form will not preclude you from attending and voting at the EGM or any adjournment thereof in person if you so wish.

If you wish to attend the EGM either in person or by proxy, you are required to complete and return the reply slip for the meeting to the Board Office of the Company on or before Thursday, 29 December 2016.

2 December 2016

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Letter from Somerley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	38
Appendix — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	70
Notice of the Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	74

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DEFINITIONS

In this circular, the following expressions have the following meanings unless the context requires otherwise:

“A Share(s)”

the domestic share(s) in the ordinary share capital of the Company with a nominal value of RMB1.00 each which are listed on the Shanghai Stock Exchange and traded in RMB (stock code: 600030)

“A Shareholder(s)”

holder(s) of A Shares

“associate(s)”

has the meaning ascribed to it in the Hong Kong Listing Rules

“Board”

the board of Directors of the Company

“CITIC Group”

CITIC Group Corporation (中國中信集團有限公司), a state-owned enterprise established in the PRC and the ultimate controlling shareholder of the Company who is indirectly interested in 16.66% equity interest in the Company

“Company”
CITIC Securities Company Limited (中信証券股份有限公司), a joint stock limited company incorporated in the PRC with limited liability, whose A Shares and H Shares are listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange, respectively
“CSRC”

China Securities Regulatory Commission

“Director(s)” the director(s) of the Company
“EGM”
the 2017 First Extraordinary General Meeting of the Company to be held at Qing Room, 5/F, Four Seasons Hotel, No. 48 Liangmaqiao Road, Chaoyang District, Beijing, the PRC at 10:30 a.m. on Thursday, 19 January 2017
“Group”
the Company and its subsidiaries
“H Share(s)”
the overseas-listed foreign invested share(s) in the ordinary share capital of the Company with a nominal value of RMB1.00 each, which are listed on the Hong Kong Stock Exchange and traded in Hong Kong dollars (stock code: 6030)
“H Shareholder(s)”

holder(s) of H Shares

“Hong Kong”

Hong Kong Special Administrative Region of the PRC

“Hong Kong Listing Rules”

The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

“Hong Kong Stock Exchange”

The Stock Exchange of Hong Kong Limited

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DEFINITIONS

“Independent Board Committee”
“Independent Shareholders”
“Latest Practicable Date”
“Miscellaneous Services Framework Agreement”
“New Third Board”
“PBOC”
“PRC” or China
“Property Leasing Framework Agreement”
“Property Leasing Supplemental Agreement I”

an independent committee of the Board comprising all independent non-executive Directors, namely, Mr. LIU Ke, Mr. HE Jia, and Mr. CHAN Charles Sheung Wai, which was established to advise the Independent Shareholders in relation to the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed, as well as the proposed annual caps and maximum daily balances for the continuing connected transactions contemplated thereunder

Shareholders (other than CITIC Group and its associates) who are not required to abstain from voting on the resolution to be proposed at the EGM in relation to the renewal of the Securities and Financial Products Transactions and Services Framework Agreement and the proposed annual caps and maximum daily balances for the continuing connected transactions contemplated thereunder

29 November 2016, being the latest practicable date of ascertaining certain information contained in this circular prior to its publication

the Miscellaneous Services Framework Agreement entered into between the Company and CITIC Group on 23 September 2011 and subsequently renewed by the parties on 31 December 2013, which is proposed to be further renewed for another term of three years expiring on 31 December 2019

the National Equities Exchange and Quotation

The People’s Bank of China

the People’s Republic of China, which for the purpose of this circular only, excludes Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan

the Property Leasing Framework Agreement entered into between the Company and CITIC Group on 23 September 2011 for a term of 10 years expiring on 22 September 2021, as supplemented by the Property Leasing Supplemental Agreement I signed by the parties on 31 December 2013

the Supplemental Agreement I to the Property Leasing Framework Agreement signed by the Company and CITIC Group on 31 December 2013 to renew the annual caps for the rentals payable and receivable by the Group under the Property Leasing Framework Agreement for the three financial years ending 31 December 2016

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DEFINITIONS

“Property Leasing Supplemental Agreement II”

the Supplemental Agreement II to the Property Leasing Framework Agreement proposed to be signed by the Company and CITIC Group to renew the annual caps for the rentals payable and receivable by the Group under the Property Leasing Framework Agreement for the next three financial years ending 31 December 2019

“RMB”

Renminbi, the lawful currency of the PRC

“Securities and Financial Products Transactions and Services Framework Agreement”

the Securities and Financial Products Transactions and Services Framework Agreement entered into between the Company and CITIC Group on 23 September 2011 and subsequently renewed by the parties on 31 December 2013, which, subject to the approval of the Independent Shareholders, is proposed to be further renewed by the parties for another term of three years expiring on 31 December 2019

“SFO”
Securities and Futures Ordinance, Chapter 571 of the Laws of Hong Kong
“Share(s)” A Shares and H Shares
“Shareholder(s)”
holders of the domestic shares and the overseas-listed foreign invested shares in the ordinary share capital of the Company with a nominal value of RMB1.00 each, which are listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange, respectively
“SHIBOR” Shanghai Interbank Offered Rate
“Somerley”
Somerley Capital Limited, a licensed corporation to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, is the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the non-exempt continuing connected transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement and the proposed annual caps and maximum daily balances thereof
“Wind Info”

Wind Information Co., Ltd., a company with limited liability incorporated in the PRC in 1994 and an integrated service provider of financial data, information and software

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LETTER FROM THE BOARD

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(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 6030)

Directors: Registered office: Mr. ZHANG Youjun (Executive Director) North Tower, Excellence Times Plaza II Mr. YIN Ke (Executive Director) No. 8 Zhong Xin San Road Mr. YANG Minghui (Executive Director) Futian District Shenzhen, Guangdong Province Mr. CHEN (Non-executive Director) PRC

Mr. CHEN Zhong (Non-executive Director)

Mr. LIU Ke (Independent Non-executive Director) Mr. HE Jia (Independent Non-executive Director) Mr. CHAN, Charles Sheung Wai (Independent Non-executive Director)

Principal place of business in Hong Kong: 26th Floor, CITIC Tower 1 Tim Mei Avenue Central Hong Kong

2 December 2016

To the H Shareholders,

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF THE EXTRAORDINARY GENERAL MEETING

I. INTRODUCTION

Reference is made to the announcement of the Company dated 30 October 2016 (the “ Announcement ”) in relation to the renewal of certain continuing connected transactions of the Company including, but not limited to, the continuing connected transactions under the Securities and Financial Products Transactions and Services Framework Agreement.

The purpose of this circular is to provide you with, among other things, (i) detailed information regarding the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps for each of the continuing securities and financial products transactions and securities and financial services transactions contemplated thereunder and the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates for the three years ending 31 December 2019; (ii) the recommendation from the Independent Board Committee to the Independent Shareholders; (iii) a letter of advice from Somerley to the Independent Board Committee and the Independent Shareholders; and (iv) a notice convening the EGM.

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LETTER FROM THE BOARD

II. RENEWAL OF THE SECURITIES AND FINANCIAL PRODUCTS TRANSACTIONS AND SERVICES FRAMEWORK AGREEMENT

1 BACKGROUND

1.1 The existing continuing connected transaction agreements

As disclosed in the Announcement, the Group has been, in the ordinary and usual course of its businesses, entering into continuing connected transactions with CITIC Group and its associates including securities and financial products transactions and provision of securities and financial services. To comply with the requirements of the Hong Kong Listing Rules, the Company entered into the Securities and Financial Products Transactions and Services Framework Agreement with CITIC Group and set annual caps for the continuing connected transactions thereunder.

The term of the Securities and Financial Products Transactions and Services Framework Agreement and the annual caps for the continuing connected transactions thereunder (other than the securities and financial products transactions which a waiver had previously been granted by the Hong Kong Stock Exchange and are exempted from setting up annual caps), as well as the relevant annual caps thereunder are due to expire by the end of December 2016. According to the size tests under the Hong Kong Listing Rules, renewal of the Securities and Financial Products Transactions and Services Framework Agreement and the applicable annual caps or maximum daily balances thereunder have to be approved by Independent Shareholders.

1.2 The proposed renewals

In order to continue and regulate the continuing connected transactions under the Securities and Financial Products Transactions and Services Framework Agreement and upon approval by the Independent Shareholders at the EGM, the Company will:

(a) renew the Securities and Financial Products Transactions and Services Framework Agreement with CITIC Group for a further term of three years commencing from 1 January 2017 and ending on 31 December 2019;
(b) in respect of the securities and financial products transactions under the Securities and Financial Products Transactions and Services Framework Agreement: set the annual caps/maximum daily balances for the continuing connected transactions contemplated thereunder, including:
(i) the annual caps for the securities and financial products transactions;
(ii) the maximum daily balance of non-exempted loans, including collateralized securities repurchase and repurchase agreements, by CITIC Group and its associates to the Group; and
(iii) the maximum daily balance of non-exempted loans, including reverse repurchase, by the Group to CITIC Group and its associates,

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for the next three years ending 31 December 2019; and

(c) in respect of the securities and financial services transactions under the Securities and Financial Products Transactions and Services Framework Agreement: set the annual caps for the securities and financial services transactions for the next three years ending 31 December 2019.

In respect of the balance of the Group’s proprietary funds and its customers’ funds which are required to be deposited with banking institutions in the PRC pursuant to the relevant PRC rules and regulations, the Company had applied for, and was granted by the Hong Kong Stock Exchange on 24 October 2016, a waiver from setting up the maximum daily balance of deposits deposited with the banking subsidiaries of CITIC Group in the PRC and Hong Kong for the three financial years ending 31 December 2019.

The provision of inter-financial institutions loans by CITIC Group and its associates to the Group are exempted from reporting, announcement and independent shareholders’ approval requirements under the Hong Kong Listing Rules as such transactions constitute financial assistance provided by a connected person for the benefit of the Group upon normal commercial terms with no security given for such financial assistance.

2 THE SECURITIES AND FINANCIAL PRODUCTS TRANSACTIONS AND SERVICES FRAMEWORK AGREEMENT
2.1 The background of the Securities and Financial Products Transactions and Services Framework Agreement

In the normal course of business of the Group, the Group regularly engages in various kinds of securities and financial products transactions (referred to herein as “securities and financial products transactions”) with CITIC Group and its associates. The Group also provides securities and financial services (referred to herein as “securities and financial services transactions”) in the normal course of its business to its customers, including CITIC Group and its associates. The various financial institutions of CITIC Group also provide securities and financial services to the Group in the normal course of their businesses. To comply with the Hong Kong Listing Rules for such continuing transactions and provisions of services, the Securities and Financial Products Transactions and Services Framework Agreement was entered into in 2011, which was renewed for another term of three years in 2013 expiring on 31 December 2016.

With the expansion of the qualifications and scope of businesses of the Company and its subsidiaries as well as the expansion of the business scope of the financial institutions of CITIC Group during the recent years, the Company proposes to renew the Securities and Financial Products Transactions and Services Framework Agreement for another term of three years commencing from 1 January 2017 and ending on 31 December 2019 upon the same terms as the existing Securities and Financial Products Transactions and Services Framework Agreement with the following changes in the scope of transactions and services.

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LETTER FROM THE BOARD

2.2 Changes in the securities and financial products transactions

The Company proposes to make the following changes to the scope of the securities and financial products transactions (as indicated by mark-ups below):

(i) Products with fixed income features - including, but not limited to, bonds, funds, trusts, wealth management products, asset management plans, assets securitized products, ~~convertible bonds,~~ bond lending and borrowing, structured products, swaps, futures, forwards, options and other financial products with fixed income features;
(ii) Fixed income related derivative products - including, but not limited to, interest rates and credit derivatives;
(iii) Equity-linked products - including, but not limited to, trading and/or subscription of equity ~~derivatives such as equity~~ (including market-making activities on the New Third Board), funds, trusts, ~~and~~ wealth management products, asset management products and equity derivatives such as swaps, futures and options;
(iv) Financing transactions - financing transactions among financial institutions with or without guarantees/pledges including, but not limited to, interbank lending and borrowing, repurchase, interbank deposits, usufruct, asset securitization, corporate account overdraft, pledge loans, holding debt certificates for each other such as short-term financing bonds, beneficiary certificates, subordinated debts, corporate bonds; and
(v) Other related securities and financial products permitted by the regulatory authority — including, but not limited to, futures, foreign exchange and commodities trading ~~and options~~ .
2.3 Reasons for the changes in the scope of securities and financial products transactions

The reasons for the changes are:

(a) Convertible bonds are traded in the PRC exchange bond market, not in the national interbank market. Such trading transactions will be included in the “equity derivatives such as swaps, futures and options” transactions proposed to be elaborated in the “Equity-linked products” category (please see below);
(b) In 2014, the Company obtained the qualification to act as a market maker in the New Third Board. In the ordinary course of its business, it may be appointed by an issuer who is a connected person (“connected issuer”) to act as a market maker. Issuance of shares by such connected issuers to the Group for market making will constitute continuing connected transactions;
(c) In the normal course of business of the Group and the financial institutions of CITIC Group, the Group may invest/subscribe for wealth management products and trust products issued by the financial institutions of CITIC Group and the financial institutions of CITIC Group and its associates may also invest/subscribe for asset management products and funds issued by the Group; and

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LETTER FROM THE BOARD

(d) The addition of “and equity derivatives such as swaps, futures and options” is to elaborate and provide more information on the types of equity derivatives. This is not a new category of products.

2.4 Changes in the securities and financial services transactions

The Company proposes to make the following changes to the scope of the securities and financial services transactions (as indicated by mark-ups below):

2.4.1 For services to be provided by the Group to CITIC Group:

(i) Underwriting, and sponsorship services — including, but not limited to, underwriting, sponsorship and continuous supervision and guidance services for equity securities, fixed income products, structured products and other derivative products;
(ii) Other investment banking services — including, but not limited to, financial advisory services relating to corporate restructuring, mergers and acquisition;
(iii) Brokerage services — including, but not limited to, securities brokerage and related financial products services as well as futures brokerage services such as treasury bond futures;
(iv) Financial products sales agency services — including, but not limited to, provision of sales agency services for financial products;
(v) Entrusted asset management services — including, but not limited to, assets management services for assets entrusted by customers; and
(vi) Other securities and financial advisory and consulting services and commodities services, etc .

2.4.2 For services to be provided by CITIC Group to the Group:

(i) Deposit services — including, but not limited to, (a) deposits of cash balances arising from the business operations of the Group including cash from daily operations, proceeds from fund raising activities such as equity and bond issuances; (b) cash deposits from the customers of the Group; and (c) other deposits;
(ii) Financial products sales agency services — including, but not limited to, provision of sales agency services for financial products and precious metals;
(iii) Client deposits management and custody services — including, but not limited to, management services provided by the banking subsidiaries of CITIC Group for managing the cash deposits of non-financial institutional customers of the Group, which are required by the relevant PRC laws and regulations to be deposited into the accounts of the Group with a PRC bank, and custody services provided by the banking subsidiaries of CITIC Group for securities and financial products issued by the Group;

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LETTER FROM THE BOARD

(iv) Loan services — including, but not limited to, funds for business operation and loans as the working capital of the Group provided by CITIC Group and its associates; and
(v) Other securities and financial advisory and consulting services, and money brokerage services and commodities services, etc .
2.5 Reasons for the changes in the scope of the securities and financial services

2.5.1 For services provided by the Group to CITIC Group:

The reasons for the addition of “continuous supervision and guidance” and “commodities services” to the scope of services are:

(a) The Company is qualified to provide continuous supervision and guidance for companies quoted on the New Third Board. As such, it may provide continuous supervision and guidance to associates of CITIC Group, whose shares are quoted on the New Third Board; and
(b) In 2013, the Company obtained the qualification to conduct commodities trading and may provide such commodities trading services to CITIC Group and its associates, which will constitute continuing connected transactions of the Company.

2.5.2 For services to be provided by CITIC Group to the Group:

The reasons for the addition of “precious metals” and “commodities trading” to the scope of services are:

(a) Certain associates of CITIC Group are licensed to provide commodities trading services and may provide such services to the Group; and
(b) In addition, the Group may engage in sale of precious metals in its commodities trading and may appoint the licensed associates of CITIC Group as agent for the sale of precious metals for which the agency sale expenses incurred will constitute continuing connected transactions of the Group.
2.6 The securities and financial products transactions

2.6.1 Introduction

The Group has been entering into securities and financial products transactions with CITIC Group and its associates in the normal course of its business and upon normal commercial terms. Such transactions involve the trading of securities and financial products in the PRC interbank bond market, the PRC exchange bond market and the stock market as well as the lending of funds by CITIC Group and/or its associates to the Group in the interbank money market. The scope of the securities and

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LETTER FROM THE BOARD

financial products include fixed income products, fixed income related derivative products, equity-linked products, financing transactions and other related securities and financial products permitted by the regulatory authorities. Please refer to paragraph 2.2 headed “Changes in the securities and financial products transactions” above for more details.

In the normal course of the Group’s business, the Group would enter into collateralized securities repurchase transactions and repurchase agreement transactions with the financial institutions of CITIC Group and its associates. Collateralized securities repurchase involves the pledge of securities of the Group, including bonds and shares as collateral, to obtain financing from the financial institutions of CITIC Group and the Group agreeing to repay the funds obtained on a future date to release the pledge. Repurchase agreement refers to the sale of securities to the financial institutions of CITIC Group for trading at an agreed-upon price, and agreement to repurchase the subject securities at another agreed-upon price on a specific date in the future.

In addition, in the ordinary and normal course of businesses, the Group may also enter into lending transactions; including reverse repurchase transactions, with or without collateralized securities, with CITIC Group and its associates.

Further, in the ordinary and normal course of their businesses, the Group and CITIC Group and its associates may enter into transactions with each other for transactions in securities and financial products which may or may not be traded on an exchange. Such transactions may include the Group subscribing, among other things, the wealth management products and trust products issued by the CITIC Group and its associates and CITIC Group and its associates subscribing, among other things, the asset management products and funds set up by the Group.

2.6.2 Pricing basis for securities and financial products transactions

Securities and financial products transactions

The securities and financial products transactions, whether conducted in the PRC interbank bond market, the PRC exchange bond market or stock exchanges, are and will continue to be conducted at the prevailing market prices in the ordinary and usual course of the Group’s business and with high frequency — for transactions in the interbank bond market and PRC exchange bond market, at the prices quoted in the interbank bond market and the PRC exchange bond market respectively, and for transactions in the stock exchanges, at the prevailing market prices in the relevant stock exchanges. For inter-financial institutions borrowings and lendings, transactions are conducted based on the prevailing interest rates quoted on the interbank money market with reference to SHIBOR. The pricings of such transactions are subject to strict PRC regulatory supervision and requirements of the applicable PRC laws and regulations.

China’s interbank bond market is an open, highly regulated quote-driven market regulated by the PBOC pursuant to the Measures for the Administration of Bond Transactions in the National Interbank Bond Market (全國銀行間債券市場債券交易管理辦法). Transactions in the interbank bond market must be reported to China Foreign Exchange Trading System & National Interbank Funding Centre (“NIFC”) and are supervised by NIFC, China Central Depository & Clearing Co. Ltd. (“CCDC”) and the National Association of Financial Market Institutional Investors (“NAFMII”).

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LETTER FROM THE BOARD

According to the relevant PRC rules and regulations, prevailing market prices in the interbank bond market are determined with reference to the bid and offer prices quoted on NIFC and all transactions, whether conducted through an authorized intermediate money brokerage firm or a market maker or through over-the-counter negotiations, have to be reported to NIFC and reflected in the price quotations provided by NIFC and CCDC. According to the self-regulatory rules of NAFMII (i.e. the Self-regulatory Rules for Bond Transaction in Inter-bank Bond Market (銀行間債券市場債券交易自律規則)), abnormal pricing may result in disciplinary action by NAFMII, including public criticism. NAFMII is a self-regulatory organization responsible for supervising interbank transactions.

Transactions in the PRC exchange bond market have to be conducted in accordance with the prevailing market prices quoted on the relevant PRC stock exchanges. The exchange bond market is an order-driven market governed by the CSRC.

In terms of subscriptions by the Group of the financial products set up by the financial institutions of CITIC Group and subscription by CITIC Group and its associates of the financial products set up by the Group, the subscription price is at the same subscription price as the subscriptions by other investors. Such subscription price is determined by the financial institutions (or by the Group, where the financial product is set up by the Group) which set up the financial products after considering the fundamentals of the assets/businesses to be invested.

CITIC Group and its associates are required to satisfy and comply with the relevant PRC administrative rules, regulations and measures regulating issuance, including pricing determination, of their financial products. The relevant rules and measures would normally require information documents to be prepared and disclosed, which would require due diligence, valuation, auditing of financial information, rating etc. to be conducted or prepared for the purpose of the issuance. In addition, issuance price may be required to be set in accordance with the methods prescribed in the relevant rules and regulations and all subscribers for the same financial product will subscribe at the same issuance price.

Inter-financial institutions borrowings, repurchase and loans

Upon the recent relaxation of the relevant PRC rules and regulations, the Group has engaged in inter-financial institutions borrowings from the banking institutions of CITIC Group since 2016. Such borrowings are all conducted at the prevailing interest rates in the interbank money market at the time of the borrowings with no security being given by the Group for such inter-financial institutions borrowings.

The Group also engages in collateralized securities repurchase transactions with the financial institutions of CITIC Group in the ordinary course of its business at interest rates which are available to independent third party customers of the financial institutions or for better than normal commercial terms. The Group may also enter into repurchase agreements with the financial institutions of CITIC Group upon the same terms applicable to repurchase transactions by the financial institutions of CITIC Group to independent third party customers or for better than normal commercial terms.

The Group would ensure that the interest rates of repurchase offered by the financial institutions of CITIC Group are at the prevailing market rates by ascertaining from time to time that the terms

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(including the securities to be collateralized and financing period) and interest rates quoted by the financial institutions of CITIC Group are comparable to those offered to independent third party customers of the financial institutions of CITIC Group by obtaining terms and interest rates from other major commercial banks to ensure that such terms and interest rates are also comparable to those offered by other comparable financial institutions in the market.

The loans by the Group to CITIC Group and its associates, including reverse repurchase, will be entered into upon normal commercial terms at interest rates and terms of reverse repurchase, as applicable to similar loans or repurchase transactions by the Group to its independent third party customers.

2.6.3 Pricing approval and supervision

The Company has access to the NIFC and CCDC systems and systems of the domestic stock exchanges for interbank bond market and PRC exchange bond market transactions. It also reviews various bond market information published by NIFC and CCDC and other agents. For example, NIFC also composes repurchase rates and is one of the key benchmarks for repurchase transactions in the PRC financial market. The Company has also subscribed for information services provided by information service providers, such as Wind Info, and has access to information channels and websites of official and voluntary industry regulatory authorities, such as Asset Management Association of China, Chinamoney.com.cn and Chinabond.com.cn etc., which publish periodic official and voluntary statistics/information on the industry from time to time.

To ensure the terms of the securities and financial products transactions are on normal commercial terms or on terms no less favourable than terms applicable to independent third parties, the Group has implemented internal approval and monitoring procedures, including the following:

(a) The Group has established its internal guidelines and policies for conduct of different types of securities and financial products as well as the internal procedures and systems for approval and supervision such transactions and lending and borrowings. Such policies and guidelines would set out the requirements for pre-trading pricing enquiries, applicable interest rates, the procedures for price determination, approval authority and procedures, record keeping, supervision and review procedures for different types of transactions and businesses.
(b) For example, for products with fixed income features, transactions through the interbank bond market and PRC exchange bond market shall be submitted to the Company’s internal system for approval by mid-level management and head of the relevant department, and for record keeping. The risk management department of the Company will, through the system and daily report issued, monitor and control the transaction process and overall business operations. For capital operations, the Company, in accordance with the PRC rules and regulations, has set up its own internal system for pre-approval of borrowing and lending, collateralized securities repurchase and repurchase agreements, which would require pre-approval by head of the relevant department and responsible officer to ensure that any such transactions are conducted at market prices.

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(c) For financing transactions involving loans from and to CITIC Group and its associates, the individual department will control the levels of borrowings, including collateralized securities repurchase and repurchase agreements, and the loans to CITIC Group and its associates to ensure compliance with the maximum daily balances. Each department has an annual plan for borrowings, which will set a limit on the level of borrowings. In addition, trainings will be provided to traders/dealers on the requirements relating to connected transactions and all connected transactions, once identified and conducted, will be recorded by the relevant department, which will check to ensure that all applicable restrictions, including the level of borrowings and the maximum daily balances, are observed and complied with.
(d) The relevant business department of the Company is responsible for reviewing whether the actual transaction amounts would exceed the annual caps or the maximum daily balances and alert relevant business lines if close to the annual caps or the maximum daily balances.
(e) The legal department, compliance department, Board Office and other specific operational and administrative departments will also collect data from all business lines and review the actual amounts of different types of securities and financial products transactions on a regular or irregular basis to ensure that the annual caps and the maximum daily balances would not be exceeded and remind the business departments on the control of such connected transactions. The legal and compliance departments will also review relevant agreements and grant approval, where appropriate.
(f) The conduct of continuing connected transactions is also subject to annual review by all independent non-executive Directors, the Supervisory Committee of the Company and the auditors of the Company. The Related Party Transactions Control Committee comprising all independent non-executive Directors is also responsible for monitoring and reviewing major and continuing connected transactions of the Company.
2.6.4 Historical total net inflow and total net outflow transaction amounts, inter-financial institutions borrowings, repurchase and loans
(a) Historical total net inflow and total net outflow

Set out below are the historical total net inflow and net outflow transaction amounts in the interbank bond market, the PRC exchange bond market and stock markets, after deducting inter-financial institutions borrowings and non-exempted loans, in respect of the securities and financial products transactions between the Group and CITIC Group and its associates under the Securities and Financial Products Transactions and Services Framework Agreement for each of the two financial years ended 31 December 2015 and the six months ended 30 June 2016:

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Securities and Financial Products		Approximate historical transaction	Approximate historical transaction	Approximate historical transaction
Transactions			amounts ended
	31 December		31 December	30 June
		2014	2015	2016
	(RMB million)		(RMB million)	(RMB million)
Total net inflow
Total net cash inflow to the Group	6,416		18,868 (Note 1)	1,084 (Note 1)
Total net outflow
Total net cash outflow from the Group	4,938	(Note 2)	23,644 (Note 2)	4,761 (Note 2)

Note 1: The total inflow for the financial year ended 31 December 2015 was RMB305,969 million as reported in the 2015 annual report of the Company. After deducting the inflow from inter-financial institutions borrowings and non-exempted loans by CITIC Group and its associates to the Group, the total net inflow amount for the financial year of 2015 was RMB18,868 million. The total inflow for the six month period ended 30 June 2016 before deduction of inter-financial institutions borrowings and non-exempted loans by CITIC Group and its associates to the Group was RMB77,630 million. After deducting the total amount of inter-financial institutions borrowings and non-exempted loans by CITIC Group and its associates to the Group, the total net inflow for the six months ended 30 June 2016 was RMB1,084 million.
Note 2: The total net outflow figures are exclusive of non-exempted loans by the Group to CITIC Group and its associates.

(b) Inter-financial institutions borrowings

There was only a minor sum of inter-financial institutions borrowings by the Group from CITIC Group and its associates in 2015. For the six months ended 30 June 2016, the inter-financial institutions borrowings from CITIC Group and its associates were approximately RMB48,068 million. As the inter-financial institutions borrowings by the Group from CITIC Group and its associates are negotiated between the parties based on the prevailing interest rate in the interbank market without security being given by the Group, such borrowings are exempted continuing connected transactions under Rule 14A.90 of the Hong Kong Listing Rules.

Historical total inter-financial institutions borrowings from the financial institutions of CITIC Group:

						_in _	RMB millions
31	December	2014	31	December	2015		30 June 2016
		0			1,212		48,068

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LETTER FROM THE BOARD

(c) Loans between the Group and CITIC Group and its associates
(i) Non-exempted loans, including collateralized securities repurchase and repurchase agreements, to the Group

The total amounts of loans for collateralized securities repurchase and repurchase agreements for the two financial years ended 31 December 2015 and the six months ended 30 June 2016 were RMB10,900 million, RMB179,200 million and RMB101,900 million, respectively, representing a maximum daily balance of approximately RMB1,600 million, RMB7,797 million and RMB4,666 million, respectively. As collateralized securities repurchase transactions and repurchase agreements are loans provided by CITIC Group and its associates and as securities are provided by the Group for such loans, such continuing connected transactions are non-exempted continuing connected transactions under Rule 14A.90 of the Hong Kong Listing Rules.

Historical amounts of loans for collateralized securities repurchase and repurchase agreements:

			in RMB millions
31	December 2014	31 December 2015	30 June 2016
	10,900	179,200	101,900

Historical maximum daily balances of loans for collateralized securities repurchase and repurchase agreements:

						_in _	RMB millions
31	December	2014	31	December	2015		30 June 2016
		1,600			7,797		4,666

(ii) Non-exempted loans, including reverse repurchase, to CITIC Group and its associates

In the ordinary course of its business, the Group may enter into lending transactions, including reverse repurchase, with CITIC Group and its associates. In 2015, the reverse repurchase transactions by CITIC Group and its associates with the Group amounted to approximately RMB2,480 million. For the financial year ended 31 December 2014 and the six months ended 30 June 2016, no repurchase agreements were entered into by CITIC Group and its associates with the Group.

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LETTER FROM THE BOARD

Historical amounts of loans for reverse repurchase transactions:

in RMB millions

31 December 2014 31 December 2015

30 June 2016

==> picture [234 x 9] intentionally omitted <==

Other than the repurchase transactions mentioned above, there were no other loans, including loans in the inter-financial institutions market, by the Group to CITIC Group and its associates. However, if the terms of the borrowings are upon normal commercial terms or favourable to the Group, the Group may also lend to CITIC Group and its associates. Such loans by the Group to CITIC Group and its associates, including reverse repurchases, are non-exempted continuing connected transactions under the Hong Kong Listing Rules. The Company does not wish to unduly restrict its loans to CITIC Group and its associates to reverse repurchase and intend to extend such loans to other loans, including inter-financial institutions lendings. The Company proposes to regulate such non-exempted loans to CITIC Group and its associates by setting the caps for the next three financial years based on the highest of the maximum daily balance of the loans to independent borrowers with a slight adjustment. During the two financial years ended 31 December 2015 and the six months ended 30 June 2016, the maximum daily balance of loans by the Group to the independent borrowers were RMB1,700 million, RMB4,000 million and RMB400 million, respectively.

Historical maximum daily balance of loans to independent borrowers (for reference):

in RMB millions 31 December 2014 31 December 2015 30 June 2016 1,700 4,000 400

2.6.5 The proposed annual caps for the three financial years ending 31 December 2019

(a) Total net inflow and total net outflow

The Company estimates that the total net inflow and total net outflow in respect of the securities and financial products transactions in the interbank bond market, the PRC exchange bond market and stock markets (excluding inter-financial institutions borrowings and non-exempted loans) between the Group and CITIC Group and its associates under the Securities and Financial Products Transactions

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and Services Framework Agreement for each of the three financial years ending 31 December 2019 as follows (for the historical transaction amounts, please refer to paragraph 2.6.4(a) headed “Historical total net inflow and total net outflow” above):

Securities and Financial Products

Securities and Financial Products
Transactions		Proposed annual caps		ending
	31	December	31 December	31 December
		2017	2018		2019
	(RMB million)		(RMB million)	_(RMB _	million)
Total net inflow
Total net cash inflow to the Group		120,000	150,000		180,000
Total net outflow
Total net cash outflow from the Group		95,000	130,000		160,000

(b) Inter-financial institutions borrowings

Inter-financial institutions borrowings by the Group from the financial institutions of CITIC Group are on normal commercial terms at the interest rates negotiated on an arms’ length basis based on the prevailing interest rates in the interbank market with no security being given over the assets of the Group. As such, such loans are exempt continuing connected transactions under Rules 14A.87 and 14A.90 of the Hong Kong Listing Rules and no cap would be required to be set in respect of the provision of such loans by the financial institutions to the Group.

(c) Non-exempted loans between the Group and CITIC Group and its associates
(i) Non-exempted loans, including collateralized securities repurchase and repurchase agreements, to the Group

The Company expects that the Group will continue to enter into collateralized securities repurchase and repurchase agreements transactions with the financial institutions of CITIC Group. Since such transactions represents financial assistance and as collaterals are provided for such financial assistance, such transactions amount to non-exempt continuing connected transactions under the Hong Kong Listing Rules. The Company estimates the maximum daily balances of collateralized securities repurchase and repurchase agreements for the next three financial years ending 31

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December 2019 as follows (for the historical transaction amounts and maximum daily balances of loans, please refer to paragraph 2.6.4(c)(i) headed “Non-exempted loans, including collateralized securities repurchase and repurchase agreements, to the Group” above):

Non-exempted loans, including
collateralized securities repurchase	Ending	Ending	Ending
and repurchase agreements, to the	31 December	31 December	31 December
Group	2017	2018	2019
	(RMB million)	(RMB million)	(RMB million)
Maximum balance of loans, including
collateralized securities repurchase
and repurchase agreements, to the
Group (including interests)	20,000	22,500	25,000

(ii) Non-exempted loans, including reverse repurchase, to CITIC Group and its associates

As stated in paragraph 2.6.4(c)(ii) headed “Non-exempted loans, including reverse repurchase, to CITIC Group and its associates” above, the Company intends to set caps for non-exempted loans, including reverse repurchase, to CITIC Group and associates by considering the historical maximum daily balance of loans to independent borrowers as the basis for estimation and the historical reverse repurchase amount. The Company estimates the maximum daily balance of such loans for the next three financial years as follows:

Non-exempted loans, including	Ending	Ending	Ending
reverse repurchase, to CITIC	31 December	31 December	31 December
Group and associates	2017	2018	2019
	(RMB million)	(RMB million)	(RMB million)
Maximum daily balance of
non-exempted loans, including
reverse repurchase, to CITIC Group
and its associates	5,000	5,000	5,000

2.6.6 Basis of determination of the annual caps

The estimates of annual caps in this Letter from the Board are estimates only and are based on various assumptions and qualification. The estimates should not be treated as any indication of the levels of revenue or profits of the Company.

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(a) Total net inflow and total net outflow

When estimating the annual caps for the total net inflow and total net outflow of the securities and financial products transactions (referred to in paragraph 2.6.5(a) above), the Company has made reference to the above historical transaction amounts, and also considered, among other things, the following key factors:

General factors

(i) Rapid expansion of the Company’s business scope and introduction of innovative products

The Group provides comprehensive financial products and services to its clients. Benefitting from the continued relaxation of the domestic financial and securities regulatory environment, the principal businesses of the Group have been authorized to include, among other things, bullion and precious metal trading, market making for New Third Board, securities investment fund custodian business, stock options market making business etc. since 2013. The Company has now obtained qualifications and authorizations to engage in more than 60 types of business activities. Some qualifications obtained by the Company in earlier years have become very active during the past three years. Businesses, such as margin financing and securities lending, repurchase, total return swap etc., have contributed significantly to the increase in revenue of the Group in the past several years. Total revenue and other income of the Group increased from RMB39,525 million in 2014 to RMB72,924 million in 2015, representing an increase of 184.5%. The PRC financial market has continued to grow and new financial products have continued to be issued. For example, based on the information available from Wind Info, the size of bond issuance in the interbank bond market in the last two years has grown from RMB2,267 billion in the first quarter of 2015 to RMB7,429 billion in the third quarter of 2016, representing an increase of approximately 327.7%. In addition, based on the information published by Asset Management Association of China, the total value of the assets under management has also grown substantially. As at 31 December 2015, total assets under management in China was approximately RMB38,200 billion, as compared to approximately RMB20,500 billion as at 31 December 2014, representing an increase of approximately 186.3%. As the size of bond issuance in the PRC bond market has continued to grow substantially and as new securities and financial products continued to be issued, the Company expects that total net inflow and total net outflow from securities and financial products and financial transactions between CITIC Group and its associates and the Group will continue to grow substantially.

(ii) Rapid growth of the PRC bond market and funds market

The PRC bond market has been growing rapidly in recent years. Total proceeds raised from bond issuances increased from RMB4.9 trillion in 2011 to RMB22.2 trillion in 2015, representing a CAGR of 46.0%. Innovative bond products and asset-backed securitized products have been introduced into the market from time to time, which increase the chances of transactions in securities and financial products as well as financial services transactions between CITIC Group and the Group.

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(iii) Increasing co-operation between securities companies and banks and investments in each other’s financial products

Liberalization of interest rates in China has seen banking institutions in China to turn to wealth management products to attract deposits from customers. While banks in China have good customer networks, they still lack the expertise and experience of PRC securities companies in research, investment and settlement management, product design and assets management. In addition, commercial banks in China are restricted by PRC laws and regulations to engage in equity investments. Asset management products and funds of securities companies therefore provide excellent investment channels to commercial banks in China, including investing indirectly in equity investments. Further, with the relaxation of the issuance policy for asset-backed securities since 2014, which only requires such securities to be filed with the regulatory authority before issuance, increasing numbers of commercial banks in China are turning to asset-backed securities to raise funds to strengthen their assets allocations.

It is expected that the banking institutions of CITIC Group will increasingly invest in the asset management products and funds of the Group to take advantage of the expertise and experience of the Group in research and development and management of financial products. On the other hand, the Group will also increase its investment in wealth management products of the banking institutions of CITIC Group for stable investment returns.

Specific factors and considerations

(i) The Company has considered the impact of the wide fluctuations of the A share stock in mid 2015 on the total net inflow and net outflow (excluding inflow and outflow inter-financial institutions borrowings and non-exempted loans) for securities and financial products transactions in the interbank bond markets, the PRC exchange bond market and the stock markets. While the total net inflow and total outflow as shown in the table in paragraph 2.6.4(a) above only represents an active market for half of 2015, China’s bond market has continued to grow and having considered the various industry growth factors, including the growth in the PRC bond market and interbank bond market and continued issuance of various financial products in China (please refer to paragraph 2.6.6(a) in sub-paragraph (i) under the heading “General factors” above), the Company estimates that the level of total net inflow and net outflow for securities and financial products transactions with CITIC Group and its associates would increase. It is estimated that the total net inflow and net outflow (excluding inflow and outflow inter-financial institutions borrowings and non-exempted loans) would be in the region of RMB30,000 million to RMB40,000 million per year for the next three years.
(ii) In addition to the estimated total net inflow and net outflow of RMB30,000 million and RMB40,000 million from securities and financial products transactions on the interbank market, the PRC exchange bond market and stock markets, the Company expects that new securities and financial products and new transactions of RMB60,000 million to RMB80,000 million will be entered into in 2017, which will have a significant impact on the estimation of the annual caps for the next three financial years. Such new securities and financial products and new transactions include the following:

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(aa) Since the wide fluctuations of A share stock in mid-2015, the Company and CITIC Group have generally agreed to strengthen the level of their co-operations to enhance mutual business development. It is also expected that the Group may increase its investment in the wealth management products and trust products of the financial institutions of CITIC Group, while CITIC Group and its associates will increase their investments invest in the asset management plans and funds of the Group. It is further expected that such subscriptions would increase total inflow by RMB7,000 million to RMB9,000 million in each year for the next three financial years ending 31 December 2019. Of the estimated range, approximately 65% to 70% are from the estimated subscriptions of new financial products, such as wealth management products, asset management plans and trust products (where applicable) set up and managed by the Group or CITIC Group and its associates and the remaining were from the issuance of new financial products, including derivative products, to the trust companies of CITIC Group and its associates. Further areas of cooperation would include provision of research, product design and investment management services to CITIC Group and its associates in their investment and management of their investments;
(bb) Since obtaining the qualifications to engage in bullion and precious metal trading in 2013, the Group’s commodities and precious metal trading has gradually increased. As the market becoming more mature, commodities derivative trading and trading and leasing of precious metals between the Group and the financial institutions of CITIC Group for the next three financial years are expected to increase substantially. It is estimated that transaction amounts on commodities derivatives and precious metal leasing and trading will be in the region of RMB9,000 million to RMB11,000 million in each year for the next three financial years. Of the estimated range, approximately 50% are from the estimated transactions with CITIC Group and its associates on precious metal leasing (mainly in respect of bullion and silver) and the remaining approximately 50% are from the estimated transactions on commodities derivative products, including non-ferrous metals, energy, agricultural products, cotton etc.; and
(cc) Further, the Company also has taken into account the possible transactions between the Group and the trusts, funds and asset management plans controlled by the financial institutions of CITIC Group as investment managers, which are regarded as connected transactions. Based on the historical transaction amounts with such financial products (such transaction data was not previously collected as connected transaction data), the Company estimates that the level of transactions arising from such financial products would be in the region of RMB40,000 million to RMB50,000 million per year for each of the next three years.
(iii) When estimating the annual caps for total net inflow and total net outflow, the Company has considered whether there are historical transactions in respect of a particular type of securities and financial products. Where there are historical transactions, the Company will calculate the percentage of historical transaction value to the historical total transaction value of that particular product and use the percentage value to calculate the projected transaction value for the next three financial years. The percentage value will be adjusted by considering the volatility and growth of the product. Where there are no historical

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transactions with CITIC Group and its associates, the Company will consider the historical total transaction value of that particular product, estimate a percentage of transaction with CITIC Group and its associates by considering the volatility and growth of the product, and use the percentage value to estimate the projected transaction value for the next three years. Where applicable, interest rates between 6% to 6.5% per annum (being the current range of interest rates in the market for transactions involving securities and financial products) have been applied in the calculation and an annual increase of 10% to 20% (depending on whether the securities and financial products are expected to have normal growth or whether the product is the business focus and major product development of the Group in the next three years) has also been included.
(b) Maximum daily balance for non-exempted loans, including collateralized securities repurchase and repurchase agreements, to the Group

When estimating the maximum daily balance of non-exempted loans, including collateralized securities and repurchase agreements, to the Group (referred to in paragraph 2.6.5(c)(i) above), the Company has considered the following factors:

(i) The Group started to enter into collateralized securities repurchase transactions with the financial institutions of CITIC Group in about 2014, which gradually increased to a high level in mid-2015. The interbank loan market has not been greatly impacted by the A share stock market crash and has continued to grow, while fluctuating widely from time to time, since mid-2015. The outstanding value of the entire PRC bond market has grown from RMB48,539 billion as at the end of 2015 to RMB62,726 billion as at 11 November 2016, representing an increase of approximately 129.2%. In addition, according to Wind Info, transactions in collateralized securities repurchase and repurchase agreements in the interbank bond market have continued to grow significantly and fluctuated widely, despite the general set back in mid-2015. For example, according to Wind Info, during the period from 15 July 2015 to 31 October 2016, the highest transaction value in collateralized securities repurchase was recorded on 14 July 2016 at RMB3,292.8 billion, and as compared with the transaction value in collateralized securities repurchase of RMB1,948.6 billion on 15 July 2015, this represented an increase of 168.9% in transaction value. In addition, during the same period from 15 July 2015 to 31 October 2016, the highest transaction value in repurchase agreements was recorded on 14 December 2015 at RMB209.6 billion, and as compared with the transaction value of RMB104.9 billion on 15 July 2015, this represented an increase of 199.8% in transaction value. Moreover, transactions in the interbank money market has also increased significantly during the same period - the highest transaction value in the interbank money market was recorded on 8 September 2016 at RMB667.3 billion, and as compared with the transaction value of RMB274.5 billion on 15 July 2015, this represented an increase of 243.1%. The Company therefore considers that the amount of collateralized securities repurchase and repurchase agreements will continue to increase as collateralized securities repurchase and repurchase agreements provide relatively convenient methods to obtain facilities and are frequently used means for obtaining banking facilities.

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(ii) The Company considers it extremely difficult and impracticable to estimate a maximum limit on the amount of loans which are required for the purpose of the Group’s business, considering the volatility and unpredictability of the stock markets as shown by the wide fluctuations of the A share stock market in 2015. A large buffer is required to avoid any undue disruption and detriment to the business operations of the Group if any annual cap or maximum daily balance is to be revised and re-approved by independent shareholders. Although the maximum daily balance of non-exempted loans in 2015 was approximately RMB7,977 million, and having considered the growth and changes/fluctuations in the PRC financial market, in particular, the interbank bond market, since mid-2015, including the growth and changes referred to in (i) above, the Company considers it appropriate to set the maximum daily balances at RMB20,000 million for 2017, RMB22,500 million for 2018 and RMB25,000 million for 2019.
(c) Non-exempted loans, including reverse repurchase, to CITIC Group and its associates

When estimating the maximum daily balance of loans, including reverse repurchase, to CITIC Group and associates, for the next three financial years (referred to in paragraph 2.6.5(c)(ii) above), the Company has considered the following factors:

(i) The Company intends to limit the maximum daily balance of such loans within RMB5,000 million, which is estimated based on the highest of the historical maximum daily balance of loans to independent borrowers, being RMB4,000 million in 2015, with a 25% upward adjustment and having considered the historical repurchase amount of RMB2,480 million in 2015. Subject to liquidity and availability of funds, the Company would like to control the total level of lending to CITIC Group and its associates within the historical levels of loans to independent third parties and the Group estimates that it may make available loans to CITIC Group and its associates up to the maximum daily balance of RMB5,000 million, if the terms of borrowing offered by CITIC Group and its associates are on normal commercial terms or more favourable to the Group. The upward 25% adjustment is to cater for expansion of business of the Group and CITIC Group. Such loan transactions may or may not be conducted in the interbank market.
(ii) When estimating the maximum daily balance for non-exempted loans to CITIC Group and its associates, the Company has also considered possible loans to associates of CITIC Group in Hong Kong for margin financing transactions and other loan transactions by the Group in Hong Kong.

2.6.7 Maximum daily balance of deposits and waiver

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Given that the Company is required by the relevant PRC regulations to place the cash balance of its customers’ settlement funds with qualified PRC commercial banks, the Company has no control over which PRC bank its customers are to open their accounts, as well as the amounts of such deposits and their withdrawals and changes in the amounts of such deposits for which the Company has no control. In addition, it is extremely difficult for the Company to estimate the amount of incoming funds to be deposited with PRC commercial banks, which may include the banking subsidiaries of CITIC Group and its associates, on a daily basis, given that the financial and securities businesses of the Company are highly responsive to the market and may fluctuate widely within short timeframe. Given the factors above, the Company had applied to the Hong Kong Stock Exchange for, and the Hong Kong Stock Exchange had granted to the Company on 24 October 2016, a waiver from strict compliance with the requirement of setting the relevant cap.

2.7 Securities and financial services transactions

Apart from the securities and financial products transactions with CITIC Group and its associates as counterparties as disclosed in paragraph 2.6 above, the Group and CITIC Group and its associates also provide securities and financial services to each others during the normal course of their respective businesses. The Group provides securities and financial services such as advisory, brokerage, agency sale and asset management services for which the Group receives service fees, commission and other payments such as interests. On the other hand, the financial institutions of CITIC Group also provide financial and other services to the Group and the Group’s customers, such as deposit management services and other agency sale services for which service fees are charged by CITIC Group and its associates.

2.7.1 Pricing basis

The pricing principles for the mutual provision of the securities and financial services are as follows:

(a) Interest rates on deposits — the interest rates offered to the Group for the deposits placed with the banking subsidiaries of CITIC Group shall not be lower than the interest rates authorized by the PBOC for the same type of deposits offered by the commercial banks in the PRC during the same period and shall not be lower than the interest rates for the same type of deposits by customers of such banking subsidiaries of CITIC Group.
(b) Service fees or commission or brokerage fees for services provided to CITIC Group — the general pricing principles for such fees or commissions charged by the Group shall be based on negotiations between the parties with reference to the prevailing market rates and the fees or commissions charged by the Group for services provided to independent third parties, while taking into account individual factors such as deal size and complexities, market responses, and competition from other securities companies, and in accordance with

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the requirements of the applicable laws and regulations of the PRC. More specifically, the pricing policies for services, which account for the major part of the securities and financial services transactions, are as follows:

(i) underwriting and sponsorship services: the service fees shall be determined with reference to, among other things, the prevailing market rates, the proposed total amount of proceeds and fee rates charged by the Group for the provision of similar services to independent third parties;
(ii) other investment banking services: the service fees shall be determined taking into account of factors including the nature and size of transactions, the then market conditions, average fee level applicable to independent third parties for similar transactions and be determined on the basis of arm’s length negotiations between the parties;
(iii) brokerage services: the commissions shall be determined with reference to, among other things, the commission rates applicable to independent third parties and the estimated scale of the brokerage transactions;
(iv) financial products sales agency services and entrusted asset management services: the service fees shall be determined based on the amount of products for sale or the estimated asset size with reference to the service fee rates applicable to independent third parties; and
(v) other securities and financial services: such fees and commission shall be determined based on the nature of the transactions with reference to the prevailing market rates in accordance with the applicable laws and regulations.
(c) Service fees or commissions for services provided by CITIC Group — the general pricing principles for such fees or commissions charged by CITIC Group and its associates shall be based on negotiations between the parties with reference to the market rates, the fees or commissions charged for services provided to independent third parties, while taking into account such factors as deal size and complexities, competition from other service providers etc..

2.7.2 Pricing approval and supervision

The Company has also subscribed for information services provided by information service providers, such as Wind Info, and has access to information channels and websites of official and voluntary industry regulatory authorities. The Company will consider the various updated market information available, including published information on completed transaction amounts and rates, and terms offered by the transaction parties etc., before entering into any securities and financial services transactions. No specific number of quotations or quotations are required to be obtained before entering into such transactions.

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The Group has adopted a series of internal pricing policies and approval procedures to regulate the mutual provision of securities and financial services between the Group and CITIC Group and its associates. The major internal policies include the following:

(a) The terms (including pricing terms) in respect of the securities and financial services contemplated under the Securities and Financial Products Transactions and Services Framework Agreement shall be comparable to those offered by/to an independent third party for comparable services, and shall be subject to the same internal selection, approval and supervision procedures and pricing policies applicable to an independent third party.
(b) For services provided by the Group to CITIC Group and its associates, the Company will offer similar pricing terms to CITIC Group as the pricing to other independent third parties and no preferential terms shall be provided to CITIC Group and its associates. Prior to entering into a securities and financial service transaction, the relevant business departments of the Company would conduct inspection and due diligence, and assess whether the pricing is in compliance with relevant policy and procedures of the Group and whether the price is fair and reasonable, after taking into consideration individual factors such as the services provided and will grant approval, where appropriate.
(c) For securities and financial services provided by CITIC Group and its associates to the Group, the Company will select suppliers and determine the relevant terms of the transactions through inquiry and negotiation process. The Company will also gather information on its suppliers and their levels of fees and prices and compare the fees/prices and quality of services before selection. A prior assessment will be conducted by the responsible officer to assess whether the proposed prices by suppliers are fair and reasonable before submission for consideration and approval by the head of the relevant department. In such case, any offer from CITIC Group or its associates has to pass through the selection process as other suppliers before it could be appointed. As the Company will consider the various updated market information available and because of the uniqueness of financial transactions, there is not specific internal requirement as to the number of suppliers that will be selected for a particular type of services.
(d) The legal department and the compliance department of the Group will review relevant agreements and grant approval, where appropriate. The conduct of continuing connected transactions is also subject to annual review by all independent non-executive Directors, the Supervisory Committee of the Company and the auditors of the Company. The Related Party Transactions Control Committee comprising all independent non-executive Directors is also responsible for monitoring and reviewing major and continuing connected transactions of the Company.

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2.7.3 Payment arrangements

According to the Securities and Financial Products Transactions and Services Framework Agreement, payment arrangements for interests, service fees, commission or brokerage fees shall be specified in the individual service agreement to be signed by members of the Group and CITIC Group and its associates under such framework agreement.

2.7.4 Implementation agreements

During the term of the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed, members of the Group and CITIC Group and its associates will enter into, from time to time and as necessary, individual implementation agreement for each of the specific transactions contemplated under such framework agreement (including such implementation agreement entered into during the term of the existing Securities and Financial Products Transactions and Services Framework Agreement which has an expiring date within the term of the agreement to be renewed), provided that any such implementation agreement shall be within the ambit of the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed.

2.7.5 Historical transaction amounts

Set out below is the historical transaction amounts in respect of the securities and financial services between the Group and CITIC Group and its associates under the Securities and Financial Products Transactions and Services Framework Agreement for the preceding two financial years ended 31 December 2015 and the six months ended 30 June 2016 is as follows:

	Approximate historical transaction	Approximate historical transaction	Approximate historical transaction
Securities and Financial Services		amounts ended
	31 December	31 December	30	June
	2014	2015		2016
	(RMB million)	(RMB million)	(RMB million)
Revenue derived from provision of
securities and financial services by
the Group to CITIC Group and its
associates	995	841		890
Expenses incurred for securities and
financial services provided by CITIC
Group and its associates to the
Group	124	94		52

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2.7.6 Proposed annual caps for the three financial years ending 31 December 2019

The Company estimates the annual caps for the mutual provision of securities and financial services for the next three financial years ending 31 December 2019 as follows:

Securities and Financial Services


Securities and Financial Services	Proposed annual caps		ending
	31 December	31 December	31 December
	2017	2018		2019
	(RMB million)	(RMB million)	_(RMB _	million)
Revenue to be derived from provision
of securities and financial services
by the Group to CITIC Group and
its associates	2,200	2,200		2,500
Expenses to be incurred for securities
and financial services provided by
CITIC Group and its associates to
the Group	400	540		740

2.7.7 Basis of determination of the annual caps

(a) Revenue

When estimating the annual caps for the revenue to be derived from provision of securities and financial services by the Group to CITIC Group and its associates (referred to in paragraph 2.7.6 above), the Company has made reference to the above historical transaction amounts, and also considered, among other things, the following key factors:

(i) Considering the substantial increased levels of corporate restructuring and mergers and acquisitions activities in China and the issuance of financial products in relation to real properties, the Company expects that revenue from the provision of financial and investment advisory services to CITIC Group and its associates in connection with corporate reorganization and mergers and acquisitions, issuance of asset-backed securities and REITs would substantially increase in 2016 and 2017 to an estimate of RMB620 million to RMB680 million in 2017, but will then decrease to around RMB320 million to RMB360 million in 2018 and 2019;
(ii) As part of its normal course of business, the Company would participate in the potential fund raising exercises such as equity financing, and debt financings and initial public offering to be undertaken by members of CITIC Group and its associates in the next three financial years, by providing investment banking services such as underwriting, sponsorship and supervision and guidance services. Although there are still restrictions on initial public offerings in China, it is expected that stable revenue will be contributed by the provision of such services by the Company, including issuances of innovative financial

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LETTER FROM THE BOARD

products and various kinds of debts by members of CITIC Group as well as sponsorship fees from quotation on the New Third Board by members or associates of CITIC Group. It is estimated that revenue from these services would be in the region of RMB220 million to RMB240 million each year for the next three financial years;

(iii) A substantial amount of revenue is expected to be contributed from both the fixed management fees and performance-based management fees from asset management plans as well as collective asset management plans invested by CITIC Group and its associates and managed by the Group. The initial contribution was estimated to be in the range of RMB460 million to RMB500 million in 2017 with an estimated growth rate of 30% or more each year to around RMB790 million in 2019, which will have a substantial impact on the estimation of the annual caps for the next three financial years;
(iv) Considering the expertise of the Group in providing research, investment advice, investment management and custodian services, and with the increasing cooperation between the Group and CITIC Group as well as the expansion of the Group’s business and launch of new businesses, the Company expects that there could be substantial growth in the advisory and consultation fees from CITIC Group and its associates from an estimate of RMB210 million in 2017 to approximately RMB340 million in 2018 and RMB480 million in 2019; and
(v) The Company has included an estimate of interest on deposits of the Group’s proprietary funds with the banking institution of CITIC Group in the proposed annual caps. Depending on the size of the proprietary funds deposited with the banking institution of CITIC Group and the interest rates offered by the banking institutions of CITIC Group, the interest on deposits could provide a steady and stable revenue to the Group in a year.
(b) Expenses

When estimating the annual caps for the expenses to be incurred by the Group for securities and financial services provided by CITIC Group and its associates (referred to in paragraph 2.7.6 above), the Company has made reference to the above historical transaction amounts, and also considered, among other things, the following key factors:

(i) It is estimated that a substantial portion of the total expenses paid by the Group to CITIC Group and its associates are for commission or agency fees for sale of financial products by CITIC Group and its associates for the financial products issued by the Group. The financial institutions of CITIC Group have good sale networks and potential customers for the Group’s financial products. Such services include, among other things, agency sale of bonds and asset management products, linked structured notes etc. It is also estimated that the aggregate expenses payable by the Group for such services for 2017 would be in the region of RMB200 million to RMB230 million, which will increase substantially to the region of RMB280 million to RMB400 million in 2018 and 2019 when more asset management products and bonds are expected to be issued by the Group during such period.

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LETTER FROM THE BOARD

(ii) For new asset management products and funds set up and managed by the Group, the financial institutions of CITIC Group and its associates may be appointed as custodians to provide custody services and client deposit management services. It is estimated that expenses in this respect would be in the range of RMB90 million to RMB110 million in 2017 and with more new asset management products and funds being set up and managed by the Group, such fees and expenses are expected to substantially increase in the next three financial years with an estimated range of RMB150 million to RMB250 million for the two years ending 31 December 2019.
(iii) With the further expansion of the Group’s businesses and the potential launch of new products/businesses, the Group and CITIC Group and its associates will cooperate in an increasing number of areas, such as investment banking, brokerage, assets management, financial advisory services, distribution of financial products and other innovative businesses by providing more value-added services. Expenses to be paid by the Group to CITIC Group and its associate are expected to have a very substantial increase.
(c) Factors considered

When estimating the annual caps for the securities and financial services transactions, the Company has taken into account various considerations and factors, including principally the following:

(i) The Company has considered the historical connected transaction amounts as well as the rate of growth/fluctuations of the relevant securities and financial products or services and other similar products or services. For example, when estimating the size of revenue from management of assets provided to CITIC Group and its associates, the Company has taken into account the significant growth in the total value of assets under management in the industry since 2014 (please refer to paragraph 2.6.6(a)(i) on page 19 of the circular for the detailed growth) as well as the contribution from performance based management fees, when estimating the size of management fees on assets under management referred to in sub-paragraph (iii) under “Revenue” in paragraph 2.7.7 above; and
(ii) The Company has also considered the Group’s corporate strategic planning and business planning of individual departments and has applied a high rate of growth for those services/transactions which are the focus of business development. For example, a higher rate of growth is attributed to investment advisory and research, which remain the business focuses of the Company and are expected to continue to grow as the demands for investment advice and consultancy services continue to grow.

In addition, in arriving at the above proposed annual caps, the Directors have also taken into account the inflation factor, and were based on the principal assumptions that, during the term of the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed, there will not be any adverse change or disruption in market conditions, operation and business environment or government policies which may materially affect the businesses of the Group and those of CITIC Group and/or its associates.

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LETTER FROM THE BOARD

2.8 Reasons and benefits of renewal of the Securities and Financial Products Transactions and Services Framework Agreement

The reasons and benefits are:

(a) The securities and financial products transactions and securities and financial services transactions under the Securities and Financial Products Transactions and Services Framework Agreement are and will be conducted in the ordinary and usual course of business of the Group. Such transactions will continue to be agreed on arm’s length basis with terms that are fair and reasonable to the Company. Due to the historical and future long-term cooperation relationship between the Group and CITIC Group and its associates, the Directors believe that it is beneficial to the Group to renew the Securities and Financial Products Transactions and Services Framework Agreement with CITIC Group as the transactions thereunder have facilitated and will continue to facilitate the overall business operations and growth of the Group’s business.
(b) These transactions will provide cost synergies by integrating advantageous resources between the Group and CITIC Group and its associates, thereby reducing the aggregate operational cost and general expenditure so as to improve the profitability and to strengthen leading position of the Company in the securities industry.
(c) Further, such continuing connected transactions will enable CITIC Group and its associates to develop a deeper understanding in the operations of the Group, which in turn will render them more expedient and efficient services and/or product provisions to the Group when compared to those services and/or products provided by independent third parties.

The Directors (excluding the independent non-executive Directors, whose view on the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps and maximum daily balances will be set out in the letter from the Independent Board Committee contained in the circular to be despatched after considering the advice from the independent financial adviser) are of the view that the securities and financial products transactions and the securities and financial services transactions under the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed will be conducted on normal commercial terms, and the terms and conditions therein as well as the proposed annual caps for the continuing connected transactions contemplated thereunder and the maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates are fair and reasonable, and are in the interests of the Company and its Shareholders as a whole.

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LETTER FROM THE BOARD

3 HONG KONG LISTING RULES IMPLICATIONS

CITIC Group is a substantial Shareholder of the Company directly and indirectly holding an aggregate of 16.66% interest in the Company as at the date hereof. Accordingly, CITIC Group and its associates are connected persons of the Company under Chapter 14A of the Hong Kong Listing Rules and the proposed transactions to be conducted between the Group and CITIC Group and its associates under the Securities and Financial Products Transactions and Services Framework Agreement constitute continuing connected transactions for the Company under Chapter 14A of the Hong Kong Listing Rules.

As the highest of the applicable percentage ratios in respect of each of: (a) the proposed annual caps for the continuing securities and financial products transactions; (b) (i) the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group, and the (ii) proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates; and (c) the proposed annual caps for the continuing securities and financial services transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed exceeds 5% calculated according to the percentage ratios under the Hong Kong Listing Rules, such continuing connected transactions are subject to the reporting, announcement, annual review and independent shareholders’ approval requirements under Chapter 14A of the Hong Kong Listing Rules.

The Company has obtained a waiver from setting up the maximum daily balance of deposits, including the Group’s proprietary funds and its customers’ funds, with the banking subsidiaries of CITIC Group in the PRC and Hong Kong for the three financial years ending 31 December 2019.

Mr. Zhang Youjun, the chairman of the Company, also acts as the assistant to the general manager of CITIC Group, the assistant to the general manager of CITIC Limited and CITIC Corporation Limited and the chairman of CITIC Holdings Limited. Therefore, he is deemed to have material interest in all the above-mentioned continuing connected transactions contemplated between the Group and CITIC Group, and thus has abstained from voting on the relevant resolutions at the Board meeting. Save as mentioned above, none of the other Directors has a material interest in such transactions and is required to abstain from voting on the relevant resolutions at the Board meeting.

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LETTER FROM THE BOARD

4 GENERAL INFORMATION

4.1 Information on CITIC Group

CITIC Group Corporation, established in the PRC in 1979, is a large-scale comprehensive multinational conglomerate engaging in both financial and non-financial businesses. Its financial business covers industries and fields including banking, securities, trust, insurance, funds, and asset management, while its non-financial business covers industries and fields including real estate, engineering contracting, resources and energy, infrastructure construction, machinery manufacturing, and IT industry. As at the Latest Practicable Date, CITIC Group indirectly holds an aggregate of 16.66% interest in the Company.

Among the subsidiaries of CITIC Group, the following companies engage in more business transactions with the Company: CITIC Holdings Limited, China CITIC Bank Corporation Limited, CITIC Trust Co., Ltd., CITIC Pacific Limited, Dah Chong Hong Holdings Limited, CITIC Prudential Life Insurance Co., Ltd., CITIC-Prudential Fund Management Company Ltd., China CITIC Bank International Limited, CITIC Networks Co., Ltd., etc.

4.2 Information on the Company

The principal businesses of the Company include securities brokerage (for areas other than Shandong Province, Henan Province, Tiantai and Cangnan Counties of Zhejiang Province); securities investment consulting; financial advisory services related to securities trading and securities investment activities; securities underwriting and sponsorship; securities proprietary business; securities asset management; margin financing and securities lending; securities investment fund sales agency; provision of brokerage services to futures companies; distribution of financial products; and stock options market making.

III. THE EGM

A notice convening the EGM to be held at Qing Room, 5/F, Four Seasons Hotel, No. 48 Liangmaqiao Road, Chaoyang District, Beijing, the PRC at 10:30 a.m. on Thursday, 19 January 2017, at which an ordinary resolution will be proposed for the Independent Shareholders to consider and, if thought fit, to approve the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps for each of the continuing securities and financial products transactions and securities and financial services transactions contemplated thereunder and the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates for the three years ending 31 December 2019, is set out at pages 74 to 76 of this circular.

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LETTER FROM THE BOARD

In accordance with the Hong Kong Listing Rules, CITIC Group and its associates will abstain from voting on the resolution to be proposed at the EGM in relation to the renewal of the Securities and Financial Products Transactions and Services Framework Agreement as well as the proposed annual caps and maximum daily balances for the continuing connected transactions contemplated thereunder. As at the Latest Practicable Date, CITIC Group and its associates, directly and indirectly, hold 2,018,602,746 A Shares of the Company (representing approximately 16.66% of the total issued share capital of the Company) with voting right.

To the best knowledge of the Directors and having made all reasonable enquiries, other than CITIC Group and its associates, no other Shareholder has a material interest in the continuing connected transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and is required to abstain from voting on the relevant resolution to be proposed at the EGM.

A proxy form and a reply slip for the EGM are also enclosed herewith. If you wish to attend the EGM by proxy, you are requested to complete the proxy form in accordance with the instructions printed thereon and return it as soon as possible. H Shareholders are required to return the proxy form to the H Share Registrar of the Company, Computershare Hong Kong Investor Services Limited; while A Shareholders are required to return the proxy form to the Board Office, but in any event the proxy form shall be returned in person or by mail not less than 24 hours before the time appointed for the EGM or any adjournment thereof. Completion and return of the proxy form will not preclude you from attending and voting at the EGM or any adjournment thereof in person if you so wish.

If you wish to attend the EGM either in person or by proxy, you are required to complete and return the reply slip for the meeting to the Board Office on or before Thursday, 29 December 2016.

The addresses of the Board Office and the H Share Registrar of the Company are as follows:

Board Office: CITIC Securities Tower, No. 48 Liangmaqiao Road, Chaoyang District, Beijing, the PRC, Postal code: 100026 (Tel: (8610) 6083 6030, Fax: (8610) 6083 6031)

H Share Registrar: Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong (Tel: (852) 2862 8555)

IV. VOTES BY WAY OF POLL

Pursuant to the requirements of the Hong Kong Listing Rules, all votes of shareholders at a general meeting must be taken by poll. As such, the resolution set out in the notice of the EGM shall be voted by way of poll. The voting results of the poll will be posted on the HKExnews website of Hong Kong Exchanges and Clearing Limited at www.hkexnews.hk and on the website of the Company at www.cs.ecitic.com at the conclusion of the EGM.

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LETTER FROM THE BOARD

V. RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out in this circular which contains the recommendation of the Independent Board Committee to the Independent Shareholders in relation to the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps and maximum daily balances for the continuing connected transactions contemplated thereunder; and (ii) the letter from Somerley set out in this circular which contains its advice to the Independent Board Committee and the Independent Shareholders in relation to the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps and maximum daily balances for the continuing connected transactions contemplated thereunder, as well as the principal factors and reasons taken into account by Somerley in arriving at its advice.

The Directors (excluding the independent non-executive Directors) are of the view that the securities and financial products transactions and the securities and financial services transactions under the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed will be conducted on normal commercial terms, and the terms and conditions therein as well as the proposed annual caps for the continuing connected transactions and the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates contemplated thereunder are fair and reasonable, and are in the interests of the Company and its Shareholders as a whole.

Accordingly, the Directors (excluding the independent non-executive Directors) recommend the Independent Shareholders to vote in favour of the relevant resolution to be proposed at the EGM.

Yours faithfully, By order of the Board CITIC Securities Company Limited ZHANG Youjun Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 6030)

2 December 2016

To the Independent Shareholders

Dear Sir or Madam,

We refer to the circular of the Company dated 2 December 2016 (the “ Circular ”) of which this letter forms a part. Unless the context requires otherwise, terms defined in the Circular shall have the same meanings when used herein.

We have been appointed by the Board as the Independent Board Committee to consider and advise the Independent Shareholders on whether, in our opinion, the terms of the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps for the continuing connected transactions and the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates contemplated thereunder (details of which are set out in the letter from the Board) are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole.

Somerley has been appointed by the Board as the Independent Financial Adviser to advise the Independent Board Committee and Independent Shareholders on the fairness and reasonableness of the terms and conditions of the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps for the continuing connected transactions and the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates contemplated thereunder. Details of the advice from Somerley, together with the principal factors taken into consideration in arriving at such advice, are set out in its letter on page 38 to 69 of the Circular.

Your attention is also drawn to the letter from the Board set out on pages 4 to 35 of the Circular and the additional information set out in the Appendix.

Having considered the terms and conditions of the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps and maximum daily balances for the continuing connected transactions contemplated thereunder, the interests of the Independent Shareholders and the advice of Somerley, we are of the opinion that the securities and financial products transactions as well as the securities and financial services transactions under the Securities and Financial Products Transactions and Services Framework

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Agreement proposed to be renewed will be conducted in the ordinary and usual course of business of the Group and on normal commercial terms, and the terms and conditions therein as well as the proposed annual caps for the continuing connected transactions and the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned, and are in the interests of the Company and its Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the relevant ordinary resolution to be proposed at the EGM so as to approve the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed and the proposed annual caps for the continuing connected transactions and the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates contemplated thereunder.

Yours faithfully,

For and on behalf of the Independent Board Committee

CITIC Securities Company Limited

Mr. Liu Ke, Mr. He Jia, and Mr. Chan Charles Sheung Wai Independent Non-executive Directors

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LETTER FROM SOMERLEY

The following is the letter of advice from Somerley Capital Limited to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of inclusion in this circular.

SOMERLEY CAPITAL LIMITED 20th Floor China Building 29 Queen’s Road Central Hong Kong

2 December 2016

To: the Independent Board Committee and the Independent Shareholders

Dear Sirs,

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders on (i) the terms of the non-exempt continuing connected transactions to be conducted under the Securities and Financial Products Transactions and Services Framework Agreement to be renewed at the EGM; (ii) the proposed annual caps (the “ Financial Products Annual Caps ”) for the securities and financial products transactions between the Group and CITIC Group and its associates contemplated under the Securities and Financial Products Transactions and Services Framework Agreement (the “ Securities and Financial Products Transactions ”)’ (iii) the proposed annual caps (the “ Financial Services Annual Caps ”, together with the Financial Products Annual Caps, the “ Annual Caps ”) for mutual provision of securities and financial services between the Group and CITIC Group and its associates contemplated under the Securities and Financial Products Transactions and Services Framework Agreement (the “ Securities and Financial Services ”); (iv) the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group; and (v) the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates (together with (iv), the “ Maximum Daily Balances ”) to be conducted between the Group and CITIC Group and its associates under the Securities and Financial Products Transactions and Services Framework Agreement, for the three financial years ending 31 December 2019. Details of the Securities and Financial Products Transactions and Services Framework Agreement, the Annual Caps and the Maximum Daily Balances are set out in the “Letter from the Board” contained in the circular of the Company to the Shareholders dated 2 December 2016 (the “ Circular ”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular unless the context otherwise requires.

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LETTER FROM SOMERLEY

As at the Latest Practicable Date, CITIC Group is a substantial shareholder of the Company indirectly holding approximately 16.66% equity interest in the Company. As such, CITIC Group and its associates are connected persons of the Company under Chapter 14A of the Hong Kong Listing Rules. The transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement are of a recurrent nature and expected to occur on a continuing basis in the ordinary and usual course of business of the Group. Therefore, such transactions constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules. As the highest of the applicable percentage ratios under the Hong Kong Listing Rules in respect of the continuing securities and financial products transactions and provision of securities and financial services contemplated under the Securities and Financial Products Transactions and Services Framework Agreement exceed 5%, the entering into of the Securities and Financial Products Transactions and Services Framework Agreement (including the Annual Caps and the Maximum Daily Balances) is subject to the Independent Shareholders’ approval at the EGM under Chapter 14A of the Hong Kong Listing Rules. CITIC Group and its associates shall abstain from voting at the EGM on the resolution in this regard.

The Independent Board Committee, comprising all the independent non-executive Directors, namely Mr. Liu Ke, Mr. He Jia and Mr. Chan Sheung Wai, Charles, has been established to advise the Independent Shareholders as to whether the terms of the Securities and Financial Products Transactions and Services Framework Agreement, the Annual Caps and the Maximum Daily Balances are fair and reasonable so far as the Independent Shareholders are concerned and whether they are in the interests of the Company and the Shareholders as a whole. We, Somerley Capital Limited, have been appointed to advise the Independent Board Committee and the Independent Shareholders in the same regard.

In formulating our opinion, we have reviewed, among others, the draft Securities and Financial Products Transactions and Services Framework Agreement, the interim report of the Company for the six months ended 30 June 2016, the annual report of the Company for the year ended 31 December 2015, and the information contained in the Circular. We have relied on the information and facts supplied, and the opinions expressed, by the Directors and management of the Group and have assumed that they are true, accurate and complete in all material aspects and will remain so up to the time of the EGM. We have also sought and received confirmation from the Directors that no material facts have been omitted from the information supplied and opinions expressed to us. We have relied on such information and consider that the information we have received is sufficient for us to reach our advice and recommendation as set out in this letter. We have no reason to believe that any material information has been omitted or withheld from us, nor to doubt the truth, accuracy or completeness of the information provided. We have not, however, conducted any independent investigation into the businesses and affairs of the Group, CITIC Group or their respective associates, nor have we carried out any independent verification of the information supplied.

As at the Latest Practicable Date, Somerley Capital Limited does not have any relationships or interests with the Company that could reasonably be regarded as relevant to the independence of Somerley Capital Limited. In the last two years, except for an independent financial adviser engagement with CITIC Limited, the controlling shareholder of which is CITIC Group, relating to the connected transaction in respect of a proposed subscription of preferred shares, details of which were set out in the circular of CITIC Limited dated 16 February 2015, there has been no other engagement

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LETTER FROM SOMERLEY

between CITIC Group or its associates and Somerley Capital Limited. Accordingly, we do not consider the past engagement as independent financial adviser gives rise to any conflict for Somerley Capital Limited acting as the independent financial adviser of the transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement. Apart from normal professional fees paid or payable to us in connection with this appointment as the independent financial adviser, no arrangement exists whereby we will receive any fees or benefits from the Company.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation, we have taken into account the following principal factors and reasons:

1. Background of the Securities and Financial Products Transactions and Services Framework Agreement

Introduction

The Group is principally engaged in (i) securities brokerage and securities investment consulting; (ii) financial advisory services related to securities trading and securities investment activities; (iii) securities underwriting and sponsorship services; (iv) securities proprietary business; (v) securities asset management services; (vi) margin financing and securities lending; (vii) securities investment fund sales agency services; (viii) provision of brokerage services to futures companies; (ix) distribution of financial products; and (x) stock options market making.

CITIC Group, established in 1979, is one of the largest state-owned conglomerates with over 30 years of operating history in the PRC and operates in both financial and non-financial sectors.

As disclosed in the prospectus of the Company dated 22 September 2011 and circular of the Company dated 14 October 2013, the Company has been entering into continuing connected transactions with CITIC Group and its associates including securities and financial products transactions and the provision of securities and financial services. On 31 December 2013, the Company and CITIC Group have renewed the existing Securities and Financial Products Transactions and Services Framework Agreement for a term of three years ending 31 December 2016 to govern the securities and financial products transactions and the mutual provision of securities and financial services, setting the relevant annual caps for the three financial years ending 31 December 2016. Subject to the Independent Shareholders’ approval at the EGM, the Company and CITIC Group will renew the Securities and Financial Products Transactions and Services Framework Agreement for a term of three years (subject to renewal) commencing on 1 January 2017 and ending on 31 December 2019 and set the Annual Caps and the Maximum Daily Balances for the three financial years ending 31 December 2019.

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LETTER FROM SOMERLEY

Securities and Financial Products Transactions

Pursuant to the Securities and Financial Products Transactions and Services Framework Agreement, the Group and CITIC Group and its associates agree to conduct Securities and Financial Products Transactions both in the PRC and Hong Kong with each other. Such transactions involve the following:

(i) products with fixed income features, including, but not limited to, bonds, funds, trusts, wealth management products, asset management plans, assets securitised products, bond lending and borrowing, structured products, swaps, futures, forwards, options and other financial products with fixed income features;
(ii) fixed income related derivative products, including, but not limited to, interest rate and credit derivatives;
(iii) equity-linked products, including, but not limited to, trading and/or subscription of equity (including market-making activities on the New Third Board), funds, trusts, wealth management products, asset management products and equity derivatives such as swaps, futures and options;
(iv) financing transactions among financial institutions with or without guarantees or pledges, including, but not limited to, interbank lending and borrowing, repurchase, interbank deposits, usufruct, asset securitization, corporate account overdraft, pledge loans, holding debt certificates for each other such as short-term financing bonds, beneficiary certificates, subordinated debts and corporate bonds; and
(v) other related securities and financial products permitted by the regulatory authority, including, but not limited to, futures, foreign exchange and commodities trading.

Provision of Securities and Financial Services

Apart from the Securities and Financial Products Transactions, the Group and CITIC Group and its associates also agree to provide Securities and Financial Services to each other pursuant to the Securities and Financial Products Transactions and Services Framework Agreement.

The Securities and Financial Services to be provided by the Group to CITIC Group and its associates include the following:

(i) underwriting, sponsorship, continuous supervision and guidance services for equity securities, fixed income products, structured products and other derivative products;
(ii) other investment banking services, including, but not limited to, financial advisory services in relation to corporate restructuring and mergers and acquisition;

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LETTER FROM SOMERLEY

(iii) brokerage services, including, but not limited to, securities and related financial products brokerage services as well as futures brokerage services such as treasury bond futures brokerage services;
(iv) financial products sales agency services;
(v) entrusted asset management services; and
(vi) other securities and financial advisory and consulting services and commodities services, etc.

The Securities and Financial Services to be provided by CITIC Group and its associates to the Group include the following:

(i) deposit services, including, but not limited to, (a) deposits of cash balances arising from the Group’s business operations including cash from daily operations, proceeds from fund raising activities such as equity and bond issuances; (b) cash deposits from the Group’s customers; and (c) other deposits;
(ii) financial products sales agency services, including, but not limited to, provision of sales agency services for financial products and precious metals;
(iii) client deposits management and custody services, including, but not limited to, management services provided by the banking subsidiaries of CITIC Group for managing the cash deposits of the Group’s non-financial institutional customers, which are required by the relevant PRC laws and regulations to be deposited into the Group’s account with a PRC bank, and custody services provided by the banking subsidiaries of CITIC Group for securities and financial products issued by the Group;
(iv) loan services, including, but not limited to, funds for business operation and loans as working capital of the Group provided by CITIC Group and its associates; and
(v) other securities, financial advisory and consulting services, money market brokerage services and commodities services, etc.

Reasons for, and benefits of, entering into of the Securities and Financial Products Transactions and Services Framework Agreement

Given the historical connection and long-term cooperation relationship between the Group and CITIC Group and its associates and the transactions to be conducted under the Securities and Financial Products Transactions and Services Framework Agreement have facilitated and will continue to facilitate the overall business operations and growth of the Group’s business, it is beneficial to continue the continuing connected transactions by way of entering into of the Securities and Financial Products Transactions and Services Framework Agreement. Also, it is expected that a better

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understanding of the Group’s operations by CITIC Group and its associates will be further achieved, which in turn will enable them to render more expedient and efficient services and/or products to the Group when compared to those services and/or products provided by independent third parties.

More importantly, by entering into of the Securities and Financial Products Transactions and Services Framework Agreement, the Group will be able to continue to integrate resources between the Group and CITIC Group and its associates and achieve cost synergies. As a result, the profitability of the Company can be improved and leading position of the Company in the PRC securities industry can be strengthened.

Having considered the factors above, we concur with the Directors that entering into of the Securities and Financial Products Transactions and Services Framework Agreement is in the interests of the Company and the Shareholders as a whole.

Principal terms of the Securities and Financial Products Transactions and Services Framework Agreement

The Securities and Financial Products Transactions and Services Framework Agreement is a master agreement which sets out the principles upon which detailed terms are to be determined in respect of each transaction to be carried out. Relevant member of the Group and of CITIC Group and its associates will then, from time to time and as necessary, enter into separate agreements to provide for the detailed terms of each of the Securities and Financial Products Transactions and provision of Securities and Financial Services.

Transaction principles

The principles governing the Securities and Financial Products Transactions and the provision of Securities and Financial Services include:

(i) the transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement shall be conducted in accordance with applicable normal market practices (if any) and on normal commercial terms;
(ii) the signing of the Securities and Financial Products Transactions and Services Framework Agreement has no effect on the Group and CITIC Group in selecting their respective trading parties, or entering into transactions with independent third parties, at their own discretion; and
(iii) in the event that one party under the Securities and Financial Products Transactions and Services Framework Agreement is not able to meet the demand for services/products from the other party, or the terms offered by one party are less favourable than those from independent third parties, the other party has the right to source the services/products from independent third parties.

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LETTER FROM SOMERLEY

Pricing basis

The Securities and Financial Products Transactions

The Securities and Financial Products Transactions, whether or not conducted through the PRC interbank bond market, the PRC exchange bond market or stock exchanges, shall be conducted at the prevailing market prices quoted in the interbank bond market or in the relevant stock exchanges.

Provision of the Securities and Financial Services

The pricing bases for the mutual provision of the Securities and Financial Services are as follows:

(i) interest rates offered to the Group for deposits placed with the banking subsidiaries of CITIC Group shall not be lower than the interest rates authorised by the PBOC for the same type of deposits offered by the commercial banks in the PRC during the same period and shall not be lower than the interest rates for the same type of deposits by other customers of such banking subsidiaries of CITIC Group;
(ii) service fees or commission or brokerage fees charged shall be based on negotiations between the parties with reference to the prevailing market rates and shall be in compliance with the applicable laws and regulations in the PRC. For specific pricing policies for major part of the Securities and Financial Services, please refer to the “Letter from the Board” contained in the Circular.

Assessment on the principal terms of the Securities and Financial Products Transactions and Services Framework Agreement

Transaction principles

In respect of the transaction principles, the Directors confirmed that the Group, when considering the counterparties of the Securities and Financial Products Transactions and Securities and Financial Services, will take into account all available market offers from independent third parties and those from CITIC Group and its associates and, after considering the offered terms and other factors, including but not limited to, the corporate background, creditworthiness, reliability of the counterparties and transaction history with the counterparties, the most favourable offer to the Group will be taken. Given the transaction principles above, the Group also has the right to source the services/products from independent third parties in the event that the terms offered by CITIC Group and its associates are less favourable than those from independent third parties.

Pricing basis — Securities and Financial Products Transactions

As disclosed in the “Letter from the Board” in the Circular, the pricing standards/mechanisms for transactions under the Securities and Financial Products Transactions and Services Framework Agreement are in general transparent and subject to strict regulatory supervision in the PRC and

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requirements of applicable PRC laws and regulations. As advised by management of the Group, the Securities and Financial Products Transactions are mainly conducted in the interbank bond market, the PRC exchange bond market, the relevant stock or commodities exchanges, through OTC bilateral negotiations or market-makers.

As advised by management of the Group, majority of the Securities and Financial Products Transactions are conducted through the interbank bond market and majority of which are conducted through independent intermediate money brokerage firms, where the bidders and offerors do not have knowledge of the identities of the counterparties and the transaction prices are based on the quotes made by the bidder or the offeror in the market. Transactions will be carried out when the deal can be matched and both parties will be informed of the deal by then. These transactions are executed through the trading system of China Foreign Exchange Trading System & National Interbank Funding Centre (“ NIFC ”), the unified trading platform designated by the PBOC for the interbank bond market in China. The rest of the transactions are mainly conducted through over-the-counter bilateral negotiations, which have to be reported to the NIFC trading system and are under supervision of the relevant PRC regulatory authorities. Pricing of these transactions will be determined with reference to the quoted market prices provided by National Association of Financial market Institutional Investors (“ NAFMII ”) and China Central Depository & Clearing Corporation, Ltd. (“ CCDC ”) where a trading market exists, i.e. interbank bond market or PRC exchange bond market. In accordance with the trading rules of CCDC and advised by management of the Group, all quotes must be real price quotes supported by physical securities and all price quotes must be within 3% of the quotes by NIFC and CCDC. Abnormal pricing may result in disciplinary action by NAFMII, a self-regulatory organisation responsible for supervising interbank transactions.

For transactions conducted in the PRC exchange bond market and relevant stock or commodities exchanges, we understand that the pricing of these transactions are with reference to the prevailing market price, i.e. the latest transaction price, quoted on the PRC exchange bond market and relevant stock or commodities exchanges and subject to close supervision by the relevant regulatory authorities of the stock and commodities exchanges and the PRC exchange bond market.

As advised by management of the Group, for transactions conducted through market-makers, the market maker will provide the market with bid or offer quotes, without the knowledge of the counterparty, and the deal will be concluded based on the price quoted. Such transactions will be reported by the market maker to NIFC. In respect of market-making transactions on the New Third Board, we understand that the quotes are estimated based on the Company’s own evaluation of the fundamentals and market value of the underlying shares and the intervals of bid and offer quotes are subject to the relevant regulations published by the New Third Board.

In terms of subscriptions by the Group of the financial products set up by the financial institutions of CITIC Group or subscription by CITIC Group and its associates of financial products set up by the Group, the subscription price is at the same subscription price as the subscriptions by other investors. Such subscription price is determined by the financial institutions (or by the Group, where the financial product is set up by the Group) which set up the financial products after considering the fundamentals of the assets/businesses to be invested. CITIC Group, its subsidiaries and its associates are required to satisfy and comply with the relevant PRC administrative rules, regulations and measures regulating issuance, including pricing determination, of their financial

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products. The relevant rules and measures would normally require information documents to be prepared and disclosed, which would require due diligence, valuation, auditing of financial information, rating etc. to be conducted or prepared for the purpose of the issuance. In addition, issuance price may be required to be set in accordance with the methods prescribed in the relevant rules and regulations and all subscribers for the same financial product will subscribe at the same issuance price.

Pricing basis — inter-financial institutions borrowings, collateralised securities repurchase and loans

The Group has engaged in inter-financial institutions borrowings from the banking institutions of CITIC Group since 2016. Such borrowings are all conducted at the prevailing interest rates in the interbank money market at the time of the borrowings with no security being given by the Group for such inter-financial borrowings.

The Group also engages in collateralised securities repurchase with the financial institutions of CITIC Group in the ordinary course of its business at interest rates which are available to independent third party customers of the financial institutions or for better than normal commercial terms. The Group may also enter into repurchase agreements with the financial institutions of CITIC Group upon the same terms applicable to repurchase transactions by the financial institutions of CITIC Group to independent third party customers or for better than normal commercial terms. The Group would ensure that the interest rates of repurchase transactions offered by the financial institutions of CITIC Group are at the prevailing market rates by ascertaining from time to time that the terms (including the securities to be collateralised and financing period) and interest rates quoted by the financial institutions of CITIC Group are comparable to those offered to independent third party customers of the financial institutions of CITIC Group. The Group would obtain terms and interest rates from other major commercial banks to ensure that such terms and interest rates are also comparable to those offered by other comparable financial institutions in the market.

In light of the above, the Securities and Financial Products Transactions are conducted according to the prevailing market rates with majority of the Securities and Financial Products Transactions under the overall supervision and monitoring of the PBOC and other PRC regulatory authorities.

Pricing basis — provision of the Securities and Financial Services

Service fees or commission or brokerage fees charged for services provided to CITIC Group shall be based on negotiations between the parties with reference to the prevailing market rates and the fees or commissions charged by the Group for services provided to independent third parties, while taking into account individual factors such as deal size and complexities, market responses, and competition from other securities companies, and in accordance with the requirements of the applicable laws and regulations of the PRC.

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Service fees or commissions for services provided by CITIC Group shall be based on negotiations between the parties with reference to the market rates, the fees or commissions charged for services provided to independent third parties, while taking into account factors such as complexities and competition from other service providers etc. For various types of transactions, we understand different pricing procedures are involved to ensure the service fees or commission or brokerage fees shall be on normal commercial terms. Details of the pricing bases for specific types of transactions are set out in the sub-sections below.

(i) Underwriting, sponsorship, continuous supervision and guidance services and other investment banking services

We understand that the service fees for underwriting, sponsorship and continuous supervision and guidance services are with reference to, among other things, the prevailing market data which are available from Wind Info, a leading integrated service provider of financial data, information, and software in the Chinese market, and shall be determined by arm’s length negotiations after taking into account factors including but not limited to the prevailing market conditions, size of the proposed issue, credibility and financial background of counterparties and fees charged on other transactions with similar nature and size. For other investment banking services, the service fees are determined based on factors including the nature of services to be provided, nature of the industry the counterparty is engaged in, size and complexity of transactions, the prevailingmarket conditions and the average fee level for similar transactions conducted and on the basis of arm’s length negotiations between the parties. As other investment banking services are differentiated in nature and fees are generally confidential within the industry, market rates of other investment banking services may not be available. We also understand from management of the Group that, given the intensive competition within the investment banking industry, the Group may offer discount to counterparties in order to maintain the Group’s market share.

As advised by management of the Group and with reference to the internal guidance of the Company, transaction team has to submit a report with details of the counterparty, such as the shareholding structure, industry and operations, financial performance etc., and details of the transaction, such as the expected timetable, potential issues and risks involved, previous engagements with the counterparty, service fee, expected income to be received and expenses to be incurred etc. The quality control department will review the application and may raise request for further information if necessary. Subsequently, the quality control department within the investment banking service line will appoint representatives from various departments based on the nature of the transactions and experience of the representatives in relation to the relevant type of transaction, forming a project committee, and assess and review individual transaction, including transactions with CITIC Group and its associates and independent third parties, and grant approval where appropriate, after considering, including but not limited to, background of the counterparty, terms of the transaction and possible risks involved based on the applications made by transaction teams and raise questions during the review and assessment, and approval would be granted by the project committee where appropriate. For transactions not meeting the basic requirements stated in the internal guidance of the Company, including but not limited to transactions with proposed service fee lower than a certain threshold specified in the internal guidance, these transactions have to be approved by the special committee,

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consisting of heads of the quality control department and investment banking department, prior to the assessment of the project committee as mentioned above. The transaction team is required to submit an additional application form stating the basic details of the transaction, the counterparty and detailed reasons of proposing a lower service fee, and any details rendering the transactions not up to the basic requirements. The special committee would consider various factors, including but not limited to, the relationship with the counterparty, the prevailing market conditions, acceptance level of the counterparty and other factors stated on the applications submitted by the transaction team, in making the decision.

(ii) Brokerage services

As disclosed in the “Letter from the Board” contained in the Circular, the commissions for brokerage services shall be determined with reference to the estimated scale of the brokerage transactions and commission rates applicable to independent third parties. According to the Notice on Adjusting the Rates of Securities Trading Commission (Zheng Jian Fa [2002] No.21) published by the China Securities Regulatory Commission, securities service providers are required to fix their commission charges (including collection of fees and charges for securities trading on behalf of regulatory and tax authorities) within 0.3% of the transacted amount of the brokerage transaction, and shall not be lower than the relevant fees paid to the relevant exchanges, such as the management and handling fee, regulatory charges and stamp duty etc.

As advised by management of the Group, the Group has issued an internal fee guidance in relation to charges on securities and related financial products trading according to the relevant regulatory requirements. We also understand that the Group has internal measures, which are applicable to service transactions with CITIC Group and its associates and independent third parties, for commission rates of brokerage services, where commission rates are generally based on the average commission rate in the operational area of that branch, subject to adjustments by the individual branch taking into account of the development plan of individual branch and existing competition in its operational area, available funds of the client for investment and trading frequency of the client. The final commission rate shall be determined on the basis of arm’s length negotiations with the client. Upon the account opening of the client, the commission rates are agreed with the client and with approval obtained from the supervisor and the general manager of operations department. As set out in the internal measures, further adjustment on the commission rates after account opening requires submission of an application form, which is subject to approval by different level of management of the relevant branch.

(iii) Financial products sales agency services

The service fees for financial products sales agency services mainly include commission fee and distribution fee, and shall be determined after taking into account of factors including the amount of products for sale and with reference to fee rates applicable to independent third parties, and shall be determined on the basis of arm’s length negotiations between the parties. For execution of the sales agency services transactions, we understand from management of the Group that there is a committee formed by members of senior management of the financial products development department, which

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is responsible for approving the sales agency services transactions after reviewing the details of relevant financial products, for example, the investment strategies, background and experience of the investment manager involved, potential risks involved in the transaction, and income (with service fee rate) and expenses expected to be generated and incurred respectively. In addition, according to the internal procedures of the Company, there would be another committee involved in approving the sales agency service transactions, which is generally formed by representatives from financial products development department, marketing department, customer service department, financial products research group and sales department etc. Such committee will review details of the financial products and assess the merchantability of the products. For products sales agency services provided by the CITIC Group and its associates to the Group, we understand from management of the Group that it will determine the terms with reference to terms offered by independent service providers, it would also take into account the sales network and client base of the service providers.

(iv) Entrusted asset management services

The service fees for entrusted asset management services shall be determined based on the estimated asset size with reference to the complexity of the services provided, taking into account the competition within the industry, the working relationship with the counterparty and types of financial products involved. We understand from management of the Group that the Group has internal regulations in relation to the service fee for management of different types of assets. A fee rate guidance is included in the internal regulations and is determined based on the research done by the product development group, involving customer service manager and investment manager, by discussing with clients on their feedback and suggestions, the fee rates applicable for certain types of financial products in the industry and market conditions and price fluctuations of investment products, and shall be updated regularly, any update on the fee rate guidance shall be approved by the head of the asset management department before becoming effective. As stated in the internal regulations, service fees for entrusted asset management services shall be determined in accordance with the fee rate guidance, any transactions not conducted in accordance with the fee rate guidance have to be approved by the product management group. In accordance with the internal regulations, service fee rates with significant deviation from the ranges specified in the internal provision have to be approved by the head of the department.

(v) Other securities and financial services

As disclosed in the “Letter from the Board” contained in the Circular, in respect of other securities and financial services, such fees and commission shall be determined based on the nature of the transactions with reference to the prevailing market rates in accordance with the applicable laws and regulations.

In particular, for consulting services provided by the Group, the engaging party will consider the nature and scope of services to be provided and overall performance of the service provider to determine and agree the service fee with the service provider. The Group will also make reference to consulting service with similar nature provided by the Group, however, given the differentiated nature and scope of services, no standardised service fees are available in determining the fees. The service

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fee will be determined based on the arm’s length negotiations between the parties. As advised by management of the Group, the transaction team has to obtain relevant approvals from senior management of the department, who will review the terms of agreementof the transaction, including but not limited to, pricing terms, before conducting the transaction. For services provided by CITIC Group and its associates , as advised by management of the Group, service fees are determined with reference to service fee quoted by independent third parties for similar services provided to the Group.

(vi) Deposit services

Interest rates offered to the Group for the deposits placed with banking subsidiaries of CITIC Group shall not be lower than the interest rates authorised by the PBOC for same type of deposits offered by commercial banks in the PRC during the same period and shall not be lower than the interest rates for same type of deposits by customers of such banking subsidiaries of CITIC Group. We understand from management of the Group that the Group has maintained up-to-date information of the interest rates for deposits of different terms with certain commercial banks in the PRC and the Group shall compare the interest rates offered by various banks.

(vii) Client deposits management and custody services

Service fees for client deposit management and custody services are determined with reference to the fees applicable to other service providers and are determined based on arm’s length negotiation with the counterparty. We understand from management of the Group that it would take into account the transaction history with the banks and preference of the customers, if any, in determining the service provider.

(viii) Loan services

Interest rates for loan services are determined with reference to the prevailing interest rates, i.e. interest rates published by the PBOC for the same period, taking into account factors including terms and amount involved in the financing. We understand from management of the Group that the Group would refer to terms, including interest rates, offered by other commercial banks in determining the loan provider.

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Conclusion

Having taken into account the factors above, we are of the view that the transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement shall be conducted on normal commercial terms and the pricing bases which are determined with reference to prevailing market prices/rates at the time of transactions and the terms are fair and reasonable.

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3. The Annual Caps and the Maximum Daily Balances

Maximum daily balance of deposits

Pursuant to the Hong Kong Listing Rules, the Company is also required to set the cap in respect of the maximum daily balance of deposits, including the deposits of the Group’s proprietary funds and its customers’ funds with the banking subsidiaries of CITIC Group in the PRC and Hong Kong for the three financial years ending 31 December 2019. Given that the Company is required by the relevant PRC regulations to place the cash balance of its customers’ settlement funds with qualified PRC commercial banks, the Company has no control over which PRC bank its customers are to open their accounts, as well as the amounts of such deposits and their withdrawals and changes in the amounts of such deposits for which the Company has no control. In addition, it is extremely difficult for the Company to estimate the amount of incoming funds to be deposited with PRC commercial banks, which may include the banking subsidiaries of CITIC Group and its associates, on a daily basis, given that the financial and securities businesses of the Company are highly responsive to the market and may fluctuate widely within short timeframe. Having considered the factors above, the Company had applied to the Hong Kong Stock Exchange for, and the Hong Kong Stock Exchange had granted to the Company on 24 October 2016, a waiver from strict compliance with the requirement of setting the relevant cap.

Securities and Financial Products Transactions and Securities and Financial Services

Overall assessment of the Annual Caps and the Maximum Daily Balances

Given the nature of the principal activities and the industry the Group is engaged in, it is necessary, in our view, to take into account the PRC economic outlook and the development of the PRC securities market in determining the Annual Caps and the Maximum Daily Balances.

According to the information on the National Bureau of Statistics of the PRC, China achieved steady economic growth, with nominal gross domestic product increased from approximately RMB48.4 trillion, or approximately RMB36 thousands per capita in 2011 to approximately RMB67.7 trillion, or approximately RMB49 thousands per capita in 2015. From 2009 to 2015, the per capita disposable income of China’s urban population grew at a compound annual growth rate (“ CAGR ”) of approximately 10.5% from approximately RMB17,175 to approximately RMB31,195. The increase in per capita disposable income demonstrates the rapid accumulation of personal wealth in China. Such wealth accumulation leads to stronger demands of financial products and asset management services.

The revenue from provision of Securities and Financial Services by the Group to CITIC Group and its associates is mainly to be derived from underwriting, sponsorship and continuous supervision and guidance services, financial advisory, brokerage and financial products sales. Expenses for provision of Securities and Financial Services by CITIC Group and its associates to the Group are mainly to be incurred from, among others, fees for financial products sales agency services, clients deposits management and custody services and other securities and financial services.The levels of such activities and services and total cash inflow and outflow in relation to sale and purchase of Securities and Financial Products are greatly depending on the market sentiment and conditions.

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The PRC securities market has grown substantially in scale. Based on the information on the websites of Shanghai Stock Exchange (“ SSE ”) and Shenzhen Stock Exchange (“ SZSE ”), the total number of PRC companies listed on SSE and SZSE increased from 2,342 as of 31 December 2011 to 2,827 as of 31 December 2015. The total market capitalisation of companies listed on these two stock exchanges increased from approximately RMB21.5 trillion as of 31 December 2011 to approximately RMB53.1 trillion as of 31 December 2015.

However, even with the growth of scale of PRC securities market, the PRC securities market has been volatile in recent years, in particular, the Shanghai Composite Index and Shenzhen Composite Index decreased steadily from January 2011 to early 2014, and until mid-2015, both indices surged to a record high, and then experience sharp decline where the Shanghai Composite Index dropped to its low end of 2,927.3 in August 2015 and to 2,655.7 in January 2016. As of mid-2016, they were close to the level of late 2014. Set out below is the chart showing the Shanghai Composite Index and Shenzhen Composite Index from January 2011 to June 2016:

==> picture [331 x 138] intentionally omitted <==

Source: Bloomberg

At the same time, average daily trading volume of the PRC securities market has declined significantly since the market crush in second half of 2015. Set out below is the chart showing the average daily trading volume of securities in the PRC from January 2011 to June 2016:

==> picture [319 x 135] intentionally omitted <==

Source: Bloomberg

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In the meantime, the PRC bond market has been developing rapidly in recent years. As disclosed in the “Letter from the Board” contained in the Circular, the total proceeds raised from bond issuances by PRC companies increased from approximately RMB4.9 trillion in 2011 to approximately RMB22.2 trillion in 2015, representing a CAGR of approximately 46%. In recent years, the PRC government has promulgated a series of policies conducive to the development of China’s bond market. These policies include the Twelfth Five-year Plan, which aims to promote development of the PRC bond market by improving the bond issuance mechanism, encouraging innovation and diversification of bond products and the development of securitisation products.

As demonstrated in the analysis above, it is considered that:

(i) the financial services industry is inherently different from other industries (e.g. manufacturing) where the volatility of such would render the estimation of future level of activities, even achievable, a very difficult job;
(ii) even with the low level of market indices, it does not mean the needs for financial services would decline as investors would have different views on prospects and different investment decisions could be made accordingly;
(iii) in general, the average daily trading volume of PRC securities market has increased in 2015 and 2016 as compared to the period from 2010 to 2014, while the PRC bond market has also experienced a significant growth; and
(iv) going forward, there are still plenty of opportunities for the PRC securities and bond markets arising from (a) the vigorous demand for financial products and asset management services as a result of accumulation of personal wealth in the country; and (b) the increasing levels of brokerage and capital market activities due to the launch of the Shanghai-Hong Kong Stock Connect in 2014 and commencement of Shenzhen-Hong Kong Stock Connect on 5 December 2016 and, consequentially, attracting more overseas investors to China and more Chinese investors to international markets.

In view of the above, it is justified for the Group to determine the Annual Caps and the Maximum Daily Balances primarily based on the development of the Group, instead of the historical amounts, in order to capture the business opportunities from the growing market and to cater for unforeseen market changes and conditions.

(a) Securities and Financial Products Transactions

The Company was granted the waiver by the Hong Kong Stock Exchange from strict compliance with the requirements of setting annual caps for the Securities and Financial Products Transactions for the three financial years ending 31 December 2016. As no relevant waiver is granted to the Company upon renewal of the Securities and Financial Products Transactions and Services Framework Agreement, it is required to set the maximum annual caps for the Securities and Financial Products Transactions for the three financial years ending 31 December 2019.

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Set out below are (i) the historical cash inflow and cash outflow transaction amounts in the interbank bond market, the PRC exchange bond market and stock markets, after deducting inter-financial institutions borrowings and non-exempted loans, in respect of the Securities and Financial Products Transactions between the Group and CITIC Group and its associates for the two financial years ended 31 December 2015 and the six months ended 30 June 2016; and (ii) the Financial Products Annual Caps:

(i) historical cash inflow and cash outflow transaction amounts:

	Approximate historical transaction amounts	Approximate historical transaction amounts	Approximate historical transaction amounts	Approximate historical transaction amounts
	for the two		financial years ended
Securities and Financial Products	31 December 2015 and the six months ended
Transactions		30 June 2016
				30 June
	2014		2015	2016
			(RMB million)
Total cash inflow to the Group	6,416		18,868	1,084
Total cash outflow from the Group	4,938		23,644	4,761
the Financial Products Annual Caps:
Securities and Financial Products	For	the financial year		ending
Transactions			31 December
	2017		2018	2019
			(RMB million)
Total cash inflow to the Group	120,000		150,000	180,000
Total cash outflow from the Group	95,000		130,000	160,000

(ii) the Financial Products Annual Caps:
(iii) Assessment of the Financial Products Annual Caps

In considering the level of the Financial Products Annual Caps, we have discussed with management of the Group various factors, including the historical amounts involved in the Securities and Financial Products Transactions, the expected business growth and development of the Group and unpredictability of the securities market.

As demonstrated above, the historical cash inflow and cash outflow in relation to the Securities and Financial Products Transactions is highly fluctuated during the historical period, in particular, the total cash inflow and outflow amount for the year ended 31 December 2015. The Securities and Financial Products Transactions involve various types of products and are conducted with high frequency, the transaction volume is also subject to the volatility of the financial market and unpredictable regulatory policies.

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As advised by management of the Group, the Company has also taken into account the following factors in determining the Financial Products Annual Caps:

(i) the increase in scope and extent of Securities and Financial Products Transactions with CITIC Group and its associates with the strengthening of level of cooperation to enhance mutual business development of the Group and CITIC Group, through transactions of equity derivative products such as swaps, futures, options and equity-linked beneficiary certificates, leading to an increase in total cash inflow and outflow;
(ii) the Group is developing and expanding the issuance of its asset management plans with a subsidiary being set up in the second half of 2015, and the Group also plans to increase its investments in wealth management products of the banking institutions of CITIC Group for stable investment returns;
(iii) in relation to commodities trading, the Group is engaged in commodities trading, trading and leasing of precious metals and providing commodities trading services as the Company obtained the qualification to conduct commodities trading in 2013. The Company expects an increase in the related transactions between the Group and financial institutions of CITIC Group as the Company continued to expand the scale of precious metal trading business. In addition, there may be mutual investment in trusts related to commodities to be launched in the next three financial years; and
(iv) given that the Company obtained the qualification to act as a market maker in the New Third Board in 2014, it may be appointed by CITIC Group and its associates (i.e. connected issuers) to act as a market maker.

In light of the above, the total cash inflow and outflow arising from sales and purchase of Securities and Financial Products between the Group and CITIC Group and its associates are likely to increase with additional types of securities and financial products offered by the Group and CITIC Group.

In assessing the fairness and reasonableness of the Financial Products Annual Caps, we have mainly considered (i) the historical cash inflow and outflow to/from the Group; (ii) industrial data of the financial products markets in recent years; (iii) overall development, volatility and fluctuation of the financial markets in recent years; (iv) nature of the Securities and Financial Products Transactions being market-sensitive; and (v) the Group’s development plan and strategic cooperation with CITIC Group and its associates.

For various types of Securities and Financial Products Transactions which have been conducted in the past, the historical transaction amounts have been relied on in calculating the Financial Products Annual Caps, and taking into account of the wide fluctuations of the interbank bond market and securities market. We noted that, based on the information available from Wind Info provided by the Company, there has been a significant increase in the size of bond issuance in the interbank bond market with a growth of approximately 100% from 2014 to 2015. In addition, the size of bond issuance

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in 2016, up to 30 September 2016, has already exceeded that of 2015. As such, the related transactions are expected to generate an estimated amount ranging from RMB30,000 million to RMB40,000 million per year in 2017 to 2019, as disclosed in section “2.6.6 (a) — Specific factors and consideration (i)” of the Circular.

For transactions in relation to precious metal trading, we have reviewed the data extracted from Wind Info and noted an annual growth rate over 90% in the transaction amounts of precious metal from 2014 to 2015. Such market development has been considered by the Company and included as a basis in estimating the Financial Products Annual Caps, together with the historical transaction amounts recorded by the Group in relation to precious metal trading.

For transactions in relation to commodities derivative trading, as advised by the management of the Company, the Group commenced this business in the second quarter of 2016. The annual cap in respect of this business has been determined with reference to the latest transaction amounts recorded with an estimated future market growth incorporated. It is noted from the information available on Wind Info that the transaction amounts of the commodities market have increased over 80% from 2014 to 2015. Taking into account the business is new to the Group, a higher growth rate is likely to be achieved in the first few years after its commencement.

Having considered the market trend and the stage of development of the relevant business, it is estimated that transaction amounts on precious metal trading and commodities derivative trading will be in the region of RMB9,000 million to RMB11,000 million in each year for the three years ending 31 December 2019 as disclosed in section “2.6.6 (a) — Specific factors and consideration (ii)(bb)” of the Circular.

In particular, for transactions between the Group and the trusts, funds and asset management plans controlled by the financial institutions of CITIC Group as investment managers, these transactions are regarded as connected transactions and the related transaction amounts have not been included in the historical transaction amounts disclosed in the Circular and this letter. With reference to the historical transaction amounts in relation to these products, as disclosed in section “2.6.6 (a) — Specific factors and consideration (ii)(cc)” of the Circular, the level of transactions arising from such transactions would be in the region of RMB40,000 million to RMB50,000 million per year for the three years ending 31 December 2019.

In relation to new financial products transactions to be conducted with CITIC Group and its associates, including wealth management products and trust products launched by the Group or CITIC Group and its associates, we understand that the annual caps for these products transactions are determined mainly with reference to the (i) existing scale of relevant transactions conducted between the Group and independent third parties; (ii) existing interest rate level of the relevant transactions; (iii) historical average return of the relevant financial products; and (iv) historical trend of development and size of the relevant markets. As disclosed in section “2.6.6 (a) — Specific factors and consideration (ii)(aa)” of the Circular, subscriptions of wealth management products, asset management plans and trust products, and the issuance of new financial products to the trust companies of CITIC Group and its associates would contribute an increase of RMB7,000 million to RMB9,000 million per year for the three years ending 31 December 2019.

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Overall, the Securities and Financial Products Transactions are highly market-sensitive and the Group has limited control on the counterparties of the transactions as majority of the securities and financial products transactions are conducted through intermediate money brokerage firms. In light of the above, the Financial Products Annual Caps are determined with reference to the historical data but mainly taking into account (i) increasing cooperation between the Group and CITIC Group and its associates; (ii) the expected growth in the business of the Group and CITIC Group, taking into consideration, among others, the relaxation of the issuance policy for asset-backed securities since 2014; (iii) the introduction of new types of securities and financial products; and (iv) the development of the financial products markets, with an adequate buffer incorporated to cater for new products and businesses, and given the nature of the Securities and Financial Products Transactions being market-sensitive and unpredictable, to avoid restriction on the Group’s future business opportunities and growth.

Generally speaking, in our opinion, it is in the interests of the Group for the Financial Products Annual Caps to be as accommodating to the Group as possible, provided that the pricing terms for the Securities and Financial Products Transactions are fair and reasonable and the conduct of those transactions would be subject to annual review by independent non-executive Directors and auditors of the Company (as discussed in the section below) as required under the Listing Rules, the Group would have flexibility in the sale and purchase of Securities and Financial Products if the Financial Products Annual Caps are tailored to the future business and market growth. If the Financial Products Annual Caps are set without considering sufficient room for future business and market growth and the Company has to revise the annual caps upward at a general meeting before conducting additional transactions, the Company’s business may be restricted and it will have to incur additional administrative costs and resources to obtain approval from the Independent Shareholders. Having considered the above, we are of the view that the Financial Products Annual Caps are fair and reasonable.

(b) Maximum Daily Balances

The Company expects that the Group will continue to enter into collateralised securities repurchase and repurchase transactions with the financial institutions of CITIC Group. Since such transactions represent financial assistance and as collaterals are provided for such financial assistance, constitute non-exempt continuing connected transactions under the Hong Kong Listing Rules. Set out below are the maximum daily balances of collateralised securities repurchase and repurchase transactions for the three financial years ending 31 December 2019:

	Maximum daily balance for the	Maximum daily balance for the	three
	financial years ending
	31 December 2019
	2017 2018		2019
	(RMB million)
Maximum daily balance of non-exempted
loans, including collateralised securities
repurchase and repurchase transactions, to
the Group (including interests)	20,000 22,500	25,000

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The Company estimates the maximum daily balances of loans, including reverse repurchase, to CITIC Group and its associates for the three financial years ending 31 December 2019:

	Maximum daily balance for the	Maximum daily balance for the	three
		financial years ending
		31 December 2019
	2017	2018	2019
		(RMB million)
Maximum daily balance of non-exempted
loans, including reverse repurchase, to
CITIC Group and its associates	5,000	5,000	5,000

Set out below are the historical maximum daily balances of loans for collateralised securities repurchase and repurchase transactions provided by CITIC Group and its associates, and loans provided by the Group to independent borrowers:

	Maximum daily balance in the	Maximum daily balance in the	two
	financial years ended 31 December
	2015 and six months ended
	30 June 2016
		30	June
	2014 2015		2016
	(RMB million)
Maximum daily balance of loans for
collateralised securities repurchase and
repurchase transactions to the Group	1,600 7,797	4,666
Maximum daily balance of loans to
independent borrowers	1,700 4,000		400

Assessment of the Maximum Daily Balances

As disclosed in the “Letter from the Board” contained in the Circular, the Company considers that the amount of collateralised securities repurchase will continue to increase as collateralised securities repurchase provides a relatively convenient method to obtain facilities and is frequently used means for obtaining banking facilities. The maximum daily balance of loans to the Group reached a high level of approximately RMB7,797 million in mid-2015 and dropped to approximately RMB4,666 million in 2016 (up to 30 June 2016). In respect of the maximum daily balance of loans to independent borrowers, the historical maximum daily balance reached approximately RMB4,000 million in 2015 and decreased to approximately RMB400 million in 2016 (up to 30 June 2016). As advised by management of the Group, if the terms of the borrowings are upon normal commercial terms or favourable to the Group, the Group may lend to CITIC Group and its associates, therefore the maximum daily balance of loans to CITIC Group and its associates is determined based on the maximum daily balance of the loans to independent borrowers for the capability of the Group to lend to CITIC Group and its associates.

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In respect of the maximum daily balance of non-exempted loans to the Group, we have considered (i) the historical maximum daily balance of non-exempted loans to the Group; (ii) the overall financial market conditions in recent years; and (iii) the business development plan of the Group in the future. We have reviewed the data for collateralised securities repurchase and repurchase transactions in the interbank bond market in the past three years and noted that the transaction values are highly fluctuated during the period. As disclosed in the Circular, the increment in transaction values of the relevant financial products in the interbank bond market and interbank money market could range from approximately 169% to 243%. As such, the proposed maximum daily balances of non-exempted loans to the Group have been set after taking into account (i) the historical maximum daily balance of non-exempted loans to the Group of approximately RMB7,797 million in 2015; and (ii) the potential significant increase in transaction values in the relevant markets.

In respect of the maximum daily balance of non-exempted loans to CITIC Group and its associates, we have considered the historical maximum daily balance of non-exempted loans to independent borrowers in our assessment. The Group would have to consider its financial capability and resources available when providing loans to CITIC Group and its associates and/or independent borrowers. The historical maximum daily balance reached approximately RMB4,000 million in 2015 and the maximum daily balance has incorporated a reasonable buffer to allow flexibility for the Group’s future development and expansion.

Such balances are largely affected by the overall performance of the financial market. As demonstrated in the sub-section headed “Overall assessment of the Annual Caps and the Maximum Daily Balances” of this letter, the PRC securities market has been volatile and unpredictable in recent years. In any event when the performance of the financial market is good, the transaction amount is likely to increase. Similarly, the loan amount would be fluctuating with the overall performance of the financial markets. If the securities market reaches a high level in the coming years, the maximum daily balance of loans may easily go beyond the historical level in 2015. It is therefore reasonable to take into account the financial markets performance and development in setting the Maximum Daily Balances.

Taking into consideration the volatility and unpredictableness of the domestic financial market, as well as the expected growth in the business of the Group, it is reasonable for the Company to incorporate a sufficient buffer to avoid undue disruption to the business operations of the Group.

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(c) Provision of the Securities and Financial Services

Set out below are (i) the historical transaction amounts in respect of the Securities and Financial Services between the Group and CITIC Group and its associates for the two financial years ended 31 December 2015 and the six months ended 30 June 2016; and (ii) the Financial Services Annual Caps:

(i) historical transaction figures of the Securities and Financial Services:

	For the	two financial years ended	two financial years ended
	31 December 2015 and the six
		months ended
Securities and Financial Services		30 June 2016
			30 June
	2014	2015	2016
		(RMB million)
Revenue derived from provision of Securities
and Financial Services by the Group to
CITIC Group and its associates	995	841	890
Expenses incurred for Securities and Financial
Services provided by CITIC Group and its
associates to the Group	124	94	52
the Financial Services Annual Caps:
	For the financial year ending
Securities and Financial Services		31 December
	2017	2018	2019
		(RMB million)
Revenue to be derived from provision of
Securities and Financial Services by the
Group to CITIC Group and its associates	2,200	2,200	2,500
Expenses to be incurred for Securities and
Financial Services provided by CITIC Group
and its associates to the Group	400	540	740

(ii) the Financial Services Annual Caps:
(iii) Assessment of the Financial Services Annual Caps

In considering the level of the Financial Services Annual Caps, we have discussed with management of the Group various factors in arriving at the Financial Services Annual Caps. We have also reviewed the 2015 annual report and 2016 interim report of the Company.

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We also note that the historical transaction amounts of revenue derived from provision of Securities and Financial Services by the Group to CITIC Group and its associates for the two financial years ended 31 December 2015 amounted to approximately RMB995.14 million and RMB841.41 million respectively, representing utilisation rates of approximately 41.46% and 33.66% over the corresponding annual caps for 2014 and 2015. Likewise, the historical transaction amounts of expenses incurred for Securities and Financial Services provided by CITIC Group and its associates to the Group for the two financial years ended 31 December 2015 amounted to approximately RMB124.43 million and RMB93.61 million respectively, resulting in utilisation rates of approximately 12.44% and 8.51% over the corresponding annual caps for 2014 and 2015. However, the Group’s business activities would be correlated with the market conditions which are not typically predictable and subject to vast variety of factors as mentioned in the sub-section headed “Overall assessment of the Annual Caps and the Maximum Daily Balances” of this letter, as such, we concur with the Directors that the past utilisation rates are not entirely relevant when considering the Financial Services Annual Caps.

In view of the above, we have, therefore, (i) reviewed the annual and interim reports of the Company and considered the Group’s development in assessing the Financial Services Annual Caps; and (ii) discussed with the management of the Group in relation to the considerations involved in determining the Financial Services Annual Caps, details of which are set out below.

Revenue to be derived from provision of Securities and Financial Services by the Group to CITIC Group and its associates

As discussed with management of the Group, the Financial Services Annual Caps for the provision of Securities and Financial Services by the Group to CITIC Group and its associates, which are approximately RMB2,200 million, RMB2,200 million and RMB2,500 million for the three financial years ending 31 December 2019 respectively, mainly represent revenue arising from provision of underwriting, sponsorship and continuous supervision and guidance services, financial advisory services, brokerage services, financial products sales agency services, entrusted asset management services and interest on deposits, which are determined with reference to the following key factors:

(i) Revenue from underwriting, sponsorship and continuous supervision and guidance services

The estimated revenue from provision of underwriting, sponsorship and continuous supervision and guidance services has taken into account the potential fund raising exercises to be undertaken by CITIC Group and its associates in the next three financial years, in which the Group may provide investment banking services.

It is noted from the annual reports of the Company that the revenue from investment banking has experienced a CAGR of approximately 18.3% during the period from 2012 to 2015. We also noted from the Company’s 2016 interim report that there was an upward trend in the equity financing market in the PRC where the A-share equity financing size increased by approximately 33.86% year-on-year. According to the Company’s 2016 interim report, the Company performed well even in the volatile

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capital market conditions and completed equity lead underwriting projects with a total lead underwriting amount of approximately RMB146,846 million during the first half of 2016, rendering the Group to be ranked first in the market. In addition, the Group continued to strengthen its efforts in developing business internationally and endeavoured to enhance its overall competitive edge.

In 2015, the Group has completed the consolidation of the overseas investment banking business and resources with CLSA Limited, further enhancing the capability of overseas business of the Company. The New Third Board business department was formally established in 2015, and as at 30 June 2016, the Company lead sponsored a total of 149 enterprises for quotation on the New Third Board, among which, 49 enterprises were newly sponsored and quoted. The Company also provided market-making services for 172 companies in the first half of 2016 with a total trading value for market-making activities of approximately RMB3,230 million. The Company is also qualified to provide continuous supervision and guidance services for companies quoted on the New Third Board and the Group will continue to invest more funds in market-making services and build on the sponsorship services on the New Third Board.

In respect of debt, asset securitisation and structured financing business, according to the Company’s 2016 interim report, the Group completed 141 transactions in the first half of 2016 with the lead underwriting amount of approximately RMB189,807 million, representing approximately 2.45% of the market share and ranking second in the industry in terms of lead underwriting amount. As stated in the 2016 interim report, the Group will consolidate and strengthen its market leading position and improve its internal and cross-border cooperation mechanism to capture future growth opportunities.

Given the new potential overseas business opportunities and development of the New Third Board business department, it is necessary, in our view, to have a sufficient annual cap to accommodate the potential growth in underwriting, sponsorship and continuous supervision and guidance services in the coming years.

(ii) Revenue from financial advisory services

When estimating the revenue from financial advisory services, the Company has considered, among other things, the expected demand for these kinds of services from CITIC Group and its associates in connection with the potential issuances of various financial products and restructuring and investment plans to be undertaken by them.

In the first half of 2016, the value of merger and acquisition transactions involving Chinese companies amounted to approximately US$378.8 billion, representing a year-on-year increase of approximately 43.5%. The value of domestic merger and acquisition transactions completed by the Company in the first half of 2016 amounted to RMB76,664 million, ranking first in the industry. The Group would leverage its abundant resources in domestic capital markets and its solid capital strength to seize opportunities arising from globalisation of a large number of Chinese enterprises and to complete a number of cross-border acquisitions with market influence. In view of (a) the potential growth for merger and acquisition transactions initiated by the PRC enterprises in the domestic and

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foreign markets; and (b) the Company’s intention to explore opportunities for projects which can complement with its domestic advantage, we concur with the Directors that it is reasonable to set the Financial Services Annual Caps to accommodate the business opportunities available to the Group regarding the financial advisory services.

(iii) Revenue from brokerage services

The estimated revenue to be generated from provision of brokerage services is determined with reference to the expected demand for brokerage services associated with the business growth of CITIC Group and its associates, taking into account the potential growth of the securities market and the potential increase in cooperation between the Group and CITIC Group and its associates.

As disclosed in the 2015 annual report of the Company, the average daily turnover of stocks and funds was approximately RMB1,076,500 million in 2015 which showed an increase of approximately 247% as compared to 2014. The Group recorded total trading turnover of stocks and funds on SSE and SZSE of approximately RMB33,800,000 million, representing a market share of 6.43% and ranking second in the market. On the other hand, the commission rate of the industry declined to approximately 0.0436% in the first half of 2016, representing a decrease of approximately 15% as compared to the end of 2015, possibly due to the development of internet finance and the permission to open multiple stock-trading accounts by the investors in the PRC. Given the market position of the Group in terms of brokerage business and the inherent uncertainty of the securities market, we concur with the Directors’ view that it is reasonable to provide for a sufficient transaction amount when estimating revenue from brokerage services to be derived from CITIC Group and its associates assuming that the current commission rate is at a reasonably low level and further downward adjustment would be limited to a certain extent.

(iv) Revenue from financial products sales agency services

As advised, management of the Group expects that the demand for sales agency services associated with CITIC Group and its associates will grow steadily given the existing cooperation between the Group and CITIC Group and its associates and the expansion of the Group’s business.

As disclosed in the Company’s 2015 annual report, in addition to its qualification to engage in fund sales and sideline insurance agency services, the Company obtained the qualification for agency business for gold and other precious metal spot contracts in 2013. It is expected that the financial products sales agency business of the Group will grow further with the newly obtained qualification for new business lines, which will facilitate the development of a wider product range. We, therefore, agree with the Directors that it is reasonable to project a stable growth rate in 2017, 2018 and 2019 for the financial products sales agency business.

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LETTER FROM SOMERLEY

(v) Revenue from entrusted asset management services

The estimated revenue from provision of asset management services is determined with reference to (a) the expected demand for asset management services associated with the industrial growth and business growth of CITIC Group and its associates; and (b) the rates charged by the Group to the associates of CITIC Group for similar services.

As disclosed in the Circular, based on the information published by Asset Management Association of China, the total value of the assets under management has also grown substantially. As at 31 December 2015, the size of total assets under management in China has increased approximately 86.3% as compared to the end of 2014. The assets under management of the Group’s asset management business increased from approximately RMB504,858 million as at 31 December 2013 to approximately RMB1,071,289 million as at 31 December 2015, representing a CAGR of approximately 45.7%, and reached approximately RMB1,551.14 billion as at 30 June 2016, rendering the Group to be ranked first among other industry players. We also note from the Company’s 2016 interim report that there was growing competition in the market for asset management business. On the other hand, the variations in product structures and diversified business operations in the asset management business created opportunities for the industry. In the first half of 2016, the Group focused on development of institutional business with wealth management business and innovative business as the dual drivers. The Group managed to record a management fee from asset management business of approximately RMB1,750.47 million for the year ended 31 December 2015, representing a CAGR of approximately 99.1% from approximately RMB441.58 million for the year ended 31 December 2013.

In addition, according to the National Bureau of Statistics of China, savings deposits of the PRC residents have been increasing continuously from approximately RMB41,020 billion as at 31 December 2012 to approximately RMB55,193 billion as at 31 December 2015, representing a CAGR of approximately 10.4%.

Given the recent strong performance of the Group’s asset management business and the continuous increase in the PRC residents’ savings, it is reasonable to expect a further growth in the Group’s asset management business and, on this basis, we agree with the Directors that it is in the interests of the Group and the Shareholders to approve a higher cap for this business sector.

(vi) Interest on deposits

It represents the interest on deposits of cash balances placed with the banking subsidiaries of CITIC Group. Such deposits mainly arise from the Group’s business operations including cash from operating activities, proceeds from fund raising exercises such as equity and bond issues and the customers’ funds for settlements.

The estimated interest income is determined with reference to (a) the recent interest rates for deposits in the interbank market; (b) the expected increase in interest rates for the next three financial years; and (c) the potential increase in the deposits amount to be placed with the banking subsidiaries of CITIC Group. According to the annual reports of the Company, bank interest income has increased

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LETTER FROM SOMERLEY

at a CAGR of approximately 47% during the period from 2012 to 2015. It is also noted that there was a general increase in the deposits in banks over the years from 2012 to 30 June 2016. With the expansion in various business lines of the Group, it is considered that the size of proprietary funds to be deposited with the banking subsidiaries of CITIC Group would increase.

(vii) Other securities and financial advisory and consulting services

The estimated revenue from other securities and financial advisory and consulting services is determined with reference to (i) the historical transaction amounts in the past three years; and (ii) the expected demand from CITIC Group and its associates resulting from the potential launch of financial products by CITIC Group and its associates, taking into account the existing cooperation between the Group and CITIC Group and its associates on investment advisory services.

As advised by management of the Group, CITIC Group and its associates may launch new types of financial products in the future. As discussed in the previous sections of this letter, it is also noted that the scale of the relevant financial products markets is expected to increase substantially. It is expected that CITIC Group and its associates would take advantage of the expertise of the Group in research, development and management of financial products, services of which may include product design and distribution. In addition, as disclosed in the Company’s 2016 interim report, the Company actively promoted the investment advisory services for financial institutions such as joint-stock banks and city commercial banks to meet the wealth management demand of customers. Taking into account the development of the Group and the potential new income stream from CITIC Group and its associates in view of new financial products to be launched, there is a different level of growth rates for 2017, 2018 and 2019 in relation to other securities and financial advisory and consulting services.

Expenses to be incurred for provision of Securities and Financial Services by CITIC Group and its associates to the Group

As discussed with management of the Group, the Financial Services Annual Caps for provision of Securities and Financial Services by CITIC Group and its associates to the Group, which are approximately RMB400 million, RMB540 million and RMB740 million for the three financial years ending 31 December 2019 respectively, mainly represent services fees to be incurred for financial products sales agency services, client deposits management services and other securities, financial advisory and consulting services, and are determined with reference to the following key factors:

(i) Financial products sales agency services

The estimated fees for the financial products sales agency services are determined after taking into account new financial products to be launched by the Group with expansion of the Group’s businesses. It is expected that there would be an increase in demand for sales agency services from CITIC Group and its associates for distribution of new financial products. As discussed with the management of the Company, the annual caps are determined based on the estimated amount of products for sale and the existing service fee rates for sales agency services.

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As discussed in the above paragraph headed “Revenue from financial products sales agency services”, we note that the Company obtained the qualification for agency services business for gold and other precious metal spot contracts in 2013 and it is expected to offer new variety of products and to expand its sales agency business. The Group may engage in sale of precious metals in its commodities trading and may appoint the licensed associates of CITIC Group as agent for sale of precious metals, leading to a potential increase in agency sale expenses to CITIC Group. In addition, as advised by management of the Group, the Group may appoint financial institutions of CITIC Group to provide sales agency services for bonds, asset management products and linked structured notes etc. As a result, we concur with the Directors that when calculating the Financial Services Annual Caps, it is reasonable to take into account the potential resulting increase in business cooperation with CITIC Group and its associates in relation to sales agency services, given the potential launch of new products by the Group.

(ii) Client deposits management and custody services

The Company is required by the relevant PRC regulations to place the cash balance of its customers’ settlement funds with qualified PRC commercial banks as discussed above. The annual caps are estimated primarily with reference to (i) the existing scale of funds placed with financial institutions of CITIC Group; (ii) the existing range of applicable service fee rates; and (iii) historical transaction amounts, with expected growth rates over the three years from 2017 to 2019, mainly with reference on the historical market growth in relation to asset management products. With new asset management products and funds to be set up and managed by the Group, the Group’s demand for deposits management and custody services from financial institutions of CITIC Group and its associates is likely to increase. It is therefore necessary to take into account such potential resulting increase in demand when calculating the Financial Services Annual Caps.

(iii) Other securities, financial advisory and consulting services

As discussed with management of the Group, the other securities, financial advisory and consulting services to be provided by CITIC Group and its associates in the next three financial years are mainly relating to fees to be paid to financial institutions of CITIC Group and its associates for referring customers using the brokerage services to be provided by the Group. As disclosed in the Company’s 2016 interim report, in the first half of 2016, the Group was undergoing a transformation for the brokerage business by building a differentiated and specialised service system, and deepening the development and management of individual clients, wealth management clients and institutional clients to provide them with diversified and comprehensive financial services. With the Group’s brokerage business transforming in the direction of providing differentiated client services as core focus, it is reasonable to provide a sufficient amount for fees to be paid to CITIC Group and its associates in respect of other securities, financial advisory and consulting services.

Overall assessment

We understand that the Company is a leading investment bank in the PRC and its business activities are highly subject to the market conditions which are volatile and vulnerable to numerous complicated factors including the global and local economic environment.

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Taking into account the factors mentioned above, more flexible and accommodating caps are necessary to allow the Group to capture any potential growth. In respect of operation landscape, as stated in the 2015 annual report, the securities industry in the PRC is facing difficulties with the declining market trading activities and lower commission rate, fluctuations in asset value and the impacted investors’ confidence. With the potential introduction of financial regulation reform program by the PRC government to adapt to the development of modern financial market, new challenges and opportunities exist for the Group’s operation. In view of the above, we agree with the Directors that it is in the interests of the Company and the Shareholders as a whole for the Financial Services Annual Caps to be as accommodating to the Group as possible.

Provided that the pricing for the Securities and Financial Services is fair and reasonable and the conduct of the relevant transactions is subject to annual review by independent non-executive Directors and auditors of the Company (as discussed below) as required under the Hong Kong Listing Rules, it is reasonable for the Group to set the Financial Services Annual Caps that are flexible for its future business requirement. Overall, we are of the view that the Financial Services Annual Caps are fair and reasonable.

4. Annual review of the transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement

Pursuant to Rules 14A.55 to 14A.59 of the Listing Rules, the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement are subject to the following annual review requirements:

a) each year, the independent non-executive Directors must review the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement and confirm in the annual report and accounts that the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement have been entered into:
(i) in the ordinary and usual course of business of the Group;
(ii) on normal commercial terms or better; and
(iii) according to the agreement governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole;
b) each year, the auditors of the Company must provide a letter to the Board (with a copy provided to the Stock Exchange at least 10 business days before the bulk printing of the Company’s annual report), confirming whether anything has come to their attention that causes them to believe that the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement:
(i) have not been approved by the Board;
(ii) were not, in all material aspects, in accordance with the pricing policies of the Group if the transactions involve the provision of goods or services by the Group;

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(iii) were not entered into, in all material aspects, in accordance with the relevant agreement(s) governing the Securities and Financial Products Transactions and provision of the Securities and Financial Services; and
(iv) have exceeded the Annual Caps and/or the Maximum Daily Balances;
c) the Company shall allow, and shall ensure that the counterparties to the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement allow, the Company’s auditors sufficient access to their records for the purpose of reporting on the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement as set out in paragraph (b). The Board must state in the annual report whether the Company’s auditors have confirmed the matters stated in Listing Rule 14A.56; and
d) the Company shall promptly notify the Stock Exchange and publish an announcement if the independent non-executive Directors and/or the auditors of the Company cannot confirm the matters set out in paragraphs (a) and/or (b) respectively.

The independent non-executive Directors and the auditors of the Company have reviewed, among other things, the transactions conducted under the existing Securities and Financial Products Transactions and Services Framework Agreement during the two years ended 31 December 2015 and their confirmations as required under the Hong Kong Listing Rules are contained in the Company’s annual reports for the two years ended 31 December 2014 and 2015. The required confirmations in respect of the relevant transactions conducted under the existing Securities and Financial products Transactions and Services Framework Agreement during the year ending 31 December 2016 will be included (if appropriate) in the Company’s annual report for the year ending 31 December 2016.

In light of (i) the reporting requirements for the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement, in particular, (a) the restriction of the values of the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement by way of the Annual Caps and the Maximum Daily Balances; and (b) the requirement under the Listing Rules for ongoing review by the independent non-executive Directors and the auditors of the Company of the terms of the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement, the Annual Caps and the Maximum Daily Balances; and (ii) the existing internal control procedures of the Company, we are of the view that there exist appropriate measures to govern the conduct of the transactions to be carried out pursuant to the Securities and Financial Products Transactions and Services Framework Agreement and to safeguard the interests of the Independent Shareholders.

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OPINION AND RECOMMENDATION

Having taken into account the above principal factors and reasons, we consider that the transactions contemplated under the Securities and Financial Products Transactions and Services Framework Agreement are on normal commercial terms, in the ordinary and usual course of business of the Group and are in the interests of the Company and the Shareholders as a whole. We also consider that the terms of the Securities and Financial Products Transactions and Services Framework Agreement, the Annual Caps and the Maximum Daily Balances are fair and reasonable. Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the relevant ordinary resolution to be proposed at the EGM.

Yours faithfully, for and on behalf of SOMERLEY CAPITAL LIMITED David Ching Director

Mr. David Ching is a licensed person registered with the Securities and Futures Commission and a responsible officer of Somerley Capital Limited, which is licensed under the SFO to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities. He has over ten years of experience in the corporate finance industry.

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Hong Kong Listing Rules for the purpose of giving information with regard to the Company. The Directors having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. INTERESTS AND SHORT POSITIONS OF DIRECTORS, SUPERVISORS AND THE CHIEF EXECUTIVE OF THE COMPANY IN SHARES, UNDERLYING SHARES AND DEBENTURES OF THE COMPANY

As at the Latest Practicable Date, the following Director and Supervisors had interests and short positions in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO), which were required to be notified to the Company and the Hong Kong Stock Exchange, pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of SFO), or required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Hong Kong Listing Rules, to be notified to the Company and the Hong Kong Stock Exchange as follows:

					Percentage to
					Total Number
				Number of	of Shares of
		Nature of	Class of	Shares	the Company
Name	Position	Interest	Shares	(Shares)	(%)
ZHANG Youjun	Chairman and	Personal	A Shares	374	0.000003
	Executive	interest
	Director
LEI Yong	Supervisor	Personal	A Shares	483,285	0.004
		interest
YANG Zhenyu	Supervisor	Personal	A Shares	81,000	0.001
		interest

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GENERAL INFORMATION

APPENDIX

Save as disclosed above, as at the Latest Practicable Date, none of the other Directors, Supervisors or the chief executive of the Company had any interests or short positions in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO): (i) which were required to be notified to the Company and the Hong Kong Stock Exchange, pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of Securities and Futures Ordinance); or (ii) required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (iii) required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Hong Kong Listing Rules, to be notified to the Company and the Hong Kong Stock Exchange.

3. DIRECTORS’ AND SUPERVISORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors or the Supervisors had any existing or proposed service contract with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

4. DIRECTORS’ AND SUPERVISORS’ INTERESTS IN ASSETS AND/OR CONTRACTS

As at the Latest Practicable Date, none of the Directors or the Supervisors had any direct or indirect interest in any asset which had been, since 31 December 2015, being the date to which the latest published audited accounts of the Company were made up, acquired or disposed of by or leased to, or were proposed to be acquired or disposed of by or leased to, any member of the Group.

As at the Latest Practicable Date, none of the Directors, Supervisors or their respective associates was materially interested in any contract or arrangement subsisting as at the Latest Practicable Date and which was significant in relation to the business of the Group.

5. INTERESTS OF DIRECTORS IN COMPETING BUSINESS

As at the Latest Practicable Date, none of the Directors or their respective close associates was interested in any business which competes or is likely to compete, either directly or indirectly, with the business of the Group.

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APPENDIX GENERAL INFORMATION

6. DIRECTORS’ AND SUPERVISORS’ EMPLOYMENT WITH SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, the following Directors were in the employment of those companies which had interests or short positions in the shares or underlying shares of the Company which are required to be notified to the Company pursuant to Divisions 2 and 3 of Part XV of the SFO:

Positions held in specific companies

China Life CITIC Insurance Corporation (Group) Name of Directors CITIC Group CITIC Limited Limited Company

ZHANG Youjun Assistant to the Assistant to the Assistant to the General Manager General Manager General Manager

CHEN Zhong

General Manager of the Investment Management Department

7. NO MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2015, being the date to which the latest published audited accounts of the Group were made up.

8. CONSENT AND QUALIFICATION OF EXPERTS

Somerley has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which it appears.

The following are the qualifications of Somerley, who has given its opinions or advices which are contained in this circular:

Name Qualifications Somerley A licensed corporation to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO

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GENERAL INFORMATION

APPENDIX

9. EXPERT’S INTERESTS

As at the Latest Practicable Date, Somerley did not have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, Somerley did not have any direct or indirect interest in any assets acquired or disposed of by or leased to, or were proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2015, being the date to which the latest published audited accounts of the Group were made up.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business of the Company at 26/F CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong during normal business hours from the date of this circular up to and including 19 January 2017:

(a) the letter dated 2 December 2016 from the Independent Board Committee to the Independent Shareholders as set out on pages 36 to 37 of this circular;
(b) the letter of advice dated 2 December 2016 from Somerley to the Independent Board Committee and the Independent Shareholders as set out on pages 38 to 69 of this circular;
(c) the written consent of Somerley referred to in paragraph 8 of this Appendix; and
(d) the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed by the parties upon approval by the Independent Shareholders at the EGM.

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NOTICE OF THE EGM

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(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 6030)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the 2017 First Extraordinary General Meeting (the “ EGM ”) of CITIC Securities Company Limited (the “ Company ”) will be held at Qing Room, 5/F, Four Seasons Hotel, No. 48 Liangmaqiao Road, Chaoyang District, Beijing, the PRC at 10:30 a.m. on Thursday, 19 January 2017 for the purposes of considering, and if thought fit, approving the following resolution. Unless otherwise specified, capitalised terms used in this notice shall have the same meaning as defined in the circular of the Company dated 2 December 2016 (the “ Circular ”).

ORDINARY RESOLUTION

The resolution in relation to the renewal of the non-exempt continuing connected transactions of the Company:

“ THAT :

a) the terms and conditions of the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed be and are hereby approved and confirmed;
b) the securities and financial products transactions and the securities and financial services transactions contemplated between the Group and CITIC Group and its associates under the Securities and Financial Products Transactions and Services Framework Agreement proposed to be renewed, as well as the proposed annual caps for such continuing connected transactions and the proposed maximum daily balance of non-exempted loans by CITIC Group and its associates to the Group as well as the proposed maximum daily balance of non-exempted loans by the Group to CITIC Group and its associates for the three financial years ending 31 December 2019 be and are hereby approved and confirmed; and
c) any one Director of the Company be and is hereby authorised to renew such agreement with CITIC Group, or to sign or execute such other documents or supplemental agreements or amendments, as so required by the relevant regulatory authority, on behalf of the Company and to do all such things and take all such actions as he may

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NOTICE OF THE EGM

consider necessary or desirable for the purpose of giving effect to the terms of the renewed Securities and Financial Products Transactions and Services Framework Agreement.”

By order of the Board CITIC Securities Company Limited ZHANG Youjun Chairman

Beijing, the PRC 2 December 2016

As at the date of this notice, the executive directors of the Company are Mr. ZHANG Youjun, Mr. YIN Ke and Mr. YANG Minghui; the non-executive director is Mr. CHEN Zhong; and the independent non-executive directors are Mr. LIU Ke, Mr. HE Jia and Mr. CHAN, Charles Sheung Wai.

Notes:

Details of the above resolution are set out in the Circular.
According to the Hong Kong Listing Rules, any vote of shareholders at a general meeting must be taken by poll. As such, the resolution set out in this notice of the EGM shall be voted on by way of poll. Results of the poll will be posted on the website of the Company at www.cs.ecitic.com and the HKExnews website of Hong Kong Exchanges and Clearing Limited at www.hkexnews.hk at the conclusion of the EGM.
Any Shareholder qualified for attending and voting at the EGM is entitled to appoint one or more proxies to attend and vote on his/her behalf at the meeting. A proxy needs not be a Shareholder of the Company.
To be valid, the instrument appointing a proxy together with the power of attorney or other authority, if any, under which it is signed or a notarial certified copy of that power of attorney or authority, must be completed and deposited at the Board Office (for A Shareholders) or the Company’s H Shares Registrar, Computershare Hong Kong Investor Services Limited (for H Shareholders) not less than 24 hours before the time appointed for holding the EGM or any adjourned meeting thereof. The address of the H Share Registrar of the Company, Computershare Hong Kong Investor Services Limited, is at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong (Tel: (852) 2862 8555). Completion and return of the proxy form will not preclude any Shareholder from attending and voting at the EGM or any adjournment thereof in person should he so wish.
In order to determine H Shareholders’ entitlement to attend the EGM, the H Share register of members of the Company will be closed from Tuesday, 20 December 2016 to Thursday, 19 January 2017 (both days inclusive), during which period no transfer of H Shares will be registered . In order to be qualified for attending and voting at the EGM, for H Shareholders, all share certificates together with the transfer documents must be lodged with the Company’s H Share Registrar, Computershare Hong Kong Investor Services Limited, at Rooms 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong, at or before 4:30 p.m. on Monday, 19 December 2016.

The H Shareholders whose names appear on the H Share register of members of the Company on Thursday, 19 January 2017 are entitled to attend and vote at the EGM.

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NOTICE OF THE EGM

In case of joint Shareholders, if more than one of them attend the EGM, either in person or by proxy, the vote of the senior holder who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of other joint Shareholders. For this purpose, seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint shareholding.
Shareholders who wish to attend the EGM, whether in person or by proxy, shall return the reply slip for the meeting to the Board Office of the Company in person, by mail or fax on or before Thursday, 29 December 2016. The address of the Board Office of the Company is at CITIC Securities Tower, No. 48 Liangmaqiao Road, Chaoyang District, Beijing, the PRC, Postal code: 100026 (Tel: (8610) 6083 6030, Fax: (8610) 6083 6031).
The EGM is expected to last for half a day. Shareholders or their proxies attending the meeting shall be responsible for their own travelling and accommodation expenses.

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AI assistant

CITIC Securities Company Limited — Proxy Solicitation & Information Statement 2016

50947_rns_2016-12-02_9d716f94-fd1a-4aaf-80a3-61c7385d7a39.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF THE EXTRAORDINARY GENERAL MEETING

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF THE EXTRAORDINARY GENERAL MEETING

I. INTRODUCTION

1 BACKGROUND

1.2 The proposed renewals

LETTER FROM THE BOARD

LETTER FROM THE BOARD

2.2 Changes in the securities and financial products transactions

LETTER FROM THE BOARD

2.4 Changes in the securities and financial services transactions

2.4.1 For services to be provided by the Group to CITIC Group:

2.4.2 For services to be provided by CITIC Group to the Group:

2.5.1 For services provided by the Group to CITIC Group:

2.5.2 For services to be provided by CITIC Group to the Group:

2.6.1 Introduction

LETTER FROM THE BOARD

2.6.2 Pricing basis for securities and financial products transactions

Securities and financial products transactions

LETTER FROM THE BOARD

Inter-financial institutions borrowings, repurchase and loans

LETTER FROM THE BOARD

2.6.3 Pricing approval and supervision

LETTER FROM THE BOARD

LETTER FROM THE BOARD

(b) Inter-financial institutions borrowings

LETTER FROM THE BOARD

LETTER FROM THE BOARD

31 December 2014 31 December 2015

2.6.5 The proposed annual caps for the three financial years ending 31 December 2019

(a) Total net inflow and total net outflow

LETTER FROM THE BOARD

Securities and Financial Products

LETTER FROM THE BOARD

2.6.6 Basis of determination of the annual caps

LETTER FROM THE BOARD

(a) Total net inflow and total net outflow

General factors

(i) Rapid expansion of the Company’s business scope and introduction of innovative products

(ii) Rapid growth of the PRC bond market and funds market

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

2.6.7 Maximum daily balance of deposits and waiver

LETTER FROM THE BOARD

2.7 Securities and financial services transactions

2.7.1 Pricing basis

LETTER FROM THE BOARD

2.7.2 Pricing approval and supervision

LETTER FROM THE BOARD

2.7.3 Payment arrangements

2.7.4 Implementation agreements

2.7.5 Historical transaction amounts

LETTER FROM THE BOARD

2.7.6 Proposed annual caps for the three financial years ending 31 December 2019

Securities and Financial Services

2.7.7 Basis of determination of the annual caps

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

3 HONG KONG LISTING RULES IMPLICATIONS

LETTER FROM THE BOARD

4 GENERAL INFORMATION

4.1 Information on CITIC Group

4.2 Information on the Company

III. THE EGM

LETTER FROM THE BOARD

IV. VOTES BY WAY OF POLL

LETTER FROM THE BOARD

V. RECOMMENDATION

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CITIC Securities Company Limited Proxy Solicitation & Information Statement 2016