DFZQ — Capital/Financing Update 2018

Jun 26, 2018

Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this announcement, 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 announcement.

(A joint stock company incorporated in the People’s Republic of China with limited liability under the Chinese corporate name “ 東方證券股份有限公司 ” and carrying on business in Hong Kong as “ 東方證券 ” (in Chinese) and “DFZQ” (in English))

(Stock Code: 03958)

PROPOSED CONTINUING CONNECTED TRANSACTION

PROPOSED FRAMEWORK AGREEMENT OF CONTINUING CONNECTED TRANSACTION

The Board announced that, on June 26, 2018, the Board considered and approved a resolution, pursuant to which the Company proposed to enter into the Framework Agreement with Shenergy Group in relation to the transactions of the securities and financial products services, the securities and financial products transactions and the purchase of goods and services that have been and will continue to be carried out between the Group and Shenergy Group and its associates in the ordinary and usual course of business for a period from January 1, 2018 to December 31, 2020.

IMPLICATIONS OF THE HONG KONG LISTING RULES

As at the date of this announcement, Shenergy Group, which is the largest shareholder of the Company, holds approximately 25.27% of the issued share capital of the Company. Therefore, pursuant to Rule 14A.07(1) of the Hong Kong Listing Rules, Shenergy Group and its associates are connected persons of the Company and the transactions contemplated by the Group and Shenergy Group and its associates under the Framework Agreement constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

As the highest percentage ratios applicable to the proposed annual caps for the securities and financial products services, the proposed annual caps for the securities and financial products transactions and the proposed annual caps for the purchase of goods and services (as defined in Rule 14.07 of the Hong Kong Listing Rules) under the Framework Agreement are higher than 0.1% but lower than 5%, pursuant to Chapter 14A of the Hong Kong Listing Rules, the continuing connected transactions contemplated under the Framework Agreement are subject to reporting and announcement requirements but are exempt from the approval requirements of independent shareholders.

In accordance with the applicable PRC laws and regulations, those contents of the Framework Agreement containing estimations for 2019 and 2020 will not take effect until the Company convenes the Board and annual general meeting to consider and approve the resolutions for the estimates of routine related party transactions of the Company in 2019 and 2020.

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BACKGROUND

On June 26, 2018, the Board considered and approved a resolution, pursuant to which the Company proposed to enter into the Framework Agreement with Shenergy Group in relation to the transactions of the securities and financial products services, the securities and financial products transactions and the purchase of goods and services that have been and will continue to be carried out between the Group and Shenergy Group and its associates in the ordinary and usual course of business for a period from January 1, 2018 to December 31, 2020.

PRINCIPAL TERMS AND CONDITIONS OF THE FRAMEWORK AGREEMENT TO BE ENTERED INTO

Parties

The Company and Shenergy Group

Term

January 1, 2018 to December 31, 2020

SECURITIES AND FINANCIAL PRODUCTS SERVICES

The securities and financial product services contemplated under the Framework Agreement include but not limited to the following services: securities, futures brokerage, seats for lease transactions, sales of securities and financial products, securities and financial business, entrusted asset management, investment consultation, securities underwriting, financial consultation and asset custody services.

The pricing method for such securities and financial products services is based on the requirements of applicable laws and regulations in accordance with relevant service fees and shall be negotiated between both parties after making reference to the prevailing market rates.

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For the three financial years ended December 31, 2017, the historical amounts of securities and financial products services between the Group and Shenergy Group and its associates are as follows:

Securities and financial products services	Approximate historical data (RMB in ten thousands)	Approximate historical data (RMB in ten thousands)	Approximate historical data (RMB in ten thousands)
	For the year ended December 31, 2015	For the year ended December 31, 2016	For the year ended December 31, 2017
Total income received by the Group for the provision of securities and financial products services to Shenergy Group and its associates	5,062	188	51
Total expenditures paid by the Group for receiving securities and financial products services provided by Shenergy Group and its associates or providing Shenergy Group and its associates with securities and financial product services	5,054	2,525	14

The Company estimates that the proposed annual caps for the securities and financial products services between the Group and Shenergy Group and its associates for the three financial years ending December 31, 2020 are as follows:

Securities and financial products services	Proposed annual caps (RMB in ten thousands)	Proposed annual caps (RMB in ten thousands)	Proposed annual caps (RMB in ten thousands)
	For the year ending December 31, 2018	For the year ending December 31, 2019	For the year ending December 31, 2020
Total income received by the Group for the provision of securities and financial products services to Shenergy Group and its associates	10,000	12,000	15,000
Total expenditures paid by the Group for receiving securities and financial products services provided by Shenergy Group and its associates or providing Shenergy Group and its associates with securities and financial product services	2,000	2,200	2,500

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When estimating the annual caps for income received by the Group and Shenergy Group and its associates for securities and financial products services, the Company has made reference to the above historical data. Given the development strategies of the industrial and financial capital integration the Group catered to Shenergy Group, the Company estimates the annual caps after taking into account the potential business development and has also made reference to, among others, the following major factors:

• (1) The Group will provide securities underwriting and financial advisory services to Shenergy Group and its associates and participate in potential fundraising activities (including equity financing and debt financing) of Shenergy Group and its associates in the next three years. It is expected that the Group will obtain stable income by providing the above services;

• (2) The Group will provide entrusted asset management services to Shenergy Group and its associates and obtain fixed management fees and performance remuneration for managing the asset management schemes invested by Shenergy Group and its associates. It is estimated that the above management fee income will grow steadily in the next three years;

• (3) The Group will provide Shenergy Group and its associates with industry research, investment advice and investment consultation services. With the increasing cooperation between the Group and Shenergy Group and its associates and growth of business volume, the Group expects to obtain stable commission fee income.

When estimating the annual caps for the amounts paid for the securities and financial products services provided by Shenergy Group and its associates to the Group or the securities and financial products services provided to Shenergy Group and its associates, the Company has made reference to the above historical data. Given the development strategies of the industrial and financial capital integration the Group catered to Shenergy Group, the Company estimates the annual caps after taking into account the potential business development and has also made reference to, among others, the following major factors:

• (1) Shenergy Group and its associates provides the Group with interbank borrowing on normal commercial terms and the Group does not need to provide any guarantee for the interbank borrowing. The Group expects to pay the corresponding interest expenses;

• (2) The Group provides Shenergy Group and its associates with securities and futures brokerage services. With the gradual increase of securities and futures investment of Shenergy Group and its associates, the Group expects to pay corresponding interest expenses.

SECURITIES AND FINANCIAL PRODUCTS TRANSACTIONS

The securities and financial products transactions contemplated under the Framework Agreement include but not limited to the following transactions: purchases under resale agreement or sales under buyback agreement transacted with related parties in the interbank market, bond private trading with related parties in the interbank market, income rights transfer transactions with related parties, subscription of bonds, funds, wealth management products or trust plans issued by related parties, and bonds, funds and wealth management products issued by the Group to be subscribed by related parties.

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The pricing method for such securities and financial products transactions is mainly as follows: subscription of securities and financial product is based on subscription prices and terms of issuance of the product. For the exchange traded transactions of securities and financial products, the prevailing applicable market prices of that type of securities and financial products or the prevailing market rates will be applied. Over-the-counter and other transactions of securities and financial products are made at prices negotiated by both parties based on the prevailing applicable market prices or prevailing market rates for that type of securities and financial products. If there is no prevailing applicable market prices or market rates for that type of securities and financial products, the prices or the rates of the transactions will be determined by the prices or rates negotiated between the parties based on the principle of arm’s length transaction.

For the three financial years ended December 31, 2017, the historical amounts of the securities and financial products transactions between the Group and Shenergy Group and its associates are as follows:

Securities and financial products transactions	Approximate historical data (RMB in ten thousands)	Approximate historical data (RMB in ten thousands)	Approximate historical data (RMB in ten thousands)
	For the year ended December 31, 2015	For the year ended December 31, 2016	For the year ended December 31, 2017
Total capital inflow arising from securities and financial products transactions between the Group and Shenergy Group and its associates	–	–	27,056
Total capital outflow from securities and financial products transactions between the Group and Shenergy Group and its associates	48,000	43,000	41,000

The Company expects that the proposed annual caps for the securities and financial products transactions between the Group and Shenergy Group and its associates for the three financial years ending December 31, 2020 are as follows:

Securities and financial products transactions	Proposed annual caps (RMB in ten thousands)	Proposed annual caps (RMB in ten thousands)	Proposed annual caps (RMB in ten thousands)
	For the year ending December 31, 2018	For the year ending December 31, 2019	For the year ending December 31, 2020
Total capital inflow arising from securities and financial products transactions between the Group and Shenergy Group and its associates	50,000	80,000	100,000
Total capital outflow from securities and financial products transactions between the Group and Shenergy Group and its associates	50,000	50,000	50,000

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The upper cap of total capital inflow from securities and financial products transactions between the Group and Shenergy Group and its associates has been arrived after making reference to the historical transaction amounts. Given the development strategies of the industrial and financial capital integration the Group catered to Shenergy Group, the Company estimates the annual caps after taking into account the potential business development. As a listed securities and financial holding group approved by the China Securities Regulatory Commission, which provides securities, futures, asset management, wealth management, investment banking, investment consultation, securities research as well as all-round and one-stop professional integrated financial services, the Company will further cater to the development strategies for industrial and financial capital integration with Shenergy Group, deepen industrial and financial capital integration and propose to implement and create special advantages and build up brand name in energy financing, duplicate and promote the successful experience and model of industrial and financial capital integration and improve strategic customer service capabilities of major programs and important initiatives. The Group expects that the total amount of capital inflow arising from securities and financial products transactions with Shenergy Group and its associates will continue to increase.

The maximum total capital outflow from securities and financial products transactions between the Group and Shenergy Group and its associates has been arrived after making reference to the historical transaction amounts generated from the Group’s participation in the subscription of Shenergy Group and its associates’ bond issues made on the open market. Given the development strategies of the industrial and financial capital integration the Group catered to Shenergy Group, the Company estimates the annual caps after taking into account the potential business development. The Group expects that the total capital outflow arising from securities and financial products transactions with Shenergy Group and its associates will continue to increase.

The incomes and payment of expenses of the Group derived from the above capital inflow and outflow have been included in the incomes and expenses of securities and financial products services. For further details, please refer to the table regarding the proposed annual caps for the securities and financial products services on page 3 of this announcement.

PURCHASE OF GOODS AND SERVICES

The purchase of goods and services contemplated under the Framework Agreement includes receiving services provided within the scope of operation of Shenergy Group and its associates, including but not limited to the following transactions: the purchase of gas, natural gas, gas stoves, gas appliances, gas kitchen equipment and receiving services of gas transmission and distribution, gas project planning, design and construction and other ancillary services.

The pricing method for such purchase of goods and services is based on the requirements of applicable laws and regulations and shall be negotiated between both parties after making reference to the prevailing market prices.

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For the three financial years ended December 31, 2017, the historical amounts of purchase of goods and services by the Group from Shenergy Group and its associates are as follows:

Purchase of goods and services	Approximate historical data (RMB in ten thousands)	Approximate historical data (RMB in ten thousands)	Approximate historical data (RMB in ten thousands)
	For the year ended December 31, 2015	For the year ended December 31, 2016	For the year ended December 31, 2017
Total expenses paid by the Group for purchase of goods and services from Shenergy Group and its associates	11	–	–

The Group estimates that the proposed annual caps for the purchase of goods and services by the Group from Shenergy Group and its associates for the three financial years ending December 31, 2020 are as follows:

follows:
Purchase of goods and services	Proposed annual cap (RMB in ten thousands)
	For the year ending December 31, 2018	For the year ending December 31, 2019	For the year ending December 31, 2020
Total expenses paid by the Group for purchase of goods and services from Shenergy Group and its associates	5,000	5,000	5,000

When estimating the annual caps for the amounts paid by the Group for the purchase of goods and services from Shenergy Group and its associates, the Company has made reference to the above historical data and has also taken into account that the Group will receive the gas engineering services, gas sales services and property management services provided by Shenergy Group in the next three years. It is expected that there will be a potential growth in expenditure.

REASONS AND EXPECTED BENEFITS OF ENTERING INTO THE FRAMEWORK AGREEMENT OF CONTINUING CONNECTED TRANSACTION

The above proposed continuing connected transactions have been and will be carried out in the ordinary and usual course of business of the Company and the Framework Agreement was determined through arm’s length negotiation. The independent non-executive Directors considered that the signing of the Framework Agreement between the Company and Shenergy Group was necessary for the day-to-day operation and business development of the Company to facilitate the centralized management and supervision of the connected transactions that may be made between the Company and Shenergy Group. The pricing for the transactions is fair and reasonable and were in line with market-based practices. No damage to the interests of non-related shareholders and interests of the Company is expected to arise and no impact on the independence of the Company is expected as a result of the above continuing connected transactions. The examination and voting process taken by the Board for the approval of the entering into the Framework Agreement between the Company and Shenergy Group complies with the requirements of relevant laws, regulations and the Articles of Association.

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In light of the above, the Board (including the independent non-executive Directors) believes that the terms of the Framework Agreement are fair and reasonable and on normal commercial terms. Entering into the Framework Agreement is in the interest of the Company and the Shareholders as a whole.

IMPLICATIONS OF THE HONG KONG LISTING RULES

As at the date of this announcement, Shenergy Group, which is the largest shareholder of the Company, holds approximately 25.27% of the issued share capital of the Company. Therefore, pursuant to Rule 14A.07(1) of the Hong Kong Listing Rules, Shenergy Group and its associates are connected persons of the Company and the transactions contemplated by the Group and Shenergy Group and its associates under the Framework Agreement constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

As the highest percentage ratios applicable to the proposed annual caps for the securities and financial products services, the proposed annual caps for the securities and financial products transactions and the proposed annual caps for the purchase of goods and services under the Framework Agreement (as defined in Rule 14.07 of the Hong Kong Listing Rules) are higher than 0.1% but lower than 5%, pursuant to Chapter 14A of the Hong Kong Listing Rules, the continuing connected transactions contemplated under the Framework Agreement are subject to reporting and announcement requirements but are exempt from the approval requirements of independent shareholders.

In accordance with the applicable PRC laws and regulations, those contents of the Framework Agreement containing estimations for 2019 and 2020 will not take effect until the Company convenes the Board and annual general meeting to consider and approve the resolutions of the estimation of routine related party transactions of the Company in 2019 and 2020.

From January 1, 2018 to the date of this announcement, as the applicable percentage ratios (as defined in Rule 14.07 of the Hong Kong Listing Rules) of securities and financial products services, the securities and financial products transactions and the purchase of goods and services between the Group and Shenergy Group and its associates are not more than 0.1%, the reporting, announcement and annual review requirements can be exempted.

GENERAL INFORMATION

Information about Shenergy Group

Shenergy Group was established on November 18, 1996 by the Shanghai State-owned Assets Supervision and Administration Commission. The registered capital is RMB10 billion. The legal representative is Huang Dinan. Shenergy Group holds 25.27% of the shares of the Company and is the largest shareholder of the Company. Shenergy Group is a limited liability company incorporated under the laws of the PRC and is principally engaged in the investment, development and management of electric power and energy infrastructure industry, the investment of natural gas resources, the investment of municipal gas pipe network, the investment and management of real estate and high-technology industry, the industrial investment, the assets management and the domestic trades (except for specific items).

Information about the Group

The Group is principally engaged in securities sales and trading, investment management, brokerage and securities finance, investment banking and other businesses.

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DEFINITIONS

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

“Articles of Association”	Articles of Association of東方證券股份有限公司, revised
	from time to time
“associate(s)”	has the meaning ascribed thereto under the Listing Rules
“Board”	the board of Directors of the Company
“Company”	東方證券股份有限公司, a joint stock limited company
	established in the PRC, whose H shares are listed on the Hong
	Kong Stock Exchange (stock code: 03958) and A shares are
	listed on the Shanghai Stock Exchange (stock code: 600958),
	respectively
“Director(s)”	the director(s) of the Company
“Framework Agreement”	The Company and Shenergy Group proposed to enter into the
	Framework Agreement of connected transaction in relation
	to the securities and financial products services, securities
	and financial products transactions and transactions for
	the purchase of goods and services that have been and will
	continue to be carried out between the Group and Shenergy
	Group and its associates in the ordinary and usual course of
	business
“Group”	the Company and its subsidiaries
“Hong Kong”	the 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
“PRC”	the People’s Republic of China, and for the purpose of this
	announcement, excludes Hong Kong, the Macau Special
	Administrative Region of the PRC and Taiwan
“RMB”	Renminbi, the lawful currency of the PRC

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“Shareholder(s)”

the shareholder(s) of the Company, including holders of H shares and holders of A shares

“Shenergy Group”

Shenergy (Group) Company Limited

By order of the Board of Directors PAN Xinjun Chairman

Shanghai, PRC June 26, 2018

As at the date of this announcement, the Board of Directors comprises Mr. PAN Xinjun and Mr. JIN Wenzhong as executive Directors; Mr. LIU Wei, Mr. WU Junhao, Mr. CHEN Bin, Mr. LI Xiang, Ms. XIA Jinghan, Mr. XU Jianguo and Mr. DU Weihua as non-executive Directors; and Mr. XU Guoxiang, Mr. TAO Xiuming, Mr. WEI Anning, Mr. XU Zhiming and Mr. JIN Qinglu as independent non-executive Directors.

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