HKEx earnings crash21pc in tough quarter
Hong Kong Exchanges and Clearing (HKEx), the operator of the city's stock and futures markets, expects a challenging time ahead after reporting a worse-than-expected 21 per cent profit drop in the second quarter.
Chief executive Charles Li Xiaojia said: 'It is a challenging period for us because low market turnover has been putting pressure on short-term profitability.' But he expects the acquisition of the London Metal Exchange (LME) to benefit the exchange in the long term.
Li said the HKEx business model focused on equities trading and new listings, which made it vulnerable to global market sentiment.
As the euro-zone crisis deepened in May, investors pulled back from the market and fewer companies went public. As a result, HKEx's second-quarter profit slumped to HK$1.07 billion from HK$1.35 billion a year earlier. Average daily turnover in those three months fell 29 per cent year on year to HK$50.2 billion as trading and clearing fees dried up.
Overall, HKEx's first-half net profit stood at HK$2.22 billion, down 14 per cent from the year before as lower turnover dragged down income from investor fees by 11 per cent, while fewer new listings slashed those fees by 8 per cent. The number of new listings in the first six months fell to 32 from 47 a year ago.
'This is why we need the LME acquisition, which is a not a deal to bring in profit tomorrow but to help the exchange establish a new business model with more diversified businesses ranging from equities to derivatives and commodities,' Li said. 'The LME will also help HKEx grab the opportunities arising from the expansion of the internationalisation of the yuan and the opening up of the mainland's commodities markets.'
After a long bidding war, HKEx in June offered to pay GBP1.39 billion (HK$16.84 billion) for LME. Analysts have expressed concern over the steep price tag, but Li said the HKEx would 'comfortably' pay for the deal with a combination of cash, bank borrowing and bonds.
Besides expanding into commodities, Li said the exchange would also expand clearing services. It would set up a clearing house for over-the-counter derivatives, while LME would have one for commodities, adding to the three clearing houses that HKEx already had - of stocks, futures and options. Li believes the five clearing houses will be a key source of income.
But Ben Kwong Man-bun, chief operating officer of KGI Asia, was not optimistic about the outlook for the exchange in the second half.
'The global market sentiment is still riddled with uncertainties, which will hurt market turnover,' Kwong said. 'The LME acquisition, which will be completed in the fourth quarter, will also add to costs.'
Credit Suisse yesterday downgraded the exchange's full-year earnings by 2 to 5 per cent. 'While there is no doubt the long-term growth profile ... is very strong ... the nearer-term fortunes of the stock are more market-volume related,' a report said, adding it was a poor start to the second half, with average daily turnover in July down 30 per cent from a year ago. HKEx shares rose 0.9 per cent yesterday to HK$109.10.