HKEx profits but not from longer hours
Hong Kong Exchanges and Clearing this Wednesday will report its first interim results after it extended trading hours in March, though brokers and analysts say the longer hours have failed to translate into higher turnover or profits for them.
Brokers believe the exchange is likely to report a profit of about HK$2.48 billion, up about 10 per cent from last year's HK$2.26 billion.
Several investment banks only gave full-year forecasts, which indicated the bourse operator would show full-year profit growth of 9 per cent to 15 per cent.
The HKEx, the holding company of the stock and futures markets as well as three related clearing houses, earns money from listing fees paid by companies, trading fees paid by investors on stock and futures transactions, as well as fees paid by information vendors for stock information.
'The stock exchange extended trading hours in March and that affected brokers' lunches and the restaurant business in Central,' said Louis Tse Ming-kwong, director of VC Brokerage. 'Four months on, the longer trading time has done little to boost turnover and hence its profit.'
Tse believes the exchange will record less than 10 per cent profit growth in the first half.
A Credit Suisse report showed that in the second quarter the turnover in the stock market, which traded for five hours, was down 11 per cent from the first quarter, when the local bourse only traded four hours a day.
However, on a year-on-year comparison, average daily turnover for the first six months showed a 15 per cent increase to HK$73.58 billion from HK$63.83 billion in the first half of last year.
The extension of trading was accomplished by opening 30 minutes earlier and cutting the two-hour lunch to one hour and 30 minutes. The exchange plans to extend trading by another 30 minutes starting in March next year by cutting the lunch break to one hour.
Before the extension, the city's exchange had one of the shortest trading periods in the world, matched only by the Shanghai and Shenzhen exchanges, though it was longer than the Philippines' exchange, which trades for only 2.5 hours a day. Major markets, such as New York and Nasdaq, trade for 6.5 hours a day, while London is open for 8.3 hours without a lunch break.
HKEx wanted the extended hours to boost its competiveness, but it came at a bad time, as global stock markets were hit hard by the European and US debt crises.
However, Tse said the exchange's interim profit would be boosted by the large number of new listings. Funds raised by initial public offerings for the first six months stood at HK$171.199 billion, an increase of 240 per cent compared with HK$50.41 billion for the same period last year. Big names, such as fashion brand Prada and the first yuan real estate investment trust Hui Xian, were listed in the first half.
Credit Suisse said it believed China listings on the HKEx would continue to be a driving force for its futures growth and it predicted its full-year profit would reach HK$5.54 billion, up 10 per cent.
'The key investment case for HKEx is longer-term growth, as the China listed market continues to evolve with the HKEx as the key global gateway having strong operating leverage,' said Arjan van Veen, a research analyst of Credit Suisse. 'However, in the short term, HKEx's fortunes are much more linked to current market volumes, which have notably weakened.'
Kenny Lee yiu-sun, chief executive of First China Securities, expected the exchange would only record a 10 per cent profit growth in the first half of this year. He said he believed the fee income related to turnover and investment income earned by the exchange from its reserve investment would not be good.
'The US and European debt crisis hurt the investment market worldwide,' he said. 'The HKEx is not going to make a good return from its own investment.'
UBS predicted the HKEx's full-year profit would rise 16 per cent to HK$5.84 billion. 'HKEx continues to be the most expensive exchange in the world despite the recent correction,' the UBS report said.
Lee noted the HKEx now traded at a price equal to 30 times earnings, compared with the global average of listed exchanges at 17 times.
'We believe some of this is justified by its exposure to mainland China's strong IPO pipeline,' the UBS report said. 'However, we think the premium also captures expectations of significantly higher growth on the renminbi theme and longer trading hours - expectations we think are unlikely to be met.'
JP Morgan believed the exchange's full-year profit would increase 9.23 per cent to HK$5.5 billion.
The number of companies listed on the HKEx main board at the end of 2010. Market capitalisation was HK$21 trillion, up 18 per cent from 2009