London Metal Exchange

Exchanges operator HKEx's earnings growth of 11pc trails market estimates

Lower than expected profit attributed to LME takeover costs and flat revenue from listing fees

PUBLISHED : Wednesday, 26 February, 2014, 1:28pm
UPDATED : Thursday, 27 February, 2014, 12:28am

Higher operating expenses and depreciation costs resulting from the takeover of London Metal Exchange saw Hong Kong Exchanges and Clearing report lower-than-expected earnings yesterday, and brokers warn of the challenges ahead.

HKEx, which operates the local stock and futures markets and owns the LME commodities bourse, reported net profit of HK$4.55 billion for last year, up 11 per cent year on year and short of market estimates of about 16 per cent profit growth.

A final dividend of HK$1.72 will be paid.

Chief executive Charles Li Xiaojia told a results briefing that LME would contribute more profit next year, with its own clearing house, LME Clear, to start operations in September and bring in settlement fee income. In addition, LME could raise its fees next year, something prohibited this year under the takeover agreement.

"We are still in the stage of initial investment in the LME and the cost is high," Li said. "However, these investments will eventually bring more profit for the HKEx in the long term.

"I would like to see any of our investments earn a lot of money overnight but this is not realistic. Investors should be patient."

Earnings growth was driven by a 16 per cent year-on-year increase in average daily stock market turnover to HK$62.6 billion. Daily derivative contracts traded rose 9 per cent to 283,610. The higher turnover brought in more trading and settlement fees from investors, boosting the bourse's revenue by 21 per cent to HK$8.72 billion.

This was offset by amortisation costs and expenses related to LME, which HKEx bought in December 2012 to expand into commodities. LME contributed HK$1.21 billion of revenue to HKEx last year, with commodities turnover at the London bourse rising 7 per cent.

However, the LME acquisition also saw financing costs rise 233 per cent year on year to HK$183 million last year, and drove up HKEx's amortisation and depreciation charges by 221 per cent from a year earlier to HK$507 million. Spending related to LME and information technology development saw expenses balloon 42 per cent to HK$2.78 billion.

Legal fees rose 170 per cent to HK$146 million, partly because LME is facing 26 lawsuits in the US for alleged anti-competitive and monopolistic behaviour. LME management said the allegations were unfounded.

Revenue from listing fees rose only 1 per cent up to HK$586 million last year, with 110 new listings, up from 64 in 2012.

Ben Kwong Man-bun, chief operating officer of KGI Asia, said HKEx paid too much for LME - £1.39 billion (HK$18 billion) - and that dragged down the exchange's profit outlook.

"In addition, we have not seen the LME benefit the local commodities market," he said. "There is also a lack of mega new listings. The HKEx profit outlook is not optimistic as the bourse is lacking any growth engine."

HKEx shares closed down 0.25 per cent at HK$120.70 yesterday.