How Hong Kong stock exchange managed to profit even as stocks lost

PUBLISHED : Wednesday, 11 November, 2015, 2:19pm
UPDATED : Wednesday, 11 November, 2015, 4:58pm

Hong Kong Exchanges and Clearing, the operator of the local stock and futures markets, on Wednesday reported a 81 per cent year-on-year net profit growth for the third quarter despite a market slump during the period, thanks to a one-off gain from property sales.

Third-quarter profit stood at HK$2.33 billion, compared to HK$1.29 billion a year earlier. It, however, fell 7.5 per cent short of the net profit in the second-quarter, when the market was on a roll. Excluding the one-off gain, the third-quarter profit stood at HK$1.89 billion, up 46 per cent a year earlier but down 25 per cent from the second quarter.

For the first nine months, HKEx profit stood at HK$6.43 billion, up 76 per cent year on year.

“Trading activities on the equity markets slowed following record-higherin second quarter 2015, as market sentiment turned cautious over the global and mainland’s economic prospects,” the HKEx said in the result statement.

In the third quarter, the Hang Seng Index fell 20.6 per cent, dragging the benchmark into negative territory for the year. It was the worst quarter for the blue-chip index since the July-September quarter of 2011.

However, this did not affect HKEx profit as it sold a property for HK$445 million on a disposal of a leasehold property in the third quarter. Total revenue rose 49 per cent in the first nine month to HK$10.6 billion, of which HK$165 million was generated by the Stock Connect scheme between Hong Kong and Shanghai launched in November.

Average turnover in the first nine months was HK$89.8 billion, 69 per cent higher year on year. This was driven mainly by the exceptionally high turnover during April’s market rally, which fizzled out in the third quarter.

In April, the exchange recorded an average daily turnover of HK$200 billion – triple its previous average level – in the midst of a market boom that started after mainland funds were allowed to invest in Hong Kong stocks, taking shares to their highest levels in seven years.

In contrast, the third-quarter turnover fell sharply to below HK$100 billion in most of the days, down 25 per cent from the first half. The market began to slump in the middle of June when Beijing tightened margin financing for stock trading, sparking a selling spree that erased nearly US$4 trillion in value from markets in Shanghai and Shenzhen. The sell-off also hit investor confidence in Hong Kong.

Ben Kwong Man-bun, executive director and head of research of KGI Asia, said he is not upbeat about HKEx’s profit outlook as turnover has gone down from the peak. Turnover on Wednesday stood at HK$73.23 billion, down 63 per cent from the record month in April and is lower than the daily average in the first nine months.

“The economic outlook in the mainland and other parts of the world is not good. The US has indicated it will increase the interest rate in December. Investment sentiment is not looking good at all. This will weigh on market turnover and hence HKEx’s fee income,” Kwong said.

Pointing out that the Shenzhen-Hong Kong Stock Connect has been postponed to next year from the original plan of the end of this year, he said: “There is lack of any growth engine in the fourth quarter for the stock market in Hong Kong.”

HKEx closed on Wednesday at HK$209.8, down 1.04 per cent, after the results announcement.

HKEx’s third-quarter profit was driven in part by a 37 per cent increase in commodities revenue in the first nine months, contributed mainly by subsidiary London Metal Exchange, which raised its trading fees from January 1. LME Clear, the clearing house launched in September last year, brought in a total of HK$592 million in the first nine months. That offset a drop in trading volume at LME by 3 per cent year on year during the nine-month period due to weaker demand for industrial metals.

HKEx’s listing fee income rose 3 per cent to HK$845 million in the reporting period. Operating expenses were up 13 per cent year on year to HK$2.46 billion, primarily reflecting increased staff costs.