Hong Kong Exchanges and Clearing (HKEx), the operator of the city's stock and futures markets, is expected to report a 10 to 20 per cent drop in net profit when it releases its results for the first half tomorrow.
Lower market turnover and fewer new listings are likely to have been the key contributors to the result.
Analyst forecasts for the bourse's first-half earnings range from HK$2.1 billion to HK$2.3 billion - down from HK$2.58 billion for last year's first half. Lower investment income and a reduction in new listings were the main reasons cited for the earnings drop.
HKEx earns revenues from trading and clearing fees paid by investors on each share transaction, listing fees paid by newcomers to the board, and fees paid by information vendors for stock information.
Brokerage house CCB International Securities expected HKEx to report a net profit of HK$2.1 billion, down 20 per cent on the same period last year, citing reduced trading and clearing fees arising from lower market turnover during the first half of the year.
Average daily turnover stood at only HK$56.5 billion, down 20 per cent on last year's first half, and CCB forecast that revenue from securities traded on the cash market would accordingly fall by the same margin to HK$818 million.
Louis Tse Ming-kwong, director of VC Brokerage, forecast a 13 per cent decline in interim earnings.
'The exchange has extended the trading hours by cutting the lunch break but it evidently has failed to boost turnover,' he said. 'As a majority of the income comes from revenue related to market turnover, we are set to see a lower profit in the first half.'
Tse said HKEx needed to control cost to enhance its earnings.
A report from brokerage Bocom International said the exchange's earnings were likely to continue suffering from high costs.
'The company [HKEx] still faces high cost pressures, given its continuing investments in the new data centre and exploration of new products,' the Bocom report said, adding that it expected first-half earnings to drop 11.5 per cent due to lower turnover and new listings.
Kenny Lee Yiu-sun, chief executive of First China Securities, expected the HKEx first-half profit to decline 20 per cent.
'Besides the lower turnover, HKEx also had fewer new listings in the first half,' he said.
The number of new listings in the six months to the end of June fell to 32 from 47 a year ago, while the total funds raised from IPOs was down 82 per cent.
According to data provider Dealogic, that reduced activity saw Hong Kong lose its ranking as the world's top IPO market for the past three years, sliding to No7.
'The current operating conditions for HKEx are the toughest in many years,' a report from Swiss investment bank UBS noted. It expected HKEx shares to be clouded by its 'expensive' acquisition of the London Metal Exchange (LME), and predicted its share price could decline further to HK$90 from levels of around HK$105.
HKEx's share price has dropped 36 per cent so far this year. Further declines are expected in its second-half result, as it will pay a high price to take over the LME.
After a more than 10-month battle, HKEx finally won approval two weeks ago from LME shareholders for its GBP1.39 billion (HK$16.85 billion) takeover offer. Pending regulatory approval, the deal will be completed in the fourth quarter, meaning the bourse will have to raise ?.1 billion from bank loans plus shares and bonds to finance its first overseas acquisition.
Many brokers have criticised the deal as being too expensive as the takeover price represents 180 times LME's after-tax earnings last year.
A Citi report noted that the necessary bank loans as well as the expected share and bond offerings would dilute the exchange's earnings in the near term. However, if executed well, Citi believed the deal would deliver profit for HKEx over the longer term as it would help the exchange expand its commodities trading business.