HKEx puzzle: what to do with HK$7b cash pile

Cash is king, but for the cash-rich Hong Kong Exchanges and Clearing, how to spend it is proving a challenge. Does it look for merger and acquisition opportunities or return it to investors in the form of a special dividend payment or a cut in fees?

With a rash of consolidation sweeping stock markets around the world, HKEx said it would consider mergers if that helped its development. But it is hedging its bets.

'Due to changes in the financial market landscape, HKEx will consider international opportunities for alliances, partnerships and other relationships that present strategically compelling benefits consistent with its focus on markets in China,' a spokeman said. 'Although we have not identified any significant synergistic opportunities, it is open to possible co-operation and joint efforts.'

But the spokesman stressed the exchange 'will not pursue alliances, partnerships or other relationships purely for investment gains' but only to strengthen its technology and business development.

No one doubts HKEx has the ability to pay - it had a HK$7.196 billion shareholders' fund as of the end of September, the strongest cash position of all listed bourses.

The exchange is the world's fifth-largest in terms of the market capitalisation of all companies listed on the bourse, with a total value of US$2.695 trillion as of the end of November. This means HKEx is smaller than stock exchanges in New York, Nasdaq, Tokyo and London but bigger than Euronext, Shanghai, Toronto, India and Brazil.

HKEx was also the world's largest initial public offering market last year. Its strong cash position is the result of it inheriting reserves from the former stock exchanges, the futures exchange and the three clearing houses which merged to form HKEx in 2000. The exchange also has a rule to deliver 90 per cent of its profit as dividend to shareholders and keep 10 per cent in its reserve every year.

The pile of cash means the local bourse would easily be able to jump into the merger craze sweeping the sector. Deutsche Boerse and NYSE Euronext yesterday announced talks over a possible merger deal, while earlier this week the London Stock Exchange disclosed plans to merge with the Toronto Stock Exchange. Last October, Singapore Exchange announced it planned to merge with the Australian Stock Exchange.

The industry consolidation has not changed the league table in terms of market capitalisation but would widen the gap between the New York Stock Exchange and the LSE with the rest. The merger also means London and Toronto will become the bourse with the largest number of mining and energy companies.

The consolidation comes as traditional exchanges faced heightened competition from electronic trading platforms such as dark pools which allow investors to trade anonymously. The US, Europe and Australia allow dark pools to directly compete with the traditional exchanges.

HKEx and many Asian bourses are protected by rules that require dark pool operators to be members or affiliates of the local exchanges and to report all trades to the exchange.

Louis Tse Ming-kwong, director of VC Brokerage, said HKEx has attracted many mainland companies so any merger talks could face concerns from Beijing.

'If HKEx set up an alliance with the Shanghai or Shenzhen exchanges, it would make sense, but I do not see the benefit in merging with the other overseas exchanges,' Tse said. 'It is true that HKEx may have excessive cash on hand, so it should consider paying out part of that to investors as a special dividend or cut fees for brokers and investors.'

Christopher Cheung Wah-fung, chairman of the Hong Kong Securities Professionals Association, said: 'It would be better for the exchange to pay a special dividend to shareholders. The only merger that could benefit HKEx is one with the Shanghai Stock Exchange.'

The HKEx spokesman said the bourse needs to keep some cash to pay a final dividend in March. The exchange has kept the dividend payment at 90 per cent of profit but has yet to decide if it would pay any special dividend on top of the normal payout ratio.

'As the market has expanded substantially in recent years, the exchange must keep cash on hand to maintain a strong capital position,' the spokesman said.