Hong Kong Exchanges and Clearing, which will announce financial results on Wednesday, is facing the twin challenges of capturing more listings and devising strategies to turn the London Metal Exchange into a growth engine, according to brokers and analysts.
They believe the exchange could still report a profit growth of about 15 to 16 per cent last year on the back of increased trading fee income driven by higher market turnover, but point out that the exchange lacks a strong growth engine.
"We view HKEx's earnings drivers as currently depressed - equity market volatility and investors' interest in China stocks are at low levels," a Goldman Sachs report said.
The report added that "LME fee rates are unchanged at very low levels and IPO activity from China has faded".
On a brighter note, the Goldman report said the HKEx could benefit from China's third plenum initiatives to open up the country's capital account. In addition, the LME would be allowed to change its fees from next year.
Credit Suisse, which expects the HKEx will report about 16 per cent net profit growth to HK$4.75 billion, said in a report "the investment case for HKEx is longer-term growth as the China listed market continues to evolve, with HKEx being the key global gateway with strong operating leverage".
However, in the short term, "HKEx's fortunes are much more linked to current market volumes", it said.
In December 2012, the HKEx spent £1.39 billion (HK$18 billion) to buy the LME in a bid to diversify its business by expanding into commodities trading.
A Macquarie report said that in the first nine months of the financial year, the commodities segment from the LME contributed 14 per cent to HKEx revenues but represented 17 per cent of its cost.
Macquarie analysts said they were concerned whether LME could gain approval from Beijing to set up warehouses on the mainland. Another concern was that LME was facing several class action lawsuits for alleged "anti-competitive behaviour" in aluminium warehousing.
The LME acquisition has also added compliance cost. The Securities and Futures Commission informed Hong Kong lawmakers earlier this month that it would set up a new team to regulate the HKEx because its business had become more complex after the LME takeover.
"It makes sense for the SFC to step up its regulation of the HKEx as it is now [involved in] more diverse businesses," said Christopher Cheung Wah-fung, the legislator representing the financial services sector.
However, Cheung added that since the LME acquisition there had been little progress in developing commodities trading in Hong Kong.
"HKEx has to set out a strategy for the LME to develop in Hong Kong and Asia," he said.
HKEx plans to conduct a market consultation this year to review its listing rules to attract more listings. This came after it lost the potential listing of mainland e-commerce giant Alibaba in October last year.
Jeffrey Chan Lap-tak, the chairman of the Hong Kong Securities Association, said the HKEx needed to introduce more initiatives to attract yuan-denominated share listings to capture the opportunities from the internationalisation of yuan.