Hong Kong Exchanges and Clearing is expected to announce a fall in net profit of about 30 per cent last year due to lower market turnover, according to analysts. They expect HKEx chief executive Kwong Ki-chi, who will unveil the exchange's annual results on Wednesday, to report a net profit of between HK$627 million and HK$653 million for the year to December 31. This would represent a fall of between 26 per cent and 30 per cent on the HK$879 million profit the previous year. HKEx, which operates the Hong Kong stock exchange and clearing systems, was formed two years ago under a government reform plan to merge the stock exchange, futures exchange and the clearing houses. The exchange, which has more than 800 companies on its market lists, became a listed company in June 2000. In September, HKEx reported a 34 per cent year-on-year fall in interim net profit to HK$365.5 million. The drop was due to depressed market turnover and low interest rates in the first half of last year - factors analysts said continued to hit HKEx in the second half of last year. HSBC expected HKEx would report profit for the year down 26 per cent year on year to HK$653 million. According to the HSBC report, the average daily turnover of the exchange was down 37 per cent to HK$8.03 billion. A lower turnover would hit the exchange as 19 per cent of its income in the first half of last year was derived from investor payments on stock transactions. HSBC said low interest rates also dealt a blow to HKEx's interest income on its cash balance of HK$3.32 billion. It also earned interest from deposit funds placed in its bank account by futures investors. When investors trade futures contracts, they have to place a sum of money with the broker as a deposit to cover potential losses. These margin deposit funds are then placed in the exchange's bank account. The HSBC report said that in the first half of last year HKEx derived 20 per cent of revenue from interest income, against 19 per cent from levy income. HSBC said a rise in interest rates would be beneficial to income at the exchange, as earnings per share would increase by 2.6 per cent with every 50-basis-point increase in interest rates. As a result of the 11 interest-rate cuts last year, HKEx's earnings were cut substantially. HSBC believed interest rates might go up again later this year, allowing HKEx to achieve better returns. 'With the interest-rate cycle bottoming out, there is nowhere to go but up. An upswing in the cycle will herald earnings upgrades for HKEx during the year of 2002,' it said. Christfund Securities managing director Christopher Cheung Wah-fung said profits at the exchange would fall about 30 per cent this year to HK$615 million. 'When compared with 2000, last year was a quiet year for listings. There were fewer new companies listing and fewer covered warrants issued,' Mr Cheung said. The reduction in new listings resulted in a drop of listing fees for the exchange, he said. 'We could not expect a very good result from HKEx this year,' Mr Cheung said. 'However, we do expect the exchange to have a better result in 2002 as we predict an increase in new listings this year.' Credit Lyonnais Securities Asia expected the exchange to report a profit of HK$627 million, down 29.5 per cent from a year earlier. However, it said the exchange would see a rebound this year, as it expected average daily turnover of HK$9 billion this year, up from HK$8 billion last year. 'Improving market sentiment will trigger [the] release of the pending IPO [initial public offering] flow from China. Imminent derivative warrant issues will raise turnover velocity from a low level of 47.8 per cent last year,' Credit Lyonnais Securities Asia said.