At first glance the 6 per cent decline in second-quarter earnings announced on Wednesday by Hong Kong Exchanges and Clearing doesn't look too bad.
In fact, it looks quite good, especially when you consider that HKEx's profits for the second quarter of last year were flattered by a one-off HK$206 million gain from the sale of its stake in a share registry. Strip that out, and profits actually grew 9 per cent in the second quarter.
Yet investors have very definitely fallen out of love with HKEx. Since the height of the bull market at the beginning of November last year, the stock has dropped a gut-wrenching 62 per cent (see first chart below), double the decline of the Hang Seng Index despite what - on the surface - look like reasonable earnings figures.
The reason is that HKEx acts as a heavily geared play on the performance of its own market. That's great in a bull market. When equity prices go up, companies and investors flock to the market, driving up earnings from both listing and trading fees. As a result, between April 2003, in the darkest days of the Sars scare, and November last year, HKEx's stock rose well over 3,000 per cent to reach HK$265.60 a share. In comparison the Hang Seng Index managed a gain of just 276 per cent.
The trouble is that gearing in a bull market also acts as gearing in a bear market. Once equity prices started declining, investors lost no time before dumping the HKEx stock. As a result, as the first chart shows, since last November the Hang Seng has lost about 30 per cent of its value, but HKEx shares have fallen by twice as much (incidentally inflicting a HK$3.4 billion loss on the government's 5.86 per cent holding in HKEx).
To understand why the stock has fallen so heavily, try comparing HKEx's second-quarter earnings released on Wednesday not to the same period last year but rather to the fourth quarter of 2007, at the height of the bull market.
