Hong Kong Exchange’s interim profit beats forecasts on higher market turnover, new listings
Higher market turnover and more new listings boost the exchange operator’s earnings
Hong Kong Exchanges and Clearing, the operator of the local bourse, reported 17 per cent growth in net profit for the first six months of 2017 as a result of higher market turnover and more new listings.
HKEX said on Wednesday its interim net profit stood at HK$3.49 billion (US$450 million), or HK$2.86 per share, up 17 per cent from a year earlier. That beats market expectation of an 11 per cent increase to HK$3.32 billion.
“The global financial markets started the year strong, driven by positive sentiment on improved global economic growth and stronger-than-expected economic performance in mainland China,” said Chow Chung Kong, chairman of HKEX in the results statement.
“Nonetheless, uncertainty over the pace of the US Federal Reserve’s interest rate increases and balance sheet normalisation, Brexit talks and geopolitical tensions across the world, have continued to cloud global economic prospects and increase market vulnerability.
“Against this mixed backdrop, the Hong Kong securities market saw active trading in the first half of 2017, with an increase in average daily turnover of 13 per cent from the same period last year. Our IPO market also recorded growth in the number of new listings and funds raised by 80 per cent and 26 per cent respectively.”
The board will pay an interim dividend of HK$2.55 per share, up 15 per cent from HK$2.21 a year earlier. That maintains the exchange’s payout ratio requirement that it pay out 90 per cent of its profit as dividend.
Deducting first quarter profit of HK$1.72 billion, the second quarter net profit stood at HK$1.77 billion, up 14 per cent from a year earlier. That easily beats a consensus of 3 per cent net profit growth predicted by analysts polled by Bloomberg.
Revenue for the first half was up 10 per cent to HK$6.2 billion, in line with the market estimate.
The growth was driven by a rise in average daily turnover in the first six months to HK$76 billion, up 12.6 per cent from a year earlier. That brought higher fees paid by investors on stock and derivatives transactions to the exchange.
The higher revenue was also due to an increase in net investment income of HK$466 million and a one-off receipt of HK$55 million in interest from Lehman Brothers’ liquidators. Excluding these items, revenue increased by 1 per cent but that was offset by lower volumes in derivative products trading in both Hong Kong and on the London Metal Exchange.
Commodities trading fees were down 13 per cent as the turnover on the metal contracts of the LME slipped 6 per cent in the first half. LME, a wholly owned subsidiary of HKEX, is the world’s largest metal exchange.
Income from listing fees also increased as the first half saw 72 newly listed companies, compared with 40 for the same period last year.
Stock connect brought in revenue of HK$162 million in the first half, up from HK$71 million a year earlier. The increase was because the launch of the Shenzhen-Hong Kong stock connect in December brought in more mainland investors to trade Hong Kong stocks. Their trading now represents 10 per cent of the local market turnover. The Shanghai-Hong Kong stock connect was launched in November 2014.
In the first quarter, the exchange had already reported a better-than-expected 20 per cent rise in net profit to HK$1.72 billion, boosted by the Lehman Brothers liquidation payment. Excluding that, it still reported profit growth of 16 per cent to HK$1.67 billion.
Gordon Tsui, managing director of Hantec Pacific, said the outlook for HKEX in the second half remains positive.
“The daily market turnover rose further in July to reach about HK$100 billion a day which would bring in better revenue to the HKEX. The bond connect and gold futures started trading from early July and that also brings in more revenue,” Tsui said.
“The risk would be interest rate movement as a weak Hong Kong dollar against the US dollar this week may lead banks to raise their commercial interest rates. If that happened, it would hurt the performance of the stock market and hence the profitability of the HKEX.”
Separately, HKEX chief executive Charles Li Xiaojia said he personally hopes to see the proposed new third board launch in the first half of next year but there is no decision yet. The exchange is having a two-month consultation until August 18 on a plan to introduce a new board to attract technology firms with dual share structures, as well as start-ups.
“We have received a lot of comments already and we expect to receive more comments before the deadline,” he said.
HKEX also continues to fight for Saudi Aramco to list in Hong Kong. The oil company is expected to be the biggest IPO in the world and Li is urging Beijing to introduce primary connect to Hong Kong, which would allow mainlanders to subscribe to IPOs in the city.
“Without primary connect, it will be very difficult, if not impossible, for HKEX to fight for Saudi Aramco to list [here],” Li said.