Hong Kong Bourse Rides Trading, IPO Surge to Record Profit

(Bloomberg) — Hong Kong Exchanges & Clearing Ltd. posted a 1% profit gain, benefiting from a spate of high-profile Chinese stock listings and a pick-up in trading as the pandemic and political tensions stoked volatility.

First-half net income rose to a record HK$5.23 billion ($674 million), on the back of a 13% gain in core revenue, the exchange said Wednesday. Investments slumped 45% in the period, dragging down the result.

Investors have been flocking to the bourse this year, propelling its share price up by almost 50%. A number of Chinese technology enterprises have floated shares in the city amid concern over their U.S. listings. Stock trading jumped 33% in the first half, helped by an increase in inflows from the mainland.

“High cash market turnover, record stock connect volumes and a notable number of IPOs, including a number of sizable secondary listings, offset softness in investment income, which was impacted by swings in global portfolio valuations during the period,” Chief Executive Officer Charles Li said in the statement.

The shares slid 0.9% to HK$376 as of 2:37 p.m. in Hong Kong, largely matching a decline in the benchmark Hang Seng Index.

Analysts at Citigroup Inc. pointed to core revenue falling below consensus estimates in the second quarter and declines in trading and income from the China link from the first three months of the year. The bourse got a boost as investments recovered in the quarter, meaning there will be only “very modest consensus EPS earnings upgrades,” Citi said in a note.

But the strategy of tying the exchange more tightly to the mainland, a goal of Li before he is scheduled to step down next year, is expected to pay off over at least the next few years. The exchange is set to welcome a mega listing soon by Chinese billionaire Jack Ma’s Ant Group, which could be among the biggest such deals ever.

Total raised equity funds in both IPOs and secondary listings rose 56% to HK$232.3 billion in the period. The bourse’s link to mainland exchanges had record flows both southbound and northbound, generating HK$743 million in the first six months of 2020.

The market is betting that HKEx’s prospects will be boosted by an influx of tech giants over the next two to three years, which will drive trading, said Alex Wong, asset management director at Ample Capital Ltd.

“Interim result hardly matters now, not even 2021’s performance,” he said before Wednesday’s report. “The market is already looking at HKEx in terms of its 2022 prospects.”

Victor Wang, an analyst at China International Capital Corp., and his team predicted trading will rise 10% this year and 24% next, hitting an average daily of HK$150 billion in 2021.

Even so, the fraying relationship between the U.S. and China has stoked uncertainty. President Donald Trump rescinded the city’s special trading status and sanctioned 11 Hong Kong and mainland officials over their roles in enforcing the controversial national security law. China is also trying to build up its own local exchanges, which is likely to pose a rising challenge over coming years.

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