HKEX Suffers Profit Decline as China Crackdown Roils Market

(Bloomberg) -- Hong Kong’s stock exchange reported its second consecutive quarterly profit decline against a backdrop of a widening crackdown by China on a broad range of sectors that roiled markets and triggered delays of major initial public offerings.

Dragged down by falling investments, net income at Hong Kong Exchanges & Clearing Ltd. fell to HK$3.25 billion ($418 million) in the three months through September from HK$3.35 billion a year earlier, according to the bourse. Revenue was flat in the quarter, while the amount raised in initial public offerings slid 40% from a year earlier.    

“HKEX had a strong first nine months of 2021, despite a turbulent macro backdrop,” said Nicolas Aguzin, the exchange’s chief executive officer, in a statement.  

Investment sentiment was clouded as China’s scrutiny over everything from technology to online tutors and real estate spurred a selloff that at its extreme wiped more than $1 trillion from the value of Chinese stocks globally. Hong Kong’s primary-listing market is going through a dry patch as several potential billion-dollar IPOs, including those by NetEase Inc.’s music unit and electric car-maker Nio Inc., were put on hold on uncertainty over Beijing’s stance toward offshore listings.

The amount raised in IPOs slid 40% in the quarter from a year earlier, though the bourse said that it raised a record HK$286 billion in the first nine months. Trading, clearing and settlement, data and overall listing fees all climbed.

Meanwhile, the exchange’s introduction of MSCI A50 futures, a long-awaited alternative for hedging Chinese stocks versus rival Singapore, may boost earnings prospects. Credit Suisse estimated that HKEX’s new product will contribute about 2% to its total revenue by 2023, as historically a new contract takes six to 12 months to build up liquidity.

During the first week of trading since its Oct. 18 debut, an average of 2,579 contracts traded a day, according to data compiled by Bloomberg. 

“The adjacencies from futures to warrants, index arbitrage and the like should be especially pronounced at HKEX, with a large retail investor base,” JPMorgan’s analysts led by Harsh Wardhan Modi wrote in an Oct. 13 note. They expected the bourse to trade at higher price-to-earnings ratio.

Another catalyst for HKEX’s growth hinges on China’s plans on how to regulate overseas IPOs. The country’s cybersecurity watchdog in July required companies seeking to list abroad to get pre-approval to ensure they comply with local laws. Those planning to go public in Hong Kong may be exempted, Bloomberg News reported earlier.

Merrill Lynch expected an announcement by the end of this year on whether HKEX would be exempt or partially exempt from its tightening grip, which will be “key to its IPO pipeline to 2022.” 

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