Hong Kong Exchange Looks for Next Act After Record Year

A year anticipated to be full of headwinds for Hong Kong’s stock exchange turned euphoric instead. The challenge is now to add to the momentum.

Hong Kong Exchanges & Clearing Ltd. on Wednesday reported that profit rose 23% to a record HK$11.5 billion ($1.48 billion) in 2020.

Incoming Chief Executive Officer Nicolas Aguzin is preparing to take the helm after a year when trading jumped 60%, the bourse saw the biggest initial public offering flood in a decade and inflows of cash through links to Shanghai and Shenzhen doubled. Political tension drove a bevy of high-profile Chinese firms to find a new home in Hong Kong on concern they would be booted off U.S. exchanges, their long-time source for funding.

The boom has continued in 2021 and investors have cheered. The stock is up 150% in the past 11 months. The bourse is now the world’s biggest in terms of market value, far bigger than its London rival and four times as big as Nasdaq Inc., for example.

The exchange’s shares fell on Wednesday amid reports the city will raise the stamp duty on stock trading for the first time since 1993, potentially cutting trading volumes. The shares were down 5.4% as of noon.

Hong Kong Exchange Looks for Next Act After Record Year

“HKEX faces several uncertainties,” said Alex Wong, director of asset management at Ample Capital Ltd., citing a push to open up to yuan-denominated products and getting further links to China, such as ETF Connect and Primary Connect.

Aguzin, who’s slated to take over in May but still needs regulatory approval, faces pressure to build on the legacy of his successor Charles Li, who became known as “Mr. China” for convincing Beijing to set up mainland stock trading links, which now account for 10% of the exchange’s revenue.

The appointment of Argentina-native has been met with skepticism in the city because of his outsider status. Being the first non-Chinese CEO, his ability to navigate the halls of power in Beijing, has come under question.

That could now largely fall on Chairman Laura Cha, who as the former vice chairman of China Securities Regulatory Commission, is well connected in the country. But Cha is also seen as less likely than Li to try to push reforms on Beijing.

Plans to allow mainland investing in IPOs and trading in futures of Chinese shares have so far seen little progress. In an effort to build up its own exchanges, Beijing has also so far nixed allowing investments in dual listed companies -- technology giants such as JD.com Inc., Alibaba Group Holding Ltd. and NetEase Inc.

“As H.K. and mainland China markets become increasingly connected, the relationships of the company and the new CEO with mainland China regulators would increasingly matter to further broaden the mutual market access,” said Yafei Tian, an analyst at Citigroup Inc., in a recent report.

The appointment of a veteran investment banker rekindled some anticipation that the bourse would again try its hand at acquisitions. Plans to internationalize have largely been put on hold since Li famously embarked on a failed bid to buy the London Stock Exchange in 2019.

“There’s a broad array of organic and inorganic growth options in front of us,” said Fred Hu, a board member and founder of Primavera Capital Ltd. “And Aguzin is well positioned to take HKEX into the future, to further deepen the connectivity with China but also connectivity with the rest of the world.”

Analysts for now are bullish the exchange can continue to ride the current boom of more mega-IPOs. It could also get a boost from a proposal by Hang Seng to expand the city’s benchmark index from the current 50.

That could propel the share price above HK$600, according to Steven Leung, executive director at UOB Kay Hian (Hong Kong). China International Capital Corp. has a target price of HK$634.

“IPOs and the daily turnover level matters more to the HKEX share price than the new CEO’s strategy, which is more mid- to long-term,” said Leung. Nonetheless, the exchange should explain further the decision to name a non-Chinese speaker as CEO and why it was announced before getting the regulatory approval, he said.

©2021 Bloomberg L.P.

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