Hong Kong Bourse Rides Trading, IPO Surge to Record Profit

(Bloomberg) -- Hong Kong Exchanges & Clearing Ltd. posted a 1% gain in profit, 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 on 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 firms have sold 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, fueling speculation that Beijing is seeking to stabilize the former British colony after imposing a sweeping new security law on the financial hub.

“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 being below consensus estimates when breaking out 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 tighter to China, an overarching aim of CEO Li who’s slated to step down in 2021, is expected to pay off over at least the next few years. The exchange is set to soon welcome a mega listing 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 Chinese exchanges had record flows both south 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% and 24% this year and next, respectively, hitting an average daily of HK$150 billion in 2021.

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 President Donald Trump has rescinded the city’s special trading status and sanctioned 11 Hong Kong and Chinese officials over their roles in enforcing the controversial national security law.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

©2020 Bloomberg L.P.