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Edited Transcript of 388.HK earnings conference call or presentation 14-Aug-19 9:30am GMT

Half Year 2019 Hong Kong Exchanges and Clearing Ltd Earnings Presentation

Hong Kong Sep 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Hong Kong Exchanges and Clearing Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John Patrick Killian

Hong Kong Exchanges and Clearing Limited - Group CFO

* Xiaojia Li

Hong Kong Exchanges and Clearing Limited - CEO & Executive Director

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Conference Call Participants

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* Gurpreet Singh Sahi

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Sharnie Wong;Bloomberg Intelligence;Senior Equities Research Analyst

* Tsz Ho Wong

Citigroup Inc, Research Division - Research Analyst

* York Pun

HSBC, Research Division - Analyst

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Presentation

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Unidentified Company Representative, [1]

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Good afternoon, everyone. Welcome to HKEX Group First Half 2019 Interim Results. Here with us today is Charles Li, Chief Executive of HKEX Group; and John Killian, Group CFO.

For the next 1 hour, we'll go through the first half interim results -- financial results, business and strategy update, followed by Q&A session. Please also note there is a webcast being -- at the IR session of corporate website, and a replay will be available from tomorrow.

And now I'd like to welcome Charles Li to present first half results and financial updates.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [2]

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Thank you. Thank you for making time and this is such a late timing. This year, we're trying to do it just with the analysts rather than with the media.

They love to do it with you guys, but I know many of you don't like to do it with them. So unfortunately, we just have to do a little bit later. So we're trying to be fast, so that you can get back to do more important things in your life. I think you know us quite well. And instead of for me to go through a lot of the details, why don't I just get the CFO, John, to run you through quickly on the numbers, and then you can get that out of the way. And then we come back and spend a couple of minutes about the broader picture and then we just directly go into Q&A. Great. Thank you, John.

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John Patrick Killian, Hong Kong Exchanges and Clearing Limited - Group CFO [3]

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Thank you, Charles. So I think all of you have had a look at this already. Some of the key highlights that we have there is a revenue of $8.6 billion, up 5%; NPAT, up 5.2 -- of $5.2 billion is up 3%. That is a record. So our records do continue, which is good news. We have had softness in the cash market, headline ADT, down 23%. But I want to highlight then, I'm sure you've probably already looked at this, this -- there tends to be a global malaise going on.

There's quite a bit of risk-off. You see this across the board. If you look at the U.S., that has actually kind of remained pretty, pretty buoyant there. You might have seen some emerging markets kind of rebound a little bit on their volumes because they were at historical lows equivalently a year ago. But broadly, when you look at the U.K. and you look at Europe, you can see there's pretty much consistent volumes, and even in Japan, Taiwan, et cetera, the volumes are down across the board there.

Our Futures Exchanges' ADV up 2% is a great story there because that's really kind of holding up our revenue performance. These are typically our higher-priced Futures HSI, et cetera, typically about $7 a contract there. We've been averaging close to 1 million ADV. Now we had a 1.6 million ADV day, a little while ago, that's literally double what you would have seen only 18 months ago. So our derivatives continue to be a good foundation and growing, and we have good news coming with the A-share Futures. LME was down 6% ADV, but the OTC booking fee has actually kind of made up for the difference as well as the market data.

Okay. The pipeline is good, we're going to have some more detail on that later as well. And the Stock Connect revenue over $0.5 billion at this point and that should continue. We have another MSCI inclusion later this month on the 27th, they'll go from 10% to 15% weighting. And then later in the year from 15% to 20%, that'll look -- I guess we're estimating the number of $66 billion in through MSCI, but we also have S&P, and we have FTSE Russell coming also at a similar sort of a weighting, 20%, 25%. So that's at least smaller scale that's for at least another $10 billion coming in the very near future.

And of course, some good news on the southbound side, which is including the WVR for the southbounds right. So Mainland can now access Xiaomi and Meituan, et cetera. And of course, our Bond Connect continues to storm ahead. In fact, we had a very big day, just about $18 billion in a single day through Bond Connect, which is literally double what you had normally -- what we had normally have seen. And that's up 100% year-over-year.

Commodities, solid contribution from there. And we've been managing the costs on that side. But we also have plans later this year and into next year around increasing the fees. And of course, we had our acquisition of Ronghui Tongjin in Shenzen, and we just started to onboard them over the last few weeks. So a lot happening on that side. You can see the numbers up 5% to $8.6 billion, EBITDA up 6% to $6.6 billion, EPS at $4.16. And the board approved this morning, the 90% dividend of $3.72 as we normally do.

Let's get into a little bit of the details. You can see our volumes down 90 -- to 98 billion, yet the revenue has stayed from that -- from the net investment income, you can see -- I'll give you some of the details on that in a moment, but also to highlight that our depository fees are up. And that's -- as we continue to grow as an exchange, and we have more companies that are listed, and we have more board lots to manage, then the fees move right along with it, and they do have more and more of a material impact year-over-year.

Now on the expenses, we show the 2%, but we use -- show also the impact of IFRS 16. So I can show you the like-for-like, which is up 10%. Now this is the salary increases that we had at the end of last year. It's also the annualized impact of the increase in headcount that we had leading into last year. And then we've been basically holding very steady on that, and we expect to hold very steady on our expenses, not only for the remainder of this year, but actually for the foreseeable future if we expect that the China-U. S. relations continue to keep people on the sidelines. So we're planning for the worst and hope for the best.

On our EBITDA, 77% like-for-like basis, 75% and the impact of IFRS 16. Just a reminder, that IFRS 16 is moving your leases from OpEx to a right-of-use asset that is financed and depreciated. So you see that impact basically below the line. So it doesn't impact your bottom line much at all.

And you can see our historical trend line, so we are -- the 2 quarters, quarter-over-quarter are literally, almost identical. The big difference being in the first quarter, we had more net investment income from the external portfolio.

In the second quarter, we had the seasonal depository fees, but otherwise, it was very much like-for-like, and from pretty much what you had seen was, like I mentioned globally, as you've seen volumes kind of come off, you've also seen vols come off as well.

So what do we do is we manage the red line, which is our expenses and making sure that we've got that well in hand.

When we look at our segments, in spite of the 23% decrease in equities, the difference was 11% year-over-year. So we have had more listing fees, and there is a very strong pipeline for listing fees, and we've actually had more forfeiture. So the forfeitures result from a number of reasons. We've had some companies that simply do not meet our listing standards. We have some companies that felt like the market was choppy globally, it wasn't a time to go to market. So they're pausing. But in any case, we know that the pipeline is very strong. So it's only a matter of time before that comes, but that will continue to increase on the listing side.

On the equity and financial derivatives, again impacted by the volumes, but also only -- overall, only 6%, as I mentioned, you really see the strong performance from our Futures.

If you look at the volatility, it's a lot more similar recently to what it was in 2017, yet our volumes are actually staying as high as -- almost as high as they were last year. So you can imagine what that means is when the volatility starts to pick up, you can see a tremendous boost then coming from our derivatives, as I mentioned, just recently, the 1.6 million contracts in a single day is something that hopefully, you can expect to see going forward as volatility increases. But obviously, we're very happy that the derivatives are that strong foundation for us.

On the commodity side, impact overall, even though the volumes were down 6%, the difference was only 2% because the OTC booking fees, but also market data. And as I mentioned earlier, we're working with the market participants there in London about fee increases later this year or next.

On the post-trade side, it's actually up 4%. And largely, it's investment income. I have some detail about that coming shortly, but also this impact that I mentioned before around the depository fees.

And as you can see now, we're starting to get a significant increase on technology, so up 14%. So couple of factors there. One is our monthly throttle fees of $2,000 each is extremely popular. And so that's having a positive impact on the growth of our technology segment, but also the new China Connect Central gateway, which is a lot slicker, easier way of connecting to the exchange is also very popular with the exchange participants. So they're driving the revenues there. And now, lastly, is that really corporate items is the net investment income, which I'll go into right now.

Okay. We have a breakout here, which shows you the composition of net investment income. If you really look at the top left-hand box, corporate funds and then the third box, margin funds. That's really the ones that we'll have to really keep the most liquid and lot -- most of the income there is actually falls in the category of the cash and bank deposits and the debt securities. So that's been about a $200 million increase year-over-year. 66% of that increase was the treasury team being a lot more proactive with our depository banks here in Hong Kong, ensuring that we have liquidity available for them on a [T0T plus 1] basis, getting preferential rates, and we are typically getting anywhere from 1.7%, 1.8% and 2%. And on the debt securities, we have U.S. treasuries, but we also have short-term investment-grade notes that are making about 2.6%. And then the collective investment schemes is up 6.9%, so I just want to put that into context. So the MSCI World Index for the first half was up 16.7%. The 10-year treasury was up 10.5%. Investment-grade credit was up 7.5%. And the basket of treasuries was up 5%. So our portfolio is positioned, you can see at 6.9% at a very conservative -- and also at a very liquid manner, and we continue to manage that in a very conservative way. And that was all done with a lower average fund size, and that's simply because of the quietness in the market overall and in volume as well as volatility.

Okay. On Cash Equities segment, margins, 84% still enviable margins on the cash equities side, and in spite of the decrease in volumes. Equity derivatives, again, 82%, very enviable margins there. And commodity is actually up 5%. There is the OTC booking fees and the impact of the leases.

But overall, we've been managing their expenses extremely tightly as it's a very mature market. On post trade, you can see we're starting to increase their 4% margin to 87%. Obviously, I mentioned about the investment income, but also the depository fees are -- have a positive impact there. And lastly, but at least our technology, while it looks like it's down, and I showed you earlier that the revenues are increasing, what we have in this segment now is the costs surrounded are in Innovation Lab. And just a few comments on the Innovation Lab. We've celebrated our 1-year anniversary a few weeks ago. We literally have a pipeline of a 100 different initiatives underway. That could take us a number of years, but pretty much involving every single recent technology development that you can imagine, whether it be optical character reading, machine learning, robotics, blockchain, every one of these initiatives so far has started to add and improve the productivity, but also the -- it's also improving our client experience. So one of the big things that we did was launch the Client Connect. That has reduced interactions with the Exchange participants, 30,000, what used to be paper forms and printouts and chops and signatures can now actually be done on your cell phone. So these things are having a tremendous impact. For example, it took -- used to take us most of the year to read all of the annual reports from the companies that are listed on the exchange and make sure that they're actually meeting our disclosure requirements, around 50 different disclosure requirements. That would actually typically take about 9 months' man-hours, in total, now you can do that in a day. And so these technologies are fantastic because not only do they improve productivity, enables you to handle more volume, but it's also not expensive to roll these things out.

And so that part -- that process in spite of our cost controls that are underway. In fact, what we wanted to a speed up our adoption of these technologies to also protect us from the downside and make us less vulnerable to headcount needs.

Okay. And on the operating expenses, as mentioned, this is really an annualized impact, exactly what we had expected coming into this year of salary increases last year, plus we had grown headcount through that period, and we expect them to level set that for the foreseeable future, including into 2020.

IT & computer maintenance, where the maintenance expenses for the whole new -- in the whole -- our whole backbone network and pretty much everything that we do from front-to-back is through an upgrade process. So you'll always continue for us to see a -- you'll continue to see from us an investment in our IT, and that will only speed our journey. Now our premises expenses, what we did was just show the impact of IFRS 16 because we basically moved that depreciation and amortization. But what's happened is our rent from IFC is -- it was higher than the rent in Exchange Square. So we're actually seeing the benefits of the lower rent, typically about $70 million, almost $80 million per annum.

Professional fees. I would just caution that, that's really a timing difference. And so we do have ongoing things with accounting firms and law firms, et cetera, and consultants and our technology journey.

So the professional fees can -- is really more of a timing difference. I would expect that to annualize similar to last year, if not even, I would say, more than last year.

And then other operating expenses are really product and marketing. And so you saw recently the LME Dollar Minis that went live last week. We've got plenty of things in the pipeline, A-share, MSCI Futures. So you'll see an increase in there, but all for very visible items.

Okay. We want to bring Charles back up for the strategic update.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [4]

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Okay. Just to very quickly look at this page, and then we'll open it up. As you can see that the market is really volatile up and down. And this year, first half is reasonably okay. We thought it was going to be a lot worse, but it turned out to be quite strong. And then July kicked in and really started to give us some doubt and then August coming back up again.

Derivative is really very important in the sense that has for the first time over many years now becoming a very strong stabilizer of our earnings because the product suites, the ecosystem that has been developed is such that it has been very resilient and is becoming increasingly more important. We used to be very heavily dependent on cash equity, but derivative ADV is becoming very important. Commodity over time will become important. But right now, LME is -- consistently just contribute to anywhere between 12% to 15%. I think with that, I don't think I want to go through any of the detailed -- are we going to share this presentation to them, physically the copy, so they will have it, right? If they can have it, so you will see all the things we're going to be -- okay. So maybe I just -- what's going on? I don't want to have a thank you. I do want to thank you, but I don't want this thank you to be here. Okay. Somebody's controlling it. It does not work.

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Unidentified Company Representative, [5]

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(inaudible)

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [6]

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Yes. Okay. Okay. And just to here. And maybe just open up for questions, we can get jump back for any detailed financial questions you have. But otherwise, I'd be very happy to talk about things that you want to talk about.

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Questions and Answers

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Unidentified Company Representative, [1]

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(Operator Instructions) First question from York Pun from HSBC.

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York Pun, HSBC, Research Division - Analyst [2]

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I only have 2 questions today. One is that I (inaudible) that you have talked about recently the turnover has been really weak. And you are looking into the reason. Have you found out the reason? And if yes, can you please share with us? So that's the first question. The second thing is, I think we talk about this. How do we benefit from the STAR Market in China? Because this seems to be taking a lot of the new economy IPO away. I know you are talking about the (inaudible) companies to be included into the Stock Connect.

But apart from this, how -- is there anything we can also benefit from the goal in the STAR Market?

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [3]

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I think on turnover, I don't really -- we try very hard. We look at it all the time, and I'm very obsessed with it every day for the last 10 years, trying to really figure out what's the trigger? What's really is the causal relationship? It define the efforts. And -- but I think one consistent relationship, co-relationship that we see in more recent years, particularly through Connect is really the relationship with the Asia domestic turnover. There's a pretty strong co-relationship in terms of directions. But generally speaking, in a weak market, we are anywhere between 1/5 of their combined market, ADT in a very strong market, we tend to be there 1/6 or 1/7 of their market. So I think that's one level of correlations that seems to be more consistently there. So I think lately, they also seem to be struggling with a lot of their investors.

And I think combining with your second question, I guess this thing is not reported, is not like a media, right? That can be a little bit more -- no? Okay. They are giving me this. Okay. I think the -- it remains to be seen as how STAR is -- you think STAR is a competition from Hong Kong Exchange perspective because some of the new economy IPOs may want to get listed. In many ways, it's a much, much more massive competition to their own other boards and Shenzhen. And if you look at it, all that STAR, everything went up 200%. It's just -- I just don't know how can that be possible that every company is so different. It's all pre-revenue or pre-profit and pre this and that. And some of them -- and they're all consistently 200% up. And then you look at the main board in Shanghai and also the Shenzhen board, it really just struggles. And the level is pretty down. It's already coming down to 27 handles, 28 handles now with all the stuff going on, but more importantly, volume is really just down significantly in the [SO] market.

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York Pun, HSBC, Research Division - Analyst [4]

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(inaudible)

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [5]

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Yes.

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York Pun, HSBC, Research Division - Analyst [6]

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(inaudible)

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [7]

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No, it's not working.

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John Patrick Killian, Hong Kong Exchanges and Clearing Limited - Group CFO [8]

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For our cash ADT, you really have to separate it into 3 components. There's single stock, there's warrants and there's ETFs. And then in our derivatives side, there's futures, mainly index futures and options, mainly single stock options. So what we see in periods where the market is relatively risk-off, mainly because of market sentiment, you see the single stock and the warrants and the single stock options, all the single stock products drop quite dramatically. But very often in those risk-off environment like we saw last night, our futures just took off. And if you look at the -- because of the volatility. So we actually have this counter-cyclical element going on finally, which gives us not a direct linkage to the cash ADT, and that's what we saw last year, what we saw this year. ADT is down 23%. But yet, even revenues without net investment income were not down 23%. They were probably whatever, down 10%, 12%. And ETFs is an area, I think we're quite optimistic about. We made a number of market structure changes, the most recent one being buy-in exemptions that the issuers can now use for creation and redemption and also, the 2x leverage inverse.

And so this is an area that actually has been relatively stable or even growing in a market that's been coming down. So I hope that adds some color.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [9]

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I think back on the STAR market, I really don't see too much of a competition from a listing perspective. And we're not terribly obsessed about listing. Listing will come, and they will not -- they come and not coming. There's -- their contribution to ADT is reasonably small, but it's just like a Hollywood stars, you tend to talk about who is playing which movie. But I care about whether you get -- whether the box office is going to get, which movie is going to generate the better box office. And I think -- but the -- remain to be seen as exactly what they're going to do with the new STAR board, because with that kind of valuation, it's almost the A-share is returning, or at least the STAR is returning to A-share's glorious days of very significant valuation premium, but what do they do now?

Do they really open up as a registration system that whoever comes, they will actually allow them to list? And -- because if they do that, who's going to list in the old board? And what is going to happen to the old board? But if -- and also, if everybody is able to be indeed freely coming to STAR, whether or not they can sustain that kind of a valuation because it's just the batches. They have this artificial batches, and then they could just hold onto the batches, and then they wait until the next batch. The problem -- the moment they start to do that, anytime they pull the trigger, they have to understand and they have to really evaluate what this going to do for the underlying secondary market. So hopefully, they can get out of that mentality.

I haven't seen the second batches coming in yet. I don't know how they're going to do. But it's a very difficult for people to conceptually, philosophically think about this market, the main board, the Shenzhen board, which is supposed to be safer, more stable, but struggling.

And then this is supposed to be highly risky companies, but all consistent in trading at this sort of elevated level and exactly how that is going to work. I think there is so much obsession to make sure the STAR is a success. I think broadly speaking, it has been a good success because there has not been any hiccups in the process. And the fear that it would be really cold and very icily received, that didn't really pan out. People think it's going to be totally out of whack crazy, that didn't seem to pan out. It did go up 200%, but they all go up to 200% and very consistent, seems to be a reasonably managed good offering and a launch. So I think it's a good success. So there's a big leap of -- a big relief because this is all coming down from the Mr. Xi. So nobody wanted to screw this up. So now it looks like it's a good launch. But I'm not hearing too much about what next now.

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Unidentified Company Representative, [10]

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Okay. May we have our next question...

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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It's Gurpreet Sahi with Goldman Sachs. I have 2 questions. First is on revenue and cost.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [12]

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On what?

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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On revenue and cost. What we saw in the first half that revenue overall was up. But if you exclude the investment income, it was down. So my first question is when management does the planning or budgeting, looking at forecastable revenue and then budgeting for cost increases, do you look at revenue excluding or including investment income? That's the first one.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [14]

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Just only the revenue, not the cost side, do you mean that?

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

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Yes. I mean when you -- like as...

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [16]

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When you -- when we budget, we generally -- I don't know what methodology, John, you use for investment income budgeting, but even for our revenue budget, to be perfectly honest, it's a guesswork, right. Because it's unlike a regular company budgeting. You know what -- how much product you're going to sell, generally you want it to achieve certain pricing. So you're able to essentially plan how much sales you wanted to do. And you can -- we actually have to almost pick a number and then you budget from that basis. So there's not a whole lot you can really do. I mean the number you pick as underlying assumption for your revenue, and you really don't have any -- you do the best you can and to come up with it.

I thought you were talking about when you're budgeting, how do you budget your margins. And when you start to see your ADT not really achieving that -- how much aggressive that you can really work on your cost. With the business with 70 -- 77 in our first half now, we can be doing it for free. And there's not a whole out where you can go and down in terms of cost, because the operating leverage is already so high, and the margin is already so high. And we do need to make investment. But in this environment, when both the political environment, the macroeconomic environment is so challenging, we are aggressively looking at things about the things that we must have, or the things nice to have. Are we able to do it? But on the other side, critical investment decisions, we're still trying not to really touch it. If we have convictions that these are the right thing to do and is going to eventually pay back, and we shouldn't really be -- keep on changing our budget and a cost basis, just depending on the monthly revenue numbers.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [17]

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Okay. And then a second one, maybe for John. The investment income, we saw that the CIS got more money. I thought the message was last time around that we don't want to put more money to the collective investment scheme. And in the first half, we saw $1.6 billion. So can you update us on, the group has a very good cash-generating machine, and then you retain 10% of it or maybe more after script. So how do you allocate that between CIS and the new technology spend and then maybe small bolt-on acquisitions?

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John Patrick Killian, Hong Kong Exchanges and Clearing Limited - Group CFO [18]

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So the decision to increase the external portfolio was made in the fourth quarter of last year. And then what it does is it does take us time to make sure we position and deploy that. So actually, we hadn't made any decision this year to increase. And all the decisions that we made around the external portfolio was to keep it as liquid and as high-quality as possible.

In our view, U.S. treasuries tends to be that place, even though they've actually rallied a lot. As you can see, they're still the highest yielding, highest quality government debt that's out there. So that's basically our mindset around that. And then -- and so basically, that's basically the plan and we don't have any plans further than that. Sorry, what was your...

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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Medium-term usage of extra cash generated between CIS, technology spend and bolt-on acquisitions.

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John Patrick Killian, Hong Kong Exchanges and Clearing Limited - Group CFO [20]

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We can't really talk about acquisitions, but those are always opportunistic at the end of the day. So and so -- but actually, and our current mindset is really just to hold steady. I don't think anybody right now is thinking about leaping into emerging markets equities or anything like that. So basically, just like everybody else on the planet, we're all just pausing.

And then if there's any sort of strategic opportunity, where it might be partnering with a technology company, et cetera, like we just did, then of course, we would have the funds available to do that.

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Unidentified Company Representative, [21]

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The next question from Sam, Citi.

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Tsz Ho Wong, Citigroup Inc, Research Division - Research Analyst [22]

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This is Sam Wong from Citi Research. I have 2 questions, if I may. First of all, can we have a bit more clarity on the timing of the MSCI A-share Futures launch? And then secondly, we noticed that Hong Kong Exchange has been increasingly active in FinTech investment in general. You guys acquired the majority stake in the FinTech start-up in Shenzhen. And then you also participated in one of the virtual banking JV very recently. So what is -- like how Hong Kong Exchange actually see this investment? Are they like simply financial investments? Or how are you going to connect all the dots together?

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [23]

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Yes. I think MSCI Index Futures is a story of sadness for me because we have been thinking about it for so long. And every year, we think we're going to do it this year, and I continue to think we're going to do it this year. All the stars are lined up, all the ducks there, and we just need the CSRC to give us the okay. And I think we have changes of chairmanship. We have number of other priorities they have. I think generally, the last -- at least before STAR was launched, all the obsession and preoccupation is there. Every other conversation were -- generally speaking were sort of shelved and tabled. Now with that is over, we are hoping that this will be allowed. I think what really psychologically very, very difficult for them is when the stock at this sort of level, this -- how have this concept derivatives can drive market down further?

But the problem is, I have also experienced with them when the market was quite high, and then they can say oh, it's going to get down, and then we're going to be back in and due to land again.

So I know I'm giving you a little bit of my sentiments rather than real information because I don't have real information. And I think it's all -- everybody said we want to do it, all the senior leaders said it's the right thing to do. There was no real opposition, but just people pulling that trigger seems to be difficult for them to do. And I still hope that we can do it this year.

On your second question, I think we're really very, very much focused in FinTech. Here is really 3 level of things that we're looking at it. At the basic level, we have Innovation Lab. Essentially, we're looking for quick, easy solutions to solve our current business problems. We have a lot of problems and processes and the efficiencies and the old way of doing things that can be quickly fixed but not by our own IT people, right, not by going back to our own vendor system, and it take forever for us to choose the vendor. So the Innovation Lab is essentially going around and find easy solutions, either a startup or either a small company already have something that can solve our problems.

And sometimes, we put some of the money there to lock the relationship, we're not really talking about the investment for purposes of return. It's about locking a relationship. Putting all -- we sometimes decided, maybe just put the CapEx there because to get their guys to come and fix this problem, and then they will be gone. And then this is becoming a CapEx rather than hiring a bunch of guys, do something and then later on have to stay here and find something else for them to do. So that level is more in the low-hanging fruit, process optimization and the improvement of system improvement.

The second layer is really about a new way of doing things that allow us to do things a lot better. A lot of our broker-dealer participants are facing with a lot of challenges of refreshing their technologies now. A lot of these technologies are bells and whistles, not core systems. The bells and whistles, they have built over the years to service their clients on different various services. Everybody were doing that. Now with the cost environment, nobody wants to pay for the services anymore.

So as a result, but they still need the services and they have charged a lot of money over the years. Now with the prospect of having to reinvest so that this process can continue to be delivered and with the client unwilling to pay for it. So many of them started to really asking questions, and we are looking at them to see whether or not we could help consolidate some of those functions and be able to provide a back office, a mid-office solutions for everybody, and then we can still charge a very good return for us, but for the client, it's actually a lot smaller because we are able to do it for everybody rather than everybody else is charging.

So there are many decisions we're making there that really require us to get out of our current in-house IT system and to be able to deliver on many of these new possibilities, including new technologies. For example, we have a POC working on northbound bond and a northbound Stock Connect, using distributed and ledger technology. Here, we actually find one business scene, where we can actually use that technology. So then we're thinking of either buy that technology, or invest in that company, or we bought this Shenzhen technology company. So that's the second layer of really new businesses, a new way of doing our current businesses and building maybe a distribution, another distribution platform for fund distribution, for example. Those are all the things that we're looking at it to see whether or not make a lot of sense for us to really get in there, either taking over from others or getting into new areas. But using technology to get in there rather than the old regulated space. The last bit is the most exciting, but it's also most uncertain part of the FinTech. There are 2 big ideas. One is data as a marketplace. Particularly, we're going to start in the medical data space, essentially building an encryption or a data billing system where actually data in China, particularly starting with medical data can actually be shared and monetized, and we are able to provide that platform for us to be able to using technology as a way and partnership with us being the organizer of the market to get that.

There's so much data available. There are so many great areas of people misusing the data, and there's so much demand for data. And there's so much money that can pay for the data. It just takes somebody to figure out a way to bring everybody together, and the Exchange is the most natural part to do that. So that's a big idea. It doesn't take a lot of money for us to do it. But if it does work out, we may -- that could be a very big idea. And there, we may put maybe HKD 10 million, HKD 50 million, into a particular technology company as a partner in doing that.

Another big idea is how to do fixed income in a different way, in a data-driven, AI-driven manner. So that's another big idea. And so those are things that we think in our strategy. If you look at our strategy, anchored in China is pretty clear. We basically have to continue to build access to China. We need to be globally competitive, including possible global footprint and also having much more global people coming to trade in Hong Kong and then building ETFs and products for other exposures.

But technology is the big part. We're using technology to essentially get into new areas like FIC, which we don't have the DNA and see whether or not there, we can use technology standing on shoulders of giants, technology giants like (inaudible) and Ali and others to basically figure out how to do a way that in the future. All these people are digging graves for the Exchange, and we just want to join the digging and figure out there's a nice bed in that hole that we can also be comfortable to be there when they really begin to disrupt our businesses. And in the Tencent Fusion investment, that company could be worth a lot of money. So we have huge confidence that with ICBC, with us, with (inaudible), we can make something big happen. I don't want to talk about what they can do, let them talk about it.

We're going to -- that stake is going to be worth a lot of money. But the reason we're also making that investment is that also lockup in the partnership, where are they going to use our physical gold platform. And if that becoming a very consistent physical gold purchaser because gold -- they're using gold to back up their other ambitions that is on the widely distributed basis. So Chinese people ultimately buying physical gold in our gold vault and to be able to trade them and then Gold Futures is going to become such a big product over time. So I think there it's -- their business is going to help our current business and if their business does take off, our stake there is going to be worth a lot of money. But it's not really because of the return as the VC investor that we're putting our money into play. It's really about using technology to come back and see whether they can help us gain a competitive advantage.

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Unidentified Company Representative, [24]

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Okay. May I have the next question?

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [25]

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Good. Nobody asked political question, which is good.

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Sharnie Wong;Bloomberg Intelligence;Senior Equities Research Analyst, [26]

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I'm Sharnie Wong from Bloomberg ...

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [27]

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I'm not inviting one.

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Sharnie Wong;Bloomberg Intelligence;Senior Equities Research Analyst, [28]

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I'm Sharnie Wong from Bloomberg Intelligence. I have a follow-up question on the MSCI A-share futures. Do you know what is holding back in terms of the regulators granting that approval? And also there have been reports that China -- they might look to launch their own product, although that's not confirmed. Have you heard anything on that front?

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [29]

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No, they already have their products -- and in CFFEX. And I think we are very open with basically, so that we can do a Connect model with you, bring international liquidity to your liquidity pool. Or we can allow you to come here to launch your own contract, and we do clearing for you if you wanted your contract to be internationally relevant. And we also said, we want to launch another index -- future index futures like MSCI, but if you want MSCI to also launch one inside China, go ahead, we can do anything and everything. I think they just -- I think for A50, they basically don't like it. But on the other hand, it's not anybody's decision to have allowed A50 at the time.

So the problem today is that there is a fear that this any offshore futures product, the tail is going to wag the dog, and they still have limited confidence in the dog. We keep telling them, the tail is not going to really rock the dog, the dog is going to lead the tail, but the dog is so insecure, that is afraid of its own tail. And we just have to wait until they feel more comfortable. I don't really -- I know who is holding this, who is holding this up or who is -- who liked it, who didn't like it, and there was a conversation. But I really don't want to share with you because also, it doesn't really help you. It doesn't give you anything particularly insightful. It's just the typical Chinese domestic regulatory pettiness, but it is what it is. So I'm sorry, I can't give you more juice on that.

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Unidentified Company Representative, [30]

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Okay. Given the time constraint, can we have the last 2 questions?

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited - CEO & Executive Director [31]

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We don't even have 1 and you said last 2 questions. It's okay. I think it's getting late. You need to get home, just in case a protest is somewhere. Yes. Okay. Thank you very much, really feel free...

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Unidentified Company Representative, [32]

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Thank you for coming. Hope to see you soon.