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Hong Kong's exchange operator posts record first-half earnings as global funds follow MSCI's weightings into China's stocks

Enoch Yiu enoch.yiu@scmp.com

Hong Kong Exchanges & Clearing Limited (HKEX) reported its best interim profit on record as more global funds used the city's cross-border investment channel to invest in Chinese stocks, after MSCI quadrupled the representation of China's A shares in its benchmarks.

Revenue rose 5 per cent to HK$8.58 billion (US$1.1 billion) in the first half, while net profit increased 3 per cent to HK$5.2 billion, the highest since the bourse was established in 2000. Second-quarter profit advanced 5 per cent to HK$2.6 billion, missing the 9 per cent growth expected by analysts in a Bloomberg poll.

International capital poured into Chinese stocks in the second quarter after MSCI announced its three-stage implementation in February, boosting income from the so-called Stock Connect investment channels by 39 per cent to a record HK$508 million, the exchange said.

"HKEX had a solid first half in 2019 despite a more challenging political and economic backdrop. Record Stock Connect revenue, a robust pipeline [of initial public offerings (IPOs)] and good returns from investment income offset some macro-driven softness in cash market volumes," said Charles Li Xiaojia, HKEX's chief executive, in a statement.

Hong Kong Exchanges & Clearing Limited's Chairwoman Laura Cha Shih May-lung (left) and chief executive officer Charles Li Xiaojia (right) handing out lai see packets on the first trading day after Lunar New Year celebrations on 8 February 2019. Photo: SCMP / Felix Wong alt=Hong Kong Exchanges & Clearing Limited's Chairwoman Laura Cha Shih May-lung (left) and chief executive officer Charles Li Xiaojia (right) handing out lai see packets on the first trading day after Lunar New Year celebrations on 8 February 2019. Photo: SCMP / Felix Wong

MSCI, the compiler of the most-followed stock market benchmarks, said in February that it would quadruple the weighting of China's A shares to 20 per cent from 5 per cent, in a three-stage process ending in November. That draws international capital, especially from passive investors, who benchmark their performances against the index.

FTSE Russell also announced to include China A shares in its global benchmark index in three tranches with the first tranche completed on June 21.

The average daily turnover of northbound funds via the Hong Kong-Shanghai Connect more than doubled in the first half to a record 23.5 billion yuan (US$3.33 billion), while the cross-border investment channel to the Shenzhen exchange soared 137 per cent to 20.4 billion yuan everyday.

As many as 84 companies raised a combined HK$71.8 billion in Hong Kong in the first six months, up 39 per cent from last year's first half, making Hong Kong the world's third-largest IPO destination.

But the outlook has soured, as an escalation in the year-long US-China trade war pushed Hong Kong's economy into a slower second quarter, while unprecedented levels of public unrest in the city dampened moods. What began as a peaceful march on June 9 by an estimated 1 million protesters against a controversial extradition law has deteriorated into mayhem and street violence, with groups occupying public space, shopping centres and " for two days this week " the Hong Kong airport.

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Three companies have postponed their IPOs since June, deferring plans to raise a combined US$11.05 billion, in a setback to HKEX's race with New York as the world's fundraising capital. The withdrawals were led by the US$9.8 billion IPO by Anheuser-Busch InBev's Budweiser Asia unit, which would have been the largest in the world this year.

The outlook is more gloomy as the July and August data showed the local market is going through its worst summer since 2012. July's listings halved to 15 companies, with their combined proceeds plummeting 57 per cent to US$1.65 billion, while a single company is scheduled to go to market in August.

"The outlook for the second half is pessimistic, due to downturns in both IPOs and the stock market's turnover," said Hantec Pacific's managing director Gordon Tsui Luen-on.

Squeezed by shrinking trading income, Hong Kong's 27,327 licensed securities traders in 594 firms are likely to be cut by 10 per cent, brokers said.

The average daily turnover on the Hong Kong exchange plunged 31 per cent in the first quarter, dropping 12 per cent in the second, compared with the same periods last year. For the first six months, average daily turnover fell 23 per cent to HK$97.9 billion, while derivatives trading decreased by 4 per cent, cutting the fee income from trading by 21 per cent.

Still, the exchange is focused on its three-year strategic plan to transform itself into a global marketplace, adding a series of new financial instruments to its portfolio, including in-line warrants in July, US-dollar metal contracts in August and weekly index options contracts in September.

"We continue to focus on executing our three-year strategic plan, maintaining good cost discipline and capturing further growth opportunities," said Li.

Li, who later addressed a press conference after the market close, said that the city has seen enough violent protests and wanted it to end soon.

"What is happening now is not small ... it will have an impact on the economy."

Asked if the protests would affect Alibaba Group Holding's planned secondary listing in Hong Kong, Li refused to comment on individual cases, saying it was up to the issuers to decide when to go public. He, however, hinted that a "big name will return as this is its home".

New York-listed Alibaba, which owns the South China Morning Post, was planning on a secondary listing in Hong Kong to raise as much as US$20 billion, Bloomberg reported in June, citing sources.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.