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HKEX Growth Sustainability: Can It Continue?

Just now, Hong Kong Exchanges and Clearing (HKEX) (00388.HK) announced its financial results for the third quarter of 2024.

In terms of revenue, in the third quarter of 2024, the main business income of HKEX (namely, trading fees, listing fees, clearing and settlement fees, custody, depository, agency, market data fees, and margin income, etc.) increased by 3.32% year-on-year, reaching HKD 4.852 billion.

Regarding investment income, in the third quarter of 2024, the net investment income from HKEX's own funds was HKD 507 million, a significant year-on-year increase of 40.83%; the total quarterly revenue and investment income amounted to HKD 5.372 billion, a year-on-year growth of 5.66%.

In terms of profitability, in the third quarter of 2024, HKEX's EBITDA increased by 5.94% year-on-year, to HKD 3.926 billion; the quarterly profit attributable to shareholders was HKD 3.145 billion, a year-on-year increase of 6.50%. The profit growth is slightly higher than the revenue growth, reflecting a further improvement in profit margins.

For the first three quarters of this year, HKEX's main business income was HKD 14.542 billion, a year-on-year increase of 0.81%; the investment income from company funds was HKD 1.408 billion, a year-on-year increase of 19.63%; the EBITDA for the first three quarters remained relatively stable at HKD 11.587 billion; net profit also remained relatively stable at HKD 9.27 billion.

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Comparing the third quarter's performance with the growth of the first three quarters, it can be seen that the third quarter's performance has significantly improved compared to the first two quarters, with noticeable improvements in revenue, investment income, and profit growth.

What drove the outstanding performance in the third quarter?

September's stimulus measures boosted the performance of the main business.

After the announcement of economic stimulus measures in Mainland China, trading in the Hong Kong spot market became more active at the end of September 2024, with spot market transaction volumes reaching a single-day record high on two consecutive trading days, September 27 and 30, amounting to 445.8 billion yuan and 505.9 billion yuan, respectively. As a result, the average daily transaction volume for the first three quarters increased to 113.3 billion yuan, a year-on-year increase of 3%.

The measures in Mainland China also stimulated the trading volumes of the Shanghai-Shenzhen-Hong Kong Stock Connect's northbound and southbound transactions, with northbound and southbound transactions setting a single-day record high of 356.9 billion yuan and 208.7 billion Hong Kong dollars on September 30, respectively. The trading volume of the Shanghai-Shenzhen-Hong Kong Stock Connect has steadily grown in the first three quarters of this year, with the average daily transaction volume of the Shanghai-Shenzhen Stock Connect reaching a historical high for 9 months, at 123.3 billion yuan, a 14% increase compared to the same period last year; the average daily transaction volume of the Hong Kong Stock Connect for the first three quarters was 38.3 billion Hong Kong dollars, a year-on-year increase of 19%.In the first three quarters of this year, the revenue and other income from the Shanghai-Shenzhen-Hong Kong Stock Connect increased to HKD 1.78 billion, compared to HKD 1.707 billion in the same period last year, of which HKD 1.297 billion (HKD 1.247 billion in the same period last year) came from trading and settlement.

In the third quarter of 2024, there were a total of 15 new listings on the Hong Kong Stock Exchange, raising HKD 42.2 billion, which is more than three times the amount raised in the first half of 2024.

It should be noted that this is mainly due to the listing of Midea Group (00300.HK) on September 17th, raising HKD 35.7 billion, which is the largest initial public offering in Hong Kong since February 2021 and the second-largest globally in the first three quarters of 2024. This is the second company listed in the third quarter of 2024 under Chapter 18C (Specialized Technology Company Listing Mechanism).

According to the Hong Kong Stock Exchange, as of September 30, 2024, there are 96 applications under processing.

In the first three quarters of this year, the trading volume of the Bond Connect Northbound maintained an overall upward trend, with the average daily transaction volume reaching a nine-month high of CNY 44.1 billion, a year-on-year increase of 9%.

The trading activity in September significantly increased, which boosted the main business performance of the Hong Kong Stock Exchange in the third quarter and the first three quarters, and is an important reason for its profit growth. Another reason is still the Hong Kong Stock Exchange's excellent investment ability.

Ideal performance of proprietary investment income

In addition to the main business, the Hong Kong Stock Exchange also earns low-cost investment income through its excellent investment skills.

The investment funds of the Hong Kong Stock Exchange mainly come from company funds, margin, and clearing house funds, among which margin and clearing house funds need to be returned to customers, while the income earned from the company's funds can be recorded in the Hong Kong Stock Exchange's own performance. See the figure below, the proportion of company funds is not high.

In terms of investment income, due to the reduction of margin requirements leading to a decrease in the average margin scale, and the increase in interest rebates for some contracts' settlement participants to attract trading, coupled with the increase in the proportion of yen collateral of settlement participants, the return has decreased. The investment income of margin in the third quarter has significantly decreased year-on-year, but the investment income of the Hong Kong Stock Exchange's company funds has significantly increased, driven by the investment income in the external portfolio, see the figure below.Caihua Society has observed that the external portfolio investment returns of the Hong Kong Stock Exchange (HKEX) have been quite satisfactory, serving as the main driving force behind its investment returns. In the first three quarters of this year, the diversified assets, government bonds, and mortgage-backed securities, as well as listed equity securities in the external portfolio, have all achieved commendable returns, as shown in the table below.

It is worth noting that HKEX has adjusted its external investment portfolio, significantly reducing its holdings in listed equity securities (which typically offer higher risk-return profiles) while increasing investments in government bonds and mortgage-backed securities.

Compared to the end of 2023, there has been a noticeable increase in the holdings of government bonds and mortgage-backed securities in HKEX's external investment portfolio. The purpose of this adjustment is to reduce the impact of market volatility on HKEX's profitability.

The listed equity securities in its external portfolio investments are likely to be stocks of companies in the U.S. market or developed countries, while bonds and mortgage-backed securities may also be primarily focused on European and American bonds, which can diversify the concentration risk associated with HKEX's main business being closely related to Hong Kong-listed companies and Chinese-funded businesses.

Starting from the second half of the year, major central banks in Europe and America have entered a rate-cutting cycle. Given that the U.S. stock market has reached a relatively high level, the risk of volatility is also expanding. At the same time, as the rate-cutting cycle deepens, bond prices are expected to rise (bond prices move in the opposite direction to interest rates), which should be one of the reasons for its strategy adjustment.

Can HKEX's growth continue?

The growth in HKEX's performance for the first three quarters and the third quarter is mainly attributed to domestic economic stimulus measures in September.

Caihua Society has noticed that before the middle and late September, trading on HKEX was not very active, and even declined compared to the same period last year.

However, the driving effect of the relevant measures on Hong Kong stocks and A-shares does not seem to have been sustained.

From Wind data, Caihua Society has observed that, driven by the economic stimulus measures at the end of September, as well as the inflow of funds into the Hong Kong stock market during the Golden Week mainland holiday to take long positions in Chinese assets, trading on HKEX was very active in early October. The daily trading volume during the Golden Week period was over 200 billion, and on October 8th, the first trading day after the A-share holiday, with the support of Hong Kong-Connect funds, the trading volume soared to over 500 billion. However, the subsequent trading activity noticeably cooled down, dropping to just over 100 billion by October 22nd, and there is a significant question about whether such high trading volumes can be sustained.However, Hong Kong's Policy Address has proposed several measures that should be beneficial to the future development of the Hong Kong Stock Exchange (HKEX).

On October 18th, HKEX and the Securities and Futures Commission (SFC) of Hong Kong issued a joint statement, announcing the optimization of the new listing application approval process to further enhance Hong Kong's attractiveness for initial public offerings (IPOs), while also accelerating the fast-track approval for eligible A-shares. This is conducive to promoting the expansion of new stock issuance and the trading target portfolio.

At the same time, the Policy Address mentioned the continuous optimization of the "Connectivity" mechanism, upgrading infrastructure, and upgrading the debt instrument central clearing system to facilitate international investors to settle various assets in different currencies. It also aims to expand the infrastructure of the fixed-income market and optimize the "Cross-Border Wealth Management Connect" to enrich offshore RMB business. These measures are beneficial for attracting capital inflow into Hong Kong, enhancing the trading volume of listed companies on the Hong Kong stock market, and increasing the competitiveness of the Hong Kong stock market.

Additionally, the Chief Executive mentioned discussions with mainland authorities to moderately expand the "Bond Connect" (Southbound Trading), which could increase capital inflow into Hong Kong's financial market and optimize asset market pricing.

The Policy Address also proposed further strengthening Hong Kong's position as an international asset and wealth management center and exploring new overseas funds to further expand capital flows, attract more companies to list, all of which are beneficial in enhancing the attractiveness of HKEX.

The London Metal Exchange (LME), as the world's most important metal exchange, has unique advantages. Currently, LME is considering expanding its global metal warehouse network to Hong Kong. In the Policy Address, the Chief Executive mentioned promoting the construction of an international-level gold storage facility, expanding the storage and delivery of physical gold in Hong Kong for users and investors, and potentially including gold products in the "Connectivity" mechanism. This will undoubtedly benefit the prospects of LME.

In the first three quarters of this year, LME's revenue and other income grew by 31.35% year-on-year to HKD 2.099 billion, accounting for 13.12% of HKEX's total revenue; EBITDA grew by 61.68% year-on-year to HKD 1.189 billion, accounting for 10.26% of the combined EBITDA.

Furthermore, the series of measures introduced in the Policy Address to stimulate the local economy, including encouraging emerging enterprises, unicorn incubation, the development of small and medium-sized enterprises, talent attraction, and optimizing the real estate market, are beneficial for输送ing target listing companies to the Hong Kong stock market. The accumulated wealth effect and financial management demands are also conducive to capital inflow into the Hong Kong stock market.

Therefore, in the long term, the outlook for HKEX should be quite optimistic.

SummaryThe current volatility in the Hong Kong stock market may impact the short-term performance of the Hong Kong Exchanges and Clearing Limited (HKEX), but in the long run, with the support of economic stimulus measures from the central and special administrative regions, HKEX should be able to develop steadily.

As a trading platform, HKEX is closely linked to the performance of the Hong Kong stock market. The "Hong Kong Stock Top 100" serves as a barometer for the Hong Kong stock market and is also closely monitoring the performance of HKEX.

The 2024 Hong Kong Listed Companies Development Summit Forum and the 11th "Hong Kong Stock Top 100" Awards Ceremony, hosted by the Hong Kong Stock Top 100 Research Center, co-organized by Caihua Community and Futu AnYi, and supported by media organizations such as the Hong Kong Takungpao Group, will be held at the Hong Kong Convention and Exhibition Center on the afternoon of November 11, 2024. The event will delve into how to further consolidate Hong Kong's position as a global hub for wealth management and a capital market fundraising center, as well as how to enrich the financial technology ecosystem in the context of a new era.

Will HKEX's ranking in the "Hong Kong Stock Top 100" rise to a higher level following the continuous improvement of its fundamentals this year? It is worth looking forward to.

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