HONG KONG -- Hong Kong Exchanges & Clearing, the operator of the world's most valuable stock exchange, reported record half-year profit that benefited from a surge in trading volumes from new listings by Chinese technology companies and increased volatility brought on by the global pandemic and local political tensions.
HKEX has stood as a bulwark for Hong Kong amid concerns that Beijing's recent moves to exert greater control over the city would spell the end of its status as a global financial hub. The exchange's shares have soared 45% this year as investors focused on the potential for further volume growth.
The exchange has become the default secondary-listing destination for Chinese companies threatened with delisting in the U.S. Washington has threatened to remove Chinese companies from American stock exchanges if they fail to comply with accounting regulations.
First-half net profit rose 1% to 5.23 billion Hong Kong dollars ($674.8 million) and core revenue jumped 13%, the exchange said. That more than offset the 45% slump in investment income that suffered from the brutal sell-off in March.
Still, the company's shares fell 1.4% on Wednesday after revenue from trading and listings, which suffered sluggish new derivatives issuance on Hong Kong stocks, missed consensus estimates by 2%, Citigroup said. Analysts said that a recent rally in HKEX's shares, which have gained nearly 50% this year, had boosted valuations well above fair value estimates.
Citigroup analysts led by Yafei Tian pointed to the weaker revenue from derivatives and said the results would only lead to "modest" earnings upgrades.
"The market is likely to be forward-looking at the pace of new initiatives being materialized. For example, American depositary receipts secondary listings, new derivatives launches and connect volume momentum," the analysts said.
Average daily equity trading climbed 33% in the first half, daily volumes of Chinese shares through the Stock Connect program rose 69%, and Chinese bond volumes through the Bond Connect program tripled. The connect programs allow investors in Hong Kong and mainland China to trade each other's securities.
The exchange also is set to benefit from higher derivatives income after it snatched 37 MSCI futures contracts from its Singapore rival, which had held them for 23 years.
The exchange has started to get volume from migration of open positions and will open new contracts in the coming "weeks and months," Chief Executive Officer Charles Li said in a media call after the midday announcement of the results.
The exchange was also continuing discussions to include secondary listings, such as Alibaba Group Holding and Shanghai Star Market, in the Stock Connect program.
"HKEX had a very good first half, set against a turbulent and volatile macro backdrop," Li said in a statement with the earnings announcement.
"With robust trading volumes, a strong IPO pipeline, and an expanding product portfolio, including the suite of newly launched MSCI index futures, I am confident that HKEX will continue to play a major role in connecting China and connecting the world," he said.
Li, who previously announced his intention to step down from HKEX by next year after more than a decade at the helm, has bet that the exchange will gain by being a gateway to Chinese markets even as the world's second-largest economy proceeds with its own liberalization.
HKEX, which last year bid unsuccessfully for the London Stock Exchange, also faces risks from the U.S. after Washington revoked Hong Kong's special trading privileges, prompted by Beijing's imposition of a controversial national security law on the city.
For now, the exchange is gaining from secondary listings by the likes of Alibaba, online retailer JD.com and game developer NetEase that have together raised almost $20 billion. More are set to follow, including Pizza Hut operator Yum China and TAL Education. Ant Group, an affiliate of Alibaba and valued at more than $200 billion, also has started work on dual listings in Hong Kong and Shanghai.
Jefferies analysts, led by Shujin Chen, estimate that the secondary listings of about 30 Chinese companies will directly boost HKEX's revenue by about 3%, with income accruing from new listings, fundraising, trading and annual listing fees.
The exchange ranked second by the number of listings globally in the first six months of the year and third by funds raised, it said. It has topped the global table in seven of the past 11 years.
Stock Connect revenue and other income reached a record six-month high of HK$743 million, up 46% from a year earlier, while net investment income fell to HK$838 million from HK$1.5 billion a year earlier, primarily due to the fair value losses of collective investment schemes due to the global market sell-off in March. Operating expenses were 6% higher, it said.