Hong Kong bourse sees profit drop as major IPOs delayed

HONG KONG (BLOOMBERG) – Hong Kong’s stock exchange reported its second quarterly profit decline as China’s widening crackdown on a broad range of sectors roiled markets and delayed major initial public offerings (IPOs).

Net income at Hong Kong Exchanges & Clearing (HKEX) fell to HK$3.3 billion (S$572 million) in the 3 months through September from HK$3.4 billion a year earlier, dragged down by a drop in investment income, according to the bourse. Revenue was flat in the quarter.

“HKEX had a strong first nine months of 2021, despite a turbulent macro backdrop,” said Nicolas Aguzin, the exchange’s chief executive officer, in a statement.

Investment sentiment was clouded as China’s scrutiny over everything from technology to online tutors and real estate spurred a selloff that at its extreme wiped more than US$1 trillion from the value of Chinese stocks globally.

Hong Kong’s primary-listing market is going through a dry patch as several potential billion-dollar IPOs, including those by NetEase’s music unit and electric car-maker Nio, were put on hold on uncertainty over Beijing’s stance toward offshore listings.

Meanwhile, the exchange’s introduction of MSCI A50 futures, a long-awaited alternative for hedging Chinese stocks versus rival Singapore, may boost earnings prospects.

Credit Suisse estimated that HKEX’s new product will contribute about 2 per cent to its total revenue by 2023, as historically a new contract takes 6 to 12 months to build up liquidity. During the first week of trading since its Oct 18 debut, an average of 2,579 contracts traded a day, according to data compiled by Bloomberg.

“The adjacencies from futures to warrants, index arbitrage and the like should be especially pronounced at HKEX, with a large retail investor base,” JPMorgan’s analysts led by Harsh Wardhan Modi wrote in an Oct 13 note. They expected the bourse to trade at higher price-to-earnings ratio.

Another catalyst for HKEX’s growth hinges on China’s plans on how to regulate overseas IPOs. The country’s cybersecurity watchdog in July required companies seeking to list abroad to get pre-approval to ensure they comply with local laws. Those planning to go public in Hong Kong may be exempted, Bloomberg News reported earlier.

Merrill Lynch expects an announcement by the end of this year on whether HKEX would be exempt or partially exempt from its tightening grip, which will be “key to its IPO pipeline to 2022”.

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