Hong Kong Exchanges and Clearing Ltd

HKEX:388

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to HKEX 2021 First Quarter Results Analyst Presentation. Today, we are very pleased to have our Interim Chief Executive, Calvin Tai; our Co-President, Romi Lamba; our Group CFO, Vanessa Lau.

Without further ado, over to you, Calvin.

[Chi Kin Tai, executive]

Thank you, Ricky. Well, Good evening, good day. Thank you for you to join our Q1 results briefing. I think the result has been out and you have already seen most of the number, I will stay brief and try to save some time for questions.

Well, I'm very pleased and delighted, together with the team present another record results in terms of the revenue for this quarter, close to HKD 6 billion, 49% year-on-year increase and with the core business revenue up by 35% year-on-year. So largely, it's driven by the cash market headline average daily turnover, which I think everyone can see it in the day-to-day results. I will consider this is an exceptionally good year because it's a record on 3 consecutive record year. So result is very encouraging.

Well, I also want to highlight the Stock Connect revenue, which -- and also the income related to it up to $737 million, 82% up year-on-year. Investment income, I do believe you'll find it difficult to forecast and anticipate same to us. But I think this year, we have made $418 million for the first quarter comparing to Q1 2020, which was a very difficult time for the global financial market, while our portfolio was suffering loss in that time.

Overall profit contribution to -- attributable to our shareholders is also a record, $3.8 billion plus, is about 70% increase year-on-year. In terms of business and strategy, it's very similar to what we have shared with you in February. Well, we are seeing very strong IPO market, we're #3 in global -- globally in terms of IPO fund raised. HKD 137 billion, which is in comparing to Q1 last year, it's almost 9x.

In terms of connect scheme performance, as you look at the results, I mean the revenue very much is relating to the high average daily turnover, both for the Northbound and Southbound. And Vanessa will get into a bit more information to that.

Well, we are continuously improving our market in terms of microstructure, technology enhancement and also, we're introducing new products as well. If you have noticed, I think we have a mini renminbi contract introduced. Well, the first day turnover was 9,000 contracts, which is very encouraging to our product team and to us as well.

In terms of improving -- continuously improving our market on the listing front, we do have a series of consultation paper out in the market. And -- well, overall speaking, we're improving and streamlining the listing regime for overseas issuers coming to Hong Kong and, also, in terms of the corporate governance and related rules, we are largely going into the direction, improving the quality of company listed in Hong Kong. This is a continuous effort, and we see it's a very important part of our business.

So I just want to highlight that here. And, well, maybe I pass it on to Vanessa for more detailed group financial review. Vanessa?

[Bik Lau, executive]

Thank you, Calvin. Good afternoon, everyone. Thank you for joining us. I'm Vanessa Lau, and would now like to share with you our HKEX Q1 2021 financial results. HKEX has had a strong start to 2021, and we are very pleased to report record quarterly financial results for Q1.

Total revenue and other income was up 49% year-on-year to $6 billion. Our core business revenue, which is revenue excluding net investment income and HKEX Foundation donation income, was up 35% year-on-year, driven by record headline ADT of $224 billion and record Stock Connect trading volumes. Net investment income improved due to external portfolio gains, reflecting the broader performance of the global equity and fixed income markets.

EBITDA margin was strong at 81%, up 6% and 7% from Q1 2020 and Q4 2020, respectively. Profit after tax and earnings per share reached record quarterly highs, with profit after tax at $3.8 billion, up 70%, and EPS at $3.03, up 68% year-on-year.

Turning to the next page on our detailed financials. Driven by record headline ADT and Stock Connect trading volumes, our core business showed strong growth year-on-year for both revenue and profit. Excluding foundation charitable donations, OpEx was up 7%, mainly driven by higher staff costs and IT costs, partly offset by lower professional fees. EBITDA margin reached 81% as compared with 75% in Q1 2020 and 77% in the full year 2020.

Moving on to the next page, where we look at Q1 2021 results versus Q4 2020. Headline ADT was 59% higher. Q1 profit after tax was 31% higher than Q4 last year due to record trading volumes, lower OpEx compared with Q4 OpEx, which includes year-end staff compensation and some seasonality, but partly offset by lower fair value gains on the external portfolio.

Moving on to look at the trend line. We have been generally trending up over the last 5 years on both revenue and profit. But as you can see here, Q1 2021 profit is significantly above the trend line. This reflects the robust trading volumes in Q1, and importantly, the resiliency of our core business, resulting from business diversification throughout the past few years and the continued growth of Stock Connect. Our cost discipline has also been strong and has helped us maintain an attractive EBITDA margin.

Next, we take a look at the year-on-year performance of our operating segments. You can see that most business segments achieved higher revenue year-on-year, largely driven by record ADT. I would highlight 3 particular drivers which showed significant growth. Firstly, Stock Connect volumes continued to achieve new records, in particular, with the Southbound ADT nearly tripling year-on-year. As a result, Stock Connect revenue reached a record high of $737 million, contributing to 12% of the group's total revenue and other income in Q1.

Secondly, listing fees were up 20%, with 32 new company listings in Q1 and the number of newly listed DWs and CBBCs also reached record quarterly highs.

Lastly, depository fees more than doubled to $346 million, driven by the increase in e-IPO service fees, reflecting a higher number of listing applications from the buoyant IPO market and the increase in Stock Connect portfolio fees.

The Commodities segment was down 10% on revenue due to a decrease in LME's chargeable ADV when compared with the high-trading volume in the Q1 comparable period in 2020, driven then by market volatility. Corporate items was up because of higher net investment income from fair value gains on the external portfolio and higher HKEX Foundation donation income.

On the next page, you can see that net investment income was $418 million versus a Q1 2020 loss of $47 million. Net investment income comprises of internally managed corporate funds, margin and clearing house funds and a noncore actively managed external portfolio. The external portfolio made a gain of $159 million, representing a 2.2% return versus a loss of $521 million in Q1 2020.

Despite market fluctuations, the portfolio has performed well since its inception in December 2016, generating a cumulative gain of $2 billion. The internally managed funds were down by approximately $200 million year-on-year, as expected, due to lower interest rates, partly offset by higher fund sizes.

Lastly, let's look at operating expenses. Excluding foundation charitable donations, OpEx was up 7%, reflecting our investments in talent and technology upgrades, which are important for the long-term growth of our business. Overall, this has been a very good quarter for the business, reflecting our core business resiliency and the considerable progress made in delivering on our strategic objectives.

Looking forward, we believe Stock Connect will continue to be a key revenue driver, as well the strong IPO pipeline and new product launches. We will continue to focus on managing our costs and risks and believe that we are well placed to capture future growth opportunities.

With that, I will hand back to Calvin for our business and strategic update.

[Chi Kin Tai, executive]

Thank you, Vanessa. Well, on this part, I just want to quickly update about the core business and also how we deliver in terms of our strategic plan. For day-to-day business, I think, as you can see in our data and also share and explained by Vanessa, very strong business growth, and you can see that the resilience that we have invested in our marketplace, in our technology system and also, well, the interaction with the market. Overall speaking, the operations has been smooth and capable of handling an upsurge of the volume, both in our market and also the cross-border Stock Connect.

Cash market, in particular, very strong. And I think it also spill over into single stock options because of the new IPO, the jumbo IPO of the new technology, I mean new economy and underlyings actually boost up the secondary trading volume and also in the single stock options.

Futures and options, while both in Hong Kong and also in London, we're recording a bit of slowness, and I think that is something not totally unexpected because the market focus actually is in stock pick. So I think that's partly explained the difference in performance in different products.

Well, in terms of IPO, I think I highlighted those numbers earlier on. I think I want to highlight the importance that we are seeing. IPO actually few, the secondary trading, in the future days. What we're seeing, these days, there are quite a few biotech companies and also weighted voting right with -- companies with weighted voting rights and secondary listing with a big market cap moving into Hong Kong, and the trading has been picking up.

And also, we're benchmarking comparing our turnover to the biggest marketplace in U.S. and try to track the -- well, liquidity in our market, how do we compare with other places. And I think in quite a few of these, returning stocks or homecoming stocks, we see the turnover actually -- well, Hong Kong market is ranking #1 against the others.

The other thing is, well, I just want to quickly share, I think, last time, we did try to share this angle from -- with analysts is, if we look at 2018, starting from that day, 31 jumbo IPOs has come to our market. And now these underlying actually contributing to the secondary trading, about 24% of our average daily turnover and 22% of our stock options average daily volume. So as I said, new IPOs of significant market cap and good liquidity, actually, have a very strong contribution to our future days in the secondary trading and derivative markets.

Well, I think I'm not repeating those numbers, but going back -- going to the strategy that we have, our China-anchored, globally connected and technology-empowered strategy. Well, in terms of the Stock Connect underlying, we continuously to expand and also the depth and liquidity of this market has been continued and picking up. And also we're seeing users consider Connect is a preferred way to access a mainland equities market as well.

Also, the Bond Connect is recording record turnover. We have been improving in terms of getting customers into -- new customers for this platform, accessing the mainland market and improving the FX risk management tools for the investors. And we will further explore ways to capture this opportunity and expand service to fixed income investors.

In terms of onshore capability, we completed the capital injection for Guangzhou Futures Exchange and they have started -- they have officially launched and opened for business. Well, I think there are various areas that we believe we can collaborate and work with Guangzhou Futures Exchange. It's early days, but I think this is a strong partner that we have established, and we become the very first offshore or investors holding mainland exchanges shares. So this is a very good start.

For globally connected, I think we -- on the IPO side, as I mentioned earlier on, we are continuously improving our listing regime and also listening rules so that we can facilitate overseas investors coming to Hong Kong. In terms of product ecosystem for international investors, we do have multiple new ETFs. One of them is biotech companies on ETF, which is -- I think is a very timely product for investors. And the Shanghai STAR market is underlying, we have the first ETF tracking it. And we have multiple other index futures and options introduced during this period.

Well, talking about derivative products. I think MSCI product suite, we continue to calculate and do all the groundwork. The competition, I have to say, it is quite keen in this arena. We'll continue to improve the market infrastructure. For example, the trading calendar, the trading hours in our futures market and distribution network to empower ourselves to make us as an international derivative trading center.

In our cash market and also in our existing derivative market, we see more and more volatility -- I mean significant movement in the market, volatility has been picking up, and some of them are quite abrupt. So in terms of the volatility control mechanism, we continue to make enhancement to it. And more importantly, we run clearing houses, which will take contingent market risk in case there are defaults. So our risk management platform is one of the crucial part of our business. And I'm very glad that we have self-launched the Orion Risk platform, which is for our cash market as a start.

And LME has introduced an electronic warranting solution to replace paper warrants, actually make the market more efficient and greener.

Well, technology front, there are a few things that we have done. In terms of the derivative market infrastructure, we have upgraded and -- well, with stronger resilience and modernize our structure. And also, we have relocated to a much more modern secondary data center. Even though it's a secondary data center, we consider it as a very crucial infrastructure for us, and we make the investment in it, and we are largely -- we have largely completed the most significant part of the relocation.

In terms of operational efficiency, we continue to deepen and broaden the usage of robotic AI across our business. And also, you will be seeing some benefit in terms of the e-forms that we're introducing for corporate actions, reporting and processing. That will be benefiting a lot of users of -- those reading, I mean, announcement and reports from issuers.

Last bit I want to emphasize is, there's a development that we see as a very important sustainability, both for us as a company and also for our marketplace. Well, in terms of sustainable finance ecosystem, we made the very first step. We are the first -- very first in the region, set up what we call stage providing the electronic platform so that facilitating issuers to share the information about their products in the green investable products on our platform and sharing the data and information about the issued products.

Well, there are 49 sustainable-focused products. Actually, now I -- displayed in the repository of -- under the platform stage in the first quarter 2021. And we will continue to invest on this front to facilitate issuers to reach out to investors about -- on the green and sustainable products.

On the other hand, the corporate governance code, I mentioned earlier on, actually is deepening and broadening as well. Well, we're going to set a higher standard for listed issuers, specifically in areas like Director independence and diversity as well as ESG. So improving the quality of issuers in our marketplace.

And LME, actually, in the metal industry, it's very relevant in the real economy, especially in the production and also the movement of inventories. Well, now they are working to us in compliance on the responsible sourcing requirements for their players and also for the products that are traded and settled through their warehouses. I think these are the areas that we believe we will continue reporting to analysts and also our shareholders on sustainable development side.

Looking ahead, I think, well, we're lucky we have a very strong start in 2021 and is a record Q1 ADT. Even though we see slowing down in April trading volume, but it's still, I think, at least 10% to 20% higher than the average turnover of last year. So how do we see the volume? Will it continue or will we be seeing Q1 exceptional result, again? I think it's hard to tell. But we believe we have a very strong momentum in our Hong Kong IPO market, and the pipeline is, we understand it's largely from new economy and together with many potential U.S.-listed stocks coming to our marketplace. I think the IPO momentum will continue, that will fuel our longer -- future secondary trading.

Another thing I want to highlight is that LME has engaged their users in the market and the members on the market structure discussion paper. And subject to the consolidation of the feedback, we will be releasing it in Q2. Well, that will set the cause for LME to continue to electronic and digitize the market.

Well, in the global backdrop, I think the COVID-19 vaccination has been in place. And also, many countries has been having a very speedy program, getting citizens vaccinated. However, there are new developments on some of the countries like India, which cause some consents. But overall speaking, with the backdrop, I think we're cautiously optimistic that the opening up would and interaction with various countries will -- or regions will become sooner, I think, but there's a lot of discussion and how soon we can get -- to connect to other places.

I think Singapore is definitely on the radar screen. And one will be Macau and Mainland China. I think that very much depends on the government's efforts to it. And we're hopeful and we would like to see it happen sooner. So I think that would give some positive sentiment to the market with a lot of cautious consideration.

In terms of the macroeconomic recovery, I think it's not certain, but U.S. market definitely showing signs of improvement. U.S. long-term yield, I think it's quite uncertain whether there will be inflation, whether there will be a change in policy, I mean easing policy. I don't think anyone has a crystal ball to tell, but overall speaking, fundamentally, we believe the U.S. economy will have a positive development that will be supportive to other global -- other developed countries as well.

But in terms of the interest rate, I think we still believe the easing policy will continue. That will be positive for the financial market, including ours. But that would -- if the interest rate remained low, then our investment income will be affected.

So in terms of overall strategy, I think we are on track, and we are still working very closely with our partners, well, in the market in Hong Kong and also in Mainland. In terms of cost discipline, our business is expanding. So our OpEx has a mild growth. But I think in terms of both cost discipline, our management team has been working very diligently on it and very, very -- I think very seriously to make sure we spend money in the right place.

I think that -- basically that -- that's all I want to share, and I want to say. Maybe we can see if there's any questions from the audience.

[Unknown Executive]

Thank you, Calvin and Vanessa. So now we'll open for taking questions from all of you. Operator, please kind of explain the steps for the audience to raise their questions.

[Operator]

[Operator Instructions] So we have a first question from Yafei from Citi.

[Yafei Tian, analyst]

Congrats on the very strong quarter. I have 2 questions, if I may. The first one is on the recent news that the Southbound Bone Connect might be open sometime this year. So just wanted to ask the management what kind of revenue opportunities could this bring to Hong Kong EX? And how that might accelerate some of the FIC initiatives that could happen with Hong Kong EX?

And then the second question is related to the IPO. There is still a lot of Mainland Chinese companies going to the U.S. for listing and they consider coming to Hong Kong afterwards for a secondary listing. I understand that Hong Kong EX is relaxing the -- probably looking at a consultation paper to further relax the secondary listing use. Is there a risk that this is actually going to make it more companies to look at Hong Kong as a secondary listing venue rather than a primary listing venue?

[Chi Kin Tai, executive]

Okay. Let me take the first question first. I think Southbound Bond Connect is something we're also hearing that is making progress. And I think -- well, I don't want to preempt anything because when time comes, we can discuss and we can provide more information about what's HKEX roles on it. But overall speaking, Southbound Bond Connect would activate the Hong Kong bond market. I think that's definitely create a better backdrop for Hong Kong in terms of developing FIC business. So I think, yes, I can't go any further to talk about Southbound Bond Connect.

Well, in terms of the IPO question about the Mainland company, I'm not sure whether I can agree with what you said is, companies choose to go to U.S. to get the primary listing and then come back to Hong Kong for secondary listing. This kind of planned path, I'm not sure whether this is a trend or there are exceptional cases. But I think the most important thing is, there are different kinds of companies, some of them would choose to come to Hong Kong and some of them would choose other marketplaces.

But -- well, I think, to be a little bit more direct, I don't think every Chinese company want to get listed may fit the requirement or meet the requirement here in Hong Kong. So we welcome those who satisfied the requirement that we have. And we're seeing, as I said, and as you may know as well, we do have a very strong pipeline for companies coming our way. So I think we need to continue to improve the, I mean, facilitating companies to our market, like the consultation that we're going through, and we want to make the change to facilitate over the issues coming to Hong Kong, either primary or secondary.

I think these are the measures that we're moving forward. So yes, as I said, I think we would do our best to attract high-quality company coming to Hong Kong. So we can't get everything to Hong Kong. But -- well, I think we have very good opportunity in front of us. We're grasping them. Thank you.

[Operator]

Next question, we will have it from Gurpreet from Goldman Sachs.

[Gurpreet Sahi, analyst]

If I can have 2 also. First is on Guangzhou Futures Exchange. So can you talk about the investment there? What kind of products you see over the medium term and adoptability by the market around these new kind of green initiatives, carbon futures? And so what kind of revenue attribution or earnings accretion we could look out? So I know it's early days. I'm not asking for actual numbers, but then talk high level as to what is the area of opportunity, specifically given that these things have been tried in the market for long. And maybe now is the time for green, but yes, just to hear from you.

And then the other one being around the discussion papers, around the change in the listing requirements that is still in discussion. I wonder if there's any early industry feedback that you noted in terms of raising the bar for profitability for some of the companies to be there on the main board?

[Chi Kin Tai, executive]

Well, okay, maybe I'll quickly take the second question. For the consultation, we have a series consultation, if I hear you correctly, what you are referring to, raising the bar of minimum profit requirement. I think We have closed the consultation period, and we're working on the consultation conclusion. I don't want to preempt the paper. We are still in progress and getting to the final product. It will not take us too long to make it public and make the announcement. So be a little bit patient on that. We would -- we have consolidated and digested market feedback and working out on a final conclusion on it. So just bear with us for a moment, okay?

So going back to Guangzhou Futures Exchange, our investment is 7% holding. Maybe Vanessa can help me about the exact dollar amount that we put in. So in terms of the types of product, I think Guangzhou Futures Exchange has yet to disclose or put into the public about their product plan, their business plan. And I think it may not be convenient for me to give any specific on this.

So I think the direction we're going because the product scope that Guangzhou Futures Exchange has is pretty wide. Green is one of them. It can be financial, it can be commodities. And actually, it's quite broad. But I think one of the angle that we also look at is Greater Bay area. So whether we can work together as serving the Greater Bay area better, and of course, with the backdrop that we can find ways to work together to serve and to attract international and also all the Mainland investors as well.

I'm sorry, well, I cannot -- actually, I'm circling around, I'm not giving you any information because I don't think I can. We will let you know once we have -- I think we get concrete ideas, agreement with Guangzhou Futures Exchange, we will make the communication or announcement at the right time.

[Bik Lau, executive]

I would just supplement that our investment in the Guangzhou Futures Exchange is RMB 210 million. And we are very excited about the opportunity because it's the first time that an entity outside of Mainland China is invited to participate in having a stake in a commodities exchange in China. And Guangzhou being the first commodities exchange in the southern part of China, complementing Dalian, Shanghai and Zhengzhou. So it's a very exciting development, and we're very pleased to be a business partner.

[Operator]

Next, we have questions from Harsh from JPMorgan.

[Harsh Modi, analyst]

My question is more on the second order impact of the Guangzhou Exchange. Do you think you may end up getting an approval for, let's say, LME-bonded warehouse in Mainland China due to this? Or is it -- or are these not related at all?

[Chi Kin Tai, executive]

Sorry, again, I think, Harsh, I do not have an answer to your question at this moment because Guangzhou Futures Exchange, as I said, they would -- they have -- the mandate is quite broad, and they have yet to announce what exactly will be the first phase of product that they're going to launch. Whether it's commodities and whether it's commodities overlapping with LME, I think this is the very first question, right?

Then, maybe we can find -- if the answer is yes, then I think we can talk about whether there's a warehouse bonding or standardization or fungible other forms of collaboration. But I think it's still early days. I think that's -- once again, I just am asking for your patience. And once we have more concrete development, we will make it public.

[Operator]

Do you have a question, Harsh? Okay, cool. Yes. Please go ahead, Harsh.

[Harsh Modi, analyst]

Yes, sorry. One more, this is more on the next steps on the F&O. My understanding was that the similar contract needs to be launched, both in Mainland China and in Hong Kong, for the F&O future to kind of get launched. Is my understanding correct? And is there on-the-ground progress which allows us to give some degree of visibility on time line?

[Chi Kin Tai, executive]

Okay. Well, I think in today's announcement, we also mentioned about the work we've been doing on the Asia Index Futures. I think this is one of the very relevant product that we believe would be useful for investors, in particular, side-by-side with the Stock Connect. However, I don't have any information about the time line when this product can be launched or you can say it is we continue -- we're diligently working on it together with our regulator and -- in terms of the product design, I think largely, we have a good idea, but we're still pending approval.

[Romnesh Lamba, executive]

Calvin, if I can just add, I think the futures division of CSRC has made comments in the past that they would like to open up more risk management tools to international investors around A shares. But there's been nothing specific that we know about. And we -- to our knowledge, there's no direct dependency between them doing something onshore and approving something offshore.

[Operator]

[Operator Instructions] Cool, so I think that marks the end of our analyst presentation today. Thank you very much for participating. Wish you a good evening.