HKEX boss optimistic on IPO outlook after third-quarter profit falls due to slump in investment income

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The chief executive of exchange operator Hong Kong Exchanges and Clearing (HKEX) remains positive on the outlook of initial public offerings in the city despite a marked slowdown in the last quarter.

Nicolas Aguzin said the pipeline of IPO applications stood at over 200 at the end of September, one of its highest levels on record. It includes 50 health care companies, reflecting Hong Kong’s increasing global role as a biotech funding hub

“The IPO market in the third quarter reflects the cautious sentiment amid the regulatory development in mainland China. However, the pipeline of IPOs in Hong Kong remains solid,” Aguzin said during a post-earnings conference.

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The bourse will continue to introduce more measures to attract companies to list here, he added, after new listings, a major revenue stream, fell considerably during the quarter.

The slowdown in IPOs and the market downturn was a result of Beijing’s crack down on the tech sector and private tutoring sector, which started in July, resulting in investors selling shares and causing IPO activity to slow down.

Aguzin also said the exchange will soon announce its decision after the consultation period on the proposed listing rules for special purpose acquisition companies (SPACs) ends on Sunday. The HKEX is working with other regulators on ways to attract companies to issue yuan shares in Hong Kong, he added.

Earlier on Wednesday, HKEX reported a 3 per cent decline in profit for the third quarter, as higher trading fees were offset by a slump in investment income.

The operator of Asia’s third-largest stock market and owner of the London Metal Exchange reported a net profit of HK$3.25 billion (US$417.9 million) for the July to September period, compared with HK$3.34 billion a year ago. This was slightly better than analysts’ forecast of HK$3.22 billion compiled by Bloomberg.

“The stock market did not perform well in the third quarter, with the Hang Seng Index recording a drop of nearly 15 per cent, which expectedly dragged down HKEX’s investment income,” said Kenny Ng Lai-yin, a strategist at Everbright Sun Hung Kai. “A slowdown in the number of IPOs in the third quarter also affected its income from new listings.”

The exchange reported higher revenues from trading fees during the third quarter as the average daily turnover increased by more than 17 per cent year on year. This was however offset by a 76 per cent decline in net investment income, which fell to HK$155 million from HK$645 million a year earlier.

HKEX shares closed 1.5 per cent lower at HK$474.8 on Wednesday.

For the first nine months, HKEX’s net profit rose 15 per cent to a record HK$9.86 billion, from HK$8.58 billion a year earlier. This was in line with analysts’ estimates.

“HKEX had a strong first nine months of 2021, despite a turbulent macro backdrop. Revenue and profit reached record nine-month highs, ” Aguzin said in the earnings statement, adding that this was mainly due to the introduction of a range of new products, including A-share derivatives.

HKEX CEO Nicolas Aguzin said the bourse remains well-placed to continue to play a vital role in global markets. Photo: Handout
HKEX CEO Nicolas Aguzin said the bourse remains well-placed to continue to play a vital role in global markets. Photo: Handout

As many as 73 companies raised US$35.9 billion in the first nine months of 2021 from IPOs and secondary listings, according to data compiled by Refinitiv. That was a jump of 25 per cent from the same period last year, making it the best nine months since records began in 1980, Refinitiv said. This was mainly due to Chinese companies redirecting their fundraising exercise to the city from New York amid lingering US-China geopolitical tension.

Total listing fees rose 14 per cent to HK$1.63 billion during the first nine months this year, HKEX said, with the IPOs raising a total of HK$285.9 billion, 32 per cent more than a year earlier.

However, most of the mega deals happened in the first half, with fundraising in the third quarter only amounting to US$5.6 billion, the lowest since the first quarter of last year when Covid-19 impacted the market, according to Refinitiv data. Despite fewer IPOs, listing fees in the third quarter increased 13 per cent year on year to HK$562 million from HK$499 million, the HKEX said.

Core business revenue rose 14 per cent to HK$15.66 billion in the first nine months this year, as trading fees and settlement fees increased because of surging market turnover, which averaged HK$180.3 billion a day over this period, 43 per cent higher than a year earlier.

The two stock connect schemes continued to bring additional revenue to the exchange. The average daily turnover from northbound trading, which refers to the trading of A shares listed in Shanghai and Shenzhen through the Hong Kong exchange, reached 123.2 billion yuan (US$19.3 billion) in the first nine months, 37 per cent higher than a year earlier. Southbound trading, which refers to mainland investors trading Hong Kong stocks, doubled to HK$46.2 billion.

HKEX’s costs during the first nine months rose 6 per cent to HK$3.33 billion as a result of higher staff and IT costs, as the exchange is in the process of digitising its operations to enhance efficiency.

Looking ahead to the fourth quarter, Credit Suisse said HKEX faces uncertainties. The Swiss bank revised its average daily turnover estimates for the October to December period to HK$168 billion, from HK$197 billion because of less optimistic market sentiment and disruption of major IPOs.

“We believe potential resumption of IPOs could boost market activities if regulatory uncertainties reduce,” Credit Suisse said in a research note issued last week. “Further, HKEX launched a market consultation on SPAC in September, laying a solid foundation to attract more market participants.”

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