If investors think of stock exchanges, we might naturally gravitate towards the big ones in the US, like the New York Stock Exchange (NYSE) or the tech-focused Nasdaq.
However, in Asia we have a massive stock market operator that is itself a listed company and has been thriving for decades – Hong Kong Exchanges & Clearing Ltd (HKEX) (HKEX: 388). The company is the sole stock market exchange operator in Hong Kong, with the value of all the companies listed on its exchange amounting to nearly HK$40 trillion (US$5 trillion).
As a result, it’s one of the top 10 stock markets (by market size) in the world. So, how can we better understand HKEX, its history and its business? Let’s dig in to find out.
HKEX Lists At Turn Of Millennium
As a listed stock exchange operator, HKEX only started life in 2000 – when it was listed on its own exchange as a listed company. The actual modern HKEX was a culmination of a combination of the Stock Exchange of Hong Kong, Hong Kong Futures Exchange and three clearing houses.
Shares of HKEX were listed by way of introduction in June 2000 and its stock price ended the year at around HK$18 per share. Today, HKEX shares change hands for around HK$316 apiece – not a bad return if you had held over the past 23 years or so.
Riding On China’s Growth
There’s no doubt that HKEX benefitted massively from the wave of Chinese listings that took place in Hong Kong post-the 1997 handover.
Many large state-owned enterprises (SOEs), like banks and oil giants, floated their shares in Hong Kong as China’s rapid economic growth and the world’s commodities boom resulted in blockbuster share sales.
Since then, though, HKEX has managed to grow into other business areas to become one of Asia’s premier exchange operators. One example has been linking the Hong Kong Stock Exchange with the Mainland China exchanges of Shenzhen and Shanghai.
Done through the Hong Kong-Shanghai and Hong Kong-Shenzhen Stock Connect programmes, launched in 2014 and 2016 respectively, the operator has benefitted from being the conduit between international investors and Chinese exchanges.
Back in 2012, HKEX also acquired the London Metals Exchange (LME) – the world’s foremost metals exchange that dates back to 1877.
How Do Exchanges Like The HKEX Make Money?
As a stock exchange operator, much of its business is understandably driven by market flows and trading activity. As a result, its business revenues tend to be cyclical and thus its earnings are lumpy (see below).
Source: HKEX Q1 2023 earnings presentation
However, in its most recent Q1 2023 earnings, investors may be surprised to learn that its net investment income (NII) saw a huge jump on the back of higher interest rates.
This is because the Hong Kong Dollar is pegged to the US Dollar, which means that Hong Kong effectively imports US monetary policy and has to align with where the US Fed decides to peg interest rates.
As a result, with a lot of funds being lent out on margin, the interest received on those ballooned in Q1 2023 (see below).
Source: HKEX Q1 2023 earnings presentation
Across its business, it has various revenue lines such as cash and clearing, derivatives, commodities, and data and connectivity.
Recent Business Outlook For HKEX
While HKEX saw lower average daily turnover on the Hong Kong stock market – which was at HK$127.8 billion in Q1 2023, down 13% year-on-year – this was partially offset by total derivatives contracts average daily volume (ADV) of 1.4 million contracts, which was up 6% year-on-year.
The company said the Stock and Bond Connect programmes with Mainland China continued to perform well.
One of the areas of focus recently has included making exchange-traded funds (ETFs) eligible for the Stock Connect – since July 2022.
HKEX has three main strategic business goals which they outline as; 1) Connecting China and the World, 2) Connecting Capital with Opportunities and 3) Connecting Today with Tomorrow.
Within China, the business opportunities are obvious, with the Connect programmes and growing China-related products.
In terms of connecting capital, the exchange aims to grow its client ecosystem and enhance its market structure by further building the attractiveness of the primary market.
Finally, with the last pillar, HKEX has a strong affinity for leveraging data and building out better digital infrastructure. Recent developments in Q1 2023 included launching a Bitcoin futures ETF and two ESG ETFs.
Gateway To China’s Markets
For the past few decades, HKEX has served as the main gateway for stock investors to access the vast opportunity set in China. Going forward, that role doesn’t look set to change all that much given how many Chinese companies are seeking listing on the HKEX.
Furthermore, with geopolitical tensions rising with the US, Chinese companies now prefer to list closer to home. Naturally, HKEX will be a big beneficiary of that trend and could be a stock on investors’ watchlists for those of us who want exposure to the burgeoning growth of capital markets in Asia.
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