Hong Kong Exchanges Earnings Miss Estimates on Turnover

Hong Kong Exchanges & Clearing Ltd., the world’s second-biggest bourse by market value, said second-quarter profit fell 21 percent, missing analysts’ estimates as market turnover and listing fees declined.

The bourse operator rose 0.9 percent to HK$109.1 at the 4 p.m. close, erasing a decline of as much as 1.8 percent. Net income in the quarter ended June 30 slid to HK$1.07 billion ($138 million) from HK$1.35 billion a year earlier, the company said in a statement. That compares with an average HK$1.09 billion estimate of four analysts surveyed by Bloomberg. Revenue and other income dropped 8 percent to HK$1.9 billion, it said.

The company, which lost its place as the world’s biggest exchange operator by market value to CME Group Inc., is seeking to broaden its business as the pipeline of large initial public offerings from China slows and equity volumes fall. It is bidding to buy the London Metal Exchange to expand into commodities markets and is developing cross-border products with its Shenzhen and Shanghai counterparts.

“The profit decline was expected because of lower turnover,” said Jonas Kan, the head of Hong Kong research at Daiwa Capital Markets. “Going forward, it will depend on how it integrates the LME and whether the average turnover will improve.”

Turnover Slides

In the six months through June, the daily average value of shares traded in the city fell 23 percent to HK$56.7 billion from HK$73.6 billion in the same period last year, the bourse said. Average turnover fell 29 percent in the three months through June 30, it said.

Listing fees fell to HK$218 million in the second quarter, compared with HK$221 million a year earlier and HK$244 million last quarter, according to Bloomberg calculations. First-half profit slid 14 percent to HK$2.22 billion.

“Lower risk appetite of investors drove market activity levels down in the first half of 2012,” the bourse said in the statement. “The global economic unrest -- and the European sovereign debt crisis in particular -- continues to be a key focus of the financial markets.”

The bourse said on June 15 it plans to pay 1.39 billion pounds ($2.15 billion) for the London Metal Exchange, which handles more than 80 percent of global trade in industrial-metal futures. LME shareholders last month approved the takeover offer, which is being reviewed by the U.K. regulator and doesn’t need approval from Hong Kong Exchanges’ shareholders.

‘Beginning Integration’

“We are not seeing any issues that potentially could stand in the way,” Chief Executive Officer Charles Li said at a press briefing after earnings were released. “Even though closing is yet to happen we are already beginning the implementation and integration process.We expect the transaction to close near the middle or end of November.”

Operating expenses rose 13 percent from a year earlier to HK$1.03 billion during the first-half amid higher staff costs and legal and professional fees, according to the exchange. It incurred HK$110 million of expenses, mainly on professional fees, in relation to the acquisition of the LME, it said.

IPOs in Hong Kong, which boosted profit from listing fees for the exchange in the first-half of 2011, have slumped to $3.77 billion in the six months through June this year, according to data compiled by Bloomberg. That compares with $10.5 billion in the preceding six months.

Listings Plunge

A total of thirty-two companies debuted on the city’s main market and Growth Enterprise Market in the first half, the Hong Kong Exchanges said. Forty-seven companies were listed on the exchange during the first-half of 2011, including transfers from the Growth Enterprise Market.

During the first six months, the bourse named Chow Chung-Kong, the former chief executive officer of subway operator MTR Corp., as the new chairman. It also introduced a yuan-denominated gold exchange-traded fund and Asia’s first futures tracking volatility. A yuan-denominated A-share ETF began trading on July 18.

The bourse cut its interim dividend to HK$1.85 a share from HK$2.16, according to the statement. It maintained a payout ratio of 90 percent.

The bourse’s gain today, brings the shares’ loss for the year to 12 percent. That compares the benchmark Hang Seng Index, which is up 8.9 percent this year.

“Over the years they relied almost totally on cash market turnover,” said Daiwa’s Kan. “Globally there is a lot of money flowing to the bond market and the equity market has been suffering in a way. In some ways, with the LME acquisition, their reliance in the cash market will further decline.”

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