Hong Kong Bourse Profit Estimated to Jump Most in 6 Years

Hong Kong Exchanges & Clearing Ltd., the world’s third-biggest bourse operator, will post its biggest quarterly profit growth in almost six years after new listings in the city surged, according to analysts.

Net income in the three months through December climbed 38 percent to HK$1.19 billion ($153.4 million) from HK$864 million a year earlier, the exchange will report tomorrow, according to the average estimate of 18 analysts surveyed by Bloomberg. Figures were derived using nine-month results and full-year analyst projections. The number of initial public offerings jumped almost fourfold to 48 from 13 a year earlier, while funds raised more than doubled to HK$107.2 billion from HK$45.2 billion, according to the bourse’s website.

“We’ll probably see further improvements in fourth-quarter results because there’s been a lot of new listings, and fee income from IPOs would have increased substantially,” said Kenny Tang, Hong Kong-based general manager of AMTD Financial Planning Ltd. “Turnover has also been improving.”

About HK$59 billion in shares changed hands on Hong Kong Exchanges on average each day in the fourth quarter, representing a 5.4 percent increase in the indicator known as turnover, according to data compiled by Bloomberg. Revenue related to market turnover accounted for about 67 percent of the bourse’s total in the first nine months of last year, while listing fees made up 11 percent. Shares of Hong Kong Exchanges slid 0.1 percent to HK$120.70 as of 9:56 a.m. today.

Stock Rebound

The Hong Kong stock market rebounded in the second half, with the Hang Seng China Enterprises Index, also known as the H-share index, surging as much as 24 percent as the nation’s policy makers unveiled in November the biggest reform package since the 1990s. The rally came after a surge in China’s money-market rates amid a crackdown in speculative lending sent the H-share index to a 19-month low in June.

The benchmark Hang Seng Index is down 3.9 percent this year through yesterday, the second-worst performer among major developed markets tracked by Bloomberg, as the U.S. pared stimulus and China data signaled a slowdown in the world’s second-largest economy. Gross domestic product expanded 7.7 percent last year and is forecast to grow 7.5 percent this year, the slowest pace since 1990.

Investors are watching whether Chinese e-commerce company Alibaba Group Holding Ltd. will choose Hong Kong over the U.S. for the biggest IPO since Facebook Inc., which raised $16 billion in May 2012. Alibaba hasn’t decided when and where to list shares, the company said in an e-mailed statement on Nov. 20, after Japan’s Nikkei newspaper cited Chairman Ma Huateng as saying he preferred going public in Hong Kong as early as this year.

Mainland Competition

Last quarter’s strong listing market may not be sustainable in the face of new competition as Chinese companies may choose to debut shares on the mainland after China Securities Regulatory Commission lifted a 14-month ban on IPOs in November, according to Core Pacific-Yamaichi Hong Kong Ltd. China was the world’s largest IPO market in 2010, with a record $71 billion raised.

“Some companies planning to list in Hong Kong may reconsider making the move in China’s stock market instead,” said Castor Pang, head of research at Core Pacific-Yamaichi. “In Hong Kong, even though IPO activity was hot and attracted overseas money, it’s hard to attract long-term funds. U.S. stimulus cuts may dry up market liquidity.”

The Hong Kong bourse will also tomorrow report profit contributed by London Metal Exchange, the world’s largest for the commodities. Hong Kong Exchanges bought LME for $2.2 billion in 2012 by selling new shares, issuing convertible bonds and securing a 543 million pound ($904 million) loan.

LME Acquisition

“As a result of capital that was issued to fund the LME acquisition, the return on equity for the business is structurally much lower than it used to be,” said Matthew Smith, an analyst at Macquarie Group Ltd. LME earnings in the first nine months in 2013 accounted for about 9 percent of the Hong Kong bourse’s HK$3.5 billion profit in the period.

Hong Kong Exchanges’ earnings momentum may slow if turnover slides and it fails to increase profit from the LME, according to Francis Lun, chief executive officer of Geo Securities Ltd.

Hong Kong Exchanges fell 6.6 percent this year through yesterday, when it traded at 26.4 times estimated earnings. That compares with a 2.1 percent gain for ASX Ltd., operator of Australia’s main exchange, and a 3.9 percent drop by Singapore Exchange Ltd. The Hong Kong bourse’s consensus rating, or the average of analysts’ recommendations, is at 3.3 out of 5, compared with 2.7 for ASX and 3.44 for Singapore Exchange.

“Hong Kong Exchanges is at an inflection point, with consensus estimate downgrades over the past couple of years finally giving way to upgrades with this week’s earnings report,” said Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong.

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