Hong Kong Exchanges Earnings: Positive Interest Rate Exposure Compensates for Lackluster Markets

We maintained our HKD 300 fair value estimate for wide-moat Hong Kong Exchanges and Clearing 00388, or HKEX, following second-quarter results. Although the Hong Kong stock market has lagged this year compared with most other major stock markets, as expressed by the Hang Seng Index being down 9% year to date, HKEX delivered a solid result for the second quarter, with net profit up 34% on the prior corresponding period, or PCP.

HKEX’s first-half result continues to reflect the benefit of its diversified business. On the one hand, higher interest rates and uncertainty about China’s economy led to an 11% decline in revenue in HKEX’s cash segment on the PCP, which was primarily driven by a 14% decrease in average daily turnover in equity products. A 9% decrease in funds raised through IPOs similarly detracted from results, as global capital markets remained relatively quiet.

However, higher interest rates and macro uncertainty also helped boost HKEX’s equity and financial derivatives segment, which saw a 40% increase in revenue during the first half of fiscal 2023, compared with the PCP. The primary driver here was net investment income, which is mostly interest collected on cash and bank deposits. Net investment income in the segment jumped nearly fivefold to constitute nearly half of segment revenue during the period. Smaller contributions came from derivative trading fees as market participants expressed increased demand for hedging, up 4% on the PCP, a stark contrast when compared with the 13% decline in cash equity trading fees over the period.

We forecast a recovery in ADT and IPO markets through the balance of the year, while investment income remains elevated.