Analysis of Hong Kong Exchanges and Clearing Limited (HKEX) 3Q 2023 Financial Performance

Good afternoon tiger community, 

In my view, the analysis of HKEX's 3Q 2023 financial performance reveals a mix of challenges and opportunities in a subdued market environment. This report highlights key aspects of HKEX's performance and its implications.

Introduction:

Hong Kong Exchanges and Clearing Limited (HKEX) is primarily engaged in stock exchange operations through five business segments. These include the cash segment, equity and financial derivatives segment, commodities segment, clearing segment, and platform and infrastructure segment.

Financial Analysis: Record-High Revenues and Strong Profitability

In terms of revenue, HKEX reported a robust performance in the third quarter of 2023, with revenues reaching 50.84 billion HKD, representing an 18% year-on-year increase. The cumulative revenue for the first three quarters of the year amounted to 156.59 billion HKD, also showing an 18% year-on-year increase, marking the second-highest historical revenue. Notably, this growth was primarily driven by an increase in investment income, despite variations in overall trading data.

Regarding profitability, HKEX achieved a net profit of 29.53 billion HKD in the third quarter, reflecting a remarkable year-on-year increase of 30.49%. This exceeded market expectations of 28 billion HKD. For the first three quarters of the year, the company recorded a net profit of 92.65 billion HKD, a 31% year-on-year increase. This strong performance was attributed to effective cost management during the first three quarters.

Operational Analysis: Market Challenges, Investment Income, and Profit Optimization

1. Challenges in the Hong Kong Stock Market

The performance of the Hong Kong stock market during the first nine months of 2023 was relatively lackluster, continuing the trend observed in the latter half of 2022. Key indicators such as average daily trading volume, the number of new listings, and capital raised displayed declining trends. This likely reflects negative market sentiment and investor uncertainty about the market's prospects. For instance, in the first three quarters of 2023, the average daily trading volume in the cash segment, as disclosed by HKEX, declined by 12% compared to the same period in 2022. However, the derivatives segment of the company continued to grow during the first three quarters of 2023, with a significant increase in the total number of derivatives contracts traded, up by 9%. Despite these challenges, there are still investment opportunities in this market environment. Long-term investors may find this period suitable for identifying quality investment projects.

2. Contribution of Investment Income to Revenue Growth

A closer examination of HKEX's revenue data reveals that most of its revenue streams experienced year-on-year declines. Only a few areas, such as other income and investment income, showed year-on-year growth. This is closely tied to the overall low liquidity in the market. HKEX reported reduced trading fees, calculation fees, and IPO-related expenses. Without the inclusion of investment-related income, the overall revenue would have decreased year-on-year. This demonstrates the significant contribution of investment income to the company's overall revenue in a challenging market environment.

3. Control of Operating Expenses Enhancing Profitability

Operating expenses increased by 5% compared to the first three quarters of 2022, primarily due to inflation-driven increases in employee and information technology costs, as well as higher professional fees related to LME. Despite this growth, it remained significantly lower than the increase in revenue. This cost control played a crucial role in driving profitability. Ultimately, the main driving force behind profit growth was the contribution of investment income.

Conclusion:

In conclusion, HKEX's performance in the first three quarters of 2023 has been commendable despite the challenging market environment. While the core business revenue showed a clear decline due to subdued market conditions, substantial growth in investment income contributed to increased revenue and profitability.

The current valuation of the Hong Kong stock market is at historical lows, with overall trading volume and liquidity remaining weak, particularly due to the underperformance of heavyweight stocks. The performance of HKEX is closely tied to the broader Hong Kong stock market, which has been uncertain for some time. Any decision to enter this market should be made cautiously, taking into account the evolving market dynamics.

Thank you for reading.😊 

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