Hong Kong Exchange Operator's Profit Jumps as Trading Surges

HONG KONG—A bull market in Chinese stocks helped propel trading activity on Hong Kong's stock exchange to the highest level in its history during the first half of the year, boosting its bottom line as its metals trading business had a slight decrease in turnover.

Profits at Hong Kong Exchanges & Clearing Ltd., the city's exchange operator, rose 73% to 4.1 billion Hong Kong dollars (US$528.5 million) in the first half after trading fees jumped, allowing it to increase its dividend by more than two-thirds.

HKEx, which vies with CME Group Inc. as the world's largest exchange operator, is a gateway to offshore-listed Chinese shares for overseas institutional investors and has developed a channel to the Shanghai market in the past year.

The exchange witnessed a surge in volumes beginning in April, when Chinese capital flooded into the city's equity markets making use of Stock Connect, a trading link allowing brokers in Hong Kong to buy shares in Shanghai and vice versa. The resulting jump in trading fees helped boost revenue 48.3% to HK$6.85 billion. The earnings missed analysts' estimates, however, with increasing staff costs driving operating expenses higher.

Meanwhile, the exchange operator reported a 3% decline in daily turnover at LME, its industrial metals trading arm.

The company said the outlook for the remainder of the year was uncertain, after a crash in Chinese markets in July that has sapped enthusiasm for Shanghai stocks. Volatility from China has also spilled over into commodity markets.

"With multiple and complex challenges facing the world economy, the performance of the global financial markets, with Hong Kong being no exception, is subject to uncertainties in the second half of the year," said C.K. Chow, the exchange's chairman in a statement. "The group will stay vigilant and strive to enhance its competitiveness further by introducing new products to meet market needs.

The company's shares were recently down 3.8% to HK$207.80 after the release of earnings, underperforming the wider Hang Seng Index, which fell 2.1%.

The daily value of stock trading in Hong Kong has dwindled since July, as the rally in Chinese shares turned to dust. The Shanghai Composite, which had gained 151% in the year through June, has subsequently fallen 24.3%—with the slide only halted by widespread intervention by Chinese authorities to quell the panic in July.

Hundreds of applications for temporary trading suspensions by companies have spooked investors who feared being unable to withdraw their capital. July brought the first monthly outflows via Stock Connect since its launch in November, casting a pall over plans to expand the trading link to Shenzhen.

The exchange's statement gave no update on a possible launch date for the Shenzhen Stock Connect.

HKEx has hoped that a further boost to volumes would come from offering global investors access to the smaller Shenzhen market, home to many listings of companies in China's new economy, including those in the technology, pharmaceutical and new energy industries. However, the decision to launch ultimately rests in the hands of Chinese regulators.

"The exchange can only do what they can do, in terms of laying infrastructure and improving the products," said Michael Wu, an equity analyst at Morningstar.

Write to Gregor Stuart Hunter at [e-mail]

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