After the Hong Kong stock market closed on February 29th Beijing time, HKEX.HK released its 2023 fourth-quarter earnings report. As most of HKEX's revenue is related to market trading conditions, which are generally public information, and the company's official website discloses this information monthly.
Overall, the performance was slightly below consensus expectations. The variance was mainly due to listing expenses, and unexpected increases in personnel expenses further exacerbated the profit miss.
However, the positive news is that since January, there has been a visible recovery in trading sentiment in the Hong Kong stock market. With the gradual expectation of increased liquidity throughout the year, short-term prospects have begun to rebound, potentially driving HKEX's performance up.
Market trading sentiment can be considered the core factor affecting HKEX's performance. In a previous Analysis Report, Dolphin Research mentioned that the daily trading volume of the stock market reaching 1 trillion can be seen as a key indicator of sentiment. In Q4, it dropped to only 900 billion, hitting a low point in nearly 15 years.
Dolphin Research believes that despite discounted rate cut expectations, the trend towards looser market liquidity is relatively certain. Coupled with the current policy release window domestically, the unsustainable daily trading volume of 900 billion. At least in terms of short-term performance in the first and second quarters, Dolphin Research suggests not being overly pessimistic.
The following is a detailed analysis of the financial report:
1. Overview of HKEX Business
2. Overall Performance: Revenue under pressure, profits significantly decline due to fixed costs
In the fourth quarter, HKEX achieved revenue of HKD 4.86 billion, a 6.6% decrease year-on-year, mainly dragged down by the decline in revenue related to stock and futures trading. The custody fee for funds saw a significant increase, while market data fees remained stable due to rigid demand.
In the first three quarters, investment income was relatively high due to high interest rates. However, in the fourth quarter, growth significantly slowed down due to a higher base. It is expected that as interest rates continue to decline, investment income will return to normal levels.HKEX Revenue Breakdown: 65% Directly Related to Trading (Trading Fees, Clearing Fees), 10% Listing Fee Revenue. Despite stable performance in the commodity market and a significant increase in investment income, a simultaneous decline in both stock and futures markets led to a 6.6% YoY decrease in overall revenue.
1. Trading Fees: Dull Sentiment, Frozen Trading Volume.
In the fourth quarter, due to significant macroeconomic pressures in both the mainland and Hong Kong markets, with relatively mild policy stimulus and unmet market expectations, there was a significant impact on trading sentiment.
In terms of trading volume, the year-on-year decrease in Average Daily Turnover (ADT) in the stock market was 28%, even lower than the second quarter of 2022. The daily trading volume of futures and options contracts in Q4 also decreased by 11% YoY, but began to recover early in December.
2. Two Factors: LME Driving Overall Commodity Market Trading Volume Growth by 30% YoY in Q4, with Trading Fees Increasing by 23% YoY.
Only bulk commodities (LME) saw an increase in trading volume in the fourth quarter, with nickel contracts growing by 32% compared to the previous three quarters after nickel trading resumed in March 2023 following a suspension in the same period last year. Additionally, lead contracts reached a record high daily trading volume after being included in the Bloomberg Commodity Index.
Despite the efforts of the LME to boost the commodity market, due to the larger scale of equity and derivative markets, trading and clearing fee revenue in Q4 still decreased by 20% and 15% respectively.4. Listing Fees: The number of new listings is warming up, but there are also many delistings
In the fourth quarter, the number of new listed companies in the Hong Kong stock market reached 26, showing a slight increase from the 14 in the third quarter, but compared to the same period last year, it is still 8 companies fewer. At the same time, due to the increasing number of companies being delisted during the same period, the total number of listed companies at the end of the year has remained relatively stable, increasing by 3 companies to 2609 (including the main board and GEM).
Due to the fact that listing fees are not only paid by companies during their IPO, existing companies also need to pay a certain amount of listing fees to HKEX every year, with the latter often accounting for a larger proportion (75-80%). Therefore, as the number of delisted companies increases, the decrease in fixed listing fees for new companies that have not yet paid will also lead to a reduction in basic listing fees.
Ultimately, listing fees in the fourth quarter decreased by 15% compared to the same period last year, totaling only 908 million, the lowest level in nearly two years.
5. Investment Income Benefits from High-Interest Environment
Throughout 2023, the capital market has been in a high-interest environment, benefiting companies' investments in fixed-income bond products, providing significant support to this year's revenue and profit. However, in the fourth quarter, due to the end of a low base period, the growth rate slowed down, but the absolute value remained relatively high. Nevertheless, as the high-interest environment weakens gradually this year, this portion of investment income will also return to normal.
6. Fixed Costs, Profits Under Pressure Amid Revenue Decline
In the fourth quarter, HKEX achieved an overall EBITDA of 32.6 billion Hong Kong dollars, a 14.3% decrease compared to the same period last year, mainly due to the pressure on current revenue. For HKEX, its cost structure is relatively fixed, with the majority being employee expenses, which increased by 7% year-on-year for the full year. Other expenses are also more related to basic operational costs, relatively inflexible. Therefore, with revenue under pressure in the fourth quarter, the decline in profits is more significant.
However, conversely, as revenue recovers, profits will also rebound more noticeably.Dolphin Research's "Hong Kong Stock Exchange" related articles
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