Hong Kong Exchanges and Clearing Ltd. is facing a softening in trading volumes as it enters the second quarter after a record performance in the first three months of 2021, though the bourse operator expects to attract more liquidity from mainland China and stay one of the world's top IPO destinations.
"It's only April, I can't say too much about the projection of the second quarter," the exchange's interim CEO Calvin Tai said at an April 28 earnings call with journalists. "When I say softer, it's in comparison to the first quarter, which is exceptional. If we look at April volume, even though we said softer, it's still roughly 20% higher than the ADT [average daily turnover] last year. While the market liquidity is still pretty high, we've seen that it's not as high as in January or February."
In the three months ended March 31, Hong Kong exchange posted a 70% year-on-year increase in net profit, driven by strong market turnover and IPOs. Companies raised a total of HK$136.6 billion selling shares in Hong Kong. Its biggest listing in the first quarter was that of Kuaishou Technology, which raised HK$41.28 billion. The exchange also hosted secondary listings of Baidu Inc. and Bilibili Inc. in the period.
The stock connect scheme, which allows investors in Hong Kong, Shanghai, and Shenzhen Stock Exchanges to trade securities in each other's markets via their home exchange, posted HK$737 million in revenue from the program, up 82% on year. Stock connect revenue made 12% of HKEX's total revenue and other income in the quarter. The average daily turnover of the program rose to 126.8 billion Chinese yuan for share purchases by Hong Kong-based investors in China, from 78 billion yuan a year earlier. The figure for the reverse southbound trade jumped three-fold to a record HK$60.8 billion, from HK$21.6 billion in the first quarter of last year.
The average daily turnover of all equity products traded on the exchange rose to HK$198.0 billion in the first quarter, from HK$103.4 billion a year earlier.
Tai, who will make way for Alejandro Nicolas Aguzin as the new CEO next month, said HKEX was "very pleased" with the first quarter results, "set against challenging economic and geopolitical backdrop."
"We will continue to manage our costs and risks and are confident we remain well placed to capture future growth opportunities, whilst at the same time ensuring our markets remain resilient, vibrant and robust," he said.
Gateway
Hong Kong's stock market remains an important gateway between mainland Chinese companies and international investors. Tensions between Beijing and Washington have driven some mainland companies to drop their U.S. listing plans and debut on Hong Kong instead. The expansion of various mutual market-access programs between Hong Kong and the mainland, also called stock connect and bond connect, has further boosted trading and demand for new listings on the city's exchange.
"Six years after launch of the Stock Connect scheme, Hong Kong is growing as the stepping-off point for international funds to gain access to Mainland China's capital market, as well as a convenient and necessary offshore destination for mainland investment," said Bruce Pang, head of macro and strategy research at China Renaissance Securities.
On Feb. 1, the scheme added qualified shares from the Shanghai Stock Exchange's STAR board. The Science and Technology Innovation Board, as the startup market is formally called, is one of the world's youngest and most expensive trading venues.
"We believe Hong Kong will continue to see strong investment interest and fund flows from the Mainland, driven by diversified investment products with attractive valuations and cost advantages, investors' long-term desire to diversify into overseas assets, further broadening of the cross-border investment channels as well as the continued resiliency, vibrancy and attractiveness of Hong Kong's capital market," Pang said.
Meanwhile, Hong Kong is still well positioned to capture U.S.-listed Chinese firms that are seeking primary or secondary listings in the city given increasingly stringent regulations in the U.S., which have caused some firms to delist.
Several high-profile firms that are expected to list in Hong Kong this year are JD.com Inc.'s logistic arm JD Logistics Inc. and Shanghai ANE Logistics Co., Ltd.. Beijing Byte Dance Telecommunications Co. Ltd. was also reported to consider going public in Hong Kong, but denied the report on April 26.
"In our view, Hong Kong may become a more attractive listing destination for current U.S.-listed China technology companies that may either chose to pursue a secondary listing outside the U.S. or have to delist in the U.S. due to potential regulatory restrictions in that market," Pang said.
As of April 27, US$1 was equivalent to 6.48 Chinese yuan.