388) One of Asia’s largest exchange companies

Of course, when investors think of stock markets, we might gravitate towards the big ones in the US, such as the New York Stock Exchange (NYSE) or the tech-focused Nasdaq.

In Asia, however, we have a huge exchange operator that is itself listed and has been thriving for decades Hong Kong Exchanges & Clearing Ltd (HKEX) (HKEX: 388). The company is the only stock exchange operator in Hong Kong, with a value of all listed companies approaching HK$40 trillion (US$5 trillion).

As a result, it ranks among the top 10 equity markets (by market size) in the world. So, how can we better understand HKEX, its history and its activities? Let’s dig in to find out.

HKEX lists around the turn of the millennium

As a listed operator, HKEX only started in 2000 when it was listed as a listed company on its own stock exchange. Today’s modern HKEX was the result of a combination of the Stock Exchange of Hong Kong, Hong Kong Futures Exchange and three clearing houses.

Shares of HKEX were listed on an initial basis in June 2000 and the share price ended the year at around HK$18 per share. Today, HKEX shares change hands for about HK$316 each, which isn’t a bad return if you had held it for the past 23 years.

Riding on China’s growth

There is no doubt that HKEX benefited greatly from the wave of Chinese listings that took place in Hong Kong after the 1997 handover.

Many large state-owned enterprises (SOEs), such as banks and oil giants, floated their shares on the Hong Kong stock exchange as China’s rapid economic growth and global commodity boom resulted in the sale of blockbuster stocks.

However, since then, HKEX has managed to expand into other business areas and become one of the major exchange operators in Asia. An example is linking the Hong Kong Stock Exchange to the Chinese stock exchanges of Shenzhen and Shanghai.

Done through the Hong Kong-Shanghai and Hong Kong-Shenzhen Stock Connect programs, launched in 2014 and 2016 respectively, the operator has benefited from being the conduit between international investors and Chinese stock exchanges.

In 2012, HKEX also acquired the London Metals Exchange (LME), the world’s premier metals exchange dating back to 1877.

How do exchanges like the HKEX make money?

As an exchange operator, many of its activities are understandably driven by market flows and trading activity. As a result, corporate earnings tend to be cyclical and thus earnings are lumpy (see below).

Source: HKEX Q1 2023 earnings presentation

However, in the most recent Q1 2023 results, investors will be surprised to learn that net investment income (NII) took a huge jump due to higher interest rates.

This is because the Hong Kong dollar is pegged to the US dollar, meaning that Hong Kong effectively imports US monetary policy and has to align with where the US Fed decides to peg interest rates.

As a result, with a lot of money being lent on margin, interest received soared in the first quarter of 2023 (see below).

Source: HKEX Q1 2023 earnings presentation

In all of its business, it has different revenue lines such as cash and clearing, derivatives, commodities and data and connectivity.

Recent Business Outlook for HKEX

While HKEX saw lower average daily turnover in the Hong Kong stock market, which reached HK$127.8 billion in Q1 2023, a 13% year-over-year decline, this was partially offset by total average daily volume (ADV ) of derivative contracts of 1.4 million contracts, which was an increase of 6% year-over-year.

The company said its Stock and Bond Connect programs with mainland China continued to perform well.

One of the areas of focus recently has been making exchange-traded funds (ETFs) eligible for the Stock Connect since July 2022.

HKEX has three main strategic business goals which they describe as; 1) Connecting China and the world2) Connecting capital to opportunity and 3) Connecting today to tomorrow.

Within China, the business opportunities are obvious, with the Connect programs and growing China-related products.

In terms of connecting capital, the exchange aims to grow its customer ecosystem and improve its market structure by further increasing the attractiveness of the primary market.

Finally, with the last pillar, HKEX has a strong affinity for using data and developing a better digital infrastructure. Recent developments in the first quarter of 2023 included the launch of a Bitcoin futures ETF and two ESG ETFs.

Gateway to Chinese markets

For the past several decades, HKEX has served as the primary gateway for equity investors to access the vast opportunities that China offers. Going forward, that role doesn’t seem to change all that much given the number of Chinese companies looking to list on the HKEX.

Moreover, with geopolitical tensions with the US rising, Chinese companies now prefer to list closer to home. Naturally, HKEX will be a big beneficiary of that trend and could be a stock on investors’ watch lists for those of us who want exposure to Asia’s burgeoning capital markets.

Read also: Understanding the Hang Seng TECH Index A collection of China’s largest tech stocks

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4 stocks this week is not a recommendation by us to buy or sell any of these stocks. For investors eager to learn more, it is recommended that you do further research on them before making your investment decisions.