HK exchange faces tougher times as markets weaken

HONG KONG (Reuters) - The world's No. 2 exchange operator, Hong Kong Exchanges & Clearing (0388.HK), which reported healthy first-quarter growth, could face a tough time for the rest of 2010 if deteriorating market conditions crimp new listings.

Like other exchanges around the world HKEx, which saw a close to 70 percent jump in the number of IPOs last year, faces the prospect of IPO volume falling sharply as companies yank back or trim their public offerings due to global market volatility and financial turbulence in Europe.

Competition from the Shanghai and Shenzhen exchanges could further pressure the exchange, with some Chinese companies preferring to list there because of their higher valuations and to minimize foreign exchange risk.

"Right now, with the current market slump and volatility, the outlook for new IPOs won't be as optimistic as it was before," said Paul Lee, an analyst at Tai Fook Research in Hong Kong.

"The near-term driver will be growing market turnover, and the challenge for the exchange is to continue attracting companies from a wider geographical region outside of the Greater China area."

Companies looking to raise funds in Hong Kong had been expected to raise a record HK$370 billion this year, Ernst & Young said in December, but fear of contagion following the Greek debt crisis has dimmed the outlook for IPOs.

The Hong Kong exchange was the top market in the world for IPOs in 2009, followed by the New York Stock Exchange and the Shanghai stock exchange.

Already, companies like the property unit of Swire Pacific (0019.HK) have pulled the plug on plans to raise up to $2.7 billion through a Hong Kong IPO, while a wave of rights issues by mainland banks could further dampen sentiment.

"We will keep building on our strengths to attract issuers globally and overseas investors to this part of the world and work closely with regulators and policymakers to enhance competitiveness," the HKEx said in a statement.

BUILDING ON DERIVATIVES

HKEx reported a 35 percent rise in first-quarter profit, as a rebound in equities markets helped boost daily turnover.

The exchange, which ranks behind global leader CME Group (CME.O) in terms of market cap, posted a January-March net profit of HK$1.13 billion ($145 million), or HK$1.05 per share, higher than the HK$834 million, or HK$0.78 a share a year earlier.

The result lagged UBS' forecast of HK$1.124 per share.

Average daily stock market turnover, the key determinant of exchange revenue, rose 45 percent to HK$64.8 million in the first quarter from a year ago, when the global stock markets hit bottom at the depths of the global recession.

For the second quarter, the exchange's average daily turnover has remained healthy so far, prompting analysts to say that they expect HKEx to continue reporting strong results in the current three months.

"It's not a one-way down street," said Dominic Chan, an analyst with BNP Paribas who has a "buy" rating on the stock. "Turnover so far actually looks better now than in the first quarter, and the share price has already factored in any turnover weakness."

Headed by Charles Li, a mainland-born former JPMorgan banker who took the helm at the HKEx in January, the exchange has drawn up plans such as building on its derivatives markets, drawing listings from overseas and pushing for more Chinese participation.

Shares of HKEx have fallen 12 percent so far this year, worse than the 8 percent decline on the benchmark Hang Seng Index .HSI.

HKEx has vaulted past its smaller regional rival Singapore Exchange (SGXL.SI) in attracting new listings this year, although IPO activity has slowed as market conditions deteriorate from a bumper 2009. Some 13 companies held IPOs during the quarter, about double last year's total.

For the whole year of 2009, Hong Kong saw 73 IPOs, raising a combined HK$248 billion, up from 49 in 2008 that raised HK$66 billion.

(Editing by Dhara Ranasinghe, Jonathan Hopfner and Valerie Lee)