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By Lawrence White and Saikat Chatterjee
HONG KONG Feb 26 With nearly half of its market value wiped out in the last three years, Hong Kong's stock exchange is hoping that a slate of new initiatives will give it a much needed boost after reporting worse than expected annual earnings on Wednesday.
Hong Kong Exchanges & Clearing Ltd 0388.HK, as it's formally known, has pinned hopes on a HK$3 billion ($386 million) technology upgrade, a push into yuan-denominated products and its $2.2 billion purchase of the London Metal Exchange (LME) in 2012.
HKEx, the world's fourth largest exchange operator, reported a lower than expected 11 percent rise in annual earnings, as a recovery in stock trading volumes last year was offset by increased expenses from the LME.
HKEx's net profit for 2013 was HK$4.55 billion ($586.22 million), the company said in a filing on Wednesday, just below the HK$4.7 billion analysts expected according to Thomson Reuters data.
The LME deal is so far acting as a drag on profits for HKEx, as the London exchange's contribution of a HK$326 million profit in 2013 was offset by its addition of operating exepenses of HK$783 million.
Some of those costs came from the LME building its own clearing house, LME Clear, which should begin contributing fees when it launches in September this year.
The LME has also been embroiled in a U.S. lawsuit. 26 class actions have been filed against LME alleging anti-competitive and monopolistic behaviour in the warehousing industry, HKEx said in its statement. The plaintiffs must file consolidated complaints on March 12.
The HKEx is betting on a bigger menu of yuan-denominated products in bonds, commodities and equities as Hong Kong strives to cement its position as the world's biggest offshore yuan hub. Last week it listed the first Exchange Traded Fund, or ETF, outside China that tracks the onshore bond market.
A resurgence in initial public offerings late last year boosted total annual listing fees by just one percent to HK$586 million, underlining how IPO revenues alone are not the answer to HKEx's turnaround.
BEYOND CASH EQUITIES
Indeed, the exchange is urgently trying to tap new areas of growth and diversify away from the traditional areas of cash equity trading and equity offerings by Chinese companies.
Otherwise, the HKEx stands to lose ground as China moves towards its goal of full convertibility of the yuan, which would allow foreign investors to trade on mainland exchanges in Shanghai and Shenzhen, unfettered by quotas or other constraints.
"If China opens up too fast, or if China finds that Hong Kong can't deliver the things it wants, then we will lose our edge," chief executive Charles Li told the audience at the Asia Financial Forum in Hong Kong last month.
With a market capitalization of around $18 billion, Hong Kong's stock exchange has fallen to fourth place from first among publicly-listed international bourses, due in part to a drop in IPO volumes since 2011.
HKEx's $6 billion to $7 billion of daily turnover now pales in comparison to New York, Tokyo and mainland China exchanges, where daily turnover at each is at least four times higher.
Meanwhile, rival exchanges such as the CME Group Ltd CME.O, Intercontinental Exchange and NYSE Euronext NYXn.BCO are encroaching on the HKEx's turf, offering their own commodity and yuan-related products.
CME, for example, sees an average daily trading volume for its yuan-denominated forex and bond products of $40 billion. That compares to a daily average in January of $774 million for HKEx's offshore yuan futures, according to company data. Regulatory hurdles also loom.
HKEx's new data center is aimed at improving its high-frequency trading (HFT) offering, at a time when Hong Kong regulators have labelled such trading as potentially disruptive.
"Exchanges have to walk a fine line in attracting liquidity and allaying public concerns about HFT," said Hani Shalabi, head of advanced execution services, Asia Pacific at Credit Suisse. ($1 = 7.7616 Hong Kong dollars) (Additional reporting by Vikram Subhedar and Melanie Burton in LONDON; Editing by Simon Cameron-Moore)