Hong Kong Bourse Says Second-Quarter Profit Up 10 Percent

Hong Kong Exchanges & Clearing Ltd. (388), the world's second-biggest bourse operator by market value, said profit climbed 10 percent last quarter as trading volumes rose.

Net income increased to HK$1.17 billion ($151 million) in the three months through June 30 from HK$1.07 billion in the same period a year earlier, according to a statement today. The profit compares with the HK$1.15 billion average estimate of seven analysts surveyed by Bloomberg.

Led by Chief Executive Officer Charles Li, the bourse acquired the London Metal Exchange, the largest platform for trading industrial-metals futures, for $2.2 billion in December to expand into commodities. The benchmark Hang Seng Index fell 0.5 percent this year through Aug. 13, the only decline among developed markets tracked by Bloomberg, as economic expansion in China slowed and amid speculation the U.S. Federal Reserve will pare stimulus as global growth shows signs of improving.

"With the gradual recovery of the global economy, trading activities at HKEx in the first half of 2013 were better than those in the corresponding period last year," Chow Chung Kong, Hong Kong Exchanges chairman, said in the statement. "Looking forward, the global financial market remains challenging, in particular with the anticipated unwinding of the liquidity easing policy in the U.S."

Shares Drop

Hong Kong Exchanges shares dropped 4.3 percent in 2013 through Aug. 13, with trading scrapped yesterday as a typhoon hit the city. The Bloomberg World Exchanges Index rose 17 percent this year through yesterday. The bourse operator's stock fell 0.4 percent at the midday break to HK$125.80 ahead of the earnings announcement.

The U.S. central bank, led by Chairman Ben S. Bernanke, will probably reduce its $85 billion in monthly bond purchases at its meeting on Sept. 17-18, according to 65 percent of economists surveyed by Bloomberg from Aug. 9 to Aug. 13. The Fed has said any reduction in stimulus would be tied to sustained economic recovery.

The Hong Kong bourse's equity rating was upgraded to overweight from neutral this week at JPMorgan Chase & Co. on expectations of increased trading volume in coming months, while the June 2014 price target was cut to HK$135 from HK$155.

"We expect volumes to improve by 10 percent in the next three months, before subsiding in December," JPMorgan analysts Harsh Wardhan Modi in Singapore and Josh Klaczek in Hong Kong wrote in a note dated Aug. 12. "This pick-up in volumes should lead to the stock price moving up in tandem."

Revenue Increases

Revenue increased 17 percent in the second quarter to HK$2.2 billion, Hong Kong Exchanges said. Operating expenses climbed 37 percent to HK$672 million.

The average daily volume of LME metals contracts traded rose 13 percent, compared with a 5 percent gain in the first three months of the year. The LME contributed about 11 percent of Hong Kong Exchanges' HK$2.33 billion profit in the first half of the year, according to the statement.

The commodities exchange is considering three candidates to replace Chief Executive Officer Martin Abbott, who plans to leave at year-end, two people familiar with the process said this month. LME is also fending off an antitrust lawsuit in the U.S. on allegations the company conspired with banks to drive up costs to restrain aluminum supplies.

'In Line'

"As far as the operations of Hong Kong Exchanges go, it's pretty much in line with what I expected," Matthew Smith, an analyst at Macquarie Capital Securities Singapore Pte, said after the earnings were announced. "It will be interesting to see what they say, if anything, about the LME-related law suits in the U.S."

Hong Kong Exchanges executives will speak to media and analysts later today.

"LME management's initial assessment is that the suits are without merit and LME will contest them vigorously," the bourse said in today's statement.

The daily average value of shares traded in Hong Kong rose 20 percent to HK$68.3 billion in the first half from the same period last year, according to the statement. That compares with a 130 percent surge on Japan's Topix Index and a 32 percent jump in Singapore, according to data compiled by Bloomberg. Average daily turnover in Australia rose 16 percent.

Funds raised through initial public offerings in Hong Kong jumped 29 percent in the first six months of the year to HK$39.7 billion, while futures and options turnover reached a record on June 25, Hong Kong Exchanges said. The exchange operator this month introduced contracts linked to the CES China 120 Index, which tracks the most liquid shares listed in both Hong Kong and the mainland.