Hong Kong Exchanges and Clearing : HKEX 2017 First Quarter Results

Pursuant to Chapter 38 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, the Securities and Futures Commission regulates Hong Kong Exchanges and Clearing Limited in relation to the listing of its shares on The Stock Exchange of Hong Kong Limited. The Securities and Futures Commission takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness, and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

(Incorporated in Hong Kong with limited liability)

(Stock Code: 388)

(Financial figures in this announcement are expressed in Hong Kong dollar unless otherwise stated)

The Board1 is pleased to present the unaudited consolidated results of the Group2 for the three months ended 31 March 2017.

• Revenue and other income for Q14 2017 was 11 per cent higher than Q1 2016, which was attributable to:

  • Increases in core revenue including Stock Exchange listing fees and depository, custody and nominee services fees;

  • Increases in net investment income arising from Corporate Funds and higher interest income from Margin Funds; and

  • One-off income of $55 million post-liquidation interest from the liquidators of Lehman Brothers Securities Asia Limited.

• Operating expenses were 2 per cent lower than Q1 2016 due to a one-off insurance recovery of $23 million relating to the warehouse litigation in the United States. Excluding this recovery, operating expenses were broadly flat compared to Q1 2016.

• EBITDA margin of 73 per cent was 4 per cent higher than both Q1 2016 and the year ended 31 December 2016.

• Profit attributable to shareholders increased by 20 per cent to $1,716 million.

1. The board of directors of Hong Kong Exchanges and Clearing Limited (HKEX or the Company)

2. HKEX and its subsidiaries

3. For the purposes of this announcement, EBITDA is defined as earnings before interest expenses and other finance costs, taxation, depreciation and amortisation. It excludes the Group's share of results of the joint venture.

4. Q1 = first quarter, Q2 = second quarter, Q3 = third quarter, Q4 = fourth quarter

   BUSINE SS RE VIEW

   Overview

   Market sentiment in the Cash Market improved since January 2017 with headline ADT rising to $74.3 billion, 16 per cent above Q4 2016 and 2 per cent above Q1 2016. This was accompanied by increased fund flows through Stock Connects5 where both Northbound and Southbound Trading saw higher volumes and generated total revenue and other income of

   $75 million in Q1 20176. Improved overall sentiment was accompanied by reduced market volatility and HKFE7 contracts traded dropped by 4 per cent from Q4 2016 and were 18 per cent lower than Q1 2016 (which included exceptionally high derivatives volumes in January

   2016). Nevertheless, increased volumes in the Cash Market and stock options more than offset lower HKFE and LME volumes and Q1 2017 Revenue8 was 3 per cent higher than Q1 2016 and 4 per cent above Q4 2016.

   Net investment income in Q1 2017 was $305 million higher than Q4 2016 and $220 million higher than Q1 2016. This arose primarily from fair value gains on collective investment schemes held as part of Corporate Funds. In addition, one-off interest of $55 million was received from the liquidators of Lehman Brothers Securities Asia Limited (Lehman). As a result, overall revenue and other income for Q1 2017 was 16 per cent higher than Q4 2016 and 11 per cent higher than Q1 2016.

   Operating expenses decreased by 2 per cent against Q1 2016 due to a one-off insurance recovery of $23 million relating to the warehouse litigation in the United States (which for the LME and HKEX defendents has now been concluded). Excluding this recovery, operating expenses remained at a similar level to Q1 2016 and were 8 per cent lower than the prior quarter. Compared with Q1 2016, increases in staff costs attributable to higher headcount and increase in premises expenses for new offices, were more than offset by Information Technology (IT) cost savings. In light of the continued global economic and market uncertainties, the Group will maintain a prudent approach to expenditure control.

5. Stock Connects refer to Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect.

6. The total revenue and other income generated by Stock Connects in Q1 2017 was $75 million (year ended 31 December 2016: $177 million), of which $38 million (year ended 31 December 2016: $81 million) arose from trading and clearing activities.

7. Subsidiaries of the Group include The Stock Exchange of Hong Kong Limited (SEHK or the Stock Exchange), Hong Kong Futures Exchange Limited (HKFE or the Futures Exchange), Hong Kong Securities Clearing Company Limited (HKSCC), HKFE Clearing Corporation Limited (HKCC), The SEHK Options Clearing House Limited (SEOCH), OTC Clearing Hong Kong Limited (OTC Clear), The London Metal Exchange (LME), LME Clear Limited (LME Clear) and other subsidiaries.

8. Excludes net investment income and sundry income

Cas h S e gme nt

Q1 2017 vs Q1 2016 ($m)

Revenue1

+14%

Operating expenses

+7%

EBITDA

+15%

Revenue rose by 14 per cent compared to Q1 2016, primarily driven by a 15 per cent increase in trading fees and tariff, in line with the increase in ADT.

738

649

22

80%

81%

Stock Exchange listing fees rose by

16

113

99

201

184

597

$17 million, reflecting an $11 million increase in annual listing fees, from a higher number of listed companies and a $6 million increase in initial listing fees, due to more newly listed companies than in Q1 2016.

517

350

402

132

141

Operating expenses rose by 7 per cent due to higher staff costs attributable to additional headcount for strategic projects.

Q1 2016 Q1 2017 Q1 2016 Q1 2017 Q1 2016 Q1 2017

Trading fees and trading tariff

Market data fees

Stock Exchange listing fees

Other revenue

1 Excludes derivative warrants (DWs), callable bull/bear contracts

(CBBCs) and warrants, which are included under the Equity and Financial Derivatives segment

ADT of equity products traded on the Stock Exchange in Q1 2017 ($58.1 billion) was 14 per cent above that of Q4 2016

($51.1 billion), and 15 per cent above that of Q1 2016 ($50.7 billion). This improvement in ADT over Q4 2016 outperformed most global and Asia-Pacific exchanges reflecting improved investor sentiment in Hong Kong and the Mainland.

Stock Connects continued to gather momentum in Q1 2017, with increases in both Northbound and Southbound Trading volumes. In particular, Southbound ADT almost trebled year-on-year. HKEX will continue to work with its Mainland counterparts to explore ways of further enhancing Stock Connects, including expansion to cover Exchange Traded Funds (ETFs) and listed bonds, and improvements in trading arrangements for holidays and stock borrowing and lending.

21 new Exchange Participants (EPs) were admitted in Q1 2017, versus 46 admitted in the full year of 2016, indicating continued optimism in the Hong Kong securities market. At 31 March 2017, the number of EPs reached a historical high of 610.

Following regulatory approval of Leveraged and Inverse Products (L&I Products) and

extensions to the scope of eligible underlying indices to include Hong Kong equity indices, a total of 17 L&I Products tracking the Hang Seng Index (HSI) or Hang Seng China Enterprises Index (HSCEI) were successfully listed in March 2017.

HKEX continues its efforts to extend market data coverage in the Mainland, to facilitate Southbound Trading, by building awareness, enhancing services and offering a number of incentive and discount programmes for both retail and institutional Mainland investors. Since the launch of Shanghai-Hong Kong Stock Connect, the number of Mainland Information Vendors who redistribute HKEX's market data has more than doubled to 58 in March 2017.

The growth of Southbound Trading through Stock Connects is also driving demand for Mainland research analysis on Hong Kong listed companies. To facilitate this, HKEX supported a Stock Connect Corporate Access Day in Shenzhen, jointly organised by the Hong Kong Investor Relations Association, the Chamber of Hong Kong Listed Companies and the Listed Companies Council of the Hong Kong Chinese Enterprises Association. This initiative aimed to connect Hong Kong listed companies with research analysts in the Mainland and facilitate more research coverage onshore. Approximately 150 representatives from over 80 Hong Kong listed companies and 180 research analysts from 33 leading Mainland brokers, attended the event.

In Q1 2017, HKEX introduced an Annual Attestation and Inspection Programme in the Cash Market to further enhance HKEX's monitoring and surveillance efforts of EPs' adherence to the SEHK Trading Rules.