Hong Kong/HKEX: uncertain position in the eyes of Beijing weighs on listings

When Beijing discouraged US listings of Chinese companies earlier this year, Hong Kong hoped that its own stock exchange would benefit. Instead, it has been left in limbo.

Hong Kong Exchanges and Clearing reported its second consecutive quarterly profit decline on Wednesday. Beijing’s regulatory crackdown coupled with a real estate crisis has hammered markets and knocked company listing plans. Net income fell to HK$3.25bn (US$418m) in the quarter to September, from HK$3.35bn the previous year. Revenue was flat as investment income fell. Operating expenses for the first three quarters of the year rose on higher staff and IT systems costs.

Beijing’s ongoing regulatory demands have hit one of HKEX’s key revenue streams: listings by Chinese companies. The amount raised fell 40 per cent in the third quarter compared with the previous year. Companies including NetEase’s music unit Cloud Village and electric car maker Nio have put their listing plans on hold for now.

Investor sentiment has soured too. Weeks-long trading halts for companies such as property group Evergrande pushed the value of frozen stocks to a record $61bn last week. Hong Kong’s trading halts are becoming known for their frequency and length, adding reputational risk.

China’s property sector crisis and rising corporate defaults are only just getting started. As Hong Kong-listed shares decline, more companies may consider going private. Chinese Estates Holdings, the second-largest shareholder in Evergrande, announced an offer to take the business private earlier this month.

HKEX shares trade at 41 times forward earnings, a steep 78 per cent premium to regional peer Singapore Exchange. Shares are up a quarter in the past year, reflecting hopes that Chinese company listings would increase.

Neither reflect the risks and uncertain outlook, including that associated with Chinese tech groups — the biggest names on Hong Kong’s Hang Seng index. Without a flow of new listings from Chinese companies, the valuation gap with peers should narrow. Hong Kong’s status as both a listing destination and finance hub is at the mercy of Beijing more than ever.

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