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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen. Welcome to HKEX Group First Quarter 2020 Financial Results Analyst Conference Call Webcast.
With us today are Chief Executive, Charles Li; Co-President, Romi Lamba; and the Group CFO, Vanessa Lau. With that, I'm going to pass to Charles.
Thank you. Thank you very much for attending this quarterly presentation. I hope you're all well. And hopefully, we all can be able to see each other physically in the not-too-distant future when we are on the other side of this. I will ask Vanessa to essentially go over the results. They are quite clear. Our underlying business, the core business is very strong. And our cost is being maintained at a very prudent level. And obviously, the result is offset by investment income changes. And there, Vanessa will walk you through some of the details if you wanted to go through it. But we are very comfortable with where we are. Business strategy and everything else is on track. And I will answer whatever other questions you have once Vanessa is done with the results itself. Vanessa?
Sure. Sure. Thank you, Charles. I'm moving on to the slide, which is titled Group Financial Review section. I'm today very pleased to be sharing with you our Q1 2020 financial results. Total revenue and other income comprises 2 elements: the core business revenue and the net investment income. In Q1 this year, our core business revenue was up 19% year-on-year, in line with the 20% increase in headline ADT. In fact, our core business revenue of $4.1 billion is a record quarterly high, demonstrating the resilience of our business. However, with the significant fall in global portfolio valuations, especially in March, we had a net investment loss of $47 million. So combining the strong core business revenue together with the investment loss, overall, our total group revenue and other income was down 7% year-on-year. EBITDA margin was strong at 74%. PAT was $2.3 billion, down 13%. And EPS was $1.80, down 14%, again, reflecting the drop-through of net investment income. It is worth reminding ourselves that 2019 was a record financial year, with Q1 2019 being the strongest quarter that year. If you look at Q1 2020 versus Q4 2019, you can see that our results have shown very pleasing positive growth. Turning to the next page on our detailed financials. Our core business showed strong growth compared with Q1 2019 on both revenue and profit. EBITDA margin was 74%, 3% lower than that in the record Q1 2019. Given the volatility in the market in recent months, we thought it would also be useful to look at consecutive quarters as well as the year-on-year figures. So on this page, you can see that our Q1 results versus Q4 last year, even including the investment loss, Q1 financials are stronger than Q4 last year. Also OpEx is lower due to seasonality. Moving on to look at the trend line. You can see that we have been generally trending up over the last 5 years on both revenue and profit. This is a direct result of the diversification of our portfolio. We are no longer just a cash market, with the breadth and diversification across asset class and geography contributing to our performance. Our results are being driven also by the derivatives and commodities markets, both of which saw significant volume increase as a result of global market volatility. Our cost discipline over the years has also helped us maintain an attractive EBITDA margin. Next, let's take a look at the year-on-year performance of our operating segments. You can see that with the significant increase in trading volumes, all our business segments achieved higher revenue year-on-year. Stock Connect revenue continued to achieve new records with Northbound and Southbound ADT reaching quarterly highs. Similarly, Bond Connect goes from strength to strength, with volumes more than tripling that of Q1 2019. Listing fees were up 9% with 39 new company listings in Q1 and a 58% increase in newly listed CBBCs versus Q1 2019. The Commodities segment was up 15% on revenue, mainly from higher chargeable volumes on the LME as well as the fee increment implemented from January this year. Post Trade revenue was up 19%, in line with the ADT increase. The Technology segment saw a 24% increase in revenue as we experienced greater demand from both new and existing exchange participants on our facilities, which in turn increases our network and throttle usage fees. Corporate items was down because of net investment income.
Given net investment income is a significant factor impacting our results this quarter, especially when compared with last year, I'd like to take the opportunity to spend a minutes giving you some further details on this. So on this slide, we summarize for you the construct and drivers of net investment income performance. I won't go through all the details here, instead, I will illustrate the key points on the next few slides. Net investment loss was $47 million versus a Q1 2019 gain of $882 million. Net investment income comprises internally managed corporate margin and clearing house funds and a noncore actively managed external portfolio. The internally managed funds were broadly flat, down by $18 million year-on-year, as fund sizes were bigger, but we increased rebates to clearing participants from September 2019. The external portfolio saw a loss of $521 million which, when compared with a record gain in Q1 2019 of $390 million, meant that year-on-year, the portfolio saw a delta of around $900 million. To put this in context, let's look at how our externally managed portfolio has performed over the years. On the left-hand side of this chart, you can see that we started our portfolio in December 2016 with a $6 billion injection. We subsequently injected a further $2 billion in tranches in early 2019. These monies were put into a portfolio that is highly diversified across asset classes with over 20 fund managers, which helps to mitigate portfolio volatility and asset class concentration risk. In the summer of 2019, we rebalanced from equities to more conservative asset classes. And in March and April this year, we made 2 cash redemptions totaling $3.3 billion. So the portfolio is now reduced by about 30% in size. You can see from the chart on the right-hand side that over the 3 years since the inception of this portfolio, despite the loss in Q1 this year, this portfolio has generated a cumulative gain of $800 million, representing a 3.7% annualized return. Moving on to the next page. This chart shows how we have derisked our portfolio, both in terms of lowering the percentage invested in equities and reducing the overall size of the portfolio to $7.5 billion by the end of March, with a further $1.9 billion redeemed in April. Next, I would like to reiterate that investment income does fluctuate from year-to-year and is primarily driven by the macro investment environment. That said, it is helpful to show that this portfolio has behaved in a countercyclical manner to our headline ADT in the period since inception. As you can see, when ADT goes down, this portfolio tends to perform well and vice versa. The loss in Q1 was within our expectations, given the global market sell-off and was well within our risk parameters. It also was an outperformance against most global market indices. We will not be looking at net investment income in this detail every quarter, but hopefully, you find this helpful. Moving on to EBITDA by segment. EBITDA largely tracks revenue performance and increased year-on-year for all of our operating segments. Lastly, let's look at our operating expenses. OpEx was up 6%, reflecting our investments in talent and technology, including our acquisition of BayConnect in June 2019. Professional fees increased mainly because of strategic projects and a review of our HKATS derivatives trading system. So reflecting on this quarter's results, like every other company, we are affected by macroeconomic changes, but it is encouraging to see that our core business continues to show real strength and resilience with strong performances across the board. Our external portfolio will continue to be impacted by the macro market valuations, but we believe the derisking actions taken should increase downside protection. We are well placed to capture future growth opportunities with a specific focus this year on managing our costs and risks. With that, I will hand back to Charles for our business and strategic update.
Thank you, Vanessa. I will try to be brief for the next section. As you can all see, our core market is performing very strongly. Cash ADT, 20% up; futures and options ADT, 9%; LME and chargeable ADV, 12%. So very strong core business all around. IPO market remained resilient and strong. Right now, we are #1 globally in terms of numbers. But in terms of fund raise, we are #4. But I'm confident that we will improve from that position because large companies are in the pipeline. And I think we are seeing some very interesting mature companies coming back to Hong Kong from overseas. And you have also seen that those companies tend to really contribute into our trading business in very, very obvious and significant manners.
Our Connect scheme continue to perform, and I think Vanessa already covered that. So both Stock Connect and Bond Connect breaking records and just to continue to break records. And I don't think we are even -- and I think we are not seeing the end of it. And this is not the end of the -- this is the -- not the end or the beginning of the end or the end of the beginning. So this is really early stage.
Market enhancement programs continues. We continue to do a lot of things in the market microstructures, whether in Southbound trading, Investor ID regime and consultation conclusions and USF -- the US -- the uncertificated securities market. We also have launched but extended the deadline for corporate WVR companies. We enhanced the VCM. We continue to launch new product. Our technology evolution also continues. This is also a period where we are going through, like everybody else, tremendous amount of stress in the system, in our people, working from home, double team, BCP. But I'm glad to report that the whole system has been extraordinarily resilient and strong. Our people have really come out of this very well and also give us some good signs as to how our business could potentially alternatively be organized and structured. So we also continue to work on organizational excellence, sustainability and developing talent, investment in talent. We are also increasing our global stakeholder engagement, whether that's in Davos or contributing and donating for COVID-19 and also strong, active regulatory industry and customer engagement. We are also pushing hard on Green Finance and other sustainability initiatives.
So with that, I will open this for Q&A. Thank you.
Thank you, Charles and Vanessa. Now let's open for questions. [Operator Instructions] Moderator, open -- over to you.
We have a first -- our first question comes from CICC, Victor Wang from webcast. His question is, may I know the criteria timetable for succession plan from Charles' personal perspective? What do you want to say to ease investors' concern? Because many worry the HKEX development may weaken post your departure.
Thank you. I think Hong Kong Exchange is extraordinarily strong company. Our business is on a strong foundation. We have done a lot. Many of the strong initiatives that we have built are now generating very sustained -- sustainable growth for us. And we also continue to look into the future.
I think in terms of criteria, I don't really think there is any magic formula here. We are looking on a global scale, and we are looking for people who probably have 3 broader -- we want that new person to be able to continue to dream big and aim high because our company is a company that dreams big and aims high. And we want visionary leader, passionate leaders and leaders who are constantly curious and wanted to find new horizons. But meanwhile, we also want someone to absolutely be to protect and preserve what we have already achieved. We've got a very strong business. They are highly defensible and highly sustainable, but that still require very dedicated, continued protection and service and optimization. And lastly, we obviously have to really deal with the current difficult operating environment, global COVID challenges. And people -- whoever comes here need to be resilient, need to be resourceful and need to be very agile. Again, we are looking for Mr. Perfect or Ms. Perfect. But in the end, I think we are such a good company that we believe and we have confidence that we will be able to attract truly world-class caliber people.
Thank you, Charles. Our next question comes from Morgan Stanley, Richard Xu.
Two questions. One is, we're seeing basically China capital markets pushing a lot of reforms in the capital markets. I don't know if Hong Kong Stock Exchange management is participating in any of the discussions with policymakers in China. Where do you see any new opportunities arising from the reforms and changes in China at the moment? And also, Charles, I have a question for you. For the remainder of your tenure at Hong Kong Stock Exchange, what's your priority? And what do you want to accomplish over the next 1.5 years?
Thank you. Yes, we are seeing a lot of initiatives now kicking off in the domestic onshore market. We're paying a lot of attention to it. At this point, very few of these reforms have direct relevance with us because they are, generally speaking, still onshore market. But the connectivity regime that effectively now bring our market together continue to operate in ways that was designed and desired for. And I think our continued conviction is that the more open the Chinese domestic market is, the more sophisticated they become. Actually, you think they become more competitive is actually good for us because they are becoming more competitive because their markets, the customers and their investors are demanding those competitive improvement. And which also means that they will -- the investor base, the issuer base were becoming much more interested and keen to try out of China. So I actually think whatever is the pressure that is driving domestic financial reforms are precisely the kind of pressure, the kind of opportunities for us. And so sometimes people tend to only look at the exchanges onshore becoming a competitor. They don't see that the only reason they become a more competitive pressure is because their investors wanted to do a lot more. And the Connect schemes and many other progress we're making obviously will become more attractive. So the structure -- or the source of our structured future growth largely will come from the domestic capital market as well.
In terms of the remainder 18 months, I don't see a tremendous distinction between what I'm doing now and what I'm going to be doing between now and then. It's a continuation of the business. It's a continuation of the strategic plan implementation and execution. Obviously, a lot more I will spend time on thinking that decisions that I'm making now will need to be carried over beyond my term, and I wanted to make sure that the decisions are made in a way that is the most facilitative towards to be further promoted and carried out by the new leader. So I think in many ways, a lot more thought, a lot more deliberation. But in terms of actual strategy, business operation, nothing really is changing.
Thanks, Charles. Our next question comes from Goldman Sachs, Gurpreet.
My questions are for Vanessa, broadly around the investment income. So can -- Vanessa, please tell us regarding this derisking that nearly $3.3 billion now in cash and money market. So what is the time line? Or is there a time line for making this entire portfolio into cash and marketable securities? And then the second one is regarding this Page 14 of the release that multi-sector fixed income had a $146 million loss. So can you give us the index that we should look at for these 3, the absolute return, the multi-sector fixed income and U.S. government bonds and mortgage-backed securities, so that we can monitor the mark-to-market going forward? Because equities, we get, it should be MSCI World Index. And then finally, a question on scrip. So we see that the cash keeps on building in terms of net cash at the corporate level, and there is a scrip issuance happening at a slight discount to the market price. So what's the strategy regarding not issuing that money scrip dividend and having more cash, or maybe not incentivizing shareholders by not keeping a discount so that the cash does not build on the balance sheet?
Thank you, Gurpreet. On your first question on the net investment income and derisking of our external portfolio, yes, we have taken out $3.3 billion in cash. And we have parked some of it in the money market fund and some of it in internal treasury. And we will keep monitoring the market conditions in the months ahead. And if timing is appropriate, then we will potentially invest some of this money back into our portfolio. But if we feel, on the contrary, that we need to do further derisking in the coming months, that's also one of the options that we will look at. In terms of your question on the fixed income, in -- our fixed income asset class is very broad and does include fund managers, which are also exposed to credit. So it's a bit of a combination of different classes. Your question on what index would be more appropriate to use as benchmark, we would suggest the BBG, Barclays Global Aggregate Index would be one that you might want to consider. And then your last question on the scrip dividend. We continue to keep this under regular review as we continue to review all the attractive organic/inorganic growth opportunities, which are aligned with our strategic plan. And when timing is appropriate, we will be open to adjusting the scrip dividend policy, but only at the appropriate time. And currently, whilst things are uncertain in the macro environment, we believe that having some surplus cash is a good problem to have.
Thanks, Vanessa. Our next question comes from Citi, Yafei.
I have a couple of questions. The first one is for Charles. The -- for the succession planning, have you identified any potential internal candidates that could take over as the CEO just to -- through the -- preserve as well as to continue what the current leadership has laid out from a longer-term strategy perspective? Or are you more open to look for external candidates that are able to bring in new strategy as well as dream high, aim high kind of new thinking to the group? That's the first question. And then the second one is around more specific derivatives that Hong Kong Exchange in a couple of quarters have seen the derivatives revenue relatively lagging behind cash to some extent. And even this quarter, when volume is good, the derivatives revenue is again behind the cash sector. This is in contrast to other exchanges like SGX. Just wanted to understand what can Hong Kong Exchange do to drive revenue growth from derivatives. And is there any update on the MSCI Asia Futures contract?
Thank you. I think on the succession planning, a search committee has been formed a while ago. This is going to be a global search because we are a global company, and we are looking for global talent. Obviously, our company is also highly unique in the sense that we are -- our business strategy is anchored in China, connecting the world and technology empowered. We'll obviously hopefully be able to identify someone who can do all 3. And then in the end, you ultimately look at the strong candidate and decide to make the right trade-offs. And in that process, both internal and external candidates will be considered. And at this point, I think I don't have a lot of detail further to add in that regard. And I ask Vanessa to discuss the derivative side.
Sure. On the derivatives, as you rightly pointed out, Yafei, the growth was positive. It was 9%, but it was shy of the 20% growth in the cash market ADT that we saw. And the reason for that is that if you look into what drove the 9% derivatives ADT, Futures was 15%. So very positive, but stock options were 2% only. And the reason for stock options lagging in this quarter was that when volatility goes up to an extreme. So if you look at the VHSI volatility index, it shot up to over 60, which we haven't seen in the last 10 years. When that happens, it actually is very tricky for even market makers to price the stock options. And hence, there was less trading in that regard.
Yes. Is there any other initiatives that has been in place to drive further derivatives growth and MSCI?
This is Romi Lamba. I think as part of our 3-year strategic plan, we continue to look at different types of underlying. And one of the things we did talk about in the plan as part of our globally connected strategy was to try and become more of a one-stop shop in Hong Kong. And so we'll probably look at this in 2 phases. The first one -- or 2 different aspects. The first one is to bring more Asian underlying to Hong Kong to attract international investors. And the second one is to bring more global underlying to Hong Kong to attract Chinese investors. Obviously, right now, Chinese investors have limited direct access to derivatives in Hong Kong. It's not part of Connect. So I think we'll be more focused on trying to bring the regional underlying here. And then we have also launched the MSCI Asia ex Japan product, and we will potentially look to do more global product that is attractive to other Asian investors as well.
Thanks. Let's move to our next question coming from HSBC, Livy.
Two questions. The first one is about the collective investment scheme. So we've seen the total size have already halved from 4 months ago. Do we have like full year front size target? And will we keep redeem some of the equities and bonds investment from that fund? And the second question is mainly about the IPOs. We've seen a very good quarter for IPOs this year. So going forward, how do we see the pipelines in the Q2 or Q3? Especially recently, we've heard some market rumors about the very famous companies are going to come back for secondary listings. So will that boost our pipelines going forward?
Thank you, Livy. I will talk about the collective investment schemes. So as you already pointed out, we have taken down the overall size of the external portfolio. It is currently down about 30% in fund size. Your question about whether we will keep redeeming, it really depends on what we see in the coming months in the global markets. If appropriate, we will -- we could redeem more, but of course, redeeming more and more means that we will also lose the upside if the markets were to rebound like they did in the month of April. So we'll keep this under review. We have strict governance in place through our Board Investment Committee. So we'll keep you posted.
On the IPO front, as Charles mentioned, I think 2 comments. One is the IPO market through the virus has been quite resilient. The companies are doing virtual road shows. They're able to price deals. Obviously, most of them are not doing physical listing ceremonies right now, but we have done 2 virtual listing ceremonies online, and some companies will come back and do their listing later. In terms of -- the listing ceremony later. In terms of the pipeline, we do see a strong pipeline. But I want to highlight, we have 2 types of filings here in Hong Kong. The typical IPO is a public filing. When it files, let's say one, everybody knows about it, it goes into the listing approval process. And hopefully, a few weeks later, it gets the approval and kicks off the deal. But when it comes to the secondary listings, like Alibaba and any other ones because they're already listed in another venue, they are able to file confidentially. So while we are optimistic, and obviously, the media has reported, we expect a couple more big ones in the second half of the year. We can't -- we ourselves, apart from the listing division, which is the regulatory entity, don't know for sure if these companies are going to file. But having said that, I think the indications are we will see more of these deals in the months to come.
Our next question comes from webcast, from Sharnie Wong, Bloomberg. Her question is -- she want to ask about the update of China -- future China initiatives such as ETF Connect, Primary Connect and A-share derivatives.
Sharnie, I'm afraid I don't have any very much of related update on those. Those are very close to our hearts. You know we will be laser-focused on them. And as soon as there is movement for us to be able to leverage and take advantage, we will. Right now, especially in light of the coronavirus situation, we're not even able to visit. And so I'm afraid I don't have any update, but you can be rest assured that when you're not even thinking about it, we will be, and we always, every minute, we're thinking about it.
Okay. Thank you, Charles. Our last question comes from Ran Xu from Morgan Stanley. Her question is the time line of A-share derivatives and Alibaba's inclusion in the Southbound Stock Connect. And secondly, he wants to ask about the potential fund raised by the ADRs. Charles, over to you.
Yes. What's AD?
The ADR, the secondary listings.
Oh, yes. Okay. I think on the first question, again, it's very similar to the question I just answered. Those are very important issues for us. We have a task force on that. And we're doing everything, coming up with all sorts of solutions. I'm highly confident we will be there. But we just need the time. And I think on the MSCI Futures, it's probably more challenging, but other things that could potentially slightly easier. But again, even easier, things are tough in China. In terms of the secondary listings size, I think the good thing about this group of companies is that they are quite binary. They're either great companies, very established, large cap, successful track record, trading very well, and that allows them to do a very large offering in Hong Kong and creating Asian time zone liquidity and then they tend to all do well, and I think Alibaba is a perfect example. So therefore, anyone -- but if you are not big enough, if you're not strong enough, if you are sort of getting involved in some of those reputationally tarnished companies there as of late, or you're not trading well, your investor not supporting that kind of a dilutive secondary offering, then it may not really -- they wouldn't be able to come or we wouldn't really -- they wouldn't really be qualified. So it's quite binary. And the ones who really should come back, we all want them to come back, fortunately, do come back.
If I can just augment, in the last earnings call in late February, we started quantifying the ADT contribution from not just secondary listings, but the big jumbo IPOs. And just to update that number, the 5 largest IPOs from 2018, which included China Tower, Meituan, Xiaomi; and the 5 largest from 2019, which included Alibaba, Budweiser, et cetera, have so far in 2020 contributed about 15% of ADT, that's 1-5. So that trend continues to be -- we see that growing. And obviously, both the pure IPOs that aren't listed elsewhere as well as the secondary listings will contribute going forward to incremental ADT.
Okay. With that, that concludes today's analyst call. Thank you, everyone, for joining the call. If you have further questions, please contact HKEX Group Investor Relations. Thank you.
Okay. Thank you. Stay safe.