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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 afternoon, ladies and gentlemen. Welcome to HKEX 2021 Q3 Results Analyst Presentation. Today, we are very pleased to have our Chief Executive Officer, Nicolas Aguzin; and our Group CFO, Vanessa Lau. We will first present the key highlights of our financial performance and strategic updates in the first 9 months of 2021, then we are very happy to take some of your questions. [Operator Instructions]
Without further ado, over to you, Gucho.
Thank you very much. Good afternoon, everyone. Thank you for joining us today. It is my pleasure to be talking with you, our investors and analysts here in Hong Kong and around the world. On behalf of HKEX, I'm delighted to present our financial results for the first 9 months of 2021. HKEX had a strong 9 months with record year-to-date revenue and profit. I will let Vanessa go into more detail on the numbers later, but if I may, let me go through some of the key highlights here first.
For Q3 year-to-date, we are reporting record revenue and other income of HKD 16.2 billion. That's up 15% year-on-year, with core business revenue up 14%. Profit attributable to shareholders was also at a record 9-month high of HKD 9.9 billion, up 15% from a year earlier.
Looking at the third quarter. As a stand-alone, Q3 2021 revenue and other income of $5.3 billion was 7% higher than Q2 2021 and in line with the strong Q3 last year. Net profit for the Q3 stand-alone was HKD 3.25 billion, our third best quarter on record. That's up 17% on the previous quarter and only slightly down 3% on the strong third quarter of last year. This small decrease was mostly driven by investment income since if we look at profit of our core business, it was up 5% on Q3 of 2020.
The strong 9-month performance to September of this year was driven by record ADT and Stock Connect volumes as well as good IPO market and a very strong IPO pipeline. During the third quarter, we continued to proactively drive the business forward, expanding our product range and cementing Hong Kong's leading position as a multi-asset liquid global investment trading and risk management center.
In August, we announced the launch of Hong Kong's first Asia derivatives product, the MSCI China A 50 Connect Index Futures, providing international investors with a new and effective management tool for their China equity exposure.
I am very excited to note that the product launched smoothly last Monday with the best notional value day 1 performance of any futures contract ever in our markets. We also launched a SPAC market consultation in September on proposals to create a listing regime for SPACs in Hong Kong. The consultation period ends in a few days.
I will talk about a little more on this shortly. But now please let me hand over to Vanessa, who will talk through our results in more detail. Vanessa, over to you.
Thank you, Gucho. Good afternoon, everyone. Thank you for joining us. I'm Vanessa Lau, and would now like to share with you our Q3 2021 financial results. HKEX continued to perform well in the third quarter of the year, and we're very pleased to today be reporting record 9-month financial results.
Against the first 9 months of 2020, total revenue and other income was up 15% to $16.2 billion. In the current quarter, we have redefined core business revenue. In the past, core business revenue represented total revenue and other income excluding net investment income and HKEX Foundation donation income. From this quarter onwards, core business revenue will include net investment income from margin and clearing house funds as income from these funds is tied directly to the performance of the business. We believe this will better reflect the scope of the group's core business.
Applying this new definition, our core business revenue was up 14% against the adjusted prior year, driven by record headline ADT of $180 billion and record Stock Connect trading volumes, partly offset by lower margin fund investment income in the low interest rate environment. However, net investment income from corporate funds increased by $96 million to $460 million, reflecting higher fair value gains in the externally managed portfolio. This was partly offset by reduced interest income from internally managed corporate funds.
Our EBITDA margin was up 1% year-on-year, increasing to 79%. Profit after tax and earnings per share reached record 9-month highs, with profit after tax at $9.9 billion, EPS at $7.79, both up 15% year-on-year.
Turning to the next page on our detailed financials. Driven by record ADT and Stock Connect volumes, our core business showed strong growth year-on-year for both revenue and profit. Excluding charitable donations through the HKEX Foundation, OpEx was up 5%, reflecting higher staff costs and IT expenses. As reported last quarter, there was a one-off deferred tax charge of $160 million on LME's acquired intangible assets resulting from an increase in the U.K. corporate tax rate from 19% to 25% effective April 2023. Notwithstanding this, we're pleased to report today that both profit after tax and earnings per share reached record highs.
Moving on to the next page where we look at our rolling quarter-on-quarter performance. Q3 revenue was 7% higher than Q2, reflecting higher volumes in our cash and derivatives markets, partly offset by the fair value losses from the external portfolio in Q3 compared with gains in Q2 and the seasonal decrease in depository fees. As I mentioned earlier, the $160 million deferred tax charge was recognized in Q2. Hence, overall, Q3 profit after tax was 17% higher than Q2.
Now let's look at our Q3 performance versus the same quarter last year, which was a particularly strong quarter. Revenue was the same for the 2 quarters as higher volumes in our cash market offset both the lower net investment income resulting from fair value losses of the external portfolio in Q3 this year compared with gains last year and reduced margin funds investment income. Overall, profit after tax was marginally lower by 3% in Q3 this year due to higher depreciation and amortization.
Moving on to look at the trend line. As you can see, we continue the upward trend on both revenue and profit. You may recall that Q1 2021 profit was significantly above the trend line due to exceptionally buoyant volumes. Q2 and Q3 volumes returned to levels similar to that which we saw in the second half of last year. This demonstrates the resiliency and robustness of our core business and our cost discipline, which have helped us maintain an attractive EBITDA margin throughout the last few years.
Next, we take a look at the year-on-year performance of our operating segments. Driven by the record ADT, the cash and post trade segments posted significant higher revenues year-on-year. I would highlight 3 particular drivers which showed significant growth. Firstly, record headline ADT drove cash market revenue up significantly. Stock Connect volumes continued to achieve new records with both northbound and southbound ADT reaching record highs. As a result, Stock Connect revenue reached a record high of $2.1 billion, contributing 13% to group total revenue and other income in the year-to-date Q3 2021.
Secondly, depository fees increased by 39% to $1.3 billion, driven by an increase in EIPO service fees reflecting a higher number of applications from the IPO market, higher script fees from more companies having their book closed this year and the increase in Stock Connect portfolio fees.
Lastly, listing fees were up 14% as the number of newly listed derivative warrants and CBBCs reached record highs, and the IPO pipeline was strong.
The Commodities segment performed robustly, down 1% reflecting the challenges faced by the global economy in a COVID-19 environment. Corporate items was up as a result of higher fair value gains on the external portfolio and higher HKEX Foundation donation income.
Moving on to investment income. Net investment income was $929 million, 37% lower than the prior year period. Net investment income comprises of internally managed corporate funds, margin and clearing house funds and an actively managed external portfolio. The internally managed funds were down $781 million year-on-year due to lower interest rates, as reflected by the drop in HIBOR overnight, 3-month and 12-month rates by 93%, 85% and 70%, respectively, against the prior period. However, the external portfolio made a gain of $298 million compared with $71 million in the prior year period. It has generated a cumulative gain of $2.1 billion since its inception in December 2016.
Lastly, let's look at our operating expenses. Excluding Foundation charitable donations, OpEx was up 5%, reflecting our continued investments in talent and technology infrastructures as well as incentives to attract new customer volumes. Overall, this has been a very good 9-month period for HKEX, and we're very pleased with another set of record results. After a very buoyant Q1, trading volumes in Q2 and Q3 returned to more normalized levels, with ADT being 33% and 17% higher than Q2 and Q3 last year, respectively.
Looking ahead, we believe Stock Connect will continue to be a key revenue driver as well a strong IPO pipeline. We are well placed to capture future growth opportunities and we'll continue our strong focus on managing our costs and risks.
With that, I'll hand back to Gucho for our business and strategic update.
Thank you very much, Vanessa. As our financial results highlight, we continue to deliver a very good and robust performance, thanks to a clear strategy and the resilience of our organization. Alongside the record ADT in our cash market, we raised $286 billion in IPOs, a record 9-month high. We welcomed a total of 73 new listings across the 9 months to September, and nearly 90% of the value of our listings was contributed by new economy and biotech companies.
I'm also pleased to note that we welcomed our first 2 dual primary listings with weighted voting right features in the third quarters. Perhaps, however, the most notable development is the strength of our IPO pipeline.
At the end of the third quarter, we had over 200 active IPO applications. Those are companies that have actually filed A1s. And that includes over 50 health care companies, reflecting Hong Kong's increasing global role as a biotech funding hub. These developments underscore my optimism about the medium and long-term outlook for the continued vibrancy, attractiveness and diversity of our robust IPO franchise.
Strong growth momentum continued in Stock Connect revenues, setting another record high at $2.1 billion. That's up 55% year-on-year. In fact, we saw record ADT levels across both our Stock Connect and Bond Connect schemes.
During the period, HKX continued to make solid progress on a number of fronts, ranging from enhancing our market attractiveness, broadening our product ecosystem, to modernizing our operations and infrastructure. We further embedded sustainability within our operations and our activities, supporting the long-term growth of Hong Kong as a leading IFC and reinforcing our commitment to the prosperity of our community.
Particular highlights in Q3 included: Published consultation paper on proposals to create a SPAC listing regime in Hong Kong; implemented multiple enhancements to Bond Connect, along with the launch of Southbound Bond Connect; launched MSCI China A 50 Connect Index Futures last Monday, providing international investors with a new and effective risk management tool for their China exposure. We introduced more new products, including options on futures as well as new thematic ETFs and cash-settled futures in LME.
We were very pleased to confirm the launch of FINI in Q4 2022, streamlining our IPO subscription and settlement cycle from T+5 to T+2. We continue to welcome more new products to our stage platform and drive our advocacy on green and sustainable finance.
LME launched LMEpassport, which is an online service and centralized digital register helping participants meet the LME's responsible sourcing requirements.
And finally, we were also very proud to have scaled the impact of HKEX Foundation by launching our new HKX impact funding scheme.
Now moving on, I would like to spend a little bit of time to talk about our newly launched MSCI China A 50 Connect Index Futures. It will be a crucial part of our comprehensive China Asia ecosystem in Hong Kong for global investors. In HKEX, investors can already invest in the Mainland via Stock Connect and via a broad suite of cost-effective A share ETFs. Additionally, they can now efficiently manage both of their A share and renminbi exposures via a broad-based index futures and USD/CNH futures and options all under 1 roof. HKX now provides broad and complete coverage of Asia underlying in Hong Kong through our equity derivative suite. This offering started with our flagship HSI and HSCEI product suite for Hong Kong market. We then expanded this last year by introducing the MSCI Asia and Emerging Markets product suite.
Today, for accessing China's 13 trillion A share market, we offer sector balanced index futures for global investors to trade and hedge their China exposures. We are confident that this new suite of products are the most competitive offshore China investment tools for investors and risk managers, and that, together, they will further strengthen Hong Kong's role as the gateway to China for global investors.
The global economy is undoubtedly shifting to recovery mode. We're seeing continued focus on vaccination efforts, a gradual resumption in travel, policy support from government and a commitment from business, finance and industry to rebuild. This all gives us cause for cautious optimism. Yet we continue to battle to beat this pandemic. And along with the impact of ongoing geopolitical developments, sentiment, while optimistic, remains fragile. We are pleased with our year-to-date performance, but we are mindful of that fragility. Our clear strategic priority is to now position HKEX as the marketplace of the future, leveraging on our China advantage and sizing the immense opportunity ahead of us.
As China's capital markets come of age over the next 10 years and beyond, we can anticipate a significant increase in our capital markets which will transform and reshape regional and global financial markets in a way that I think perhaps is hard to imagine still. HKEX has a big part to play in that. We will leverage our unique role as a super connector between East and West to build a comprehensive equities, derivatives and fixed income ecosystem, providing access to and from China. We want to become the premier global primary listing venue of choice, welcoming companies and entrepreneurs from the region and around the world. We want to support them as they fund their ambitions, create jobs and fuel the ideas and businesses of today and tomorrow. We're confident that HKEX remains well placed to capture future growth opportunities, whilst at the same time, ensuring our markets remain resilient, vibrant and robust. We will continue to work closely with the market, regulators, key stakeholders to support Hong Kong's positions as Asia's premier global financial center.
In conclusion, we are very pleased with the performance of the business, and we look forward to continuing to build our business and enhance our markets. Once again, thank you very much. I'm now delighted to take your questions.
Thank you very much, Gucho and Vanessa, for your sharing. Now we will open for questions. Operator, could you please give the audience the instruction again how to raise questions either via webcast or audio? Thank you.
[Operator Instructions]
Can we have a first question from Yafei from Citi. Yafei, over to you, please.
I have 2 questions, if I may. The first one, you mentioned that there are 2 new primary listings in this quarter. Just wanted to understand a bit more for your clients. When they decided to list here, what made them to decide to go for dual primary versus secondary listing? And remember, there is a consultation going on around Chapter 19 C further reforms to that. And can you give us some update on that progress? And are we going to see more dual primary listings going forward? So that's the first one.
And second one is on MSCI A 50 contract. Congratulations for the launch. I know it's still very early days, but how is the progress so far compared to your initial expectations? And along with that, you have given fee waiver until middle of next year. Would there be any expenses related to the contract on an annual basis or on a variable basis that you can share with us?
Thank you very much for the question. As it relates to the dual primary listings, one of the key attractiveness of having a dual primary is that you have the possibility of getting, of course, full access to the Hong Kong market. But over time, as you qualify for Stock Connect, you have the possibility of attracting Southbound investors that -- and this plays several roles. Of course, you have the additional demand that's derived from Mainland investors. But besides that, companies usually are attracted by the idea that their securities are listed in a market in which -- which knows the name quite well.
So it acts a little bit as a type of free promotion in a way. So that is something that a lot of players are very attracted by, the ability to get access to mainland investors and the ability to also have all the stability, experience and comfort of, let's say, the Hong Kong investors -- investor base, which attracts investors from all over the world. So it's almost like you get the best of all worlds. And that is one of the key attractiveness of companies looking to do this dual primary listing.
It's hard to comment as to how many will come in the future. And as you well mentioned, we are in the process of reviewing potential improvements to listing regimes of overseas companies that want to come and list in Hong Kong, and we will be communicating any new developments on that field as we have them.
The next question was around MSCI and performance of those contracts so far or compared with our expectations. It's not every day that you get a contract that trades USD 1 billion in the first week. That is what happened. As we mentioned, probably it has been the most successful product launch in the first week that MSCI has in all of its portfolio. I believe it may be like our best launch ever of any product. So we had high hopes and expectations. The launch has met our expectations. We see open interest building on a very healthy way, and we see volumes continue to be active. And we expect this trend to continue to evolve as the market gets used to the contract. And the other thing that I think is very, very attractive, when we look at the correlation of this A 50 contract with the broader China market, we were very, very pleased about how the tracking performed of this index versus the overall and broader China index. So lots of very good thing. We think it's a very, very good product, and we're confident that it will continue gaining strength, growth, liquidity and vibrancy.
In terms of the holiday, any cost for whom? Yes?
The later part is about the costs associated with the product.
Well, I mean there's a holiday in terms of fees. I mean, if any of the players have their own costs, I mean, it's on a player-by-player basis. I mean -- but there's a fee holiday on the product, as you mentioned, until the middle of next year. There's the regular taxes that they would have or cost, but there's no cost from our side.
Thank you, Gucho. Next question, we'll have Gary Lam from HSBC. Gary, over to you, please.
A few questions, if I may. First off, I guess, on the cost perspective, we understand -- we measure our operating expense relative to EBIT or EBITDA. We are way lower relative to global peers, NASDAQ, CME, even SGX. So in your plan to execute a future strategy, how should we think about the budget for new investments? Year-to-date, of course, we're seeing around 6% to 7% growth. Shall we sort of expect this ratio to go high in coming years? And what are the key expected results coming from the investment -- new investment?
Secondly, if I may, just to get your thoughts around both the VIE listing. Seemingly, the momentum of new listing so a big party on market, but maybe it's also on the regulatory uncertainty. Do we hear sort of the latest development on this front?
And last, if I may also aware, of course, the government has been discussing more about RMB-denominated hedge maybe equity instrument or maybe a dual currency trade mechanisms in HKEX. Maybe can you also share your early thoughts about this? Are we very eager to get this delivered as soon as possible? Or how should we think about the [indiscernible] of success on that angle?
Okay. Thank you very much. So let's tackle the first one, which is OpEx and CapEx and investments. I think you highlighted some good points in there. There's a few forces here that you will have a plan in different directions. On the first side, I mean, we have our interest in maintaining cost discipline. We want to be very thoughtful about how we invest, whether it's our capital, our OpEx, and so we have very thorough reviews of everything that we do, and we want to be very, very disciplined.
On the other hand, we realized that the market is changing very quickly and that there are very exciting opportunities for the future. So what I can tell you is that we are going to be focused on the long term. We are going to invest both in OpEx and CapEx to take advantage of the opportunities that are coming. And that is a very important part of our long-term ambitions of becoming the marketplace of the future. So some of these investments will take a bit of time to realize the potential, the opportunity. And we will set our sights on the long-term market realization.
So I cannot give you specific figures because we don't provide that sort of guidance. But the concept that is the important one that you need to maintain is that we're focused on investing on the future, making this a great market. At the same time, we will be disciplined with our costs.
And then the second question was around a combination of things, including VIEs and dual counter, renminbi counters. So the issues around VIE regulatory reforms, I mean, it's something that has caused some restraint in terms of international investors and they became quite cautious on the market. We've seen this reflected in the fact that companies were less willing to pull the trigger and actually list especially in the last month, the third quarter was comparable to the second quarter, which when you add it all together, I mean, for looking at the last -- the first 9 months, of course, it was a record first 9 months. If you look at quarter by quarter, third quarter versus third quarter of last year, it looks weaker because, I mean, third quarter of last year was a really strong quarter. There was about HKD 123 billion of [issuance]. I mean it's a tough comp.
And as you well know, equities itself is volatile in terms of issuance. There is not a direct seasonality that you can say, okay, first quarter is always going to be strong. I mean the reality is that we see that when the markets are open and people are willing to take on some additional risk, the activity goes up very quickly. So VIEs, it's a bit of a "Let's see how the market develops." Of course, we expect companies that list in Hong Kong to comply with all the rules and regulations. The more clarity there is in terms of how that works, I think the more level playing field for everyone involved. So we welcome additional clarity on VIEs, and we are seeing how that market develops.
As it relates to dual counter and renminbi initiatives, this is something that has been publicly reported over the last couple of weeks about the interest on enhancing the ability for investors that want to invest in renminbi or giving them the possibility that they can buy shares in Hong Kong, either in Hong Kong dollars or in renminbi. This is what we call a dual counter. This is not something new. This possibility has existed for many years. It hasn't been very popular because there were some costs related to trading in renminbi in Hong Kong.
However, the recent initiative that's been discussed with the government is around how do we make this market more attractive. And an important element of that, that was discussed by some government officials was about around the possibility of having southbound investors actually investing in renminbi. Today, as you know, Southbound Stock Connect investors, today, they buy in Hong Kong dollars. That is an inconvenience for them. If they can invest in renminbi, that would be a very significant enhancement to their ability to invest in through Stock Connect. So this is one of the areas that is being currently explored.
And I cannot anticipate timing because it involves, obviously, dealing with a number of stakeholders, making some technology updates, upgrades and a lot of discussions on many parties. So it's hard for me to give you a timeline at this point.
Thank you, Gucho. Next, we will have Gurpreet from Goldman Sachs. Gurpreet, over to you.
Thanks management for going through the results. I have 2 fairly quick questions. First is on reforms, other kind of reforms. With Connect, we still have the holidays, which are not -- of course, public holidays are not aligned across the border. And because of the settlement cycle has also been different, we lose roughly 20 trading days with respect to Connect, relative to everything else. So can you update us on what sort of efforts are being put so that, that can, over time, be working with the banks and to remove that? That's the first one.
And second, maybe around clearing houses that we do have a number of clearing houses, which, at the back end, might not be integrated right now. But as futures or derivatives becomes more of a focus of the group, would that be integration of them leading to more capital benefits or margining benefits for investors? Would that be a focus? And if yes, are we committed to a time line on doing that integration?
Thank you very much, Gurpreet. So let me take the clearing houses. And what was the first one?
Holiday.
Holiday trading. Okay. So as -- yes, as it relates to holiday trading, you're absolutely right. The fact that we have a lot of Hong Kong holidays, and when you combine that with the China holidays, it does create a large number of days where Stock Connect is not active. And we have some similar situation as it relates to the MSCI A 50 trading. We -- as you can imagine, we are looking at this very carefully. We expect to have some progress on this one very shortly. So I mean, we'll be obviously talking to the key stakeholders, the market participant, making sure that we do what's the best for the market. So there will be some additional comments that I will make whenever we have something concrete. So we need a bit more time on this one.
And then as it relates to clearing houses and consolidation of margins and positions. This is part of some processes that we're doing enhancement to try to see how we can make it the most efficient for our clients. In general, we believe that the big vibrant environment that we have and the volume that there is around equities fundamentally makes it a convenient venue to actually trade, but we are constantly seeing how we can enhance the margin environment for our participants.
Thank you, Gucho. We have time for the very last question coming from Richard from Morgan Stanley. Richard, over to you, please.
Two questions very quickly. One is we've seen the progress on certainly the Bond Connect, Wealth Connect. I'm just wondering whether there's any update on ETF Connect? What's the progress and any further discussion on that?
And then also with progress on the Bond Connect Southbound bond investors, are there any review of our fixed income strategy at the moment? Any potential investments longer term given the new development?
Okay. Thank you, Richard. As you mentioned, these were 2 recent introductions that I would say that the impact of these products in our markets are a bit more indirect. Of course, I mean, it increases the amount of flows cross border. It's a very positive development in terms of like opening up of new channels. We're very excited about that. However, when you measure the impact of this, it's more of an indirect nature. And the fact that they will add liquidity vibrancy to the market, and it's not one that I would say, okay, you can measure like specifically this dollar here or there. So think about this more of an indirect nature.
Fixed income is a large market, huge market. And given the size that it is, if you look at the onshore fixed income market, it's just a little short of USD 20 trillion. So it's very, very significant. And therefore, we're always trying to see the roles that we can play.
We are, as you know, part also of the steering committee to review the evolution of fixed income markets in Hong Kong. And as part of that group that actually involves a lot of market participants, the government and the regulators, SFC, HKMA, we're exploring ways in enhancing the market developing the market and continuing to have Hong Kong as the fixed income center around the world. So yes, continue to expect more on this front, and we want to be able to do more.
You specifically asked around the ETF Connect. From experience, I mean, all of you that have been waiting for different products over the years to be introduced, it's very hard to give you a precise time line on each one of these because it does require getting a lot of parties in a room and agreeing to everything. What we can tell you is that we feel very well supported by the key parties, both in Hong Kong and in the Mainland to continue having Hong Kong be an international financial center that acts as a super connector between East and West. So this is part of our strategy to continue expanding all the adjacency around all these connection schemes. So sorry that I cannot give you a very precise timeline. But of course, we're looking at all these adjacencies to the -- to our Connect programs.
Thank you, Gucho. I think this marks the end of today's session. Thank you very much for joining us today. If you have any further questions, please reach out to the IR team as well. Have a very nice evening.