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Good afternoon, ladies and gentlemen. Welcome to HKEX 2022 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 our key highlights in Q3 2022, financial performance reviewed, followed by business and strategic updates. Then we are happy to take some of your questions. Without further ado, over to you, Gucho.
Thank you, Ricky. Good afternoon, everyone, and thank you for joining us today. I'm delighted to be updating you, investors and analysts here in Hong Kong and around the world on our progress over the last quarter. This afternoon, we have announced the launch of a consultation of a new listing chapter for specialist technology companies. These proposals set out how we want to broaden and deepen our markets, and adding more choice to investors and welcoming new issuers to our markets. proposed new chapter is part of our ongoing work to further elevate the attractiveness and competitiveness of Hong Kong as an IPO destination and as an investment market.
It is also part of an approach to upholding and enhancing market liquidity. And today, on behalf of HKEX, I am pleased to present our financial results for the third quarter of 2022. I will let Vanessa go into more details on numbers later, but let me share a few of the highlights. We are pleased to report a resilient set of results despite the challenging backdrop.
Economic fragility and weak sentiment impacted global markets, and Hong Kong was no exception. Weak sentiment resulted in cash market softness and reticence of some to IPO, although we did see some early signs of recovery. More on that shortly.
Revenues and other income for the first 9 months ending September was HKD 13.3 billion, down 18% on the same period a year earlier. For Q3, it was up 2% from the second quarter of this year. Net profit for year-to-date Q3 2022 was HKD 7.1 billion, down 28% on the comparable prior year.
For Q3, it was up 4% from the second quarter. During the quarter, the Connect franchise further extended with the inclusion of ETFs in Stock Connect and the announced launch of Swap Connect. And an earlier announcement on adjustments to the trading calendar between Hong Kong and Mainland China markets, under Stock Connect, will further deepen cross-border market accessibility.
We feel very energized by the recent announcements made by CSRC on 3 new initiatives. One, the inclusion of Hong Kong listed international companies in Stock Connect; two, the proposed launch of RMB counters in Stock Connect and three, plans to explore the launch of Chinese treasury bonds in Hong Kong.
The first, in particular, is an important milestone for Hong Kong. It provides international companies with access to the massive regional liquidity pool, and it builds on the attractiveness of the Hong Kong IPO market. the cash market witnessed significant softness in the third quarter, reflecting the prevailing global market sentiment. But we're encouraged to see some early signs of renewed momentum in the IPO market.
Fundraising in the third quarter was more than double the amount in the first half of this year, helping Asia take the global top spot for funds raised at the 9-month mark this year. And our pipeline also remains strong with over 140 active applications as at the end of September.
Our derivatives markets performance was particularly the highlight during the quarter. It has continued to grow, becoming more vibrant and more relevant with the introduction of new derivative products and increased cross-product trading. I'm also pleased that our commitment to diversification is reflected in our numbers with good growth in revenues from FICC products, ETPs, technology and data. Now let me hand you over to Vanessa to go through the Q3 results in more detail. Over to you, Vanessa.
Thank you, Gucho. Good afternoon, everyone. Thank you for joining us. I'm Vanessa Lau, I would now like to share with you our Q3 2022 financial results. In Q3, the volatile global market fragility inflationary pressures, rising interest rates and slowing global growth, all adversely impacted global market sentiment.
And HKEX was not immune to this. Our trading volumes were lower and we saw IPOs waiting for better conditions. However, our results continue to reflect the resiliency and robustness of our markets and business. Despite headline ADT falling by 41% Q3 total revenue and other income at $4.3 billion was only 19% lower than Q3 of last year, a very strong comparable quarter.
Excluding net investment income on our corporate funds and HKEX Foundation income, our core business revenue was down by 17%. Our EBITDA was $3 billion, profit after tax at $2.3 billion, and earnings per share at $1.79.
Compared with the second quarter, total revenue and other income was up 2%, as the increase in net investment income offset the 25% drop in headline ADT. Our EBITDA and profit after tax were up 2% and 4%, respectively, as compared with the second quarter.
Despite the decline in cash market volumes, we were also very pleased to see that our derivatives market performed well, with derivatives contracts traded on the Futures Exchange, reaching a record high in the year-to-date Q3 2022. The strong performance reflected both the increased risk management needs of our clients in a volatile market and increased demand for our newly launched derivatives products, including the Hang Seng TECH Index Futures, which we launched in November 2020 and the MSCI China A50 Connect Index Futures launched in October 2021, both very much welcomed by the market.
Turning to the next page, where we focus on the Q3 detailed financials. Core business revenue was down 17% against Q3 of last year, attributable to the softer cash market and Stock Connect Northbound volumes and lower listing fees from fewer newly listed derivative warrants and CBBCs.
This was partly offset by the increase in net investment income from margin funds, driven by rising interest rates. Excluding the HKEX charitable donations and nonrecurring items, including the professional fees in respect of the LME nickel incident, OpEx was up 6% against Q3 of last year. Coupled with the losses of the external portfolio, Q3 profit after tax was 30% lower than last year.
Next, we move to the quarter-on-quarter comparison. Core business revenue was down 4% against the previous quarter. The 25% drop in headline ADT was mostly offset by more trading days and the increase in net investment income from the margin funds. Coupled with lower losses on the external portfolio, total revenue and other income was up by 2% compared with Q2.
As OpEx remained broadly flat, EBITDA and profit after tax were up by 2% and 4%, respectively, as compared with the second quarter. Moving on to look at the trend line. We continue to follow the general upward trend of the last 5 years on both revenue and profit, with 2022 results consistent with long-term trend levels.
Despite the weaker market sentiment, HKEX continues to maintain an attractive EBITDA margin, reflecting the active work we have undertaken to diversify revenues, introduce market microstructure enhancements and work with our customers to continue to make our liquid markets attractive and relevant.
Next, we take a look at our investment income. Net investment income comprises of internally managed corporate funds, margin and clearing house funds and an actively managed external portfolio. Total net investment income in Q3 was $334 million, more than doubled that of the comparable prior year quarter. Our internally managed investment income nearly tripled, benefiting from rising interest rates.
But this was partly offset by the mark-to-market losses of $148 million on the external portfolio in Q3 compared with losses of $23 million in the prior year quarter. In Q3, a redemption of $1.8 billion on the external portfolio was completed to reduce the impact of market volatility on HKEX's earnings. A further $200 million will be redeemed in Q4 this year.
As Hong Kong and global interest rates are expected to rise further in Q4, we should see continuous improvement in our internally managed investment income in Q4 and into 2023. Lastly, let's look at our operating expenses. OpEx was up 17% in Q3 as compared with Q3 of last year.
Excluding HKEX Foundation charitable donations, which are funded by the foundation donation income and excluding nonrecurring items, OpEx increased by 6%, reflecting our continued investments in existing and new talent, technology and operational excellence.
We expect wage inflation and the competition for talent to continue to shape the market in the coming months. To summarize, despite challenging conditions in Q3, our core business continues to show its strength and resilience, built upon solid foundations and a clear strategy.
Looking forward, we expect net investment income from internally managed funds to rise, benefiting from the higher interest rate environment. And we will continue to invest in clients, technology, talent and risk management to deliver our vision of building the marketplace of the future. The market, we think, however, will continue to be characterized by fragility and will be impacted by macro pressures.
Notwithstanding this, we will remain resolute in the strong execution of our strategy, ensuring prudent cost management and in building our business and the market for the long term. With that, I'll hand back to Gucho for our business and strategic update.
Thank you, Vanessa. Our diversification, new initiatives and vibrancy in our derivatives markets have, in part, offset broader general market softness. Daily trading volumes in the derivatives products traded on the Futures Exchange surged 26% in the January to September period from a year earlier to a fresh new record.
Bond Connect average daily turnover reached a record 9-month high, building on its strong performance throughout the period. We're encouraged to see some early signs of renowned momentum in the IPO market. As I mentioned before, fundraising in the third quarter was more than double the amount in the first half of the year.
Now let's look in more detail at our performance against our 3 strategic imperatives in the third quarter. Our first, connecting China and the world is an area where we are continuing to build on a role as a super connector between East and West, facilitating the vital 2-way capital flows that fuel growth and innovation.
In particular, the initiatives announced by the CSRC provide the next wave of building blocks for the evolution in our markets. Our second imperative is connecting capital with opportunities. Here, we have been focused on making our markets more attractive as a premier capital raising hub.
Today's announcement on the new listing regime for specialist tech companies sets out how we envision HKEX plays a major role in funding the ambitions of new ideas and the innovative companies of tomorrow. We also continue to expand our offering to add to the vibrancy of our product ecosystem with the listing of several new ETPs as well as the listing of derivative warrants that track the MSCI A50 Connect Index, for example.
As a business that puts clients at the forefront of all that we do, we are committed to continuously enhancing our markets to boost efficiency and accessibility. Examples of this include the launch of IR Connect as well as our announced revisions to the closing and opening hours of trading and after our trading sessions for select MSCI products and our third strategic imperative connecting today with tomorrow.
During the quarter, we have very much been focused on the modernization of our infrastructure and driving our sustainability agenda. We have long sought to be a leader in ESG and are sustainable and green finance offerings continue to gain traction. The first green bond ETF was listed during the quarter.
Another highlight was the launch of the Hong Kong International Carbon Markets Council in July, which brings together leading corporates and investors to explore carbon opportunities in the region. More on this to come in the weeks ahead. We're pleased with the progress we have made on executing our strategy. We have achieved much in a short space of time.
This sets up well for when sentiment improves and confidence returns to global markets. We remain focused on our long-term vision to build the marketplace of the future. Looking ahead in the short term, headwinds will continue to affect the broader environment in which our business operates.
We expect that ongoing market volatility, inflationary pressures, the rising interest rate environment and slowing global growth could continue to impact our business. The early signs of momentum in the IPO market are encouraging, and we will continue to monitor appetite for listings.
Our pipeline continues to be robust, which is good news for when that confidence returns. The CSRC announcement that I have already mentioned, coupled with a range of new projects and initiatives in the pipeline all give me cause for long-term optimism as we look ahead.
We have a great team at HKEX, a clear strategy, and we're firmly focused on the long-term health and success of both our business and our markets. We're in a good place to capture the opportunities ahead. Thank you very much, and we're now happy to take your questions.
Thank you, Gucho and Vanessa Lau, for your sharing. And now we will open for some questions. Operator, could you please give the audience the instruction again, how to raise questions either via the webcast and audio? Thank you.
[Operator Instructions]
Thank you, operator. Yes, let's go for the first question. Thank you.
First question is from the line of Gary Lam from HSBC.
Today, a bit greedy, 3 questions that I made. Firstly, related to the new consultation on the advanced tech listing regimes, can we get a thought on the timing of sort of having this effort? We noticed that the consultation period is probably to due December. Just learn from sort of prior experiences, should we expect sort of more concrete progress, hopefully, in the first half '23 or maybe first quarter? So any implications on those on the further listing?
Second question related to actually the investment portfolio where, of course, you mentioned of the downsizing of external portfolio and increasing size in the internally managed portfolio. Does it reflect the increased flexibility on how you deploy the fund? And mind sharing your view with us your thinking on what are the potential sort of deployment strategies going forward in the corporate fund?
Maybe -- is it -- dividend is a potential consideration or maybe M&A in the mind? Just wondering if this increased the flexibility for you to deploy? And the third one is a tougher, maybe broader, question. A remote reference to Gucho sort of big bank of finance article in January.
Now clearly, it's a difficult market, a lot of unpredictable events on war, inflation, COVID, et cetera. If the bank is smaller, how should we see the way that you execute the Hong Kong Exchange strategy sort of get adjusted?
Is it maybe some lower cost growth expectation for lengthening the time required for some of the initiatives that you are putting new investment into just try to gauge your thoughts into implication if and when the case this growth in the coming years just doesn't get as appealing as some of the long-term macro assumptions could be?
Yes. Okay. Thank you, Gary. So let me quickly address the 3 questions, which are some of them quite broad. But the new consultation by the way, Bonnie Chan, our Head of Listing, will be having an event at 6:00 p.m. So -- I mean, feel free to dial in and get all the details. But essentially, the new consultation has a regular time period. for the market to provide its feedback.
And then after that, what we do is we receive the material, we assess it, and we come up with the new chapter. So I can't provide like effective date just because, I mean, it depends on the feedback and the responses, but we look forward to completing this as soon as possible.
Secondly, as it relates to the investment portfolio, the decision to redeem some of that portfolio was related to the fact that with the volatility that we're seeing with interest rates being like so conservative, so high at this point, it's a good time to think potentially of putting more in a conservatively managed scenario.
So approximately $2 billion was redeemed, and that is going to be invested in a very conservative manner. And as it relates to your question about the usage of those funds, of course, we're always assessing what the opportunities are. and what can be done, I don't foresee any significant acquisition.
However, there are investments in our own business and there could be -- we're always open to tag on acquisitions that fit some small part of our business. But for the most part, we're not envisioning anything drastic or very large in the near term.
And your last question around the evolution of the market and how about like the market grows a bit slower than initially anticipated. I mean, as I was mentioning -- I mean, when I look at the long term, we're looking at a 10-year horizon and the growth of capital markets over a 10-year period.
If that is delayed over a number of years, that -- we should still prepare the company to take advantage of those opportunities. So I anticipate that there will be periods are going to be slower than others. We are investing for the long term, but we're very conscious of changes in outlook movement we try to be thoughtful about both.
So we still need to invest for the long term. But as we see markets perhaps softening, there are certain things that we can move in the queue and change them in terms of like priority. So I mean, I don't anticipate a complete change of strategy based on what we're seeing now.
However, if at some point, we see something that merits us to completely change the strategy, we will assess it at that point.
Thank you very much, Gucho. Operator, next question, please?
We'll now take our next question, and this is from the line of Yafei Tian from Citi.
I have 2. The first one is along Gucho comment, some encouraging early signs of IPO market warming up a little bit and pipeline being strong. So you look at that pipeline, we have been seeing relatively resilient pipeline for relatively long period of time. So what do you think, in your view, is driving that all of a sudden a bit warmup in third quarter?
And what visibility do we have in the coming quarters when it comes to that pipeline materializing into actual funding activities. So that's the first one. The second one is around LME. In the third quarter report, it's quite a detailed discussion about some of the litigation risks, some of the reviews that is being involved.
So I'm just taking a slightly longer-term view of Hong Kong, yet looking at LME business overall. So when this business was acquired, I think there was bigger ambition to drive Asia liquidity over. But given the change of dynamics at the moment, is there still value for Hong Kong yet to maintain LME as a subsidiary, right? What is the long-term growth potential for LME for Hong Kong? Yes.
Thank you, Yafei. And okay, starting with the IPO pipeline. Yes, I mean, the third quarter was significantly better than the first 6 months in terms of IPOs. We had 29 listings during the quarter raising over HKD 50 billion. So it's more than twice what we had in the full first 6 months of the year.
So very, very excited about seeing that those green shoots of activity. However, as you know very well, the market is still fairly risk off and it's still a muted investor sentiment. So hard to predict what's going to happen over the next few months. Now what's driving a lot of this IPO pipeline, it's just like a lot of like great companies that want to access the capital markets.
They have been -- the markets have been tough for some period right now. So what we're seeing is companies that have an interest in just like using public markets to fund their ambitions. And so a lot of new economy companies and a lot of tech companies -- we are seeing biotech companies. And so all sorts of businesses -- what we want to make sure is that we diversify and it's not only companies from Chinese companies from all over the world.
And that's why we're very excited about this announcements by CSRC around the potential inclusion of international companies in Stock Connect because that will essentially allow any company that has the right size and everything come and list in our markets and essentially have access to 2 uncorrelated investor bases.
The domestic investor base and the international investor base that they don't always correlate in terms of their sentiment. Sometimes on the mainland, it's very positive sentiment. And we've seen how the local exchanges have done really, really well in terms of IPO in the first 9 months of the year.
And sometimes it's the other way around. The international markets are very bullish, and it's a bit more muted on the mainland market. So Hong Kong would pretty much be the only market where an issuer can come and get access to those 2 investor bases after, of course, qualification into Stock Connect. So that is something that we're quite optimistic about the future. And then the other area in terms of types of issues is precisely what we announced today, specialist technology sector.
I mean, companies that have a lot of investments in R&D significant potential for the future. They have really interesting products. They just may not have the revenues to qualify for our regular main board. So this will provide a new opportunity for those companies to access, to be listed and also for investors an opportunity to access those companies. So we're very excited about that.
And hard to say when we will see a huge activity in terms of IPO markets. But so far, we are seeing the pipeline stays strong. Okay. Second question around LME. So the potential of the LME is precisely to fit it into our core strategic imperatives, is to find a way to make sure that investors from this part of the world can really leverage the power, the tradition, the experience of LME to hedge their commodities internationally.
And so that hasn't been realized historically. But if you look at the key producers and consumers of base metals around the world China represents a very large chunk of that opportunity. So this was directly the path that we think makes the most sense for LME to leverage that China advantage to connect that capital with opportunities.
Clearly now, we have to deal with the current situation, the current issues around the nickel market. And -- but we still have like a lot of conviction around the potential for the long term of having this really interesting business with a region that really relies significantly on base metals.
Thank you very much, Gucho. Operator, can we take the next question, please?
We'll now take our next question, this is from the line of Richard Xu from Morgan Stanley. Richard Xu from Morgan Stanley, your line is open, please ask your question. We'll move on to the next question. And we have a question from Gurpreet Sahi from Goldman Sachs.
I just have 2 very simple ones. First is for Gucho. In terms of the listings that we continue to see happen onshore, especially in Star and key next board, there are a lot of listings happening. So in terms of the reform that we had aiming to do hard tech. And also, the government announced today that Hong Kong Exchange can think about GEM reboard revitalization. So what is the reason that onshore so many companies can get listed and although there's improvement in third quarter, we are still lagging?
So what is in your minds the key difference here? Is it policy push or some rule which we have is it one that we are not attracting these mainland IPOs to come and list here in Hong Kong? Is it that the GEM board should be a better board and then it will happen? So that's number one.
And number 2 is LME. with the review and all that's happening with also the external review from the regulator, what do you think is the best case? The best case for us is that just the legal expenses are higher as we see it right now. And then we don't have any fine be paid in terms of the court?
Or -- and then we continue to run business like we are doing. Is that the best case that we are aiming for? And -- I mean, all the while I'm noting that the volumes keep on declining at LME.
Thank you, Gurpreet. Let me address your first questions around listings in the onshore markets versus Hong Kong. The main difference that I see today in terms of the main markets -- the Mainland markets versus international markets, is that the Mainland has, to a great degree, its own ecosystem.
We have a very active retail trading environment. And so what we have seen is that retail demand has continued very active in terms of seeking participation in these IPOs. So that is a bit of like the point that I mentioned in -- when I was addressing the other question, which the investor base in the domestic mainland market is uncorrelated with the international investor base. So globally, what we're seeing is very subdued interest in participating in IPOs.
We have a lot of companies that have an interest in listing, but the pricing may -- it's not a pricing at which companies are excited to go out. So that different situation of the onshore market where the pricing is -- there is a differential in pricing between onshore and offshore is something that maintains the domestic markets quite active.
And precisely for that reason, I think that HKEX can potentially have a great market for the future because, I mean, it will be the only market you can -- where you can merge those 2 pools of interest in an effective way. And remember that you need to combine this also with the announcement around possibly being able to subscribe shares in Southbound Stock Connect in renminbi.
Because today, the -- when investors in the Mainland buy shares through Stock Connect, it still needs to be converted to Hong Kong dollar, that takes place the next day. It's after like putting an extra deposit or margin of 2%. So there are complications. It's not as smooth. If we can find a way to make the process of buying shares from the Mainland into HKEX as smooth as buying any other A shares, we think that could drive a lot of liquidity in our markets.
So when we combine that with the fact that companies -- international companies can come here and you see it as a competitive advantage, whereby they can rely on a liquidity and an investor base that pretty much -- you cannot get in any other market. That's a differentiated factor. That's a competitive advantage that we want to leverage going forward.
The LME question -- going back to your LME question, it's a really difficult one, and it's hard for me to speculate in terms of like different scenarios, what is the best case scenario. Of course, we're working very hard to make sure that we continue serving our clients in the market that we provide as best a service as we can do to our metals industry.
And we will continue defending ourselves vigorously. So that's as much as I can say because it's hard for me to comment on speculation.
Thank you, Gucho. Operator, can we try the line again for Richard, please?
Richard Xu, Morgan Stanley.
Sorry, my line was dropped earlier. My question is on the inclusion of foreign companies. I don't know if management had done any conversations with regulators on the timetable of that. In addition, I don't know if there's any initiative to engage with some of these overseas companies to for this opportunity, if there's any notable interest from overseas companies at the moment. And then a follow-up on that is whether there will be required some additional investments on that front?
Thank you, Richard. So there have been companies that have approached us to express interest and trying to understand how that would work. And it's hard for us to give a very precise time line because it does require interacting with a variety of stakeholders, but we want to move as expeditiously as possible on this one. This does not require significant investments in CapEx or in infrastructure because essentially, it's just extending the application of inclusion criteria that applies today to local companies, to international companies. So of all the initiatives, this is the one that should be fairly straightforward.
However, it does still require coordinating with various parties and understanding exactly how they're included, one, rules and regulations and all that. So the -- I think the second part of your question is if those companies would need to do any significant investment or other things, as you know, to be considered for inclusion I mean, into Stock Connect, companies today need to have a primary listing in Hong Kong.
So companies that are primarily listed and they qualified for the relevant Hang Seng Index, they -- and meet the criteria, they end up being qualified for Stock Connect. So there will be some activity that will need to be taken by the international companies, but we believe that the benefit of listing in such a unique market will really be a big thing.
And as I said, by the questions that we've been handling, there is a lot of interest in trying to understand and how this would work. We don't have all the answers yet, but we're working on them to try to get this in place as soon as possible. And we think -- I mean -- and this complements very well what we're doing in terms of opening offices internationally.
We're opening offices in London. We're opening offices in New York and so it fits very well in terms of a lot of the investments that we're doing to be a bit closer to our issuers.
Thank you, Gucho. I think we have time for one more question. This question is actually coming from the portal. It's a written question from [indiscernible] young from Bloomberg. So the question would be what is your outlook on cost growth for fourth quarter and beyond?
Yes. As you all know, we don't provide guidance, I mean, in terms of like quarter-by-quarter earnings or costs I would just like to highlight the point that Vanessa made during her presentation, if we look at the cost, and we try to look at the growth, that growth has been effect, which, excluding this one-off items, it's about 6% growth, and they are driven by an inflationary environment.
The fact that we have invested in our people, both in our existing business and some people that we've hired externally, so we're building our talent base. And so the key message here is that we think it's important to have like the best talent possible, and we would want to continue focusing on preparing our organization for the opportunities of the future.
Great. Thank you very much, Gucho, and Vanessa for sharing. So I think this marks the end of today's session, and thank you, everyone, on the line for joining us today. So we hope to meet and speak with you again very soon, and have a good evening ahead.
This concludes today's conference call. Thank you for participating, and you may now disconnect.