Hong Kong Exchanges and Clearing Limited (0388.HK) Earnings Call Transcript

Good afternoon, ladies and gentlemen. Welcome to HKEX 2025 Annual Results Analyst Presentation. Today, we are very pleased to have our Chief Executive Officer, Ms. Bonnie Y. Chan; our COO, Ms. Vanessa Lau; our Group CFO, Mr. Herbert Hui; our Group CIO, Mr. Richard Leung; and our Head of Markets, Mr. Gregory Yu. Bonnie and Herbert will first give a presentation about our business highlights, strategic progress and financial results. Then we are very happy to take some of your questions. Without further ado, over to you, Bonnie.

Good afternoon, everyone. Thank you for joining us today. I hope everyone have an enjoyable holiday season. I'm pleased to be presenting HKEX's annual results for 2025, in which I'm joined by a few members of our senior management team. Now I will start things off with a quick overview of the highlights. Then our Group Chief Financial Officer, Herbert Hui, will share more details on our financial performance. After that, I will return to talk about what is on the horizon from a strategic perspective. So let's begin. HKEX delivered record results in 2025, reporting the group's best ever revenue and other income and best ever profits for the second consecutive year. Herbert will go into these numbers in more details in a few moments. The very decisive return of issuers and investors last year [ rebuild ] confidence in Hong Kong's markets and unlocked liquidity. This enabled us to accelerate our strategic initiatives. For listing, we introduced new IPO price discovery rules that enable a more flexible, transparent and fit-for-purpose pricing and allocation framework. And we continued to increase support for specialist technology issuers. In the securities market, we implemented the first phase of minimum spreads reduction, which very quickly began to demonstrate market efficiency enhancements. In the derivatives market, we launched the Hang Seng Biotech Index Futures, complementing our existing suite of biotech-related offerings and flagship equity index derivatives. In 2025, we broke new ground in the development of Hong Kong's fixed income and currency ecosystem. Our agreement to acquire a 20% stake in CMU OmniClear will strengthen Hong Kong's position as the global hub for bond fundraising, risk management and offshore RMB business. This lays the foundation for a vibrant FIC marketplace that mirrors the depth and liquidity of the equities markets. In commodities, the LME approval of warehouses in Hong Kong now expanding to a total of 15, is an important milestone signaling the city's potential to becoming a global commodities trading hub. And we expanded our index business with the launch of the HKEX Tech 100 Index, our first equity index focused exclusively on Hong Kong's technology sector. In addition to these initiatives, we also invested in establishing our permanent headquarters here in Exchange Square, highlighting our confidence in and commitment to Hong Kong's continued development as an international financial center. These are just some of the highlights of the strategic initiatives we implemented last year. But you can get a sense that in addition to the momentum of our markets, 2025 was also a year of progress driven by reforms and strategic investments. Now I will return in a few moments to talk about how we are setting our journey ahead. First, let me hand over to Herbert to go over the HKEX Group financial review. Over to you, Herbert.

Thank you, Bonnie. Good afternoon, and happy New Year. I'm pleased to be here to share with you our 2025 full year financial results. HKEX delivered a record financial performance in 2025, with revenue and profit both posting record highs for the second consecutive year. Driven by increasing international investors seeking diversification and opportunities in China-related assets, together with the greater participation from Mainland China investors, trading volumes in Hong Kong cash and derivatives markets reached record highs. The group's commodities market also performed strongly with LME chargeable ADV reaching a new record high, surpassing the previous record set more than a decade ago. Revenue and other income of HKD 29.2 billion was 30% higher than 2024. Profit after tax was HKD 17.8 billion and EPS was HKD 14.05, both up 36% compared with the year before. The Board has declared a second interim dividend of HKD 6.52 per share, representing 90% of the group's profit attributable to shareholders, excluding the results of HKEX Foundation. Together with the first interim dividend of HKD 6 per share, the 2025 full year dividend is HKD 12.52, up 35% against 2024. Turning to the detailed financials of the year, trading volumes reached record highs across all markets in 2025. Headline ADT of HKD 249.8 billion was 90% higher than the year before. And both Northbound and Southbound Stock Connect saw all-time highs. Derivatives and commodities market also performed strongly, with trading volumes increasing by 7% and 8%, respectively, compared with 2024. Revenue and other income was 30% higher than 2024, driven by higher trading and clearing fees from increased volumes, higher depository fees and listing fees. OpEx was up by 5%, mainly due to the nonrecurring FCA fine of HKD 90 million paid in '25 and recovery of legal fees of HKD 60 million in '24, both relating to the LME nickel incident. This cost growth is below our historic cost growth trend line. The group's effective tax rate increased to 15.7% in 2025 as compared to 11.4% in 2024 due to the provision of top-up tax under BEPS 2.0 taking effect January last year. Turning to the next page, where we look at the fourth quarter 2025 financials against the same period last year. Revenue and profit were both up 15%, driven by increased trading and clearing fees from higher cash market and commodities market volumes and increase in depository fees and listing fees, partially offset by lower net investment income from margin funds due to higher rebates payable to participants following the implementation of revised margin rebate arrangement in the fourth quarter of last year. Moving on to the 2025 results against the historical trend line, driven by the positive market momentum since fourth quarter 2024, 2025 performance is above the historical trend line. Throughout the years, HKEX continues to maintain an attractive EBITDA margin, reflecting the successful diversification of our business in recent years and our cost discipline. As we have been building and enhancing our product offerings, market micro structure and technology platform over the last few years, we were well positioned to capture the opportunities arising from this positive momentum. Next, we take a look at our investment income. Total net investment income of internally managed funds in 2025 was 8% higher than 2024, primarily driven by the increase in margin fund size as a result of higher margin requirements and higher open positions for stock options and the nonrecurring fair value gains on our unlisted equity investment, partly offset by lower investment returns and higher rebates to participants. The external portfolio was fully redeemed in May '25 to fund the acquisition of HKEX headquarters here, with the proceeds returning to us after the applicable lockup periods. As at 31st December '25, we have already recovered over 80% of the funds. Now let's look at our operating expenses. OpEx was up 5% in '25 compared with the year before due to a HKD 90 million FCA fine and the recovery of LME nickel legal fees, HKD 60 million in 2024. Excluding these items and the charitable donations, OpEx was up 2% due to high staff costs from payroll adjustments as well as higher IT costs from inflationary increases. In summary, the 2025 financial results were characterized by record trading volumes, disciplined cost management and successful execution of our strategy. Looking ahead to 2026, we started the year strongly, both in terms of turnover and IPO pipeline. However, net investment income is expected to be affected by our revised margin collateral arrangements that's going to have the full year impact, Hong Kong dollar rate movement and redemptions from our external portfolio. Our strong financial performance and solid financial position have positioned us well to invest in the future, and we will continue to enhance and expand our multi-asset ecosystem to support the long-term development of Hong Kong's capital markets. With that, I will now hand back to Bonnie for our business update and outlook.

Thank you, Herbert. Now when we look at the broader landscape ahead of us, we expect to maintain and even accelerate the pace of strategic progress of the last year. In 2025, we held the top global position for IPO fundraising, and we are starting 2026 with a robust pipeline of quality companies from a diversity of high-growth sectors from AI, robotics and new energy to health care and consumer. Years of continuous enhancements to our listing framework put us in an unrivaled position to capture emerging trends such as the pace of development and innovation sectors, especially in the Chinese Mainland. At the same time, follow-on issuance in 2025 totaled more than HKD 500 billion, including 2 of the top -- the world's top 5 ECM transactions, demonstrating the deep liquidity here. And in 2025, the secondary market remained very vibrant, fueled by renewed global interest in Hong Kong equities, rising demand for short-dated options and ongoing micro structure enhancements. Headline ADT saw a 90% year-on-year increase. The ADV of the derivatives market was up 7%, while the ADT of the exchange-traded products market nearly doubled from a year earlier. So stepping back a little bit, what is behind this momentum, which we have been seeing since late 2024 and continue to see into 2026? Perhaps let's zoom out a bit and quickly look at the macro landscape. And there, we see two major forces at play. The first is a broad trend of global capital diversification. We are living in a time of persistent uncertainty and global investors are starting to react to this in a very predictable way, that is they have begun seeking out diversified growth opportunities. This is pushing capital into Asia. Then there is a second force, pooling capital into our markets, and that is being driven by the evolution of China's development model. The country's great focus on technology innovation was most dramatically demonstrated by the DeepSeek moment earlier in 2025. Following that, at HKEX, we welcomed a wave of companies that are pushing the frontiers of global innovation. We're also seeing the emergence of Chinese Mainland multinational companies that are expanding internationally. Almost half of the companies we welcome to our markets in 2025 were Mainland businesses with over 50% revenue coming from international business. And these and other companies attracted a broad and diverse representation of cornerstone investors, including from North America, Europe, the Middle East and other Asian markets. Okay. So with these structural changes increasing the attractiveness of our market, what are we going to do next? Well, in the last decade, since the launch of Stock Connect, our efforts were focused on developing capital market connectivity to the Chinese Mainland. We developed a highly comprehensive product ecosystem around our cash equities market. This was supported by our equity derivatives franchise. And that attracted global liquidity, diversity and vibrancy to our markets. Going forward, we will continue to reinforce this unique connectivity to the Chinese Mainland. This is our greatest advantage as a global exchange. But the next decade will also be about strengthening the connectivity between the markets of the Chinese Mainland and other Asian economies, connecting the region's capital to its biggest opportunities and then connecting global investors to an even bigger regional pool of liquidity and growth potential. More specifically, with the growing appetite for China assets, we see an opportunity to expand what we offer. Now what we've heard from investors is that they want more tools to tap into Asia and China. And as I touched on a moment ago, in the last decade, we have developed a comprehensive product ecosystem built around our cash equities, and we have continuously developed this ecosystem in step with the evolving needs of global investors. But now the investors are looking beyond equities and so are we. Of course, we will continue to play to our strength as the cash market of choice in the region. Now in 2025, we further increased our connectivity with markets in the Middle East and Southeast Asia, adding to our growing network of partnership with stock exchanges as well as welcoming IPO listings from both regions and establishing our new office in the Middle East. Looking ahead, we will be leveraging this connectivity to creating a regional liquidity pool with a powerful global gravitational pool. We will also be exploring products that are tailored for clients in Asia and especially the growing retail class of investors here. In the last year, especially in the Southbound channel of Stock Connect, we've seen very vibrant activity from retail investors in this region, and yet there is still vast growth potential there. ETPs are another area of the cash market with strong potential. We introduced 48 new ETP listings in 2025, including several market-first innovations. We will continue to expand and innovate our ETP product suite, cementing Hong Kong's position as Asia's leading ETP ecosystem. But looking beyond cash equities, we will also be making long-term investments in other asset classes as we enhance a multi-asset ecosystem. This will provide a diverse range of global investors with all the tools they need to invest, trade and manage risk in Asia. We have already broken new grounds in the fixed income space with our investment in CMU OmniClear. Through our partnership with HKMA, we will accelerate the development of Hong Kong's post-trade securities infrastructure into a major central securities depository in the region. Specifically, this will include the continued commercialization of CMU and the pursuit of business development initiatives in areas such as the expansion of its investor CSD services, asset classes coverage and collateral management services. Commodities. That is another asset class with great potential. I have already mentioned the approval of [ LME ] warehouses in Hong Kong, which is an important milestone in the physical market connectivity. As the complexity of the macro environment continues to drive a trend of capital diversification, there will also be demand for products such as for gold futures, for example, that gives investors broader accessibility to commodities. We will also continue to enhance the tools investors need to manage risk in the region, and we will be enhancing these tools across asset classes, most notably in our derivatives ecosystem. In derivatives, we will continue to build on our success in product expansion, such as by growing our portfolio of monthly and weekly single stock options and by developing derivatives that reflect the innovative companies that continue to list on our markets. And running through all our asset classes will be our investment in adjacent capabilities, including the data and index business. A highlight of this in 2025 was the launch of the HKEX Tech 100 Index, our first equity index focused exclusively on Hong Kong's technology sector. These investments in adjacent capabilities will support our core business by driving capital flows and liquidity. But it's not just about products. We also must ensure that our markets are as accessible as possible if we want to fully capture the opportunity of global capital diversification. Over the years, our investment in technology and market reform have helped us generate the liquidity that has been attracting high-quality issuers and investors to our markets. Earlier, I highlighted some of the strategic market structure enhancement initiatives we introduced in 2025. We will continue to future-proof our technology and operations in the years ahead to meet the greater demand for China assets and to optimize the conditions for cooperation with our market infrastructure partners in the region, from leading market-wide discussion on finding a suitable settlement cycle for Hong Kong to removing manual and paper-based processes and from delivering on the modernization of our derivatives platform to adopting emerging technologies such as AI in our operations. So wrapping up, 2025 was a year of strong momentum, progress and transformation. We had record results. We led the world in IPO fundraising, and we had record volumes in our markets. It was also a year in which we have made strong progress in delivering strategic initiatives. Looking at the macro landscape, while we see a lot of uncertainty, we also see great opportunities that we are well positioned to capture. As we move forward into 2026, we will be focusing on enhancing our multi-asset ecosystem, doubling down on the strength of our equities markets while developing other asset classes. And we will be looking at ways to make it as frictionless as possible to invest, trade and manage risk in our markets. We are confident that our efforts and investments in recent years will ensure our business remains competitive in this global landscape and will support Hong Kong in its role as a global IFC, facilitating capital flows in Asia, and in China and in Asia more broadly and between this region and the rest of the world. Thank you very much for listening. My team and I are now very happy to take your questions.

Thank you, Bonnie and Herbert, for your sharing. We'll now take some of your questions. In fact, already some questions are waiting. But operator, could you please give the audience the instruction how to raise questions either via webcast or audio? Thank you.

[Operator Instructions] We will take our first question. The question comes from Richard Xu from Morgan Stanley.

Congratulations on the very strong results. I got two questions. One is, Bonnie, you mentioned there's also potential expansion of connectivities with the rest of the regions like Malaysia and others. Could you elaborate a little bit on that? What are the initiatives and how we can connect more closely with the rest of the regions? Certainly, we're seeing capital inflows to that region in general. Secondly is on cost. There are a lot of initiatives. I have seen very good cost discipline in the past few years. But with all of these increasing initiatives, does it mean the cost will need to grow with the revenue -- in line with the revenue a little bit more or there's more investments in people, technology, including like AI, right? I mean there's a lot of initiatives there. I guess, two questions for me.

Thank you. Thank you, Richard. So first of all, your first question, the rest of the region. So first of all, why are we aspiring to do this is really because we see an increase in demand. If you think -- well, just to throw some figures, January this year, I've been reading some statistics. Broadly in Asia Pacific, if you look at the equities markets, about 75% of the trading volume actually can be attributable to the Mainland Chinese and the Hong Kong market, 75% of the total APAC liquidity, if you may. That's a huge figure. And that gives us a belief that there is actually a lot of appetite from the rest of the region to connect with the opportunities in both the Hong Kong market as well as the Chinese Mainland market. And of course, you know that we have built the infrastructure already, which is our franchise Stock Connect program, and it's not just stock. It covers more asset classes. So we really want to take advantage of this momentum and through, I think, a few things. On the issuer side, you're aware that we are already doing -- or we have already been approached with more opportunities to do dual listings and join hands with other exchanges to support fundraising needs of Asian-based issuers. Last year, for example, we saw companies from Thailand, from Indonesia and even further away from Kazakhstan doing -- in the case of the Kazakhstan company doing a dual listing between us and Astana. That's on the issuer side. On the investor side, there is a very strong desire to build more connectivity, and I'll ask Greg to elaborate on that. That could be through jointly exploring cross-listing, et cetera, but I'll let him supplement on that. Now in terms of cost discipline, I think we have to responsibly follow good cost discipline. I mean that is just, I think, a good habit of doing business. But that doesn't mean we do not invest for the future. As I mentioned in my presentation, we see very good momentum and the macro backdrop is very positive. There is a strong desire to make use of our market and to really diversify and that does not confined to the equities market, which historically is our core business. And therefore, since we believe that this trend and this momentum will continue, I think it is important for us to make the necessary and thoughtful investment into other areas, be it fixed income, be it currency, be it commodities; because our belief is that this desire from global investors to continue to diversify is not going to abate in any time soon, right? So while we will continue to maintain good cost discipline, we will, at the same time, be very thoughtful about where and how we make investments where we think it is going to yield us the best opportunity set. But let me pass over to Greg to talk about the regional aspirations we have.

Thanks, Bonnie. And so I think, first of all, right, the importance of bonding it together with other regional exchanges, the main reason is you see that global investors are diversifying, right, and when they diversify, when they come to Asia; they're looking for various different assets. And if you want to keep their capital and investments in Asia, you need more assets and a wider base. So by bonding it together with other regional exchanges and products and so forth, it would basically help us to grow a bigger ecosystem. So a few things, I mean, I already mentioned, for example, like dual listing and so forth, it will help to create further liquidity into our equities markets as well as our peer market equity liquidity. On top of that, what we will build and what we are linking up on our derivatives products. So what we will look into our offering, in both sides, products that are referencing other exchanges exposures or others would offer our exposures in DR form and so forth. On top of that, obviously, ETF is an important instrument these days for investors. And one thing that is key for us is facilitating two-way flow. I mean, historically, we've been facilitating quite a lot of global investors going into Chinese Mainland through the Northbound Connect. And we see a strong growth in the Southbound Connect side as well. And with the ETF Connect program now expanding into allowing what we call 60-40 allocation, 60% allocation in Hong Kong stocks, or Connect stocks, while 40% could be foreign equity exposures; that gives us more opportunity to build products around that and allowing Chinese Mainland investors to enjoy offshore exposures. So all of these type of activities and activities and product offering effectively allow us to build stronger liquidity around the region and keep the liquidity in Asia.

The question comes from Gary Lam from HSBC.

Bonnie, and Ricky, I appreciate the presentation, particularly on the strategy side. The first question is related to the multi-asset diversification, particularly on the CMU OmniClear. Now if we factor in like a 3-year forecast in our model, to what extent should we start to think about the revenue contribution from here? How do you think about it in the way that you deploy sort of costs and investments? Should we make reference to like globally leading central securities depository, which are generating like over EUR 1 billion of profit every year or it basically should take longer, noting, of course, the participation right now is about 20% sticks? The second question perhaps is more on the global exchange competitive landscape. Noting that not only Hong Kong Exchange, global exchange leading ones indeed have underperformed their domestic market. I think part of the sort of market where we has been both on the threat coming from digital access or maybe to data -- market-related data fees. So in Hong Kong Exchange sort of context, where do you think are the sort of like key area of defense reason as to why our business model can hardly be disrupted from those developments?

Thank you. Let me maybe start with the first question, and I will let Vanessa elaborate on it. The investment into CME OmniClear, I think it's just one step in the overall strategic -- but a very important strategic step in our overall FIC strategy. Now the initial investment is not a tremendous sum of money. For the 20% stake, we paid HKD 455 million. But the potential, which Vanessa will explain, it's quite a big one and also will tie in with other things, other ideas that we have in the FIC space. So while I think your question is quite specific in terms of asking for sort of when we're going to see return, et cetera, I would perhaps say that this will be a longer-term investment, but potentially going to yield a rather attractive return. Now before I hand over to Vanessa, maybe to your second question about generally sort of how exchanges around the world have been performing, and I guess you asked specifically threats from other sort of newer emerging exchanges such as those focusing on digital or virtual assets. I feel that, first of all, we are in a more advantageous position compared to some of our peers. Now if you think about the -- simply on the primary market side, right, we were #1 fundraising platform last year. We have a very solid pipeline of over 400 IPOs. I mentioned earlier that the desire from investors around the world to increase the exposure to China assets is increasing, and I'm not seeing it abating in any short term. And therefore, given that we have the Connect franchise, which is our unique selling point, I think that does set us apart from the other more traditional equities exchanges in the world. And that's something that we're very grateful about. Now certainly, there are other asset classes such as what you suggested, virtual assets or digital assets; that's a totally different playground altogether. I think for now, we want to focus on what we believe we are most -- or we are the best positioned to do, starting with equities, derivatives into fixed income commodities, which, of course, we already have had a very important asset in the form of LME and really focus on developing those instead of trying to sort of cover all grounds. I think that's how we will probably sort of compete the best, and we will stick to that as the guiding principle in terms of setting out our future strategic imperatives. But perhaps on that note, let me pass over to Vanessa to give you a little bit more about our thinking around, first of all, the CMU investment, but more broadly, where we are headed on our FICC journey.

Thank you, Bonnie. Thanks, Gary, for your question. If I answer very specifically on CMU, it's a 20% equity accounting treatment. And in the scheme of things, it will be -- the contribution to our group results will be financially not so material, given the size of it in the coming years. But what -- the way we should be thinking about it, both strategically and financially over the coming years is in terms of this whole FIC ecosystem that Bonnie has been describing. So Gary, you know our business pretty well. So the way to look at it is the pieces that we already have, the strategic pieces that we invested in, in the last numbers of years, like Bond Connect, like Swap Connect, like OTC Clear and products such as interest rate swaps and cross-currency swaps, and I could go on; each of these is an important part of the puzzle that we're trying to pull together into an FIC ecosystem. In the past, admittedly, it was more like having a few products to try out and then having a few partnerships. But now the way we look at it in the coming years is the whole FIC ecosystem. And what I mean by that is starting from bond issuance and bond marketing to trading to the repo market and having a yield curve and then to clearing and settlement, depository and custodian services. Now comparing what I just said, this ecosystem to what we currently have; we have some good pieces. And the latest addition to the family is CMU. So our 20% strategic stake is indeed very important because without that, then we wouldn't have our piece of the puzzle in terms of depository and custodian services, which is critical to Hong Kong having a comprehensive and competitive ecosystem. And without CMU, we would never be able to develop in Hong Kong the ICSD or the CSD that we currently are working on. And in terms of CMU itself, it's also gone through its own growth journey, and it is not insignificant. So right now, assets under custody has already reached HKD 5 trillion, clearly boosted by the huge acceleration in CGB issuances, China government bonds, but there are also corporate bonds that are starting also to be deposited into CMU. So this partnership with the HKMA and supported by our regulator, the SFC, totally aligned with the road map that the two regulators published for FIC in September last year. You can just see how, in a way, the stars are aligning. All parties are working together towards building this ecosystem, not just for HKEX strategy, but more importantly, for Hong Kong as the FIC and the ICSD center in the coming years. So this is how we think about it. So when I think about the next 3 years, the next 5 years, think about the whole ecosystem of FIC. We have some pieces. We have some smaller pieces that we're bolting on now, but hugely strategic and something very significant for Hong Kong.

Thank you, Bonnie and Vanessa, for the very comprehensive response. Next question is coming from Harsh Modi from JPMorgan. I'll just read it here. There are actually three questions from Harsh from quite different perspective. Question number one, are you looking at the prediction market launch or investment? If so, what will be the regulatory and operational considerations around the market innovation? Question number two, how do you rate the probability of IPO pipeline converting in cost of this year? Question number three, could you please just share the time line on the Southbound renminbi counter and any key issues involved?

Thank you for the question, Harsh. I'll answer them in turn. The first question is prediction market instruments, I believe. Short answer to your question is no, we're not looking to offer that. As I mentioned earlier, we prefer to focus on building a multi-asset ecosystem, and we've already broadly mentioned that we want to replicate the success of our equities business into other areas such as fixed income, currency and commodities. So for now, that will be the focus. Second question, IPO conversion rate. I guess that's not an easy question to answer. I don't have the crystal ball. But I do want to say that -- I mean, first of all, the pipeline looks very, very healthy. And when I say healthy, it's not just how many we have, it is really the diversity and the quality that I see. Now since the beginning of the year, we've already completed 24 IPOs, raising over USD 10 billion. And you compare that with last year's figure, which was about USD 37.5 billion raised, we have essentially covered more than 25% in 6 weeks actually. But the more exciting thing is that the demand is huge. I mean, if you look at the ones which we have already completed, all of them have performed quite well in the aftermarket. I think maybe except for one which has dropped slightly, everyone has -- is staying above IPO price. And therefore, if that demand continues to stay strong, I really think that we will end up with another very solid year in terms of IPOs. Yes. Third question is Southbound. Okay. So if you have paid attention to the budget speech that the FS, the Financial Secretary has put out yesterday, there is a mention of Southbound RMB counter. And I think the wording he used was that he will be looking to accelerate the implementation. So for now, that's what I can share. But suffice to say that, that's still being progressed. And as soon as we have news to share, we will do it ASAP.