February 28, 2019 / 4:24 AM / 7 months ago

Breakingviews - Hong Kong exchange primed for some M&A trades

Hong Kong Exchanges and Clearing Ltd (HKEX) chairman Laura Cha Shih May-lung (L), Chief executive Charles Li Xiaojia (R) and Hong Kong Financial Secretary Paul Chan attend a ceremony marking the first day of trade after Lunar New Year at the Hong Kong stock exchange in Hong Kong, China February 8, 2019. REUTERS/Tyrone Siu

HONG KONG (Reuters Breakingviews) - Hong Kong Exchanges and Clearing is primed for some M&A trades. The $43 billion bourse operator enjoyed a blowout 2018, but its three-year strategic plan unveiled on Thursday offers few bold ideas for reducing dependence on trading in local equities. Looming Chinese reforms pose a further threat. A trio of new blue-chip advisers may be able to help.

Heavy trading and a string of jumbo new listings such as that of Chinese smartphone maker Xiaomi helped HKEX generate a record profit of $1.2 billion last year, a 26 percent increase from 2017. The results also reinforce the group’s heavy dependence on mainland stocks and derivatives. They accounted for more than half of last year’s EBITDA. 

For now, the Fragrant Harbour remains the venue of choice for Chinese companies to raise capital from international investors. That could change, though. In time, Beijing is expected to ease capital controls to allow mainland shares to be bought directly from overseas. A new Shanghai-based technology board is also in the works to challenge Hong Kong and New York dominance in the sector.

New HKEX initiatives include potential small acquisitions in commodities and technology, including to facilitate extended trading from its London Metal Exchange into the Asian time zone. Bigger ambitions look increasingly necessary, however. There are signs that Hong Kong bourse Chairman Laura Cha and Chief Executive Charles Li may be thinking about global expansion. They just established an international advisory council that includes Alibaba co-founder Joseph Tsai, former HSBC Chief Executive Stuart Gulliver and onetime U.S. Securities and Exchange Commission Chair Mary Schapiro.

The defensive and nationalistic nature of exchanges in Australia, Singapore and Tokyo make buying Asia-Pacific rivals tough. A union with the London Stock Exchange would help both companies compete against New York Stock Exchange owner Intercontinental Exchange as a global markets powerhouse. While LSE’s $21 billion market capitalisation and HKEX’s generous dividends plan would make such a deal tough to finance, a share swap might work.

Acquiring a big financial data business would be another option. Nasdaq generates about a third of its revenue selling information services. It is a considerably lower proportion at HKEX, which has outlined plans to make more money from its own data. There are a variety of options, but it’s time for Hong Kong to diversify its portfolio.

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