HKEx Investor Presentation

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The 15th Credit Suisse Asian Investment Conference –

HKEx Investor Presentation Charles Li Chief Executive

Vincent Kwong Deputy Chief Financial Officer 22 March 2012

Agenda

1

Business Review

2

Financial Review

3

Strategic Plan Update

4

Appendix

2

2011 – Key Achievements

IPOs – Globally # 1 for 3rd year in a row

Established RMB equities trading infrastructure

Upgraded cash trading system to AMS/3.8

Launched BRICS alliance

Completed important market consultations

3

2011 Annual Results Revenue and other income

Operating expenses

Profit attributable to shareholders

($ million)

Basic earnings per share

Dividend per share

($)

7,566

4.73

7,855

4.68

5,037

5,093

4.20

2010

2011

1,612

1,823

2010

2011

2010

2011

2010

2011

2010

4.25

2011

4

HKEx remains World’s Largest IPO Exchange for the 3rd Year in a Row IPO Funds Raised by Various Exchanges in 2011 (in US$bil) 36.2 31.4 26.2 19.4 16.3 10.7 7.6

HKEx

NYSE

SZSE

LSE

SHSE

NASDAQ

SGX

5.3

4.7

BME

BM&F

3.6

KRX

Source: Dealogic (figures include funds raised by REITs; full value of dual listing deals are allocated to the respective exchanges)

2012 pipeline remains robust – 79 applications under review or approved as of 29 Feb 2012 5

2011 Securities and Derivatives Trading Trading volume of shares growing, but value flat due to market decline

Derivatives turnover reached all time high

2009-2011 Securities ADT

2009-2011 Derivatives ADV

572 468 398 222

366 295

176

173

207

2009

2010

2011

(In ‘000 contracts)

ADT in billion $

ADT in billion shares

Futures contracts traded

Options contracts traded

Recent ADT momentum showing pick-up over Nov-Jan ADT Source: HKEx statistics

6

Agenda

1

Business Review

2

Financial Review

3

Strategic Plan Update

4

Appendix

7

Financial Highlights 2011

% of revenue & other income

2010

% of revenue & other income

Y-o-Y Change

7,855

100%

7,566

100%

+4%

(1,823)

(23%)

(1,612)

(21%)

+13%

Profit before taxation

6,032

77%

5,954

79%

+1%

Taxation

(939)

(12%)

(917)

(12%)

+2%

Profit attributable to shareholders

5,093

65%

5,037

67%

+1%

Basic earnings per share

$4.73

$4.68

+1%

Diluted earnings per share

$4.72

$4.67

+1%

Interim dividend per share

$2.16

$1.89

+14%

Final dividend per share

$2.09

$2.31

-10%

Total dividend per share

$4.25

$4.20

+1%

Dividend payout ratio

90%

90%

-

$69.7 bn

$69.1 bn

+1%

743

99

+6.5x

($ million, unless stated otherwise) Results Revenue and other income Operating expenses

Average daily turnover of Cash Market Capex

Revenue and PAT moved in tandem with ADT Capex and operating expenses rose due to implementation of various strategic initiatives 8

Revenue and Other Income Breakdown Trading fees and trading tariff

Stock Exchange listing fees

Clearing and settlement fees

Depository, custody and nominee services fees

Market data fees

Other revenue and other income

Net investment income

($ million)

2,843

2,936

1,569 945

1,663

949 612

2010

2011

2010

2011

2010

2011

2010

685

2011

670

2010

637

2011

455

2010

595

2011

472

390

2010

2011

 Trading and clearing fees increased due to increase in market activities  Market data revenue declined due to lower per-quote fees  Other revenue and other income rose due to forfeiture of unclaimed dividends held by HKSCC Nominees  Net investment income decreased due to lower fair value gains 9

Operating Expenses Breakdown Staff costs and related expenses

IT and computer maintenance expenses

Premises expenses

Product marketing and promotion expenses

Legal and professional fees

Depreciation

Other operating expenses

($ million)

1,030 892

265

2010

2011

2010

302 210

2011

2010

217

2011

15

16

16

35

2010

2011

2010

2011

107

90

107

133

2010

2011

2010

2011

Operating costs increased due to implementation of strategic initiatives

10

Results by Quarter ($ billion – ADT Only)

($ million)

Average daily turnover value on the Stock Exchange ($bn) Revenue and other income ($mil) Operating expenses ($mil) Profit attributable to shareholders ($mil)

120

2,500

2,275 2,065

100

1,714

1,740

1,837

1,907 75.9

62.9

61.8

1,131

71.1

1,500

59.3 1,238

1,220

2,000

72.6

1,559

60

1,127

1,938

86.5

80

64.8

1,945

1,346

1,237

1,272

1,000

40 500

20

385

391

402

434

442

474

467

440

0

0

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

11

Agenda

1

Business Review

2

Financial Review

3

Strategic Plan Update

4

Appendix

12

2012 – Key HKEx Strategies

Business Drivers

Chapter 1

Chapter 2

Chapter 3

RMB and Moving Beyond Equities

Essential Infrastructure Investment

Next Generation Data Center

Hosting Services

IT Upgrades

Critical Implementation Year

13

HKEx Strategic Vision China

CHAPTER 1

Issuers

International

HKD Equity

Investors Issuers with China Nexus

CHAPTER 2

Investors

CHAPTER 3

Financial Players and Corporates

RMB Equity

Fixed Income, Currency and Commodities

Issuers

Financial Players and Corporates

14

New Asset Classes

Market Cap × Turnover

Key Business Drives – Seizing the Opportunities

Chapter 1

China IPOs

International listings

China Add-on’s

Chapter 2

RMB products

Cross-border market access

Structural uplift in ADT

Chapter 3

OTC clearing

Financial derivatives

Commodities

Near-term visibility may be limited, but we must capitalise on our unique position 15

Chapter 1 – Key Business Drivers

China IPOs  New Issues from China still strong…  …but a mature growth story

International Listings  Incremental growth leveraging on existing platform  Great branding effect

Chapter 1

China Add-on’s  Financial Institutions (FIs): strengthen capital adequacy  Non-FIs: funding growth and overseas expansion

16

Robust Fund Raising Story Continues…

Chapter 1

($bil)

91%

86% 77%

859

91% 85%

83%

79%

77%

73%

642

591

409

525 191 282 214 111 64 39 26 2001

155

185

59 52

59

97

2002

2003

2004

IPO

298

427

50%

490

394 37%

302

230 361

136 334

292

450 260

248

166 66 2005

2006

Follow-on

2007

2008

2009

2010

2011

% of China IPOs

…but IPOs are mature growth story 17

International Listings Becoming A Key Driver 2011 IPO Funds Raised

Chapter 1

Selected International Listings

Hong Kong

12%

Mainland Enterprises

37%

International Listing

52%

Four overseas jurisdictions were recognised in 2011: Canada-Alberta, France, Guernsey and Italy

US$10.0bil Switzerland

US$2.5bil Italy

US$1.3bil Luxembourg

US$206mil Japan

By Introduction England & Wales

By Introduction USA

18

China Add-On’s – Potential for Substantial Future Sell-down

Chapter 1

Domestic Shares of H-share Companies – Public Free Float:

Controlled by Major Shareholders

HK$2 trn

HK Public Free Float:

HK$10 trn Domestic Shares of H-share Companies – Controlled by Major Shareholders:

HK$9 trn

HK Listed Shares Controlled by Major Shareholders:

HK$10 trn Public Free Float

Non Public Free Float

Total

Hong Kong and International Issuers

HK$6 trn (64%)

HK$3 trn (36%)

HK$9 trn

Red-Chip

HK$1 trn (31%)

HK$3 trn (69%)

HK$4 trn

Non-H Mainland Private Enterprises

HK$0.7 trn (35%)

HK$1 trn (65%)

HK$2 trn

H-Share – Hong Kong Listed Shares

HK$3 trn (53%)

HK$2 trn (47%)

HK$5 trn

H-Share – Domestic Shares

HK$2 trn (14%)

HK$9 trn (86%)

HK$11 trn

Source: Estimates only, from Thomson Reuters, ETNet and HKEx statistics

19

Chapter 2 – Key Business Drivers

RMB Products  Critical to the sustainable growth of offshore RMB  Prepare for the arrival of Mainland investors

Cross-border Market Access  Huge need for Mainland investors to go offshore driven by domestic economic growth

Chapter 2

Structural Uplift in ADT  Higher velocity from Mainland investors will drive ADT

20

Potential Impact of Mainland Investors

Chapter 2

LTM ADT & Velocity of Major Global Exchanges (in US$bil) 291%

113.7 125%

75.0

66%

129%

65%

13.4

14.7

108% 218%

11.5

3.7 NASDAQ

NYSE

BM&F

Source: WFE, as of 31 January 2012

LSE

SHSE

SZSE

55%

179%

17.3 8.1

6.0 HKEX *

TSE

KRX

84%

111%

44%

45%

5.5

3.5

2.3

1.1

ASX

TWSE

NSE

SGX

= LTM average velocity

* Excludes structured products

HKEx has the potential to substantially increase velocity as China opens capital account 21

RMB Products – Recent Developments

Chapter 2

Largely Completed

RMB Infrastructure

  

Readiness of brokers, service providers, systems, regulations About 90% of market is ready to trade RMB equity RMB Equities Trading Support Facility (TSF)

Launch slowed down by Market Conditions

RMB Products

  

Dual Tranche Dual Counter (DTDC) RMB Equity Model Potential issuance of RMB bonds and equity in Hong Kong by H-share companies BRICS Alliance

22

RMB Capability – Laying the Foundation Oct 2010 Listing of the first RMB bond – Asian Development Bank

Mar 2011 RMB Readiness Testing with participants – 365 EPs and 35 CPs are ready

Apr 2011 Listing of the first RMB REIT – Hui Xian REIT (RMB10.5 bil)

2010 Oct

Sep 2011 Introduced Dual Tranche Dual Counter (DTDC) - RMB equity listing model to the market

Full Year 2011 Listing of 9 RMB bonds by 7 companies

2011 Jan

Apr

Jan 2012 Launch of RMB Trading Support Facility (TSF)

2012 Jul

Oct

Jan

Chapter 2

Feb 2012 First RMB Gold ETF listed – Hang Seng RMB Gold ETF

...

RMB Bond RMB REIT RMB ETF RMB Equity Other RMB Products 23

Different Models & Facilities to Support the Listing & Trading of RMB Equities

STSC

IPO

Trading

RMB + HKD

RMB

RMB

RMB

HKD

HKD

Chapter 2

Supported by

DTDC

Will also be used for follow-on offerings STSC

DTDC

TSF

Single Tranche Single Counter

Dual Tranche Dual Counter

RMB Equities Trading Support Facility

Launch of RMB equities....awaiting market conditions to pick up 24

Cross-border Market Access – Why is it Important?

RQFII

Cross-border ETFs

Potential JV

Chapter 2

  

Expands CNH product suite



Gives Mainland investors access to Hong Kong underlying at index level

 

Increases familiarity with HKEx equity market



Landmark cooperation between three Chinese exchanges (HKEx, SHSE, SZSE)



Potentially gives HKEx access to futures on Mainland underlying

Enhances yield on CNH Facilitates RMB ETFs on A-Share underlying

HKEx-listed RMB ETFs on A-Share underlying provide currency neutrality

Benefits of aligned opening hours will begin to emerge as cross-market access increases 25

Offshore RMB – Progress on 3 Critical Steps

Chapter 2

Step 1 – RMB flows out of the Mainland ■ Size of CNH pool by 31 Jan 2012 was RMB 576 bil

Step 2 – RMB circulates offshore Step 3 – RMB flows back onshore ■ Product curve: Moving from

Deposits / Insurance / Bonds to ■ Streamlined approval Equity / Structured Products ■ 8.9% of trade procedures to send RMB settlement executed proceeds back to in RMB in 1H 2011 ■ RMB 234 bil of Dim Sum Bonds Mainland outstanding to date* ■ China’s ODI in nonfinancial sectors ■ The first batch of RQFII ■ Potential issuance of RMB reached US$60 bil in products in Hong Kong by Hquota to invest mainly in 2011 share companies fixed income ■ HKMA eases regulations to allow banks to expand CNH business

■ Expanded RQFII quota to facilitate RMB ETFs on Ashare underlying

Source: Chinese Government’s Official Web Portal; HKMA website * As of 27 Feb 2012

Substantial progress but still early days in a long march 26

BRICS Exchanges Alliance

Brazil

Russia

India

Chapter 2

China

South Africa

+

Cross-listing of key index futures

Development of cross-market products

Slow start expected, but a strategic partnership initiative 27

Hong Kong’s Financial Markets – Future Vision

Chapter 3



Hong Kong continues to rank as the world’s top financial center



HKEx has the opportunity to lead Hong Kong into new asset classes

Equities

Fixed Income & Currency

Commodities

28

Chapter 3 – Why Now?

Chapter 3

China’s influence and relevance in global market is larger China needs access to financial and commodity derivatives markets in RMB and Asian time zone

China is internationalizing fast

Extension of Hong Kong value proposition “China meets international” to new asset classes

But these are also globally competitive sectors

Incremental driver of CNH growth 29

Size of the Opportunity

IRS & FX

RMB FX Derivatives

Chapter 3

Sectors? Value Chain? Business Models?

Commodities OTC Clearing

Financial Derivatives

Offshore RMB will be the transformational driver 30

Infrastructure – 2012 is a Critical Implementation Year

Required Investment

Fiscal Regime

Essential Infrastructure



Essential infrastructure investment to preserve current revenue



Increased headcount and operating expenses



Building blocks for incremental revenue



Strengthened project management



Higher capex



Enhanced fiscal discipline



Potential change in margin structure



Internally funded



Reduced cash flow in interim



No planned changes to dividend policy

To preserve our franchise and grow, we have to invest 31

Market Structure

Platform

Infrastructure

Essential Infrastructure Investment – A Comprehensive Plan

SDNet2

AMS/3.8

New Trading Hours Part 1

Consolidated Data Center

Essential Infrastructure

Hosting Services

Market Data System

Market Access Gateway

Derivative Trading System Upgrade

T+2 Finality

After Hours Futures Trading

Clearing House Risk Management

New Trading Hours Part 2

32

2012 – Key HKEx Strategies

Chapter 1

Business Drivers



Globally leading IPO market



International listings continue



Essential Infrastructure Investment

China add-on’s expected to enhance float

Chapter 2 

RMB infrastructure completed



Awaiting market improvement



…and crossborder flows

Chapter 3 

Moving beyond equities



Potentially transforming Hong Kong’s market



…but globally competitive



Essential to preserve our franchise and grow business



2012 is a critical implementation year



Capital expenditure and headcount will have financial impact

33

Questions and Answers

34

4

Appendix – Additional Financial Information

35

Quarterly Trend - Revenue and Other Income ($ million)

Total

1,714

125 108 169 73 365

1,740

33 96 166 247 362

1,837

174 115 160 141 358

221

204

232

653

632

657

Q1 2010

Q2 2010

Q3 2010

Trading fees and trading tariff Clearing and settlement fees Market data fees Net investment income

2,275 140 136 175 151 484

1,907

111 127 168 72 418

288 246 901

Q4 2010

2,065 130 119 164 322

1,945 *

111 159 192 441

409 221

1,938

108 155 130 146 99 395

247 235

765

700

801

Q1 2011

Q2 2011

Q3 2011

670

Q4 2011

Stock Exchange listing fees Depository, custody and nominee services fees Other revenue^ Other income

* Including net investment loss of $6 million for the third quarter of 2011 ^ Other income represents the forfeiture of unclaimed cash dividends held by HKSCC Nominees Limited.

36

Quarterly Trend - Operating Expenses ($ million)

Total

385

391

32 27

37 26

53

52

64

64

402

434

32 26 53

209

212

Q1 2010

Q2 2010

Q3 2010

474

467

37 28

48

45 24

44 20

26

54

55

52

52

70

72

247

244

Q4 2010

Q1 2011

Staff costs and related expenses Premises expenses Other costs*

440 47 20 56

77

67

224

442

73 80

274

275

Q2 2011

Q3 2011

237

Q4 2011

IT and computer maintenance expenses Depreciation

* Other costs include product marketing and promotion expenses, legal and professional fees and other operating expenses. 37

Net Investment Income by Funds Average Amount of Funds Available For Investment ($ billion)

Net Investment Income ($ million) Total

472

390

Total

40.5

14

48.2 2.8

4

2.5

257 250

30.7 24.9

1 200

15 121

2010 Corporate Funds

2011 Cash Collateral

3.8

4.1

9.3

10.6

2010

2011

Margin Funds

Clearing House Funds

38

2011 Results - Net Investment Return by Funds Corporate Funds

Cash collateral

Margin Funds

Clearing House Funds

HKEx Group Total

2.16%

1.13%

1.17%

1.04% 0.81%

0.81% 0.54%

0.37% 0.15%

0.02% 2010

2011

2010

2011

2010

2011

2010

2011

2010

2011

39