HONG KONG -- Hong Kong Exchanges & Clearing faces a murky earnings outlook after posting its first drop in quarterly profit in more than a year on Wednesday, with initial public offerings poised to lose steam.
The world's most valuable stock exchange operator, which saw its own share price climb 40% over the past year as investors poured into the market, is now being buffeted by China's crackdown on the technology and education sectors.
Market players are reassessing expectations about how much the exchange will benefit from recent moves by Beijing to constrain IPOs in New York.
"The new-economy IPOs are set to slow down in both Hong Kong and overseas, and this will impact HKEX eventually," said Shujin Chen, head analyst for Chinese financial institutions at Jefferies in Hong Kong.
"While the exchange has benefited in the short-term from the sentiment that companies will come to list in Hong Kong rather than U.S., in the long run that will suffer too as investors look elsewhere to deploy capital to avoid uncertainties from geopolitics," she said.
A record $32.5 billion was raised in Hong Kong IPOs from January to July, 85% more than the same period a year before. But of 20 companies that listed in July, only electric vehicle maker Xpeng targeted at least $200 million in proceeds.
It raised $1.8 billion while rival Li Auto is slated to list on Thursday after selling $1.5 billion in shares. Both were already listed in New York.
Only one IPO is now open for subscription in Hong Kong, an offering of up to $145 million by Shanghai HeartCare Medical Technology.
Music streaming company Cloud Village, a unit of game developer NetEase, this week called off its debut sale of up to $1 billion in shares in Hong Kong after a tepid response from investors in preliminary meetings.
On Tuesday, the Hong Kong Securities and Futures Commission said it would begin requiring identity documents from share investors, following controversy over mainland Chinese investors evading IPO subscription controls by applying for shares through multiple brokerages.
Meanwhile, the average daily trading volume on the HKEX fell to 151.3 billion Hong Kong dollars ($19.66 billion) in the April-June quarter from HK$224.4 billion in the first three months of the year. Chief Executive Nicolas Aguzin referred to the current trading levels as "normal."
The exchange's net profit for the second quarter fell to HK$2.77 billion from HK$2.97 billion a year earlier, the first fall since the January-March 2020 quarter, according to data compiled by Refinitiv.
Profit for the first six months of 2021 rose 26% to a record HK$6.61 billion but missed the consensus of analysts surveyed by Refinitiv of HK$7.33 billion.
Aguzin, who joined HKEX in May from JPMorgan, described markets as "jittery" amid Beijing's regulatory interventions and said the "macro backdrop" will remain challenging in the months ahead.
He said about 200 companies have applied for IPOs in Hong Kong, with "significantly" more inquiries since Beijing announced new controls on offshore listings in early July.
"So whether our companies list in Hong Kong or in the U.S., we believe this market will continue growing aggressively for some time," he said.
HKEX shares climbed 0.4% on Wednesday to HK$517.50, giving it a market value of $84 billion.
Beijing's latest tech crackdown came in the wake of ride hailing operator Didi Global's $4.4 billion New York IPO.
The authorities' intervention brought a halt to what had been shaping up as a record year for Chinese listings in the U.S. Regulators declared that most technology companies listing offshore would need approval from the country's cybersecurity watchdog to ensure protection of user data.
Other moves have targeted private education services, food delivery providers and online finance platforms. Alibaba Group Holding and sister company Ant Group have taken the biggest hits as authorities have tackled anti-competitive practices and sought to improve conditions for workers and parents.
The crackdown has dragged the Hang Seng Tech Index down 38% from its peak in February, wiping out tens of billions of dollars in market value from the likes of Alibaba and Tencent Holdings.