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 review, followed by business and strategic updates. 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. The 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. 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're 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 nine 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 inclusion of ETFs in Stock Connect and the announced launch of Swap Connect. 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 three 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. 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 nine-month mark this year. 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 FIC 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, and 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 continued to reflect the resiliency and robustness of our markets and business. Despite headline ADT falling by 41%, Q3 total revenue and other income at HKD 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 HKD 3 billion, profit after tax at HKD 2.3 billion, and earnings per share at HKD 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 non-recurring 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 five 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 HKD 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 non-recurring 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. 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 Nicolas Aguzin for our business and strategic update.
Sorry. 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's average daily turnover reached a record nine-month high, building on its strong performance throughout the period. We're encouraged to see some early signs of rebound 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 three 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 two-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 China 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-hours trading sessions for select MSCI products. 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 our 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 Market 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. 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.
Thank you. If you would like to ask a question over the audio conference, please press star one one on your telephone and wait for your name to be announced. Once again, it's star one one to ask a question on the audio. If you would like to ask a question via the webcast, please type it in the Ask a Question tab available on the webcast link any time during the webcast.
Thank you, operator.
Stand by while we get the first question.
Yep. Let's go for the first question. Thank you.
Thank you. Please stand by. First question is from the line of Gary Lam from HSBC. Please go ahead.
Thank you Gucho , Vanessa, and Ricky. Today I be greedy, three 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 effect? We noticed that the consultation period is probably due December. Just learn from sort of prior experiences, should we expect sort of more concrete progress, hopefully in the first half 2023 or maybe first quarter? Any implications on those on the further listing? Second question related to actually the investment portfolio. Aware of course, you mentioned of the downsizing of external portfolio and increasing size in the internally managed portfolio.
Does it reflect increased flexibility on how you deploy the fund? Mind sharing view with us, you know, your thinking on what are the potential sort of deployment strategies going forward in the corporate fund? Maybe, is it, you know, dividend is a potential consideration or maybe M&As in the mind. Just wondering if this increased the flexibility for you to deploy. The third one is a tougher, maybe broader question. A remote reference to Gucho's sort of the Big Bang 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 bang is smaller, how should we see the way that you execute a Hong Kong exchange strategy sort of get adjusted?
Is it maybe some slower cost growth or expectation for, you know, lengthening the time required for some of the initiatives that you are putting new investment into? Just try to gauge your thoughts into the implication, if and when the case that, you know, this growth in the coming years just doesn't get as appealing as some of these long-term macro assumptions could be. Thank you.
Yeah. Okay. Thank you, Gary. Let me quickly address the three questions which are some of them quite broad. By the way, Bonnie Chan, our Head of Listing, will be having an event at 6 P.M., so I mean, feel free to dial in and get all the details. Essentially, the new consultation has a regular time period for the market to provide its feedback. Then, after that, what we do is we receive the material, we assess it, and we come up with the new chapter.
I can't provide like effective dates just because I mean it depends on the feedback and the responses. 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 you know with the volatility that we're seeing with interest rates being so high at this point, it's a good time to think potentially of putting you know more in a conservatively managed scenario. Approximately HKD 2 billion was redeemed and that is going to be invested in a very conservative manner.
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, you know, tack on acquisitions that fit, you know, some small part of our business. But for the most part, we're not envisioning anything, you know, drastic or very large in the near term. Your last question around the evolution of the market and how about if like the market grows a bit slower than you know, initially anticipated.
I mean, as I was mentioning, 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, you know, a number of years, we should still prepare the company to take advantage of those opportunities. I anticipate that there will be periods that are going to be slower than others. We are investing for the long term, but we're very conscious of, you know, changes in outlook movements. We try to be thoughtful about both.
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. 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.
Thank you.
Thank you. We'll now take our next question. Please stand by. This is from the line of Yafei Tian from Citi. Please go ahead.
Hi. Good afternoon. Thanks for taking my questions. I have two. The first one is along Gucho's comment, some encouraging early signs is, IPO market warming up a little bit and pipeline being strong. When you look at the pipeline, we have been seeing relatively resilient pipeline for a relatively long period of time. What do you think, in your view, is driving that, you know, all of a sudden a bit warm up in third quarter? And what visibility do we have in the coming quarters when it comes to that pipeline materializing into actual fundraising activity? That's the first one. The second one is around LME. In the third quarter report, there is quite a detailed discussion about some of the litigation risk, you know, some of the reviews that is being involved.
I'm just taking a slightly longer term view of Hong Kong, yet looking at LME business overall. When this business was acquired, I think there was bigger ambition to drive Asian liquidity over. Given the change of dynamics at the moment, is there still value for HKEX to maintain LME as a subsidiary, right? What is the long-term growth potential for LME for HKEX? Thank you.
Thank you, Yafei. Okay, starting with the IPO pipeline. Yes, I mean, the third quarter was significantly better than the first six months in terms of IPOs. We had 29 listings during the quarter, raising over HKD 50 billion. It's more than twice what we had in the full first six months of the year. Very excited about, you know, seeing that those green shoots of activity. However, as you know very well, the market is still fairly risk-off and still muted investor sentiment. It's 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, you know, want to access the capital markets.
The markets have been tough for some period right now. What we're seeing is companies that have an interest in just like using public markets to fund their ambitions. A lot of new economy companies and a lot of tech companies, you know, we are seeing biotech companies and so all sorts of businesses. What we want to make sure is that we diversify. It's not only companies from China, it's companies from all over the world, and that's why we're very excited about these 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 two 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. We've seen how the local exchanges have done really well in terms of IPO in the first nine months of the year. Sometimes it's the other way around. The international markets are very, you know, bullish and it's a bit more muted on the mainland market. Hong Kong would pretty much be the only market where an issuer can come and get access to those two investor bases after of course qualification into Stock Connect. That is something that we're quite optimistic about the future.
Then the other area in terms of types of issuers 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. This will provide a new opportunity for those companies to access to be listed, and also for investors an opportunity to access those companies. We're very excited about that. Hard to say when we will see a huge activity in terms of IPO markets. So far, we're seeing the pipeline stay strong.
Second question.
Second question around LME. 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. So that hasn't been realized historically. But if you look at the key producers and consumers of base metals around the world, China represent a very large chunk of that opportunity. 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. 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?
Thank you.
Thank you. We'll now take our next question. Please stand by. This is from the line of Richard Xu from Morgan Stanley. Please go ahead. Richard Xu from Morgan Stanley, your line is open. Please ask your question. Perhaps your phone is on mute. We'll move on to the next question. Please stand by. We have a question from Gurpreet Sahi from Goldman Sachs. Please go ahead. Your line is open.
Thank you. Gucho , Vanessa. Thank you for taking my question. I just have two very simple ones. First is for Gucho. In terms of the listings that we continue to see happen onshore, especially in STAR Market and ChiNext, there are a lot of listings happening. In terms of the reform that we are aiming to do hard tech, and also the government announced today that Hong Kong Exchange can think about GEM reform revitalization. What is the reason that onshore so many companies can get listed and we, although there's improvement in third quarter, we are still lagging. What is, to your minds, the key difference here? Is it policy push or some rule which we have, which they don't, 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'll happen? That's number one. Number two 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 to 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? I mean, all the while I'm noting that the volumes keep on declining at LME. Thank you.
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. What we have seen is that retail demand has continued very active in terms of seeking participation in these IPOs. That is a bit of like the point that I mentioned when I was addressing the other question, which the investor base in the domestic mainland markets is uncorrelated with the international investor base.
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 is not a pricing at which companies are, you know, excited to go out. That's a 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. Precisely for that reason, I think that HKEX can potentially have a great market for the future, because, I mean, it'll be the only market where you can merge those two pools of interest in an effective way.
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, 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%. 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.
When we combine that with the fact that, you know, companies, international companies can come here and use it as a competitive advantage, whereby they can rely on a liquidity and on 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, you know, 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, you know, as best a service as we can do to our, you know, metals industry. We will continue defending ourselves vigorously. 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? Thank you. Yes, one moment please. Just opening the line. Richard Xu, Morgan Stanley, your line is open. Please ask your question.
Thank you. Sorry, my line was dropped earlier. My question is on the inclusion of foreign companies. I don't know if management had 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 explore this opportunity. If there's any, you know, notable interest from overseas companies at the moment.
Follow up on that is whether there will be required some additional investments on that front. Thank you.
Yeah. Thank you, Richard. There has been companies that have approached us to express interest in trying to understand how that would work, and it's hard for us to give a very precise timeline because it does require interacting with a variety of stakeholders. 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. 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.
I think the second part of your question is if those companies would need to do any significant investments 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. Companies that are primary listed and they qualified for the relevant Hang Seng Index and meet the criteria, they end up being qualified for Stock Connect. 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.
As I said by the questions that we've been handling, there is a lot of interest in trying to understand how this would work. We don't have all the answers yet, but we're working on them to try to get this, you know, in place as soon as possible. I mean, and this complements very well what we're doing in terms of opening offices internationally. You know, 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 actually coming from the portal. It's a written question from Shanny Wang from Bloomberg. The question would be: What is your outlook on cost growth for fourth quarter and beyond?
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 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 affected, which excluding this, you know, one-off items, it's about 6% growth. And they are driven by, you know, an inflationary environment. The fact that we have, you know, invested in our people both in our existing business and some people that we've hired externally. We're building our talent base.
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. I think this marks the end of today's session, and thank you everyone on the line for joining us today. We hope to meet and speak with you again very soon, and have a good evening ahead.
Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect. Speakers, please stand by.