Half Year 2022 Hong Kong Exchanges and Clearing Ltd Earnings Call Hong Kong Aug 19, 2022 (Thomson StreetEvents) — Edited Transcript of Hong Kong Exchanges and Clearing Ltd earnings conference call or presentation Wednesday, August 17, 2022 at 9:15:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alejandro Nicolas Aguzin Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director * Bik Yun Lau Hong Kong Exchanges and Clearing Limited – Group CFO * Ricky Choi Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning ================================================================================ Conference Call Participants ================================================================================ * Gurpreet Singh Sahi Goldman Sachs Group, Inc., Research Division – Equity Analyst * Jia Wei Lam HSBC, Research Division – Analyst & Head of Greater China Banks Research * Michael Li BofA Securities, Research Division – Research Analyst * Ran Xu Morgan Stanley, Research Division – MD * Yafei Tian Citigroup Inc., Research Division – VP ================================================================================ Presentation ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– Good afternoon, ladies and gentlemen. Welcome to HKEX 2022 Interim 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 2022 first half financial performance review, followed by business and strategic updates. Then we are happy to take some of your questions. Those of you dialing into this call may follow the instruction of the conference call moderator later on to ask questions. Meanwhile, those of you joining us through the webcast may send us written questions through the webcast portal as usual. Without further ado, over to Gucho. ——————————————————————————– Alejandro Nicolas Aguzin, Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director  ——————————————————————————– Thank you, Ricky, and good afternoon, everyone. Thank you for joining us today. It gives me great pleasure to be speaking to all of you, investors and analysts here in Hong Kong and around the world. And I hope you all have found some time in this busy summer season to relax and recharge. So during the first half set against a challenging macro backdrop, we have proactively launched a range of new initiatives and continue developing projects that are focused on our vision to build the marketplace of the future. This long-term vision to build a thriving sustainable and successful organization and market is fully aligned with our strategic principles that we set out earlier this year. And today, on behalf of HKEX, I am pleased to present our first half financial results. I would first like to give a strategic overview of the business in the last quarter. Then our Group CFO, Vanessa Lau, will provide details on the financials. And after that, I’ll be happy to take questions from all of you. During the first half of 2022, HKEX demonstrated resiliency and robustness set against a range of global headwinds. Our Connect programs performed well during the quarter despite a challenging backdrop. I’m pleased to confirm that Bond Connect average turnover reached a record half year high. We also further enriched our offering by including ETFs in Stock Connect and announcing the launch of Swap Connect, and we warmly welcomed the announcement last week of the adjustment of the trading calendar between Hong Kong and Mainland China markets under Stock Connect. Activity on our IPO market reflected global market sentiment, impacting IPO revenues across the world. But encouragingly, our pipeline remains strong with more than 180 active applications. Hong Kong continues to be a preferred and attractive market for homecoming issuers. We recently welcomed Zai Lab converting from a secondary to a primary listing in June. Our derivatives offerings goes from strength to strength and volumes throughout the quarter have shown strong growth. This reflects the growing popularity of our new derivative products and increased cross product trading. At the same time, it is also partly driven by the heightened market volatility. In the first half of the year, we continued to diversify our product offering, and we introduced a range of new initiatives. As a result, we have seen growth in ETPs and data revenue. We also announced plans for the carbon market. We have also continued to build our business for the long term by making investments in talent, technology, customer centricity and risk management, all of which are central to building our vision of building the marketplace of the future. I will describe this in a few moments, but first, let me hand you over to Vanessa to go through the interim results in more detail. Over to you, Vanessa. ——————————————————————————– Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO  ——————————————————————————– Thank you, Gucho. Good afternoon, everyone. Thank you for joining us. I’m Vanessa Lau. I would now like to share with you our interim and Q2 2022 financial results. In the first half 2022, we continue to navigate a volatile global macroeconomic backdrop, ongoing geopolitical tensions and the continued impact of the pandemic. And our results this half reflects the resiliency and robustness of the HKEX business, especially when viewed against the exceptional record results of the comparable first half of last year. Despite headline ADT falling by 27%, total revenue and other income was $8.9 billion, down 18% against the first half 2021. In fact, if you look at core business revenue, which excludes net investment income on our corporate funds and HKEX Foundation income, this was down by only 11%. Our EBITDA was $6.4 billion, profit after tax was $4.8 billion and earnings per share was $3.82. Dividend per share is at $3.45. Turning specifically now to Q2’s performance. Our core business revenue was $4.5 billion, down 4% against the prior year Q2, reflecting the 14% lower headline ADT. Our Q2 results were also impacted by the performance of the external portfolio, which recorded a mark-to-market loss of $322 million against gains of $162 million in Q2 2021. As a result, profit after tax was 22% lower compared with prior year at $2.2 billion. Turning to the next page where we focus on the Q2 detailed financials. Core business revenue demonstrated its resiliency down 4% against Q2 2021, attributable to softer cash market volumes and lower depository fees from eIPO applications. This is partly offset by strong ADV in the derivatives market, driven by the increased popularity of HKEX’s newly launched products and the increase in net investment income from margin funds and clearing health funds. We are particularly pleased to see our newly launched products like the Hang Seng TECH Index Futures launched in November 2020 and MSCI China A50 Connect Index Futures launched in October 2021 and registering strong growth in 2022. OpEx was up 14% against Q2 2021, reflecting investments in talent and higher legal fees. Coupled with the losses of the external portfolio, Q2 2022 profit after tax was 22% lower than last year. Moving on to look at the trend line. We continue to follow the general upward trend of the last 5 years on both revenue and profit. With the first half 2022 results returning to long-term trend levels, after the exceptionally buoyant volumes in Q1 2021. Despite the weaker market sentiment, HKEX continues to maintain an attractive EBITDA margin. 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 Q2 was $30 million. As mentioned earlier, net investment income was affected by the mark-to-market fair value losses on the external portfolio in Q2 2022 compared to gains in the prior year quarter. As we look forward, a positive trend that we’re beginning to see is the impact of rising interest rates on our internally managed funds with net investment income up by $158 million in Q2 2022 or 81% versus Q2 2021. As U.S. and Hong Kong interest rates are expected to rise further in the second half of this year, we should see continuous improvement in investment income of our internally managed funds in the second half 2022 and into 2023. Moving on to look at the external portfolio. As mentioned, the mark-to-market fair value loss of $322 million in Q2 2022 of $511 million in the first half 2022 was largely influenced by downward valuation adjustments in both the global equity and fixed income markets. These fluctuations in fair value reflect the normal fluidity of market cycles. It is worth noting that even including the loss in the first half 2022, the external portfolio has generated a cumulative net gain of $1.7 billion, representing a 4.6% annualized return since its inception in December 2016. That said, given our expectations as to ongoing market volatility, together with the uncertainty of rising interest rate environment and continued global economic weakness, we will be initiating a $2 billion redemption from the external portfolio in the second half 2022 to prudently manage our earnings volatility in the medium term. The redemption proceeds will be invested internally with the rest of our corporate funds. Lastly, let’s take a look at our operating expenses. OpEx was up 14% in Q2 2022 as compared with Q2 2021, reflecting our continued investments in existing and new talent, technology infrastructures and strategic initiatives as well as legal fees incurred in respect of claims relating to the nickel market at the LME. We expect wage inflation and the competition for talent to continue in the coming months. To summarize, we have seen challenging conditions in Q2, but our core business continues to show its strength and resilience built upon solid foundations and a clear strategy. We manage the business for the long term, and we will continue to invest in clients, technology, talent and risk management to deliver our vision of building the marketplace of the future. With that, I’ll hand back to Gucho for our business and strategic update. ——————————————————————————– Alejandro Nicolas Aguzin, Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director  ——————————————————————————– Thank you, Vanessa. And as I mentioned earlier, our business continued to demonstrate resiliency in the first half of the year. Here, you can see some data about some of the points that I made, in particular, our diversification, new initiatives and vibrancy in our derivatives market, which have in part offset the broader general market softness. Trading volume in our derivatives markets have surged by 35% compared with the same period last year. This was driven by the growing appetite for a number of derivative products, including HSCEI Futures, HS TECH Index Futures and MSCI China A50 Connect Index Futures. Our Connect program performed well. And while the number of IPO listings reflected global sentiment, we continue to welcome new economy and biotech companies as well as high-quality homecoming and SPAC issuers, and our pipeline remains strong. I just mentioned diversification and the new initiatives that reflect our vision and our strategic focus. Let me now drill down into our ETF franchise as an example. Enhancements to our market structure have continued to make Hong Kong’s ETP market more vibrant. And reflecting this ETP appetite continue to gain momentum with daily turnover records hit again and again. In the past few years, we have welcomed more first of their kind ETFs helping us to build a more diversified ecosystem. And we have launched various liquidity-enhancing initiatives to maintain the competitiveness of our ETF markets. Examples of this include the fee waivers for Hong Kong listed fixed income ETFs and money market ETFs. Also, the market makers stamp duty exemptions and the new spread table amongst many others. As a result of all these actions, the average daily turnover of ETPs, including ETFs and leveraged and inverse products increased by 53% to HKD 11.8 billion from 2021. And we continue to add enhancements to this market. A significant new initiative in the first half was the announcement of the inclusion of ETFs in Stock Connect, which was launched on July 4. This is the next development in our highly successful Connect franchise. It provides our customers around the world with a broader range of investment choices, risk management tools and opportunities. It also underpins our strategy to connect China and the world. We believe the growth potential for ETFs in Stock Connect is significant. It provides issuers with an additional channel to tap into the savings of Chinese household wealth, and this creates favorable conditions for even more new ETF listings, and this, in turn, will add to the vibrancy of Hong Kong’s ETF market. Looking in more detail at our 3 strategic imperatives in the first half of the year, we have built on our China strength to facilitate the 2-way capital flows. You can see some highlights of our China-related products here in this slide. some I have mentioned before, the introduction of the first A share structured products was another much anticipated and welcomed initiative. We have also been deepening our Mainland strategic partnerships opening up new opportunities in the Greater Bay Area. The GBA is something that continues to excite us. In connecting capital with opportunities, we have strengthened our position as Asia’s derivatives trading hub, reflecting increased customer demand for hedging and risk management tools. We have been making our markets more attracted by expanding our product ecosystem and enhancing our market structure. For example, in the first half of 2022, we launched derivatives holiday trading, a new SPAC regime, the value risk platform in the cash market and a broad range of new ETF listings including the first metaverse ETF, the first carbon futures ETF, and the first blockchain ETF. And in connecting today with tomorrow, 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. A highlight was the launch of the Hong Kong International Carbon Market Council in July. During the quarter, we also expanded our offerings to listed issuers through their corporate life cycles with the launch of IR Connect. This reflects our commitment to excellent corporate governance standards in our market. We’re pleased that we have made good progress on executing against our long-term strategy, and we remain firmly focused on our vision to build the marketplace of the future. Looking ahead, we know that there will be — there will continue to be headwinds especially in the short terms; geopolitics, market volatility and the rising interest rate environment will continue to impact our markets. We expect cash market trading volumes to continue to be affected by the broader global market sentiment. But we remain resolutely optimistic about the medium- to long-term opportunities for our business and the market. We have a robust IPO pipeline and we are seeing some green shoots of market activity with 16 companies listing in July. We will continue to expand our Connect programs to connect China and global markets. This will further deepen cross-border market accessibility. And as Vanessa mentioned earlier, we will keep investing in talent and technology to support the long-term growth of our business. With an exceptional team and a clear strategy in place, we’re confident that we remain well placed to capture the opportunities ahead. Thank you very much. And with that, I’m happy now to answer your questions. ================================================================================ Questions and Answers ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– Thank you, Gucho, Vanessa, for your sharing. And now we will open for questions. Operator, can you please give the audience the instruction how to raise questions either via webcast or audio. Thank you. Over to you, operator. ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– So we’ll go ahead and take the first question from the line. Operator, please. ——————————————————————————– Operator  ——————————————————————————– We will take the first question. Your question comes from the line of Michael Li from Bank of America. ——————————————————————————– Michael Li, BofA Securities, Research Division – Research Analyst  ——————————————————————————– This is Michael Li from Bank of America Securities. I have two questions. So we noticed that in the first half results, you mentioned that you did not take any [LFP]. Maybe some guidance that you give any core case and any update of a loan in the LME segment? The second question is about the change from secondary listing to do primaries we noticed the baba which is the largest amount in plan to completely by end of this year. So the most after the company of this will excluded in downtown billing, will still — I mean, be waiting for segment? ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– I think the lines actually have a lot of echo. So Michael, if I may repeat your questions. I think your first question is mainly around any updates on the LME regarding the nickel incidents. And your second question would be around the potential ADR dual primary listing conversion for [Alibaba], Am I correct? ——————————————————————————– Michael Li, BofA Securities, Research Division – Research Analyst  ——————————————————————————– Yes. ——————————————————————————– Alejandro Nicolas Aguzin, Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director  ——————————————————————————– Okay. Yes, sure. I mean, it’s — clearly, there’s not a lot that I can comment on the LME situation, the active situation there on the reviews that are happening and the judicial reviews. I mean, the LME management is of the view that the — of course, the claims are without merit and the LME will contest them vigorously. And the reviews are at an early stage, and therefore, there is no sufficient information to estimate the numbers that you were mentioning. And so it’s hard for us to provide any guidance for that. And so there has no — there hasn’t been any provisions made in our financial statements. Of course, we’re fully committed to supporting the efforts of the LME to restore confidence in the market and making sure that we support the long-term health and efficiency of that market. Now as it relates to the situations of companies that are transforming their listings from secondary to primary. Clearly, there are mechanisms in place whereby companies that are primarily listed in our market and meet certain criteria, they would qualify for Stock Connect. We do review like — I mean it’s hard to make a general comment. As much as I can do a general comment, I would say that companies that meet the criteria of having been traded for 6 months and that qualify under the eligibility requirements of Stock Connect, including the fact that they have a certain amount of volume, they quality for certain indices, they would qualify for Southbound Stock Connect. ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– Thank you, Gucho. So we will take the next question from the line as well. Operator, please? ——————————————————————————– Operator  ——————————————————————————– The question comes from the line of Yafei Tian from Citigroup. ——————————————————————————– Yafei Tian, Citigroup Inc., Research Division – VP  ——————————————————————————– I have two. The first one is around the Swap Connect as — just recently, we launched, would you be able to give us a little bit more color what is the long-term implication from the Swap Connect, particularly around your development of fixed income business? The second one is probably for Vanessa, around the investment in talent, in technology. We noticed that operating expenses have been going relatively higher than run rate that you were at previously? So just wondering, is this ongoing trend that we should expect as Hong Kong yet continues to invest in people as well as new initiatives? ——————————————————————————– Alejandro Nicolas Aguzin, Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director  ——————————————————————————– Okay. Let me address the first one around Swap Connect. The significance of Swap Connect is that most of the connectivity initiatives that we have or all the connectivities were around cash product. This is 1 that is a connectivity program around a risk management tool. And as you well mentioned, it also implies a development of the fixed income market. There are a lot of, let’s say, ancillary products that over time may be developed. . Right now, we’re at the early stages of implementing this. It will take about 6 months to implement it. So as with any initiative that we have across with the Mainland. It takes a lot of coordination with many stakeholders. In this case, CFFEX and Shanghai Clearing Houses, our OTC Clear business. And we’re excited about the potential of this market, and we should be working over the next 6 months to launch this. And the other question, I will pass it on to Vanessa to answer. ——————————————————————————– Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO  ——————————————————————————– Thank you, Gucho. Yafei, thank you for your question. You’re right in that we have invested in talent, technology, infrastructures and these continue to be very important investments for the long-term health of our business. If I look at specifically the OpEx for the first half, and you would know that 70% roughly of our OpEx can be attributable to staff costs, but if we take a slightly longer-term view on staff costs, if I look back at the last 4 years, for example, staff costs in absolute dollars have only grown at around 8% annualized, right? So which is not an unreasonable rate for a business that we are really relying on talent to deliver on the future growth. And of course, this quarter and also for the rest of this year, you will see the legal cost that Gucho already talked about in respect of the LME. So I think for the rest of the year, we would expect to see wage inflation to continue and also the competition for talent, which will have some impact on our costs. But we will continue to try and strike the right balance between investing for long-term growth and navigating are currently challenging times with our prudent cost management. ——————————————————————————– Alejandro Nicolas Aguzin, Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director  ——————————————————————————– Yes. And maybe I’ll complement a little bit on that question because Yafei I know it’s a very important one. and you have quite a bit of focus on that correctly. So when we look at the first 6 months of last year, for example, you can see that headcount and expenses. I mean actually, particularly around staff, they went down quite a bit. There were a lot of positions that remained and filled and had to be covered up. Many of this around our control infrastructure to make sure that our marketing being resilient, robust and there were a lot of those areas that were filled. I mean if we look at the first 6 months, actually, the growth in headcount was about 2%. So you can say, okay, but maybe there was an uptick on average or something. There were a number of things that are quite unique including the fact that the first 6 months of last year, you pretty much for the whole 6 months, you did not have a CEO. This year, you do have CEO. And then also, the — there are a number of individuals, I mean, with retirement and essentially, there’s a bring forward of their invested shares. So I would say that we will continue investing in people. We want to make sure that we’re market competitive. We feel very good about some of the actions that we took in the first 6 months around making sure that we have a competitive workforce. And we’re going to make sure that our talent is at the right level of both compensation and also competitiveness in the market. ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– For a detailed response. Operator, can we move to the next question from the line as well? ——————————————————————————– Operator  ——————————————————————————– We will take our next question. The question comes from the line of Richard Xu from Morgan Stanley. ——————————————————————————– Ran Xu, Morgan Stanley, Research Division – MD  ——————————————————————————– I have a question on the derivative market. Certainly, the volume has been up. Just wondering whether you can share a little bit on your pricing strategy after the holiday on the Asia Index Futures? Also, obviously, there could be demand for other Asia Index Futures, given different components right now. any dialogue with also regulators in terms of whether there’s opportunity for other do you this product to be launched in the near or ——————————————————————————– Alejandro Nicolas Aguzin, Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director  ——————————————————————————– Okay. Thank you very much. We’re very pleased with the performance of our derivatives business and a lot of the things that we have introduced, including all the enhancements, the micro structure enhancements that we’ve done with non-Hong Kong products. I mean this includes the derivatives trading holiday with Stock Connect programs. Obviously, we’ve also announced something about a week ago. So what I’d like to do is to have Wilfred, you are co-COO and Head of Market to just like talk a little bit about the current environment and what we’re doing about it. ——————————————————————————– Unidentified Company Representative,  ——————————————————————————– Yes. Thank you, Gucho, Richard. Long time as well. So the — I want to comment a little bit on the new product development front and then address specifically about the Connect A50 contract in particular. Obviously, we are very encouraged by a lot of the support of — from the market across from our new product launches, whether it’s HS TECH, Connect A50 or options on futures, just to name a feel. By working closely with our partners, we were able to see significant growth in ADV and also open interest as a result of it. And very quickly, I think we come to a good maturity point that some of the initial trading [free] holiday, we were able to take it away. And then at the same time, we still encouraged very encouraged by the continued increase in the volume and participation from a substantially broader and more diversified flows that are coming into our market. So that’s the first 1 I want to make. Second point I want to make is — the Connect A50 is still a very new index itself. We have been articulating about the advantage of the contract especially in a lot of the risk management, as you can imagine, there’s a significant amount of A share exposure out there. And if you look at the specifics about the Connect A50 contract, it does offer a very cost effective way in a substantially better market tracking and sector balance approach for a lot of the portfolio manager. And that actually helps in terms of a lot of the portfolio managers to achieve the goal. And therefore, from an aggregate perspective, we are pleased with the development. Now that’s the second point. Last point I want to make is about the that Gucho mentioned. We are also very pleased to see the launch of derivative warrants on Connect A50 on the 8th of August, which is a very good day. And then the important point there is not just about derivative warrants launching, but I think what is very good at is actually building a very vibrant product ecosystem alongside with our partners and client ecosystem. So we’ll continue to work very closely with our regulators and also Mainland regulators to stage in the right product into the mix to increase the overall vibrancy of the market. Thank you, Richard. ——————————————————————————– Alejandro Nicolas Aguzin, Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director  ——————————————————————————– Yes. And just to complement, Richard, a little bit 1 extra point in terms of our plans and things that we’re doing to enhance the platform something that we think is very important in — especially in the derivatives market is to make sure that we make a push to be closer to our international clients. And we’re trying to develop that investor base and 1 key thing is obviously being more aggressive in going out internationally, setting up an infrastructure in the U.S. where we can market and be closer to the clients same things in Europe. So we are trying to have a more client-oriented view of our business. We’ve centralized our sales force. We have global account management to make sure that we can get the most synergies we’re trying to establish ourselves closer to the client. We have to become much more aggressive, competitive and that is a core part of our strategy on derivatives. ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– Thank you, Gucho, and operator, please proceed to the next question from the line. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from the line of Gary Lam from HSBC. ——————————————————————————– Jia Wei Lam, HSBC, Research Division – Analyst & Head of Greater China Banks Research  ——————————————————————————– Two questions, if I may. First off, if I may refer to Page 24 of your slide about the ADR conversion. When we compare the Hong Kong market to the other exchange you quoted here, like NASDAQ, et cetera, where do you see the underlying investor demand that is not being met out from Hong Kong, but more on my expect. Asking this question because we would definitely think whether would cause an ultimate listing of some of these companies around. And Hong Kong might represent 100%, therefore, on the trading volume. But that 100% relative to today, the absolute volume, how much of those are migration? How much of those sort of reduction? We know that Hong Kong doesn’t have a sort of active high-frequency trading or algo trading market. other than that, can you maybe help us share some of the gap that you might identify that we can actually enhance from the infrastructure side in order to capture a bigger absolute volume of trade for these particular stops? And I think actually reconcile your plan to expand our representation in U.S. and Europe. And secondly, a more smaller question more on the investment portfolio. Vanessa mentioned, there’s a sort of $2 billion redemption plan. Can you just clarify that has been executed so far, like with before today? Or is yet to come? Asking also because we are definitely also seeing some form of rebound from third quarter to date over the last one or plus. So do we see some form of recovery from the earlier losses? And are we be to capture that as well as to what extent are we now benefiting from a sort of higher deposit rate. Just could you remind us, is it more on the Hong Kong wage sort and a short end sort of that sort of repricing mechanism so we can better gauge the sensitivity to that? ——————————————————————————– Alejandro Nicolas Aguzin, Hong Kong Exchanges and Clearing Limited – Member of Mainland China Advisory Group, CEO, Ex-Officio Member of the Board & Executive Director  ——————————————————————————– Thank you, Gary. I think it’s going to be a little bit hard for me to just give you all the details around the question that you’ve asked on the different trading platforms. But you’re right. I mean our market does have a little less of the high-frequency trading investors. There are several areas or investor types that we’re trying to make sure that they come to a market or attracted to our market and hence, our idea of expanding our international presence. Of course, we do have like 1 advantage for some of the names in this list that is the Mainland investors that can qualify through Stock Connect, that’s a source of demand that is very attractive. And on the other ones, and most of the institutional investors that can invest in NASDAQ can also pretty much invest in our market. So I mean, I don’t know, Wilfred, if you have any additional color on that. ——————————————————————————– Unidentified Company Representative,  ——————————————————————————– First and foremost, I think the conversion is all still in process, right? And we are seeing a lot of developments and willingness — not only the fact that I think the stocks are migrating from the U.S. to Hong Kong per se. But importantly, that these are stocks that have more information during Asia powers that is better captured within the Asia market. So I think that is the benefit of being in Asia, in Asia time zone for these stocks. And that’s the first point I want to make. Now second point is about the relative activities from the high-frequency trading or high-frequency trading. I think that gives you the impact on the aggregate trading volume per se. But importantly, I think we want to highlight is the Hong Kong participants perspective is a very diverse set of participants that brings in a very nice mix of client base from all around the world. And I think that is absolutely important. And the third point I want to make is also we are massively investing in our market micro structure to cater more with the trend the market is trending in trading. And the Hong Kong unique advantage is, actually, we are a consolidated single trading revenue where full price transparency and order book level changes can be a lot more efficiently represented and integrated into providing solutions to a lot of our clients who are accessing our market. And those are the that I think we will work very closely with our partners and participants to deliver that trading and settlement solutions to our clients. ——————————————————————————– Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO  ——————————————————————————– I’ll answer the question on the external portfolio and investments. So the external portfolio derisking of the HKD 2 billion that started from July onwards. We’re more than halfway done with the $2 billion redemption, clearly subject to the exit clauses of individual fund managers. And we have a very diversified portfolio with over 33 fund managers. So as you think about the performance, and Gary, you rightly pointed out the market rebounding somewhat in July and through August, that will have an impact on the external portfolio that you will see hopefully in — when we announced in Q3. For the deposits, the internally managed funds, these fall into different categories. So if you look at our margin fund, and I’ll just take Q2 as an example, around 30% of that margin fund was held at overnight deposits. And therefore, you would look to the HIBOR overnight rates, which if you look at Q1 this year versus Q2 this year, it went up from 7 basis points to 10 basis points. So it did go up, but not significantly. Whereas if you look at HIBOR 3 months and HIBOR 12-month rates, HIBOR 3 months went from 41 basis points to 88 basis points. HIBOR 12 months went from 96 basis points to over 200 basis points. Now part of our margin funds would be deposited in these longer-time 10-year instruments with maturity up to 12 months. So we’ll start to benefit, and we’re already starting to benefit from the interest rate hikes, and there will be some lagging effect because as you have these long time — long tenure time deposits, it takes time to mature the old ones and get renewed at higher rates for the new ones. But you’re beginning to see some of that impact in already our Q2 results. So that will likely continue as we see more rate hikes through the rest of this year. So I hope that gives a better sense of the fund spread. And for Clearing House Funds, which is a much smaller size fund pool, most of these are held overnight due to regulatory reasons. ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– Thank you, Gucho and Vanessa. So we’re going to take the last question, which is also coming from the line. Operator, over to you. ——————————————————————————– Operator  ——————————————————————————– The question comes from the line of Gurpreet Sahi from Goldman Sachs. ——————————————————————————– Gurpreet Singh Sahi, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Can I have three, please, and all should be pretty small. First of all, Vanessa, I was hoping that on top of what you told us regarding the staff cost growth into the second quarter, can we be a bit more specific, that 18% was the staff cost growth on a Y-o-Y basis within the second quarter. Can you please break it up into new hires, number one? And what that had an effect on a Y-o-Y basis? Because clearly, when Gucho came in here, they not have the team that he has right now for building out in the longer term? And second, what is wage inflation and talent retention, et cetera, et cetera, in Hong Kong that we need to do? And third, all the other things, like any other technology-related thing comes here so that we can look forward to what kind of cost growth — staff cost growth we can expect here. That’s the only question on staff on the cost that I have. Do you want the second one now? Or do you want me to follow up as you reply? ——————————————————————————– Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO  ——————————————————————————– Why don’t we have all the questions, and we’ll take it with the right person. Thank you, Gurpreet. ——————————————————————————– Gurpreet Singh Sahi, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Following up on the investment and government very quick question is that when you say that this $2 billion will be then used internal investments. Can I just check that it will be like the deposit form or overnight HIBOR or 6-month HIBOR kind of investment and nothing else. So I just want to clarify that. And then the third being that the tax rate, tax rate typically has been around effective tax rate, 17%, just simplistic view of tax. Why was that in the first half ’15? Is it anything to do with the investment income not coming in? And how do we see that going forward? That’s it. ——————————————————————————– Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO  ——————————————————————————– Okay. Thank you, Gurpreet. I think for the staff costs, it’s difficult for me to disclose exactly how many new hires and what is exactly the wage inflation. So I will point — I’ll highlight a few of the numbers that you will be able to find in the announcements. So as I said, the — I think it’s difficult, as Gucho also said, to look at just 1 quarter or 1 half of what’s happening to staff cost dollars because there are bound to be new hires or retirements or exits in any particular month or quarter. So it’s better actually to look at the overall growth rate. And if you look at the last 4 years, CAGR, staff cost dollars have been growing at about 8% a year, and that’s already looking at the last 4 years. And if you look at what’s happened in, say, 2021, we actually came down on staff costs. So in a way, we’re just building back up to where we were before after a year of 2021 where staff costs came down and head count came down, especially in the first half of 2021. And I can also point to in addition to staff cost, headcount growth, right? So headcount growth for the last 4 years, averaging about 6% a year. And again, we saw some dips in 2021, and we’re now rebuilding somewhat, and Gucho mentioned in the first half of this year, headcount growth was only 2%. So I think I would definitely guide to longer term, when we think about what’s happening to staff cost dollars or headcount, take a longer-term trend would be the right way to approach it. Your second question on investment portfolio, the external portfolio redemption of the $2 billion. This — the $2 billion will be placed back with the rest of our corporate funds. So as you know, our corporate funds, we have all different types of deposits. So we have the longer tenure deposits. We have some debt securities. So it will be the same as the rest of our corporate funds. Your third question on tax rate on the first half, I will — last year is a one-off tax, the deferred tax of $160 million that we took in 2021, and that’s why it distorts the comparison. ——————————————————————————– Ricky Choi, Hong Kong Exchanges and Clearing Limited – VP of Business Development and Planning  ——————————————————————————– Thank you very much, Vanessa. I think this marks the end of today’s session, and thank you, everyone, for joining us today. We hope to meet and speak to all of you again very soon, and have a good evening. ——————————————————————————– Operator  ——————————————————————————– This concludes today’s conference call. Thank you for participating. You may now disconnect. Speakers please standby.