Hong Kong Exchanges and Clearing Limited (0388.HK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to HKEX 2021 Interim Results Analyst Presentation. Today, we are very pleased to have our Chief Executive, Nicolas Aguzin; and our Group CFO, Vanessa Lau. Today, we will present the key highlights of our financial performance and related updates in the first half of 2021 as well as some initial thoughts from Nicolas since he joined HKEX around 3 months ago. We will then open the floor to take some of your questions. Those of you dialing into this call may follow the instruction of the conference call moderator to ask questions. Meanwhile, those of you joining us via the webcast can send us return questions via the portal. Without further ado, over to you, Gucho.

Good afternoon, and thank you for joining us. It is my pleasure to be talking with you, the analyst and investor community here in Hong Kong and around the world. This is my 12th week at HKEX, and I have really been enjoying getting to know the business and the great team that we have here. And today, I'm delighted to be presenting my first set of HKEX results as CEO of the business. We're presenting our results in virtual format today, but we will hopefully resume physical events in the not-too-distant future, and I look forward to meeting all of you in person. So today, I'm delighted to present a set of robust half yearly result. HKEX had a strong start to 2021 reporting record half yearly revenues and record profits. I will let Vanessa go into more details on the numbers later, but in the meantime, let me go through some of the key highlights. We had record revenues of $10.9 billion. That's up 24% year-on-year with core businesses going up 27%. Profits were a record half yearly high of $6.6 billion, and that's 26% up on the same period last year. This strong performance was driven by a buoyant IPO market and very robust trading volumes with average daily turnover in our cash market for the 6-month period up 60% year-on-year to $188 billion. Hong Kong's IPO franchise is performing well with funds raised in the first half, more than double that of a year earlier, ranking third globally overall. And our pipeline remains strong. Meanwhile, our Connect schemes continue to go from strength to strength, setting fresh records on both northbound and southbound, and Bond Connect 2 has had an excellent 6 months. We have also continued to actively manage our business and our growth during the half year. We have done this by focusing on market enhancements, new product launches and initiatives, ensuring that our markets maintain their resiliency and robustness through periods of volatility and leveraging our unique differentiators, which is our connection to China. I will talk a little more on this shortly. But now please let me hand over to Vanessa, who will talk through our interim results in more detail. Vanessa, over to you.

Thank you, Gucho. Good afternoon, everyone. Thank you for joining us. I'm Vanessa Lau, and would now like to share with you our HKEX first half 2021 financial results. HKEX performed well in the first half 2021, and we are very pleased to report record half yearly financial results. Against the first half 2020 total revenue and other income was up 24% to $10.9 billion. Our core business revenue, that is revenue excluding investment income and HKEX Foundation donation income was up 27% year-on-year, driven by record headline ADT of $188.2 billion and record Stock Connect trading volumes. Net investment income was down by 8% as the low interest rate environment impacted our margin fund investment income. However, this was partly offset by gains in the actively managed external portfolio. EBITDA margin was up 2%, increasing to 79% compared with the first half last year. Profit after tax, earnings per share and dividend per share all reached record half yearly highs with profit after tax at $6.6 billion, EPS at $5.22 and dividend per share at $4.69, all up 26% year-on-year. Turning to the next page on our detailed financials. Driven by record ADT and Stock Connect volumes, our core business showed strong growth year-on-year, for both revenue and profit. Excluding charitable donations through our foundation, OpEx was up 7%, driven by higher staff costs and IT expenses. There was also a one-off deferred tax charge of $160 million on LME's acquired intangible assets, resulting from an increase in the U.K. corporate tax rate from 19% to 25% effective April 2023 and enacted in June this year. Notwithstanding this, we are pleased that profit after tax and earnings per share both reached record highs. Moving on to the next page where we look at our quarter-on-quarter performance. Q1 was an exceptionally buoyant quarter and Q2 reflected this with profit after tax 28% lower than Q1 due to lower headline ADT. But very encouragingly, headline ADT was still 33% ahead of Q2 last year. Q2 was also impacted by the $160 million one-off deferred tax charge I mentioned earlier, but this was partly offset by the seasonality increase in depository fees as more companies have their book close in Q2. 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. You can see that Q1 2021 profit was significantly above the trend line due to the exceptionally buoyant volumes. Q2 volumes returned to levels similar to that which we saw in Q4 2020. This trend line demonstrates the resiliency of our core business and our strong cost discipline, which has helped us maintain an attractive EBITDA margin despite the volatile macroeconomic backdrop. Next, we take a look at the year-on-year performance of our operating segments. The cash and post trade segment had a good first half with higher revenues year-on-year driven by the record ADT. I would highlight 3 particular drivers, which showed significant growth. Firstly, record headline ADT drove cash market revenue up significantly. Stock Connect volumes continue to achieve new records in particular with southbound ADT more than doubling year-on-year. As a result, Stock Connect revenue reached a record high of $1.3 billion contributing 12% to group total revenue and other income in the first half. Secondly, depository fees increased by 61% to $889 million driven by an increase in EIPO service fees, reflecting a higher number of applications, higher script fees from more companies having their book close in the first half and the increase in Stock Connect portfolio fees. Lastly, listing fees were up 15% as the number of newly listed derivative warrants and CBBCs reached record half yearly highs. The Commodities segment was down 3% due to a decrease in LME's chargeable ADV, partly reflecting the high-trading volume in the first half 2020 caused by the volatility during COVID. Corporate items was up as a result of higher net investment income from fair value gains on the external portfolio and higher HKEX Foundation donation income. Moving on to investment income. Net investment income was $774 million, 8% lower than the first half 2020. Net investment income comprises of internally managed corporate funds, margin and clearinghouse funds and a noncore actively managed external portfolio. The internally managed funds were down by $523 million year-on-year due to a significant decrease in overnight and 3-month HIBOR rates, partly offset by higher fund sizes. However, the external portfolio made a gain of $321 million versus a loss of $138 million in the first half last year. The portfolio has generated a cumulative gain of $2.1 billion since its inception in December 2016. Lastly, let's look at our operating expenses. Excluding Foundation charitable donations, OpEx was up 7%, reflecting our investments in talent and technology infrastructures as well as incentives to attract new customer volumes. Overall, this has been a very good half year for HKEX, and we are very pleased with another set of record results. After a very buoyant Q1, trading volumes in Q2 returned to more normalized levels, but was still 33% higher than Q2 last year, reflecting the resiliency and strong positioning of our business. Trading volumes have continued to be robust into Q3 2021, driven by higher volatility. However, we expect the macroeconomic environment to remain uncertain and impacted by the pace of the COVID recovery. Looking ahead, we believe Stock Connect will continue to be a key revenue driver as well the strong IPO pipeline of homecoming listings, biotech companies and increased interest from China technology companies. We are well placed to capture future opportunities, and we'll continue to focus on managing our costs and risks to prepare for the potential challenges ahead. With that, I will hand back to Gucho for our business and strategic update.

Thank you very much, Vanessa. Our interim financial results highlights. We continue to deliver a very good robust performance, thanks to a clear strategy and the resilience of our organization. Alongside record ADT in our cash market, we raised $212 billion in IPOs, more than double that of the same period last year. This saw Hong Kong rank as the third biggest IPO fundraising center globally for the first 6 months of the year. Of the total IPO funds raised, 92% came from new economy and biotech companies. We welcomed a total of 46 new listings, including 4 biotech company listings, 4 secondary listings and 3 listings with WVR structure. We also welcomed the first dual primary listing with WVR structure in July. Now turning to our Connect schemes. Strong growth momentum continued in Stock Connect revenues, setting another record high. In fact, we saw record ADT levels across all our connect schemes. For Stock Connect, we had record revenues of $1.3 billion, up 78%. For northbound ADT of CNY 114 billion up 54%. For Southbound ADT of $48 billion, up 132%. Bond Connect also saw record ADT of CNY 27 billion, up 34% year-on-year. During the period, HKX continued to make solid progress to deliver on all 3 pillars of its strategy, being China anchored, being globally connected and technology empowered. At the same time, we further embedded sustainability within our operations and our activities, supporting the long-term growth of Hong Kong as a leading international financial center and reinforcing our commitment to the prosperity of our community. Particular highlights included: enhancing Stock Connect with inclusion of Shanghai Star Market A shares, building our China onshore capabilities with the launch of the Guangzhou Futures Exchange, broadening our product ecosystems with a range of new products such as multiple new ETPs, new Hang Seng Index options and mini dollar CNH Futures. We also confirmed the launch of FINI, our game-changing program to streamline our IPO subscription and settlement cycle and launched a consultation on an enhanced corporate governance code. The London Metal Exchange launched their new LME passport, helping market participants meet the responsible sourcing requirement. And we also -- we're also proud to have scaled the impact of HKEX Foundation with a further $20 million commitment to our charity partnership program. This brings the total donated by HKX to around $70 million in just the first half of the year. This goes directly to those most in need in our community. After 12 weeks into the job, I can say that the macro environment and global geopolitical landscape continues to be complex and uncertain, more connections, not less are needed, and Hong Kong has a vital role to play as a super connector. As I said in my first week here, I don't expect significant shift in our strategy of being China anchored. This, for us, is a major differentiator and a strategic advantage. I want us to also continue to do what we're very good at, making our markets as attractive as possible with new products and micro structure enhancements, expanding our Connect programs, diversifying our offering, including leveraging the unique opportunities that will be presented by the Greater Bay Area, deploying technology to drive our efficiency and competitiveness, attracting and building great talent. And I want us to increasingly tap into some of the megatrends such as ESG data and alternative asset classes. I'm also very focused on building a customer-centric culture and driving our accountability and performance at HKX. Ultimately, I want to grow HKX together with the growth of Hong Kong. We want everything we do to enlarge Hong Kong's role as Asia's premier financial center. Our goal is to position HKX as the market of the future. Looking ahead, volumes have gotten off to a solid start in July. But we do have some headwinds to manage through: regulatory developments in China, continued geopolitical fragility, a jittery market and heightened volatility, a low interest rate environment, which will continue impacting our investment income, this will all continue to shape our operating environment and our markets. But our business is robust. There is significant demand from both issuers and investors, and I am confident that we're very well placed. So in conclusion, we're very pleased with the performance of the business. We will continue to execute on our strategy, drive our performance and demonstrate the resiliency. I am very excited about the future of HKEX, and I remain energized about Hong Kong, as I was -- when I was -- when I first moved into the region nearly a decade ago. Hong Kong is a city of great energy and great adaptability with fantastic people who are internationally minded and are keen to embrace change. This is a city of reinvention. I am looking forward to play my role in shaping the path ahead. I think I will stop here, and we're very happy to take questions from the audience.

Thank you very much, Gucho and Vanessa. And now we will open for questions. Operator, could you please give the audience the instruction on how to raise the questions. Thank you. Over to you, operator.

[Operator Instructions]

Thank you, operator. I think we have some questions in the line already. First, we have Yafei from Citi to ask the first question.

And first of all, to Mr. Aguzin for your first successful set of numbers. So my question is on your initial thought of Hong Kong EX, are you able to lay out some of the key priorities and probably in the next year or so that you will be focusing on, especially in the increased market attractiveness that you mentioned earlier? And then secondly is on the regulatory dynamics that you also alluded to is indeed Mainland China is having some listing reforms. So I was wondering how is the overseas IPO process is likely to change for Hong Kong EX on that part of the Mainland reform?

Okay. Thank you very much. What we want to do is to make sure that HKX is the market of the future. We are the most international city in China and the most Chinese city outside of the Mainland. We are the IPO center of the world. We're very, very well placed for opportunities and challenges ahead, and so we need to leverage those strategic advantages. So in terms of like the priorities, we're going to continue investing in the connectivity with China, expanding our Connect programs, adding new services related to China. As we do this, we're going to attract more and more international interest. Of course, we're also going to continue strengthening our products outside of the cash business around equities, fixed income, commodities. And a good example of this is, of course, the suite of MSCI products, including the 38 futures and 2 option indices that were added to our portfolio, and that is just an example of what we want to do that includes not only China but all of Asia and emerging markets. So looking further ahead, we also have to be very alert to the megatrends that are going on in the market. And that includes looking at ESG data. Those are all very, very important markets. Our data as a percentage of total revenue is still very low. Private markets, alternatives, all those are things that we need to be attuned for the future. And what's...

And the second question is around the Mainland China resident reform and the policy around the technology companies and education, et cetera.

Yes. Yes, I heard like it was more about the listing in China. So the -- let me talk about the regulatory reforms because I know a lot of people are going to be thinking about that and the changes and the sudden news that came around whether it's the education sector or DD or any of the recent events in the market. China is in the process of trying to clarify how they're going to be regulating the big tech companies. What China is doing is really not something very unique. We're seeing similar trends in Europe, similar trends in the U.S. around antitrust regulation of big tech companies. And all of this is going to be a long-term process, whereby we're all dealing with a new industry, a new sector where regulations need to be set, some of them around how data is used others around how big platform companies can exercise their really significant power in the market, and all this thing takes time. And when you combine that with a very, let's say, excitable investor base, it does generate some movements in the market. I would expect this to be a long march. It will take some time, and it has to just trickle down through the markets.

Thank you very much, Gucho. We will move on to the next question from Gary Lam from HSBC.

I have 2 questions in mind. In various public presence, you mentioned the intention to raise the turnover velocity. Can I get your thoughts on those? Where do you see the gap or the upside can be delivered into the Hong Kong market? And in that process, do you sort of visualize or compare yourselves with China with cost velocity around 20%, 60%? For some developed markets, of course, we have a very different composition with maybe high frequency trading. So how should -- how should we think about that in the philosophy side? Second, if I may also, is on the IPO pipeline represent the channel statement that commenting the IPO pipeline remains to be strong. But clearly, we do see some sort of weakness in momentum after DD and after the regulation business as mentioned. What I don't think I'm sure part of this asset is not from the exchange control. But what I do think that we can do to facilitate sort of continue, as you mentioned, to build the brick between China's profit and global investment funds?

Okay. So let me tackle the first one around velocity first. Our end objective is to have a very vibrant market. We believe that a deep liquid market will enhance its position and attract even more players to participate in the market. So that's one of the important things that we want to look at. Currently, it's around 70% to 75% velocity. And if you compare, of course, with some markets in the U.S., they are significantly lower. And if you compare with the markets in China, it's quite a bit lower than the stock exchanges in China as well. China has a lot of retail investors, and that generates quite a bit of velocity as well. And in the case of the U.S., you have a lot of high-frequency traders, HIBOR traders that are the ones that also have an impact on velocity. In Hong Kong, part of the issue is that the cost of trading is affected by a number of things, including some duty tax, which causes velocity to be a little bit lower and less participation from the high-frequency traders. But in addition to that, we need to just continuously look at enhancement to our micro structure. There's many, many things that we're doing on a day-to-day basis, which is extending some operating hours, taking into account holiday trading, all those things are things that we're constantly evaluating, looking at how we can do it so that it's easier for investors from around the world to trade in Hong Kong. At the same time, we're also adding new products and whether it's cross-listing of ETFs or new ETP products, new options. As you all know, we have announced that we're adding options on futures as another thing, mini U.S. dollar, CNH Futures, and all these products, of course, improve the vibrancy of the marketplace and -- but this is something that we have to continuously monitor and try to make it more efficient. I think that we are okay, but there's a lot of areas that we can also work to continue improving it. As to the other question, I think it was around IPO pipeline. I mean it remains strong. Let's also remember that when markets are volatile, issuers prefer to wait a little bit. So there may be periods where we see a little less issuance now with the current volatility. I mean the past couple of weeks has been relatively soft in terms of like companies going out to the market. The pipeline is there. At some point, they will go to the market -- And I mean, the figures around companies that actually intend to list or have filed applications is public. Right now, it stands at around 200. So it's very, very healthy. And I mean, we -- I think you also asked that what are we going to do to continue facilitating companies that want to list in Hong Kong. And we -- this is something that we analyze every day. We're constantly benchmarking ourselves and making sure that we can -- we're providing the right regulatory environment, the right protection for investors, investors like the regulatory regime of Hong Kong. They like the -- all that we do to make sure that we protect investors' interest -- and there's a balance because, I mean, we have, on the buy side, a lot of companies or there are a lot of companies that obviously want an easier regime, but we have an obligation to also continue protecting the investors.

Thank you, Gucho. Next, there will be a written question from Jesse through China Securities. Can you give us more color around the establishment and rationale behind the Mainland China Advisory Group?

Yes, yes. So we've established 2 bodies. One has been established by the Board, it's -- that's a mainland advisory, the China Advisory Group that's been established at the Board level. And there's another group, which is called the Mainland Market Panel that -- which I chair. The other one is chaired by our Chairman, Laura Cha. And the purpose of this is to try to provide insights on trends that we are observing in the Mainland to anticipate potential opportunities around things like a Greater Bay Area, continue development or expansion of -- around the opening up of the economy in China. And it has proven very, very useful in terms of gathering feedback and advice for both the Board and myself. So it's been very productive so far.

Thank you, Gucho. Next, we have Gurpreet from Goldman Sachs.

I have a few. So if you prefer, I can go one by one or I can just fire it all in one. But then broadly, Gucho, thanks for your initial thoughts. I want to drill more into what sort of focus you are having over the next 1 year, maybe in terms of just very simply China focus and international focus? Because as I see the exchange and very good business model, but then China is giving us a lot of growth, a lot of opportunity on the cash side. But really where the exchange stands in the international context, the mix is very different. And so very helpful to hear your thoughts around derivatives, commodities, fixed income being the focus area, data ESG going forward. But then how much of your time would you really spend on this versus chasing the incremental growth opportunity from existing business around China, so ADT and all those things that we focus on. That's broadly question number one. And then the second one, if I may go in this manner, is around the listing rules. So as we see, there's a lot of secondary-listed companies right now, which have weighted voting rights. And -- but then some incremental companies, the ADRs that are coming are using the dual primary. So will there be any clarification or accelerated route for these existing secondary-listed weighted voting right ADR companies of China to convert their listings into dual primary. And then the final one maybe for Vanessa is the MSCI product suite that we launched last year and which Gucho referred to? Can I check, is that profitable? Because as you see from OpEx, it seems that around $15 million or $20 million of the Y-o-Y increase in OpEx was on account of licensing fees paid to MSCI. And I'm wondering whether we managed to get that much in revenues.

Okay. Let me just mention a few things around China versus international. I think you correctly pointed out that today, a lot of our businesses thrive on a very, very good cash market. And of course, most of that is related, in one way or another, to China. So the question is how much time do we want to dedicate to international. And what I would say here is that the more that we do around China, the more that we're going to attract internationally. So just like trying to say, okay, I'm going to just bring someone from the U.S. with very little linkages to the region. It's just not going to be a long-term proposition. What we need to do is to make sure that we do everything that we can to build a vibrant market. To do that, we need to, first of all, make sure that we have good volume and that we have a suite of products that investors feel comfortable with. So that is something that we're working. As I mentioned, we have added multiple new ETPs. We had added the Hang Seng Technology Index options. We have the cross-listings of ETF. So there are products that we're adding to make the market more vibrant. Then when you look at some of the listing reforms that took place in 2018, and you see, for example, our chapters around biotech. We have, in a very short period of time, become a very, very active market for biotech companies. We're the second-largest biotech fundraising hub. So what happens is that when you have a lot of companies listing -- in a market, people want to list next 2 companies that are similar to yours. In this sector, we've already had over 60 health care companies coming to list to Hong Kong. They raised in total, between primary and secondary, over $400 billion -- or sorry, over HKD 200 billion. And this, about half of this company is 33 actually did not even have revenues. I mean they are like pre-revenue companies. So if you're a company in Southeast Asia and you see this market, that is like a market that presents great opportunities and you are a biotech player or in a segment of diagnostics, the therapy or something, this is a natural place for you to come and list. So the best thing that we can do is to make sure that we develop a great infrastructure around our areas of strength, and then from there, we can continue expanding and diversifying. So there will be lots of things that we will try to do internationally, but we cannot lose our focus from our core strength. So that's answering your first question. As to the second question, the way I understood it and let me paraphrase it to make sure I understood it correctly. You said we have some dual primary, but we have also some secondary listings and the possibility of that becoming also a primary. Was that the question?

And a clear road map for these companies to follow like let go of -- like make new disclosure or let go of this thing and then you become dual primary?

Yes. Yes. I mean there's a current consultation in the market. I mean, to deal specifically with these types of situations. So we're, of course, looking at this. And as we get feedback from the market, we will be taking a path forward, taking into account that feedback and trying to make this market as efficient as possible.

Let me answer the third question, Gurpreet. So on the MSCI suite, as you know, we launched those 38 contracts back in Q3 last year. So we've been running it for about a year and for these new products, it's still early stage for us. So what you will see and what we are tracking is that every month, it's -- we track the ADV going up. We see the open interest. If you ask us, would we like to see it doing better, of course, right? But as I said, this is still very early stage for us. And what we're doing now to try and increase the attractiveness, we're introducing a suite of trading fee waivers, customer incentives. It's having some impact, but our teams continue to work on the microstructure enhancements, including trading hours, extension, looking at holiday trading. So all of this is still in progress, and we look forward to seeing continued volume uptake in the coming 12 months. And all in all, the MSCI contracts, it's still strategically very, very important for us as we build out our product ecosystem.

Thank you, Gucho and Vanessa. Next, we have Michael Li from Bank of America Securities.

This is Michael Li from Bank of America Securities. I have 2 questions. The first question is just I want to check the initiative on Asia derivatives. We have been talking about this for 4 to 5 years. So any progress or anything we can foresee in the next like 6 to 12 months? And what's the key thing here for the launch of such kind of products? The second thing is about LME. I think sometimes people just forget everything when people talk about Hong Kong Exchange. So any initiatives for LME to improve it like profitability or turnover?

Yes. So as it relates to the A shares, I have no new updates. I understand that the market has been talking about this for a long time, and we're engaging with the relevant authorities to see progress, but I have no new updates on this front. As it relates to the LME, so LME performance was fairly stable while you see everything else growing. But behind the scenes, there are some very, very significant structural changes that LME has been undertaking to modernize the exchange. Some of this relate to -- and there's been a consultation and a conclusion of this consultation of preliminary -- conclusion of that consultation. And the idea is to have more prices on screens and some less prices on the ring itself. The purpose of this is to modernize it, attract new types of investors, fundamentally, a lot of investors in the financial community, which is one sector that is growing because a lot of -- more people are looking at the commodity sector as well, are becoming more and more relevant. So there's a lot of investments that is being done that it's hard to visualize in the short term because they are micro structure investments for the future. So for now, we've seen LME with a lot of stability over multiple years, but there are changes being implemented to make sure that they are positioned to grow in the future. And also, remember that when prices go up, most of what's traded in LME is done in lots. So it's more related to volume, while the amount trade has increased in terms of currency terms, dollar terms, the volume has remained very, very stable.

We have Richard Xu from Morgan Stanley.

Actually, related to that is, it's been COVID-19 for quite some time. I remember basically the dialogue between the exchange with the policymakers in Mainland probably become a little bit more difficult. But I find current time, it's actually a very important crucial time given changes in the Mainland and then probably rising importance for Hong Kong Stock Exchange, right? I mean, I'm just wondering whether there's any dialogue going on between the exchange, with regulators onshore and advisers you've been providing any, I guess, reform the outlook you can share with us? Secondly is a question on the costs. Obviously, I don't know if management has taken a review of the cost base under the new leadership? And any thought on the cost base and the investment opportunities in coming years?

Let me address first the question around conversations with regulators in the Mainland. Since I arrived, I've had many conversations with pretty much all the key regulators and our key counterparts in the Mainland. And the dialogue is very, very good, very collaborative. The facts are presented on the table as they are, and we're trying to make sure that we can -- we can absolutely take advantage of the opportunity that there is ahead to make this a really healthy vibrant market. So I don't have anything specific in terms of any announcement, most of the calls and the meetings that I had were from an introductory type of meetings, although I knew a lot of these people from my days at JPMorgan, but the reality is, I'm very well impressed by the collaborative nature of the dialogue with regulators. In terms of the cost, one of the things that I have done since the day that I arrived, of course, we've had many business reviewed, evaluated all the areas as we see areas where we can enhance the way we operate, of course, we're going to be executing on that. The -- if you want, let's say, some thoughts around our environment around investments. I do believe that there is more that we can do around investments. We have to make sure that we continue investing in the future. So probably, this is an area where we're going to be spending quite a bit of time and making sure that we create the exchange of the future, and we position it to be successful under every circumstance.

Thanks, Gucho. Next, we have Harsh from JPMorgan.

A couple of questions. First, do you think it's plausible that over next couple of years, 100% of Chinese IPO -- what these IPO are in Hong Kong?

Sorry, Harsh, can you repeat the question? It was hard to hear.

Yes. So is it plausible that in next couple of years we reached a point where all the Chinese IPOs or in transaction that are happening just in Hong Kong and then there is a very good probability that anything outside any -- none of the companies [Technical Difficulty]

Sorry, Harsh. I think we can't hear you quite well. Why don't you jump...

He wants to know we get 100% market...

Okay. So yes, I guess, Harsh, you're asking about Hong Kong versus Shanghai and Shenzhen and IPOs and which venues is that? Is that? No?

Just the once that go offshore. Nobody goes for the U.S. or anywhere else. They want to...

No, I mean, I really don't see that scenario unless the U.S. pushes IPO completely out of the U.S., I mean I don't know. I mean it's hard for me to predict what will happen, but I would prefer a scenario where companies have an option to go to many venues around the world, including the U.S. I do believe that the more dialogue there is, the more connectivity, the better for everyone. Yes, I mean, of course, I prefer every company to come to Hong Kong. But Hong Kong will have certain characteristics that attract certain companies. Other companies will prefer Shanghai. Other companies will prefer other markets. We have seen a significant increase in the number of inquiries around listing in Hong Kong. So potentially people that have originally planned to list in New York are now inquiring around listing in Hong Kong. But I'm not in a position to predict that Hong Kong will attract 100% of the offshore IPOs.

Thanks, Gucho. Next, we have Ethan from CLSA.

I have 2 questions. The first is more technical in nature. So we all know the delisting risk faced by Chinese ADRs, which is really unfortunate. But let's assume this risk is -- will be realized in 3 to 4 years. So under the current rule, because we know things may change and Gucho just mentioned that we're in some kind of salutation phase. But under the current rule, if that really happens, for those who have already completely -- completed secular listing, are they delisted from Hong Kong Exchange automatically or you are converted to primary listing, if they are delisted from the U.S.? So that's the first question. The second one is on our usage of cash. So we still have more than HKD 150 billion cash on our balance sheet. Just wonder, is there any plan for the usage of the cash? Do we still have any M&A plans? Or do we think due to the current geopolitical environment, maybe M&A is not an option? So we may want to do a special dividend to distribute cash or some share buyback?

Okay. So let me start with the first one. The -- with respect to the possibility of companies being asked to delist from the U.S., and therefore, having their only option to be in Hong Kong and then becoming primary, there's no automatic delisting from Hong Kong. We will have an arrangement for them to convert to primary. Now I don't want to say, "Okay, there is an automatic qualification or something like that." They will still have to go to the process and -- but there will not be an automatic disqualification and you're also delisted from Hong Kong. There's a process that you have to follow and companies that are in that situation and they become purely Hong Kong listed, they will have to go through that process. On the Second question around the usage of funds.

The usage of surplus cash. So Ethan, when -- a lot of the times when investors and analysts look at our accounts, they think that our entire corporate funds is surplus. So you may have in mind the number of close to HKD 35 billion. But in fact, what it is, is that not all the corporate funds are surplus cash. A substantial proportion of the corporate funds is to comply with the regulatory capital requirements of our entities. And also for liquidity requirements of our clearinghouses to cover the daily needs and also support skin in the game. And if you look at what's then remaining, which is the real surplus, it's a much smaller number, which we used to fund our dividends, our CapEx, and in recent years, we've had a number of investment opportunities, be it in new products, or be it in investments in China. So we will continue to review our capital structure, our surplus cash versus our investment opportunities and our cash flow and deploy the remaining surplus funds in the best interest of our shareholders.

Yes. And of course, we are -- in market infrastructure, it is very important that we have a fortressed balance sheet and a very strong balance sheet. Now we -- to the extent that we have some excess cash, we will think about using that in -- for strategic purposes. That's the priority. There is -- if I just arrived just 2 months ago. So my intention is not to immediately launch into the first M&A transaction possibly. I, of course, would have to analyze the situation, and it's early days to say anything. My priority is to build the business by sticking to our strategy of being China anchored globally connected and trying to enhance our technology to support our business.

Thank you. In the interest of time, we are going to take the last question. It will be a written question from Shujin from Jefferies. The current 3-year strategic plan is going to end this year with the Board and management are going to reflect in the new strategy, what would be the key changes in the new strategy?

So we are still working on this. As I mentioned, this is just 2.5 months that I've been in the job. We are looking at the strategic initiatives. I wouldn't anticipate gigantic changes in the strategy. At the same time, I also don't want to focus too much on creating 2021 to 2024 plan and things like that. There will be, of course, a plan. We will have strategic initiatives. We will be communicating that to the market. You will know, but it doesn't need to be a 3-year. It doesn't need to be fixed in a certain amount of time. It will be what are our key initiatives? What are the things that we want to do, where do we want to focus our efforts. And there will be some shades of things that will add or subtract, but the key concept of being China anchored, it will not change.

Thank you, Gucho, Vanessa, and thank you, everyone, for joining today's session. This marks the end of today's session. We have a good evening. Thank you.