Hong Kong Exchanges and Clearing : HKEX 2017 Interim Results

Pursuant to Chapter 38 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, the Securities and Futures Commission regulates Hong Kong Exchanges and Clearing Limited in relation to the listing of its shares on The Stock Exchange of Hong Kong Limited. The Securities and Futures Commission takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness, and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

(Incorporated in Hong Kong with limited liability)

(Stock Code: 388)

(Financial figures in this announcement are expressed in Hong Kong dollar unless otherwise stated)

The Board is pleased to submit the unaudited consolidated results of the Group for the six months ended 30 June 2017.

• Revenue and other income for the six months ended 30 June 2017 (1H 2017) was 10 per cent higher than the same period in 2016 (1H 2016). Key highlights for the period include:

  • An increase in Stock Exchange listing fees from more listed companies and an increase in newly listed DWs and CBBCs;

  • A significant increase in net investment income from Corporate Funds and Margin Funds;

  • A one-off receipt of $55 million post-liquidation interest from the Lehman liquidators; and

  • A marginal reduction in Trading and Clearing fees, where a healthy increase in Cash Market turnover was offset by declines in derivatives volumes, including commodities.

• Operating expenses increased by 1 per cent against 1H 2016. Excluding a one-off insurance recovery of $23 million relating to legal expenses in respect of the warehouse litigation in the US, operating expenses increased by 3 per cent compared to the prior period.

• The EBITDA margin of 72 per cent for 1H 2017 was 2 per cent higher than 1H 2016 reflecting both revenue growth and prudent cost management.

• Profit attributable to shareholders rose by 17 per cent to $3,493 million.

* For the purposes of this announcement, EBITDA is defined as earnings before interest expenses and other finance costs, taxation, depreciation and amortisation. It excludes the Group's share of results of the joint venture.

1

The global financial markets started the year strong, driven by positive sentiment on improved global economic growth and stronger-than-expected economic performance in Mainland China. Nonetheless, uncertainty over the pace of the US Federal Reserve's interest rate increases and balance sheet normalisation, Brexit talks and geopolitical tensions across the world, have continued to cloud global economic prospects and increase market vulnerability.

Against this mixed backdrop, the Hong Kong securities market saw active trading in the first half of 2017, with an increase in average daily turnover of 13 per cent from the same period last year. Our IPO market also recorded growth in the number of new listings and funds raised by 80 per cent and 26 per cent respectively. Although the average daily number of derivatives contracts traded on the Futures Exchange decreased by 13 per cent, trading of our RMB Currency Futures stayed strong, with average daily volume up 37 per cent. Stock Options trading was strong as well, rising 21 per cent. In London, the average daily volume of metals contracts traded on the LME fell by 6 per cent amid continued weakness in the global metals

market. For the six months ended 30 June 2017, the Group recorded consolidated revenue and other income of $6,203 million and a profit attributable to shareholders of $3,493 million,

up 10 per cent and 17 per cent respectively from the corresponding period of 2016. The Board declared an interim dividend of $2.55 per share, which is 90 per cent of the profit attributable to shareholders.

We are pleased to see that our mutual market access programme continues to contribute to China's capital market development and consolidate Hong Kong's gateway position connecting China and the rest of the world. With the successful launch of Bond Connect on 3 July 2017, another milestone was reached by providing international investors with access to the Mainland bond market via Hong Kong. MSCI's recent decision to add Mainland A shares to its benchmark emerging markets index was an acknowledgement of the important role of Stock Connects in the opening up of the Mainland stock markets.

In order to diversify our business and support Hong Kong becoming China's offshore risk management centre, we continue to expand our capabilities in fixed income, currency and commodities. We introduced our first RMB Currency Options on 20 March 2017 and physically settled CNH and USD Gold Futures contracts on 10 July 2017 to provide investors with more options for trading and risk management. The LME also rolled out its own USD-traded Gold Futures contract on 10 July 2017 alongside a USD-traded Silver Futures contract through LMEprecious to capture the increasing demand for precious metals trading. Preparations are underway for the Qianhai Mercantile Exchange, which has a long term target to support Mainland China's real economy and its pricing power in the global commodities market.

As an exchange operator, we are committed to continuing improvement of our market quality as well as competitiveness in response to the evolving market environment. In Hong Kong, we launched a market consultation in June to seek views on the proposed New Board to attract listings of new economy companies and on our GEM reform. We also published a consultation paper in June on proposed after-hours trading (T+1 session) enhancements. To further enhance our securities market, we implemented Phase 2 of the Closing Auction Session on

24 July 2017. In London, we issued a discussion paper in April on the LME's market structure with a view towards improving the accessibility and efficiency of its trading, and we are now analysing the market feedback.

Details of our progress in various initiatives are set out in the Business Review section of this announcement.

In tackling the challenges and opportunities ahead, we will continue to work closely with our regulators and other stakeholders. We are committed to providing a quality and diversified market which can help transform Hong Kong into China's global wealth management centre.

Chairman

BUSINE SS RE VIEW

Fig. 1 - Market activity and Group Revenue

Market sentiment continued to improve in Q21 2017 with Cash Market headline ADT rising to

$77.8 billion, 5 per cent above Q1 2017. The positive momentum on Stock Connects also continued, with Northbound and Southbound ADT being 47 per cent and 15 per cent higher than Q1 2017. However, market volatility continued to decline reaching lows last seen in 20142, which adversely impacted derivatives volumes. While the average daily number of HKFE contracts traded in Q2 2017 was slightly up against Q1 2017, it was 16 per cent below Q1 2016 when market volatility was approximately twice as high as Q2 20172.

Revenue and other income overall was 4 per cent higher than Q1 2017. This arose from seasonal increases in depository, custody and nominee services fees, partially offset by a one-off receipt of

$55 million post liquidation interest from Lehman's liquidators in Q1 2017, and net investment income in Q2 2017 being $41 million lower.

For 1H 2017, revenue and other income rose by 10 per cent against 1H 2016, mainly due to a significant increase in net investment income of $466 million and a one-off receipt of $55 million post liquidation interest from Lehman's liquidators. Excluding these items, revenue increased by 1 per cent with higher volumes in the Cash Market being offset by lower volumes in HKFE and the LME.

Operating expenses for 1H 2017 increased by 1 per cent against 1H 2016. After adjusting for a one-off insurance recovery of $23 million of legal costs, relating to the warehouse litigation in the US (which for the LME and HKEX defendants has now been concluded), operating expenses increased by 3 per cent compared to 1H 2016. This increase primarily reflected increases in staff costs and premises expenses, which were partly offset by savings in IT costs. Having regard to persistent global economic uncertainties, the Group continues to maintain a prudent approach to cost management.

1. Q1 = first quarter, Q2 = second quarter, Q3 = third quarter, Q4 = fourth quarter, 1H = first half, 2H = second half

2. Reference based on VHSI (the HSI volatility Index)

Six months

ended 30 Jun 2017

Six months

ended

30 Jun 2016 Change

Results by segment:

Revenue and other income

$m

EBITDA

$m

Revenue and other income

$m

EBITDA

$m

Revenue and other income

%

EBITDA

%

Cash 1,512 1,221 1,282 1,012 18% 21%

Equity and Financial Derivatives 952 730 1,065 836 (11%) (13%)

Commodities 721 440 804 513 (10%) (14%)

Clearing 2,308 1,930 2,122 1,770 9% 9%

Platform and Infrastructure 279 204 264 190 6% 7%

Corporate Items 431 (33) 93 (379) 363% (91%)

6,203 4,492 5,630 3,942 10% 14%

Cas h S e gme nt

Trading fees and trading tariff increased by 22 per cent compared to 1H 2016, below the 27 per

1H 2017 vs 1H 2016 ($m)

1

cent growth in ADT. This was primarily because

of an increase in average transaction size, which dampened the increase in trading tariff income, and the significant growth in

Revenue

+18%

Operating expenses

+8%

EBITDA

+21%

Southbound Trading, where we share half of the trading fee with the Mainland exchanges, exceeding the growth of Northbound Trading.

Stock Exchange listing fees rose by $27 million, reflecting a $21 million increase in annual listing fees from a higher number of listed companies and a $6 million increase in initial listing fees due to more newly listed companies than in 1H 2016.

1,282

33

200

371

109

569

1,512

48

238

398

114

714

270 291

79%

1,012

81%

1,221

Market data fees increased by 19 per cent as a result of higher allocated revenue following an increase in the volume of cash equities traded, alongside decreases in the volumes of DWs, CBBCs and warrants traded.

1H 2016 1H 2017 1H 2016 1H 2017 1H 2016 1H 2017

1 Excludes DWs, CBBCs and warrants which are included under the Equity and Financial Derivatives segment

Operating expenses rose by 8 per cent due to additional headcount for strategic projects.