Edited Transcript of 388.HK earnings conference call or presentation 26-Feb-20 9:30am GMT

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Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO [3]

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Thank you, Charles. Good afternoon, everyone. I’m Vanessa Lau. By way of introduction, I have been with HKEX for 4.5 years, and I’m delighted to take on the group’s CFO role. I look forward to meeting more of you in the coming months to explain how our strategic initiatives impact our financials and drive shareholder value.

With that, let me share with you our 2019 financial results. 2019 was a solid year for financials. Revenue was up 3% year-on-year, reaching a record of $16.3 billion despite a 19% drop in headline ADT. OpEx was down 2% or up 6% like-for-like if we exclude the lease accounting impact. EBITDA margin was 75%, 1% higher than the prior year. Profit after tax was a record at $9.4 billion. Earnings per share was roughly flat year-on-year at $7.49, reflecting our scrip dividends issued during the year.

Moving on to look at the trend line. You can see that we have been generally trending up over the last 6 years on both revenue and profit. This is a great result of the diversification of our portfolio, meaning we’re no longer solely reliant on the cash market, but that our results are also driven by the derivatives and commodities markets and our expanding suite of products. Our cost discipline over the years also helped us in maintaining an attractive EBITDA margin.

Next, we take a look at the year-on-year performance of our operating segments. You can see the macro environment led to softer trading volumes, which, as expected, impacted our cash and derivatives revenue. However, there was a lot of good news in those segments, too. As Charles mentioned, Stock Connect had a record year, especially with strong Northbound volumes. Bond Connect volumes almost tripled. Also, our listing fees were up, and our IPO pipeline remained strong. The Commodities segment was roughly flat on revenue mainly from lower chargeable volumes but helped by the new OTC booking fees. The Post Trade revenue was up slightly because of higher interest return on Margin Funds and higher depository fees. The Technology segment saw a 17% increase in revenue as we experienced more demand by both new and existing exchange participants on our facilities, which increased our network and throttle usage fees. Corporate items was up because of net investment income.

If you look at the next slide, you will see that net investment income reached $2.7 billion, 72% higher than the prior year. While this isn’t our core business, it was a particularly strong result. The externally managed portfolio, what we call collective investment schemes here, made a significant positive contribution as the underlying investments in global equities and fixed income both rallied in 2019. However, it’s worth noting that investment income was up across all of our portfolio, including the internally managed funds, Margin Funds and Clearing House Funds. This was a result of higher interest rates and various initiatives we have taken in-house to optimize the investment return.

Although this is a great result for 2019, it’s worth reminding ourselves that investment income does fluctuate from year-to-year and is primarily driven by the macro investment environment. We remain focused on strengthening our core business and the effective delivery of our strategic plan.

Moving on to EBITDA by segment. EBITDA largely tracks the revenue performance of our operating segments, which I shared with you earlier. What I would like to highlight is that with a strong control on costs, we were able to achieve a 75% EBITDA margin despite softer trading volumes. Even excluding the lease accounting impact, EBITDA margin would’ve been 73%, almost the same as the prior year, which was a much stronger year for trading volumes.

Lastly, let’s look at our operating expenses. OpEx was up 6% like-for-like, reflecting our investments in 2 key areas, in talent and technology, in line with our strategic plan. On a more technical point, the big drop year-on-year in premises expenses, coupled with a significant increase in depreciation, is due to the change in lease accounting, which you won’t see again when we compare the 2020 with 2019 results. So undoubtedly, 2019 presented some challenges. But overall, this is a solid set of financial results, reflecting the resiliency of our business, good cost discipline and a strong focus on our strategic priorities.

With that, I’ll hand back to Charles for more details on our performance and strategic drivers.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited – CEO & Executive Director [4]

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Thank you, Vanessa. I would like to bring you directly to Page 15 just to look at the graphic, and I want you to quickly run some of the key point of who we are. Most of you know us, but we have now — but there are a few new analysts and investors on the call. We wanted to — this is — I want to have a broader introduction of the exchange first.

I think we are a sole market operator in Hong Kong with the equity business, very strong with strong participation from China and global. And our business model has been pretty clearly articulated that we’re anchored in China on the left, but we’re globally connected. And then increasingly, we’ll be using technology to empower new growth. Just very quickly looking at that circle in the middle. The equity business is a very strong Hong Kong-based ecosystem and with a very strong entrenched business model, increasingly now connected with China and with global. And we’re trying to use technology to move into FIC.

Just very quickly, our 3 key definitions — or key characteristics of Hong Kong Exchange. One, we are the sole exchange group in Asia’s leading financial market with a robust and resilient business model. That reflects in we are a sole operator of cash and derivative market and post trade infrastructure. We are an international financial center, backed by English common law and the rule of law in respected legal system. We have a very diverse international and regional and local investor base attracted to a very broad product ecosystem. We have a very strong, competitive, transparent fee structure alongside a transaction-based government fiscal regime. This is important to know to differentiate us from a lot of the traditional western exchanges where trading is no longer a franchise, where here, due to many factors but particularly because of the government fiscal regime in transaction-based tariffs, our fee structure is highly competitive and highly defensible and is likely going to continue to sustain our strong business model.

And that strong Hong Kong-based business has now been structurally connected with China, and the strong structure growth is going to be sustained by our role as China’s offshore capital formation center and entrenched to China capital connectivity. It’s 2 sides of the same coin. So on the capital formation side, we are now the global leading IPO venue, attracting both Mainland and international issuers. We are now the destination market for new economy issuers of choice, particularly from Asia, our major IPOs fueling increasing — increased trading activities. The Northbound Connect ensured Hong Kong continue to be benefiting from the long-term growth even in the onshore market of China. The Southbound Connect secures Hong Kong’s role as the primary destination market for Mainland investors’ global diversification drive. So sustained Mainland capital flow will cement Hong Kong’s role as a destination market ultimately for international underlyings as well.

So in the future, our growth opportunity lies in the FICC space, and our key strategy is to find ways to replicate our great success in the China connectivity, great success in equities and trying to see whether we can replicate them in FIC and in leveraging, in particular, technology to transform the operations of FICC into the future. Our overall FICC journey is still at early stage. Our commodity success initially reflected in our buying LME and building QME onshore. The ultimate FIC success will depend on the acceleration of renminbi internationalization, and our Bond Connect demonstrate a very strong, notable success in the initial phase of connecting the bond market between China and the world.

But overall, our FICC growth capacity — growth is going to come from 2 directions: one, we need to continue to build and grow our FICC capacity and international footprint when the right opportunity present themselves; two, leveraging technology and partnership, particularly with China’s big players in AI, blockchain and data, to develop new ways to compete in the emerging FICC space and by leveraging China’s digitalized economy.

So essentially, going back — coming back to the same chart, in equity, we connect both China capital, China underlying with international capital, international underlying. And that connectivity is largely driven by connecting with the public side of China, China Inc. In commodities, we will connect with China by building our onshore exchange platform, QME. And on the right side, we bought LME as an international market, and we connect them. FIC is still early stage, but here, the connectivity with public of China Inc. is about Bond Connect. But into the future, on trading, clearing, post trade, we will internationally — we will increasingly be looking at international market for building out new capacities, whether organically or inorganically. And on the left, by partnership with Chinese technology companies to leverage the digitalized China today to find ways for us to entertain FIC differently by potentially using AI, using data, using blockchain. We are the latecomer in FIC, but hopefully, in the new way of doing things, in the ABCDs of the world, we will no longer be the latecomer, and we can overcome that latecomer advantage by achieving a technological advanced partnership.

And that’s anchored in China. So anchored in China, reflecting both anchor with public in China and also private China and globally connected in terms of bringing both global investors and underlyings to Hong Kong or purchasing international platforms like LME or building out other partnerships and opportunities in post trade. So anchored in China, globally connected, technology empowered are the 3 key components of our strategy, and we continue to push that ahead.

With that, I will turn this to Romi, who will give you some further highlights of the business and operations and to give you a sense as to where various products lie and the various initiatives going. Romi?

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Romnesh Lamba, Hong Kong Exchanges and Clearing Limited – Co-President [5]

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Thank you, Charles. I’d like to drill down on some of the factors Charles mentioned, but particularly on where we are seeing organic and structural growth in our core business.

And on this slide, I talk about 3 key factors that individually are driving growth but are also very symbiotic with each other. The first one is both about products, not just new products but the consistent development of a product ecosystem in — particularly in China underlying and offshore China underlying, combined with onshore China underlying. I’m going to come back to that in the next slide. And that ecosystem is also driving more and more diversified investor base. Apart from Southbound Connect and your traditional global investors, one of the key trends that we have seen in our market over the last couple of years is the emergence of global algo and quant investors, combined with after-hours trading. And this has been driving a lot of the growth in our Derivatives business.

But if we quickly look at the ADT on the top left, for a while now, I have been saying — or we’ve been saying that we are optimistic that we will get a re-rating. I feel pretty comfortable now to say we have re-rated. From 2008 to 2016, our ADT was range-bound between $60 billion and $70 billion. We had one one-off year in 2015 where it was $106 billion, and that was largely driven by the Asia bubble. But if you look at ’17, ’18 and ’19, even a difficult year like 2019, our average ADT has been $94 billion a day. And year-to-date, 2020, we’re running at $108 billion. As you will have seen, last few days have been particularly robust.

Similarly on derivatives, we have seen a more stable — sorry, a more consistent growth driven by algo/quants as well as after hours. IPOs, obviously being #1 in the IPO market is great, but what really counts for us is many of these jumbo IPOs driving growth in our ADT across various products. And I’ll come back to that.

And finally, you can see the Stock Connect story has been extremely strong, particularly Northbound. Northbound last year was CNY 42 billion ADT. Year-to-date, 2020, it’s CNY 71 billion ADT. And the last 3 trading days, we have broken records for the second-highest trading day with over CNY 100 billion of Northbound. The highest was November 26 of last year, the index inclusion day. But clearly, this trend of Northbound is very strong. On Southbound, it’s a little bit not as high, and that’s largely because of the investor eligibility cap, which limits the retail participation. But we have seen a pickup this year, and Southbound year-to-date is about $19 billion.

If we go to the next slide, talking about the correlation between the product ecosystem and the types of investors that are entering our market. What you can see on the left in the blue is our own underlying, in the red is our onshore — access to onshore underlying, both in Stock and Bond Connect. Obviously, we have put here in dash circle A-share derivatives. That remains a big aspiration for us, but it’s subject to Chinese regulatory approval.

But I just want to spend a couple of minutes on the right talking about algo and quant participation. This is lower in our cash equity market mainly because of stamp duty, the fact that we have one market platform, which means that the so-called flash boys or the high-frequency traders, we’re not a great market for them in cash. However, when you look at our derivatives market, the same investors act as market makers. Most of the products there have no stamp duty, and they’re able to utilize the product system to implement multiple strategies with capital efficiency.

We have incentive schemes that provide them cross-selling opportunities to lower cost. And this is something we’re very focused on in 2 ways. We’re attracting more than 10 new players. I’m talking about firms who’ve been here for a while, like Optiver and IMC and Citadel, but also a number of new firms like Tower and Virtu and Jump and so on. So we’re very focused on bringing them to Hong Kong. And second is we’re implementing a number of market microstructure — market structure enhancements that are good for the overall market but are particularly useful in attracting these types of investors. So a lot of our recent growth in volumes has been driven by these investors.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited – CEO & Executive Director [6]

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I just want to make sure. This chart was prepared before the coronavirus situation. So it looks like that. But it’s not meant to be.

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Romnesh Lamba, Hong Kong Exchanges and Clearing Limited – Co-President [7]

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It’s not a DNA of the virus.

The next slide actually is the first time that we are presenting these statistics, and I think many of you will find it quite interesting. What we’re trying to show here is just focusing on our largest IPOs. Obviously, every year, we have — last 2 years, we had 180. We had 230 IPOs. We have a lot of small- and medium-sized IPOs. But it’s really that — here, we focused on the 5 largest IPOs each year and what is their contribution to ADT. And what you can see in ’17, ’18, ’19 by — just the 5 largest in each of those years were increasing contribution to ADT. But when you do it on a cumulative basis and you look at the 15 largest IPOs, particularly, obviously, in ’18 and ’19, we had IPOs like Alibaba and Budweiser, the contribution to ADT is very significant, 13%, almost 1% per IPO on average. When you look at our top 10 stocks today, you already have 4 or 5 of them are the new economy stocks. And obviously, as part of our strategy, we expect this to continue as we continue to see more Mainland unicorns as well as international jumbo IPOs list in Hong Kong.

And then finally, on Stock Connect, Bond Connect. I think this is a story you’re all very familiar with. What I do want to highlight — because the charts we are showing here are not ADT. They’re actually the positions, the net buildup of positions in Northbound Stock Connect, Southbound Stock Connect as well as Bond Connect. And this is equally as impressive as the growth you see in ADT. The one point I want to highlight, whereas Southbound Connect ADT looks a bit lackluster, the reality is it’s very institutional. The Chinese domestic market, as you all know, is very retail and can get huge ADTs. In fact, as we have seen in the last few days, there’s a very high activity there. But a lot of the growth coming to Hong Kong is institutional volumes, which is reflected in the buildup of Southbound portfolio value, which has already reached $1.1 trillion. And the CAGR in this buildup, the growth is very similar to Northbound. And these institutions obviously don’t trade as much as retail, but it’s still an important factor.

And finally, Bond Connect. Charles mentioned over 1,600 investors. The interesting thing about Bond Connect is its ADT of CNY 11 billion, and this year, they’ve been hitting CNY 20 billion many days, 2 years into the program is actually higher than Shanghai Stock Connect with 2 years into its program. So it’s a very impressive number. The fee structure is quite different in bond trading. It’s more subscription-based, so we don’t see the same amount of revenue. But we do see this as a major driver for our overall FIC strategy going forward.

Back to you, Charles.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited – CEO & Executive Director [8]

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Yes. I think the last point before I turn to Q&A is that we have developed an increasing focus on organizational excellence and CSR. This is really a big area, investing in our people, investing in the culture and increasing global stakeholder engagement, heavily involved in Davos and trying to get involved in a lot of the conversations that are important to the industry, such as sustainability issues and redefine CSR strategy. And we’re setting up a new Hong Kong Exchange Foundation. So there are a lot of things we’re doing that will just make us a good place for people to want to work with, a place where it cares about this environment, cares about the community, cares about the overall stakeholder engagement.

I think with that, I’ll be happy to move on to the Q&A session.

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Unidentified Company Representative, [9]

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Thanks, Charles. Let’s open for questions. Moderator, please open for questions.

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Questions and Answers

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Unidentified Company Representative, [1]

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Okay. Our first question come from Citi, Yafei Tian.

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Yafei Tian, Citigroup Inc, Research Division – Assistant VP and Analyst [2]

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Question. The first one is that you mentioned about developing China underlying. And one of the key products everyone has been waiting to being launched is the MSCI futures. Is there any update on that?

And the second question is Charles mentioned that FIC is a long-term growth for Hong Kong Exchange, and you would consider both organic and inorganic ways to drive the growth. Can you just help us to understand post the LSE acquisition being dropped, are there any other potential interesting areas that Hong Kong Exchange would consider as an inorganic target?

And finally is around the derivatives, it used to be having relatively weak correlation with the cash market. And looks like derivatives and cash are, again, very correlated and relatively slow growth compared to the past. Can you just help us to understand what is your outlook for the Derivatives business going forward?

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited – CEO & Executive Director [3]

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Okay. I think on Asia derivative launch, I do not have any update. It is an aspiration. It’s something we wanted. It’s on top of our list. But for reasons that everybody know, that we do not yet have anything to report. This thing could be quite binary. And so right now I don’t have any update. In terms of what you call inorganic, we talked about the organic growth is structured in nature, particularly through our Connect program and our building into Commodities, in LME and QME. And the future connectivity between the 2 will also give us complete new avenues of growth and associated with the current equity, our core business.

Beyond that, in FIC, Bond Connect is the natural organic growth as we continue to enhance the program, making — working with our partners to allow greater flexibility in the regimes, such as a repo and other programs. But in terms of the real transformative change in FIC, I think FIC is a very big market globally and is dollar-based and euro-based. So we really needed to — in order for us to have a chance to truly thrive in that new space, we need for the day when renminbi becoming more relevant, when China underlying becoming more relevant on the fixed income side and currency side. And it is in this area where we are looking at anchoring China by working with the Chinese to see whether there are additional breakthroughs on Bond Connect, whether there are additional post trade collaborations we could have with some of the post trade institutions. And also — and then on the global side, again, trying to build capabilities that we currently do not have, either in the trading or clearing or post trade infrastructures and platforms. But those are areas that take years and decades to develop. And so we will be looking at potential inorganic possibilities and should opportunities present themselves. But I really can’t really talk about specific ideas and targets at this point for reasons you must understand.

But in terms of something new that is not intuitively clear to most people is what we’re going to do in the FIC space through technology. We have a high level of conviction that if we are able to work with big technology players from China and leveraging the highly digitalized economy of China and when China is ready to open up its bond market, fixed income and currency could be trading — treated differently, could be treated with a much greater level of involvement of data, of blockchain, of AI. And if we are able to stay on the front of that progress, then we will be able to overcome our late-mover disadvantage on the FIC space and potentially gain first-mover advantage. So it is in that area that we’re exploring deeply with other — with big players from China and globally to see whether or not, in FIC, we are able to find new ways of doing it differently in this new era of technology.

I move to — I ask Romi to answer your third question.

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Romnesh Lamba, Hong Kong Exchanges and Clearing Limited – Co-President [4]

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On cash and derivatives, I would just like to make 3 points. The first point I already made, which is Cash ADT is — sorry, Cash ADT is largely driven by macro factors and market sentiment. So it’s very difficult to look at year-over-year growth in terms of Cash ADT, which is why I use the term re-rating. That market will continue to be cyclical, but hopefully, it’s going to be cyclical around $90 million or $100 million a day, not cyclical around $60 million or $65 million.

The second point is while it looks like the derivatives and cash volumes are correlated, the reality is over the last 4 or 5 years, we have seen the structural growth in the derivatives market driven by some of the new investors, like the algo and quant investors. So there is still an element there of structural growth that is not just linked to market sentiment.

And then a final, final point is if you drill down, when markets are good and people are bullish, you usually see a lot of single stock activity. You see a pickup in volumes in single stock trading and in single stock warrants, CBBCs and single stock options. When markets are more volatile, you see a pickup in futures activity. And actually, it turns out that our futures products and derivatives, particularly Hang Seng Index future has a bundled fee of HKD 10, HSI — sorry, HS is $3.50, and our single stock options are $1.50 to $3 per contract. So what we find is a counter cyclicality or diversification. When cash is weak in a particular month or a particular quarter, we actually see a pickup in the more profitable derivative products. And I think if you look at our quarterly results for the last few quarters, this trend is very apparent.

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Unidentified Company Representative, [5]

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Okay. Thanks, Charles and Romi. Our next question come from HSBC, Livy Lyu.

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Yu Lyu, HSBC, Research Division – Analyst [6]

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I have 2 questions. First one is more about the financials. So we see a 10% Q-on-Q decline in the investment income in the fourth quarter. I want to ask how much does it — is it affected from the interest rebate or it’s more affected by the collective investment scheme? So is — do we now have a strategy for the collective investment scheme allocation for this year? And what’s our market view towards the equities and the bond market?

My second question is about the latest operation update during the coronavirus outbreak. So do we have our plans for employees and also operations for the business continuity? And did the outbreak affect amount of the new listing or secondary listing candidate application? Especially if we have the arrangement of on-site hearing, how do we deal with that now?

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited – CEO & Executive Director [7]

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Okay. I ask Vanessa to answer the first question on the income, and Romi will answer the questions on BCP.

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Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO [8]

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All right. Thank you, Charles. Interest rates do affect investment return, obviously, on our Margin Funds and Clearing House Funds. But I would point out that year-to-date, for example, we are continuing to see very solid ADT trading volumes, and therefore, the fund sizes are very robust. As to the impact of interest rates on our external portfolio, I would say that it’s actually less relevant because our external portfolio is constructed to be extremely diversified, 4 categories of assets, 23 fund managers with very low beta to equities and rates. So the exposure is actually less.

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Romnesh Lamba, Hong Kong Exchanges and Clearing Limited – Co-President [9]

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Our business continuity efforts actually started probably in July or August of last year related to the Hong Kong protests. And through that whole period into January, we managed to be very robust and resilient. And so those efforts have now continued, but probably with a greater focus on a mix of remote working and people coming into the office. But we are very conscious of — and remain focused on keeping the operations up and running and we manage to do that. Where we are seeing a bit of an impact is just because people are not doing events. So some of our own sponsored events as well as listing ceremonies and the overall IPO market slowing down because of companies not being able to travel and do road shows, we are seeing an impact, and we are being very prudent about that. We’ve delayed many of our flagship events to later in the year, such as the biotech conference, the LME Asia Week and so on.

But overall, I think as you can see from our volumes and so on, business is doing well. We would expect a slowdown in IPOs in this first quarter and maybe longer. And we are also working with the companies, who are listing, to provide them with the possibility of doing more virtual listing ceremonies, which don’t involve a large number of people gathering.

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Yu Lyu, HSBC, Research Division – Analyst [10]

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Can I have a follow-up question?

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Unidentified Company Representative, [11]

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Yes. Sure. Please go ahead.

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Yu Lyu, HSBC, Research Division – Analyst [12]

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The external portfolio, because we see that there is a 30% year-on-year increase on that portfolio, is this going to be the trend in the future as we have increased retained earnings?

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Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO [13]

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Clearly, we would caution against taking this year’s investment income and rolling it forward for future years because investment income does fluctuate year-on-year and is impacted by the macro investment environment. As to whether it was up 30% in a year, we — as I said, it varies from year-to-year. We’re very comfortable with the design and construct of the portfolio because it’s very diversified. And I would leave it at that.

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Unidentified Company Representative, [14]

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Our next question comes from CICC, Victor Wang.

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Yaoping Wang, China International Capital Corporation Limited, Research Division – Analyst [15]

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Can you hear me clearly?

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Unidentified Company Representative, [16]

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Yes, we can hear you.

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Yaoping Wang, China International Capital Corporation Limited, Research Division – Analyst [17]

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Okay. Congratulations on the results, which seem to be actually very resilient despite of a relatively weak cash market volatility in the last — second half of last year. My question is really on a forward-looking basis. What are the areas that you believe will bring relatively significant short-term incremental business opportunity? I understand FIC is a very tremendous business opportunity, but it should take actually a rather long time to materialize gradually. In the short term, what are the things that you view from management perspective will be the next relatively significant income stream, some opportunities similar to the Stock Connect, which in a matter of 5 years actually already become a meaningful contribution for your revenue as well as profit?

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited – CEO & Executive Director [18]

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I think I showed you the 3 key points of positioning Hong Kong Exchange, and I will use that to answer your question. Essentially, we are a very strong robust market of its own in Hong Kong. Okay. We don’t need to — we don’t need to do it. It’s distracting, actually. Just go back to — yes. So essentially, we have a great defensible business model here in Hong Kong that has a great ecosystem, very robust, with a very strong fee environment and structure. And then that is now successfully and structurally connected with China, which essentially means that the major bridge and highways with China are there. And all that is needed is having a huge operating leverage because we’re not — with the traffic coming down the bridge, it’s basically — it’s almost unlimited. You don’t — it’s not like — there are a lot of variable in — and variable cost that have to be put into it.

So essentially, our short-term and medium-term, even long-term, growth is really that the massive market of China, ultimately, a very healthy piece of it, is going to be very much tied with you together. Because 90% of the market value of Hong Kong — of Shanghai and Shenzhen markets are accessible through Connect, and 90% of the Hong Kong Exchange’s market cap, of all the listed company here, are accessible by Southbound investors. And it’s only a matter of more people will trade, less restrictions will be in place, more product will be opened up and derivative product is going to be introduced. So many of those things, in a structural way, were just to ensure that, that growth will just continue to come. You need to build your own confidence levels as to how fast that integration is going to be, how many of the Chinese wanted to trade us and how many of you want to trade China. And with every up and downs of the respective economies and political situations in China and outside, we are right in the middle to be the recipient of that volatility and of that volume flow in and out, in and out. And I think that should be, from my perspective, is a structural growth you should be banking on.

But that’s only in equity that’s already very strong. But the big future is in FIC. I agree with you. It is a market that is going to take time to build. I also agree with you — well, the agreement is premised on the idea that we have to replicate a FICC infrastructure, like everybody else in U.S. or in Europe and the U.K. We don’t want to do that. Because if you do that, it may take forever. And even if you build it, it may not really be relevant. We are really highly looking at the very strong promise that the Chinese FIC market, when they do become global in the next 3 years, 5 years, will be fundamentally different. They will trade differently. They will be structured differently. The product will be differently. The clearing and settlement philosophy will be differently. It’s all going to be about blockchain, about AI, about data. It’s no longer about the incumbent systems that we have in the west. And the west is marching towards that direction as well. And just like everything else in China, the Chinese FIC market will start in a new way rather than in the old way and then changing.

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Romnesh Lamba, Hong Kong Exchanges and Clearing Limited – Co-President [19]

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Charles, I have one comment. I think for a while now, for several years, people — the market has this expectation, we’re going to pull another rabbit out of a hat. We’re going pull another rabbit out of a hat. But the important point here is that 3 or 4 of our biggest initiatives over the last few years, Stock Connect, Bond Connect and the listing reform, are still in very, very early days of us reaping the benefits from these investments. It’s really the start of that journey. And so — and I’m not saying we are not going to do other initiatives. Obviously, in this current environment, it’s a little bit more challenging sometimes to get things like Asia futures and so on. But it’s important not to assume that the growth is going to not show up unless we do brand-new things. I think when you look at some of the growth coming out of the Connect programs, as I illustrated to you, the impact of some of the IPOs on the ADT and then the network effect of all of this being symbiotic, I think we have a lot of growth ahead of us in the very near term.

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Unidentified Company Representative, [20]

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Okay. Thank you, Romi and Charles. Our next question comes from Goldman, Gurpreet Sahi.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division – Equity Analyst [21]

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This is Gurpreet from Goldman Sachs. Can you hear me?

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Unidentified Company Representative, [22]

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Yes, we can hear you.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division – Equity Analyst [23]

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Okay. So a couple, please, the first one broadly linked to the comment from Charles and Romi around the infrastructure build-out. So if I can check with you, like lay out the road map for us in terms of the development that the exchange is focused on. On the infrastructure build-out, we know that the clearing of the — the integration of the clearing houses was one of the initiatives that the exchange was working towards. Bond Connect, I can see that the post trade — sorry, in the Bond Connect, you don’t own the entire value chain. So when can you do that? And what’s the next step? So that’s broadly point number — question number one.

And linked to that is question number two for when you say that how does an analyst then see the cost picture develop. Do you invest more now in your systems? So this 6% growth rate in overall costs, should it go higher over the medium term? And then final question is on housekeeping. Like the scrip dividend is down. Is it still 3% of the share price? And then the CIS allocation, is it fixed, that 9-point something billion will not be changed and that is done from here on?

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Romnesh Lamba, Hong Kong Exchanges and Clearing Limited – Co-President [24]

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Okay. Why don’t I start off? In terms of infrastructure, yes, we have — as part of our strategic plan, we are focused on either building some of our own infrastructure using technology, as Charles just talked about, or even potentially partnering or acquiring inorganically some of the tools and infrastructure we need. I think in terms of the FIC value chain, today, we have on exchange derivatives already, mainly the currency suite, we have Bond Connect and we have OTC clearing, which actually is growing its volumes as well. And the piece that we’re missing is around the custody and depository. And so we mentioned in our strategic plan, we would like to get into the ICSD business. There isn’t a big regional ICSD operator today in the Asian time zone. But if that’s going to cost us hundreds of millions, probably that’s not the model that we’re going to choose.

So broadly, to answer your question, I don’t see us — our investment in infrastructure meaningfully changing our levels of CapEx. Last year, our total CapEx was just under $1.1 billion, which is close to a historical — I think it is now exceeded 2010 when we built our data center. So you probably see a pickup in D&A, which is already happening, not just related to the premises factor. And you’d also see another trend that’s important, which you should focus on, is the way, in today’s world of ABCD that Charles was referring to, a lot of the technology models, and this includes the cloud, it includes software and services, is not so much about the CapEx that you initially spend. It’s the ongoing OpEx for licensing fees for the cost of supporting that infrastructure. So I guess what I’m trying to say, that’s another reason the CapEx — and we’re capitalizing staff costs more. So I don’t see our investment levels or CapEx shooting through the roof in any meaningful way. But I do see D&A and some of our project-related ongoing annual OpEx going up. And we’re not going to be the only company in the world that has seen this trend. So that’s really to answer to your first point.

And I’ll hand over to Vanessa on scrip and the other.

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Bik Yun Lau, Hong Kong Exchanges and Clearing Limited – Group CFO [25]

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Thank you, Romi. On the scrip dividend point, we have no intention to change our scrip dividend policy for the time being. We maintain our 90% dividend payout ratio. We will continue to keep our cash position under review. And as to the external portfolio allocation, currently market value at $9.3 billion, we have no plans to add to that position at the moment. And given all the uncertainties in 2020, I think it is prudent for us to maintain a strong balance sheet and the flexibility that we need.

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Unidentified Company Representative, [26]

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Okay. Thank you, Vanessa and Romi. Thanks, everyone. That concludes today’s conference call and webcast. If you have further questions, please contact HKEX Investor Relations. Thank you for — everyone.

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Xiaojia Li, Hong Kong Exchanges and Clearing Limited – CEO & Executive Director [27]

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Thank you. Stay safe. Stay healthy.