Hong Kong Exchanges Earnings: Exchange Posts Solid Profit Growth Despite Muted Cash Volumes

Hong Kong Exchanges and Clearing’s, or HKEx's, first-quarter EBITDA increased 11% quarter on quarter as the top line and bottom line grew 7% and 14%, respectively. The ability to achieve solid profit growth despite relatively muted cash trading volumes demonstrates progress in its efforts to diversify its sources of revenue, in our view. While cash volumes were down 23% from their average in 2021 (though still up 4% from the 2022 full-year average), the first-quarter run rate for HKEx’s revenue was nonetheless up 6% from 2021 and up 21% from 2022. Much of the resilience was due to net investment income on funds held by the exchange amid higher interest rates, a revenue source that we forecast will decline later this year as HKEx has already recognized 67% of our full-year forecast for the item. However, we also think cash-market volumes are likely to rise somewhat, with first-quarter volume reaching only 23% of our full-year forecast. The run rate for EBITDA was right in line with our 2023 forecast, reaching 25.1% of our full-year number, while the bottom line reached 26.5% of our full-year forecast. We maintain our wide moat rating and our fair value estimate of HKD 400, 22% above the current share price. Our fair value estimate is equivalent to 40 times our 2023 EPS forecast and 25 times our 2027 forecast.