Company Reports

Hinging on slower-than-expected economic recovery in China, wide-moat Hong Kong Exchanges, or HKEx, continued to show sluggishness in the cash and equity segments. In the March quarter of 2024, the EBITDA of the two segments was down 15% and 20% year on year, respectively, affected by reduced trading- and clearing-related fee revenue. The declines were partially offset by strong performance in the commodities business. Group EBITDA dropped 12% in the first quarter compared with the previous corresponding period, or PCP, to HKD 3.7 billion. Due to lower trade flows and smaller margin fund size, net investment income fell 13% year on year.

We expect Hong Kong Exchanges and Clearing's, or HKEx's, strategy for the foreseeable future to focus on ensuring that it can continue to serve as the gateway between China and the rest of the world. HKEx currently enjoys an extraordinarily privileged position, in that it holds an effective monopoly on facilitating the movement of capital between the world’s second-largest economy and the rest of the world. Maintaining this position requires a balance between access to China while maintaining a degree of autonomy. However, China has steadily increased its influence over Hong Kong in recent years and Hong Kong has seen an outflow of some people, businesses, and capital. Counteracting this headwind has been HKEx’s increased expansion of the Connect program with the Shanghai Stock Exchange and Shenzhen Stock Exchange, which is creating financial highways between Hong Kong and China.

We raise our fair value estimate for wide-moat Hong Kong Exchanges and Clearing, or HKEx, by 2% to HKD 307, following full-year results, reflecting the time value of money. At current prices, the exchange’s share price screens as undervalued, which we attribute to the market being overly focused on the woes of China’s economy.

We expect Hong Kong Exchanges and Clearing's, or HKEx's, strategy for the foreseeable future to focus on ensuring that it can continue to serve as the gateway between China and the rest of the world. HKEx currently enjoys an extraordinarily privileged position, in that it holds an effective monopoly on facilitating the movement of capital between the world’s second-largest economy and the rest of the world. Maintaining this position requires a balance between access to China while maintaining a degree of autonomy. However, China has steadily increased its influence over Hong Kong in recent years and Hong Kong has seen an outflow of some people, businesses, and capital. Counteracting this headwind has been HKEx’s increased expansion of the Connect program with the Shanghai Stock Exchange and Shenzhen Stock Exchange, which is creating financial highways between Hong Kong and China.

We maintain our HKD 300 fair value estimate for wide-moat Hong Kong Exchanges and Clearing, or HKEx, following its third-quarter results. During the quarter, ongoing concerns about economic growth in China saw the Hang Seng Index continue its downward trajectory and underperformance compared with other major stock markets, thereby hitting HKEx’s trading-related businesses. However, HKEx delivered a 30% increase in net profit after tax compared with the previous corresponding period on the back of strong net investment income.

We expect Hong Kong Exchanges and Clearing's, or HKEx's, strategy for the foreseeable future to focus on ensuring that it can continue to serve as the gateway between China and the rest of the world. HKEx currently enjoys an extraordinarily privileged position, in that it holds an effective monopoly on facilitating the movement of capital between the world’s second-largest economy and the rest of the world. Maintaining this position requires a balance between access to China while maintaining a degree of autonomy. However, China has steadily increased its influence over Hong Kong in recent years and Hong Kong has seen an outflow of some people, businesses, and capital. Counteracting this headwind has been HKEx’s increased expansion of the Connect program with the Shanghai Stock Exchange and Shenzhen Stock Exchange, which is creating financial highways between Hong Kong and China.

We maintained our HKD 300 fair value estimate for wide-moat Hong Kong Exchanges and Clearing, or HKEX, following second-quarter results. Although the Hong Kong stock market has lagged this year compared with most other major stock markets, as expressed by the Hang Seng Index being down 9% year to date, HKEX delivered a solid result for the second quarter, with net profit up 34% on the prior corresponding period, or PCP.

We expect Hong Kong Exchanges and Clearing's, or HKEx's, strategy for the foreseeable future to focus on ensuring that it can continue to serve as the gateway between China and the rest of the world. HKEx currently enjoys an extraordinarily privileged position, in that it holds an effective monopoly on facilitating the movement of capital between the world’s second-largest economy and the rest of the world. Maintaining this position requires a balance between access to China while maintaining a degree of autonomy. However, China has steadily increased its influence over Hong Kong in recent years and Hong Kong has seen an outflow of some people, businesses, and capital. Counteracting this headwind has been HKEx’s increased expansion of the Connect program with the Shanghai Stock Exchange and Shenzhen Stock Exchange, which is creating financial highways between Hong Kong and China.

We expect Hong Kong Exchanges and Clearing's, or HKEx's, strategy for the foreseeable future to focus on ensuring that it can continue to serve as the gateway between China and the rest of the world. HKEx currently enjoys an extraordinarily privileged position, in that it holds an effective monopoly on facilitating the movement of capital between the world’s second-largest economy and the rest of the world. Maintaining this position requires a balance between access to China while maintaining a degree of autonomy. However, China has steadily increased its influence over Hong Kong in recent years and Hong Kong has seen an outflow of some people, businesses, and capital. Counteracting this headwind has been HKEx’s increased expansion of the Connect program with the Shanghai Stock Exchange and Shenzhen Stock Exchange, which is creating financial highways between Hong Kong and China.

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.

We maintain our wide moat rating on Hong Kong Exchanges and Clearing, or HKEx, and reduce our fair value estimate from HKD 463 to HKD 400 upon change of coverage analyst. We project double-digit EPS growth throughout our forecast horizon, with 27% growth in 2023 as market volumes rebound cyclically from a dispirited 2022, followed by growth slightly above 10% thereafter as HKEx benefits secularly from increased capital flows in and out of China through the Northbound and Southbound Stock Connect programs and other cooperative initiatives between Hong Kong and the mainland. Our fair value estimate of HKD 400 is 40 times our 2023 EPS forecast, in line with HKEx’s history though higher than the average for many other exchanges, reflecting HKEx’s unique secular growth prospects. Based on our earnings projections, it would be 25 times forecast EPS for 2027.

Hong Kong Exchanges and Clearing, or HKEx, is the only exchange operator in Hong Kong that provides trading, clearing, and settlement services for equity, derivative, and other financial products. Unlike the U.S. capital markets, which have multiple exchanges offering trading venues for different financial products, HKEx holds a monopoly position for trading equity and equity-related products in Hong Kong, allowing it to enjoy much higher operating margins and returns on invested capital.

With equity markets remaining challenged in the third quarter, Hong Kong Exchanges and Clearing, or HKEx’s, third quarter was weak. Excluding investment income, revenue was 17% lower against the same period last year at HKD 4.3 billion, while the high operating leverage saw EBITDA and earnings per share decline by a larger magnitude of 28% and 30%, respectively. We have lowered our fiscal 2022 and fiscal 2023 revenue forecasts by 6% and 8%, respectively, assuming lower average daily turnover, or ADT, for the cash market. We factor in ADT of HKD 117 billion for fiscal 2022, compared with our earlier assumption of HKD 143 billion. The lower cash market ADT assumption is offset by a higher derivatives futures volume assumption, this continues to perform well amid market volatility. While third-quarter operating expense was up 13% against the same period last year as the exchange continues to invest in its platforms, this was kept largely flat quarter on quarter. Our fair value estimate is tweaked to HKD 463 from HKD 470.

Hong Kong Exchanges and Clearing, or HKEx, is the sole exchange operator in Hong Kong that provides trading, clearing, and settlement services of equity, derivative, and other financial products. Unlike the U.S. capital markets, which feature multiple exchanges offering trading of different financial products, HKEx has a monopoly position for trading equity and equity-related products in Hong Kong. As such, HKEx enjoys much higher operating margins and returns on invested capital.

Hong Kong Exchanges and Clearing’s weak second-quarter result reflects reduced capital market activities. Second-quarter net profit was 22% lower against the same period last year at HKD 2.17 billion, and 19% lower compared with the first quarter. This was mainly driven by lower cash market turnover, with a stronger performance for the derivatives business not enough to offset. Average daily turnover, or ADT, for the cash market was 11% lower compared with last quarter, and 15% against the same period last year. Both northbound and southbound volume were also lower against last quarter. The result was also affected by lower net investment income for the corporate funds, which saw overall net investment income at HKD 30 million in the quarter, compared with HKD 356 million the same period last year. The exchange is expected to reallocate HKD 2 billion in its corporate funds to cash deposits to minimize volatility in the second half.

With subdued investor sentiment resulting in a lower level of trading activities, HKEx ended the year with a weak fourth quarter. Revenue in the fourth quarter was HKD 4.3 billion compared with HKD 5.1 billion last quarter as the cash market, including equity derivatives, average daily turnover, or ADT, in the fourth quarter was 24% lower against last quarter at HKD 126.6 billion. On a full-year basis, revenue was 3% below our forecast and lower investment income saw net profit at HKD 12.5 billion, compared with our forecast of HKD 13.5 billion and Refinitiv consensus of HKD 13 billion.

Hong Kong Exchanges and Clearing, or HKEx, is the sole exchange operator in Hong Kong that provides trading, clearing, and settlement services of equity, derivative, and other financial products. Unlike the U.S. capital markets, which feature multiple exchanges offering trading of different financial products, HKEx has a monopoly position for trading equity and equity-related products in Hong Kong. As such, HKEx enjoys much higher operating margins and returns on invested capital.

Hong Kong Exchanges and Clearing, or HKEx, is the sole exchange operator in Hong Kong that provides trading, clearing, and settlement services of equity, derivative, and other financial products. Unlike the U.S. capital markets, which feature multiple exchanges offering trading of different financial products, HKEx has a monopoly position for trading equity and equity-related products in Hong Kong. As such, HKEx enjoys much higher operating margins and returns on invested capital.

HKEx’s third-quarter result was below expectation with earnings per share of HKD 2.57 per share below the exchange’s consensus estimate of HKD 2.76 per share. This was mainly attributable to lower than expected average daily turnover, or ADT, for the cash market of HKD 159.6 billion for the quarter, compared with an expectation of HKD 173.1 billion. On a comparative basis, earnings were 3% below the same period last year but bounced back against a comparatively weak second quarter. With the weaker ADT persisting in October at HKD 131 billion, our fiscal 2021 ADT forecast of HKD 178 billion and consensus estimate of HKD 179.9 billion appear optimistic. We revise our fiscal 2021 ADT assumption to HKD 170 billion, implying ADT of HKD 150 billion for November and December respectively. Our fiscal 2022 ADT assumption is revised slightly higher to HKD 180 billion, offsetting our lowered assumption in fiscal 2021. Our compound annual growth assumption is 12% and do not factor in a down market over the next 10 years. Our fiscal 2022 EPS forecast of HKD 12.72 is largely unchanged and adjust our long-term assumptions to factor in compound annual EPS growth of 14% over a 10-year period.

Hong Kong Exchanges and Clearing, or HKEx, has finally received regulatory approval in launching the MSCI China A50 contract. A new licensing agreement on the contract was reached with MSCI, building on a suite of MSCI derivatives products, launched in mid-2020. The MSCI China A50 index comprises the 50 largest companies listed on the Shanghai and Shenzhen exchanges, providing a representation of the overall Chinese economy. In our view, the new product is in line with the exchange’s overall strategy in broadening its asset classes and developing new financial products. The contract itself was long expected to be launched and was previously held up by regulators.