20150115-高盛-More__Connect_ed_than_meets_the_eye__maintain_Buy_21页_1mb

Hong Kong Exchanges (0388.HK) Summary

Core Content

The report provides an equity research analysis of Hong Kong Exchanges (0388.HK), focusing on the impact of the SH-HK Stock Connect on trading volumes and revenue estimates, as well as the valuation and financial performance of the company.

Main Points

Volume Trends

• SH-HK Stock Connect volumes have not met market expectations, but overall HKEx volumes have performed better than expected due to increased local market activity and higher A-share market volumes.
• Local market volumes have rebounded significantly, driven by cross-listed H shares and widened A/H premiums.
• The SH-HK Stock Connect is expected to grow in volume and scope over time, although initial traction has been lower than anticipated.

Revenue and EPS Adjustments

• The report revises HKEx's 2014/15/16 EPS estimates to +7% / -2% / -3% respectively, due to reduced Connect turnover and lower revenue expectations for new businesses such as Asia commodities and Fixed Income & Currency.
• The updated 12-month target price is HK$196, down from HK$198, based on a 32X 2015E P/E.

Valuation

• HKEx currently trades at 29X 2015E P/E, slightly below the average of 31X since 2010.
• The SOTP (Sum of the Parts) estimate has been reduced to HK$201 from HK$240, reflecting lower revenue projections from new business areas.
• Key valuation ratios:
  • P/E: 33.0 / 39.2 / 29.4 / 23.6
  • P/B: 7.4 / 9.3 / 8.8 / 8.2
  • EV/EBITDA: 25.1 / 28.0 / 21.4 / 17.7
  • Dividend yield: 2.7 / 2.3 / 3.1 / 3.8
  • ROE: 23.9 / 24.8 / 30.9 / 36.0

Investment Implications

• The firm maintains a Buy rating, citing upside potential from increased local market activity and system improvements in the SH-HK Stock Connect.
• Potential upside risks include:
  • Higher onshore market volatility due to looser monetary policy.
  • Further market opening with the Shenzhen Connect and MSCI inclusion.
  • Expansion of the SH-HK Stock Connect through system improvements, broader investor base, and inclusion of more stocks and products.

Key Risks

• Lower market activity.
• Limited upside from the opening of China's capital account.
• Higher capital requirements for HKEx's clearing houses.

Key Financials

Profit Model

• Transaction fees: HK$4,279.0 / HK$6,238.6 / HK$7,979.9 / HK$9,042.1
• Market data: HK$562.0 / HK$591.5 / HK$617.2 / HK$642.2
• Listing fees: HK$1,016.0 / HK$1,153.3 / HK$1,270.7 / HK$1,395.2
• Other revenue: HK$2,866.0 / HK$3,505.8 / HK$5,029.1 / HK$6,092.2
• Total revenue: HK$8,723.0 / HK$10,041.7 / HK$12,436.3 / HK$14,629.9
• Pretax profit: HK$5,246.0 / HK$6,203.6 / HK$8,323.3 / HK$10,306.0
• Net income: HK$4,552.0 / HK$5,284.5 / HK$7,061.7 / HK$8,801.0

EPS and DPS

• EPS (basic, pre-except): HK$3.95 / HK$4.54 / HK$6.05 / HK$7.54
• EPS (diluted, pre-except): HK$3.94 / HK$4.54 / HK$6.04 / HK$7.53
• EPS (diluted, post-except): HK$3.95 / HK$4.54 / HK$6.05 / HK$7.54
• DPS: HK$3.53 / HK$4.07 / HK$5.44 / HK$6.78

Revenue Growth and Margins

• Total revenue growth: 21.0% / 15.1% / 23.8% / 17.6%
• Net revenue growth: 21.0% / 15.1% / 23.8% / 17.6%
• Pretax margin: 60.1% / 61.8% / 66.9% / 70.4%
• Net margin: 52.2% / 52.6% / 56.8% / 60.2%
• Tax rate: 13.3% / 15.1% / 15.2% / 14.6%

Balance Sheet

• Cash & equivalents: HK$1,394.0 / HK$9,088.0 / HK$9,088.0 / HK$9,088.0
• Total current assets: HK$65,146.0 / HK$232,862.7 / HK$266,505.7 / HK$301,619.1
• Total assets: HK$85,943.0 / HK$253,361.3 / HK$282,397.9 / HK$313,049.7
• Total liabilities & equity: HK$85,943.0 / HK$253,361.3 / HK$282,397.9 / HK$313,049.7

Financial Forecasts and Assumptions

Revenue Breakdown

• Equities business excluding China-RoW trading link: HK$8,390 / HK$7,549 / HK$7,035 / HK$7,566 / HK$7,855 / HK$7,135 / HK$7,513 / HK$8,477 / HK$9,634 / HK$11,440
• LME: HK$1,447 / HK$2,461 / HK$2,542
• China-RoW trading link: HK$117 / HK$340 / HK$610
• Asia commodities: HK$2 / HK$20
• FIC (Fixed Income & Currency): HK$2 / HK$18

EPS Growth

• The report forecasts 15% / 33% / 25% yoy EPS growth for 2014E/15E/16E.

Key Assumptions

• Incremental cost/income ratio: 24%
• Effective tax rate: 15%
• Terminal value@3% growth: Not specified
• Discounted NPAT (@9%): HK$80 / HK$212 / HK$349 / HK$532 / HK$675 / HK$839 / HK$1,005 / HK$1,189 / HK$1,319 / HK$1,493 / HK$1,587 / HK$1,562

Conclusion

Despite initial disappointment with SH-HK Stock Connect volumes, the overall performance of HKEx has been positive due to increased local market activity. The firm maintains a Buy rating, with updated EPS and target price estimates, while acknowledging key risks that may affect future performance.