20150413-高盛-Riding_the_high_tide__Raise_EPS_TP_again,_affirm_Buy,_add_to_CL_15页_635kb

Hong Kong Exchanges (0388.HK) Summary

Core Content

Hong Kong Exchanges (HKEx) is the subject of a bullish equity research report by Goldman Sachs, which reaffirms the "Buy" rating and raises the EPS and target price (TP) based on improved market activity forecasts. The report highlights the potential for a structural shift in HKEx's turnover and valuation, supported by the second wave of the China-Securities Connect (Connect Southbound) and the resulting increase in liquidity and market participation.

Main Points

• Revised EPS and TP: The report raises the 2015E/16E/17 EPS estimates by 26%/24%/17%, respectively, and updates the 12-month TP to HK$355, representing a 43% upside from the current price of HK$249. This TP is the midpoint between the bull case (40X P/E) and base case (36X P/E).

• Market Activity and Turnover: HKEx's turnover is expected to increase significantly due to the second wave of Connect, which is anticipated to lift market activity beyond the first wave. The report notes that HKEx's velocity is currently near historical mid-cycle levels and may increase due to the new China investor base, which trades with high velocity.

• Valuation Adjustments: The valuation methodology has shifted from a 3-stage DDM to average values derived from the base case, with a P/E of 36X for 2015E and a bull case P/E of 40X. The report expects the stock to reflect a mix of these valuations due to the uncertainty around volume growth.

• Investment Profile: The stock currently trades at 30X P/E, which is slightly below the 31X average since 2010. The report highlights that HKEx's revenue and earnings are highly leveraged to equity volumes, with significant growth expected in the coming years.

• Key Risks: The report identifies key risks such as lower market activity, potential upside from the opening of China's capital account, and higher capital requirements for HKEx's clearing houses.

Key Financials

Metric	2014	2015E	2016E	2017E
EPS (basic, pre-except)	4.44	8.40	10.23	12.19
EPS (diluted, pre-except)	4.43	8.39	10.22	12.18
P/E (X)	34.3	29.6	24.3	20.4
P/B (X)	8.3	11.9	11.0	10.1
EV/EBITDA (X)	23.0	21.7	18.4	15.8
Dividend Yield (%)	2.6	3.0	3.7	4.4
ROE (%)	24.8	42.9	47.0	51.5
Market Cap (HK$ mn / US$ mn)	290,856.4 / 37,529.6	-	-	-

Earnings and Revenue Growth

Metric	2014	2015E	2016E	2017E
Total Revenue (HK$ mn)	9,849.0	15,817.3	18,457.6	21,285.1
Pretax Profit (HK$ mn)	6,038.0	11,671.3	13,974.0	16,423.9
Net Income (post-exceptionals)	5,165.0	9,801.2	11,954.1	14,244.5
EPS Growth (%)	12.3	89.3	21.8	19.2
Net Income Growth (%)	26.0	24.0	22.0	19.0

Turnover and Velocity

• Local Market ADT (ex Connect Southbound): Forecasted to increase from HK$95bn to HK$136bn by 2017.
• Turnover Velocity: Expected to approach the average level of the past 10 years, with free float adjusted velocity reaching 131% in 2017.
• China-related Velocity: Shows strong growth, particularly in 2015E and 2016E, indicating a significant boost from the new investor base.
• Ex-China Velocity: Also expected to grow, though at a slower pace than China-related turnover.

Risk-Reward Analysis

• Bull Case: Projects a 12-month velocity average of 135%, implying a P/E of 40X and a scenario value of HK$410, representing a 65% upside.
• Base Case: Assumes a 12-month velocity average of 100%, with a P/E of 36X and a scenario value of HK$300, a 20% upside.
• Bear Case: Projects a 12-month velocity average of 42%, with a P/E of 24X and a scenario value of HK$120, a 52% downside.
• Blue Sky Case: Assumes a high velocity of 158%, with a P/E of 40X and a scenario value of HK$463, an 86% upside.

Conclusion

The report concludes that the risk-reward profile for HKEx remains favorable, with the stock potentially reflecting a mix of base and bull case earnings. The increased market activity, particularly from the new China investor base, is expected to drive significant EPS growth and valuation uplift. The report also notes that the stock's current P/E is well justified by its superior EPS growth compared to peers.