20150706-高盛-Down_to_Sell_as_we_lower_EPS_and_TP_on_the_grand_unwind_15页_652kb

Hong Kong Exchanges (0388.HK) Summary

Core Content and Key Insights

Hong Kong Exchanges (HKEx) has been downgraded to Sell from Neutral, with EPS and TP reduced by 8-19% and 26%, respectively. The new 12-month price target (HK$220) implies an 18% potential downside from the current price (HK$268.60). The downgrade is primarily due to weaker volume momentum since April 2015 and a lower probability of a Bull case velocity (130%+ vs. Base of 111%) over the next 12 months.

The P/E ratio for HKEx is currently 39X for 2015E and 34X for 2016E, which is higher than the average of 32X since 2010, leading to an unfavorable risk-reward profile. The EPS estimates for 2015/16/17 are 13%/11%/3% below Bloomberg consensus, indicating earnings disappointment and lower growth expectations.

Main Points

• Downgrade Reasoning:

  • Sequentially weaker volumes, especially in relation to China.
  • Lower probability of a Bull case velocity in the next 12 months.
  • Revised TP methodology now uses only the Base case instead of an average of Bull and Base cases.

• Earnings Expectations:

  • Revised 2015E/16E/17E cash equity ADT (ex Connect Southbound): HK$130bn / HK$142bn / HK$150bn (previously HK$149bn / HK$176bn / HK$197bn).
  • Expected below Street EPS for 2015: HK$1.93.

• Valuation:

  • HKEx is trading at a premium to global exchange peers, with a 32X P/E (from 36X) applied to 2015E EPS to derive the TP.
  • The stock is overvalued relative to historical averages and peer performance.

Key Risks

• Higher market volumes than expected.
• Faster-than-anticipated opening of China's capital markets.

Investment Profile

• Price: HK$268.60
• 12-month TP: HK$220.00
• Market Cap: HK$320,713.2m / US$41,374.3m
• EPS (New):
  • 2015E: HK$6.84
  • 2016E: HK$7.98
  • 2017E: HK$9.68
• EPS (Diluted, New):
  • 2015E: HK$6.68
  • 2016E: HK$7.80
  • 2017E: HK$9.46
• P/E:
  • 2015E: 39.3
  • 2016E: 33.6
  • 2017E: 27.8
• P/B:
  • 2015E: 13.7
  • 2016E: 12.8
  • 2017E: 11.8
• EV/EBITDA:
  • 2015E: 30.1
  • 2016E: 26.5
  • 2017E: 22.5
• Dividend Yield:
  • 2015E: 2.3%
  • 2016E: 2.7%
  • 2017E: 3.2%
• ROE:
  • 2015E: 36.1%
  • 2016E: 39.4%
  • 2017E: 44.3%

Earnings and Revenue Drivers

• Volumes are the biggest driver of earnings, especially cash equity volumes.
• 2015E ADT (ex Southbound) is expected to be HK$130bn, down from HK$149bn in 1H15.
• Revenue growth for 2015E is 38.4%, but net revenue growth is 12.9%.
• Pretax margin is 70.3% for 2015E, increasing to 73.6% by 2017E.
• Net margin is 59.2% for 2015E, rising to 64.1% in 2017E.
• Tax rate is 16.1% for 2015E, decreasing to 13.1% in 2017E.

Financial Highlights

• Total Revenue for 2015E is HK$13,627.2m, up from HK$9,849.0m in 2014.
• Total Operating Expenses for 2015E are HK$3,851.8m, increasing from HK$3,605.0m in 2014.
• Pretax Profit for 2015E is HK$9,583.4m, down from HK$10,323.0m in 2014.
• Net Income (pre-except) for 2015E is HK$8,068.0m, up from HK$5,165.0m in 2014.
• EPS (basic, pre-except) for 2015E is HK$6.84, down from HK$4.44 in 2014.
• EPS (diluted, pre-except) for 2015E is HK$6.68, down from HK$4.43 in 2014.
• EPS (diluted, post-except) for 2015E is HK$6.84, down from HK$4.44 in 2014.
• DPS for 2015E is HK$6.08, up from HK$3.98 in 2014.

Key Risks and Catalysts

• Catalysts:

  • Sequentially weaker volumes.
  • Unfavorable risk-reward ratio.
  • Earnings disappointment.

• Key Risks:

  • Higher market volumes.
  • Faster-than-expected opening of China's capital markets.

Conclusion

HKEx faces a downgrade to Sell due to weaker volume expectations, lower earnings growth, and an overvalued P/E ratio. The price target reflects a 18% downside from the current price, and the EPS estimates are below consensus. While the company has strong EPS growth in 2015E, the return to teens growth is expected in 2016E. The valuation remains high, and the risk-reward is skewed to the downside.