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Hong Kong Equity Market Summary (May 25, 2018)

Core Content

This report provides an overview of the performance and outlook of the Hong Kong equity market, focusing on the Hong Kong Exchanges and Supervisory Commission (HKEX), its trading activities, financial results, and the impact of regulatory reforms. It also includes an analysis of market dynamics, key drivers, and potential risks.

Market Performance

• Indices:

  • Hang Seng Index (HSI) rose by 0.31%.
  • Hang Seng China Enterprises Index (HSCEI) rose by 0.51%.
  • Shanghai Composite (SSE Composite) fell by 0.45%.
  • Shenzhen Component (SZSE Component) fell by 0.63%.

• Trading Activity:

  • Average Daily Turnover (ADT) in Hong Kong dropped by 12% compared to the 30-day average.
  • Southbound ADT (from mainland China) increased significantly in 2017 and January 2018, contributing 12.8% of total ADT in January 2018, up from 1.3% in 2014.

• Sector and Stock Tracking:

  • Media sector was up 2.9% in 1 day and 115.6% in 1 year.
  • Gas sector was up 93.5% in 1 year.
  • Top Performing Stocks:
    • TENWOW INTERNATIONAL (1291): 24.0% rise in 1 day.
    • ZHENG LI HOLDING (8283): 204.0% rise in 1 year.
    • WANDA HOTEL DEVELOPMENT (169): 18.0% rise in 1 day.
    • INDIGO STAR HOLDING (8373): 15.2% rise in 1 day.
    • AV PROMOTIONS HOLDING (8419): 180.6% rise in 1 year.
    • CHINA FIRST CAPITAL (1269): 144.3% rise in 1 year.
    • VI GROUP (82): 128.6% rise in 1 year.

Key Financial Highlights (2017–2018)

• Revenue Growth:

  • Total Revenue in 1Q2018 was HK$4,150m, up 36.2% YoY from HK$3,048m in 1Q2017.
  • Trading Fees & Tariff increased by 63.5%.
  • Listing Fees rose by 51.3%, driven by the growth of IPOs and newly listed products.
  • Clearing & Settlement Fees increased by 48.9%.
  • Market Data Fees increased by 5.8%.
  • Net Investment Income & Sundry Income declined by 9.7%.
  • Other Revenue declined by 20.0%.

• Net Profit:

  • Net profit increased by 28.34% YoY in 1Q2018, reflecting strong market momentum.
  • EPS was HK$6.03, and DPS was HK$5.40 in 1Q2018.
  • Dividend Payout Ratio remained high at 89.6%.

• Financial Metrics:

  • Net Margin: Maintained above 50%.
  • Dividend Payout Ratio: Nearly 90%.
  • Net Gearing: Improved from -338.7% in 2015 to -295.2% in 2017.

Market Outlook and Opportunities

• IPO Growth:

  • HKEX ranked 3rd globally in IPO numbers in 2017 with 174 companies listed.
  • The listing regime reform, including the implementation of weighted voting rights, is expected to attract more new-economy companies to list in Hong Kong, potentially doubling IPO fundraising to HK$200–250bn in 2018.
  • This reform is anticipated to boost listing fees, market data fees, and trading fees.

• Valuation:

  • Forward P/E is 29.5x, and 5-year average P/E is 31.3x.
  • Forward P/B is 7.8x, and 5-year average P/B is 7.4x.

• Potential Drivers:

  • Influx of southbound capital may increase ADT and improve HKEX's financial performance.
  • The HSI reached a new high in 2018, driven by market optimism and the expectation of reform.

Challenges and Risks

• Weakness:

  • HKEX's results are highly sensitive to market sentiment, leading to volatility.
  • Mainland regulations may impact southbound capital, affecting ADT and results.

• Threats:

  • Intense global competition from exchanges like the US, Singapore, and the UK.
  • Political and economic changes may negatively impact market sentiment.

• Key Risks:

  • A downward market trend or inactive trading could hurt HKEX's financial results.
  • Failure to implement strategic reforms may reduce HKEX's competitiveness and affect market sentiment.

Conclusion and Our Opinion

• The bullish market in Hong Kong has driven the HSI to new highs and boosted ADT, which in turn has improved HKEX's trading fees and revenue.
• The weighted voting rights reform is expected to attract new-economy companies and improve valuation for long-term undervalued stocks.
• HKEX's results may remain volatile due to its exposure to Mainland China and global market conditions.
• Despite the challenges, the potential for growth remains strong, especially with the reform and increased southbound capital inflows.

Analyst Certification

Scarlett Liu, CFA (SFC CE: BMA553), certifies that:

1. The views in the report reflect her personal opinion.
2. No part of her compensation is linked to the report's recommendations.
3. She is not supervised by the Investment Banking Department.
4. The subject companies are not in a quiet period.
5. She and her associates did not trade the stocks covered in the report within 30 days of its release.
6. She is not an officer of the listed companies.
7. She and her associates have no financial interest in the listed companies.

Disclaimer

• This report is for informational purposes only and does not constitute an offer or solicitation to buy/sell securities.
• The firm may have a conflict of interest and is not liable for any losses arising from reliance on the report.
• Past performance is not indicative of future results.
• The report is not directed to individuals in jurisdictions where distribution is restricted.
• No warranties are given regarding the accuracy or completeness of the information.
• No prior consent is required for copying or distributing the report.