20181108-中国银河国际证券-香港交易所-00388.HK-Decent_Q3_Results_amid_a_Volatile_Market_5页_745kb

Hong Kong Exchange (0388.HK) Q3 2018 Summary

Core Content and Key Financial Highlights

Hong Kong Exchange (HKEx) reported a net profit of HK$2.44bn for Q3 2018, representing a 20% year-over-year (YoY) increase. Despite a 14% quarterly decline in average daily turnover (ADT) to HK$92bn, the net profit only dropped by 1.45% QoQ, showcasing resilience in the face of market volatility. The equity and financial derivatives segment played a crucial role in offsetting the moderate weakness in the cash segment, contributing to a total revenue decline of only 1.7% QoQ to HK$3.56bn. The EBITDA margin fell by 0.7 percentage points (ppt) QoQ to 75%, and the overall net margin remained stable at 65%.

For the first nine months of 2018 (9M2018), HKEx's net profit grew 35% YoY to HK$7.48bn, and revenue rose 27% YoY to HK$12.3bn. The firm is currently trading at a 28.2x 2019E PER and a 20.8x 2019E EV/EBITDA, both near the low end of their 8-year average, indicating low market expectations. The investment rating is BUY, with a target price of HK$274, reflecting a 22% increase from the current close of HK$224.4.

Main Points

• Net Profit and Revenue Performance:

  • Q3 2018: Net profit HK$2.44bn (+20% YoY), revenue HK$3.56bn (-1.7% QoQ).
  • 9M2018: Net profit HK$7.48bn (+35% YoY), revenue HK$12.3bn (+27% YoY).

• Segment Performance:

  • Equity and Financial Derivatives: Revenue increased 8.34% QoQ to HK$857m, driven by increased market volatility.
  • Cash Segment: Revenue fell 3.6% QoQ to HK$934m, but was offset by growth in the derivatives segment.
  • Stock Connect: ADT for northbound trading reached RMB19.6bn in 9M2018, up 148% YoY. Southbound trading ADT reached HK$14.1bn, up 62% YoY. Revenue from Stock Connect was HK$156m in Q3 2018, up 36% YoY.

• Forecast Adjustments:

  • ADT for 2019E was revised down from HK$135bn to HK$115bn due to uncertain market outlook.
  • 2019E EPS was trimmed by 6%.
  • The Gordon Growth Model-based target price was lowered from HK$300.4 to HK$274, based on a 34.4x 2019E PER, beta of 1.38, cost of equity of 8.4%, and medium-term ROE of 20.5%.

• Valuation Metrics:

  • 2019E PER: 28.2x
  • 2019E EV/EBITDA: 20.8x
  • These metrics are near the low end of their 8-year averages, suggesting potential for share price upside if market sentiment improves.

Key Assumptions and Financial Projections

Market and Financial Context

• Market Cap: US$35,842m
• Shares Outstanding: 1,251m
• Auditor: PricewaterhouseCoopers
• Free Float: 94.45%
• 52-Week Range: HK$195.6 - HK$306.00
• 3-Month Average Daily Turnover: US$142m
• Major Shareholding: HKSAR Government (5.45%)

Investment Outlook

• The firm's performance in Q2 and Q3 indicates the positive impact of recent listing reforms, particularly the Stock Connect program.
• Despite the current low valuation, the investment thesis of structural growth in ADT remains intact, although the benefits may take longer to materialize due to increased market volatility.
• The market consensus for Q4 2018 net profit is HK$1.74bn, which is achievable even with higher operating costs.
• Potential upside exists if market sentiment improves, and cost control exceeds expectations.

Analyst and Disclaimer

• The report is prepared by Wong Chi Man, Head of Research.
• The report is issued by Galaxy International Securities and is not directed at any jurisdiction where it would be illegal or against regulations.
• No guarantees or warranties are provided regarding the accuracy or completeness of the information.
• The analyst certifies that the views expressed accurately reflect his personal views and that there are no conflicts of interest.