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Hong Kong Exchanges & Clearing (HKEx) Summary

Core Content

Hong Kong Exchanges & Clearing (HKEx) is a key player in the financial markets, owning and operating the only stock exchange and futures exchange in Hong Kong, as well as related clearing houses. The company was formed in 2000 through the merger of the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange and has since been working to enhance its position as a leading global, vertically integrated multi-class exchange.

Main Points

• Recent ADT Surge: On 18 November, there was a significant increase in the average daily turnover (ADT) for HKEx, which is seen as a positive sign and potentially the start of a period where the company's long-term investments will begin to yield results.

• Positive Outlook: The company is believed to be undergoing a transformation that could position it as a major global exchange, especially with the potential for increased offshore investment from China and the commercialisation of the London Metal Exchange (LME).

• Earnings Forecast: The 2015 earnings forecast for HKEx has been raised by 5.2% due to the anticipated greater contribution from the LME.

• Target Price and Rating: The six-month target price for HKEx shares is set at HKD159.60, with a Buy (1) rating reiterated. This is based on a 30x PER on 2014 earnings (excluding LME) plus HKD15.60 for the LME business.

• Option Value: HKEx shares are believed to have significant option value that is currently underappreciated, with potential for substantial growth based on its evolving business model and the integration of China into the global financial system.

Key Information

Financial Highlights

• Market Capitalisation: Reached a record high of HKD23tn.
• ADT Performance:
  • YTD level: HKD63bn
  • 2014E EPS: HKD4.803
  • 2015E EPS: HKD5.253
• Upside Potential:
  • 2014E: 15.9%
  • 2015E: 5.2% increase in earnings forecast
• Dividend Yield: 3.0% to 3.4% (projected)
• Share Price Performance:
  • 12-month range: HKD114.10 to HKD149.90
  • Shares outstanding: 1,150 million
• Major Shareholder: Government of the Hong Kong Special Administrative Region (5.8%)

Financial Summary (HKD)

Earnings Revisions

• 2014E ADT Forecast: HKD70bn, now appears conservative following the November spike.
• 2015E Earnings Forecast: Revised up by 5.2% due to LME commercialisation.
• ADT Sensitivity Table: Indicates increasing fair value with higher ADT levels, up to HKD159.60 at 70bn ADT.

Missing Links

• Mainland Capital Flow: Increased offshore equity investment from China is considered a critical missing link for unlocking HKEx's potential.
• LME Commercialisation: Progress in LME commercialisation is expected to boost earnings and valuation.
• HK as Equity Market: Hong Kong is becoming more important for secondary equity trading.
• ETFs and Derivatives: These are growing contributors to HKEx's revenue and could drive further growth.

Risk Factors

• ADT Decline: A potential drop in ADT could negatively impact the company's performance.
• Regulatory Uncertainty: The success of the company's strategy depends on the continuation of positive regulatory changes in China and the global market.

Key Ratios

Conclusion

HKEx is poised for growth due to its strategic developments and the potential for increased offshore investment from China. The recent ADT spike is viewed as a positive signal for the company's future performance. Despite a relatively low ADT, the company's long-term value is expected to increase with the commercialisation of the LME and the expansion of its services in the financial sector. The Buy (1) rating is reiterated, with a six-month target price of HKD159.60.