20150408-高盛-Second_Connect_wave_seems_more_powerful__raise_EPS_TP,_Buy_17页_544kb

Hong Kong Exchanges (0388.HK) Summary

Core Content

This report provides an equity research analysis of Hong Kong Exchanges (HKEx) with a Buy rating and updated EPS and 12-month price target (TP) based on increased market activity expectations. The analysis highlights the potential for a second wave of increased turnover, driven by the Stock Connect initiative and related market reforms, which may lead to higher earnings for HKEx.

Main Points

• Investment Recommendation: The report reiterates a Buy rating and raises both EPS and 12-month TP.
• EPS and TP Revisions:
  • 2015E/16E/17E EPS is raised by 11%/12%/9%, respectively.
  • 12-month TP is raised to HK$220 from HK$195, offering 12% potential upside and a 3% dividend yield.
• Valuation:
  • The new TP implies a 33.0X 2015E P/E, slightly higher than the previous 32.5X.
  • The stock currently trades at 29X 2015E P/E, which is lower than the 31X average since 2010.
  • The 2-year forward PEG is 1.2X, which is half of the peer average.
• Market Activity Drivers:
  • The Stock Connect initiative (SH-HK Connect) is expected to increase liquidity and turnover in the Hong Kong market.
  • The second Connect wave is anticipated to be more powerful than the first, due to:
    • Closing the liquidity gap between H shares, mid-cap, and small-cap stocks.
    • Enhanced pre-trade checking mechanisms and ownership clarification.
    • Inclusion of small-cap stocks and China mutual funds in the Connect framework.
• Liquidity Trends:
  • Small and mid-cap HK stocks are showing record liquidity, indicating potential for further growth.
  • H shares are re-rating as A shares also experience growth, suggesting increased cross-border activity.
• Turnover Projections:
  • The report forecasts HK$95/105/115bn ADT for 2015E/16E/17E, up from HK$80/90/100bn previously.
  • HKEx could see a significant turnover increase if liquidity gaps are closed, with potential increases ranging from HK$38bn to HK$150bn.
• Key Risks:
  • Lower market activity than expected.
  • Upside from opening of China's capital account.
  • Higher capital requirements for HKEx's clearing houses.

Financial Highlights

Revenue and Costs

Key Assumptions and Catalysts

• Connect Growth:
  • The SH-HK Connect is expected to increase Southbound (SB) trading and liquidity.
  • Enhanced pre-trade checking mechanism (launched on Apr 20) is expected to ease concerns for global investors.
• New Initiatives:
  • Inclusion of small-cap stocks in eligible Connect stocks.
  • China mutual funds adopting Connect.
  • Global mutual funds investing in China via Connect.
• Earnings Impact:
  • 5% increase in turnover could lead to a 3.4% increase in EPS.
  • 5% increase in derivatives ADV could lead to a 0.5% increase in EPS.

Summary

The report emphasizes that the second wave of increased turnover is expected to be more powerful than the first due to the Stock Connect and related reforms. These developments are anticipated to increase liquidity, market activity, and ultimately earnings for HKEx. The Buy rating reflects confidence in the company's future performance, supported by the updated EPS and TP estimates. However, the report acknowledges the uncertainty around the magnitude of potential earnings upside due to the early stage of these initiatives.

Key Risks

• Lower than expected market activity.
• Potential upside from opening of China's capital account.
• Higher capital requirements for HKEx's clearing houses.