20160819-高盛-香港交易所-00388.HK-Further_underperformance_as_focus_shifts_to_fundamentals__Sell_20页_556kb

Hong Kong Exchanges (0388.HK) Summary

Core Content

This document provides an equity research analysis of Hong Kong Exchanges (HKEx), highlighting its recent underperformance, valuation concerns, and potential for future growth. The report maintains a Sell rating for HKEx, citing weak fundamentals, high valuations, and the absence of a positive trend in market activity. However, it acknowledges potential upside from the Shenzhen-Hong Kong Connect (SZ-HK Connect) and suggests a more constructive outlook if market volumes improve.

Main Points

• Performance: HKEx has underperformed the Hang Seng Index (HSI) by -8% since early February, reversing its previous high beta behavior.
• Fundamentals: Weak trading volumes and lack of sustained market activity have led to consensus downgrades.
• Valuation: HKEx trades at 37X 2017E P/E, which is higher than the historical average of 25X since 2000 and 33X since 2010. It is also at a 72% premium to global peers.
• EPS Revisions: The 2016-18E EPS has been modestly raised by 1%-2% due to increased activity in August, but the overall outlook remains negative.
• Target Price: The 12-month target price is revised to HK$148, implying a 28X 2017E P/E, with a 23% potential downside from the current price.
• Connect Impact: The SZ-HK Connect is expected to offer a 24% upside to 2017E EPS, but timing and outcomes are uncertain.
• Catalysts for Downside: Continued weakness in fundamentals, absence of positive news flow, and high valuations are the primary risks.

Key Information

• Current Price: HK$191.60
• 12-Month Target Price: HK$148.00
• Market Cap: HK$231,555.5 million / US$29,861.6 million
• EPS Growth:
  • 2016E: 51.0%
  • 2017E: -25.8%
  • 2018E: 11.2%
• P/E Ratio:
  • 2016E: 32.3
  • 2017E: 38.6
  • 2018E: 36.7
• P/B Ratio:
  • 2016E: 8.8
  • 2017E: 7.3
  • 2018E: 6.8
• EV/EBITDA:
  • 2016E: 24.0
  • 2017E: 27.2
  • 2018E: 23.5
• Dividend Yield:
  • 2016E: 2.7%
  • 2017E: 2.3%
  • 2018E: 2.4%
• ROE:
  • 2016E: 31.1%
  • 2017E: 19.6%
  • 2018E: 20.8%

Summary Financials

• Revenue Trends: Total revenue is expected to decline in 2016E, but show modest growth in subsequent years.
• Profit Margins: Pretax margin and net margin are projected to decrease slightly, with a slight improvement in tax rate.
• Balance Sheet: HKEx has a strong cash position, with cash and equivalents decreasing from HK$110,890.0 million to HK$94,159.6 million in 2016E.

Key Risks

• Upside: Increased market volumes and faster opening of China capital markets.
• Downside: Continued weakness in fundamentals, absence of positive news flow, and high valuations.

Market Activity and Connect Impact

• SZ-HK Connect:
  • Northbound leg adds ~US$2.5tn in incremental market cap for foreigners.
  • Southbound leg adds ~US$122bn in market cap, with a higher proportion of new economy and small cap stocks.
• Potential Upside: The report estimates a 24% upside to 2017E EPS from ETF/equity derivatives Connect, though the timing is uncertain.

Summary P&L

• Total Revenue: Expected to decline in 2016E but show modest growth in 2017E and 2018E.
• Operating Expenses: Slightly increased in 2016E and 2017E.
• EBITDA and Pretax Profit: Both are expected to decline in 2016E but increase in 2017E and 2018E.

Analysts and Contact

• Gurpreet Singh Sahi, CFA: +852-2978-1287 | gurpreet.s.sahi@gs.com
• Jonathan Lim: +852-2978-0037 | jonathan.lim@gs.com

Disclosure

• Goldman Sachs does business with companies covered in its research reports, which may create conflicts of interest.
• This report is for informational purposes only and should not be the sole factor in investment decisions.
• For full disclosures, refer to the Disclosure Appendix or visit www.gs.com/research/hedge.html.