EUR 850.00 For Business Accounts Only

Morningstar | Glass Half Empty or Half Full? Quality of the Glass Matters More for HKEx

With the volatility in earnings tied to the condition of capital markets, Hong Kong Exchange and Clearing's, or HKEx's, first-quarter results reinforce our view the focus should be the exchange’s underlying strategy. Excluding mark-to-market gains for the investment portfolio, we estimate first-quarter revenue declined by 6.9% while EBITDA fell close to 10% against the same period last year. This was due to the strong equity market in the beginning of 2018. And against a weak equity market in the fourth quarter last year, we estimate revenue increased 2.8% and EBITDA increased slightly higher at 5.1%.

Our fair value is increased to HKD 245 per share from HKD 225 per share as we factor in higher revenue contribution from the Bond Connect. The exchange is trading slightly above our new fair value. Our thesis for the wide-moat-rated HKEx is unchanged and we continue to see the exchange benefiting from the liberalisation of the capital markets in China. This was evident across equity, bonds, and the clearing businesses. In the equity market, the increasing contribution of China A Shares in MSCI indexes, and the inclusion of China A Shares for FTSE Russell and S&P Dow Jones indexes underpinned trading volume for Northbound Stock Connect in the first quarter. While revenue contribution from Bond Connect is limited, average turnover of HKD 5.9 billion doubled on the same period last year. The inclusion of renminbi-denominated bonds to the Bloomberg Barclays Global Aggregate Indexes will also lift transaction going forward. The exchange’s over-the-counter clearing is now profitable, benefiting from rising transaction for U.S. dollar and offshore Renminbi currency swaps. We also see the need for risk management tools to increase and will increase demand for the on-exchange products, such as renminbi-related currency futures.