EUR 850.00 For Business Accounts Only

Morningstar | Solid First-Half Result for HKEx, but Weaker Second Half Expected as Investor Sentiments Wane. See Updated Analyst Note from 08 Aug 2018

Wide-moat Hong Kong Exchange and Clearing posted a strong second-quarter result that was largely in line with the first quarter. The result was much stronger than the year-ago period, as second-quarter fiscal 2017 saw subdued equity trading volume. Equity markets were weaker in second-quarter fiscal 2018 against the first quarter as rhetoric between the United States and China resulted in the implementation of tariffs and lower investor sentiments. The latter resulted in average daily equity turnover of HKD 100.9 billion this quarter versus HKD 146 billion in the first quarter. We retain our full-year forecast of HKD 108 billion, or HKD 115 billion including the Stock Connects, as we project uncertainty on trade to persist in the second half. Average daily turnover dipped to HKD 98 billion in June before bouncing back to HKD 107 billion in July. Positively, increased volatility from uncertainty should result in higher derivatives turnover, as it did in the first half. This is in line with other Asian exchanges we cover.

We lift our fair value estimate to HKD 195 from HKD 187, as we expect the change in listing rules to allow dual-class structure to lead to higher level of listings in the medium term. We maintain our positive view on the competitive advantages of the exchange, as it is positioned to benefit from the liberalization of the financial markets in China. However, this is factored into the current share price, as opposed to our fair value estimate, which assumes normalized growth in average turnover over the long term. We reiterate that the focus should be on the exchange’s underlying strategy as it looks to develop new financial products across different asset classes. This is supported by continued operating and capital expenditure, which were in line with our full-year forecast. Operating expense was higher on increased headcount, and investment in its technology and IT systems underpinned capital expenditure of HKD 339 million in the first half.