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Morningstar | Stronger Derivatives Volume Offsets Softer Equity Turnover in HKEx's 3Q Result. See Updated Analyst Note from 08 Nov 2018

Wide-moat Hong Kong Exchanges and Clearing reported a good third-quarter result. Despite weaker investor sentiment weighing on lower equity turnover, higher volatility in the capital markets saw increased derivatives turnover. This was in line with the second quarter. The lower equity trading revenue in the third quarter was also balanced by steady revenue from commodities. Our fair value estimate increases 7% to HKD 210 as we account for higher derivatives turnover and factor in the time value of money, offset by higher operating expense. While the share price has declined from a high of HKD 306 in January and underperformed the market during the period, we believe the exchange is slightly overvalued. We maintain our view the liberalization of financial markets will benefit the exchange in the long term. This is reflected in the earlier launch of the two Stock Connects and Bond Connect. The change to allow dual-class shares should attract new listings to the exchange going forward. Our thesis that the exchange’s earnings are more diversified is also reflected in this result. Derivatives are a risk-management tool, and increased volatility will see market participants looking to hedge their positions, resulting in higher derivatives volume. Operating expense was 4.3% higher as the exchange maintained investments in technology, resulting in higher staff costs.