Hong Kong Exchange - Long Terrm Growth

Excerpts from OCBC Investment Research report

Hong Kong Exchanges & Clearing Limited (HKG: 0388)

A leverage play to market rebound
Pick up in average daily turnover
Long-term growth drivers
Lifting fair value estimate

Pick up in average daily turnover

The Hong Kong Exchanges and Clearing (HKEX) should be structurally well-positioned to take advantage of China’s capital account liberalisation and its turnover is well supported by favourable structural and cyclical trends.

Its capability is also further bolstered by the inclusion of A-shares into MSCI indices as well as listing reforms that open up possibilities of new economy initial public offerings (IPOs) and secondary listings.

Recent average daily turnover (ADT) has picked-up substantially with ADT rising to HKD140b in November and HKD185b month-to-date in December, vs around HKD98b in 3Q22 and HKD123b in the first nine months this year.

This has bucked the trend as cash trading volume is usually seasonality weaker in 4Q

Long-term growth drivers

A pick up in ADT and an improving market sentiment set the stage for catalysts to play out. A consultation paper on Specialist Technology Companies was released mid-October with a 2-month consultation period.

New rules would apply to companies in one of the five Specialist Technology Industries ((i.e. next-generation IT, advanced hardware, advanced materials, new energy & environmental protection, new food & agriculture technologies).

Shifting to a more diversified exchange with a larger new economy companies mix and a higher velocity should help invigorate the IPO market and subsequent trading volume, in our view.

Lifting fair value estimate

Share price has risen 53% since November, outperforming Hang Seng Index by about 19ppt, on the back of improving market sentiment owing to relaxation of Covid-19 measures and treatments, and further supporting policies in China real estate.

The Politburo meeting that was held last week highlighted pro-growth messages. Look ahead, we will continue to watch out for:

the upcoming FOMC so as to gauge the rate hike trajectory in the next 6 months and
the Central Economic Work Conference to get a first glimpse of economic priorities and issues under the new leadership team.

A pick-up in ADT and the rolling out of long-term growth drivers should support re-rating. HKEX is uniquely positioned to be a key offshore listing venue for mainland Chinese companies and benefit from a revival of investment activity.

Key swing factor would be whether the current consensus ADT forecast of HKD140b in 2023 would be achievable.

Valuation/Recommendation

We lift our fair value estimate to HKD385 with a higher valuation multiple of 35x forward price-to-earnings (P/E) and an unchanged ADT assumption of HKD140b in 2023, which is in-line with market expectations.