A long-awaited catalyst; upgraded to "buy"

Hong Kong Exchanges and Clearing (HKEx) announced the launch of A-share index futures products, which is the long-awaited catalyst for the market. The newly launched MSCI China A50 Interconnection Index Futures will become another offshore A-share index futures after FTSE China A50 Index Futures (traded in Singapore). We expect the product to facilitate northbound trading of derivatives and Hong Kong stocks in Hong Kong, paving the way for a higher weighting of A shares in the MSCI index. We cut HKEx's 2021 net profit forecast by 1.5 per cent to HK $14 billion to reflect market turnover since 3Q21, and raised the 2022nd net profit forecast by 5.9 per cent to HK $16.6 billion / 19.2 billion to reflect possible growth from new products. We upgraded HKEx to "buy" and raised our target price based on DCF valuation by 5.3 per cent to HK $534.

MSCI China A50 Index Futures products are expected to promote derivatives and northbound trading MSCI China A50 Index Futures will be launched on October 18, 2021. We estimate that assuming that new products divert half of the trading volume of FTSE China A50 index futures, MSCI China A50 index futures will contribute HK $149 million / 716 million / 716 million in fee income in 2023.

At the initial stage of listing, we expect that HKEx may offer certain fee concessions to attract investors. At the same time, we believe that the product as a Hong Kong-listed A-share risk management tool is expected to boost northbound trading.

Lay the foundation for MSCI to further improve An equity weight.

Given the size of HKEx's revenue (expected to reach HK $22.6 billion in 2021), we expect the initial direct contribution of the product to be small, but it is expected to have a significant impact in the medium to long term. In the last round of market consultation on further increasing the weighting of A shares in the MSCI global index, foreign investors raised four concerns, including the lack of listed hedging and risk management tools. We believe that the introduction of A-share index futures in Hong Kong will help address this concern and lay the foundation for a further increase in the weighting of A-shares in the MSCI index.

Competitive advantage and "based on China" Strategy

We believe that HKEx's competitive advantages include its connectivity, reform and adaptive regulatory environment, as well as its comprehensive product coverage and innovation. We believe that the company will continue to benefit from "having a foothold in China".

Strategy. Our target price corresponds to 40.8 times the 2022 forecast PE.

Risk tips: 1) weaker-than-expected market turnover, 2) volatility in market performance, 3) sharp rise in overseas interest rates, and 4) regulatory changes.