4Q21 net profit may be flat or slightly lower than the same period last year
We estimate that Hong Kong Exchanges and Clearing (HKEx) has total 4Q21 revenue of HK $4.9 billion (year-on-year / month-on-month:-3.7Universe 7.5%), total fee income of HK $4.6 billion (year-on-month: + 9Universe%), and homecoming net profit of HK $2.8 billion (year-on-year / month-on-month:-3.3 Universe 13%). Despite the improvement in investment income performance on a month-on-month basis, 4Q21 Hong Kong market volume and northbound transaction volume are weak, resulting in a weaker core income performance than 3Q21.
We have slightly reduced the 2021 4Q21 2022 Acer 2023 net profit forecast to HK $12.7 billion / 14.2 billion / 16.3 billion (previous value: HK $13.2 billion / 15.2 billion / 17.5 billion) and correspondingly reduced the target price based on the DCF valuation by 2.6% to HK $516, which mainly reflects the downward revision of the 4Q21 turnover assumption by 2023 due to liquidity conditions or tightening. Maintain the "overweight" rating.
4Q21 so far, market trading activity has been weaker than the previous month.
As of December 6, the average daily turnover of Hong Kong's main board and gem was HK $133.3 billion (year-on-year / month-on-month ratio:-5.4 Maxime 19%), northbound trading volume of Shanghai-Shenzhen-Hong Kong Stock Connect was 110.6 billion yuan (year-on-month: + 16 mam 21%), southbound average daily turnover was HK $27.9 billion (year-on-month:-0.6 ram 34%). The Hong Kong stock IPO market performed poorly in the fourth quarter, with HK $40 billion (3Q21:740 billion) raised by IPO in the fourth quarter, according to Wind. Activity in derivatives trading weakened quarter-on-quarter between October and November. The quarter-on-quarter improvement in investment income was mainly due to the stabilization of short-term interest rates in Hong Kong in December and the smaller decline in the overall stock market in the fourth quarter than in the third quarter.
Key earnings assumptions adjusted to reflect liquidity tightening prospects
In view of the liquidity or marginal tightening in overseas markets next year, we have slightly lowered our forecast for the average market turnover in 2022 to HK $173 billion / 196 billion in 2023. At the same time, higher interest rates may help improve HKEx's investment returns in 2022. Northbound transaction volume is likely to continue to grow, albeit at a slightly slower pace than in previous years, and revenue from the Shanghai-Shenzhen-Hong Kong Stock Connect is expected to rise further.
Maintain the "overweight" rating and focus on potential catalysts
We maintain our "overweight" rating, and in the face of tighter macro liquidity, net profit growth next year is likely to be slower than we previously forecast, while valuations may have limited room for improvement. Potential catalysts include 1) approval of the SPAC listing mechanism, 2) A-share derivatives are expected to stimulate northbound trading activity after the launch of A-share derivatives in Hong Kong, and 3) fundraising activity may recover as market uncertainty diminishes.
Risk hint: market trading volume is weaker than expected, market volatility increases, overseas interest rates rise sharply, and regulatory changes.