occurrences

The June operating data was released, and the spot market continued to recover steadily. Derivatives continued to be strong. At the end of June 2022, the stock market value of the Hong Kong stock market rebounded 3% from the end of May to HK$39.1 trillion, and the average daily transaction value (ADT) in June increased 26% month-on-month to HK$15.7 billion. In June, the average daily futures trading volume (ADV) was 670,000, +77% year on year, +4.6% month on month; options ADV was 728,000, +19.9% year on year, +14.2% month on month.

Brief review

Net profit for Q2 is expected to be -6.8% year on year, compared to -14.3% year on year with ADT. In the second quarter of alpha2022, ADT was HK$129.72 billion, -14.3% year on year, down 11.5% from Q1. This is mainly due to the Hong Kong market's low market capitalization base and relatively low turnover rate in April after experiencing a fearful sell-off in March, so ADT did not perform well in April. Since June, the overall spot market has shown a downward recovery trend, as shown by a recovery in overall market capitalization and turnover. Among them, southbound ADT was -13.7% yoy and -7.5% month-on-month, accounting for 11.4% of the Hong Kong market ADT. Northbound ADT was 94.87 billion yuan, -3.1% year on year and -5.7% month on month. In terms of the derivatives market, futures ADV was 555,000, +60.1% YoY, +1.4% YoY, and 60.4% month-on-month; options ADV was 680,000, +8.9% YoY, and -10.1% month-on-month. Based on the tracking of core data, we expect the company's Q2 core business revenue (excluding net investment income) to be HK$4.5 billion, down 2.1% from the previous month, mainly due to significant month-on-month growth in depository and agent service fees and a steady increase in futures trading due to quarterly reasons; net profit was HK$2.58 billion, -6.8% yoy and -3.3% month-on-month.

The interconnection product industry is becoming more and more rich. The position of the Hong Kong Stock Exchange as a connector continues to rise. Following ETF interconnection, the People's Bank of China, the Hong Kong Securities Regulatory Commission and the Hong Kong Monetary Authority issued a joint announcement on July 4 to carry out interconnection cooperation between Hong Kong and the Mainland interest rate swap market (“Swap Connect” for short) to promote the common development of financial derivatives between the Mainland and Hong Kong.

“Swap Pass” was officially launched 6 months after the announcement was issued. “Swap” means that domestic and foreign investors connect with mainland infrastructure institutions through Hong Kong to participate in institutional arrangements for the two financial derivatives markets. “Northbound Connect” was initially launched, meaning that overseas investors from Hong Kong and other countries and regions will participate in the Mainland interbank financial derivatives market through exchange arrangements between Hong Kong and mainland infrastructure institutions in terms of transactions, clearing, settlement, etc., and will be extended to “Southbound Connect” in due course in the future. At the same time, the People's Bank of China and the Hong Kong Monetary Authority announced the optimization of the currency exchange agreement, which was changed to a standing agreement. The scale of the agreement was expanded to 80 billion yuan/940 billion Hong Kong dollars. Hong Kong OTC Clearing Limited, a subsidiary of the Hong Kong Stock Exchange, will jointly support the development of “interchange” business with relevant mainland institutions through the establishment of infrastructure connections.

Launched a new investor relations platform - Investment Service Connect, and is committed to building a sustainable financial ecosystem. Strengthening ESG disclosure requirements On July 7, the Hong Kong Stock Exchange officially launched a new investor relations platform - IR Connect (IR Connect). As part of the Hong Kong Stock Exchange's “Connect Capital and Opportunity” strategy, Investment Service Connect will provide a one-stop investor relationship management platform for listed companies to facilitate efficient communication between listed companies and investors, enhance market convenience and transparency, and promote market connectivity.

In the early stages, in addition to communicating with investors, listed companies can also obtain shareholders' shareholders' shareholding situation analysis, market data, key financial indicators and research ratings of related stocks, and stock information in the same industry for free through the Investment Service Channel; investors can also obtain an overview of listed companies and market data for free. At the same time, the Hong Kong Stock Exchange is also cooperating with leading third party data providers to help listed companies subscribe to rich data and information from leading data providers such as S&P Global through the Investment Service Channel. In the future, Investment Service Connect will also launch a series of interactive features, including supporting online communication between listed companies and investors.

Against the backdrop of increasing emphasis on ESG in the global market, the Hong Kong Stock Exchange introduced ESG guidelines in 2013, raised the reporting obligation to “explain if you don't comply” in 2015, adjusted the guidelines until 2020, further enhanced practices and disclosure requirements, and required listed companies to publish ESG reports on the same day their annual reports were published. Looking ahead, the Hong Kong Stock Exchange is committed to building a sustainable financial ecosystem. The International Sustainability Standards Board (ISSB) expects to implement corporate climate-related disclosure standards by the end of the year and set comprehensive and applicable benchmarks around the world. The Hong Kong Stock Exchange's future disclosure standards will be in line with the ISSB.

Investment advice: The Hong Kong Stock Exchange is the preferred target for investing in the Hong Kong market. It contains upward “options” for future bull markets to maintain purchase ratings. Since the Hong Kong Stock Exchange carried out listing system reforms in 2018, we mainly chose index performance and stock price performance since 2018 to resume trading. The stock price trend of the Hong Kong Stock Exchange is closely related to the development of the Hong Kong stock market. Overall, compared to major market indices such as the Hang Seng Index, the Hang Seng Technology Index, and the Hang Seng Financial Index, the stock price of the Hong Kong Stock Exchange showed obvious upward elasticity and certain safe-haven properties. Specifically, 1) In the upward cycle, the stock price of the Hong Kong Stock Exchange was relatively consistent with the Hang Seng Technology Index and significantly outperformed the Hang Seng Index and the Hang Seng Financial Index, showing obvious upward elasticity.

2) In the sideways trading cycle, the stock price trend of the Hong Kong Stock Exchange was more consistent with the Hang Seng Index and the Hang Seng Technology Index, but the volatility and return were slightly superior to the Hang Seng Technology Index.

3) In the downturn cycle, the stock price of the Hong Kong Stock Exchange showed a downward trend along with the market. The adjustment was slightly greater than the Hang Seng Index and the Hang Seng Financial Index, but both the decline and the volatility were clearly superior to the Hang Seng Technology Index.

4) As a superconnector connecting China and the world and a direct beneficiary of connectivity, in addition to being affected by market fluctuations, the stock price of the Hong Kong Stock Exchange also benefited from continuous improvement of its own market system and continuous improvement of the market structure so that it was able to outperform a certain period of independent market, and its alpha properties were further strengthened.

Therefore, from the perspective of stock price recovery, we believe that the Hong Kong Stock Exchange is the core preferred target for investing in the Hong Kong market. From the perspective of long-term holding, HKEx's return significantly outperformed major market indices such as the Hang Seng Index, the Hang Seng Technology Index, and the Hang Seng Financial Index. From the perspective of market style switching, HKEx can not only enjoy higher upward elasticity when the market rises, but also enjoy similar resistance to the Hang Seng Financial Index and the Hang Seng Index when the market falls. The retracement margin and volatility are significantly less than the Hang Seng Technology Index.

We adjusted the profit forecast based on tracking data. We expect the company's revenue to be -4.6/ +21.4%/+14.4% yoy to HK$199/242/27.7 billion in 2022/2024, and net profit -6.7/+27.4/ 17.1% year-on-year to HK$116.9/148.9/17.43 billion HK$17.43 billion, giving a target price of HK$472 for the next 12 months, which is equivalent to 45 times PE in 2022 and 45 times PE in 2023 being weighted 50%, respectively.

Risk warning: The impact of the macro environment has exceeded expectations, the overall recovery of Hong Kong's market capitalization has fallen short of expectations, and policy risks.