1Q22's performance is weak, but its long-term value is gradually emerging.
HKEx's total 1Q22 revenue was HK $4.69 billion (year-on-month ratio:-21% Maxime 0.9%), and its net profit was HK $2.67 billion (year-on-month ratio:-31% Universe 0.2%), which was lower than our expected HK $2.95 billion, mainly due to lower-than-expected deposit fee income and investment income. Although HKEx's dynamic price-to-earnings ratio is likely to remain below the centre of the upstream channel for some time due to recent adverse macro factors, taking into account HKEx's long-term growth prospects and competitive advantage, as well as the potential improvement in 2H22 market trading volume may lead to a moderate repair of its valuation, we believe that the downside is limited and long-term value is emerging. We have lowered our target price based on DCF to HK $395 (previous value: HK $450), corresponding to 39 times 2022 PE, to reflect the impact of liquidity tightening, and we have upgraded the HKEx to "Buy", maintaining the 2022 pound 2023 pound 2024 homing net profit forecast of HK $12.7 billion / 14.4 billion / 15.6 billion.
Trading volume and investment return in 1Q22 market are weak.
The average daily turnover of 1Q22 in Hong Kong was HK $146.5 billion, down 35% from a year earlier and up 16% from a month earlier.
The trading volume of northbound Bond Link, derivative contracts and LME metal contracts increased year-on-year. The IPO market was depressed, raising a total of HK $15 billion, almost on a par with 1Q20's HK $14.4 billion. The net investment income is relatively weak, mainly due to the lag effect between the maturity of deposit investment and the rise in short-term interest rates, while the pooled investment plan portfolio recorded a net loss. The net interest rate of 1Q22 is 56.8% (year-on-year / month-on-month ratio:-7.5pm / month 0.3%).
Continuous product innovation to consolidate long-term competitive advantage
HKEx launched the SPAC listing system on 1Q22, announced the holiday trading rules for derivatives, which will begin in May, and launched a number of new ETF products. On Enterprise Day, management shared the company's vision and plans to build it into a future-oriented market. In our view, these strategies and measures help to consolidate HKEx's long-term comprehensive advantages.
Short-term valuation is under pressure, long-term value is apparent
Macro adverse factors, including tighter overseas liquidity, high inflation, market concerns about China's macroeconomic outlook and geopolitical tensions, may continue to affect HKEx's short-term share price performance.
However, we believe that the recent downturn in share prices has broadly reflected the weakness of 1Q22's performance. A potential recovery in trading activity in the 2H22 market could help HKEx fix its valuation moderately. To reflect tighter liquidity, our new DCF valuation model assumes a cost of capital of 5.0 per cent (previous value: 4.6 per cent).
Risk tips: weaker-than-expected market volume, increased market volatility, sharp rise in overseas interest rates, and regulatory changes.