[Event] The Hong Kong Stock Exchange announced results for the first quarter of 2022: realized revenue and other earnings of HK$4.690 billion, -21% year-on-year; net profit of the mother was HK$2,668 million, or -31% year-on-year. We expect that the decline in performance is mainly related to continued market fluctuations and continued geopolitical tension.
The decline in the average daily turnover of the spot market led to a decrease in revenue in the spot segment. The spot segment achieved revenue of HK$1,379 million in the first quarter of 2022, -24% year on year, accounting for 29% of revenue. The average daily trading volume of the spot market fell 35% to HK$146.5 billion from the record high for the same period last year. The average daily turnover of northbound trading was 105.9 billion yuan, -16% compared with the previous year; the average daily transaction volume of southbound trading was 35.5 billion Hong Kong dollars, -42% year on year. Bonds connected to the North increased sharply in the first quarter, with an average daily turnover of RMB 33.9 billion, +34% year on year. The Stock Exchange issued 17 IPOs, a decrease of 15 over the previous year, and the total amount raised was HK$19.9 billion, or -89% year on year. The first SPAC company was listed on the Hong Kong Stock Exchange on March 18, 2022, raising HK$1 billion.
Trading of bulls and bears, warrants, and stock options on the Stock Exchange declined, and MSCI China A50 futures trading was active. Revenue from the Equity Securities and Financial Derivatives segment in the first quarter of 2022 was HK$926 million, -8% year-on-year. The average daily turnover of derivative warrants, bulls and warrants on the Stock Exchange was -22% year on year, the average number of stock options contracts per day on the Stock Exchange was -23% year on year, and the average number of derivatives contracts on the Futures Exchange was +21% year on year. The number of newly listed derivative warrants increased by -19.7% year on year, and the number of newly listed bullbear securities was -8% year on year. The average number of contracts traded per day for MSCI China A50 Connectivity Index futures in the first quarter was 2,1468, +86% compared to the number of daily transactions up to the end of 2021.
Commodity segment: Achieved revenue of HK$376 million in the first quarter of 2022, +4.2% year on year. The average daily turnover of LME fee-traded metal contracts in the first quarter was +10% compared to the same period last year, and transaction fees were +6% compared. The reason transaction fee growth rate was lower than the transaction volume was the decrease in average fees per contract and the increase in preferential rebates.
Settlement revenue declined, and margin investment income declined. Settlement revenue for the first quarter of 2022 was HK$1,804 million, or -20% year-on-year, mainly due to a decrease in the number of transactions and a decrease in settlement fee revenue from Shanghai Stock Connect and Shenzhen Stock Connect. Net margin investment income was -18%, but +28% month-on-month, mainly due to the increase in interest rates on deposits in Hong Kong dollars and US dollars in the first quarter.
Company project: Achieved revenue of HK$71 million in the first quarter of 2022, with profit and loss over the previous year. The company's capital investment losses were mainly due to changes in the fair value of listed equity securities and multiple assets, which led to the loss of fair value of collective investment plans. The net return on investment fell to -1.21% from 2.56% in the same period in 2021.
The target price is HK$403.6, maintaining the “better than the market” rating. We estimate that the total operating revenue of the HKEx 22/23/24E was HK$207/224/24.5 billion, respectively, or -1%/+8%/+9%, respectively; net profit attributable to the shareholders of the Hong Kong Stock Exchange was HK$123/129/13.6 billion, respectively, and -2%/+5%/+6% year-on-year. Using two-stage DDM to value the Hong Kong Stock Exchange, the target price was HK$403.6, corresponding to 2022 EPE 41.6 times. Maintain a “better than the market” rating.
Risk warning: Hong Kong's spot and derivatives trading volume has shrunk sharply; progress in connectivity has stalled; the results of LME reforms have not met expectations, and volume and prices have plummeted.