Forecast 2Q24 profit +7% y/month-on-month +5%
The Hong Kong Stock Exchange plans to disclose 2Q24 results on August 21: We expect 2Q revenue +8% YoY/+4% YoY to HK$5.41 billion, excluding investment income, main expenses revenue +9% YoY to HK$4.12 billion, and profit +7% YoY +5% to HK$3.11 billion. Cumulatively, total revenue for the first half of the year is expected to remain basically flat at HK$10.61 billion year on year, and profit -4% to HK$6.08 billion year over year.
Key points of interest
Spot, derivatives and commodity trading activity have all increased significantly. We expect 2Q main fee revenue +9% YoY/+9% month-on-month. 1) Spot: Benefiting from the improvement in market sentiment in May, 2Q ADT +18% YoY +22% to HK$121.6 billion, including Southbound ADT +47% YoY +42% to HK$44.1 billion, accounting for 18.1% of Hong Kong stocks, and +4% YoY to $127.3 billion, accounting for 8.2% of A shares; 2) Derivatives: Single share options benefit from active spot, ADV +25% /month-on-month +16% to 0.747 million shares, in addition Indicate futures and options ADV +15% YoY/-4% month-on-month to 0.827 million, and activity remains high; 3) Commodity: LME ADV +27% YoY +10% to 0.769 million, of which ADV reached 0.857 million in April, the highest transaction record in a single month since the LME merger; 4) Listing:
In 2Q, 18 IPOs were completed, raising HK$8.6 billion (-23% YoY/+78% month-on-month), and Hong Kong stock listing activity improved marginally. Recently, the Mainland Securities Regulatory Commission stated that it will speed up the filing of overseas listings by Chinese companies and support mainland enterprises to go public in Hong Kong. We expect that listing activity will continue to improve.
We expect steady income from internal investment, and outsourced investment may drag down overall investment income over month performance. We expect 2Q24 investment income +6% YoY/-10% month-on-month to HK$1.21 billion (accounting for 22% of total revenue and 39% of net profit). Among them: 1) 2Q24 6M HIBOR (moving average) -0.27ppt month-on-month and average 1M HIBOR -0.25ppt month-on-month. We expect interest spreads to be relatively stable. At the same time, market index performance repaired or led to a month-on-month increase in nominal principal in derivatives market stocks and boosted margin size; 3) On the external side, the increase in 2Q24 overseas major stock markets narrowed month-on-month (2Q24 MSCI Global Index +2.4% vs. 1q24 +7.8%). We expect 2Q external portfolio returns to decline month-on-month.
The profit improvement provides a basis for valuation correction, and focuses on potential policy catalysts for Hong Kong stocks. The Hong Kong Stock Exchange currently has 1-yrforward P/E trading at 8% in the past 10 years/ 32% since listing. The valuation has entered the long-term layout range, focusing on potential transaction reforms such as large secondary listed companies shifting to double entry (such as Alibaba) and Hong Kong stock dividend tax to catalyze market activity. Furthermore, if Hong Kong stocks benefit from the introduction of potential economic policies in the Mainland in the second half of the year, interest rate cuts by the Federal Reserve, and market sentiment boosted, the company's allocation value as a high-quality and flexible target for the Hong Kong stock market is outstanding.
Profit forecasting and valuation
Considering the increase in trading activity in the Hong Kong stock market, we raised the company's profit by 3%/2% in 24/25 to HK$12.6 billion/13.6 billion. Currently, the company is trading at 2024e/25e 25x/23x P/E. Maintain target price and outperform industry ratings (corresponding to 31x/29x 24e/25e target P/e and 27% upward space).
risks
Market transactions are sluggish; policy strength falls short of expectations; overseas liquidity easing falls short of expectations; geographical risk.