In 2Q24, the recovery in trading activity is expected to drive net profit up +11%/+8% month-on-month. The Hong Kong Stock Exchange (HKEx) is expected to announce 2Q24 results in mid-August. We expect total revenue for 2Q24 to be HKD5.4bn (+8/ +4%), and net profit to mother HKD3.2bn (YoY: +11/ +8%). The main driving force behind the increase in revenue and profit is the increase in 2Q24 trading activity. The average daily turnover (ADT) of the Hong Kong market in 2Q24 was HKD122bn (1Q24:
HKD99bn). The number of IPOs increased quarterly to 18 (1Q 24:12). Benefiting from the good performance of the Hong Kong stock market in 2Q24, the margin size may increase, but the return on investment is expected to decrease due to the decline in HIBOR. Due to the recovery in market trading activity in 2Q24, we adjusted the company's 2024/2025/2026 net profit to HKD12.8/13.7/14.4bn (previous value: HKD12.6/13.7/14.4bn) and gave DCF (50-year forecast period, 5% discount rate) target price of HK$356. “Buy”.
Market transactions are picking up in the spot market
In 2Q24, spot ADT in the Hong Kong market increased 22% month-on-month to HKD122bn (1Q24: HKD99bn), and the share of south-bound turnover increased to 17% (1Q24:15%). In the derivatives market, a total of 94.5 mn futures and options contracts were traded in 2Q24 (1Q24:91.7 mn), an increase of 3% over the previous month. In the commodity market, the 2Q24 commodity contract ADV reached 0.769 million (1Q24:0.696 million), an increase of 10% over the previous month. We expect 2Q24 transaction fees, trading system usage fees, and settlement fee revenue to reach HKD2.6bn (month-on-month: +12%). US Treasury yields have historically had a negative correlation with Hong Kong market turnover. The June US CPI data fell short of market expectations, boosting the probability that the Federal Reserve will cut interest rates in September and the expected cumulative rate cut during the year. If the pressure on high overseas interest rates is released, it will benefit Hong Kong stock transactions.
Return on investment is likely to decrease
The 6-month HIBOR moving average for 2Q24 fell to 4.9% (1Q24:5.17%), and the overnight HIBOR average fell to 3.95% (1Q24:4.20%). Although the average one-month HIBOR used to evaluate investor returns also fell to 4.39% (1Q24:4.64%), we estimate that the return on investment of the internal portfolio will decline. The equity and bond indices that are mainly tracked in 2Q24 both increased or declined slightly. We estimate that the external portfolio yield may decline slightly from month to month. The scale of investment capital is likely to increase. Due to the recovery in Hong Kong stock performance in 2Q24, the increase in margin requirements will increase the margin size. We estimate the net investment return for 2Q24 to be HKD1.2bn (1Q24:1.3 bn).
The number of IPOs increased month-on-month, focusing on the company's allocation value
The number of IPOs on the 2Q24 Hong Kong Stock Main Board and GEM rose to 18 (1Q24:12), and the number of newly listed derivative warrants and bullbear certificates was 7,456 (1Q24:7,504). We expect 2Q24 listing revenue to be approximately HKD375 Mn (1Q24: HKD365 mn). Currently, the company's valuation is at the bottom of the long-term valuation channel. The stock price is traded at 24x 2024E PE. It is recommended to focus on allocation value.
Risk warning: Market turnover falls short of expectations; market fluctuations; sharp rise in overseas interest rates; risk of LME litigation; regulatory changes.