Diversified strategies support profit resilience
The company's profitability is in a leading position. In international comparison, the 7-year average dividend payout ratio of the Intercontinental Exchange, NASDAQ, Pan-European Stock Exchange, SGX, and Hong Kong Stock Exchange reached 31.9%, 57.4%, 48.2%, 78.5%, and 89.6%; the 7-year average ROE of the Intercontinental Exchange, NASDAQ, Pan-European Stock Exchange, Toronto Stock Exchange Group, Singapore Exchange, and Hong Kong Stock Exchange reached 11.4%, 12.2%, 23.3%, 9.2%, 33.8%, and 21.8%. Taken together, the Hong Kong Stock Exchange ROE and dividend ratio are at the top.
The spot and derivatives business is currently the company's main source of revenue. In 2016-2022, the spot segment, equity securities and financial derivatives business, and settlement business contributed about 80% of the total revenue, which is the company's main source of revenue. In 2023, due to changes in the business structure, the spot segment and derivatives division together accounted for more than 70% of revenue. Looking ahead, the core business is expected to benefit from the continuous optimization of the market microstructure, diversification of derivative product categories, multiple interconnection policies, and institutional dividends brought about by listing system reforms. LME & QME joined forces to develop the product division, combining data and connectivity to become a new profit growth point. Looking forward to the future, the commodity division is expected to benefit from the linkage between LME and QME, while the data and connectivity division is expected to rely on fintech strategic empowerment platforms to form a business synergy advantage.
Product and system innovation to open up business space
New trading products are constantly being introduced, attracting the participation of international investors and increasing the revenue generated by trading and settlement. The Hong Kong Stock Exchange continues to expand its product range, and has launched the Shanghai-Shenzhen-Hong Kong Stock Exchange and ETFs to include 14 categories including the Shanghai, Shenzhen, and Hong Kong Stock Connect. The launch of some new products has effectively increased market activity and increased revenue from transaction fees and settlement fees. The reform of the IPO system was combined with the introduction of SPAC mechanisms to broaden the scope of listed companies. In April 2018, the Hong Kong Stock Exchange implemented a biotechnology IPO system reform. To a certain extent, this move encouraged the listing and trading of Hong Kong stocks and attracted the entry of emerging companies such as the new economy and biotechnology. The company began a new round of IPO system reform from 2022 to 2023, which mainly includes: 1) introducing the SPAC (Special Purpose Acquisition Company) system; 2) introducing listing rules for specialty technology companies; 3) consulting market opinions on GEM (GEM) listing reform. The main suggestions include simplifying the transfer mechanism.
Efficient organizational structure ensures implementation of strategies
Each member of the management team has a clear division of labor and various strengths to jointly maintain the company's operations and ensure the gradual implementation of the strategic goals of connectivity.
The Hong Kong Stock Exchange's governance model takes the form of “6+6+1", that is, 6 elected directors, 6 government-appointed directors, and 1 chief executive. Benefiting from an efficient organizational structure and experienced management, the Hong Kong Stock Exchange's three-year strategic plan has a high degree of implementation. Among them, the implementation of the dual counter model is expected to further strengthen Hong Kong's position as an international financial center. By the end of 2023, a total of 24 Hong Kong listed companies were trading on a dual counter model.
Investment advice
With the support of a series of connectivity policies, we believe that the Hong Kong Stock Exchange already has the basic conditions for recovery at the level of capital market system construction and its own innovation. At the macro level, the Fed is expected to cut interest rates gradually. Liquidity in the Hong Kong stock market is expected to gradually increase, and overall market activity and valuation are expected to recover accordingly. The company is expected to achieve revenue and other income of HK$21.323/23.89/25.068 billion in 2024-2026, and net profit to mother of HK$12.342/13.744/HK$14.158 billion. The corresponding PE valuation is 23.52/21.12/20.51 times, respectively, giving a purchase rating.
Risk warning
1. A sharp correction in the equity market; 2. The reform of the listing system fell short of expectations 3. Connectivity is progressing slowly; 4. The Federal Reserve's policy is uncertain.