2Q24 Main business is in line with expectations
The total revenue of the Hong Kong Stock Exchange in 2Q24 was +8% YoY +4% to HK$5.42 billion. Excluding investment income, main operating fee revenue +10% YoY to HK$4.22 billion, and profit +9% YoY +6% YoY to HK$3.16 billion. Cumulatively, total revenue for the first half of the year was basically flat at HK$10.62 billion year on year, and profit -3% to HK$6.13 billion YoY, in line with our expectations.
Development trends
Spot, derivatives and commodity trading activity increased significantly, and Q2 main fee revenue achieved steady growth. 1) Spot: 2Q ADT +18% YoY/22% month-on-month to HK$121.6 billion, including Southbound ADT +47% YoY/42% to HK$44.1 billion, accounting for 18.1% of Hong Kong stocks, Northbound ADT +4% YoY/-4% YoY to $127.3 billion, accounting for 8.2% of A shares; 2) Derivatives: Individual stock options benefit from active spot, ADV +25% /month-on-month +16% to 0.747 million shares, and stock index futures and futures ADV +15% YoY/-4% YoY to 0.827 million shares, and activity remained high; 3) Commodities: LMEADV +27% YoY/+10% YoY to 0.769 million, of which the April ADV reached 0.857 million, the highest monthly transaction record since the LME merger; 4) Listing: 2Q completed 18 IPOs with a financing amount of HK$8.6 billion (-23% YoY/+79% month-on-month).
Investment returns were steady year over year, falling interest rates, and external investment returns dragged down month-on-month performance. 2Q24's investment income was +3% YoY/-12% month-on-month to HK$1.18 billion (accounting for 22% of total revenue), and the net return on corresponding company-wide annualized investment increased +0.53ppt to 5.33% year over year. Among them: 1) Internal investment income was -1% YoY/-5% month-on-month to HK$1.12 billion, with a slight year-on-year decline mainly due to a decline in margin size and a decline in interest rates from month to month; 2) Outsourced investment income +220%/-62% YoY to HK$64 million, which was mainly affected by the narrowing increase in overseas stock markets (2Q24 MSCI Global +2.4% vs. 1q +7.8%).
Reforms are progressing steadily, and market competitiveness continues to be strengthened. The Hong Kong Stock Exchange has continued to steadily implement various market reforms since this year. In terms of connectivity, it was announced that REITs will be included in the Shanghai-Shenzhen-Hong Kong Stock Exchange and expanded for the ETF Stock Exchange; in terms of market mechanisms, the severe weather trading mechanism will soon be officially implemented (trading will be suspended for 3.5 days due to bad weather in 2023, accounting for 1.4% of the total trading day); and in terms of technological empowerment, it has announced the development of its own Pioneer Star derivatives platform. We believe that continuous multi-dimensional reforms are expected to further strengthen our medium- to long-term competitiveness.
Profit forecasting and valuation
The company currently trades at 2024e/25e 24x/22x P/E. Due to the reduction in market ADT and investment returns, we reduced 24e/25e profit by 3%/3% to HK$12.2 billion/ 12.9 billion. Maintaining an outperforming industry rating and lowering the target price by 3% to HK$300, corresponding to 31x/29x 24/25e P/E and 31% upside.
risks
Market transactions continued to decline; the market reform process fell short of expectations; the IPO market continued to be sluggish.