Matters:
HKEx released its 2024 semi-annual report. 24H1 achieved operating income of HK$10.621 billion (+0.4% YoY) and net profit of HK$6.125 billion (-3.0% YoY). 2024Q2 achieved operating income of HK$5.42 billion (+4.2% YoY) and net profit to mother of HK$3.155 billion (+6.2% YoY).
Commentary:
In terms of revenue structure, the share of stock exchange listing fees and net investment income has declined. The main sources of revenue for the Hong Kong Stock Exchange include: 1) trading and trading system usage fees; 2) settlement and delivery fees; 3) Stock Exchange listing fees; 4) depository, custodian and agent service fees; 5) market data fees; 6) investment income, etc. 2024H1, transaction system and trading system usage fees+settlement and delivery fees+depository, custodian and agent service fees accounted for 56.1% of total revenue (+1.6pct year over year). The share of listing fees on the Stock Exchange accounted for 6.8%, a year-on-year decrease of 0.6 pct.
Net investment income accounted for 23.7%, a year-on-year decline of 1.6 pct.
The return on investment is high, and the decline in the size of margin and clearing house funds is dragging down investment income. 24H1, net return on investment of HK$2.521 billion (-5.8% YoY). 1) In a high-interest environment, the return on investment of margin and clearing house funds is still high. The 24H1 annualized return on investment is 1.64% (+0.06pct year over year). However, the size of margin and clearing house funds declined 15.9% year over year to HK$197.8 billion, mainly due to an increase in the share of yen collateral with lower margin requirements. 2) The company's net return on capital investment was +10.3% to HK$0.901 billion, and the 24H1 annualized return on investment was 5.33% (+0.53 pct year over year).
Spot segment: Trading activity is gradually picking up, and connectivity is progressing steadily.
1) 24H1 spot sector transaction fee HK$1.424 billion (-6.6% YoY). 2024H1, the average daily turnover of stock capital securities products on the Stock Exchange (including southbound bilateral transactions) was HK$100.3 billion (-2.5% YoY).
As the activity of the Hong Kong stock market increased, the average daily turnover of the 24Q2 Stock Exchange's equity securities products (including southbound bilateral transactions) rose 25.5% month-on-month to HK$111.8 billion, showing an inflection point in trading activity. Connectivity turnover grew steadily, with the average daily turnover of 24H1 northbound trading reaching RMB 130.2 billion (+19.1% year over year). However, due to the 30% reduction in A-share transaction fees from August 28, 2023, compounded by the double impact of RMB depreciation, northbound transaction fees have declined. Southbound trading activity picked up marginally, with 24H1 southbound trading with an average daily turnover of HK$37.5 billion (+10.9% YoY).
2) 24H1 listing fee HK$0.431 billion (-3.8% YoY). The listing fee mainly consists of the annual listing fee and the listing fee for newly listed companies, of which the annual listing fee accounts for a relatively high amount. Affected by market liquidity, the 24H1 IPO market remained sluggish. There were 29 newly listed companies on the main board (down 4 year-on-year), and the amount of capital raised in the IPO was HK$13.4 billion (-25.1% year over year). Entering 24Q2, the IPO market showed signs of recovery, and the amount of capital raised in the IPO increased sharply by 79.2% month-on-month to HK$8.6 billion. As of 24H1, the number of companies with IPO reserves reached 107. The reform and innovation of the listing system is beginning to bear fruit. In June 2024, the Hong Kong Stock Exchange welcomed the first listed company under the 18C rule. The positive effects of the future policy may gradually become apparent.
Equity Securities and Financial Derivatives Division: Due to market fluctuations, trading volume has repeatedly reached new highs, and listing fees have declined year-on-year.
1) 24H1, the total transaction fee for derivative warrants, bullbear securities and warrants+futures exchange derivatives contracts+stock options contracts was HK$1.141 billion (-0.7% YoY). Among them, the average number of derivatives contracts traded per day increased 12% year over year to 1.533 million, a record high for half a year. 2) Due to the year-on-year decline in the number of derivative warrants and bullbear securities listings, the listing fee on the Stock Exchange decreased by 12.8% year-on-year.
Investment advice: The Hong Kong Stock Exchange leads the industry in ROE and continues to pay attention to shareholder returns. At this stage, the core driver of the company's performance is trading activity in the Hong Kong stock market. In the short term, the activity of the Hong Kong stock market is under slight pressure, but the net return on investment has to a certain extent ironed out the performance pressure that may be brought about by insufficient liquidity in the Hong Kong stock market. In the long run, considering that the Federal Reserve is gradually entering a cycle of interest rate cuts, the liquidity pressure on the Hong Kong market is expected to improve. In April 2024, the China Securities Regulatory Commission announced 5 capital market cooperation measures with Hong Kong. The implementation of the policies can be expected. Under the impetus of strengthened connectivity between North and South and reform and innovation of the listing system, the Hong Kong Stock Exchange is expected to continue to grow in various businesses with its unique monopoly position and diversified business model. We maintain our profit forecast. The company's 2024/2025/2026 EPS is HK$9.76/10.59/11.45, and the corresponding PE is 23/22/20 times, respectively.
According to the comparable company PE valuation method, the company was given a PE valuation of 26 times in 2024, and the corresponding target price was HK$253.8, giving it a “recommended” rating.
Risk warning: The Hong Kong stock market is facing extreme market conditions and continues to decline; the reform of the listing system, progress in connectivity, and the listing of new economy companies falls short of expectations; there is uncertainty about the Fed's policy.