Core views
In 24Q2, the total revenue of the Hong Kong Stock Exchange reached HK$5.42 billion, +8.0/ +4.2% year over year, and net profit to mother was HK$3.155 billion, or +8.6/ +6.2% yoy, respectively, but overall it was slightly lower than Bloomberg's agreed expectations. Among them, due to the sharp rebound in Hong Kong stocks in May, stock spot and derivatives trading volume increased markedly, but as the Hong Kong Stock Exchange increased discounts and rebates on some contracts, the Futures Exchange's derivatives contract trading fees have declined month-on-month. Investment income stabilized due to rising margin and settlement house fund size in the Q2 market (still declining year-on-year), but the marginal decline in market interest rates caused investment returns to stabilize. Currently, the company's valuation is at the bottom of history, with sufficient margin of safety, and “upward options”. We expect market improvements and favorable policies to catalyze valuation restoration.
occurrences
HKEx announced 24Q2 results, slightly lower than market expectations of 24Q2, benefiting from a rebound in the Hong Kong stock market and improved company performance; total revenue was HK$5.42 billion (Bloomberg agreed to expect HK$5.514 billion), +8.0/ +4.2% year over month, respectively; net profit to mother was HK$3.155 billion (Bloomberg agreed to expect HK$3.199 billion), +8.6/ +6.2% year over month, respectively.
Brief review
Performance attribution: Increased trading and investment, improved performance
In 24Q2, the company's total revenue reached HK$5.42 billion, +8.0/ +4.2% year over month; when split, net investment income reached HK$1.179 billion, +3.3/ +12.1% year over month, accounting for 21.8%, and -1.0/4.0p c t year over month respectively; and benefiting from a sharp rebound in the May market, revenue from non-investment businesses related to transactions improved, +9.4/ +9.6% year over month, respectively billion Hong Kong dollars.
Spot market: Benefiting from the market rebound in May, trading activity rose markedly in 24Q2. The Hong Kong stock market rose and then fell. From April 19 to May 20, the Hang Seng Index rose sharply by 19.84%. Although there was a slight decline thereafter, it still rose 7.1.2 percent cumulatively in Q2.
Following a sharp rebound in the market, trading activity in the Hong Kong stock market improved markedly; 24Q2 ADT was +18.2/ +22.4% yoy to HK$121.6 billion, respectively. Among them, the share of southbound trading ADT for Hong Kong stocks reached 18.3%, an increase of 4.4/2.7 pct year-over-year and month-on-month respectively.
In terms of IPOs, 18 new listed companies were added in 24Q2, an increase of 5 over the same period last year. The amount of capital raised from the IPO was HK$8.3 billion, down 25.5% year on year; however, the amount of refinancing after listing reached HK$23.4 billion. As of August 21, the Hong Kong Stock Exchange is still processing the listing applications of 96 companies, and the IPO pipeline is still sufficient; moreover, Alibaba said at the performance meeting that the company is actively seeking Hong Kong as the company's main listing site. It is expected to complete the dual major listing in New York and Hong Kong by the end of August after the shareholders' meeting held on August 22 to obtain approval. It is expected that with the subsequent market recovery, the activity and richness of the Hong Kong stock primary market will increase significantly, and the subsequent recovery of the Hong Kong IPO market can be expected.
Derivatives & commodity market: Derivatives turnover reached a new high. Derivatives transaction fee revenue declined 24Q2 due to discounts, or due to increased demand for market risk hedging and a bullish commodity market, derivatives and commodity contract turnover increased markedly. The average daily transaction volume (ADV) of 24Q2 derivatives contracts (including futures and options) reached 1.565 million, a record high, up 18.9%/4.3% year over year, respectively. However, as the Hong Kong Stock Exchange increased discounts and rebates on some contracts to attract trading volume, and low-fee varieties such as Hang Seng Technology Index futures were more popular in the market, and trading fees for derivatives contracts on the 24Q2 Futures Exchange were +4.3/ -5.0% year over month, respectively.
The average daily turnover of metal contracts traded on LME reached 0.803 million lots (with a DV of 0.73 million lots for fee-traded metal contracts), up 32.3%/15.6% year over month, respectively. Meanwhile, LM E and LM E Clear increased transaction and settlement fees by an average of 13% on January 1, 2024, so product segment revenue was +37.3/ 8.8% year over month, respectively.
Investment: The margin scale recovered month-on-month but still declined year-on-year. Market interest rates declined marginally, and the company's investment income may have reached an inflection point. On the one hand, the 24Q2 market recovered month-on-month but still declined significantly compared to the same period last year. The nominal principal amount corresponding to a single contract increased month-on-month but also declined year-on-year. Therefore, the corresponding margin size was also affected by this, the average fund balance of margin and clearing house funds under the Hong Kong Stock Exchange and LM E reached HK$197.8 billion year over month, respectively. 15.9/+7.2 %; on the other hand, due to improvements in US inflation data, interest rates in the 24Q2 market declined marginally, but overall remained high; at the same time, investment income declined slightly due to an increase in the share of yen collateral among Hong Kong settlement participants. Overall, the net annualized investment return of Hong Kong Stock Exchange margin and clearing house funds reached 1.64%, +0.16/-0.10pct year over month, respectively. Affected by the above two factors, the total net investment income of the company's security deposit and clearing house funds was -6.9/ +0.7% year-on-month, respectively, to HK$0.813 billion. The hedging effect is still obvious. Furthermore, due to fluctuations in peripheral markets, the net investment income of 24Q2's capital was HK$0.398 billion, +48.5/ -25.6% year-on-year, respectively.
Investment advice: The Hong Kong Stock Exchange currently has an adequate margin of safety. It has an “upward option”. Previously, we reviewed the Hong Kong Stock Exchange's stock price. Since the Hong Kong Stock Exchange carried out listing system reforms in 2018, we mainly used index performance and stock price performance since 2018. The trend of the Hong Kong Stock Exchange stock price is closely related to the development of the Hong Kong stock market. Overall, compared to major market indices such as the Hang Seng Index, Hang Seng Technology Index, and Hang Seng Financial Index, the Hong Kong Stock Exchange stock price shows clear upward elasticity and certain safe-haven attributes. Specifically,
1) In the upward cycle, the stock price of the Hong Kong Stock Exchange was in line with the Hang Seng Technology Index and outperformed the Hang Seng Index and the Hang Seng Financial Index by a large margin, showing clear upward elasticity.
2) In a sideways trading cycle, the stock price trend of the Hong Kong Stock Exchange is in line with the Hang Seng Index and the Hang Seng Technology Index, but the volatility and return are slightly superior to the Hang Seng Technology Index.
3) In the downward cycle, the Hong Kong Stock Exchange stock price showed a downward trend along with the market. The adjustment was slightly larger than the Hang Seng Index and Hang Seng Financial Index, but both the decline and volatility were clearly superior to the Hang Seng Technology Index.
4) As a superconnector connecting China and the world and a direct beneficiary of connectivity, in addition to being affected by market fluctuations, the stock price of the Hong Kong Stock Exchange also benefited from the continuous improvement of its own market system and continuous improvement of the market structure, so it was able to run independently for a certain period of time, and the alpha attribute was further enhanced.
We expect the company's revenue in 2024/2025 to +6.5/5.9% yoy to HK$21.85/23.13 billion, and net profit to mother +5.9/4.8% yoy to HK$12.56/13.17 billion, respectively. The current stock price corresponds to a net profit of only 23.1x PE in 2024, and the valuation is at its lowest level in nearly ten years, and the margin of safety is sufficient. Currently, the management of the Hong Kong Stock Exchange has completed a change of office. Under the strong support and impetus of the two local regulations, many market reform measures that have been proposed before are expected to be implemented at an accelerated pace, and the Hong Kong stock market ecosystem is expected to usher in further optimization and expansion. We gave the company a target price of HK$304 for the next 12 months, corresponding to 30 times PE in 2024/20005, maintaining a “buy” rating.
Risk warning:
The impact of the macro environment exceeds expectations: if the Federal Reserve's monetary policy or geopolitical risks exceed expectations, it will increase market uncertainty, and may cause trading volume and listing progress to fall short of expectations, which may adversely affect the performance of the Hong Kong Stock Exchange. Policy implementation falls short of expectations: We expect that policies related to connectivity will continue to expand, especially the RMB Hong Kong stock exchange policy, which is expected to be implemented in the future, will have a profound impact on the company's performance and future competitiveness; if the relevant listing rules are revised and the implementation of the policy falls short of expectations, it may have a certain negative impact on the company's performance and future competitiveness.
Overall asset-side recovery falls short of expectations: We make a benchmark market assumption based on the overall recovery of the Chinese economy and driving the recovery of the Hong Kong stock market. If the overall asset-side recovery falls short of expectations, it will have an impact on profit forecasts.