Interest rate cuts catalyze a cyclical inflection point, with positive policies and a recovery on the asset side

On September 19, Beijing time, the Federal Reserve cut interest rates by 50 bps. On September 23, the Hong Kong Stock Exchange officially implemented arrangements for normal trading in bad weather. On September 24, the State New Office introduced a steady growth policy. From September 19 to September 24, the Hong Kong Stock Exchange rose 14.9%, exceeding the Hang Seng Index/Hang Seng Technology by 7.3%/4.2%. We believe that the Federal Reserve's monetary policy is transmitted more directly under the Hong Kong Linked Exchange Rate System. The Hibor interest rate reduction has led to a reduction in local financing costs, and at the same time, the international capital market is more sensitive to external liquidity. The recovery in Hong Kong stock spot ADT directly benefits the Hong Kong Stock Exchange's stock trading and settlement business. Structured products and derivatives benefit from indirect market benefits. Concerning the recovery in Hong Kong stock valuations due to steady domestic growth, the Hong Kong Stock Exchange is expected to hit both by improving performance and rising valuations. We forecast the 2024-2026 spot ADT for Hong Kong stocks to be HK$111.7/132.4/152.9 billion, and the net profit forecast for 2024-2026 is HK$12.47/13.24/14.27 billion (previous value was HK$12.37/13.19/14.22 billion), +5.2%/+7.7% YoY, respectively. The corresponding EPS is $9.8/10.4/11.3, respectively. The current stock price corresponds to PE They were 26.3/24.8/23.0 times, respectively, and PE valued 28.5 times on September 25. They are in the 14% fraction of the past 5 years, maintaining a “buy” rating.

The improvement in trading activity directly benefits the core trading business. The scale of investment is expected to pick up and the yield is stagnant over time

(1) Improved liquidity directly benefits the Hong Kong Stock Exchange transaction settlement business. 2024H1 accounts for 56% of Hong Kong Stock Exchange transaction settlement revenue. Recovery in market sentiment and marginal improvement in liquidity are driving spot ADT recovery, and structured products and futures exchange derivatives are expected to be indirectly boosted. (2) The scale of investment is expected to pick up, and the impact on yield is lagging behind. 2024H1 investment income accounted for 24%, and margin and clearing house funds/own funds accounted for 64%/36% respectively. Improvements in the spot-driven derivatives market activity are expected to lead to a rebound in margin size. The return on investment is that 34% of margin funds invested in overnight loans are more sensitive than interest rates. The yield on the remaining 24% bonds (mainly OCI) and 42% weighted average 10-month rollover time deposit has a certain time lag compared to Hibor. (3) Sensitivity calculation: Under optimistic assumptions, 2024E/2025E Hong Kong stocks will benefit from global liquidity easing and steady domestic growth. Spot ADT reached HK$114/140 billion, +8.3%/+24.2%, respectively. HKEx's non-investment income is expected to be +12.2%/+22.9% YoY. Core business improvements hedge the impact of declining return on investment, and net profit to mother is +6.2%/+8.5%, respectively.

Cyclical benefits from easy liquidity and steady growth, while the Hong Kong Stock Exchange also benefits from improved performance and higher valuations

(1) Cyclicality: Continued improvement in global liquidity during the Fed's interest rate cut cycle is beneficial to the Hong Kong stock denominator. According to the bitmap, interest rate cuts are expected to total 50 bps in 2024. The overall interest rate cut in 2024-2026 will reach 250 bps, and the interest rate will end at 2.75-3%; the September 24 real estate support policy is conducive to steady domestic growth, and the creation of monetary policy tools to encourage stock market stability. Looking forward to investment-side reforms to promote medium- and long-term capital entry, Hong Kong Stock Connect dividends and growth assets and turnover rates are expected to improve at the same time. Benefit from improved performance and valuation lift. (2) Growth: Asset-side trends are picking up, and attention is being paid to promoting the implementation of Hong Kong stock liquidity policies. The number and size of IPOs in January-August was HK$19.8 billion, respectively, +10.3%/-5.0% year-on-year, respectively. Policies to optimize arrangements for bad weather transactions were implemented, focusing on promoting the continued implementation of the Hong Kong stock liquidity policy.

Risk warning: macroeconomic instability affects trading activity and company listing; there is uncertainty about the Federal Reserve's monetary policy; the implementation of the company's strategy falls short of expectations.