High market sentiment boosts the performance of the Hong Kong Stock Exchange

Since mid-late September, boosted by factors such as the Federal Reserve's interest rate cut, the Mainland's monetary policy punch, and the September Politburo meeting, the market performance and trading activity of Hong Kong stocks increased rapidly and dramatically. The single-day turnover of Hong Kong stocks reached a record high of HK$500 billion. ADT for 3Q24 rose from a low of HK$95 billion (August 28) to HK$118.8 billion (September 30). Increased trading activity will drive up the Hong Kong Stock Exchange's 3Q24 and full-year results. Hong Kong stock turnover is related to the macro environment. The Federal Reserve may continue to cut interest rates during the year, the narrowing spread between China and the US is expected to support the RMB exchange rate, and Hong Kong stock transactions are expected to be supported. Also, the 3Q24 derivatives market volume was basically the same as 2Q24. Considering the rapid increase in market turnover, we raised our 2024/2025/2026 net profit forecast to HK$12.8/13.7/14.3 billion (previous value: HKD12.5/13.6/HK$14.3 billion) and raised the target price based on DCF (50-year forecast period, 5% discount rate) to HK$404 (previous value: HK$356). Maintain “buy-in.”

The turnover of Hong Kong stocks is affected by the exchange rate between China and the US, interest rates on US bonds, and market performance. The turnover of the Hong Kong stock market is affected by the macro environment. There is a certain negative correlation between the turnover of Hong Kong stocks and the exchange rate of the US dollar against the RMB. When the RMB appreciates, Hong Kong stock trading is usually more active. The appreciation of the RMB reflects an increase in growth expectations for the Mainland, boosting profit expectations for Hong Kong stocks, and increasing the interest of various investors in Chinese assets.

Interest rates on US bonds are negatively correlated with the turnover of Hong Kong stocks. The Hong Kong financial market is highly open. The turnover of the Hong Kong stock market is affected by global liquidity, and interest rates on US bonds are an important indicator for measuring whether global liquidity is sufficient. At the same time, interest rates on US bonds also affect the exchange rate between China and the US, and the narrowing of the gap between China and the US is expected to support the RMB exchange rate, which in turn affects Hong Kong stock transactions. The Federal Reserve may continue to cut interest rates during the year, and we believe that Hong Kong stock turnover is expected to be supported. Market performance also affects Hong Kong stock transactions. The turnover rate of Hong Kong stocks is related to the fluctuation in expectations of the Hang Seng Index (VHSI). If the Hang Seng Index continues to rise rapidly in the future, Hong Kong stock turnover is expected to remain at a high level.

The rapid recovery in market turnover in 3Q24 is beneficial to the performance of the Hong Kong Stock Exchange

Hong Kong stocks fell to a quarterly low of HK$95 billion in the 3Q24 ADT, but the Federal Reserve's interest rate cuts and the continuation of mainland policies drove 3Q24 ADT to rapidly rise to HK$118.8 billion (HK$2Q24: HK$121.6 billion) after mid-September. The 3Q24 southbound total turnover was HK$1.21 trillion (2Q24:1.26 trillion HKD), accounting for 16% of the total Hong Kong stock turnover; the total northbound turnover was HK$3.4 trillion (2Q24:3.6 trillion HKD). The 3Q24 futures options contract volume was 94.39 million lots (2Q24:94.45 million lots). Trading business revenue accounts for more than 60% of the Hong Kong Stock Exchange's non-investment income, and the costs and expenses of the Hong Kong Stock Exchange are relatively stable. We estimate that every 5 billion HKD increase in ADT for the whole year will drive the profit of the Hong Kong Stock Exchange by about 2.2%.

The non-transactional business has remained stable, and recent valuations have been quickly repaired

The number of 3Q24 IPOs was 15 (2Q24:18). On the investment side, based on HIBOR trends, we expect the return on investment for 3Q24 to be comparable to 2Q24. Currently, the company's stock price is traded at 37.15x2024E PE. TTM PE has been restored to the median value in the valuation channel since 2009, focusing on allocation value.

Risk warning: Market turnover falls short of expectations; market fluctuations; LME litigation risk; regulatory changes.