$HKEX (00388.HK)$ The performance for the third quarter of 2024 will be announced on October 23. The strong performance of the Hong Kong stock market at the end of September and early October has made the performance of the Hong Kong Exchanges and Clearing Ltd. (HKEX) in this quarter the focus of the market's attention.

Benefiting from the recent increase in daily trading volume of Hong Kong stocks, the market estimates that HKEX's Q3 revenue will be 5.4 billion Hong Kong dollars, up more than 6% year-on-year; earnings per share are 2.49 Hong Kong dollars, also surpassing 6% year-on-year. In terms of analyst ratings, as of the 21st, more than 80% of analysts have given a "strong buy" rating.

With continuous favorable policies, the trading in the Hong Kong market is active.

Since the Federal Reserve started cutting interest rates in September and countries have successively implemented a combination of stimulating economic policies, the monthly trading volume and turnover ratio in the Hong Kong market have significantly increased. According to HKEX data, the daily average turnover of Hong Kong stocks in September was 169.2 billion Hong Kong dollars, an increase of 77% month-on-month and 87% year-on-year. The daily turnover hit a historic high of 505.9 billion Hong Kong dollars on September 30.

The combination of strong fundamentals and optimistic market sentiment has helped HKEX start a major uptrend at the end of September and early October. Within just 13 trading days from September 17 to October 7, HKEX's stock price surged by nearly 80%, reaching 397.8 Hong Kong dollars, hitting a new high in nearly two and a half years!

Although the Hong Kong stock market has cooled down recently, on the 20th, Hong Kong Financial Secretary Paul Chan Mo-po expressed firm confidence in the market. He expects the Hong Kong economy to continue growing for the rest of the year! He stated:

Recently, the main source of net inflows into Hong Kong stocks mainly comes from European and American investors, accounting for approximately 85% of the net inflow value; in terms of investor distribution, 90% are from funds or investment banks, reflecting the strong interest of European and American investors in the mainland China and Hong Kong markets.

In addition, foreign capital is an important source of incremental funds in the Hong Kong stock market. In recent years, Middle Eastern capital has increasingly focused on the Hong Kong stock market. Against this backdrop, the Securities and Futures Commission of Hong Kong and the Hong Kong Exchanges and Clearing are also working to deepen cooperation with Middle Eastern capital to bring incremental funds to the Hong Kong stock market.

According to a report from the China Securities Journal, the first Hong Kong-listed ETF to be listed in Saudi Arabia will be traded on the Saudi Stock Exchange on October 30th Beijing time. The fund mainly invests in the Southbound Dongying MSCI Hong Kong Stock Connect Select ETF to track the performance of the relevant index. Analysts in the industry believe that the listing and development of Hong Kong ETFs in the Middle East will increase the opportunities for Middle Eastern funds to flow into Hong Kong stocks.

Institutions are full of confidence in the future of Hong Kong stocks! GTJA believes that Hong Kong stocks are entering the configuration range again, with the forecast valuation of Hong Kong stocks and market risk premium space opening upward, making Hong Kong stocks still attractive for allocation.

1) The continued expectation of domestic incremental policies is promising. Weak external demand, short-term export data falling below expectations, but active policies still hold potential. The State Council Information Office press conference mentioned that the incremental fiscal policy is "to be continued." China has set up a 10 billion yuan innovation and technology industry guidance fund in Hong Kong, with multiple liquidity incentive policies announced, forming positive factors for growth-related sectors.

2) The previous market exuberance has returned to a neutral state, with the AH premium rising, forecasting valuation/risk premium rate space opening. The AH premium has returned to above +1 standard deviation, enhancing the relative attractiveness of Hong Kong stocks compared to A shares. Hong Kong stock valuations have fallen, risk premium rates have risen, and the rebound space has opened up again.

3) Hong Kong stock profit expectations continue to improve. The earnings expectations of the three major Hong Kong indexes have been steadily rising, with significant upward revisions to earnings expectations for US and Chinese stocks since mid-year. The Bloomberg net income forecasts for the Hang Seng Index/Technology/China Enterprises Index for 2024/2025 continue to rise, with remarkable performance from the Hang Seng Tech Index, with forecast EPS growth rates of 44%/34% for 2024/2025.

Optimization of IPO approval processes, John Lee Ka-chiu: Promoting large mainland companies to list in Hong Kong.

Recently, the Hong Kong IPO market has been bullish, with IPO fees being an important component of HKEX's revenue, and under policy guidance, there will be even greater incremental space.

On October 16, John Lee Ka-chiu, the Chief Executive of the Hong Kong Special Administrative Region, mentioned IPOs in the '2024 Policy Address.'

They will leverage the advantage of mutual market access with the mainland, attract international companies to list in Hong Kong, promote large mainland enterprises to list in Hong Kong, and strive to achieve more iconic IPOs in the short term.

At the same time, they will streamline the listing approval process to make the listing application approval more predictable.

Just 2 days later on the 18th, the Hong Kong Securities and Futures Commission and HKEX jointly announced to optimize the timeline for new listing applications, further enhancing Hong Kong's appeal as an international new capital market.

Under the fast approval timeline for eligible A-share companies, if eligible A-share listed companies submit applications that fully comply with regulations, the SFC and HKEX will each issue only one round of regulatory comments. In this case, the regulatory assessments of the two regulatory bodies will be completed in no more than 30 business days respectively.

How do institutions view the performance of HKEX?

Recently, there have been numerous bullish factors with certainty for HKEX, and many major banks have been bullish.

JPMorgan raised the target price of HKEX from 280 Hong Kong dollars to 390 Hong Kong dollars, maintaining a "buy" rating, expecting an increase in Hong Kong stock market turnover and market revaluation.

The bank raised its forecast for the average daily trading volume of Hong Kong stocks this year, next year, and the following year by 8% to 9%, reaching HK$258 billion, HK$318 billion, and HK$379 billion, respectively, leading to a 5% to 7% increase in earnings per share forecast. JPMorgan forecasts the daily average trading volume of Hong Kong stocks (excluding southbound and northbound trades) to be HK$120.4 billion, HK$153.2 billion, and HK$181 billion this year, next year, and the following year.

Goldman Sachs raised the earnings per share forecast for HKEX for the 2024-26 fiscal years by 3% and increased the target price by 3.9% from 306 Hong Kong dollars to 318 Hong Kong dollars.

Goldman Sachs believes that HKEX is mainly driven by the trading volume of the Hong Kong stock market, accounting for approximately 40% of its revenue. Improved sentiment in the mainland stock market, declining real interest rates, and a rebound in IPO activity may further enhance profitability. The bank emphasizes that the risk-return profile of HKEX remains attractive, rating it as a "conviction buy".

However, at the same time, some institutions have maintained a certain level of rationality on the basis of optimistic expectations.

Citi expects HKEX's attributable profit to shareholders in the third quarter to be 3.3 billion Hong Kong dollars, up 11% year-on-year, and 4% quarter-on-quarter.

Citi mentioned that the stock market atmosphere is rapidly recovering, leading to record-high trading volumes in recent weeks, paving the way for solid profits in the fourth quarter of this year. However, the bank believes that the current trading volume levels may not be sustainable, and as volatility decreases, trading speeds may return to normal.

China International Capital Corporation research report predicts that HKEX's third-quarter revenue will rise 6% year-on-year, flat quarter-on-quarter at 54.1 billion Hong Kong dollars, with main business revenue up 8% year-on-year and down 1% quarter-on-quarter to 41.5 billion Hong Kong dollars, while net profit is expected to increase by 7% year-on-year to 3.15 billion Hong Kong dollars, remaining flat quarter-on-quarter. The bank lowered HKEX's profit forecasts for the next two years by 2% and 6% to 13.1 billion Hong Kong dollars and 14.3 billion Hong Kong dollars, maintaining an "outperform" rating, with the target price lowered by 8% to 440 Hong Kong dollars.

The bank stated that all products experienced a significant increase in trading activity in the third quarter due to improved investor sentiment, thereby boosting the revenue of the main business. The impact of low interest rates on investment income may be offset by robust interest margin and external investment income improvements.

Dah Sing, on the other hand, expects that the Hong Kong Exchange will achieve a new high average daily turnover of 350.3 billion Hong Kong dollars in the last five trading days of September, with the daily turnover in the third quarter increasing by 20.7% year-on-year to 118.8 billion Hong Kong dollars, driving a 9.3% increase in quarterly main business revenue.

However, due to the decrease in interest rates affecting the decline in net investment income, Dah Sing expects a lower growth rate in revenue and net profit for the Hong Kong Exchange during the forecast period. In addition, the decrease in net investment income will also pressure profitability, therefore believing that the valuation reassessment space may be limited, and downgrade rating for the Hong Kong Exchange to 'hold,' with the target price raised from 300 Hong Kong dollars to 355 Hong Kong dollars.

Editor/Lambor