Core views

Affected by a sharp rebound in the market since September and single-day turnover repeatedly reaching record highs, the Hong Kong Stock Exchange's 24Q3 performance improved, and overall it was slightly better than market expectations. In terms of attribution, trading revenue and investment income were +7.9/ -0.3% year-on-year respectively, accounting for 77.5/ 22.5% respectively; it is expected that the Hong Kong Stock Exchange may experience a peak in performance as market transactions pick up and market interest rates remain high. In retrading history, during the bull market, the valuation and performance of the Hong Kong Stock Exchange will increase dramatically with the rapid volume of market transactions, and the upward elasticity of its stock price far exceeds that of the market as a whole. Performance improvements brought about by the current volume of market transactions may provide solid support for valuations. We are optimistic about future “Davis double hit” opportunities with both internal and external liquidity improvements, and it is recommended to focus on it.

occurrences

HKEx announced 24Q3 results, which were slightly better than market expectations of 24Q3, benefiting from a sharp rebound in the Hong Kong stock market and a marked recovery in market transactions, and the company's performance improved; total revenue was HK$5.372 billion (Bloomberg agreed HK$5.395 billion), +5.7/ -0.9% year over month, respectively; net profit was HK$3.155 billion (Bloomberg agreed to HK$3.113 billion), respectively.

Brief review

Performance attribution: Increased trading and investment, improved performance

In 24Q3, the company's total revenue reached HK$5.372 billion, +5.7/ -0.9% YoY; when split, net investment income reached HK$1.207 billion, -0.3/ +2.4%, accounting for 22.47%, or -1.4/0.7pct YoY, respectively; and benefiting from a sharp rebound in the market at the end of September, revenue from non-investment businesses related to transactions improved, +7.9/ -1.8% YoY to 4.14 billion, respectively Hong Kong dollars.

Spot market: Benefiting from the rebound in the September market, trading activity rose markedly in 24Q3. From September 12 to September 30, the Hang Seng Index rose sharply by 23.53%; under the sharp market rebound, Hong Kong stock market trading activity increased markedly; 24Q3 Hong Kong stock ADT +21.8% year-on-year to HK$119.9 billion; however, due to the rebound in the Hong Kong stock market in May 2024, 24Q2 trading activity also increased markedly. decline 1.4% Among them, the share of the 24Q3 Hong Kong Stock Exchange Southbound Trading ADT reached 17.0%, +2.3/-1.3 pct YoY and Month-on-month, respectively.

In the primary market, the 24Q3 Hong Kong stock market added 15 new listed companies, and the amount raised in the IPO reached HK$42.2 billion, more than three times that of the first half of 2024. Among them, Midea Group was listed on the Hong Kong Stock Exchange on September 17, 2024 and raised HK$35.7 billion, which is the largest IPO financing on the Hong Kong Stock Exchange since February 2021; Alibaba also switched toDual major listingsIt was also included in Hong Kong Stock Connect, and is expected to continue to attract Hong Kong Stock Connect capital allocation in the future. As of September 30, the Hong Kong Stock Exchange is still processing listing applications from 96 companies, and the IPO pipeline is still sufficient; it is expected that the activity and richness of the Hong Kong stock primary market will increase significantly as the subsequent market recovers, and the Hong Kong IPO market can be expected to recover.

Derivatives & commodities market: Derivatives turnover reached a new high. Derivatives transaction fee revenue declined 24Q3 due to discounts. Benefiting from a recovery in market and investor sentiment, derivatives turnover has repeatedly reached record highs. The average daily turnover (ADV) of 24Q3 derivatives contracts (including futures and options) reached 1.48 million, +7.3% YoY/ -8.3% YoY. However, as the Hong Kong Stock Exchange increased discounts and rebates on some contracts to attract trading volume, the trading fee for derivatives contracts on the 24Q3 Futures Exchange fell slightly by 4.3% year-on-year.

The average daily turnover of metal contracts traded on LME reached 0.679 million lots (of which the ADV for fee-traded metal contracts was 0.642 million lots), +17.4%/-15.4% year-over-year, respectively. Meanwhile, LME and LME Clear raised transaction and settlement fees by an average of 13% on January 1, 2024, resulting in a marked increase in product segment revenue since 2024; 24Q3 commodity segment revenue was +24.2/ -5.2% year over month, respectively.

Investment: Margin investment income declined under the “sharp drop in volume and price”. On the one hand, the company's capital investment income performance was impressive. Although the Hong Kong stock market showed a marked recovery at the end of September, the overall market still declined in 24Q3 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, so the corresponding margin size was also affected by this, but still declined year-on-year; overall, the average fund balance of margin and clearing house funds under the Hong Kong Stock Exchange and LME reached HK$192.5 billion/year over year. The ratio is respectively- 12.9/ 2.7%; on the other hand, due to improvements in US inflation data, interest rates in the 24Q3 market declined marginally, but overall remained high; at the same time, investment income declined slightly due to an increase in the ratio of Japanese yen collateral settlement participants in Hong Kong settlement. Overall, the net annualized investment return of the Hong Kong Stock Exchange's margin and clearing house funds reached 1.45%, or 0.09/0.19pct, respectively. Affected by the above two factors, the total net investment income of the company's margin and clearing house funds was -17.7/ 13.9% year-on-year to HK$0.7 billion, respectively. However, thanks to market recovery, the net return on investment of 24Q3's capital was HK$0.507 billion, +38.5/ +27.4% year-on-year, respectively.

Investment advice: The Hong Kong Stock Exchange currently has an adequate margin of safety. Expectations of a bull market are expected to usher in a “double hit by Davis” with improved performance and valuation. It has “upward options” and maintains a buying rating

The performance and valuation of the Hong Kong Stock Exchange are highly correlated with market transactions, and there is significant upward elasticity in anticipation of a bull market. On the one hand, the Hong Kong Stock Exchange's trading-related business accounts for more than 50% of revenue all year round, and boosting market activity during the market cycle will directly affect the growth of the Hong Kong Stock Exchange's performance; on the other hand, the valuation of the Hong Kong Stock Exchange is also highly correlated with market transactions. When market trading is hot, high ADT (average daily turnover) often indicates more optimistic expectations for the medium- to long-term growth of the Hong Kong Stock Exchange, and the PE center of the Hong Kong Stock Exchange is also expected to rise with ADT.