FMX | Connect – www.fmxconnect.com - (Reported 5/10/2010)
We expect HKEx to report a 1Q10 Net Income of HKD1,075 mn, -8% below consensus estimates
· 1Q10 Cash ADV reached HKD60 bn (+34% Y/Y; -10% Q/Q). 2Q10 volumes are tracking higher sequentially (HKD69.2 bn per day), but -1% lower than 2Q09 figures.
· HKEx handled an average 417.3k derivatives contracts per day (+7% Y/Y; +9% Q/Q). Volumes picked up slightly in the second quarter and are currently at 427.3k contracts per day, -5% below 2Q09 figures.
· We expect total revenues to reach HKD1,626 mn (+21% Y/Y; -10% Q/Q) on lower traded volumes and a reduced listings activity.
· HKEx is trading at 20.3x consensus 2011 earnings, an 83% premium to the domestic index (Hang Seng).
HKEx 1Q10 Business review
· HKEx is facing several challenges which could put pressure on earnings and it’s multiple as the company is trading at 20.3x 2011 earnings - a significant premium to the 15.8x sector average
· Increased competition from mainland exchanges, namely Shanghai, Shenzhen and the recently launched China Financial Futures Exchange, as China prepares to for a free float of its FX rate and the convertibility of its currency
· HKEx’s role under the current FX rate regime is to channel foreign investments into the Chinese capital markets without pushing the Yuan higher, while at the same time providing Chinese companies with an access to the global capital market
· Furthermore, as China mops up liquidity with limits on bank lending and increased reserve requirements, trading volumes as well as valuations on financial stocks are likely to decline and lower the value traded
· China is preferencing mainland exchanges for the listing of state-owned enterprises as it attempts to turn Shanghai into a financial centre by 2020
· Lower than expected cash volumes and a fade out of the market’s catalysts will put downward pressure on HKEx’s stock price
· When the HKMA attempted to launch the “through train” scheme (which would allow Chinese investors to invest freely in Hong Kong) in September 2007, HKEx’s shares skyrocketed (to its all-time high of HKD266.6). However, the scheme is unlikely to come into force any time soon and the convertibility of the Yuan would render the scheme pointless.
Highlights:
· Cash ADV declined -10% Q/Q during 1Q10 to HKD60 bn
While derivatives ADV increased +3% Q/Q during 1Q10 to 382K contracts.
· Increased competition for listings with mainland exchanges (which took the global lead in IPO proceeds in 1Q10) will also put pressure on listings revenues (12% of revenues). Trading in Chinese companies will also continue to flow to the mainland as China liberalizes restrictions on its QII program and on its currency. The launch of new products and order types (the Shenzhen exchange recently launched index futures, and allowed margining and short selling) will also help China repatriate traded volumes in its domestic companies which make up about two thirds of traded volumes in HKEx. The probable cancelation of the AIA IPO (which will likely be acquired by Prudential) will also reduce listing fees (equities only contribute to 25% of listing fees, with CBBCs and Warrants contributing with the bulk of listing revenues).
· Hong Kong currently has a historically high excess liquidity which regulators (particularly in China) are beginning to mop up (with limits on bank lending, increased reserve requirements, etc). This will likely reduce volumes as well as valuations on financial stocks (which constitute about 1/3 of ADV in HK). Low interest rates in HK (with 3 month HIBOR currently at 0.14%) will also maintain investment income low. Expansion via domestic retail penetration is also saturated as 35% of local adults engage in trading.
· HKEx is trading at a significant premium to other exchanges. This will allow for multiple compression as Shanghai internalizes most of the revenue opportunities outlined in HKEx’s 2010-2012 Strategic Plan
Source: ERDESK
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