Citi Research has released a report maintaining a "Buy" rating for HKEX (00388), lowering its price target from HKD 530 to HKD 495, which corresponds to a 31 times forward price-to-earnings ratio for 2027.
The firm expects HKEX to announce its second-quarter results on August 19, forecasting a net profit attributable to shareholders of HKD 5.0 billion, down 3% quarter-on-quarter but up 13% year-on-year, exceeding market consensus by 7%. Total revenue is projected at HKD 8.1 billion, decreasing 1% quarter-on-quarter but rising 13% year-on-year, supported by strong trading volumes in Hong Kong stocks and northbound Stock Connect. Investment income is anticipated to fall 23% quarter-on-quarter and 36% year-on-year to HKD 1.0 billion, primarily due to a high base effect.
The report notes that the average daily turnover (ADT) of Hong Kong stocks in the second quarter reached HKD 290 billion, up 5% quarter-on-quarter and 22% year-on-year, driven by increased contributions from new listings. Southbound Stock Connect ADT stood at HKD 124 billion, a 1% quarter-on-quarter and 10% year-on-year rise, accounting for 21% of total market turnover. Northbound ADT hit RMB 366 billion, climbing 13% quarter-on-quarter and 141% year-on-year. New listing activity accelerated, with 47 companies debuting during the period.
According to Citi, HKEX's ADT is the most critical driver of its earnings and stock price. After the ADT nearly doubled year-on-year to HKD 250 billion last year, it further increased to HKD 283 billion in the first half of this year and reached HKD 307 billion in July. The firm believes several structural factors can support sustained growth in Hong Kong stock turnover, coupled with a vibrant new listing market, which may make ADT growth more resilient than anticipated. Its forecasts are 3% to 11% above market consensus.
Citi analysts point out that new listings have become a primary driver of turnover growth. New listings contributed HKD 24 billion to ADT in the first half of the year, accounting for 11% of total ADT, and increased to HKD 40 billion in July, representing 18% of monthly ADT. Currently, there are about 500 active listing applications, including approximately 100 for A+H share listings, with the A-share market capitalization of these companies exceeding RMB 6 trillion. Their ADT in the first half was RMB 194 billion. Assuming 5% of this turnover shifts to Hong Kong, it could generate an additional HKD 11 billion in ADT.
Additionally, US-listed Chinese ADR trading is steadily migrating from the US to Hong Kong, with Hong Kong's share of the total ADR turnover now at 45%, up from 10% in 2021. Southbound Stock Connect participation continues to rise, with holdings as a percentage of market capitalization increasing from 5% in 2021 to 13% in the first half of this year. Citi estimates that southbound funds have a turnover rate approximately three times that of non-southbound funds. ETP product ADT has also grown from HKD 8 billion in 2021 to HKD 49 billion in the first half of this year, accounting for 17% of the market.
Citi is optimistic about the resilience of ADT growth, forecasting Hong Kong stock ADT for 2026 to 2028 at HKD 281 billion, HKD 300 billion, and HKD 324 billion, respectively, which are 3% to 11% above market expectations. The firm has raised its earnings per share forecasts for 2026 to 2028 by 4% to 5%, reflecting increased contributions from new listings and the recent rebound in Hong Kong stocks.
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