To The Moon

$Hong Kong Exchanges and Clearing(00388)$

HKEX’s latest quarterly results were soft & was 3% below consensus expectations. While core revenue came in-line with expectation, it dropped 6% QoQ or 24% YoY. Cash trading revenue was down 13% QoQ or 39% YoY, reflecting a subdued market sentiment & trading volume as average daily turnover (ADT) dropped 25% QoQ or 41% YoY. Going into 4Q22, cash trading volume is usually weaker due to seasonality & therefore, earnings growth is likely to remain subdued. Looking ahead, management will focus on strategic priorities, e.g. continued expansion of the Stock Connect program & listing reforms to make HKEX an attractive listing venue for new economy stocks. It is also working on RMB share class to make southbound trading easier for mainland investors.

The stock is trading at 23x forward price-to-earnings (P/E), which is comparable to historical trough levels over the past decade. The current valuation is discounting a very depressed trading volume. We believe an improvement in market sentiment will be critical in setting the stage for catalysts to play out in supporting valuation re-rating. We revise down earnings estimates by 7-9% in the next two years & lower our Fair Value estimate to HKD310 with a lower valuation multiple of 29x forward P/E, which was at -1s.d. to historical average, & an unchanged ADT assumption of HKD140b in 2023, which is in-line with market expectations.

I would be careful in investing in this given the recent market weakness and the issues with China and Hong Kong. The zero-Covid policy is detrimental to the economy and Hong Kong has been lackluster in its growth. As such, its stock is likely to remain depressEd. May wait till the stock bottoms out or when the risks subside. 

DYODD 

@TigerStars