HKEx reported FY19 net profit of HK$ 9.4bn, flat YoY, in-line with our estimates vs. shy 1% of consensus. Sequentially, 4Q19 recorded weaker investment income and higher costs which we see as an implication for similar trend ahead. YTD market data showed recovery and resilience, but the catalysts that the market has been longing for are yet to be materialized. Trading above its 5-yr avg. P/E at 33x, we think HKEx looks fair in valuation. We raise TP to HK$ 265 to reflect better-than-expected market activity, while maintain HOLD on the stock.
- 4Q19 results recap and implications: Strong investment incomes (+129% YoY) helped offset soft market activity (other revenues -4% YoY). Northbound was a bright spot (ADT +78% YoY), and Stock Connect’s trading and clearing fees contribution rose to 8.5%. But note that invt. income dropped 10% QoQ, and we expect its support to revenue may fade as market volatility could weigh on gains from Collective Invt. Scheme. Total cost (opex+D&A) also went up (+5% YoY) and mgmt. guided further tech expenses ahead.
- Results briefing key takeaways: 1) There was no update on launch schedule of the MSCI A Index Future, a major near-term catalyst still absent. 2) Mgmt. shared several structural changes that could drive near-term growth, incl. more engagement of quant funds to boost esp. derivatives vol., new economy mega IPOs that fuels up ADT, continuous active flows through Stock Connect Schemes, etc. 3) HKEx aims to build its FIC competitiveness in the long run both organically, i.e. through established Bond Connect and the deepening RMB internationalization, and inorganically. The Exchange is also developing this business in a different way by cooperating with Chinese tech giants and leveraging their state-of-the-art technologies.
- YTD cash market data ahead of our est.; revise up FY20E/21E earnings by 2%/7%. Both local cash market and Stock Connect ADT was stronger and more resilient than we expected YTD, yet derivatives trading fell slightly short. We therefore revise up our FY20E/21E net profit forecasts by 2%/7%. We also factor in a slower IPO pipeline in 1Q20E due to coronavirus; but we would expect the demand to resume soon post outbreak.
- Raise TP to HK$ 265; Maintain HOLD. We raise TP by 7% to HK$ 265 on new earnings forecast, implying 33.4x FY20E P/E. HKEx now trades at 32.7x FY20E P/E, above its 5-yr average of 30x. The market activity recovery is underway, but we believe it is in the price, and near-term catalyst is absent to underpin re-rating. Maintain HOLD.
