HKEx reported 1Q20 net profit of HK$ 2.3bn (22% of consensus FY20E est.), down 13% YoY, as investment losses outweighed remarkable trading volume recovery (core revenue +19% YoY). HKEx’s active de-risking action could alleviate impact from volatile investment gains in coming quarters, and potential secondary listing of tech giants in 2H20E may excite market, yet trading activity is moderating since Apr and catalysts to drive structural changes remain absent in near-term. In addition, we think Charles Li’s stepping down could possibly adding uncertainty to the Company’s future China-related strategy execution. We fine-tune TP to HK$ 254.0 post results and maintain HOLD.
- 1Q20 results recap and implications: While robust cash equity trading, record high Stock Connect ADT and resilient listing fees well drove core revenue growth despite COVID-19, net investment loss from external invt. portfolio (HK$ 521mn) due to global sell-offs dragged HKEx’ top-line growth. The Company has actively pared down this invt. portfolio size by ~40% to de-risk, and FV may reverse should market sentiment improved. On opex side, we still see HKEx enhancing investment into talents and IT.
- Market activity moderating since Apr; initiatives driving structural growth still not in sight. Looking ahead, headline ADT is not likely to stay at similar high level in 1Q20, and we’ve already seen it down 29%/17% in Apr from Mar/1Q20. Initiatives that we expect to spur its structural growth and re-rating, e.g. the launch of MSCI A Index future, are still unlikely to be seen in near-term. Though potential secondary listing of tech giants in 2H20E may shore up market sentiment, we expect relatively limited revenue impact in FY20E. The inclusion of secondary listing WVR companies into Stock Connect would have more substantial positive impact, but this is also wait-and-see. Moreover, Charles Li’s stepping down in 12-18mths could add uncertainties in the Bourse’s future strategy, in our view. Regarding Charles Li’s succession, mgmt. mentioned this would be a “global search” for someone who “dreams big, aims high” while at the same time protects what HKEx has achieved.
- Fine-tune TP to HK$ 254; Maintain HOLD. We trim FY20E/21E net profit by 3%/4%, mainly on lower ADT/ADV and invt. gains assumptions, while lift listing fees and maintain similar opex est. We also see potential downside revision of consensus EPS post results. We thus cut TP by 4% to HK$ 254.0, implying 33x FY20E P/E (vs. 5-year avg. of 30x). Maintain HOLD.
