HKEX reported in-line FY20 net profit of HK$ 11.5bn, up 23% YoY. But the record high results was overshadowed by HK government’s decision to raise stamp duty for stock transaction from 0.1% to 0.13%. We think the stamp duty hike will hit market sentiment in near-term and slow some inflows from cost-sensitive investors in the mid-term, which could reduce HKEX ADT by ~10%, while in the longer run, HKEX’s advantages in attracting China-related new economy names and the Connect Scheme is not likely to be materially affected by costs. We revise up our earnings to reflect stronger ADT trend and raise TP to HK$ 549.0. We maintain HOLD as we think current valuation (47x 1-year fwd P/E) is relatively rich.
- Our thoughts on stamp duty hike: 1) The stamp duty hike may potentially reduce HKEX ADT by 10% and earnings by 5%, which could happen in mid-term. HKEX mgmt. estimated that stamp duty accounted for ~30% in total trading costs in HK, therefore a 3bps hike will increase total costs by ~8%. We estimate that ~84% of HKEX’s cash equity ADT (mainly local equities trading and Southbound) is exposed to stamp duty (ETFs and DWs/CBBCs/IWs are exempt), and they contributed ~40% of HKEX’s revenue. We believe that high-frequency investors are most price sensitive, whose participation accounted for ~10% of ADT according to mgmt. Assuming all these 10% ADT will be affected due to stamp duty increase, this will reduce HKEX’s FY21E net profit by 5% based on our estimates, which we believe is not significant. 2) But we think HKEX’s core competitiveness of attracting trading on China-related new economy listings and through Connect Scheme is not likely to be materially dampened by trading costs, as these are HKEX’s advantages that are difficult to be copied elsewhere. Even without this stamp duty hike, HK already has one of the highest trading costs among major markets, esp. higher than its major competitors US exchanges and mainland China exchanges. But trading of new economy companies remained active and shares of secondary listing companies kept migrating from the US to HK. The new economy names and the Connect Scheme will continue to effectively bridge the liquidity from mainland to HKEX, in our view. 3) Potential downside risks here include: further stamp duty hike and longer existing period of higher stamp duty. Historically, the trend of stamp duty in other markets was being cut and finally scraped. If stamp duty remains at a high level in the long run, it will definitely hurt HKEX’s market velocity and hurt its attractiveness to global issuers and investors.
- 4Q20 results recap and implications: 4Q20 revenue reached HK$ 5.1bn, 4% lower QoQ due to seasonality. Core revenue (excl. net investment income and other incomes) was down 9% QoQ, as cash equity ADT was stronger (local excl. Southbound ADT +5% QoQ and Southbound ADT +3% QoQ), but was more than offset by weak derivatives. Investment income came in 16% higher QoQ, on higher gains from corp. fund investment and higher margin and CH fund size. On a YoY base, cost-to-income ratio was improved 5.3ppt, showing better operating efficiency.
- Revise up FY21E-22E earnings and raise TP to HK$ 549; Maintain HOLD. We lift our FY21E/22E net profit by 25%/27%, mainly to reflect stronger cash equity ADT and Stock Connect ADT. Our new TP of HK$ 549.0 is derived from 3-stage DDM, where we lower our COE from 8.3% to 8.0% and other assumptions not changed. HKEX’s share price has gained 20% YTD, and traded at >50x recently, vs. post-Connect Era average +2SD of 45x. We think the valuation largely reflected recent strong Southbound and several news from new economy listings. We maintain HOLD on HKEX.
