Elevator Pitch
I still assign a Hold investment rating to Hong Kong Exchanges and Clearing Limited (OTCPK:HKXCF)(OTCPK:HKXCY) [388:HK] or HKEX. My earlier January 8, 2024 write-up drew attention to Hong Kong Exchanges’ outlook and valuations.
The current update previews HKEX’s Q2 2024 financial results and analyzes the company’s full-year FY 2024 financial prospects.
On one hand, I see HKEX performing well in the second quarter with a return to positive top line and bottom line expansion, considering the Hong Kong Exchange’s latest monthly ADT (Average Daily Turnover) data. On the other hand, my concerns lie with HKEX’s 2H 2024 and full-year results, as the Hang Seng Index has underperformed in the past one month and expectations for the Hong Kong IPO market have been revised downwards. Therefore, I have opted to leave my existing Hold rating for HKEX unchanged.
Investors should note that the company’s shares are traded on the Stock Exchange of Hong Kong and the OTC or Over-The-Counter market. The 10-day mean daily trading values for HKEX’s Hong Kong-listed shares and OTC shares were $150 million and $2 million, respectively based on S&P Capital IQ data. Readers can deal in HKEX’s comparatively more liquid Hong Kong shares with US brokerages such as Interactive Brokers or Hong Kong stockbrokers like Monex Boom Securities.
HKEX’s Results Are Expected To Be Good In The Second Quarter
HKEX will likely announce the company’s financial results for the second quarter of 2024 in August. I take the view that HKEX’s Q2 2024 financial performance will be as good as, if not better than, what the market anticipates.
The company’s performance in the first quarter of this year was poor. HKEX’s top line and net income attributable to shareholders decreased by -6% YoY and -13% YoY, respectively for Q1 2024 in HK$ terms. In its first quarter results announcement, HKEX explained that the contraction in both its top line and bottom line was driven by “the decrease in ADT (Average Daily Turnover) of equity products traded.”
But HKEX is poised for a turnaround in Q2 2024. In specific terms, the sell-side analysts are projecting that the company’s revenue and net profit will rise by +11% YoY and +12% YoY, respectively, for the second quarter of the year. I am optimistic that HKEX’s actual Q2 results will be in line or even above the sell side’s expectations, taking into consideration the favorable read-throughs from the latest ADT data for the Hong Kong Exchange.
HKEX’s ADT rose by +38% YoY and +25% MoM (Month-on-Month) to HK$139.8 billion in May 2024 as per the latest data available. HKEX also achieved a positive +1% MoM and +3% YoY growth in ADT for April this year. In contrast, the Hong Kong stock exchange’s ADT dropped by -22% YoY to HK$99.4 billion in the first quarter of 2024.
In summary, I anticipate that HKEX will report a good set of results for Q2 2024 in August. A return to positive ADT growth in April and May 2024 bodes well for the company’s Q2 financial performance.
But The Company’s Full-Year Performance Might Still Be Lackluster
HKEX’s expected financial outperformance in Q2 2024 might not be sustainable, which means the company’s full-year 2024 results could still be inferior to that of 2023.
One key factor to consider is the possibility of HKEX’s ADT growth slowing or even turning negative in the coming months or the rest of the year.
The positive growth in ADT for HKEX in the first two months of Q2 2024 coincided with a +7.4% jump and a +1.8% rise for Hong Kong’s benchmark Hang Seng Index in April 2024 and May 2024, respectively. It is reasonable to assume that ADT growth is positively correlated with the outperformance of the Hong Kong equity market as represented by the Hang Seng Index.
At the time of writing, the Hang Seng Index has declined by approximately -6% (source: S&P Capital IQ) in the past one month, and this has negative read-throughs for HKEX’s ADT outlook in July 2024 and Q3 2024.
Earlier, Morgan Stanley (MS) issued a research report (not publicly available) titled “Thoughts On The Recent Rally” on May 7 highlighting the performance and outlook for the Hong Kong equity market and Chinese equities in general. In its May 7, 2024 report, Morgan Stanley noted that “April had already observed quite sizable repair of positioning in Chinese equities” and highlighted that “the hurdle for meaningful reduction in underweight positions (for Chinese equities and Hong Kong-listed stocks) from here will be much higher.”
In other words, the +7.4% jump for the Hang Seng Index in April 2024 mentioned above is already reflective of a significant increase in investors’ exposure (or smaller share of “underweight positions”) to Chinese equities and the Hong Kong market. As such, it will be tough for the Hong Kong equity market to outperform meaningfully in the future driven by a substantial increase in investor exposure. This translates into expectations of a more modest pace of ADT expansion for HKEX going forward.
The other key factor relates to the outlook for Hong Kong’s Initial Public Offering or IPO market.
Auditing firm KPMG recently lowered its forecast of the number of public listings and IPO proceeds for the Hong Kong market in 2024 as per a recent June 18, 2024 Radio Television Hong Kong or RTHK news report. Specifically, KPMG’s projection of Hong Kong’s full-year IPOs and listing proceeds were revised downwards by -13% and -40% to 80 listings and HK$60 billion, respectively.
A lower-than-expected number of IPOs for the Hong Kong market implies that HKEX’s actual listing fees and ADT (IPOs are correlated with investor interest) might fall short of expectations.
Concluding Thoughts
HKEX’s shares could possibly perform well for the near term in the event of a successful Q2 2024 turnaround with respect to its financial results. But HKEX’s potential stock price outperformance (assuming good second quarter results) is unlikely to be sustained, as I think that its ADT and IPOs for 2H 2024 might surprise on the downside.
Moreover, I view HKEX’s valuations as fair, as its consensus next twelve months’ normalized P/E of 26 times is largely aligned with its consensus FY 2024-2027 ROE estimates in the 24%-29% range (source: S&P Capital IQ). I continue to rate HKEX as a Hold.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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