Result Analysis: Geopolitical conflicts weigh on HK’s trading volume in near term
- FY2021 results in line with market expectations
- Geopolitical tensions weigh on HK trading volume in near term; better 2H2022 ADT is widely anticipated and has been reflected in the current share price
- Revised down FY22/FY23F earnings by 16%/18% to reflect the lowered ADT of HK$176bn/HK$184bn, respectively
- Maintain HOLD with lower TP at HK$422
FY21 earning in line with market expectations. Net profit gained 9% to HK$20.9bn. Revenue rose 9% to HK$20.9bn in FY21, thanks to the higher trading and clearing fees driven by a record average daily turnover. Stock connect revenue increased 41% against 2020, accounting for 13% of HKEx’s overall revenue. ADT reached a record high HK$166.7bn in FY21, a growth of 29% from FY20, thanks to the ultra-high southbound turnover in Jan-Feb 2022. EBITDA margin is at 78%, 1% higher than 2020. The board announced a final dividend per share of HK$8.87 (second interim: HK$4.18) with the same payout ratio of 90%.
Weak market sentiment is likely to persist in 2Q due to the geopolitical conflict in Ukraine, on-and-off regulatory developments in the technology and new economy sectors, and the ongoing COVID-19 pandemic. The year-to-date ADT stays at the HK$130bn level, in contrast to HK$230bn in the same period last year. We reckon the current risk appetite remains low in the HK equity market, given there is no near-term catalyst.
Cautiously optimistic for 2H2022 ADT, where market uncertainties should show signs of easing, in our view. Given that these overhangs are largely priced in the current market valuation for the HK market, we could likely see the return of southbound net buys for the attractively valued and unique secular growth companies offered in HK. Additionally, given the significant increase in southbound eligible mutual funds in the previous years, this should provide a relatively strong basis for a bounce back. We expect the overall HK turnover to gradually improve to HK$180bn moving into 2H.
HKEx was the 4th largest IPO market in term of IPO fund raised. It raised 331.4bn in FY21 with 88% from new economy and Biotech companies. 5 secondary listings and 3 dual-primary listings. HKEx continues to enhance its listing framework, including introducing and enhancing HK SPAC and overseas issuers listing regime. HK government proposed more listing reforms to help pre-profit or pre-revenue start-ups raise funds during Budget 2022-2023. However, the strength of IPO pipeline subjects to the market sentiment in stock market. With the current sentiment amid various uncertainties, we think applicants would prefer to wait until HK market to have a better risk appetite in 2H.
Revised down FY22/FY23F earnings by 16%18% to reflect weak market sentiment in HK. We have revised down our average daily turnover estimates from HK$196bn/ HK$204bn to HK$176bn/ HK$184bn for FY22/FY23F, respectively. We have factored the low trading velocity in the first two months of 2022 into our estimates but expect a HK$180bn ADT for the rest of the year. We have also lowered our net investment income as persistent inflationary pressures, global tightening of the monetary policy, and upcoming interest rate hikes could cause volatility and impact returns on the external investment portfolio.
Maintain our HOLD recommendation with a lowered target price (TP), at HK$422. The TP is based on an unchanged valuation benchmark to FY22F, with our TP premised on a 40x PE, pegged to a +1.5SD of its 10-year mean. The secondary listings and dual-primary listings conversion, especially for those tech and new economy giants, will be a positive catalyst for the company to re-rate.