Result Analysis: HKEx 1QFY22 earnings below market expectation
- 1QFY22 earnings below market expectation, with 31% drop in net profit y-o-y
- Expect weak market sentiment to persist but a better 2H is anticipated where overhangs show easing sign
- Revised down FY22/23F earnings by 14/10% to reflect the lower ADT and net investment income expectation
- Maintain HOLD with a lower TP of HK$361
HKEx 1QFY22 earnings below market expectation. HKEx’s net profit dropped 31% y-o-y to HK$2,668m, missing the market’s expectation. Revenue dropped 16% y-o-y to HK$4.8bn due to the lower trading and clearing fees driven by lower headline average daily turnover (ADT) and the decline in net investment income. The ADT was at HK$146.5bn in 1QFY22, a 36% drop from 1QFY21, due to the weak market sentiment amid the Ukraine-Russia war and American depository receipt (ADR) financial conflicts between the US and China.
HKEx was not able to maintain its usual EBITDA margin of 77%-78% as it did in previous years and recorded a 75% EBITDA margin in 1QFY22. This is due to an increase in operating expenses because of higher allocated costs from the Listing Division and an increase in cash incentives relating to new products in the cash, equity, and financial derivatives segment and post-trade segment.
Weak market sentiment to persist in the short term amid market uncertainties. The Hang Seng Index has dropped 14% YTD. Persistent inflationary pressures, tightening of monetary policy, upcoming interest rate hikes, and geographical fragility could continue to impact investors willing to invest in the equity market. Although the IPO pipeline remains strong, supported by Chinese companies seeking homecoming listings and a new listing regime for SPACs and overseas issuers, we think issuers are more likely to wait till the uncertainties are clear. Moreover, the lockdowns in Shanghai also contributed to the low-risk appetite at the current stage.
Moving into 2H, these overhangs will likely persist, but the tension should ease compared to 1Q2022. The market reaction to the existing overhangs is less. We are cautiously optimistic for 2H as compared to 1H this year.
Revised down FY22/23F earnings estimate by 14/10% to reflect worse-than-expected 1Q. Due to the weak market sentiment in 1QFY22, we have revised our FY22/23F ADT estimates to HK$157bn and HK$176bn to reflect the lower-than-expected ADT. The new ADT estimate for FY22F is equivalent to HK$165-175bn in the next seven months of the year. We are cautiously optimistic for 2H2022, and hopeful that the Ukraine-Russia war will end or ease moving toward 2H. We revise down our earnings estimate by 14/10% to reflect the revision of the ADT estimate as well as the lower estimate for net investment income. We maintain HOLD with a lower TP of HK$361. The TP is based on an unchanged valuation benchmark to FY22F, with our TP premised on a 40x PE, pegged to a +1SD of its 10-year mean.