DBS: Hong Kong Exchanges and Clearing Ltd – Buy Target Price HK$449.00

Results First Take: HKEx (388 HK) 1HFY22 earnings result below market expectation

What’s new

• 1HFY22 Net profit dropped 27% to HK$4.8bn, below market expectation
• Revenue dropped 18% to HK$8.9bn in 1HFY22, reflecting lower trading and clearing fees driven by lower headline ADT, and lower depository fees from e-IPO applications
• The earnings miss is due to the HK$378mn of net investment loss of corporate funds, in contrast to HK$428mn gain same period last year
• Average daily turnover reached HK$138.3bn in 1HFY22, 27% drop from 1QFY21, due to the low market sentiment amid Ukraine-Russia War and ADRs financial conflict between US and China.
• EBITDA margin dropped to 72%, from the usual 77% in previous years, as operating expenses were 11% higher than 1H2021, attributable to higher staff costs and professional fees 
• HKEx announced an interim dividend of $3.45 per share, with 90% payout ratio(same as previous years)

Our view: 

• HKEx’s share price YTD dropped 23.7%, reflecting the stock market is at a risk averse stage with low market sentiment.
• Uncertain geopolitical tension, China property contagion, elevated inflation risk and higher interest rate environment have affected overall market sentiment in HK, but we think the overhangs have factored in HKEx share price. 
• The ADT YTD remains at HK$133bn and will likely to stay at this level in 2H amid low risk appetite at the current market. 
• However, looking ahead, we believe secondary listing companies’ shift to dual primary listing in HK and their inclusion in Southbound trading will be positive to HKEx earnings.
• We currently recommend BUY and TP at HK$449.0
• More details after today’s earnings conference call at 5:00PM