Result Analysis: HKEx 1HFY22 net profit dropped 27% to HK$4.8bn, below market expectation
- HKEx 1HFY22 net profit dropped 27% to HK$4.8bn, below market expectations
- Volatile global market reflected in investment loss of external portfolio led to the earnings miss
- Expect low-risk appetite to persist in 2H but improve in FY23F, thanks to the Southbound inclusion of potential dual primary listings
- Revised down FY22/23F earnings by 14/10% to reflect the persistency of low-risk appetite in market; maintain BUY with a lower TP of HK$403.0
HKEx 1HFY22 net profit dropped 27% to HK$4.8bn, below market expectations. Revenue dropped 18% to HK$8.9bn in 1HFY22, reflecting lower trading and clearing fees driven by lower headline average daily turnover (ADT), and lower depository fees from e-IPO applications. ADT reached HK$138.3bn in 1HFY22, a 27% drop from 1HFY21, due to the low market sentiment amid the Ukraine-Russia war and ADR-related financial conflict between the US and China. EBITDA margin dropped to 72%, from the usual 77% in previous years, as operating expenses were 11% higher than in 1H2021, which is attributable to higher staff costs and professional fees. HKEx declared an interim dividend of $3.45 per share, with a 90% payout ratio (same as previous years).
Volatile global market reflected in investment income of external portfolio. While the drop in the EBITDA margin to 72% was a surprise, given the consistent 77% in previous years, the earnings miss was due to the HK$378m net investment loss of corporate funds, in contrast to the HK$428m gain over the same period last year. This was principally due to net fair value losses on the external portfolio.
Market concerns about inflation risk, aggressive interest rate hike expectations, and the potential implications on global growth, together with continued geopolitical fragility, triggered a sharp global asset repricing in 1H 2022. There will be HK$2bn redeemed from the external portfolio in 2H 2022 to reduce the volatility in earnings, as mentioned by HKEx.
Expect low-risk appetite to persist in 2H but improve in FY23F. We expect ADT to be around HK$130bn in FY22F, equivalent to HK$110-120bn in 2HFY22, in contrast to HK$133bn YTD. We think the uncertain geopolitical tensions, China property contagion, elevated inflation risk, higher interest rate environment, and concerns over a US recession will continue to have a negative impact on overall market sentiment in HK.
Expect ADT to reach HK$148bn in FY23F, thanks to the Southbound inclusion of the dual primary listings. Moving into FY23F, factoring in the worse-than-expected risk appetite in FY22, we have lowered our ADT estimate from HK$178bn to HK$148bn, a 14% growth from FY22F. While we are cautiously optimistic, even considering the market overhangs mentioned above, market sentiment in HKEx is likely to improve. This is driven by secondary listed companies shifting to dual primary listing, which is a key positive catalyst for the HKEx in FY23F. Alibaba, the pioneer of secondary listings in 2019, has filed for dual primary listing in HK. We believe this is the start of a trend of switching from secondary listings to dual primary listings, in order to be eligible for Southbound Stock Connect
We estimate this shift to dual primary listing will inject at least HK$1.5-2.0bn in FY23F through the Southbound Stock Connect inclusion, while improving the trading velocity at HKEx, with more tech companies signing up for primary listing in HK.
ADT structural changes such as secondary listings, ETF Connect, MSCI derivatives, attractive valuation of the HK market vs. that of A-shares and the US, and higher Southbound participation should support a further increase in trading activities when market uncertainties ease in FY23F.
Expansion in eligible ETFs will provide potential for growth in HK. In particular, so far, ETF Connect has contributed 1% of the total Southbound trading with four eligible ETFs. In fact, there are around 120 ETFs listed in HK that are eligible for Southbound ETF. These ETFs’ ADT has improved by a 27% CAGR in the past five years and reached HK$11.8bn. We believe the further inclusion of ETF Connect will improve overall HK ADT moving forward and the potential for growth in HK. In addition, there are 268 China ETFs eligible for Northbound ETF Connect, where only 83 of them are included in the first batch in July. We believe ETF Connect will be another key driver of HKEx’s earnings.
Revised down earnings by 14%/10% for FY22/FY23F to reflect the worse-than-expected net investment income and ADT estimates. Overall, we have revised down our ADT estimates by 12%/17% to HK$127bn/HK$148bn for FY22/FY23F. While we have lowered our net investment income estimate for FY22F to reflect the 1H earnings result, we believe the margin funds and clearing house fund would offset the loss the corporate fund had made in 2H2022, thanks to the higher HIBOR moving forward. Overall, we maintain BUY with a lowered TP of HK$403. Our new TP is based on a 41.0x FY23F PE, pegged to +0.5SD of its 10-year mean.
