More Patience Needed For Recovery
HKEX’s sentiment appears weak, but we anticipate multiple positive signs in the near future, including: a) the potential expansion of Stock Connect, b) the launch of renminbi counters, c) the potential trading of treasury bond futures, and d) listing reform for hard tech companies. Maintain BUY with a reduced target price of HK$405.30 as we made slight tweaks to EPS to incorporate full-year ADT adjustment.
• Recent market activities. Hong Kong Exchanges and Clearing’s (HKEX) share price has corrected by nearly 50% since 1Q21’s peak mainly due to the Hong Kong stock market correction, which has reduced market capitalisation and consequently turnover volumes. Jan-Sep 22 ADT was HK$124b (vs HK$180b in Jan-Sep 21), representing a decrease of 31.3% yoy primarily due to: a) slowdown in monthly turnover (+1% mom), and b) a decline in average market capitalisation (-13.5% mom).
• Multiple upsides ahead… We anticipate multiple positive trends for HKEX as policies are being discussed to bolster HKEX’s unique position in China, including:
a) Potential expansion of Stock Connect. The China Securities Regulatory Commission (CSRC) plans to expand the Stock Connect programme to include more Hong Kong primary-listed foreign companies and listed companies on the Shanghai and Shenzhen exchanges.
b) Introduction of renminbi counters in Hong Kong in 1H23. The authorities have been cooperating to achieve this target. To support this effort, the Hong Kong government has proposed waiving stamp duty on certain stock transactions for dual counter trading.
c) Possibility of Treasury bond futures trading in Hong Kong. The CSRC will support Hong Kong’s introduction of China Treasury bond futures, thereby accelerating China’s Treasury bond futures market’s opening to foreign investors.
d) Listing reform for hard-tech corporations. HKEX is contemplating a rule change that would reduce the revenue requirement for hard tech companies seeking an IPO. According to reports, HKEX could begin public consultations as early as this month and finalise the rule change by the end of the year.
• …but more time needed for recovery. We view the aforementioned policies as catalysts for the medium-to-long term, as the timeline for implementing most of these policies has not been outlined. Hence, we believe more time is required for HKEX’s share price to recover. However, we maintain our view on HKEX’s near-term catalysts including the potential upticks in trading activities or IPOs which are contingent on the improvements in market conditions. In 3Q22, there were 27 IPOs that raised a total of US$6.6b, more than twice the proceeds raised in 2Q22 including Tianqi Lithium and China Tourism Group Duty Free which had raised HK$13.5b and HK$16.2b respectively, in Jul 22 and Aug 22.