Due to increased trading activity since the beginning of 2020, thetrend towards China Concept Stocks returning (represented byAlibaba), more active stock connect trading and potential inclusion ofETF connect, we raise HKEX’s 2020e earnings forecast 2.5% toHK$11.1bn (+17% YoY), and lift TP 11% to HK$326. We reiterateOUTPERFORM.
HKEX is expected to benefit from increasingly active trading, basedon the positive outlook of the Hong Kong market by CICC StrategyTeam.
New businesses represented by returning China Concept Stocks,expansion of China connectivity and MSCI A-share futures, areexpected to further contribute earnings and diversify the revenuestructure. (See figures 1-5 for sensitivity analysis of each newbusiness.)
Under the neutral assumptions, we expect the net income of HKEXin 2020 to grow by 17% to HK$11.1bn. Meanwhile, we conduct abear and bull case analysis on the assumptions of ADT and the launchof new business, which implies 8% and 24% YoY earnings growth,respectively. (See figure 6)
Earnings forecast and valuation
HKEX is currently trading at 31.7x 2020e P/E. We maintain our 2019earnings while raise 2020 earnings 2.5% to HK$ 11.1bn as we lift ADTassumption to HK$97.4bn, and assume greater earnings contributionfrom new business mentioned. We introduce 2021 earnings forecastof HK$12.2bn and maintain OUTPERFORM. Considering the raising ofearnings and cutting of risk-free rate, we lift TP 11% to HK$326 (37x2020e P/E), offering 16% upside.
Sharp decline in market turnover; slower-than-expected execution ofnew initiatives