LewisTsePuiLung
Elevator feed
I nonetheless assign an funding grade of Maintain Hong Kong Exchanges and Clearing Restricted (OTCPK:HKXCF)(OTCPK:HKXCY) [388:HK] or HKEX. My earlier submit dated January 8, 2024 drew consideration to the forecasts and valuations of the Hong Kong Inventory Alternate.
The present replace exhibits a preview of HKEX Q2 2024 monetary outcomes and evaluation of the corporate’s monetary outlook for FY2024.
On the one hand, I see HKEX performing nicely within the second quarter with a return to constructive earnings and revenue development given the newest month-to-month ADT (Common Every day Turnover) information from the Hong Kong Inventory Alternate. However, my concern is with the HKEX 2H24 and full-year outcomes because the Cling Seng has underperformed previously month and expectations for the Hong Kong IPO market have been revised downward. Due to this fact, I made a decision to go away my current maintain ranking for HKEX unchanged.
Traders it must be famous that the corporate’s shares are traded on the Hong Kong Inventory Alternate and on the OTC market. The ten-day common buying and selling values of Hong Kong-listed shares and over-the-counter shares had been $150 million and $2 million, respectively, primarily based on information from S&P Capital IQ. Readers can cope with comparatively extra liquid Hong Kong shares on the HKEX with US brokerages comparable to Interactive Brokers or Hong Kong stockbrokers comparable to Monex Increase Securities.
HKEX outcomes are anticipated to be good within the second quarter
HKEX is more likely to announce the corporate’s monetary outcomes for the second quarter of 2024 in August. I imagine HKEX’s Q2 2024 financials can be nearly as good, if not higher, than the market expects.
The corporate’s efficiency within the first quarter of this yr was poor. HKEX income and internet earnings attributable to shareholders had been down -6% y/y and -13% y/y respectively in 1Q24HK phrases. In its first-quarter outcomes announcement, HKEX defined that the contraction in each the highest and backside strains was on account of a “lower in ADT (common each day turnover) of traded inventory merchandise.”
However the HKEX is poised for a turnaround in Q2 2024. Particularly, sell-side analysts forecast the corporate’s income and internet earnings to develop by +11% YoY and +12% YoY, respectively, in Q2 2024. I’m optimistic that HKEX’s precise Q2 outcomes will meet and even exceed the vendor’s expectations, given the favorable studying of the newest ADT information for the Hong Kong Inventory Alternate.
HKEX ADT rose +38% y/y and +25% m/m (mother) to HK$139.8 billion in Might 2024 in keeping with the newest accessible information. HKEX additionally achieved constructive ADT development of +1% month-on-month and +3% year-on-year in April this yr. In distinction, the Hong Kong Inventory Alternate’s ADT fell by -22% y/y to HK$99.4 billion in Q1 2024.
In abstract, I anticipate HKEX to report good Q2 2024 ends in August. ADT’s return to constructive development in April and Might 2024 bodes nicely for the corporate’s Q2 monetary efficiency.
However the firm’s full-year efficiency may nonetheless be lackluster
HKEX’s Q2 2024 monetary expectations could also be risky, which means the corporate’s full-year 2024 outcomes may nonetheless be decrease than 2023 outcomes.
One key issue to contemplate is the potential of slower and even adverse ADT development within the HKEX within the coming months or the remainder of the yr.
ADT’s constructive development for HKEX within the first two months of 2Q2024 coincided with a +7.4% soar and +1.8% achieve for Hong Kong’s benchmark Cling Seng index in April 2024 and Might 2024, respectively. It’s cheap to imagine that the expansion of ADT is positively correlated with the main efficiency of the Hong Kong inventory market as represented by the Cling Seng Index.
On the time of writing, the Cling Seng index is down about -6% (supply: S&P Capital IQ) over the previous month, and this has resulted in adverse outcomes for ADT HKEX’s July 2024 and Q3 2024 forecasts.
Earlier, Morgan Stanley ( MS ) issued a analysis report (not accessible to the general public) titled “Ideas on the latest rally” on Might 7, which highlighted the efficiency and outlook of the Hong Kong fairness market and Chinese language equities typically. In its report dated Might 7, 2024, Morgan Stanley famous that “April has already seen a reasonably important correction in Chinese language fairness positioning” and careworn that “the impediment to considerably lowering underposition (for Chinese language and Hong Kong-listed shares) from right here can be a lot increased.”
In different phrases, the above-mentioned soar within the Cling Seng index of +7.4% in April 2024 already signifies a major enhance within the publicity of buyers (or a decrease proportion of “underpositions”) to Chinese language shares and the Hong Kong market. Due to this fact, will probably be troublesome for the Hong Kong inventory market to considerably outperform sooner or later as a result of important enhance in investor publicity. This implies anticipating a extra modest fee of ADT enlargement for HKEX sooner or later.
One other key issue pertains to the market outlook for Hong Kong’s preliminary public providing, or IPO.
Audit agency KPMG not too long ago lowered its forecast for the variety of public listings and IPO revenues within the Hong Kong market in 2024, in keeping with a latest Radio Tv Hong Kong or RTHK information report dated Jun 18, 2024. Particularly, KPMG’s forecast for Hong Kong’s full-year IPOs and itemizing revenues had been revised downwards by -13% and -40% to 80 listings and HK$60 billion, respectively.
The lower-than-expected variety of IPOs within the Hong Kong market signifies that precise HKEX and ADT itemizing charges (IPOs correlate with investor curiosity) might not meet expectations.
Last ideas
HKEX shares may do nicely within the close to time period if it efficiently turns round monetary ends in the second quarter of 2024. However the potential value outperformance of the HKEX inventory (assuming good Q2 outcomes) is unlikely to final as a result of I believe its ADT and 2H2024 IPO may shock the deal.
Furthermore, I imagine HKEX’s valuations are truthful because the consensus trailing twelve-month normalized P/E of 26x is broadly consistent with FY2024-2027 ROE consensus estimates within the 24%-29% vary (supply: S&P Capital IQ). I proceed to fee HKEX as a Maintain.
Editor’s Observe: This text discusses a number of securities that aren’t traded on a serious US trade. Pay attention to the dangers related to these shares.