Executive Overview
The comprehensive equity research report on Hong Kong Exchanges & Clearing Limited (HKEX) outlines a compelling investment thesis amidst a backdrop of market reforms, capital account liberalisation, and favourable cyclical trends. With a rating of BUY and a fair value estimated at HKD440.00 (compared to the last close of HKD365.00), the research emphasises HKEX’s robust business model and its strategic positioning to benefit from China’s evolving capital market integration.
Investment Thesis and Core Strengths
The report’s investment thesis highlights that HKEX is structurally well positioned to leverage China’s capital account liberalisation. The exchange’s turnover is supported by both structural and cyclical trends, bolstered further by the inclusion of A-shares in MSCI indices and recent listing reforms. The core business performance is exceptionally strong:
- Earnings in 4Q24 were 3% above consensus estimates, marking a 46% year-on-year improvement.
- EBITDA margin climbed by 6.4 percentage points to reach 73.6%.
- A final dividend of HKD4.90 per share was declared, reflecting strong cash distribution capability.
Deep Dive into Business Segments
Core Revenue Growth
HKEX’s key positives include a significant rebound in its trading and clearing activities:
- Stock Connect: Revenue surged by 93% YoY, now accounting for 21% of core revenue.
- Cash Trading: Revenue surged 105% YoY, driven by an impressive rebound in average daily turnover (ADT), which increased by 105% YoY to HKD187 billion in 4Q24 following encouraging policy pivots by Chinese regulators.
- The ADT for Stock Connect Southbound and Northbound surged 1.8x and 1.1x YoY, reaching HKD78 billion and CNY231 billion respectively.
- Investment income exceeded expectations by 3% and increased 12% YoY as a result of improved equity securities investment performance and an expansion of HK margin and clearing house fund assets under management (AUM).
- The commodities segment also contributed with a 17% YoY revenue rise, underpinned by increased trading and clearing fee charges.
Strong ADT Rebound
ADT is a leading performance metric for the exchange. The report notes a sharp rebound in ADT, climbing to HKD213 billion year-to-date compared to HKD132 billion in 2024. This momentum is expected to be sustained by improved market sentiment and renewed IPO dynamics, with future growth potential in other segments such as derivatives and IPO markets.
2025 Strategic Initiatives
Looking ahead, the management has outlined several pivotal initiatives for 2025:
- Minimum Spread Reduction: A phased rollout is planned with the initial phase expected around mid-2025, aimed at tightening the bid-ask spread.
- Shorter Settlement Cycle: HKEX is contemplating a shift towards a settlement cycle more aligned with U.S. standards, with a consultation anticipated mid-2025.
- IPO Rule Revisions: A review of the IPO rules is underway to attract more listings and accommodate a growing roster of new-economy companies.
Comparative Analysis with Peers
In the context of valuation, HKEX’s current market position is contrasted against other leading exchanges – notably Singapore Exchange Ltd (SGX) and London Stock Exchange Group (LSEG).
Valuation Metrics
- Price-to-Earnings (P/E): HKEX is trading at around 33.2x for 2025E and 31.6x for 2026E. By comparison, SGX is at 23.1x and 22.2x, while LSEG is at 29.0x and 26.2x, respectively.
- Price-to-Book (P/B): HKEX registers P/B ratios of 8.5x (2025E) and 8.2x (2026E); SGX stands at 6.8x and 6.1x; and LSEG at 2.6x and 2.5x.
- Return on Equity (ROE): For HKEX, ROE is relatively lower at 2.7% to 2.8% compared with LSEG which records 8.8% to 10.0%, whereas SGX figures remain in a similar range as HKEX at approximately 2.7% to 2.9%.
- Dividend Yields: HKEX shows dividend yield levels at 25.8% to 26.1%, while SGX and LSEG offer figures of 30.8% to 28.8% and 8.8% to 10.0% respectively, reflecting different capital distribution policies.
The report also highlights that during the previous market upcycle (2020-2021), HKEX traded at around 40x forward P/E. Currently, with the stock trading at 31x forward P/E and a ROE of 25-26%, alongside expectations of sustained improvements in ADT, the re-rating appears both achievable and sustainable.
Company Overview and Financial Highlights
HKEX has a longstanding reputation as the operator of Hong Kong’s major cash and derivatives markets. Listing its integration of the securities and futures markets in June 2000, HKEX today operates both cash markets – the Main Board and the Growth Enterprise Market – and its derivatives market, complete with associated clearing houses. The platform also extends into fixed income, currencies, commodities, custody, and information services.
The financial performance underscores its robust business model, evidenced by key 2024 figures:
- Revenue: HKD22.4 billion in 2024, with projections of HKD23.9 billion in 2025E and HKD24.2 billion in 2026E.
- Operating Profit: HKD14.9 billion recorded in 2024, maintaining strong profitability through HKD15.9 billion in 2025E.
- Net Profit: HKD13.1 billion in 2024 with modest growth projections.
- EPS & DPS: EPS stood at HKD10.3 in 2024, with a slight rise forecasted, paralleled by dividends of HKD9.2 per share in 2024 and modest growth thereafter.
- Margins & Yields: Operating margins have remained impressive at around 66.5%, and the investment yield is steady at 2.1% for 2024, with slight dips expected in subsequent years.
ESG and Governance Considerations
HKEX’s commitment to high business ethics is evident through its strong governance framework:
- The company utilises board-level oversight of business ethics and employs a detailed anti-corruption policy.
- Robust workforce practices are noted, including confidential employee grievance channels and a decreasing employee turnover trend (averaging ~12.3% over FY21–23).
- Corporate governance practices are on par with global peers. The majority of the board comprises independent directors, supported by fully independent audit and pay committees. However, it is noted that six of the 13 board directors are government representatives, which may raise potential concerns regarding government influence.
Potential Catalysts and Investment Risks
Potential Catalysts
- Stronger-than-expected ADT: Any notable surge in ADT could further enhance trading volumes and bolster overall revenues.
- Regulatory Changes: Future regulatory changes may usher in stronger capital inflows into Hong Kong’s equities market.
- Listing Reforms: Proposed listing reforms aimed at boosting international and new-economy company listings could provide an additional tailwind.
Investment Risks
- Potential weakness in China’s macroeconomic growth.
- Delayed or slower-than-expected U.S. interest rate cuts.
- Liquidity tightening in China that may affect market dynamics.
- A sharper-than-expected decline in stock turnover, which could challenge revenue streams.
Conclusion
The report positions HKEX as a strategic beta play that is poised to benefit from transformative policy reforms and enhanced market conditions. With strong earnings performance, a clear roadmap of strategic initiatives for 2025, and encouraging comparative metrics relative to its global peers, the BUY recommendation underlines a sustainable opportunity for long-term growth.
Valuation Comparison: A Peer Analysis
A detailed valuation comparison further highlights the competitive positioning of HKEX when set against the Singapore Exchange Ltd (SGX) and the London Stock Exchange Group (LSEG). Key valuation metrics are as follows:
- Price-to-Earnings Ratio (
