Hong Kong Exchange [0388.HK]

Transcription

1 Hong Kong Exchange [0388.HK] We believe the proposed establishment of New Board Premium and New Board Pro will be another game changer for the HKEx after the launch of the Stock Connect in November If the establishment of the new boards is approved by the authorities, we estimate that HKEx s average daily turnover (ex-warrants) may increase by >14% initially and that the potential increase may be >30% in the medium term if the Top 10 Chinese ADRs are traded in Hong Kong. Although the share price of HKEx has come under moderate pressure recently because of weakening market sentiment, we reiterate our view that investors should treat HKEx as not just a market proxy; the huge potential of business opportunity expansion should not be overlooked. Maintain BUY with a Gordon Growth Model-based target price of HK$232.5 (40.9x 12-month-forward PER; beta at 1.38, cost of equity at 8.4%, and medium-term ROE at 20.5%). Investment Highlights New Board Premium & New Board Pro to be Another Game Changer Two key features of New Board Premium and New Board Pro. (i) Weighted voting right structures will be allowed. This paves the way for Alibaba and other companies with similar share holding structures to be listed in Hong Kong. (ii) Currently, Chinese ADR companies are not allowed to be listed in Hong Kong in the form of secondary listings. New Board Premium and New Board Pro will allow Chinese ADR companies to have secondary listings in Hong Kong. (See Figure 1 for details.) Lowers the cost of returning to Hong Kong substantially. Without New Board Premium and New Board Pro, Chinese ADR companies need to delist first and then launch an IPO in Hong Kong. After the establishment of these two new boards, Chinese ADR companies will be able to avoid the high cost of delisting and be traded in Hong Kong in the form of a secondary listing. As the example of Tencent (0700.HK) shows that Hong Kong investors are willing to pay high a PER for leading technology companies, we believe Alibaba and other leading Chinese ADRs will be willing to consider a secondary listing in Hong Kong. Huge trading volume upside for HKEx. The 3-month average daily turnover of the Top 10 most traded Chinese ADR companies is HK$30.2bn (Figure 2). If we assume about 30% of the trading volume will go back to Hong Kong, this implies that the average daily turnover of the Hong Kong market may increase by 14% (exwarrants). In the medium term, we believe the potential increase may be >30% because of the home-bias effect, as shown by some SOE ADR companies (Figure 3). New Board rules to be finalized in early The consultation for the New Board will end on August 18, If the proposal is supported by market participants, HKEx aims to finalize the New Board rules in early Year ended 31 December E 2018E Revenue (HK$ m) 12,233 10,398 11,475 12,259 Net income (HK$ m) 7,956 5,769 6,837 7,536 Net Margin 65% 55% 60% 61% Basic EPS (HKD) YOY Change 51% -29% 17% 9% PE (x) PB (x) ROAE 31.1% 18.6% 20.2% 20.4% ROAA 3% 2% 3% 3% Sources: Company, CGIS Research Hong Kong Financials Sector BUY Close: HK$197.6 (June 16, 2017) Target Price: HK$232.5 (+17.7%) Price Performance (HK$) Market Cap US$31,197m Shares Outstanding 1,225m Auditor PricewaterhouseCoopers Free Float 94.48% 52W range 3M average daily T/O Major Shareholding Sources: Company, Bloomberg HK$ Livy Lyu Research Analyst (852) livylyu@chinastock.com.hk US$102.0m HKSAR Govt. (5.45%) Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk June 19, 2017 (HK$ million) Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Turnover (RHS) Price (LHS) Source: Bloomberg

2 Figure 1: Highlights of the proposal to set up new boards New Board Premium New Board Pro Eligibility Open to both retail and professional investors. Open to professional investors only. Basic requirements Quantitative entry requirements equivalent to those of the Main Board in force from time to time. No track record or minimum financial criteria, subject to a minimum market cap at the time of listing of HK$200m. Investor protection Secondary listings Special shareholding structure Regulatory approach Sources: HKEx, CGIS Research Figure 2: Trading volume of Top 10 most traded Chinese ADR companies Ticker Company name Sources: Bloomberg, CGIS Research Regulatory cooperation requirement under the 2013 Joint Policy Statement (JPS) would continue to apply but listings by companies listed on recognized US exchanges (NYSE and NASDAQ) will be exempted from having to provide equivalent shareholder protection standards. No restriction on secondary listings by Mainland Chinese companies. Weighted voting rights (WVR) structures permitted. A more stringent approach to initial listing requirements. Price (US$) Market cap (US$m) 2017E PER (x) 2018E PER (x) PBR (x) 3-month average daily turnover (HK$m) BABA US Equity Alibaba Group Holding Ltd , ,679 BIDU US Equity Baidu Inc , ,671 JD US Equity JD.com Inc , ,769 NTES US Equity NetEase Inc , ,757 MOMO US Equity Momo Inc , ,984 CTRP US Equity Ctrip.com International Ltd , ,693 WB US Equity Weibo Corp , ,162 SINA US Equity SINA Corp/China , YUMC US Equity Yum China Holdings Inc , EDU US Equity New Oriental Education & Technology Group Inc , Total 30,197 Figure 3: ADR accounted for less than 20% of the trading volume of leading SOEs Regulatory cooperation requirement under the 2013 Joint Policy Statement (JPS) would continue to apply but issuers will not be required to provide equivalent shareholder protection standards. No restriction on secondary listings by Mainland Chinese companies. WVR structures permitted. A "lighter" approach to initial listing requirements. Equivalent to % of HK 3-month average daily turnover (exwarrants) Equivalent to % of HK 3-month average daily turnover 46.6% 37.8% Ticker Company name Sources: Bloomberg, CGIS Research 3-month average daily turnover (ADR) (HK$) (A) 3-month average daily turnover (HK) (HK$) (B) 941 HK Equity China Mobile Ltd 248,234,891 1,326,127, % 2628 HK Equity China Life Insurance Co Ltd 40,942, ,066, % 857 HK Equity PetroChina Co Ltd 54,102, ,013, % 386 HK Equity China Petroleum & Chemical Corp 69,011, ,329, % A/B 2

3 Key financials P&L summary (HK$m) E 2018E Trading fees and trading tariff 5,469 4,428 4,935 5,277 Stock exchange listing fees 1,114 1,092 1,165 1,232 Cearing and settlement fees 3,118 2,358 2,725 2,992 Depository related fees Market data fees Other revenue Revenue 12,233 10,398 11,475 12,259 YoY 34% -15% 10% 7% Net investment income 1, ,032 1,286 Other income Revenue and other income 13,375 11,116 12,529 13,566 Staff costs (2,020) (2,035) (2,125) (2,260) IT expenses (517) (500) (510) (520) Premises expenses (294) (333) (340) (345) Marketing expenses (41) (54) (58) (62) Legal and professional fees (99) (106) (120) (125) Other operating expenses (396) (427) (450) (480) EBITDA 10,085 7,661 8,926 9,774 Depreciation& amortisation (684) (771) (757) (767) Operating profit 9,401 6,890 8,168 9,007 Finance costs (114) (82) (83) (83) Share of loss of JV (9) (9) (9) (9) Profit before tax 9,278 6,799 8,076 8,915 Tax (1,347) (1,058) (1,268) (1,409) Minorities (25) (28) (29) (30) Net Profit 7,956 5,769 6,837 7,536 YoY 54.0% -27.5% 18.5% 10.2% Balance Sheet summary (HK$m) E 2018E Cash 110, , , ,318 Financial assets 92,144 99, , ,620 Accounts receivable 15,535 12,928 14,475 16,355 Current assets 218, , , ,293 Financial assets Goodwill 17,872 17,812 17,850 17,820 Fixed assets 1,560 1,499 1,450 1,430 Non-current assets 19,622 19,508 19,502 19,457 Financial liabilities 64,486 61,627 62,009 65,009 Margin deposits 115, , , ,000 Accounts payable 15,270 12,246 13,455 14,719 Clearing House Fund of Participants 7,474 8,656 8,982 9,070 Current liabilities 203, , , ,420 Borrowings 3,409 3,422 3,430 3,436 Deferred tax liabilities Non-current liabilities 4,255 4,246 4,441 4,555 Shareholders' Equity 29,816 32,266 35,380 38,598 Minorities Sources: Company, CGIS Research estimates 3

4 Key financials Cash Flow summary (HK$m) E 2018E Profit before tax 9,278 6,799 8,076 8,915 Depreciation& amortisation Net working capital adjustment (293) (321) (487) (626) Net cash from operations 8,321 6,164 7,519 8,125 Capex (710) (620) (746) (717) Others 290 (2,715) (2,198) (3,980) Net cash from investing (420) (3,335) (2,944) (4,697) Dividends paid (3,017) (3,329) (3,077) (3,391) Net cash from financing (3,224) (3,586) (3,368) (3,708) Free cash flow 7,611 5,544 6,773 7,408 Net cash/(debt) 9,335 5,864 7,063 6,777 Net Gearing n.a. n.a. n.a. n.a. Gross gearing 11% 11% 10% 9% Ratios E 2018E EBITDA margin 82% 74% 78% 80% Net margin 65% 55% 60% 61% ROAE 31% 19% 20% 20% ROAA 3% 2% 3% 3% PE (x) PB (x) EV/EBITDA Basic EPS (HKD) Diluted EPS (HKD) DPS (HKD) Dividend yield 3% 2% 3% 3% BVPS (HKD) 90% 90% 90% 90% Segment Income Contribution Cash 28% 26% 26% 26% Equity and financial derivatives 18% 20% 20% 19% Commodities 14% 15% 15% 15% Clearing 36% 35% 35% 35% Platform and infrastructure 4% 5% 5% 5% Key assumptions E 2018E ADT of equity products (HK$bn) ADT of DWs, CBBCs &warrants (HK$bn) Total Cash Segment ADT (HK$bn) ADT of northbound( bn) ADT of southbound(hk$bn) Southbound Contribution 3.2% 5.4% 10.3% 12.9% Number of newly listed (main board) Number of newly listed (GEM) ADT of DWs, CBBCs &warrants (HK$bn) ADnumber of derivative contracts 393, , , ,000 ADnumber of stock options contracts 374, , , ,000 ADvolume of metals contracts (LME) 670, , , ,000 Sources: Company, CGIS Research estimates 4

5 Disclaimer This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited ( Galaxy International Securities ) and/or its group companies to any registration or licensing requirement within such jurisdiction. This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries ( China Galaxy International ), directors, officers, agents and employees ( the Relevant Parties ). All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. Disclosure of Interests China Galaxy Securities Co., Ltd. (6881.HK; CH) is the direct and/or indirect holding company of the group of companies under China Galaxy International. China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies) market capitalization. One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) mentioned in this report. China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report. Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies). Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered in this report. Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: