Hong Kong Exchanges and Clearing Earnings: Resiliency From Diversified Business Exposure

We maintain our HKD 300 fair value estimate for wide-moat Hong Kong Exchanges and Clearing 00388, or HKEx, following its third-quarter results. During the quarter, ongoing concerns about economic growth in China saw the Hang Seng Index continue its downward trajectory and underperformance compared with other major stock markets, thereby hitting HKEx’s trading-related businesses. However, HKEx delivered a 30% increase in net profit after tax compared with the previous corresponding period on the back of strong net investment income.

HKEx’s declining trading-related revenue confirms our view that HKEx is leveraged to the Chinese economy, on the way up and on the way down. During the year, the much-expected Chinese reopening story failed to materialize, while the much-expected stimulus out of China underwhelmed. As a result, the Hang Seng Index, whose constituent companies are leveraged to China’s domestic economy, tracked the Shanghai and Shenzhen stock markets and underperformed other major stock markets across the United States, Europe, and Asia. Unsurprisingly, equity trading fees and tariffs in HKEx’s cash segment declined 13% year to date on the PCP, driven by a 9% decline in average daily turnover. However, the third quarter did show some improvement with revenue down 8% on the PCP, from a 15% decline in the first half.

However, HKEx’s results were resilient due to the diversified exposure of its various businesses. While its cash segment would have benefited from lower interest rates and the economic activity this would have spurred, higher interest rates continued to boost HKEx’s NII. Year-to-date NII in HKEx’s equity and financial derivatives segment nearly quadrupled on the PCP. Given the third quarter compared with an already increasing interest-rate environment in 2022 we saw a mirror image of the cash segment, with the third quarter seeing relatively weaker growth on the PCP than the first half at 130% compared with 383% during the first half.