Founded in 2000, HKEX is one of the largest exchange operators in the world, with a market cap of HKD387bn and is known for its well diversified revenue streams. It operates Hong Kongs’s securities and derivatives markets and owns the LME, strengthening its position as a global leader. HKEX plays a crucial role as a gateway for Asian capital, particularly bolstered by a surge in IPO listings, including the listing of Midea group in September 2024, which raised HK$35.7bn, the largest in Asia and the second largest in the world in 2024.

HKEX derives its revenue from several key segments. The largest segment is the cash segment, which accounted for 40% of sales in 3Q24. This segment includes trading and listing fees from stocks and bonds, driven by trade volumes and new listings on the exchange. The next largest segment is Equity and Financial Derivatives, contributing 28% of revenue, followed by Commodities segment, which derives revenue from the LME, accounts for 13% of revenue. Other segments include Data and connectivity (10%), and Corporate Items (9%).

China’s economic stimulus boosts volumes

The global shift towards monetary easing in 2024, following a prolonged period of high-interest rates, coupled with China’s recent stimulus package announced in September, has significantly driven trading activity at HKEX. This is reflected in the company’s strong financial performance, where the company reported 6% YoY sales growth in 3Q24, fueled by higher trading volume across segments. The cash segment saw a growth of 2% YoY, with an average daily turnover of HK$113bn, up 7% YoY.

Additionally, derivatives trading reached record levels, with the average daily volume (ADV) increasing by 12% YoY to 1.5mn contracts. Following the announcement of China’s stimulus package in September, daily ADVs hit record highs of 3.8mn and 4.3mn contracts on the 26th and 27th of September, respectively. Furthermore, the LME saw a 25% YoY rise in traded lots, driving revenue from the segment up by 31% YoY, highlighting strong momentum in the commodities segment as well.

IPOs, connect programs and innovations

HKEX has a healthy IPO pipeline with 96 active applications, as of Sep 2024. Total funds raised in first nine months of 2024 reached HK$55.6bn, a staggering 126% increase YoY. This growth was bolstered by high-profile listings like the Midea Group, which raised HK$35.7bn, making it the second-largest IPO in the world this year and the largest in Asia. This momentum is expected to attract more Chinese enterprises to list on the Hong Kong exchange which solidifies HKEX’s position as a leading hub for offshore listing of Chinese companies.

Additionally, HKEX’s connect programs strengthen the integration of Hong Kong with mainland China’s financial markets. The connect programs facilitates Northbound trading, allowing international investors to trade in eligible stocks listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange, and Southbound trading, allowing mainland Chinese investors to purchase Hong-Kong listed stocks. Northbound Bond Connect trading increased 9% YoY to reach a record nine-month high ADT of RMB44.1bn in first nine months of 2024.

Furthermore, other initiatives such as the building of the Orion derivatives platform announced in April 2024, are likely to boost derivatives trading efficiency while the T+1 cash market clearing and settlement platform, targeted for late 2025 including the introduction of severe weather trading mechanisms in September 2024, are collectively expected to improve operational resilience and market stability.

Attractive valuation and dividend

HKEX’s share price is up around 10% in the last 12 months and is trading at a P/E of 29.8x based on the estimated 2024 EPS of HK$10. This represents a 20% discount to its 10-year average of 37.5x and a 25% discount to the weighted average industry P/E of 39.4x.

Additionally, the company has consistently paid out healthy dividends with an average payout of 90%. For 1H24, HKEX declared an interim dividend of HK$4.36. Based on the projected DPS of HK$9 for full year 2024, HKEX offers an attractive dividend yield of around 3.2%. Out of the 18 analysts covering stock, 10 have given a “Buy” recommendation, with an average target price of HKD355, implying an upside potential of around 29% from the current market price.

In conclusion, HKEX remains a cornerstone of Asia’s financial ecosystem and is poised to benefit from its robust IPO pipeline and expansion of it connect programs. This aligns with the outgoing chairwoman’s message, emphasizing that HKEX will continue to go international. Key risks include immediate global slowdown and negative macro-economic developments, which could weigh on sentiment. However, gradual interest rate cuts and stimulus measures in Mainland China is likely to support the cash market.