HKEX and Hong Kong Market
HKEX
Initial thesis : Cyclical play with a Moderate growth story originating from Hong Kong Stock and Bond connect and increased liberalization of China Market and CNH/CNY. Company is cheap from a historical PE perspective. There is a margin of safety resulting from adverse market sentiment contrasted by strong bottom up performance. Monopoly in a growing financial market, as investors utilize Hong Kong as a gateway to China market. Management has reported record profits and earnings for first 9 months. Stock is expensive from historical PE perspective but looking at its earning profile, earnings growth is expected to sharply increase, and other metrics are considered cheap. Initiate position of one lot (high conviction play) and seek to average up /down as the trade war plays along. Have initiated at around HKD210-220 and monitor for future developments.
Lines of businesses
1) The Cash segment covers all equity products traded on the Cash Market platforms, the Shanghai Stock Exchange and the Shenzhen Stock Exchange through Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect (Stock Connect), sales of market data relating to these products and other related activities.
trading fees, trading tariff, listing fees of equity products and market data fees.
2) The Equity and Financial Derivatives segment refers to derivatives products traded. These include the provision and maintenance of trading platforms for a range of equity and financial derivatives products, such as stock and equity index futures and options, derivative warrants (DWs), callable bull/bear contracts (CBBCs) and warrants and sales of related market data.
trading fees, trading tariff, listing fees of derivatives products and market data fees.
3) The Commodities segment refers to the operations of The London Metal Exchange (LME), which operates an exchange in the UK for the trading of base and precious metals futures and options contracts, and the development of a new commodity trading platform in the Mainland. It also covers the Asia Commodities contracts and gold and iron ore futures contracts traded on the Futures Exchange.
trading fees of commodity products, commodity market data fees and fees from ancillary operations.
4) The Clearing segment
clearing, settlement and custodian activities of the exchanges of the Group and Northbound trades under Stock Connect, and clearing and settlement of over-the-counter derivatives contracts.
clearing, settlement, depository, custody and nominee services and net investment income earned on the Margin Funds and Clearing House Funds.
5) The Platform and Infrastructure segment
network, terminal user, dataline and software sub-license fees and hosting services fees.
Porter 5 Forces (Monopoly)
SWOT/PEST
Strengths
Great increase in IPO volume this year will lead to increased one off earnings in the share price.
Liberalization of listing rules should attract listing volumes whom view Hong Kong positively as a capital raising center from China as well as regional Asia.
Hong Kong has relatively modest stamp duty, and no capital gain and Dividend withholding tax which makes it attractive to global investors with no fixed trading strategies, and don't trade frequently. People usually ignore scrip fee as they do not know what it is. Hong Kong has zero capital flow restrictions, currency convertibility and free transfer-ability of securities.
Corporate Governance is top notch as HKEX is the operator of the securities and derivatives marketplace, as well as the regulator and administrator of rules. Companies will dubious financial records and shareholding structure was turned away from IPO in HK. The integrity of the market and company is NOT compromised over short term increases in revenue.
HKEX is widely respected as a leading international financial center, it already hosted many of the region’s leading firms, it had a well - established legal system, and it provided a strong and attractive foundation for issuers to raise funds. HKEX did not accept mainland accounting standards which is a Plus and will screen out the dodgy accounting qualities.
HKEX spending profile consist of mainly discretionary spending and not high capex business. It is heavily investing in technology infrastructure to support higher volumes, new products and services. It can easily increase prices as it is a Monopoly position and can have incredible cash flow and low debt. As a central position in Hong Kong financial markets, the risks of it going bankrupt is negligible. Despite sharp increase in revenue, increased operational costs is very well contained.
Relative well developed market infrastructure and mature market compared to Asia Exchanges and Shanghai / Shenzhen exchanges. IMHO, HKEX has refined and adopted some of the best practices in global financial markets which is far ahead of other Asian Developing / developed markets.
Weakness
Very volatile stock and heavily subject to macroeconomic trends, although it still enjoys stable coupon like cash flow from its other business areas.
Company is never cheap historically and its present PE is still high, but from a growth approach (quarterly results) and relative PE it is moderately undervalued.
Management in the investor talk is aggressively embracing fin-tech in its technology hub to improve volumes and better up to date data visibility. Technology costs are not easily contained and if trading volume drops dramatically, the CAPEX and goodwill write off can be substantial.
Opportunity
It is also a proxy to China due to restricted China market and CNY / CNH currency restrictions
With increased China market and currency liberalization, trading volumes of HK market should improve.
New products such as ETF connect, China Bond connect, China Stock connect, and favorable growth prospects for HKEX and China market.
Inclusion of Stock Connect shares into MSCI index may encourage other ETF providers to do so. Both active and passive funds are also increasing their exposure to China and increasing trading volumes.
Block Chain is adopted by HKEX despite the incredible moat it has, which showcases the forward looking outlook of its managers and inclination to adopt change and technological changes to be ahead of its neighbors.
Threats
If Shenzhen and Shanghai wants to eat into the blue ocean of HKEX and compete for listing opportunities as well as financial center, political changes can make the outlook difficult to forecast.
Political and economic embargo risks will result in high volatility of Hong Kong shares and general market sentiment. The US OFAC sanctions (against RUSAL shares) and possibly other embargo / restrictions can lead to huge market capitalization being wiped out within days and limiting liquidity and trading volume of targeted companies and companies.
.
Executive meddling from authoritarian Mainland China authorities could compromise the sovereignty and integrity of Hong Kong exchange and market. The government is the largest shareholder of HKEX.
China has proven to have intervened in the political arena of Hong Kong. It is possible (although unlikely under Xi JinPing) that the China leaders will resort to political struggles / capital control against other countries and heavily affect trading volume.
Known Revenue Stream
Cyclical Businesses
IPO
Stock Connect + Bond Connect trading volume
Clearing and Settlement services of stocks and CMU
Potential development of ETF connect
Steady Businesses
Registration
Market Data Provision
Custody Fees and corporate actions, Scrip Fee and related fees
Financials
Balance Sheet
Cash Flow
Valuation I am buying this company as Hong Kong is undergoing a bear market correction and I hope it will introduce a sufficient margin of safety. From a historical perspective, this company was never cheap and this is as close as to a cheap P/E and P/Cash and P/B ratio. Earnings growth is expected to increase sufficiently (around 20%). DDM DCF model will be unreliable as this company is prone to marco economic headwinds and investor trends and sentiment.
Sources
https://edge.media-server.com/m6/p/gn5vu8d7
http://lbms03.cityu.edu.hk/oaps/is2011-6912-lf981.pdf
https://www.hkexgroup.com/-/media/HKEX-Group-Site/ssd/Investor-Relations/annouce/documents/2018/181107_3qtr_e.pdf
Initial thesis : Cyclical play with a Moderate growth story originating from Hong Kong Stock and Bond connect and increased liberalization of China Market and CNH/CNY. Company is cheap from a historical PE perspective. There is a margin of safety resulting from adverse market sentiment contrasted by strong bottom up performance. Monopoly in a growing financial market, as investors utilize Hong Kong as a gateway to China market. Management has reported record profits and earnings for first 9 months. Stock is expensive from historical PE perspective but looking at its earning profile, earnings growth is expected to sharply increase, and other metrics are considered cheap. Initiate position of one lot (high conviction play) and seek to average up /down as the trade war plays along. Have initiated at around HKD210-220 and monitor for future developments.
Lines of businesses
1) The Cash segment covers all equity products traded on the Cash Market platforms, the Shanghai Stock Exchange and the Shenzhen Stock Exchange through Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect (Stock Connect), sales of market data relating to these products and other related activities.
trading fees, trading tariff, listing fees of equity products and market data fees.
2) The Equity and Financial Derivatives segment refers to derivatives products traded. These include the provision and maintenance of trading platforms for a range of equity and financial derivatives products, such as stock and equity index futures and options, derivative warrants (DWs), callable bull/bear contracts (CBBCs) and warrants and sales of related market data.
trading fees, trading tariff, listing fees of derivatives products and market data fees.
3) The Commodities segment refers to the operations of The London Metal Exchange (LME), which operates an exchange in the UK for the trading of base and precious metals futures and options contracts, and the development of a new commodity trading platform in the Mainland. It also covers the Asia Commodities contracts and gold and iron ore futures contracts traded on the Futures Exchange.
trading fees of commodity products, commodity market data fees and fees from ancillary operations.
4) The Clearing segment
clearing, settlement and custodian activities of the exchanges of the Group and Northbound trades under Stock Connect, and clearing and settlement of over-the-counter derivatives contracts.
clearing, settlement, depository, custody and nominee services and net investment income earned on the Margin Funds and Clearing House Funds.
5) The Platform and Infrastructure segment
network, terminal user, dataline and software sub-license fees and hosting services fees.
Porter 5 Forces (Monopoly)
- Competitive rivalry
For trading and Settlement,
HKEX enjoys a monopoly position in Bond Connect, Stock connect as well as CMU and HK stock trading and SettlementRegarding IPO capital raising for debt and equity
Contrary to popular belief, I do not believe the respective exchanges enjoy a monopoly position in IPO in their home countries. Company can always choose to relist / de-list / dual list in locations apart from their home exchanges (Alibaba US, Singtel SG-AU ex listing, Razor HK listing, HaidiLao HK listing, HSBC HK-UK listing, SCB HK-UK listing).Considering the market practices and general market liquidity, SGX, BURSA, SET and other local exchanges seem largely inferior compared to HKEX prospects. Mainboard and GEM exchanges have been fueled by mainland listings as well as potential cross border listing from regional countries.
- Bargaining power of suppliers.
Trading and Settlement.
NIL. Take it or leave it.
IPO capital raising for shares and equity
Difficult to control and compare as different markets have different costs of listing and market practices. Nonetheless, liquid markets with high concentration of High Net Worth as well as developed market infrastructure is more attractive compared to others.
- Bargaining power of customers.
NIL. There is significant discount broker price wars and promotions among the brokerages but HKEX is sheltered from it. In fact, this might increase trading volume and increase the liquidity and operation efficiency of HK market.
- Threat of new entrants.NIL.
- Threat of substitute products or services.
NIL.
Strengths
Great increase in IPO volume this year will lead to increased one off earnings in the share price.
Liberalization of listing rules should attract listing volumes whom view Hong Kong positively as a capital raising center from China as well as regional Asia.
Hong Kong has relatively modest stamp duty, and no capital gain and Dividend withholding tax which makes it attractive to global investors with no fixed trading strategies, and don't trade frequently. People usually ignore scrip fee as they do not know what it is. Hong Kong has zero capital flow restrictions, currency convertibility and free transfer-ability of securities.
Corporate Governance is top notch as HKEX is the operator of the securities and derivatives marketplace, as well as the regulator and administrator of rules. Companies will dubious financial records and shareholding structure was turned away from IPO in HK. The integrity of the market and company is NOT compromised over short term increases in revenue.
HKEX is widely respected as a leading international financial center, it already hosted many of the region’s leading firms, it had a well - established legal system, and it provided a strong and attractive foundation for issuers to raise funds. HKEX did not accept mainland accounting standards which is a Plus and will screen out the dodgy accounting qualities.
HKEX spending profile consist of mainly discretionary spending and not high capex business. It is heavily investing in technology infrastructure to support higher volumes, new products and services. It can easily increase prices as it is a Monopoly position and can have incredible cash flow and low debt. As a central position in Hong Kong financial markets, the risks of it going bankrupt is negligible. Despite sharp increase in revenue, increased operational costs is very well contained.
Relative well developed market infrastructure and mature market compared to Asia Exchanges and Shanghai / Shenzhen exchanges. IMHO, HKEX has refined and adopted some of the best practices in global financial markets which is far ahead of other Asian Developing / developed markets.
Weakness
Very volatile stock and heavily subject to macroeconomic trends, although it still enjoys stable coupon like cash flow from its other business areas.
Company is never cheap historically and its present PE is still high, but from a growth approach (quarterly results) and relative PE it is moderately undervalued.
Management in the investor talk is aggressively embracing fin-tech in its technology hub to improve volumes and better up to date data visibility. Technology costs are not easily contained and if trading volume drops dramatically, the CAPEX and goodwill write off can be substantial.
Opportunity
It is also a proxy to China due to restricted China market and CNY / CNH currency restrictions
With increased China market and currency liberalization, trading volumes of HK market should improve.
New products such as ETF connect, China Bond connect, China Stock connect, and favorable growth prospects for HKEX and China market.
Inclusion of Stock Connect shares into MSCI index may encourage other ETF providers to do so. Both active and passive funds are also increasing their exposure to China and increasing trading volumes.
Block Chain is adopted by HKEX despite the incredible moat it has, which showcases the forward looking outlook of its managers and inclination to adopt change and technological changes to be ahead of its neighbors.
Threats
If Shenzhen and Shanghai wants to eat into the blue ocean of HKEX and compete for listing opportunities as well as financial center, political changes can make the outlook difficult to forecast.
Political and economic embargo risks will result in high volatility of Hong Kong shares and general market sentiment. The US OFAC sanctions (against RUSAL shares) and possibly other embargo / restrictions can lead to huge market capitalization being wiped out within days and limiting liquidity and trading volume of targeted companies and companies.
.
Executive meddling from authoritarian Mainland China authorities could compromise the sovereignty and integrity of Hong Kong exchange and market. The government is the largest shareholder of HKEX.
China has proven to have intervened in the political arena of Hong Kong. It is possible (although unlikely under Xi JinPing) that the China leaders will resort to political struggles / capital control against other countries and heavily affect trading volume.
Known Revenue Stream
Cyclical Businesses
IPO
Stock Connect + Bond Connect trading volume
Clearing and Settlement services of stocks and CMU
Potential development of ETF connect
Steady Businesses
Registration
Market Data Provision
Custody Fees and corporate actions, Scrip Fee and related fees
Financials
Balance Sheet
Cash Flow
Valuation I am buying this company as Hong Kong is undergoing a bear market correction and I hope it will introduce a sufficient margin of safety. From a historical perspective, this company was never cheap and this is as close as to a cheap P/E and P/Cash and P/B ratio. Earnings growth is expected to increase sufficiently (around 20%). DDM DCF model will be unreliable as this company is prone to marco economic headwinds and investor trends and sentiment.
Sources
https://edge.media-server.com/m6/p/gn5vu8d7
http://lbms03.cityu.edu.hk/oaps/is2011-6912-lf981.pdf
https://www.hkexgroup.com/-/media/HKEX-Group-Site/ssd/Investor-Relations/annouce/documents/2018/181107_3qtr_e.pdf
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