HK Exchanges:Trumped by China

Results review

HKEx’s 4Q14 was the strongest quarter since 2010 but was wellanticipated and in line with estimates. However, the strength was drivenby China’s rally, rather than the much hyped Stock Connect, whichlaunched in 4Q and has continued to see weak volumes, contributing just2.6% to revenues. Continued easing in China is unlikely to have the sameeffect on volumes, whilst we remain cautious on the potential upside fromStock Connect. We leave earnings virtually unchanged. Maintain SELL.。

4Q14 result review: Made in China

HKEx’s FY14 finished strongly, with 4Q14 the best quarter since 2010. Adj.NPAT came in at HK$1,492m, in line with our estimate. Operating revenueswere also in line with expectations (+12% QoQ; +29% YoY), with strengthhere largely attributed to the PBOC easing in November. Volumes on the Asharemarket spiked and dragged up volumes in Hong Kong with it.

Volumes waning

However, the effects of the November interest rate cut have now worn off andmore recent efforts by Beijing to boost the economy have met with alukewarm reception in the equity market. Therefore, we caution investorsagainst anchoring their expectations to 4Q volumes. Volumes have beentrending down and we expect that to continue back to the levels seen prior tothe November easing, despite our view that further easing is likely this year.

Stock Connect low flow; short sell no show

Stock Connect continues to see lacklustre volumes. We accept that therecontinue to be factors inhibiting trade on the link but continue to err on theside of caution as to the level that they can spur trading activity. The abilityfor investors to sell short via the Stock Connect link is the first iteration of theprogramme. Since the launch 4 days ago, there has not been a single sharesold short through the mechanism and we expect this iteration to beimmaterial in the short-to-medium term.

Undeserved premium; maintain SELL

We tweak earnings slightly on the back of this result. We remain of the viewthat the stock is overpriced and expectations on Stock Connect are tooaggressive. The stock is trading at a 32% premium to its closest exchangerival, SGX. Whilst a premium is undoubtedly deserved for HKEx, we argueagainst the magnitude, given that the China angle, that has put a bid underthe valuation for the last five years, may not be as meaningful as expected,given the early months of Stock Connect. Our regression model agrees. SELL.