SG/HK exchanges:Warming up

SG/HK exchangesSGX and HKEx participated in our HK Investor Forum last week. Thecompanies remain relatively positive on the outlook; more granularstrategic updates should be available by the end of 2015. Given QTDmarket trends, we revise our earnings for HKEx and SGX by 1-4% and -1-3% respectively. We retain our SELL recommendation and S$6.96 targetprice on SGX. Following the recent correction, we upgrade HKEx fromSELL to U-PF with a revised HK$183 target price.

Mgmt remain relatively positive on the outlook despite headwinds

Both SGX and HKeX participated in IF2015 last week. Management remainrelatively positive on the outlook despite market turmoil.

Investor concern largely centred on i) moderating of derivative volumes, ii) costs iii)regulatory overreach for SGX; i) change in pace of China’s market liberalisation, ii)future relevance of the exchange, iii) costs for HKex

SGX’s new CEO will outline his key priorities with 1Q16 results on 21st Oct. Our viewof his priorities can be found in the note SGX - SELL (Contracting contracts).

HKEX intends to complete its three year strategic plan by the end of 2015.SGX: QTD broadly in-line with expectationq。

The biggest drivers of our forecasts are cash and derivatives volumes (and margins)given that these two segments contribute >60% of revenue.

Cash: Quarter to date (QTD) securities ADT (average daily turnover) is trending atS$1,204m vs our previous forecast of S$1,200m for 1H16CL, driven by highervelocities but partially offset by a lower market cap.

Derivatives: QTD avg daily volumes for the Nikkei 225 are 32% higher QoQ, butother major contracts are 5-9% lower. A50 volumes (~15% of revenue) have comeoff sharply in recent weeks.

There have been no other material updates or changes (eg. no mainboard listings,no update on potential SGX-Taiwan link or strategy).HXEx: QTD cash trends are materially stronger than expectedq。

The biggest drivers of our forecasts are: cash, commodities and derivativesvolumes (and margins) given that these contribute >70% of revenue.

Cash: QTD securities ADT is HK$103bn (previous 2H15 forecast: HK$78bn)

Commodities: Avg daily volumes are down 5% for Jul/Aug relative to 2Q15

Derivatives: Avg daily derivative volumes down 12% over the same period.

There have been no other material updates/changes albeit listings have droppedsharply since mid-august.SGX remains expensive but HKEx is now close to fair value

Both stocks have corrected substantially (SGX: -9%; HKEx: -21%) since 9th July.We believe that value is starting to emerge at HKEx.

SGX (SELL): We make small changes to our cash forecasts. Velocity increases butthis is largely our market cap assumptions. The net result is a 0-4% change in ADTsand -1-3% change in earnings. We now expect a 16/17CL ADT ofS$1,213/S$1,340m vs S$1,166/1,337m previously.

q We roll forward our SGX valuation to 17CL EPS and retain our 22x multiple. Wereiterate our S$6.96 target price and SELL recommendation.

Key risks: i) Regulatory overreach affecting A50 trading, ii) sustainability ofderivative volumes iii) inability of the new CEO to effect change iv) inability to curbcapex/costs in the face of lower volumes v) negative market sentimentq。

HKEx (U-PF): With HKEx’s cash turnover more resilient than previously expected,we increase our 15/16CL ADT assumptions by 7/2%. We now have a 15CL ADT ofHK$109 (implying 2H15CL ADT of HK$80bn) and a 16CL ADT of HK$102bn(Previous: HK$100bn). Our top-line changes trigger a 1-4% EPS increase. Weretain our 30x P/E multiple. We move from SELL to U-PF with a revised HK$183TP.

q Key risks: i) Significant and relevant regulatory or policy changes in China ii) lowerLME volumes iii) negative sentiment wrt the potential connection of HKex’s CEO inthe US FCPA investigations of JPM iv) inability to curb capex/costs in the face oflower volumes v) negative market sentiment