A deep dive into the fundamentals for Hong Kong Exchange

06 Aug 2021

By Eric Lee, Account Manager, Phillip Futures

Hong Kong Exchange (HK:388), like the Singapore Exchange, enjoys a monopoly as the only stock exchange in Hong Kong. Unlike SGX, it is a gateway to the much larger Chinese marketplace. Its Stock Connect initiative with Shanghai and Shenzhen Stock Exchanges allows Chinese investors to invest into Hong Kong-listed stocks and give international investors access into China-listed stocks.

Apart from a gradual increase in its daily transactional volume, it is also the leading choice for many Chinese firms to list their IPOs to raise funds from international investors. As can be seen from the table below, it even edged other local exchanges like Shanghai, Shenzhen, STAR and ChiNext.

Since 2018, under ex-US President Donald Trump’s executive order to ban U.S. investment in companies with an alleged tie to China’s military, there had been some selling pressure weighing down on Chinese stocks, causing its valuation to be lower than that of its U.S. counterparts. The recent clamp down of Didi Global (DIDI), which recently had its IPO in Nasdaq on 30 June 2021, had once again turned the spotlight on Chinese firms that are listed on U.S. exchanges.

According to the U.S.-China Economic And Security Review Commission Report, there were 248 Chinese Companies listed on U.S. exchanges with a total market capitalization of S$2.1 trillion as of 5 May 2021. Some of which had already secured a secondary listing into Hong Kong Exchange.

With governments on both sides adding pressure to these companies, it is possible that many will eventually move their listing to Hong Kong or at the very least have a secondary listing there, in case a sudden escalation causes disruption to their abilities to raise capital from the equity markets.

On top of that, many new companies looking to list in U.S. will probably relook their strategy and consider listing in their home market or in Hong Kong, so as not to provoke scrutiny from the Chinese regulators. For example, on Thursday, 8 July 2021, medical data platform LinkDoc Technology had shelved its IPO plan. It was expected to raise US$211m on Nasdaq.

Fundamental Analysis:

Stock exchanges benefit from their asset-light business model in that they really need not add in too much investment in order to scale up their businesses. Hong Kong Exchange was able to achieve a Return on Invested Capital (ROIC) of around 45% consistently every year over the past 5 years. What this means is out of its Total Capital Invested of HK$28.6b (comprising Net Working Capital, PP&E and Intangible Assets) for 2020, it was able to generate Net Operating Profit After-Tax (NOPAT) of HK$11.6b.

Source: Bloomberg

Past research had demonstrated that there is a correlation between high ROIC percentage and the Compound Annual Growth Rate (CAGR) of its stock price. Bloomberg’s Total Return Analysis function demonstrated that over the past 5 years, Hong Kong Exchange’s share price grew at a compounding rate of 21% p.a. and at almost 25% with its dividends reinvested into the stock.

Moreover, the exchange is doing a great job at generating investor funds that out of its current Market Capitalization of HK$708b, its balance sheet is sitting on Total Cash of HK$309b (inclusive of Cash & Cash Equivalent, and Short-term Investments) and having only a miniscule debt of HK$3b. This worked out to an Enterprise Value of HK$402b. At its last traded price of HK$507 per share (as of Wednesday, 14 July 2021), investors were actually paying HK$288 per share for its business and “pocketing” HK$219 per share in cash.

Though already a large cap stock, Hong Kong Exchange was still growing its top line at a compounding rate of 10% p.a. over the past 10 years. As mentioned above, this growth is likely to continue, if not accelerate for the next couple of years due to current geo-political environment and the huge marketplace that it can potentially tap into.

Technical Analysis:

Source: Phillip MT5

From its daily chart, we are seeing a consolidation into an ascending triangle formation over the past 3 months and price had recently broken out of the formation with an expanding volume as additional support. Next resistance is around HK$600 and supports are at HK$440, followed by HK$420.


Please do your own due diligence on the company’s fundamentals & assess if the Fundamental & Technical analysis opinions are applicable to your trading or investing needs. Click here to view our disclaimer.

Eric Lee is an Account Manager with Phillip Futures. With expertise in Futures, Forex, Stocks, and Unit Trust, Eric makes an all-rounded advisor. Make informed trading decisions without spending time combing through endless information as Eric readily provides clients with trade alerts and insights via WhatsApp. Over his years of experience, Eric developed systematic strategies in trading and investing. Book a complimentary coaching session below to leverage on his expertise as he imparts his knowledge to enhance your trading journey.

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