Amid continuing market volatility and a slowdown in the Q4

HKEX reported 4Q2021 revenue of HK$4.73bn, -7.2% YoY and -10.9% QoQ. Shareholders` net profit was HK$2.67bn, down 8.6% YoY, 17.8% QoQ, slightly below the consensus estimates. Although 2021 started exceptionally well, 1Q2021 with record quarterly Headline ADT of $224.4bn, 2Q2021 & 3Q2021 ADT both higher than the same period in 2020. However, amid continuing market volatility in 2021 and a slowdown in 4Q2021. The ADT 4Q has dropped to 126.4bn, down 24% YoY. In addition, Derivatives ADV decreased by 17% and ADT of Northbound Trading of Stock Connect decreased by 20%, resulting in trading and clearing fees decline in 4Q. Operating expenses decreased by 7.8% YoY, due to lower staff expenses. This led to EBITDA margins broadly flat as 74%. The IPO pipeline remained very robust, with the demand of US-listed Chinese companies homecoming listings in Hong Kong, as well as the introduction of a listing regime for SPACs and the enhanced listing regime for overseas issuers. However, numerous challenges posed by uncertainty surrounding the continued inflationary pressure, the tightening of the Fed's monetary policy, the entry of interest rate hike cycle, ongoing geopolitical risks and the pandemic recovery.

2021 Annual Results

FY2021, revenue and other income of HK$20.95bn, up 9% against the previous record set in 2020. Profit attributable to shareholders up 9%, to a record high of HK$12.5bn. Core business revenue of HK$20.1bn, up 10% compared with 2020, benefit from the headline ADT set new record in 2021, reaching HK$166.7bn, up 29% YoY. Record Stock Connect revenue and other income of HK$2.724bn, up 41% YoY. Stock Connect Northbound and Southbound reached record annual turnover of RMB27.6 trillion and $9.3 trillion, up 31% and 70% YoY, respectively, and record ADT of RMB120.1bn and $41.7bn, up 32 per cent and 71% YoY, respectively. Operating expenses increased by 2% compared with 2020, mainly due to higher IT and computer maintenance expenses and higher product marketing expenses and cash incentives for new products. EBITDA margin was 78%, 1 per cent higher than 2020.

2021 review, with a total of 98 company listings raising HK$331.4bn, down from the strong 2020 (154 company listings raising HK$400.2bn) and 5% higher than 2019 (HK$314.2bn). During the year, 59 new economy companies, including 31 Weighted Voting Rights (WVR), healthcare and biotech firms (including Chapter 18A listings only) and/or secondary-listed companies, accounting for 88% of IPO funds raised in Hong Kong during the period. Total market turnover in 2021 reached HK$41.2 trillion, up 28% compared with 2020. Total turnover of securitized derivatives (DWs, CBBCs and Inline Warrants) reached HK$4,956.8bn, up 8% compared with 2020. As world metal trading remained under pressure, the chargeable average daily volume of metals contracts traded on the LME decreased by 4% from 2020.

Company valuation

Overall, HKEx has continued to make a good progress in enhancing competitiveness and attractiveness of HK markets, with new product offerings across asset class, as well as a range of new market enhancements. Among the notable achievements were the successful launch of the MSCI China A 50 Connect Index Futures as Hong Kong's first A-share derivatives product and a cash settled Mini USD/CNH Futures contract. In January 2022, the enhancement and streamlining of the listing regime for overseas issuers and the introduction of the Hong Kong listing regime for special purpose acquisition companies (SPACs) which enhanced the channels available for fundraising on HK markets; the plan to roll out the FINI (Fast Interface for New Issuance) platform in the fourth quarter of 2022 to streamline Hong Kong's IPO settlement process.

However, the ongoing pandemic and the macroeconomic environment is full of challenges. In particular, the United States named China's largest chip manufacturer SMIC (0981) last year to consider imposing tougher sanctions on China's largest chip manufacturer. SenseTime Group (0020) was also banned by the United States. U.S. Department of Commerce also plans to add more mainland biotech and medical companies to a so-called entity list, which bans the companies from key U.S. exports because they pose national security risks. In addition, the United States has passed legislation that if a foreign company U.S.- listed for failing to adhere Holding Foreign Companies Accountable Act that the act would allow the SEC to delist Chinese companies from U.S. exchanges it American regulators cannot review audit for three consecutive years; and the Securities and Exchange Commission (SEC) has earlier confirmed that 11 companies were included in the provisional list. Although this may lead to more US-listed Chinese companies homecoming listings in Hong Kong, but due to high transaction costs, and restrictions to investing on Chinese mainland companies, overseas funds and investors may not able to invest in HK-listed Chinese securities. Continued geopolitical tensions and macroeconomic risks, global investors may further reduce their investment in Chinese and Hong Kong companies, and even lead to massive capital outflows. We expect 2022 estimated EPS to be HKD10.19 and our TP at HKD464.70 (based on a past 2yr average dynamic P/E of 45.6x). Since the stock price has fallen from a high level earlier, we believed that many potential unfavorable factors have already been reflected. Thus, our investment rating maintains “Buy”.

Risk factors

1) The market performance was weaker than expected and less active; 2) The IPO pipeline turning weak; and 3) Tightening regulations and Geopolitical uncertainty.

* The analyst has a financial interest in the listed corporation covered in this report.

Financial

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