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研究部 (Research Team)
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HKEx (00388.HK) -- Short term bearish

Wednesday, March 17, 2010

6535

HKEx(388)

Recommendation on 17 March 2010
Recommendation	Trading Sell
Price on Recommendation Date	$130.600
Target Price	$109.500

Weekly Special - 2333 Great Wall Motor

After our last report released on November 18, HKEx's share price rose more than 8.1% and broke 19-month high on Jan 11, 2010 while HSI dropped by 2.2% in the same period. HKEX though outperformed the market, the market turnover steadily decreased from mid-Jan and the performance of both HKEx and HSI are not good. We see the market turnover is hard to pick up in the short term and this will put pressure on HKEx's share price.

HKEx reported FY09 net profit of HK$4,704mn, which was slightly below the consensus. Trading fees dropped 4% QoQ as the market turnover was decreasing in 4Q09. As HKEx's business is transparent enough that its share price can always reflect the current and the expected market turnover levels, we believe HKEx is very likely to drop more in the coming 3 months. We assign “Trading Sell” for HKEx with a 3-month target price of $109.5.

Average Daily Turnover (ADT) is squeezing

ADT steadily decreased from May 2009's HK$79bn, and TV also dropped below 80% in February. ADT of the first two months is only HK$68bn, we believe investors are waiting for more signs of economic recovery and hence the market turnover is squeezing.

China to tighten monetary policy

China raised reserve requirement ratio two times in 2010, and this should be the prelude of tightening monetary policy. We believe it would harm overall market sentiment and investors will become less aggressive, market turnover is hence hard to pick up in the short term.

Revised ADT and Turnover Velocity Estimate

ADT of the first two months is only HK$68bn, to meet our previous estimates, ADT of the remaining 10 months need to be over HK$102bn. As we believe the market sentiment will not be so good in the short term, we revise downward full year ADT estimates to HK$77bn, the corresponding TV estimates is 115%.

Recommendation

When ADT keeps at current level for one or two more months, HKEx will drop more to reflect the expectation of its full year profit. We assign “Trading Sell” for HKEx with 3-month target price of $109.5, about 19.8x 2010E P/E which is the mean of last 7 years` forward P/E. We believe HKEx will underperform and its total return is expected to be below HSI's by 5% or more in the coming 3 months.

Peer comparison

Key Upside Risk

- Market turnover picks up faster than expected

- Global economy recover more strongly than expected and boost market sentiment

Financial Data

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