HK Ex + 17%

Regierung kauft 5%....

2007/09/10   12:04 DJ MARKET TALK: HKEx +18.6%; UBS Ups To Buy, Targets HK$192

388 HKEX 185.2 27.2 +17.22 4,206,096 23,652

Hong Kong Exchanges & Clearing raised to 'buy' by UBS, kept 'sell' by

Citigroup

HONG KONG (Thomson Financial) - Brokerage houses have taken a mixed view of the government's stake purchase in Hong Kong Exchanges and Clearing Ltd as excitement over the exchange operator's long-term potential was tempered by worry over possible government interference in its operations.

UBS Investment Research has upgraded HKEx to a ""buy"" from ""neutral"" while increasing its target price to 192 Hong Kong dollars from 132 dollars previously. The research house said it expects susbstantial increases in cash and derivatives market turnover between 2007-2011.

UBS has increased its estimate for HKEx's cash market turnover between 2007-2011 by 22-55 percent. It has also revised its forecast for the exchange's 2008 daily turnover to 103 billion dollars from 73 billion.

UBS analysts Ben Hu and Sally Ng think the government's latest move shows its willingness to be involved and contribute to HKEx's strategic development.

""It is also likely a preparation for future integration and alliance with mainland exchanges,"" UBS analysts said in a research report. They also believe the government is likely to further increase its stake in HKEx in future.

Citigroup has taken a different view on the matter and questions the necessity of the government hiking its holding in HKEx at this point. ""We are disappointed with the government's enigmatic market intervention,"" Citigroup analyst Bob Leung said in a report.

Citigroup has maintained its ""sell/medium risk"" rating on the stock as the government has not shared any details on the future integration between HKEx and mainland exchanges.

The brokerage house sees increased regulatory risk for the local bourse once it becomes a part of China's greater plan. ""The government's secretive on-market acquisition of HXEx severely undermines HKEx's independence in our view, where HKEx shareholders' interests would well be on balance with the Chinese government's interest in developing China's own exchanges and financial markets.""

JPMorgan has maintained its ""overweight"" rating on the HKEx but has recommended that investors stay alert as it expects government to further increase its stake in the exchange operator.

JPMorgan analyst Michael Chan also says the government's plan to merge the HKEx with the Shanghai Stock Exchange is not imminent.

The Hong Kong Government last Friday unexpectedly increased its shareholding in HKEx, the operator of the local stock and futures market, to 5.88 percent. Following this additional acquisition the government has emerged as the single largest shareholder in HKEx.

The government will not be curbed by the Securities and Futures Ordinance (SFO), which does not allow any person to become a minority controller of HKEx, as the Financial Secretary has the legislative power to lift the shareholding restrictions. A minority controller is a person who is entitled to exercise, or control the exercise of 5 percent or more of the voting power in HKEx.

""This acquisition underlines the government's support for HKEx and enables the government, over the longer term, to contribute as a shareholder to the promotion of HKEx's strategic development,"" Financial Secretary John Tsang said.

Reports in the local media have interpreted the government's move as a first step towards merging the local bourse with mainland exchanges by swapping shares with the Chinese government. The Hong Kong government has not commented on the speculation.

HKEx was up 25.7 dollars or 16.3 percent at 183.7 dollars, after hitting a new intra-day high of 188 dollars earlier in the session.  

According to the Times of London, the mainland’s new foreign exchange reserve funds might be building a stake in HKex (388) (Buy). The HK government recently increased its holding in the exchange, revealing on Sept 8 that it held a 5.88% stake. The exchange also issued a strategy for developing closer links with the mainland earlier this year, in which it outlined plans to establish a platform for cross-trading of securities and to establish strategic linkages between the exchange of HK and the mainland.  

Hong Kong Exchanges and Clearing Ltd (0388.HK)

leapt 3.2 percent to HK$235.80

after brokers upgraded their price targets, with DBS raising its target to HK$333 from HK$245, marking the high end of a range  

Targets revised higher as HKEx keeps soaring

Two investment banks raised their target prices for market operator Hong Kong Exchanges and Clearing (0388), indicating up to 36 percent more upside on a stock that has almost tripled this year, on expectations of an inflow of mainland funds.

Goldman Sachs bumped up its target price for the bourse operator by 31 percent to HK$280 after HKEx shares rocketed past its previous target of HK$213. Goldman's target indicates another 15 percent upside from current levels. "We believe velocity and turnover will continue to rise," said Goldman Sachs analyst Darwin Lam. "We remain buyers of Hong Kong Exchanges' shares despite the recent share price rally."

Meanwhile, DBS Vickers raised its target price to HK$333, a move which made the stock surge past their previous target of HK$245. DBS Vickers' street- topping target indicates another 36 percent upside. The analysis from DBS Vickers assumes the Hang Seng Index will hit 29,000 by the end of the year and 32,000 by the end of 2008.

Shares in HKEx rose as much as 8.3 percent on Friday, hitting HK$247.40 before closing at HK$244.20, up 6.9 percent or HK$15.80. HKEx is now trading at a price-earnings ratio of 69.4 times. Shares in the bourse operator have jumped 186 percent since the beginning of the year.

Lam pointed to the likely liquidity flow from developed markets into Hong Kong and China, given a "muddling- through" US economy.

He also said he expects expanding capital inflows from China, given the through-train scheme, the Qualified Domestic Institutional Investor program, and potential overseas investments from China's sovereign wealth fund. Every 10 percent of China's investable savings that is invested in Hong Kong will raise the daily turnover in the Hong Kong market by HK$15 billion, he said.

"We believe the Hong Kong government's 5.88 percent stake in HKEx could open up the optionality for HKEx and the Shanghai Stock Exchange to establish closer collaboration ... in the longer term," Lam added. He also said he does not rule out the possibility that the Hong Kong government will further raise its stake in the bourse operator.

HKEx non-executive director Laura Cha Shih May-lung said on Friday that the board of directors had not yet considered reducing the lot size again. With the current lot size of 500 shares, buying one lot of HKEx requires an investment of HK$122,100.  

HKEx (0388.HK) +1.8% at HK$253.80, tad below all-time high of HK$254 hit last week, likely in part helped by The Standard report Chinese government will support state-owned enterprises to list shares in HK.

Additionally, HSI's recent record-breaking run accompanied by record-breaking volume; European house trader says if HSI can sustain recent trading volume (5-day average volume at HK$166 billion),

HKEx "no doubt" can be worth HK$300 or more, though thinks current market mania can't be sustained over longer term. Adds he won't chase stock higher, but any pullback due to market correction, to say HK$230 level would offer entry opportunity. Volume in line with recent average at HK$942 million.  

HKEx Pauses; UOB Lifts ADT Assumption, Target

HKEx (0388.HK) down 0.1% at HK$247.80, in line with HSI's decline on further consolidation. UOB KayHian notes HK stock market's ADT Oct. 1-12 doubled vs that of 1H07, is 6x that for 2005. Given continued strength, which UOB attributes to expectations of further liberalization of QDII investments, it lifts 2008 ADT assumption by 17% to HK$95.4 billion, 2009 by 16% to HK$110.2 billion respectively; accordingly ups HKEx's fair price to HK$235 from HK$175.10; keeps on Hold. Though adds likely players more bullish on turnover assumption, thus if assuming FY09 ADT is 20%, 40% higher than base case of HK$110.2 billion, then HKEx may be worth HK$264, HK$292 respectively. Volume in line with recent average at HK$647.2 million.  

Hong Kong Exchanges and Clearing Ltd (0388.HK: Quote, Profile , Research), the city's bourse operator, climbed 2.2 percent to HK$256 on speculation that further tie-ups with the mainland would spur greater turnover on the exchange  

Dao Heng Securities
 

HKEx (388, $256.0) 6M Target $300.0 Trading BUY

We estimate the effects of (a) China Investment Corporation and (b) QDII on FY08 average daily market turnover (“ADMT”) will be $1.8bn and $4.7bn respectively.

We also estimate the effect of PRC individual investors on FY08 ADMT will be $15.1bn for every 10% of savings deposit investment in equities listed in Hong Kong.

We raise our FY07 ADMT estimates from $75bn to $88bn and FY08 ADMT estimates from $130bn to $155bn to reflect the continuously increasing monthly ADMT from $94.3bn in August to the record high $165.0bn for the month-to-date.

We estimate the 3Q07 net profit to be $1.62bn, representing 15% qoq and 185% yoy growth respectively.

We also believe the cost-to-income ratio will further decline from 19.5% for 2Q07 or 31.3% for 3Q06 to 15.8% for 3Q07 due to the continuous trend of (a) quicker 23.1% CAGR growth in income between 2002 and 2006 while the CAGR growth in cost for the same periods is just 2.0%; and (b) management’s cost awareness. HKEx deserves a valuation premium on the low cost-to-income ratio and cost-efficiency.

We upgrade our hold recommendation to BUY with a 6-month target price raised from $256.0 to $300.0, representing FY08 PER of 37.8x with a FY08 EPS growth of 45% yoy and a reasonable valuation of 0.84x PEG ratio.  

HKEx (388)

Market capitalization drives turnover and thus valuation

We forecast average daily market turnover (¡§ADMT¡¨) to reach $88bn for FY07 and $155bn for FY08. This will boost HKEx¡¦s earnings to $8.52bn in FY08, up 45% yoy, translating into undemanding FY08 PER of 28x and 0.63x PEG ratio. Our target price of $300, representing an upside potential of 32%, is derived from our dividend discount model. We believe the high ADMT, which is the core factor for a premium valuation of HKEx, will persist mainly driven by the market capitalization and the following factors:

The FY07 and FY08 ADMT is well supported by (i) high market capitalization; (ii) a rise in market velocity; and (iii) active warrant market. Given high growth in market capitalization in FY08F, the ADMT is likely to be high and leads to high valuation. We believe trading in derivative warrants will continue to contribute some 20% of market turnover for FY07 and FY08 and thus support the ADMT.

Our 5-stage dividend discount model suggests the fair value of HKEx is $305.6 assuming the CAGR of dividend in first four stages is 15.9% and followed by long-term growth rate of 10%, discounted by required rate of return of 12.5%.

The sell-off due to Premier¡¦s comment on the delay in ¡§through train scheme¡¨ will be short-lived. On the contrary, we view the comment as a strong commitment of the PRC Government in maintaining the stability and prosperity of Hong Kong as a key financial centre in China. Therefore, HKEx will be benefited in long run.

3Q07 net profit will surge by 185% yoy and 15% qoq. HKEx will announce its 3Q07 results this evening. We believe the 3Q07 revenue will rise 138% yoy or 28% qoq to $2.26bn. 3Q07 net profit will be $1.62bn, up 185% yoy and 15% qoq.

Favourable policies and environments. The ADMT will be supported by capital inflow triggered by rate cut in US and weak US dollar. In addition, we believe the PRC Government will allow funds flowing into Hong Kong in long run given the excess liquidity problem and growing appreciation pressure on Renminbi.

Key risks on share price are (i) volatile nature of ADMT; (ii) PRC Government policies on capital flow; and (iii) further purchase of shares by the HK Government.  

HK Exchanges & Clearing Jan-Sep Net Profit HK$4.01 Bln

Hong Kong Exchanges & Clearing Ltd. (0388.HK), the operator of the city's stock and derivatives exchanges, said Wednesday its net profit for the first three quarters of the year more than doubled on robust growth in equities and derivatives trading.

The blue-chip company said its net profit for the nine months ended Sept. 30 was HK$4.01 billion, up from HK$1.67 billion a year earlier, as revenue jumped to HK$5.50 billion from HK$2.84 billion.

Hong Kong Exchanges' revenue streams include fees and tariffs related to securities, options and derivatives trading, as well as listing fees, investment income, and clearing and settlement fees.  

388 HKEX 248.4 9.4 3.93 2,286,377 9,315

HKEx +2.8%,Slew Of Upgrades;Macquarie Eyes HK$300

HKEx (0388.HK) +2.8% at HK$245.80, may regain 10-day moving average of HK$246 in just a tick, boosted by slew of post-results upgrades

- Goldman Sachs lifts target to HK$300 from HK$280,

JP Morgan to HK$258 from HK$145;

while Deutsche Bank ups stock to Buy from Sell with HK$300 target.

Macquarie also ups to Outperform from Neutral with HK$300 target;

says medium-term outlook upbeat for HKEx due to negative real interest rates in HK, continuation of China's self-reinforcing liquidity cycle. "We believe that the relative attractiveness of Asia (HK/China specifically) will ensure continued inflows from foreign investors in the medium term;" at same time gradual increase in inbound investment from China should support trading activity. Stock 3rd most heavily traded with HK$1.235 billion.  

Hong Kong Exchanges and Clearing Ltd (0388.HK: Quote, Profile , Research), which runs the city's stock exchange, was also a big loser as equity markets could suffer further in the current risk-averse climate.