Hong Kong Exchanges and Clearing (388), the listed corporate owner of Hong Kong's stock exchange, had a sluggish 2011. Stock trading turnover - from which the exchange derives most of its income - was up just 1 per cent from 2010, while fund raising from initial public offers was down 42 per cent year on year. The exchange had a bad December and analysts are bearish on the stock.
Sam Hilton (Keefe, Bruyette & Woods Asia) says that, as the HKEx derives most of its revenue from stock trading commissions and given that investors' interest in trading stocks is linked to macro events, the exchange's fortunes are closely tied to the general climate for trading.
'The obvious things to watch are anything that will have an impact on the flow of funds into the equity market, such as US policy on quantitative easing, or anything on the China policy front, such as an opening of the capital account,' Hilton says.
Hilton does not expect a dramatic increase in turnover this year. The HKEx is working on a number of initiatives, such as a joint venture with the mainland exchanges, an increase in its commodities trading arm, and investments in data centres that will boost high-speed trading. However, these measures will contribute only marginally to its core revenue in the short term, says Hilton. Aniel Mahtani (Macquarie Research) has had an underperform rating on the HKEx since September 2011. He remains bearish.
'We don't think 2012 will be a great year for the Hong Kong exchange,' Mahtani says.
He says the stock exchange is a leveraged play on the Hong Kong market. If you think Hong Kong equities are going up, the HKEx is a great stock to buy. Mahtani says the HKEx has a beta of about 1.45, which means it will rise (or fall) at a rate of 1.45 times the wider market. 'It's become a proxy stock for the Hang Seng index,' Mahtani says.