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Enoch Yiu

The proposed merged exchange is likely to list at a price-earnings (PE) ratio of 7.69, based on pro-forma earnings of $538.9 million in the year to June 30.

 Brokers, who had expected a PE ratio of 10 to 12, said the lower ratio would be attractive to investors.

 However, they warned the figure may change when the new entity is listed next year.

 The ratio would be affected by the earnings of the new exchange after its inception next year, they said.

 The earnings figure is based on the combined profits of the stock exchange, the futures exchange and Hong Kong Securities and Clearing Corp (HKSCC), according to a merger document sent to brokers yesterday.

 This PE ratio is lower than other listed exchanges.

 For example, the Australian Stock Exchange had a PE ratio of 43.69, while OM Gruppren - the Stockholm Exchange - had a ratio of 20.87, the document said.

 The Government has proposed the stock and futures exchanges and their associated clearing houses be merged into a new entity to be called Hong Kong Exchanges and Clearing (HKEC).

 HKEC chairman Charles Lee yesterday called on the shareholders of both exchanges to vote in support of the proposals.

 'I believe the success of the merger will be an important step to reinforce Hong Kong's position as a global financial centre in the new millennium. It forms a crucial part of the comprehensive market reform announced by the Financial Secretary in March this year,' he said.

 'The making of alliances among exchanges and technology development are global trends that cannot be ignored.'  Under the merger plan, the HKEC will be listed by September next year.

 The merger document was prepared by the investment advisers of the two exchanges to help brokers prepare for a scheduled vote on September 27.

 Both advisers consider the terms of the merger to be fair and acceptable.

 According to the documents, the stock exchange's profit in the year to June fell 35 per cent to $251.8 million from a year earlier, while the futures exchange's profit plunged 47 per cent to $155.4 million.

 The HKSCC had a profit of $131.6 million, down 64 per cent.

 Under the terms of the merger, HKEC will issue 1.06 billion shares at $3.88 each to take over the 929 stock brokers seats and 230 futures brokers seats.

 Based on this number of issued shares, the pro-forma earnings per share of the new exchange was 50 cents.

 In the document, stock exchange adviser Merrill Lynch said the proposal for the two exchanges to share the new entity at the ratio of 70:30 in favour of the stock exchange was fair.

 It said the combined earnings of the stock exchange and futures exchange for the year to June stood at $407 million.

 The stock exchange's earnings represented 62 per cent of the total, while the futures exchange's represented 38 per cent.

 Also, the HKEC's net assets amounted to $4.1 billion as of the end of June.

 The figure for liabilities does not include the $1.34 billion to be paid by the HKEC to brokers who choose to receive part of their entitled HKEC shares in cash.

 Under the merger plan, each stockbroker seat holder could get 805,000 HKEC shares worth $3.1 million, and each futures broker seat holder 1.39 million HKEC shares worth $5.4 million.

 Brokers could choose a combined share-cash option in which they take one-third of their entitlement in cash and two-thirds in shares.

 In a bid to finance the cash option, the HKEC will borrow $600 million from HSBC, Bank of China and Standard Chartered Bank.

 The loans would carry interest at 1.25 per cent above the three-month Hibor rate.

 The loans, to be drawn on or before March 31, are to repaid in four years.



Merged exchange listing at PE of 7.69