Have you missed the boat on Hong Kong Exchanges and Clearing? There is a good chance you have. The stock has risen 197.68 per cent to HK$11.55 since its debut last month at $3.88 per share. Its market capitalisation of $12.01 billion exceeds, for instance, Merrill Lynch's top-range target of $10.11 billion. Some brokers suggested it was still in its honeymoon phase and that a painful bout of profit-taking could set in soon. However, few quibble that it deserved a fat premium to its initial public offering price. Merrill Lynch pointed to the bonanza coming as more and more mainland companies list in Hong Kong. That is a more than relevant point - since 1993 the market's 46 H shares and 60 red chips have raised $280 billion in Hong Kong. Merrill thinks the eventual installation of the open-interface AMS/3 trading system - which will facilitate mobile-phone and Internet trading - will boost retail trade numbers. The stock exchange's biggest income source is interest income on margin funds. That makes up 27 per cent of revenues compared with 23.9 per cent for transaction fees. Providing third parties with data such as the price of Hong Kong stocks is the third biggest source of revenue at 12.5 per cent, while listing fees and clearing and settlement each account for about 11 per cent. The stock offers more transparency than many other listed vehicles in Hong Kong. Yet as much as you may know about its business operations, valuing them is a different story. The only directly comparable counter is the Australian Stock Exchange (ASX). Merrill used the estimated price-earnings (PE) ratio of the ASX relative to the ASX's broad-market PE as a benchmark. The brokerage then discounted the implied PE for Hong Kong's exchange by 15 per cent to 25 per cent to account for ASX's lack of liquidity and its short trading history. That would give the SAR a PE range of 13.7 to 15.5 times present year earnings. In terms of market cap - $8.94 billion to $10.11 billion. By Friday's close, the stock was trading at 18.04 times Merrill's estimated profit of $661 million for this year, or 64 cents per share. Using a dividend discount model to compare the exchange to utilities and banks, the bank gets a $4.29 billion to $9.72 billion market capitalisation range. A soft landing in the United States, a return to favour of the technology stocks, and Hong Kong could see a surge in trading figures as well as thick pipeline of new offerings both from the mainland and on the second-board Growth Enterprise Market. As the biggest Asian market excluding Japan, and one of the most liquid, Hong Kong would be the first to benefit from a strong Wall Street. The SAR's market cap of $3.73 trillion makes it roughly 30 per cent bigger than the next largest competitor, Taiwan. Hong Kong's futures market sees less business than Singapore or South Korea's but Merrill said it stood out for efficiency and liquidity, and could be helped by AMS/3. However, that is assuming the positive. A hard landing and market crash in the US, and things could be deathly still in the SAR. Graphic: equitygbz
