Hong Kong Exchanges and Clearing (HKEX) is on course to deliver its best earnings report card, after a surge in stock listings and trading volume. The challenge of sustaining that momentum to justify its high-flying stock price awaits its new boss.
The city’s stock exchange operator probably earned 22 per cent more profit, at HK$11.4 billion (US$1.47 billion) in 2020 or HK$8.99 per share, according to a consensus among analysts polled by Bloomberg. This would be the highest since it went public in 2000.
The consensus also implies the firm earned about HK$2.78 billion in the fourth quarter, a slowdown from HK$3.45 billion in the preceding three months, before the board narrowed down its CEO search to JPMorgan Chase banker Nicolas Aguzin. The firm will report its earnings on Wednesday.
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A prolific flow of new stock offerings and a late surge in southbound net purchases of local equities by mainland funds have helped propel the stock to an all-time high of HK$567 on February 19. It followed a 68 per cent surge in 2020, the most in 13 years, turning the company into the world’s most valuable exchange operator.
“If southbound trading continues to grow at a big volume of HK$300 billion, the stock price will rise no matter who serves as the CEO,” said Chi-man Wong, head of research at China Galaxy International Securities. He is “moderately” positive if Aguzin gets the nod.
Traders will be looking for updates on his status. The chief executive officer of JP Morgan’s global private banking arm will start on May 24 under a three-year contract, HKEX announced on February 9, subject to approval from the Securities and Futures Commission.
The Argentine faces an immediate challenge of sustaining the momentum in new stock offerings and potentially volatile fund inflows to justify the HKEX’s lofty stock valuation, analysts said. Based on Monday’s closing price of HK$558, HKEX trades at 62 times forward earnings, compared with 30 times for CME Group and 45 times for London Stock Exchange Group.
There are 19 buy, 10 hold and 2 sell recommendations on the stock, according to analysts tracked by Bloomberg. Their consensus 12-month price target stands at HK$525.31, implying a 6 per cent downside.
Mainland traders spent a total of HK$672.1 billion buying Hong Kong-listed stocks in 2020, when the market ranked the cheapest among major world markets at 8.6 times average earnings due to the Covid-19 pandemic and social unrest.
There are certainly tailwinds for HKEX as China considers allowing mainlanders to invest in securities and insurance products in offshore markets subject to a US$50,000 cap, said Ye Haisheng, head of the capital accounts management bureau at the State Administration of Foreign Exchange.
“It is expected to bring more capital into the Hong Kong market and further energise market activities in the city,” analysts at Tianfeng Securities led by Xia Changsheng said in a report on Saturday. Trading volume will continue to rise, a key element supporting HKEX’s valuation, they added.
In the IPO business, Hong Kong has continued to attract large Chinese technology companies to the bourse this year, including the sought-after video-sharing platform operator Kuaishou Technology.
Hong Kong last year became a magnet for US-listed Chinese companies seeking secondary listings amid heightened political and accounting concerns. E-commerce platform operator JD.com and gaming giant NetEase were among 144 listings in 2020 that raised US$51.6 billion of proceeds, according to Bloomberg data.
Investors will have to wait and see how Aguzin and HKEX chairwoman Laura Cha split the work going forward, Wong at China Galaxy said, given the potential language hurdle.
“He cannot speak Chinese, which causes some worries as he may not be able to communicate well directly with Chinese officials” at key agencies such as the China Securities Regulatory Commissions and the central bank, Wong added.
His investment banking experience, however, will help HKEX with possible overseas merger and acquisition deals, while Cha can be the bridge between Hong Kong and mainland authorities given her connections and previous role as vice-chairman of the CSRC, he added.
“We expect HKEX in the next five years will benefit from the market capital brought by the increasing mutual connections with the mainland,” Lu Yunting, an analyst at Zhongtai Securities, said in a report on Monday.
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