Is Hong Kong Exchanges and Clearing Limited The Best Stock Exchange In Asia?

Hong Kong Exchanges and Clearing Limited (HKEX) is a leading financial market operator in the world. It operates world-class facilities for trade and clearing of securities and derivatives of equities, commodities, fixed income, and currency at bases in Hong Kong and London. Today, on 21 February 2019, HKEX is valued at HK$ 324.1 billion in market capitalization.

Here, I’ll cover its fundamentals, recent financial results, and would evaluate its stock as a potential candidate for investment at current price of HK$ 264.00. As such, here are 11 things to know about HKEX before you invest.

  1. Sources of Revenue & its Breakdown
    HKEX derives income from 5 different business segments. They include:

    Cash: Fees from trade, list, and market data of equity products.
    Equity & Financial Derivatives: Fees from trading derivative products.
    Commodities: the London Metal Exchange (LME) – Note 2
    Clearing: Operations of 5 Clearing Houses
    Platform & Infrastructure: Network & Software Sub-License Fees


    Their breakdown of revenues for 2017 is as follows:
No.SegmentsSales (HK$ Million)Sales (%)
1Cash3,36329.1%
2Equity & Financial Derivatives2,19519.0%
3Commodities1,43612.4%
4Clearing4,00934.7%
5Platform & Infrastructure5604.8%
Total Revenues*11,563100.0%


Exclude: Revenues of Corporation Items of HK$ 11 million.





Source: HKEX Annual Reports

  1. Acquisition of the London Metal Exchange (LME)
    On 6 December 2012, HKEX has acquired the LME for GBP 1,388 or HK$ 17.3 billion. The LME is the world centre for trading of industrial metals such as aluminium, copper, zinc, nickel, lead, and precious metals. Over the last 2 years, the LME has recorded lower revenue and profits due to a slowdown in the global commodity sector during the period.



Source: HKEX Annual Reports

  1. Group Revenue
    Fortunately, for the other 4 segments, they have delivered continuous growth in revenues and hence, offsetted sales decline recorded by the LME. Overall, HKEX has recorded steady growth in group revenues, up from HK$ 6.5 billion in 2008 to HK$ 11.6 billion in 2017.



Source: HKEX Annual Reports

  1. Profitability
    After its acquisition of the LME, HKEX has maintained its profit margins at around 60% of its revenues for the past 5 years. With stable margins, HKEX has recorded continuous growth in shareholders’ earnings. It had risen from HK$ 5.1 billion in 2008 to HK$ 7.4 billion in 2017.



Source: HKEX Annual Reports

  1. Return on Equity (ROE)
    HKEX’s ROE has fallen from 55.61% in 2011 to 22.99% in 2012. It is due to a substantial increase in shareholders’ equity in 2012 as a result of a private placement exercise in that year to raise funds for its acquisition of the LME. Since then, HKEX’s ROE has averaged around 22.33% a year over the 6-year period.


  1. Cash Flows Management
    From 2008 to 2017, HKEX has generated HK$ 54.6 billion in cash flows from operations and had raised HK$ 6.5 billion in equities and another HK$ 5.4 billion in net long-term debt. Out of which, HKEX has spent:

    – HK$ 4.7 billion on capital expenditures.
    – HK$ 16.8 billion on acquisition of the LME in 2012.
    – HK$ 37.3 billion in dividend payments to its shareholders.


    HKEX increased its cash balances from HK$ 4.8 billion in 2008 to as high as HK$ 13.5 billion in 2017. Thus, HKEX is a cash-cow and has built itself an excellent track record of sustaining dividend payments over the long term to its existing shareholders.



Source: HKEX’s Annual Reports

  1. Latest 12-Month Financial Results
    From Q4 2017 to Q3 2018, HKEX has generated HK$ 14.1 billion in sales and HK$ 9.4 billion in shareholders’ earnings or HK$ 7.626 in earnings a share (EPS). Thus, HKEX has continued to sustain growth in sales and as well as profits over the last 12 months.

PeriodRevenueEarningsEPS (HK$)
Q4 20173,1171,8781.530
Q1 20183,7602,5622.087
Q2 20183,6252,4792.019
Q3 20183,5632,4431.990
Total14,0659,3627.626


Source: HKEX’s Quarterly Reports

  1. Balance Sheet Strength
    As at 30 September 2018, HKEX has reported non-current liabilities of HK$ 0.9 billion and shareholders’ equity of HK$ 39.4 billion. Hence, its gearing ratio is 2.36%. It has current assets of HK$ 235.8 billion and as much as HK$ 215.0 billion in current liabilities. Its current ratio is 1.10. Thus, HKEX has maintained a healthy balance sheet with a low gearing ratio, above 1.0 in its current ratio, and has cash reserves of HK$ 128.1 billion presently.


  2. P/E Ratio
    As at 21 February 2019, HKEX is trading at HK$ 264.00 per share. Thus, its current P/E Ratio is 34.62, calculated based on its EPS for the recent 12 months, slightly below its 5-Year Average of 35.92, but nevertheless, by any standards, definitely not undervalued.


  1. P/B Ratio
    As at 30 September 2018, HKEX has net assets of HK$ 32.10 a share. As such, its P/B Ratio is 8.22, slightly above its 5-Year Average of 7.89.


  1. Dividend Yields
    Over the past 12 months, HKEX has paid out HK$ 6.49 in dividends per share. Thus, its current dividend yield is 2.46%, the lowest in 10 years.


VIA’s Verdict

Evidently, HKEX has delivered sustainable growth in sales, profits, and dividend payments to its existing shareholders for the last 10 years. This has contributed to continuous increase in its market capitalization from HK$ 83.9 billion in 2008 to HK$ 324.1 billion currently.

So, should I invest in HKEX?

Let us compare its valuation figures with its peers such as Bursa Malaysia Bhd and Singapore Exchange Ltd:

StockHKEXBMBSGX
Stock PriceHK$ 264.00RM 7.18S$ 7.82
P/E Ratio34.6225.8322.54
P/B Ratio8.226.658.79
Dividend Yield2.46%3.57%4.48%

According to valuation figures above, P/E Ratio & Dividend Yields are relatively more attractive for SGX than BMB and HKEX. Thus, my own personal pick from the three stocks is (1) SGX (2) BMB and (3) HKEX.

What’s yours? Please leave your comments below.

Ian Tai

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

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