- HKEX faces headwinds including a fall in trade volumes amid Hong Kong's political crisis, and more competition for listings from mainland Chinese exchanges
- The exchange is on course to secure the No. 1 spot globally for fundraising for the seventh time in 11 years, but this doesn't guarantee plain sailing, say analysts
It may be on the cusp of being declared the world's leading initial public offering market again. But a dramatic fall in trading volumes amid political turmoil, and fierce competition from mainland Chinese rivals, mean the operator of Hong Kong's stock exchange is by no means a sure-fire bet for investors, according to some analysts.
Hong Kong Exchanges and Clearing, which runs Asia's third-largest stock market, is on course to secure the coveted No. 1 spot for fundraising for an impressive seventh time in 11 years. That will not be enough to protect the HKEX's own share price from a combination of damaging headwinds, said Stanley Chan, director of research at Emperor Securities.
Saudi Aramco IPO boosts Tadawul bourse, but Hong Kong remains No 1 globally
"Daily trading volumes this year are down about 20 per cent from last year on average, which will be reflected in its share price," he said. "The IPO market will maintain its current level but won't be growing much next year. Overall the share price lacks a direction and is rangebound."
The exchange has fallen victim to six months of violent anti-government rallies that have dragged Hong Kong's economy into recession and tarnished the city's image as a global finance centre. As radical protesters have vandalised bank branches and forced the closure of some outlets at the height of the tensions, global investors have adopted a risk-off mood, fleeing the stock market and causing a slump in turnover.
On top of that, HKEX will probably find it more difficult to woo listings of fast-growing Chinese companies, as its mainland peers ramp up their efforts to keep those firms in their home market.
Hong Kong is leading the world in fundraising this year, thanks largely to last month's US$12.9 billion secondary offering of Alibaba Group Holding, owner of the South China Morning Post. In all, 131 companies have raised a combined US$37.2 billion in the embattled financial hub, according to figures from data provider Dealogic.
The Nasdaq and the New York Stock Exchange are ranked second and third, while Saudi Arabia's Tadawul exchange has leapt into fourth place from 25th following the US$25.6 billion sale by Saudi Aramco in the world's biggest ever IPO.
In terms of IPOs and first time listings, Hong Kong is also ranked top with the Saudi bourse in second place, according to data tracker Refinitiv.
To some analysts, that is not enough to offset the negative fallout of reduced trading values. Fourth-quarter profit for HKEX will probably trail the consensus estimate of HK$2.07 billion (US$264.6 million) by as much as 17 per cent and fall by 11 per cent from a year earlier, if the weak trading volumes extend to the rest of the year, Sharnie Wong, an analyst at Bloomberg Intelligence, said in a report published on December 4.
The average value of shares that changed hands in Hong Kong on a daily basis slid 10 per cent from a year ago in the early part of this quarter, while the daily volume of futures and options trading tumbled 30 per cent in October, according to Wong.
HKEX's current valuation may be too upbeat and not fully price in the risk of an earnings miss, she said. The stock trades at 29.2 times projected earnings, slightly higher than the average of 29.1 times for the multiple over the last six months.
The bourse's profit may increase 2.1 per cent from a year ago to HK$9.5 billion in 2019 and accelerate to 11 per cent growth next year, according to the estimates of analysts surveyed by Bloomberg.
However, forecasts for Hong Kong stocks in 2020 by major investment banks are not encouraging. Morgan Stanley says the Hang Seng Index may be the worst performer next year among the major gauges tracking China's onshore and offshore stocks because of the political crisis engulfing the city. Bocom International, the brokerage unit of Bank of Communications, predicts the city's benchmark will underperform the mainland's yuan-traded shares, known as A shares, as they gain more exposure to foreign buying.
"The biggest concern is that the Hong Kong market will be very quiet," said Louis Tse Ming-kwong, managing director of VC Asset Management. "People don't want to trade because they have low visibility in the global economy. There are quite a few uncertainties."
HKEX's share price has risen 16 per cent this year, more than double the gain on the Hang Seng Index. It added 2.2 per cent to HK$255.40 on Friday. The stock may climb 4 per cent in the next 12 months, according to the share-price estimates of analysts polled by Bloomberg.
Still, there are bulls that see HKEX as a long-term bet. They point to a cross-border investment channel linking Hong Kong and the mainland, known as the Stock Connect, that started in 2014, as a catalyst for the share price.
"I think the company has good long-term prospects," said Kevin Leung, executive director of investment strategy at Haitong International Securities. "A shares are likely to perform well next year, so more people will be buying them through the Stock Connect, which is a good thing for HKEX."
The Stock Connect, which gives overseas traders access to an array of the mainland's shares through HKEX, gained more popularity this year when index provider MSCI raised the weightings of the stocks in its global benchmarks three times to spur more foreign inflows. Net buying of Chinese stocks by foreign investors has exceeded 300 billion yuan (US$42.6 billion) in 2019, and is poised to surpass the total for the whole of last year.
The investment scheme already accounts for about 6 per cent of HKEX's revenues, double the contribution two years ago.
However, the advantage bestowed by the scheme may be eroded by the further opening-up of the mainland's exchanges, which have been seeking their own collaborations overseas.
The Shanghai bourse kicked off a trading link with the London Stock Exchange in June, a similar cross-border investment channel to the Stock Connect, allowing Chinese companies to float depository receipts in the UK market. While only Huatai Securities and China Pacific Insurance have so far taken advantage, more such offerings in London will surely challenge HKEX's status as the hub for offshore trading of Chinese stocks.
Mainland China's exchanges have also ratcheted up their campaign to retain domestic listings of the country's technology companies, potentially taking a major source of income away from HKEX. The Shanghai bourse in July launched the Science and Technology Board, also known as the Star market, which allows unprofitable companies to list for the first time on the mainland and gives investors more say in pricing new shares in the registration-based system for IPOs.
These changes may also eventually be applied to the ChiNext market, a board that hosts hi-tech companies under the Shenzhen Stock Exchange.
"A plunge in stock trading activity and IPOs are among several factors weighing on the Hong Kong exchange's earnings that could linger into 2020," said Wong at Bloomberg Intelligence. "The political crisis in Hong Kong and mainland China's regulatory push to attract local technology IPOs on Shenzhen's ChiNext board and Shanghai's Star Market could deter new listings."
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