Hong Kong Exchanges and Clearing: 3 Things to Consider Post-Reforms

Hong Kong’s stock market recently reclaimed its spot as the world’s third-biggest by market capitalisation, overtaking Japan, and benefitting from the better access granted to China’s massive pool of retail investors. The company behind the exchange is the Hong Kong Exchanges and Clearing Limited (SEHK: 388), or HKEX for short. It’s been a year since it implemented new listing rules, hoping to increase the bourse’s attractiveness for highly desirable and fast-growing players of the future.

With Hong Kong positioning itself as a financial and technological hub in China’s Greater Bay Initiative, the new rules included dual-class shares for technology stocks (weighted voting rights), as well as pre-revenues for biotech companies. The changes were designed to reflect the economics of these sectors, which are not necessarily profitable during the early stages of their business. These are the three things investors should consider about HKEX going forward.

1. Rich valuations for new tech listings

By making it easier to raise capital, the HKEX was looking to bring in those that had, in recent years, chosen to list in the US’s larger markets. Since the exchange launched new rules in April 2018, the results have been mixed.

The bourse did manage to pull in headline technology companies, including Xiaomi Corporation (SEHK: 1810) and Meituan Dianping (SEHK: 3690), raising more than US$5.4 billion and US$4.2 billion, respectively. But though the growth outlook remains impressive, thus far, the stock prices post-listing remain sluggish with both still trading below their IPO prices. Rich valuations had not left much on the table for investors.

2. Better returns despite slower growth

Over the same period, HKEX’s story has been better. While new listing rules were expected to be an earnings catalyst, the share price followed global sentiment lower into the end of 2018. However, HKEX’s stock price would rebound amid the turn in sentiment, even outperforming the HSI during the 12-month period since the reforms began.

The share price recovery is particularly interesting, given the renewed interest in fast-growing emerging technology stocks in early 2019. Bloomberg consensus estimates see extraordinary top-line growth at Xiaomi and Meituan for the 2019-20 period, with forecasts ranging from 25-40%. This is exceptional given HKEX’s share price has outperformed these tech darlings more recently, and even more so when comparing their revenue expectations against the relatively modest revenue growth of 10% for HKEX this year.

3. HKEX not cheap at current valuation

The Hong Kong Exchange’s valuation isn’t necessarily a bargain, trading at 33x, a 50% premium to the Singapore Exchange (SGX: SP), a rival exchange that mirrors HKEX given their similar ambitions to attract technology and advanced science research companies.

The reforms at HKEX have helped Hong Kong attract names from the desired sector but it still has a long way to go. Last year, Hong Kong welcomed seven biotech IPOs compared to the US Nasdaq’s 57, suggesting considerable room to play catch-up. This effort also overlaps with Hong Kong policymakers’ bigger ambition to diversify away from the financial and consumer names that dominate the local economy.

The Foolish bottom line

It may seem counter-intuitive to say this but perhaps the best way for investors to get exposure to the new and rapidly-expanding Chinese technology names could be by investing in the less exciting HKEX.

分享給你的朋友

美股表現近年持續強勁,不知如何入手?我們精選了10隻高增長美股,並撰寫了《不應錯過的10隻高增長美股》免費報告。立即按此下載!

想提早退休? 想提高每月的被動收入?

我們撰寫的《必須收藏的收息股投資指南》電子書用實例教您挑選出真正可長期持續派息的收息股及揭示必要避開的收息「陷阱」。要知道打造穩健收息投資組合的竅訣,請立即按此免費下載!

本文所提供的信息僅供一般參考之用,並不構成任何個人化的投資勸誘或建議。作者沒持有以上提及的股票。
HK MoneyClub (www.hkmoneyclub.com)