Is HKEx’s Share Price Rally Sustainable?

Ever since the Luckin Coffee Inc (NASDAQ: LK) incident amid the rising tension between China and the US, the Trump administration has been putting pressure on China stocks.

This has contributed to all the secondary listings of Chinese technology giants in Hong Kong, and an increase of trading liquidity in the Hong Kong stock market.

Hong Kong Exchanges and Clearing Limited (SEHK:388), also known as HKEx, is the sole securities and derivatives exchange operator and clearing house.

The stock is enjoying a strong rally despite some other sectors being affected by the political unrest and Covid-19 since February 2020. The share price of HKEx has jumped from HK$211 in March to a historical high of HK$330 as of late June.

To understand the jump in share price, I’ll look at the underlying reasons for the current valuation and HKEx’s growth strategies to see whether the share price run can be sustained.

What is moving the HKEx share price? 

With HKEx’s strategic vision of connecting China and the world in the Asian time zone, the stock exchange has been performing well and enjoyed a solid core business performance.

Its first-quarter core revenue was up 19% year-on-year to HK$4.1 billion (US$529 million), while earnings per share (EPS) dropped 14% to HK$1.80 due to the fall in Net Investment Income.

Beyond this, HKEx has successfully worked towards transforming itself from a stock exchange merely facilitating securities trades to a data-driven technology company connecting the world’s capital markets.

With the technological advancement, the trading fees and post-trade businesses have recorded high year-on-year growth of 34% and 21%, respectively, in 2020. This can be explained by the opening up of Stock Connect and Bond Connect programmes in the past four years.

Northbound trading amounts to RMB 1.45 trillion (US$205.1 billion) in portfolio value so far in 2020 and the inclusion of A shares into major global stock indices also benefits the increase of capital flows into and out of China.

Other than the impressive trading volume, the IPO market is one of the main factors for HKEx’s high share price. Alibaba, Budweiser APAC and other Chinese tech giants contributed a handsome amount of listing fees, while more healthcare and internet companies are lining up for Hong Kong IPOs.

This indicates that the business outlook for HKEx is positive, and it currently provides a solid ground for its high valuation.

What’s next?

Based on the encouraging market sentiment, HKEx is enjoying growth in its core business along with the launch of a broader product suite.

This bodes well for the development of a sustainable and diversified revenue stream, namely green financing portals, post-trade infrastructure and expanding its services to over-the-counter (OTC) markets.

In addition to the company’s healthy financial results, let’s not forget HKEx’s inorganic growth strategy. The attempt of a hostile takeover of the London Stock Exchange in 2019 is an indication of HKEx’s ambition to complement its strategy of being a “bridge between the East and the West”.

Although Charles Li announced he will step down as CEO of HKEx, the company has made clear its expansion plans to other tie-ups such as building fixed income, commodities, and currencies offerings amid the internationalisation of the yuan.

Foolish bottom line

Despite the challenging situations, the fundamentals of HKEx remain steady, thanks to its status of the sole stock exchange operator and clearing house in Hong Kong.

While Covid-19 and trade tensions may not abate in the short term, I believe HKex still has upside potential, but retail investors should also look at other technical indicators to see whether its shares are worth buying now.