HKEX 0388

[millionairemind]

Is exchange-rule furor a bad sign for Hong Kong?
Commentary: Regulators face rearguard action on anti-insider-trading rules
By Craig Stephen
Last update: 4:01 p.m. EST Jan. 11, 2009

HONG KONG (MarketWatch) -- Dismal results by Lenovo Group last week has increased fears that the season of bad earnings surprises is upon us, as the damage inflicted by the economic storm in recent months is revealed. In Hong Kong, this unraveling has also seen a storm erupt over corporate governance issues.

Playing out in parallel to the upcoming earnings season is a growing rebellion by the corporate community over new stock-exchange rules extending the blackout period for share trading by directors and major shareholders.
Following a petition, signed by 200 listed companies and published in local newspapers, asking to restart the year-long consultation on the rules, the protest was taken to Hong Kong's Legislative Chamber last week.

So far Hong Kong's market regulator, the Securities and Futures Commission, has refused to back down, agreeing only to a three-month delay to April 1. The new rules mean top executive and stake-holders can't trade their companies' stock from the year-end cut-off period until earning results are publicly announced, lengthening the black-out period from just one month previously.

The storm these new measures have created is surprising and could be a red flag to individual retail investors.

You might think there were bigger issues to worry about in Hong Kong, with economic confidence plummeting, the market for initial public offerings all but dried up, and thousands of businesses closing.

We may not have had a Madoff or a sub-prime meltdown, but the winds of regulatory change will be felt here just the same. Last week's accounting scandal surrounding India's Satyam Computer Services is likely to only further elevate corporate governance as a source of concern in the eyes of investors.

Now everyone, including regulators, governments and listed companies, is under increased scrutiny to raise their game.
The new rules really only bring Hong Kong into line with major world exchanges and were part of measures designed to speed up reporting schedules for listed companies.
Hong Kong may be a fast-paced city, but it's siesta time when listed companies report their performance. It is common to wait until the end of April to find out what happened in the year ending the previous December, meaning that the trading blackout period can last seven months, counting final and interim results.
If plans go ahead next year to speed things up, final and interim reporting deadlines will be cut to three and two months, respectively.
Perhaps one explanation for the delayed response to the proposed changes isn't directors worried about boosting income (although the SFC found that directors' trades were mostly profitable), but rather protecting wealth at a time when many companies face a fraught-looking future.
Last week broker BNP released a new research report highlighting 40 listed small and medium-sized enterprises which it said were at risk of defaulting on banks loans over the next two years.

It also said, worryingly, that the three high-profile SME failures in Hong Kong at the end of last year were 'top notch players' in their respective sectors: Smart Union Group (toys), U-Right International Holdings Ltd. (apparel) and BEP International Holdings (home furnishings).
The current credit climate and global economy is clearly piling the pressure onto vulnerable SMEs, which means that being locked into shares could be painful for some directors and major shareholders.

But what are normal investors to make of this? One practical suggestion would be to steer clear of equities until we get some visibility. Credit Suisse, in reviewing the Satyam episode, suggested that management quality is now the yardstick to watch, rather than asset allocation or standard quantitative measures.

A recurring criticism of the Hong Kong market is that it's too accommodating to the interests of the large family owned shareholders of many listed companies ahead of the needs of institutional and other minority investors.
The success of the Hong Kong market has been largely based on its geographical proximity to China, but now its earlier de facto monopoly on China listings is over. Not only is China handling more domestic listings, but the world of electronic exchanges brings a lot more competition, be it Nasdaq or London.
Hong Kong has tried to safeguard its future by asking for concessions from China, such as the preferential "through train" for mainland investors. But many think the territory should focus instead on improving its listing standards and governance at home.
It was noticeable that the mainland Chinese state-owned companies who answered the SFC Consultation document did not object to the rule changes. In many cases, they have listings overseas and already submit to more onerous regulation. We have also heard how mainland courts take a rather robust approach to dealing with insider trading.
Ultimately if Hong Kong's regulators do buckle and cave in to local tycoons, it will send a bad signal to global investors. And it could also have a political cost for the administration of Chief Executive Donald Tsang, which has seems to have been forced into backtracking on policy initiatives at every turn. End of Story

[winston]

DJ MARKET TALK: HKEx Down 3.2%; May Test HK$55-HK$60 N/T -Tanrich

1111 [Dow Jones] HKEx (0388.HK) down 3.2% at HK$67.30, tracking HSI's 3.4% fall to 12,886.94, but may test lower levels, possibly around HK$55.00-HK$60.00 near-term if HSI sells off to test around 11,800-12,000 amid uncertain market outlook, says Tanrich's Jackson Wong.

Adds, however, "thin trading volume in the local bourse due to the seasonal festive factors should have been well-expected, and I don't expect to see heavy selloff in Hong Kong Exchanges today," says Wong. Early low of HK$66.50 as immediate support.

[winston]

Waiting for a chance to buy a Put on this one as well...

Risks include one of the European or American Exchanges buying a stake in them or the HK government averaging down their losses on this counter.

=========================================

From UOB-Kay Hian:-

Fundamentals weakening

We remain highly confident that Hong Kong Exchanges and Clearing’s (HKEx) share price will weaken based
on three reasons:-
a) continuous decline in stock market turnover,
b) high turnover velocity and
c) expensive valuation.

Our fair price of HK$44.90 (over 30% downside from the current level) is based on the assumption of an average daily turnover (ADT) of HK$33.2b in 2009. The ADT has been sliding relentlessly since the slight rebound in Sep 08.

In addition, the annualised turnover velocity in Dec 08 was still high at over 100% compared to the 10-year average turnover velocity of 75%. As the Hong Kong stock market is in the midst of a velocity downcycle, ADT is expected to drop further.

HKEx is trading at 26x 2009 PE, which is expensive compared with the historical average of 21.8x in 2001-07.
In the current bearish market with poor market sentiment, the stock could be trading at 17.5x 2009 PE, implying a fair price HK$44.90. Maintain SELL.

[winston]

Bought a Put on HKEX today.

The following are some of my notes:-
1) ADT has been coming down to around HK$40b to HK$50b
2) JPM has been selling
3) PE is 26
4) IPO has dropped significantly

Target Price:-
1) GS 52 Nov 13 from 126 Aug 14 from 136 Aug 5 from 147 Feb 22 from280 Oct 5 from 213 Sep 13 from 130 Jun 27 PE 29 from 102 Jan 8 from 80 Nov 15 PE 33
2) Dao Heng 120 Jun 18
3) UOB 45 Dec 10 from 46 Nov 5 from 42 Oct 28 from 81 Aug 14 from 156 May 15 from 179 Jan 30 Jan 23 from 216 Jan 14 from 261 Nov15 from 172 Sep 11 from 140 Aug 16 from 99.8 may 10 from 98.7 Mar 9
3) UBS 194 Feb 25 from 290 from 306 Nov 5 from 192 Sep 10
4) DBS 144 Feb 28 from 252 from 333 Oct 4
5) Citi 125 Sep 16 from 150 Mar 7 from 151 Feb 18 from 219 Oct 21 from 133.1 Sep 25
6) Daiwa 282 Dec 20 PE 30
7) JPM 120 Aug 14 from 200 Mar 7 from 258 Nov 15
8) MacQ 300 Dec 4
9) CS 40 Dec 9 from 65 Nov 7 from 90 Aug 1 from 150 May 16 from 158 Mar 7 from 199
10) DB 173 Mar 7 from 300
11) Nomura 161 mar 7 from 336
12) MS 38 Nov 17 from 75 Nov 7 from 85 Aug 14
13) BNP 49 Nov 13 from 69 Nov 7 from 75

Disclaimer: Follow me at your own risk. The above notes are for my own reference.

[winston]

DJ MARKET TALK: HKEx +3.8% But Consensus Too Optimistic - CS

1209 [Dow Jones] HKEx (0388.HK) +3.8% at HK$69.80 vs HSI +3.1%, getting boost from HK market volume jump, now at HK$26 billion with still half an hour left to midday close, vs roughly HK$20 billion at midday in past few sessions. Still, Credit Suisse says review of trading activity levels in HK equity, derivative markets suggests downside risk to FY09 consensus forecasts.

Adds, proximity of year-to-date trading volumes to house's forecast assumptions lends support to FY09 EPS estimate of HK$3.03, which is 19% below consensus, implying further downgrades may emerge. Based on CS forecast, HKEx trades at 23X forward P/E, "way above" 7X-17X P/Es of global peers, CS says, keeps Underperform call, HK$40.00 target

[winston]

DJ MARKET TALK: HKEx +0.4%;Heavily Shorted, More Downside N/T-DBS

1510 [Dow Jones] Hong Kong Exchanges (0388.HK) +0.4% at HK$67.55, narrowing advance to match HSI's 0.8% gain, as counter faces selloff pressure after touching above HK$70.00 (intraday high at HK$70.85), becoming most heavily shorted stock midday with HK$215.58 million, or 12.7% of total short sales volume.

"Some investors may have set their target at HK$70.00 and this may have triggered the huge volume in shorting HKEx today," says Peter Lai at DBS. Adds, potential downside to test HK$60.00 near-term as trading volume of local bourse tipped sharply lower vs 2008, as trading mode remains bearish

[winston]

DJ MARKET TALK: HKEx Off 1.4%; Current Level Unattractive-Redford

1457 [Dow Jones] HKEx (0388.HK) down 1.4% at HK$66.75, as rally in HSI (+2.0%) more related to strength in China plays, with Shanghai Composite +4.0%, while trading cautious ahead of U.S. jobless data tonight; volume of local bourse tepid at HK$27.79 billion.

Kenny Tang at Redford says HKEx's current level unattractive, would be justified if stock at around HK$60.00. May explain HKEx's heavy short-selling volume Thursday, topping list with HK$350.92 million, as stock hit HK$70.85 high yesterday, while today's intraday peak at HK$69.15, suggests stock succumbs to profit-taking near psychologically key HK$70.00

[winston]

DJ MARKET TALK: DBS Raises HKEx Target To HK$51 But Keeps Sell

0934 [Dow Jones] STOCK CALL: DBS Vickers ups HKEx (0388.HK) target to HK$51 from HK$46 as raises FY08-09 earnings forecast given 2008, 2009 year-to-date market volume slightly higher than expected; keeps Sell call though as sluggish HK stock market could linger with global financial de-leveraging to drag on fund flows. Trading at 18.3X FY09 P/E, stock is "still expensive"; shares indicated flat at HK$65.50 at pre-open

[winston]

DJ MARKET TALK: Daiwa Downgrades HKEx To Hold; Targets HK$67.10

0905 [Dow Jones] STOCK CALL: Daiwa downgrades HKEx (0388.HK) to Hold vs Outperform, lowers target to HK$67.10 vs HK$84.20, based on 17.8X 2009 P/E. House also cuts its 2009, 2010 earnings forecast by 20%, 26% to reflect lower assumptions for average daily turnover, achieved returns from investment income.

"Given the recent weakness in the global equity markets and decline in global average daily turnover, we think HKEx will face a challenging macro environment over the next few months," says Daiwa. Stock ended 3.1% lower at HK$63.35 Tuesday

[winston]

How low can it go ?

=====================================

Equity slump to take toll on HKEx net by Mandy Lo

Net earnings of Hong Kong Exchanges and Clearing (0388) last year is expected to drop at least 20 percent because of a slump in equity trading and investment return, and analysts expect the situation to continue this year.

BNP Paribas analyst Dominic Chan forecasts HKEx net income to drop 22.3 percent to HK$4.79 billion for the year ended December. Earnings per share are expected to fall to HK$4.47 from HK$5.78.

"Average daily turnover would drop by 22 percent in 2009, while assuming a 5 percent drop in futures turnover," Chan said.

He forecasts the situation will not change this year with average turnover of the local market to be HK$55 billion per day.

( For the past few weeks, it was around HK$35b to HK$45b. )

Investment return for 2008 and 2009 is expected to be 1.6 percent and 1.3 percent respectively, down from 2.1 percent in 2007.

HKEx net profit in the fourth quarter last year is tipped to drop 60 percent from a year earlier to HK$861 million.

Citi analyst Bob Leung estimates net income of HKEx in 2008 to fall 20 percent to HK$4.94 billion. Citi slashed the earnings forecast for 2009 by 8 percent to HK$3.47 billion from the previous HK$3.78 billion.

HKEx is set to announce its full-year result on Wednesday.