HKEX 0388

[winston]

HKEx shares slide on broker report

HONG KONG, March 2 (Reuters) - Shares in bourse operator Hong Kong Exchanges & Clearing (HKEx) (0388.HK) slid more than 5 percent on Monday after Morgan Stanley slashed its target price on the stock on expectations a sharp slowdown in daily turnover would continue well into 2009.

By 0207 GMT the stock was down 5.3 percent at HK$59.25, but still well-above Morgan Stanley's new target price of HK$33.

The investment house said daily turnover on the exchange would average HK$37 billion ($4.77 billion) in 2009 and agressively cut estimates on other revenue streams including investment income and information fees.

"Given the weakness in the markets and the reduced activity of market participants, our estimates could still prove too optimistic," said analysts Anil Agarwal and Daniel Shum in a report Monday.

[winston]

DJ MARKET TALK: HKEx Off 7.1%; No Need To Rush In - Macquarie

1231 [Dow Jones] HKEx (0388.HK) down 7.1% at HK$58.10, remains worst-performing blue chip, likely in part hurt by slew of negative broker views including Morgan Stanley cutting target price to HK$33 from HK$38. Macquarie says "no need to rush in;" keeps Neutral call but lowers target price to HK$60 (previous target not stated); lowers FY08 earnings forecast by 8% to HK$4.8 billion, vs HK$4.91 billion now pegged by Thomson Reuters, mainly to factor in sluggish market activity, adjust for costs related to Lehman bankruptcy.

Macquarie also lowers FY09 earnings by 36% to HK$3.3 billion, implying 32% on-year drop on lower ADT assumptions. "We see no upside catalysts to drive the share price in the near term, but the +6% dividend yield should provide support to the share price in the current low interest rate environment." Suggests accumulating stock when shares fall below HK$50

[winston]

Outlook dimmer for exchange operator by Katherine Ng

A HSBC-led plummet in the equities market has set a dimmer outlook for the local bourse operator after three investment banks slashed their target prices just two days ahead of its results announcement tomorrow.

HKEx shares closed at an intra- day low of HK$57.50 yesterday after three more investment banks cut their target prices to HK$33.

Morgan Stanley analyst Anil Agarwal cut his target price for Hong Kong Exchanges and Clearing (0388) to HK$33, from the previous HK$38.

Agarwal predicts the average daily turnover on the local market will fall to the 2006 level of HK$37 billion.

"We are cutting our 2009 earnings per share to HK$2.34, broadly the same as 2006, given the weakness in the markets and the reduced activity of market participants," he said.

The estimate was about 16 percent revised down from previously and was still 43 percent down from yesterday's close. The widespread expectation of a HSBC rights issues slashed nearly 500 points from the blue-chip index and also shrank the main-board turnover to about HK$36 billion.

Agarwal said he holds a pessimistic view turnover will continue to contract and fall even to the 2004-05 level of only HK$15 billion.

"The target price would then cut to HK$15."

Credit Suisse analyst Christopher Esson said he expects HKEx to announce a 2008 net profit drop of 21.3 percent from a year ago to HK$5.6 billion, or a HK$4.50 earnings per share level.

"[The current] actual trading activity is tracking in line with or below our assumptions of HK$42 billion daily turnover and 385,000 derivative contract volume," said Esson, despite maintaining the HK$40 target price and "underperform" recommendation.

Macquarie analyst Jemmy Huang also revised the HKEx 2009 net profit down 36 percent.

[winston]

What are the implications ??

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REFILE-Goldman launches HK dark pool equities platform

HONG KONG, March 2 (Reuters) - Wall Street bank Goldman Sachs (GS.N) will launch its "dark pool" trading platform in Hong Kong on Monday, providing an alternative source of liquidity to clients at a time when trading volumes are thinning.

In dark pools, buyers and sellers anonymously match large stock orders, keeping details about order prices and volumes concealed so big orders do not distort the broader market.

The Goldman dark pool -- named SIGMA X -- was first launched in 2005 in the United States and also operates in Europe. It comprises hedge funds, institutions, broker dealers, as well as franchise flow from Goldman Sachs' trading desks.

"The growth potential of Hong Kong's market remains significant and we think alternative pools of liquidity will play an important role in its development going forward," said Gene Reilly, managing director and head of trading and execution for Goldman Sachs in Asia.

Daily average trading volume on the Hong Kong stock exchange is expected to fall by as much as 47 percent this year, according to a Morgan Stanley forecast.

Other dark pool operators in Hong Kong include brokerage CLSA, Investment Technology Group (ITG.N), and the Instinet unit of Nomura Holdings (8604.T).

SIGMA X is the largest non-displayed liquidity pool in the United States by equity shares traded daily, Goldman said in a statement. Its average daily volume has grown 10-fold in the last two years, and trades over 300 million shares per day.

Last year, market analysts said anywhere from 10 to 20 percent of U.S. equity trades could be occurring in dark pools.

[winston]

All the Analysts were recommending a Sell before the results today. Wanted to buy a Put but decided not to. It's up 8% now . May buy a Put on it if it get's crazy in the next few days.

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UPDATE 1-HKEx Q4 earnings fall 44 pct as trading shrinks

* Q4 net profit HK$1.2 billion vs HK$950 million consensus
* Trading fees dented by sharp drop in turnover
* Turnover expected to slide by nearly 50 pct in 2009
* Shares jump as much as 7.9 pct after results (Updates to add comments, details and byline) By Parvathy Ullatil

HONG KONG, March 4 (Reuters) - Asia's largest listed bourse operator, Hong Kong Exchanges & Clearing <0388.HK>, posted a smaller-than expected 44 percent fall in fourth quarter profit, sending shares in the exchange operator nearly 8 percent higher.

But shrinking turnover signalled further profit declines this year, said analysts. Battling slumping global equity markets and a drop-off in new equity issues, HKEx's earnings have fallen for three successive quarters.

Daily average turnover, a key indicator of the exchange's trading fees that in turn make up nearly a fifth of its revenue, slid 18 percent to HK$72.1 billion in 2008 as international fund flows froze amid the contagion in the global financial markets.

HKEx reported a net profit of HK$1.2 billion ($155 million) in the quarter to Dec 31, topping the average forecast of HK$950 million from 14 analysts polled by Reuters Estimates, but sharply lower than the HK$2.16 billion a year earlier.

The exchange operator slashed its final dividend by 47 percent to HK$1.80, bringing the annual dividend down 17 percent to HK$4.29.

(For an earnings graphic, please click on https://customers.reuters.com/d/graphics/HK_EXC0309.gif) The earnings decline looked particularly stark as HKEx's performance in the worst leg of 2008's bear market came a year after the peak of the 2007 bull run.

Listing fees in the exchange, which prides itself as the world's gateway to China, shrank 21 percent, stricken by a raft of cancelled and shelved IPOs as global markets tanked.

Investment income fell 42 percent, owing to corporate funds' losses in fair value after logging gains in 2007. But income was still above analyst's expectations due to high interbank rates in the final quarter of 2008.

Analysts predict tougher times for the exchange operator in 2009, with turnover expected to fall by as much as 50 percent and other revenue streams also hard hit.

New initiatives from the exchange, including the launch of Hong Kong Depository Receipts and gold futures and the pending launch of carbon futures in 2009, are unlikely to prop up the company's dented top line, according to analysts.

HKEx did better than its rival Singapore Exchange which reported a 52 percent drop in its second-quarter net profit in January, hurt by lower trading volumes and a dearth of new share issues.

HKEx shares fell 21 percent in the final quarter of 2008, in line with losses on the benchmark Hang Seng Index <.HSI>.

The stock was up 1.4 percent at HK$56.70 on Wednesday before the results were announced.

Shares in the exchange operator, the world's second largest by market value, plunged earlier this week after Morgan Stanley slashed its target price on the stock to HK$33 and warned that turnover could nearly halve in 2009.

"Given the weakness in the markets and the reduced activity of market participants, our estimates could still prove too optimistic," said Morgan Stanley's Anil Agarwal.

[winston]

UPDATE 2-HKEx Q4 profit beats forecasts, shares rally

* Q4 net profit beats expectations.
* Shares soar nearly 10 pct after results (Updates to add comments and outlook) By Parvathy Ullatil

HONG KONG, March 4 (Reuters) - Hong Kong Exchanges & Clearing <0388.HK> posted a smaller-than-expected 44 percent fall in quarterly profit on tighter cost control, sending shares in Asia's largest listed bourse operator up nearly 10 percent.

But shrinking turnover signalled further profit declines, knocking HKEx's shares down by about a fifth so far this year.

"At the company level HKEx is good at controlling costs. It has been launching new products, but when the global market turnover is falling there's little they can do," said Jonas Kan, analyst with Daiwa Securities. "HKEx may be able to hold on to their share but the pie is definitely shrinking." Battling slumping global equity markets and a drop-off in new equity issues, HKEx has posted three consecutive quarterly profit falls, and the stock, once a darling of Asian fund managers, has just two buy ratings in a poll of 18 brokerages.

HKEx reported a net profit of HK$1.2 billion ($155 million) in the quarter to Dec. 31, topping the average forecast of HK$950 million from 14 analysts polled by Reuters Estimates, but sharply lower than the HK$2.16 billion a year earlier.

For a graphic on earnings, click https://customers.reuters.com/d/graphics/HK_EXC0309.gif Daily average turnover, a key indicator of the exchange's trading fees that in turn make up nearly a fifth of its revenue, slid 18 percent to HK$72.1 billion in 2008 as international fund flows froze amid the contagion in the global financial markets.

Other revenue streams such as investment income and information and listing fees are also seen hard hit this year.

Shares in the exchange operator, the world's second largest by market value, were 7 percent higher at HK$59.90 at 0750 GMT, compared with the broader market up 2.6 percent.

The stock plunged earlier this week after Morgan Stanley slashed its target price to HK$33 and warned that turnover could nearly halve in 2009.

TOO EXPENSIVE Many investors have stayed away from HKEx shares because they reckon its valuation, at between 17 times and 27 times estimated 2009 earnings, is just too expensive.

That compares with Australia's ASX Ltd and Singapore Exchange's 14 times and 19 times respectively.

"It is still expensive when other exchanges like CME , which have more more trading products, are trading at prospective 12.5 times," said William Lo, analyst with Ample Finance Group.

"The only positive factor that can support the stock is the China story. I would suggest holding on until the stock comes down to about HK$40." HKEx did better than its rival Singapore Exchange which reported a 52 percent drop in its second-quarter net profit in January, hurt by lower trading volumes and a dearth of new share issues.

New initiatives from the exchange, including the launch of Hong Kong Depository Receipts and gold futures and the pending launch of carbon futures in 2009, are unlikely to prop up the company's dented top line, according to analysts.

The exchange operator slashed its final dividend by 47 percent to HK$1.80, bringing the annual dividend down 17 percent to HK$4.29.

[winston]

HKEx freezes pay as net drops 17pc by Katherine Ng

Hong Kong Exchanges and Clearing (0388) said prudent cost controls and a liquid derivatives market helped offset negative factors last year as it reported a net profit that beat market expectations.

But staff salaries will be frozen this year.

Chief executive Paul Chow Man-yiu said market turnover is likely to continue falling and he is not optimistic that the launch of new products can help offset falling turnover-related income.

The net profit of the local bourse operator dropped 17 percent to HK$5.13 billion, against HK$6.17 billion in 2007 and the market consensus of HK$4.9 billion, amid shrinking turnover and fee income.

Fourth-quarter profit plunged 44 percent to HK$1.2 billion compared with HK$2.16 billion in 2007. It was the third consecutive quarter that profit declined.

Chow said turnover in the past two months continued to drop - January's daily volume dropped to HK$47 billion while February's was HK$39.9 billion. The average turnover last year slumped to HK$75 billion while in the fourth quarter it fell to HK$50 billion.

Revenue fell 10 percent to HK$7.5 billion. Operating expenses increased by 15 percent to HK$1.62 billion inclusive of the HK$160 million Lehman-related default impairment losses.

All income, including listing fees and transaction levies, dropped. Investment returns from corporate and margin funds declined as interest rates headed south, chief financial officer Archie Tsim said.

Operating expenses surged 15 percent but salaries and related expenses decreased only 3 percent. Chow said performance-related bonuses were cut by HK$86 million last year but this was offset by having to pay more in salaries for staff expansion.

In order to keep costs down, the HKEx board yesterday agreed to freeze salaries this year. Only 291 junior staff received a one-off half-month bonus.

HKEx shares surged the most in two months yesterday after the better-than- expected results and maintained dividend payout ratio. HKEx closed at HK$59.60, up 6.62 percent.

[winston]

DJ MARKET TALK: HKEx Upside Likely Capped Despite FY Topping View

0743 [Dow Jones] HKEx's (0388.HK) short-term upside likely limited as yesterday's 6.6% post-results rally probably prices in above-view FY results, but outlook remains weak. Analyst says HKEx's earnings drivers from market activities, but "last year, market activities were nearly double what we are having at the moment."

FY08 ADT at HK$72.1 billion, but slipped to HK$47.7 billion in January, most recently hovering around HK$40 billion. Separately, DBS Vickers keeps HKEx as Sell with HK$51.00 target; maintains ADT assumptions of HK$43.7 billion for this year, based on 98% market velocity, year-end market cap of HK$11.9 trillion, year-end HSI target of 16,000. Despite having fallen 78% from peak, "sluggish Hong Kong stock market could linger with global financial deleveraging to continue dragging fund flows," DBS says

[winston]

DJ MARKET TALK: HKEx +2.3% At Pre-Open;Strengths Priced In -Daiwa

0943 [Dow Jones] HKEx (0388.HK) +2.3% at HK$61.00 at pre-open, adding to yesterday's 6.6% rally yesterday after better-than-expected FY results. Daiwa says positive surprise mainly from higher-than-expected return from investment, which rose from 3Q's 1.2% to 1.7% in 4Q, taking full-year figure to HK$999 million, higher than house's estimate of HK$820 million; lower-than-expected operation costs also help.

Keeps stock at Hold, 6-month target of HK$67.10 pegged on 17.8X FY09 earnings; "we think the company has several strengths at the micro level, but believe these have been reflected in its premium valuation compared with its peers and its outperformance over the past three months." 10-day moving average at HK$61.94 marks immediate cap

[winston]

DJ MARKET TALK: Citi Cuts HKEx Target To HK$60.10; Keeps At Sell

1347 [Dow Jones] STOCK CALL: Citigroup cuts HKEx (0388.HK) target price to HK$60.10 from HK$67.00 due to lower ADT assumption; keeps Sell call as HKEx is "high beta stock with deteriorating fundamentals." Says with rapidly deteriorating global, local market conditions, HKEx revenue from margin fund investments, derivative listing warrant fees, ADT will likely continue to deteriorate into 2009.

Still, notes company's strong balance sheet, cashflow keeps generous 90% dividend payout ratio, reckons 4.6% FY09 dividend yield could limit downside risk for now. Stock off 2.9% at HK$57.85 midday.