HKEx (388.HK): China A50 Index Future to Debut in 2 Weeks

Equity Bottom-Up

411 Views06 Oct 2021 05:01

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SUMMARY

HKEX (388 HK) is set to launch MSCI China A50 Connect Index future on Oct 18, 2021. The debut marks the significant milestone for HKEx to diversify its earnings stream away from a heavy reliance on cash equity market volumes. With the rising volume for China A-share through Stock Connect Northbound, we believe the demand for China A50 Connect future is huge. Due to regulatory restriction in the past, there is lack of China A-share related derivative products in Hong Kong market. The to-be-launched MSCI China A50 Connect future will likely fill the gap. In longer term, this product launch is a game changer for HKEX (388 HK) derivative business. We estimate the derivative business contribution to HKEx revenue will likely grow to 25% from current 16%.
We analyzed the trading volume of future contracts for Hang Seng China Enterprises Index (HSCEI INDEX) on HKEx and FTSE China A50 Index (XIN9I INDEX) on SGX (SGX SP). We estimate that ADV (Average Daily Volume) of MSCI China A50 Connect contract will likely be ramped up at 1.5-2.0x the volume of FTSE A50 at its launch. In a long-run, we believe ADV of MSCI China A50 could be more than 5x of ADV of FTSE A50 as offshore investors' exposure on China A-share cash equity grows. This will reshape HKEx with more balanced revenue stream from both cash equity and derivative.
HKEX (388 HK) August ADT (Average Daily Turnover) has been resilient, delivering 18% year-over-year growth in the month. The ADT for the first eight months of 2021 was up 46 per cent from the same period last year. Although China market is clouded by recent Beijing's crackdown of big tech, we still think HKEx will play a key role on offshore China listings. We forecast HKEX (388 HK) Securities ADT of HK$240bn in FY 21 (excluding Stock Connect Northbound volume) and remain bullish on HKEX (388 HK) and have TP HKD 550.