Please ensure Javascript is enabled for purposes of website accessibility

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

By Motley Fool Staff – May 14, 2019 at 6:49PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company behind the world's third-largest stock market has reformed to attract listings. Here are three things investors should consider about HKEX.

Hong Kong's stock market recently reclaimed its spot as the world's third-biggest by market capitalization, overtaking Japan, and benefiting 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 (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 companies that chose to list in the US's larger markets in recent years. 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 (1810 -3.30%) and Meituan Dianping (3690 -2.37%), 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.

A version of article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Hong Kong Exchanges & Clearing Ltd Stock Quote
Hong Kong Exchanges & Clearing Ltd
388
$284.80 (%)
XIAOMI Stock Quote
XIAOMI
1810
$9.08 (-3.30%) $0.31
Meituan Stock Quote
Meituan
3690
$172.90 (-2.37%) $-4.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.