Summary of Hong Kong Exchanges (0388.HK) Conference Call Company Overview - **Company**: Hong Kong Exchanges (0388.HK) - **Market Cap**: HK$559.4 billion / $71.7 billion - **Current Price**: HK$441.20 - **Target Price**: HK$509.00 - **Upside Potential**: 15.4% Key Financial Highlights - **2Q25 Earnings**: Earnings exceeded expectations, driven by higher-than-expected investment income. Core profits (excluding investment income) were in line with expectations, down 2%, but showed a strong increase of approximately 40% year-over-year due to nearly doubling cash Average Daily Turnover (ADT) [1][2] - **Earnings Estimates**: Adjustments made to FY25E/FY26E/FY27E EPS estimates increased by +3%/+1%/+2% respectively [1] - **P/E Ratio**: The stock trades at a mid-cycle P/E of approximately 35X, despite a year-to-date share price rally of around 50% [1] Market Structure Enhancements - **Tick Size Reduction**: Initiated a tick size reduction for the bottom half of the market, affecting around 300 stocks that contribute approximately 30% of total ADT. This led to a 22% reduction in bid-ask spreads and a 25% increase in ADT for these stocks [2] - **Weekly Option Expiry**: Expanded the number of stocks with weekly option expiry from 10 to 11, contributing about 21% to total stock options Average Daily Volume (ADV) [2] - **Future Enhancements**: Plans to further reduce spreads for the remaining stocks in mid-2026 and enhance intra-day margining setups [2] Investment Income Outlook - **Investment Income Forecast**: Management indicated a weaker outlook for investment income due to lower HIBOR rates and a reduction in the external portfolio to fund the purchase of headquarters. Investment income is expected to decline by approximately 17% and 11% year-over-year in 2025E and 2026E respectively [18] - **2H Investment Income**: Projected to be around HK$1.1 billion in 2H, down from HK$3.0 billion in 1H, with a modest recovery expected in 1H-2H 2026E [18] Revenue and Profit Projections - **Revenue Growth**: Total revenue is projected to grow from HK$22,374 million in 2024 to HK$29,117 million by 2027, with a compound annual growth rate (CAGR) of approximately 18% excluding investment income [19] - **Earnings Per Share (EPS)**: EPS is expected to rise from HK$10.32 in 2025E to HK$13.41 in 2027E, reflecting a strong growth trajectory [19] - **Dividend Payout**: The dividend payout ratio is expected to remain around 90% with dividends per share increasing from HK$9.26 in 2025E to HK$12.07 in 2027E [19] Other Important Insights - **Market Trends**: The management believes that the weekly option expiry setup could be expanded to more stocks over time, and the Orion derivatives platform is expected to enhance trading hours and volumes by 2028 [18] - **RMB Counter**: Anticipated handover of the RMB counter to Southbound investors by the end of the year, which is expected to lower transaction costs for these investors [18] Conclusion - The Hong Kong Exchanges is positioned for continued growth with strategic enhancements in market structure and a strong earnings trajectory, despite challenges in investment income. The stock remains a buy with a favorable target price indicating significant upside potential.