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Valuations of Hong Kong's stock market operator go interstellar


[HONG KONG] For the first time analysts are more bullish about the operator of Hong Kong's stock market than fast-growing Chinese firms like Lenovo Group and Tencent Holdings.

Shares in Hong Kong Exchanges and Clearing Ltd (HKEx) have risen about 40 per cent in the past six days on an unprecedented flood of mainland investment in Hong Kong stocks. Average daily turnover hit a record HK$291 billion (S$51.06 billion) last Thursday, nearly three times the historical average.

The HKEx is now the world's biggest bourse operator with a US$43 billion market value, ahead of rival CME Group Inc. Its price-to-earnings (P/E) ratio has jumped to 45 times, while CME trades at a P/E of 23. No company in the Hang Seng Index matches that.

The P/E estimate is based on increased daily turnover flowing through the rest of the year. A Reuters poll of six analysts estimated average daily turnover of HK$103 billion for the rest of 2015 versus HK$86 billion in the first quarter.

"This is the new normal," said Hong Kong-based Jimmy Weng, a fund manager with Genesis Capital Investment, adding that he was bullish on HKEx's stock.

Fund managers are stacking their chips on HKEx after Beijing allowed institutional investors to buy discounted shares in Hong Kong via a landmark stock pipeline scheme.

HKEx, which derives two-thirds of its profits from equity trades, is well placed to benefit from more initiatives such as the planned Shenzhen-Hong Kong connect scheme, and as investment quotas for the Hong Kong-Shanghai pipeline are increased.

"With the Stock Connect Program and improved market sentiment, it is likely to see market trading to remain robust and it will continue to see higher volume than the past," said Bin Shi, a portfolio manager at UBS Global Asset Management.

Investors want HKEx to stay focused on China opportunities and not splurge its rich share price on expensive acquisitions. In 2012, HKEx bought the London Metal Exchange (LME) for US$2.2 billion, 58 times LME's adjusted earnings for the previous year. That had caused some unease among investors early on.

"I don't think the goal is really to do any takeover. What they really need to do is to expand the quota that will allow both investors to go into the Shanghai stock exchange as well as invest in Hong Kong," Mr Weng at Genesis said.

HKEx's biggest shareholder is Hong Kong's government, followed by Thornburg Investment Management and BlackRock Institutional Trust.