Analysts gloomy on HK exchange after Shenzhen link

A banner promoting the Shenzhen-Hong Kong Stock Connect is displayed at the Hong Kong Exchanges on Aug 16, 2016.
A banner promoting the Shenzhen-Hong Kong Stock Connect is displayed at the Hong Kong Exchanges on Aug 16, 2016.PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Hong Kong Exchanges & Clearing Ltd.'s outlook hasn't improved despite last week's official announcement of a trading link with Shenzhen, according to analysts.

The proportion of sell recommendations is at its highest level since 2013, according to data compiled by Bloomberg, and price estimates suggest an 8.6 per cent stock decline in the next 12 months. Daily turnover, which jumped last week, is declining, and shares have fallen 5.4 per cent in a week. The stock traded without the rights to a dividend on Tuesday (Aug 23).

Research notes published after the Aug 16 unveiling of the Shenzhen link draw a glum picture, as analysts were left unsurprised by the long-awaited approval: Goldman Sachs said there is now an absence of positive news flow around the company, while Citigroup said the link was possibly the last catalyst for the exchange.

"There's no more optimism in the short term - the last piece of good news has been announced," said Daniel So, a strategist at CMB International Securities in Hong Kong. "Market turnover at these levels cannot support its valuation. I expect 20 per cent downside from here by the end of this year."

The connect programme with the Shenzhen Stock Exchange will give investors a wider selection of stocks for cross-border trading. HKEx shares had climbed 3.4 per cent in the week leading up to the announcement.

Daily turnover on Hong Kong's main exchange averaged HK$85.4 billion (S$14.9 billion) last week, about 28 per cent more than this year's average, according to data compiled by Bloomberg. Investors will likely have to face the reality that turnover won't increase as much as they expect, Tony Tanaka, an analyst at Haitong International Securities Group, said in a report on Aug 19, cutting his rating to sell from neutral. Turnover was HK$60.8 billion on Tuesday.

HKEx dropped 0.1 per cent at 10:08 am local time, heading for a five-week low.

With the Shanghai link contributing to just 1.3 per cent of HKEx's total revenue in the first half of the year, the new link won't have a large impact, Citigroup analyst Darwin Lam wrote in a report on Aug 16.

Earlier this month, HKEx said first-half net income declined 27 per cent compared to the year-ago period on lower trading. With the stock at 34 times estimated earnings, it's among the most expensive compared to its global peers.

It was a different story when the Shanghai link was announced in April 2014. The news spurred a wave of analyst upgrades that month, although downgrades followed the program's commencement in November. About 47 per cent of analysts tracked by Bloomberg are now recommending investors sell the shares, compared with 29 per cent a year ago.

Lorraine Chan, spokeswoman for HKEx, declined to comment on analysts' opinions.

"Shenzhen connect only marks another milestone in the first phase of our mainland mutual market access plans," said Ms Chan.

HKEx will benefit from capital flow as mainland markets open up, Michael Wu, an analyst at Morningstar, wrote in a report on Aug 16. Exchange-traded funds are likely to be allowed in the stock link programme next year, and there are plans for more bonds and stocks to be included in the mutual market programme, HKEx chief executive officer Charles Li said in a briefing last week.

While authorities didn't give a start date for the link with Shenzhen, which has been expected for more than a year, HKEx said last week preparations for the launch will take about four months. Daily limits will be the same as for Shanghai's, 13 billion yuan for orders going north to the mainland and 10.5 billion for southbound traffic. The connect will also include small-cap companies listed in Hong Kong that have a market value of more than HK$5 billion.

"People might have had higher hope on the basket of eligible stocks and on the expansion of daily trading quota too," said Francis Chan, a Bloomberg Intelligence analyst. "Demand for stock connect has been limited. It's unlikely that Shenzhen stock link will make a material difference for HKEx."