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Hong Kong Insanity Launches Exchange Operator's Shares Into Orbit
Last weekend we highlighted a note out of Deutsche Bank where analysts hiked their target on shares of Hong Kong Exchanges and Clearing. HKEx is running at “full throttle” DB said, thanks to inflows from the mainland (attributable to new regulations in China which allow mutual funds to invest in Hong Kong-listed shares and to investors hunting for “bargains” outside of the Shanghai bubble mania) and things can only get better from here what with “sustained interest from Chinese investors focused on discounted Hshares, and potential growth in scale and scope of Stock Connect.”
As it turns out, DB made a good call here as the only thing more exciting than betting on the continuation of a margin-fueled, self-feeding domestic mania is betting on the exchange where the maniacs are trading, which is why, as Reuters reports, shares of HKEx are up 40% in just the past 6 trading days and is now the world’s largest exchange operator with a P/E ratio that’s double that of CME. Here’s more:
Shares in Hong Kong Exchanges and Clearing Ltd (HKEx) have risen about 40 percent 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 ($37.54 billion) last Thursday, nearly three times the historical average.
The HKEx is now the world's biggest bourse operator with a $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...
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.
As we showed a few days back, market turnover is now above the levels seen in 2007 and average turnover from March 30 to April 10 was 120% greater than average turnover from January 1 to March 27.


But as Citi will tell, you, there may be a long way to go before we reach peak absurdity in Asia because the indexed average turnover shows that we’re only about half way there in terms of duplicating the surge in turnover that took place in 2006-2007 (and remember, whether it’s EV/EBITDA levels, CDO issuance, subprime lending, or record tight credit spreads, it’s all about getting back to 2006 or, in other words, completely reflating the bubble). Here’s Citi:
The bull run in 2007 suggests turnover rises in stages and by 10x in its full course. Given a different cyclical backdrop and structural drivers ahead, we believe recent turnover rise is likely the start of a secular uptrend. We raise our 15E-17E EPS forecast by 39-42% (33-36% above consensus) and roll our TP to HK$400 (42x mid-2016 P/E), based on HK$150bn daily stock turnover.
Reminiscent of 2007? We are probably just at mid-point
From 2006 to the market peak in late 2007, stock turnover (we use two-week moving avg.) rose by c.10x from HK$16bn to HK$170bn. Meanwhile, since 2014, stock turnover has risen by <5x from HK$48bn to currently HK$230bn. If 2006-2007 is a guidepost, current turnover uptrend is just half way done, and may reach c.HK$500bn over time.
We emphasize the turnover rally (of 10x) in 2007 took place in the absence of actual launch of "through-train". This time, the SH-HK Connect has kick-started, and liquidity flow to HK is bound to rise over time (e.g. raising quota of SH-HK Connect; launch of Shenzhen-HK Connect; fund flow through China banks). We also stress that China has huge savings (e.g. Rmb120trn of deposits) and institutional funds (e.g. Rmb5trn of mutual funds; Rmb11trn of insurance assets), vs merely HK$30trn of HK stock market cap.


So Citi is looking for 42% EPS upside and a 42X multiple, and why not? Because as we pointed out earlier this month, Chinese retail investors opened enough stock trading accounts in March for every man, woman, and child in Los Angeles and when we checked the data from the China Securities Depository and Clearing Co., we were not at all surprised to learn that there were 3.2 million more accounts opened in just the first two weeks of April meaning this month is on pace to beat last month by 63%.


The easier China makes it for this new money to find its way due south, the crazier things are likely to get in Hong Kong and that means that the investment thesis for the exchange makes some measure of sense. However, this has thus far been a self-fulfilling prophecy of sorts. That is, gains beget more gains as no one wants to miss the boat and as we've noted on a few occasions lately, it doesn't matter how much you overpay, as long as someone else is willing to pay more and in that type of envirornment, where a rising tide lifts all boats, it's easy to overlook the fact that these very same "investors" will have the very same herd mentality when the tide goes out, meaning that if something shakes their collective confidence, the whole is likely to crumble in spectacular fashion.
We'll leave you with the following chart showing the "interstellar" (to quote Reuters) move in shares of HKEx.

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I like you long a long time. Double down, GI Joe.
Just wait til obama and his comrades have that happening in USSA. all part of their plan..
Just the beginning. They have along way to go to catch the NYSE.
From ludicrous speed to full retardedness, it just keeps getting better. "lunch not launch!" in full effect.
+40% in 6 days - lulz
Real spikey not fat w slow build up... Looks like that cloud skyscraper to come in Dubai.
Bang bang all over You!
https://m.youtube.com/watch?v=0HDdjwpPM3Y
This is the 3rd best chance to bet big & win big (on a Shanghai/Hong Kong equity market meltdown) in the last 15 years (it may be the 2nd best chance, statistically speaking).
Every bull will come with a laundry list of reasons why this very stretched & artificial bull market can run longer, inevitably citing central bank omnipotence as reason number 1, yet ironically, the PBoC is more likely than not going to intentionally pop the Chinese mania in their equity markets assuming they can't achieve an engineered glide down (they won't be able to).
Central banks are not omnipotent whatsoever, as a hundred years of history proves (they are actually the primary cause of asset bubble formation & crashes), and in the case of the Chinese/Hong Kong equity market silliness, the PBoC will intentionally prick the current bubble soon.
dp x2
a billion suckers cant be wrong,,can they?
Not at the moment.
Watch what happens to paper gold when they panic.
Back in the good ol' US, NFLX has risen 36.05% since Apr 1, 2015....yes...2015.
Why doesn't anyone feel jealous about that?
But Chinese putting their money where they feel like...then they seem to be falling apart?
Get out much?
Does anyone remember which year the US economy grew by more than 10% for the last time? It was in 1950.....a full 65 years ago...and it is still sputtering....
The Chinese growth has just started.....Hoping for their stock market death is greatly exaggerated.
The largest IPO on the planet ever was just from them last year. So is the largest bank....and the largest oil company...the largest reserves....the highest banking profits....the largest trading nation.......
Invest in China and do yourself a favour or better still buy the HKD currency and also the stocks which will break the peg to the USD soon....
Did you know that Citibank's branch in HK has the largest cash deposits on the planet of any other Citi branch in the world?
You might be right DB, but--the USA had all that and more--in 1929. China has a lot more mosts too: the highest rates of cancer and birth defects due to the most polluted place in world history, with probably the most corrupt gov, the largest credit bubble ever, the most riots and protests, the largest internal security apparatus, the most export dependent economy, the most nuke plants going up (would you live next to a Chinese nuke plant?) the most testosterone fueled crazies who can't find a woman, the most billionaires leaving the country, the most serious water crises, the most rapidly widening wealth disparity....etc...etc
At the right hand side of this page it says: "How To [Read/Tip Off] Zero Hedge Without Attracting The Interest Of [Human Resources/The Treasury/Black Helicopters]"
Exactly what makes you think it's China that has the largest internal security apparatus?
Exactly, anonymice.
Made me chuckle...
Most people are like frogs..unable to see that the pot is boiling.....that too right underneath them...until it is too late....:)
Got to have a Plan B when you don't need it...not when it is too late.
Fair enough...
But why does no one talk about AIG and Lehman and Merrill...with Goldman hiding under the desk when the world started falling apart.
None of that has occured in China.
Once that occurs, then we will worry about China.
Until then if Americans can live near a nuke plant so can the Chinese.
The Japanese, the Indians and the Russians have all suffered the catastrophe of living next to a nuke plant. It is certainly not the end of the world.
As far as the exports of China and its dependence is concernmed. I strongly suggest that BMW, GM, Apple, Dell, all shirt manufacturers, all furniture makers, Sony, Samsung and every foreign company to voluntarily shut down immediately and leave China. Let us see where they will go next to manufacture? Because they are the majority makers of everytihng and have sent over USD 1 trillion in last 1 decade and over USD 2 trillion in last 2 decades to build factories in China.
If China has a credit bubble then US and UK have a 1000 times more, I am afraid.
Water crisis...I think we need to look at California first and then worry about China.
Corruption is more in US and every other nation. NY and HSBC are the money laundering capitals along with Switzerland where more than USD 2 trillion sits in cash and n bank accounts that is unaccounted for. Never heard of a Chinese bank doing money laundering at that scale globally or being named as a nerve centre of money laundering.
Riots are being held in South Africa, Brazil, Greece, Paris etc more than in China.
So, I dont think any of your assertions are valid.
If you said something about NASA or miltary aggression by America or Hollywood fantasy movies, I would have believed that yes indeed US is world leader but in anything else they lost both the moral standing and the super power status several years ago. I am afraid the US Govt sold its citizens and its own soul for the sake of WHAT? I dont even know why they undersold everyone.
Today a US woman was killed in Pakistan just because she was American. Same happend in Saudi, UAE not to mention Iraq, Afghanistan, Syria, Libya etc. Wonder why US persons individually are paying the price for the atrocities of the US Govt? It is not only barbaric but
In South Africa they are kicking out even other Black Africans and Indians, Chinese and Pakistanis.
The whole world is falling apart and if I see one nation that is still holding it, it is China. Because they have provided economic growth in the last 2-3 decades to majority of their citizens and reduced reasons for conflict. And thus far, they are doing just fine.
I dont see any billionaires leaving China....I dont know what you are saying? Can you please share some names? China is close to reaching the same number of billionaires as in America and just 10 years ago, they had very very few. They are minting billionaires as we speak. They are also printing 40-50 IPO's per month. This is happening at such a rapid clip because they have real money and so much liquidity and real deals are happening and retail as well as all sorts of growth is occuring.
It is very sad that most western people just look at just the negatives. Yes, China has negatives, who doesn't, but their positives by far are much more than their negatives and hence they are having stable long term growth.
Insanity at its best. Won't end well.