HONG KONG EXCHANGES & CLEARI

Hong Kong Exchanges and Clearing Ltd (0388.HK: Quote, Profile , Research), which runs the city's stock exchange, was also a big loser as equity markets could suffer further in the current risk-averse climate.

388 HKEX 248.4 9.4 3.93 2,286,377 9,315 HKEx +2.8%,Slew Of Upgrades;Macquarie Eyes HK$300 HKEx (0388.HK) +2.8% at HK$245.80, may regain 10-day moving average of HK$246 in just a tick, boosted by slew of post-results upgrades - Goldman Sachs lifts target to HK$300 from HK$280, JP Morgan to HK$258 from HK$145; while Deutsche Bank ups stock to Buy from Sell with HK$300 target. Macquarie also ups to Outperform from Neutral with HK$300 target; says medium-term outlook upbeat for HKEx due to negative real interest rates in HK, continuation of China's self-reinforcing liquidity cycle. "We believe that the relative attractiveness of Asia (HK/China specifically) will ensure continued inflows from foreign investors in the medium term;" at same time gradual increase in inbound investment from China should support trading activity. Stock 3rd most heavily traded with HK$1.235 billion.

HK Exchanges & Clearing Jan-Sep Net Profit HK$4.01 Bln Hong Kong Exchanges & Clearing Ltd. (0388.HK), the operator of the city's stock and derivatives exchanges, said Wednesday its net profit for the first three quarters of the year more than doubled on robust growth in equities and derivatives trading. The blue-chip company said its net profit for the nine months ended Sept. 30 was HK$4.01 billion, up from HK$1.67 billion a year earlier, as revenue jumped to HK$5.50 billion from HK$2.84 billion. Hong Kong Exchanges' revenue streams include fees and tariffs related to securities, options and derivatives trading, as well as listing fees, investment income, and clearing and settlement fees.

HKEx (388) Market capitalization drives turnover and thus valuation We forecast average daily market turnover (¡§ADMT¡¨) to reach $88bn for FY07 and $155bn for FY08. This will boost HKEx¡¦s earnings to $8.52bn in FY08, up 45% yoy, translating into undemanding FY08 PER of 28x and 0.63x PEG ratio. Our target price of $300, representing an upside potential of 32%, is derived from our dividend discount model. We believe the high ADMT, which is the core factor for a premium valuation of HKEx, will persist mainly driven by the market capitalization and the following factors: The FY07 and FY08 ADMT is well supported by (i) high market capitalization; (ii) a rise in market velocity; and (iii) active warrant market. Given high growth in market capitalization in FY08F, the ADMT is likely to be high and leads to high valuation. We believe trading in derivative warrants will continue to contribute some 20% of market turnover for FY07 and FY08 and thus support the ADMT. Our 5-stage dividend discount model suggests the fair value of HKEx is $305.6 assuming the CAGR of dividend in first four stages is 15.9% and followed by long-term growth rate of 10%, discounted by required rate of return of 12.5%. The sell-off due to Premier¡¦s comment on the delay in ¡§through train scheme¡¨ will be short-lived. On the contrary, we view the comment as a strong commitment of the PRC Government in maintaining the stability and prosperity of Hong Kong as a key financial centre in China. Therefore, HKEx will be benefited in long run. 3Q07 net profit will surge by 185% yoy and 15% qoq. HKEx will announce its 3Q07 results this evening. We believe the 3Q07 revenue will rise 138% yoy or 28% qoq to $2.26bn. 3Q07 net profit will be $1.62bn, up 185% yoy and 15% qoq. Favourable policies and environments. The ADMT will be supported by capital inflow triggered by rate cut in US and weak US dollar. In addition, we believe the PRC Government will allow funds flowing into Hong Kong in long run given the excess liquidity problem and growing appreciation pressure on Renminbi. Key risks on share price are (i) volatile nature of ADMT; (ii) PRC Government policies on capital flow; and (iii) further purchase of shares by the HK Government.