HKEx 'flying on vapor', CLSA warns

May 14, 2015 16:35
CLSA sets its target price for HKEx at HK$155 in 12 months, 44 percent lower than the current level. Photo: Reuters

In its latest review, CLSA said it does not share the market's optimism toward Hong Kong Exchanges and Clearing Ltd. (00388.HK), describing the recent rally of the local bourse operator's shares as “flying on vapor”.

The brokerage said the stock's surges in April were “driven by velocity spikes and have never been sustained in the past”.

At these lofty levels, CLSA said it cannot “justify any call other than SELL”.

Unless investors believe in the "bigger fool theory" -- there will always be another investor willing to assume the current forthy levels of trading volume will last -- they better stay away, it said.

The debate can go on forever if HKEx is flying on powerful and sustainable fuel.

But a review of what happened in 2007, the last time when the market went crazy over the stock, does prove CLSA has a point.

In its 2007 annual report, HKEx highlighted a record daily turnover in excess of HK$210 billion in October of that year.

But, as it turned out, the party didn’t last. In the ensuing seven years, the daily turnover dwindled to an average of less than HK$70 billion.

The current market boom followed the launch of the Shanghai-Hong Kong Stock Connect last November, and underpinned by the continued capital inflows into the territory and mainland policies aimed at bolstering the slowing economy.

While these are good reasons to remain bullish, a dosage of cautiousness is still warranted based on historical experience.

In a bold call, CLSA set its target price for the stock at HK$155 in 12 months, 44 percent lower than the current level.

That may sound too bearish, but there is indeed room for investors to scale back their optimism following the counter’s 56 percent jump in April.

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EJ Insight writer