Hong Kong Banks：Higher ADT means higher EPS. Buy HKEx & HK Brokers

>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 19 to 22. Analyst Certification on Page 16. Price Objective Basis/Risk on page 15. 11504494 Banks - Hong Kong Rating Change Higher ADT means higher EPS. Buy HKEx & HK Brokers Equity | Hong Kong | Banks-Multinational 17 April 2015 Christopher Lai, CFA >> +852 3508 3093 Research Analyst Merrill Lynch (Hong Kong) chris.s.lai@baml.com Winnie Wu >> +852 3508 3058 Research Analyst Merrill Lynch (Hong Kong) winnie.wu@baml.com Table 1: PO Changes Rating New PO (HKD) Upside Chg. In PO Old PO market price HKEx Buy 335.0 +17% +81% 185 286.4 GTJAI Buy 12.5 +20% +69% 7.4 10.46 HTI Neutral 12.0 +15% +114% 5.6 10.48 Source: BofA Merrill Lynch Global Research, Bloomberg, For HTI please note this is our price objective & rating before the upcoming 1:1 rights issue. Table 2: EPS Changes 2015 EPS (HKD) Previous 2015 EPS (HKD) Chg. % HKEx B-1-7 9.70 6.09 +59% GTJAI C-1-7 0.66 0.47 +42% HTI C-2-7 0.58 0.49 +19% Source: BofA Merrill Lynch Global Research, Bloomberg, For HTI this EPS already incorporates the impact of the upcoming rights issue  Higher ADT & EPS justifies bullish view on HKEx & Brokers We upgrade HKEx (388 HK) to a Buy and reiterate our Neutral rating on HTI (665 HK) and our Buy rating on GTJAI (1788 HK). We raise our EPS for all three companies on the back of higher Average Daily turnover. For the HK brokers we also factor in higher margin finance growth. We explain our valuation approach & higher POs in more detail below. Among the HK Brokers we prefer GTJAI over HTI. ADT remains key driver: We estimate HK$150bn for FY15 HKEx, GTJAI & HTI’s earnings are driven by Average Daily turnover (ADT) in HK which is linked to investor sentiment. For our base case model which drives our rating for these 3 companies, we assume a Full year 2015 ADT of HK$150bn, based on average ADT over last 30 days plus one standard deviation. We have also included various scenario analyses for investors to consider. HKEx: Higher ADT could be the new normal We believe investors may need to rebase their HKEx ADT expectations higher going forward. The recent spike in turnover reflects an improvement in investor sentiment driven in part from favorable Chinese policy. We have seen turnover remain high in the A-share market and believe the higher HKEx turnover may likely be sustainable for a while longer. HKEx remains a main beneficiary to higher turnover as over 60% of HKEx’ revenue is related to ADT including cash Equities, clearing and derivatives income stream. Our revised EPS of HK$9.7 is 59% higher than our previous estimates. HK Brokers: Mainland Chinese rapidly opening HK accounts The two brokers we cover will both benefit from increased ADT & adoption of margin finance. Our channel checks suggest strong demand by Mainland Chinese to open HK brokerage accounts, which allow them to trade global equity markets and allow their wealth to be kept offshore. We lift our EPS primarily on the HK$150bn ADT and factor in small market share gains. We prefer GTJA with 73% revenue from brokerage and margin finance and 90% of customers from mainland. We keep HTI on neutral as our estimates are more cautious than management guidance particularly on Margin finance front. GTJA is also more defensive as it has a lower cost base. Investors are reminded to consider HTI’s upcoming rights issue when considering the current share price & valuations. Risks to our Bullish view: Investor Sentiment, Govt Policy Provided investor sentiment, government policy and liquidity remains supportive we remain bullish on HKEx & HK brokers. We closely monitor ADT, investor sentiment and media reports as a turn in the sentiment could lead to a sharp correction in ADT & share prices. For HKEx, ADT has traditionally been volatile and supportive government policy can turn. For HK Brokers, increasing competition could lead to a cut in brokerage commission and MF yields. Further the HK regulator SFC may consider imposing additional constraints to manage the growth of Margin Finance. barbarayy_tong@citickawahbank.com Barbara Tong 04/16/15 11:39:47 PM CITIC Bank International股票报告网整理http://www.nxny.com Banks - Hong Kong 17 April 2015 2 iQprofileSM HKEX Key Income Statement Data (Dec) 2013A 2014A 2015E 2016E 2017E (HK$ Millions) Sales 8,723 9,849 17,581 18,966 20,218 Gross P