Bloomberg/Hong Kong




Hong Kong Exchanges & Clearing’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 8.3% stock decline in the next 12 months. 
Daily turnover, which jumped last week, is declining, and shares have fallen 5.4% in a week through Tuesday, when the stock traded without the rights to a dividend.
Research notes published after the August 16 unveiling of the Shenzhen link draw a glum picture, as analysts were left unsurprised by the long-awaited approval: Goldman Sachs Group 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 Ltd in Hong Kong. “Market turnover at these levels cannot support its valuation. I expect 20% 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% in the week leading up to the announcement.
Daily turnover on Hong Kong’s main exchange averaged HK$85.4bn ($11bn) last week, about 28% 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 August 19, cutting his rating to sell from neutral. Turnover was HK$60.8bn on Tuesday.
HKEx dropped 0.3% to close at a six-week low yesterday.
In the days before the Shenzhen link was announced, prices for bullish bets relative to bearish ones on HKEx were increasing to their highest in more than a year, according to data compiled by Bloomberg. The so-called skew has since been reversing course.
“People use options largely for short-term speculation - so it could be buy on rumor and sell on facts,” said Tony Chu, a Hong Kong-based money manager at Sophus Capital. Shenzhen connect is “just like the Shanghai connect, it’s small. It’s not a big earnings driver.”
With the Shanghai link contributing to just 1.3% 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 August 16. Earlier this month, HKEx said first-half net income declined 27% 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% of analysts tracked by Bloomberg are now recommending investors sell the shares, compared with 29% 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 Chan.
HKEx will benefit from capital flow as mainland markets open up, Michael Wu, an analyst at Morningstar, wrote in a report on August 16. 
Exchange-traded funds are likely to be allowed in the stock link program 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, 13bn yuan for orders going north to the mainland and 10.5bn for southbound traffic. 
The connect will also include small-cap companies listed in Hong Kong that have a market value of more than HK$5bn.
“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.”