＃Title＃ the Global Markets Leader in the Asian Time Zone Market＃Marketdata Data ＃＃Createtime1＃ Date 2019.07.03 in July 8, 2019

Research

Overseas

Equity Research Report

＃industryId＃ Financial Industry

I ＃＃dyCompany＃＃investSuggestion＃ (Initial 00388 .HK ( dyStockco HKEx Stock Connect (SH/SZ)

Buy Overseas Coverage) ＃ de ＃title＃ The Global Markets Leader in the Asian Time Zone Market＃marketData Data ＃＃createTime1＃ Date 2019.07.03 In July 8, 2019

Closing Price 279.6

dep Total Shares (Mn) 12.58 Key Financial Indicators

th Research Report Shares Outstanding (Mn) 3,517.8 FY＄zycwzb| 主要财务指标＄ 2018A 2019E 2020E 2021E Revenue (Mn/HKD) 158.7 174.6 192.6 215.5 Market Cap (CNY/Mn) 397.9 YoY (%) 20.4 10.0 10.3 11.9 Market Float (CNY/Mn) 2,660 Net Profit (Mn/ HKD) 93.1 106.3 116.1 129.5 Net Assets (CNY/Mn) 31.63 YoY (%) 25.8 14.1 9.2 11.6 279.6 Total Assets (CNY/Mn) Gross Margin (%) 23.9 25.7 27.3 29.6 BVPS 12.58 Net Profit Margin (%) 84.0 83.8 83.8 83.1 Source:Wind ROE (%) 32.8 33.7 34.7 35.8

EPS (HKD) 7.50 8.56 9.35 10.43 ＃relatedReport＃ Related Report DPS (HKD) 6.71 7.66 8.36 9.33 Source: Company Disclosure, Industrial Securities Research Institute 《连接中国与世界，打造亚洲交易时钟》海外公司深度研究报告 20190704 Investment Highlight ＃summary Initiate＃ with “Buy”, TP at HK$319.15: TP/EPS is37.3,34.1 and 30.6 from 2019 to 2021.

 The first echelon of Stock Exchanges around the world, outstanding growth potential expected: In 2018, HKEX ranked #4 in the world and #3 in Overseas＃emailAuthor Research＃ - Asia, only second to Tokyo Stock Exchange and mainland China. ROE of HKEX is 1.5 to 3 times higher than that of LSE, NASDAQ and TSE. Average dividend yield of the company is 3%, 1-2 per cents higher than that of LSE, Analyst: NASDAQ and TSE. Being the pioneer in China connectivity, the business of Zhang Yidong HKEX shall bloom.

Deputy Head of Research at  Spot market trading remains stable, derivative market continues to Industrial Securities Co. Ltd. innovate according to client’s need: From July to September in 2018, IPO of General Manager of Overseas Xiaomi, China Tower and Meituan boosted ADT, when HSI decreased. HKEX Market is actively promoting reformation of IPO regulations, with leading technical Research Center companies, such as Alibaba, joining Hong Kong market, ADT of HKEX is [email protected] expected to increase. Hong Kong derivative market contains 13 different kinds SAC: S0190510110012 of equity derivative products. The volume of transaction of securitization SFC: BIS749 derivative products ranked first in the world for 12 consecutive years. The company also connects spot market and futures market within and without the country via using LME and QME.

Contact:  Investing in technology, efficiency of clearance improved: 40% of EBT of Bo Zhang the company comes from clearance business. In February 2018, HKEX [email protected] promoted a new version of stock trading system. In August 2018, upgrade for SAC: S0190519060002 Central Moneymarkets Unit clearance system improved safety and efficiency SFC: BMM189 of clearance of CMU. In 2019, the company would keep upgrading systems for derivatives, HKATS and derivative products clearance and settlement system are also arranged for the second quarter in 2019.

Potential risks: 1). ADT decrease significantly; 2).Policy of Connect between China and Hong Kong fall below expectation; 3). Decrease in IPO

Please Refer to the Last Page for Important Disclosure

Overseas In-depth Research Report

Content

1、Company Overview ...... - 5 - 1.1、Company Development History ...... - 5 - 1.2、Shareholding Structure of HKEx ...... - 6 - 1.3、Operating Conditions of HKEx ...... - 7 - 2、First Tier Stock Exchange around the World ...... - 8 - 2.1、Strong Performance in Revenue and Profit ...... - 8 - 2.2、Benefit from the Connect, Macro-competitiveness Improves ...... - 10 - 2.3、Product Richness + Technology Innovation Motivate the Market ...... - 13 - 3、Active Market, Stable Spot Market Outlook ...... - 16 - 3.1、Active Spot Market Trading, ADT Increased ...... - 16 - 3.2、IPO of Breakthrough Growth, HKEx Revitalized ...... - 20 - 4、Innovating Derivative Market ...... - 23 - 5、QME，A Warehouse in Mainland China for Contracts in London ...... - 30 - 6、Technology Boosts Settlement Revenue ...... - 33 - 7、Financial Analysis and Forecasting ...... - 36 - 7.1、Major Financial Indicators ...... - 36 - 7.2、Profit Forecast ...... - 39 - 8、Valuation and Rating ...... - 41 - 9、Potential risk ...... - 44 -

Figure 1、 Company Development History ...... - 6 - Figure 2、 Company Shareholding Structure ...... - 6 - Figure 3、 Operating Income and YoY Growth （2013-2019Q1） ...... - 7 - Figure 4、 Net Profit Attributable to Shareholders and YoY Growth（2013-2019Q1） ...... - 7 - Figure 5、 Structure of Operating income（2013-2019Q1） ...... - 7 - Figure 6、 Structure of EBT（2013-2019Q1） ...... - 7 - Figure 7、 Structure of Operating Expenses ...... - 8 - Figure 8、 Gross Profit Margin/Net Profit Margin ...... - 8 - Figure 9、 Operating Income of 4 Exchanges（2015-2018） ...... - 9 - Figure 10、 Net Profit Attributable to Shareholders of 4 Exchanges（2015-2018） ...... - 9 - Figure 11、 CAGR of 4 Exchanges（2015-2018） ...... - 9 - Figure 12、 Growth Rate of Net Profit Attributable to Shareholders of 4 Exchanges（2015-2018） . - 9 - Figure 13、 Net Profit Margin of 4 Exchanges（2015-2018） ...... - 10 - Figure 14、 Dividend Yield of 4 Exchanges（2015-2018） ...... - 10 - Figure 15、 Proportion of GDP（2007-2017） ...... - 10 - Figure 16、 Economy Growth (2018) ...... - 10 - Figure 17、 Strategic Plan 2019-2021 ...... - 11 - Figure 18、 Trading Volume of HKEx by Participants（2010-2016） ...... - 13 - Figure 19、 Location of Foreign Investors of HKEx（2016）...... - 13 - Figure 20、 Market Capitalization of Exchanges（2018） ...... - 14 - Figure 21、 Total Trading Amount of Exchanges（2018） ...... - 14 - Figure 22、 Funds Raising from IPO of Exchanges（2018） ...... - 15 - Figure 23、 Trading Volume of Securitized Derivatives of Exchanges（2018） ...... - 15 - Figure 24、 Operating Income and YoY Growth of Spot Sector ...... - 16 - Figure 25、 Revenue Structure of Spot Sector ...... - 16 - Figure 26、 Average Trading Volume and Contracts of Equity Securities in SEHK ...... - 17 - Figure 27、 Change in Trading Fee and System Access Fee of Spot Sector ...... - 17 - Figure 28、 Yearly Trading Amount of the Stock Connect and its Proportion in HKEx ...... - 18 - Figure 29、 ADT of the Stock Connect...... - 18 - Figure 30、 Holding of Northbound Bond Connect（2017.6-2019.1） ...... - 18 - Figure 31、 2018 Trading Amount and Market Capitalization of Hong Kong Listed Companies - 19 - Figure 32、 Turnover Ratio of Main Exchanges（2018） ...... - 19 - Figure 33、 Industry Distribution of Market capitalization in HK（2018） ...... - 20 -

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Figure 34、 Industry Distribution of Market capitalization in US（2018） ...... - 20 - Figure 35、 Hong Kong Market IPO ...... - 21 - Figure 36、 Listing Fee of Spot Sector ...... - 21 - Figure 37、 Hong Kong IPO Funds Raising Ranking by industries in 2017-2018 ...... - 22 - Figure 38、 Top 10 IPO in 2018 ...... - 22 - Figure 39、 Number of Stock Traded in Mainboard and HSI ...... - 23 - Figure 40、 in 2018 Number of Stock Traded in Mainboard and HSI ...... - 23 - Figure 41、 Operating Income and Growth of Equity Securities and Financial Derivatives...... - 24 - Figure 42、 Revenue Structure of Equity Securities and Financial Derivatives Sector ...... - 24 - Figure 43、 Number of New Listed Security Warrants and Callable Bull and Bear Contracts ..... - 25 - Figure 44、 Listing Fee in SEHK...... - 25 - Figure 45、 Structure of Trading Fee and System Access Fee ...... - 26 - Figure 46、 Revenue from Trading Fee and System Access Fee of Derivatives Sector ...... - 26 - Figure 47、 ADT of Security Warrants, Callable Bull, Bear Contracts and Warrants ...... - 26 - Figure 48、 Proportion of Security Warrants and Callable Bull and Bear Contracts ...... - 26 - Figure 49、 ADT of Derivatives Contracts ...... - 27 - Figure 50、 ADT of Stock Options Contracts ...... - 27 - Figure 51、 ADT of Futures and Options on HSI and YoY Growth ...... - 27 - Figure 52、 ADT of Futures and Options on H-share and YoY Growth ...... - 27 - Figure 53、 ADT of USD/CNH Futures and YoY Growth ...... - 29 - Figure 54、 The Number of USD/CNH Futures with Open Interest and YoY Growth ...... - 29 - Figure 55、 The Number of Average Daily After-hour Trading Contracts and YoY Growth ...... - 30 - Figure 56、 ADT of Metal Contracts of LME and YoY Growth ...... - 31 - Figure 57、 Metal Contracts Structure of LME ...... - 31 - Figure 58、 ADT of Metal Contracts of LME...... - 31 - Figure 59、 Metal Contracts Classification of LME ...... - 31 - Figure 60、 QME Strategic Plan ...... - 32 - Figure 61、 Average Daily Trading Amount of SEHK ...... - 34 - Figure 62、 Average Trading Amount by CCASS ...... - 34 - Figure 63、 Revenue Structure of Settlement Sector ...... - 35 - Figure 64、 Average Margin Account Amount ...... - 35 - Figure 65、 Operating Income and YoY Growth ...... - 36 - Figure 66、 Net Profit Attributable to Shareholders and YoY Growth ...... - 36 - Figure 67、 ADT Amount of HKEx and YoY Growth ...... - 37 - Figure 68、 ADT of Equity Securities ...... - 37 - Figure 69、 ADT of Securities, Callable Bull and Bear Contracts, and Warrants ...... - 37 - Figure 70、 Number of Contracts on Derivatives and Options in HKFE ...... - 37 - Figure 71、 Gross Profit and Net Profit Margin (%) ...... - 39 - Figure 72、 Debt/Asset Ratio ...... - 39 - Figure 73、 Historical PE ...... - 42 - Figure 74、 Historical PB ...... - 42 - Figure 75、 PE ...... - 43 - Figure 76、 PB ...... - 43 -

Table 1、Marco-Competitiveness of 4 Exchanges ...... - 12 - Table 2、Products Type of Exchanges(By December 31, 2018) ...... - 13 - Table 3、Strategic Plan of Exchanges ...... - 15 - Table 4、Fee Structure of HKEx ...... - 17 - Table 5、Fee paid for IPO ...... - 21 - Table 6、Modification of Mainboard Listing Rule of HKEx ...... - 21 - Table 7、Fee Charged by Derivatives Sector ...... - 24 - Table 8、Main Products and Plans in 2018 ...... - 28 - Table 9、Measure to Improve After-hour Trading ...... - 29 - Table 10、 LME Strategy ...... - 30 - Table 11、QME current products ranges ...... - 32 - Table 12、Fee of Settlement Sector ...... - 33 - Table 13、HKEx Plan for Applying New Technology ...... - 35 -

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Table 14、Revenues and Expenses Structure of HKEx in 2018（Million HKD） ...... - 38 - Table 15、Revenues and Expenses Structure of HKEx in 2019Q1（Million HKD） ...... - 38 - Table 16、Revenue forecasting ...... - 41 - Table 17、Valuation of exchanges (By July 3, 2019) ...... - 42 - Table 18、Valuation in Security Industry (By July 3, 2019) ...... - 43 - Appendix ...... - 45 -

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Main body

1、Company Overview

Hong Kong Exchange and Clearing limited (HKEx, 0388.HK) was listed on HKEx in June 2000. HKEx provides world-class facilities for securities and derivatives trading and clearing. Its responsibilities include monitoring and regulating issuers of IPOs, and trading and clearing activities of the market; providing service for clients of the Exchanges and Clearing Houses. The clients of the Exchanges and Clearing Houses include issuers and intermediaries directly serving the investors, such as investment banks or sponsors, securities and derivatives brokers, custodian banks and information providers. The services include trading, clearing and settlement, depository, agent service, and providing information. The market institutions under HKEx have made the Hong Kong financial service industry develop from a domestic dominated market to a central market, which attracts the global investment to Asia.

1.1、Company Development History

Securities trading began in Hong Kong in 1866. From 1891 to 1972, Hong Kong Securities Exchange (Hong Kong Securities Association), the Far East Exchange Limited, the Kam Ngan Stock Exchange Limited, the Kowloon Stock Exchange Limited were established one after another. These four exchanges were formally merged into the Stock Exchange of Hong Kong (SEHK) in 1986. In March 2000, SEHK and Hong Kong Futures Exchange Limited (established in 1976) became shareholding and merged with Hong Kong Central Clearing Limited (established in 1989), and now, the new company is solely owned by Hong Kong Exchange. The merged HKEx was listed on SEHK on 27 June 2000 by introduction. In December 2012, HKEx acquired London Metal Exchange (LME). In October 2018, HKEx expanded strategic distribution in global commodity market as the Shenzhen Qianhai Mercantile Exchange (QME) began trading.

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Figure 1、Company Development History

Source: Company information, China Industrial Securities Research Institute of Economics and Finance

1.2、Shareholding Structure of HKEx

As of December 31, 2018, the largest shareholder of HKEx is the Government of the Hong Kong Special Administration Region with 5.98% of shareholding ratio. The second largest shareholder is JPMorgan Securities Co., Ltd with 1.42% of shareholding ratio. The remaining 92.6% shares outstanding is held by the public. As for now, HKEx holds wholly-owned subsidiaries SEHK (including its subsidiaries Stock Exchange Options Clearing house, SEOCH), Hong Kong Futures Exchange (HKFE, including its subsidiaries Hong Kong Clearing Corporate limited, HKCC), LME and LME Clearing, HKCC, 75% of OTC Clearing and 90.01% of QME.

Figure 2、Company Shareholding Structure

Source: Company information, China Industrial Securities Research Institute of Economics and Finance

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1.3、Operating Conditions of HKEx

From 2013 to 2018, the company's main business income increased from HKD8.72 billion to HKD15.87 billion, with a CARG of 12.7%. Net profit attributable to company's shareholders rose from HKD4.55 billion in 2013 to HKD9.31 billion in 2018, achieving a CARG of 15.4%. In 2018, the company's operating income increased by 20.4% over the same period, while net profit attributable to company's shareholders increased by 25.8% over the same period.

Figure 3、Operating Income and YoY Growth Figure 4、Net Profit Attributable to Shareholders and （2013-2019Q1） YoY Growth（2013-2019Q1）

Source: Annual report, China Industrial Securities Research Source: Annual report, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance

The main revenue of company comes from settlement, spot market and derivatives. In 2018, they realized operating income of HKD4.78 billion, HKD3.86 billion, HKD3.5 billion, respectively, accounting for 34.0%, 27.0% and 24.6% of the total revenue and 85.6% in sum. These three businesses accounted for 42.6%, 26.6% and 23.7% of EBT in 2018, respectively, with a total of 92.9%.

Figure 5、Structure of Operating income Figure 6、Structure of EBT（2013-2019Q1）（2013-2019Q1）

Source: Annual report, China Industrial Securities Research Source: Annual report, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance

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The operating expense of HKEx mainly comes from employment related expenses, and thus its net profit margin always remains around 60%.

Figure 7、Structure of Operating Expenses Figure 8、Gross Profit Margin/Net Profit Margin

Source: Annual report, China Industrial Securities Research Source: Annual report, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance

2、First Tier Stock Exchange around the World

By the end of 2018, there are 43 public stock exchanges in the world. We select London Stock Exchange (LSE), NASDAQ, Tokyo Stock Exchange (TSE) as comparable for HKEx. HKEx is always in the first echelon of the stock exchange from the perspective of operating revenue, profit attributable to the shareholders and growth rate. In recent years, with continuous promotion of opening-up policy of Mainland China and the employment of Connect, the macro-competitiveness of Hong Kong market has gradually improved to the bridgehead of China to connect the world. Meantime, HKEx keeps innovating and improving in product, regulation, technology aspects.

2.1、Strong Performance in Revenue and Profit

In 2018, HKEx realized operating income of HKD15.87 billion with an increase of 20.4%, and net profit of HKD9.29 billion with an increase of 26.3%. HKEx outperformed other three exchanges in the volume of profit attributable to the shareholders for four consecutive years from 2015 to 2018.

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Figure 9、Operating Income of 4 Exchanges Figure 10、Net Profit Attributable to Shareholders （2015-2018） of 4 Exchanges（2015-2018）

Source: Bloomberg, China Industrial Securities Research Source: Bloomberg, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance

HKEx ranks first within these four exchanges in terms of operating income and net profit growth rate. From 2015 to 2018, LSE, NASDAQ, TSE and HKEx achieved a CAGR of 11.5%, 5.1%, 2.0% and 11.9% respectively in operating income, and a CAGR of 24.5%, 10.8%, 10.3% and 15.6% in net profit attributable to shareholders. From the perspective of growth potential, the CARG of operating income of HKEx from 2015 to 2018 performed well.

Figure 11、CAGR of 4 Exchanges（2015-2018） Figure 12、Growth Rate of Net Profit Attributable to Shareholders of 4 Exchanges（2015-2018）

Source: Bloomberg, China Industrial Securities Research Source: Bloomberg, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance

Since HKEx does not own any PP&E, its net profit margin is well ahead of the other three exchanges. In 2018, net profit margin of HKEx is 65%, which the average margin of the other three exchanges is lower than 45%. The dividend yields of HKEx are higher than that of LSE and NASDAQ from 2015 to 2017, except that in 2017 the dividend yield decreased due to a large increase in the stock price.

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Figure 13、Net Profit Margin of 4 Exchanges Figure 14、Dividend Yield of 4 Exchanges （2015-2018）（2015-2018）

Source: Bloomberg, China Industrial Securities Research Source: Bloomberg, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance *Note：Using year-end price and dividend from the financial year to calculate

2.2、Benefit from the Connect, Macro-competitiveness Improves

In 2018, GDP of US is $20.94 trillion, while GDP of China is $13.43 trillion, and Japan ranks third with a GDP of $4.9 trillion. Within the period from 2007 to 2017, the international influence of China increased significantly, and proportion of Chinese GDP of the world increased. The macroeconomic environment is the base for the development of the stock exchange, and a stock exchange with great competitiveness needs a relatively large scale of national economy and a relatively fast growth rate of economy to support.

Figure 15、Proportion of GDP（2007-2017） Figure 16、Economy Growth (2018)

Source: Wind, China Industrial Securities Research Institute of Source: Wind, China Industrial Securities Research Institute of Economics and Finance Economics and Finance *Note：Data from inner to outer are 1997, 2007, 2017 respectively

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Hong Kong can benefit from the opening-up of Mainland China market and the Connect as a bridgehead of Chinese capital outflow. In February 2019, HKEx releases Strategic Plan 2019-2021 and center on three focus areas: 1. China Anchored: (1) enhancing the internationalization of China’s domestic capital markets through the Northbound Connect programmes; (2) facilitating the international investment diversification of China’s national wealth through the Southbound Connect programmes; (3) enhancing the market infrastructure to address the risk and capital management needs stemming from the expected growth in cross-border capital flows. 2. Globally Connected: (1) offering more China product and Asia Pacific investment exposures in Hong Kong; (2) enhancing the market microstructure and further increasing the relevance of Hong Kong’s market to global liquidity; (3) improving the global competitiveness and expanding the global presence. 3.Technology Empowered: (1) modernization and growth of the market; (2) embracing the new technology; (3) exploration of new frontiers. HKEx focuses on transferring from a local tradition exchange with a single asset class into a modern global-leading exchange with multiple asset classes and connecting China to the world to become a world leading exchange in Asia time zone.

Figure 17、Strategic Plan 2019-2021

Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

In addition, the overall quality of national and regional financial system, the degree of internationalization of currency and the marketization of interest rate and exchange rate have great influence on the development of the stock market, the opening-up of the capital market and international expanding. From these four indicators, HKEx and TSE in the same Asia zone are basically in the same level, and slightly inferior to LSE and NASDAQ, mainly because of the influence of degree of marketization of the exchange rate. With the promotion of RMB internationalization, the future of HKEx would be considerable. Specifically, the overall quality of the financial system and currency internationalization of HKEx are slightly lower than those of the LSE and NASDAQ.

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The overall quality of the financial system is higher than that of the TSE, and the degree of currency internationalization is the same as that of the TSE. In terms of interest rate marketization, the HKEx is on par with LSE and NASDAQ and is stronger than TSE. In the degree of exchange rate marketization, the HKEx lags behind the other three exchanges, mainly because the Mainland China financial market is not fully opened up, and the internationalization of RMB is still in progress.

Table 1、Marco-Competitiveness of 4 Exchanges Type HKEx LSE NASDAQ TSE Financial System 4 5 5 3 Quality Degree of Currency 4 5 5 4 Internationalization Degree of Interest 5 5 5 4 Rate Marketization Degree of Exchange 2 5 5 4 Rate Marketization

Total 15 20 20 15

Source：SSE, Global Competitiveness of Stock Exchange, China Industrial Securities Research Institute of Economics and Finance Note：For degree of indicators, using score of five: extreme poor (1 point）, poor (2 point）, normal（3 point）, good（4 point）, excellent（5 point）; For yes-or-no indicators, using score of 0 or 2: No (0 point）, Yes (2 point）

Based on the information released by the HKEx about the Hong Kong spot market participants, the main participants in Hong Kong market include local individual investors, local institution investors, foreign individual investors, foreign institution investors and exchange participants themselves. The institution investors dominate the market, which accounting for over 50% of the participants steadily. Within the institution investors, the foreign institution investors play a big role which accounts for 33.3% of the participants. The foreign institution investors mainly come from UK, Mainland China, and US, accounting for 23.1%, 21.5% and 20.1% respectively. The proportion of institution investors and the foreign investors would influence the degree of international business participation of the stock exchanges. HKEx can take advantage of its location and investors structure to promote the international business.

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Figure 18、Trading Volume of HKEx by Figure 19、Location of Foreign Investors of HKEx Participants（2010-2016）（2016）

Source: Company information, China Industrial Securities Source: Company information, China Industrial Securities Research Institute of Economics and Finance Research Institute of Economics and Finance

2.3、Product Richness + Technology Innovation Motivate the Market

In addition to macro indicators, the micro indicators, such as the products structure and business model, investors structure, market size, and technology system, are also important factors of global competitiveness. The stock exchange with rich products structure can provide the financial products with different ways of earning, different investment horizons, and different portfolios with different risks and returns to satisfy the diversification needs of different investors and improve the attractiveness of the securities market. A variety of business models based on different products structure can make the revenue of the exchange more diversified. HKEx has a complete product line of spot market and derivatives, and the volume of warrants and callable bull and bear contracts rank first in the world. HKEx optimizes the structure of the public companies by modifying the regulation of listing and attracts the new economic corporations.

Table 2、Products Type of Exchanges(By December 31, 2018) Exchange Products Types  1926 main board listed companies, 389 listed second board companies  2847 listed callable bull and bear contracts, 6763 security warrants  1195 Listed Bond HKEx  30 derivatives including index derivatives, stock derivative from 9 different countries and areas, 2 interest rate futures, 6 currency products, 9 metal products  137 exchange traded products, including 115 funds, 22 leverage and reverse products  11 real estate trust funds  Comprehensive and real-time data services including FTSE index  Providing technical solution for financial institutions and companies, including monitoring and big data LSE service, earning 6.5 billion pounds in 2018  2856 listed companies, 2831 traded funds, 158 traded bonds  31 kinds of options, 9 kinds of futures

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 Several warrants

 4077 listed companies, 3058 in NASDAQ, 1019 in Nasdaq Nordic and Baltic exchanges and Nasdaq First North. Companies with 1418 in NASDAQ global selected market, 852 in global market, and 788 in capital market.  Equity derivatives trading and clearing: 6 electric option exchanges, providing stocks, ETFs, index and currency options. In Europe, Nasdaq Clearing provides these services  Spot stocks trading service: 3 stock exchanges in US, 4 exchanges in Europe NASDAQ  FICC business, and trading management service  Market data service: providing over 40000 index services including NASDAQ 100 index, NASDAQ composite index and NASDAQ biotech index  Revenue structure: 958 million USD market service revenue with 37.9%, 528 million USD corporate service revenue with 20.9%, 270 million USD market technology revenue with 10.7%, 714 million USD information service revenue with 28.3%. Source: Public information, China Industrial Securities Research Institute of Economics and Finance

From the perspective of market capitalization and transaction volume, HKEx has continuously developed from a local-dominated market to a central market attracting investment from all over the world since its establishment. In 2018, HKEX ranked #4 in the world and #3 in Asia, only second to Tokyo Stock Exchange and mainland China.

Figure 20、Market Capitalization of Exchanges Figure 21、Total Trading Amount of Exchanges （2018）（2018）

Source: Wind, China Industrial Securities Research Institute of Source: Wind, China Industrial Securities Research Institute of Economics and Finance Economics and Finance

HKEx ranked first in the area of the fund raising from IPO and the trading volume of securitized derivative products in 2018, and the trading volume of securitized derivative products of HKEx was much higher than that of Tel Aviv Stock Exchange in Israel.

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Figure 22、Funds Raising from IPO of Exchanges Figure 23、Trading Volume of Securitized （2018） Derivatives of Exchanges（2018）

Source: Bloomberg, China Industrial Securities Research Institute Source: Bloomberg, China Industrial Securities Research Institute of Economics and Finance of Economics and Finance Note：India includes NSE and BSE

From 2010, HKEx releases a strategic plan every three years, focusing on transferring from a local tradition exchange with a single asset class into a modern global-leading exchange with multiple asset classes and connecting China to the world to become a world leading exchange in Asia time zone.

Table 3、Strategic Plan of Exchanges Strategic Plan Content Goal: Be the global market leader in the Asia time zone, connecting China and the world  China Anchored: in the next 3 years, HKEx would expand northbound capital inflows by broadening the availability of onshore products and underlying, and through delivering more risk management tools offshore; expand Southbound capital allocation to facilitate Mainland investors’ investment diversification by offering more global underlying; expand post-trade infrastructure to position Hong Kong as the trusted and secure cross-border trading, settlement, clearing and custody center, particularly in FICC, address the capital efficiency needs of both Northbound and Southbound capital.  Globally Connected: enhance the product ecosystem across asset classes, improve the market HKEx microstructure to make the markets more globally competitive, cost effective and accessible, in order to enhance overall market liquidity, expand the international footprint further to broaden and deepen the global operations beyond LME.  Technology Empowered: HKEx would focus on applying new technology to modernize the core functions in order to enable greater efficiency in the operations and deliver new services to markets, institute a more data-oriented management culture through HKEx and drive the adoption of integrated management information systems, increase focus on innovations that may offer new business opportunities and avenues of revenue generation, including through establishing potential partnerships with leading new economy companies. Goal: be the global financial market leader 3 main focuses:  Create opportunities to push economic growth via financial market value chain LSE  Widen the channels of customer and expand the types of customers in the process of industry upgrading and changing in regulation  Keep improving management ability, innovate management style, look for opportunities in new technologies such as artificial intelligence by mergers and acquisitions  Follow the macroeconomy, regulatory and trends in technology  Focus on developing market technology service and information service, understand short-term and long-term needs of customers NASDAQ  Seek opportunities to complement strengths and expand existing capabilities to enhance competitiveness related to other exchanges in Europe and North America  Provide synergy between revenue and expense, increase shareholders’ value

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Source: Public information, China Industrial Securities Research Institute of Economics and Finance

3、Active Market, Stable Spot Market Outlook

Spot sector includes all equity securities products, sales of market data of these products and related business trading in trading platform of spot market, Shanghai Stock Exchange and Shenzhen Stock Exchange via the Stock Connect. The revenue mainly comes from trading fee of these equity securities products, access fee for trading platforms, listing fee and market data fee.

In 2018, the spot sector realized operating revenue of HKD38.6 billion with an increase of 15% YoY and performed well in trading volume and initial public offerings. As a traditional pillar industry of HKEx, the spot sector has contributed revenue steadily for HKEx. HSI reached reach historical high of 33484 in January 2018. After entering the second half of the year, the market sentiment weakened, and the investor’s confidence decreased due to the Trade War between China and US and uncertainty of the global market. However, HKEx strengthened the attractiveness of Hong Kong market by modifying the listing rule, actively cooperating with Mainland China to promote the Connect. Spot market reached a new highest level of ADT, 1.074 billion HKD, with a YoY of 22%.

Figure 24、Operating Income and YoY Growth of Figure 25、Revenue Structure of Spot Sector Spot Sector

Source: Annual report, China Industrial Securities Research Source: Annual report, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance

3.1、Active Spot Market Trading, ADT Increased

The revenue for HKEx would increase since investors are charged by HKEx for trading fee of 0.027% of trading amount for investing in equity securities product via SEHK or

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the Connect and access fee for trading system, 0.5 HKD per transaction. In 2018, the spot market was active, and amount of trading volume increased significantly. SEHK had an average daily trading volume of 1.074 billion HKD, bringing up revenue from trading and settlement.

Table 4、Fee Structure of HKEx Charged fee Rules

From November 1, 2014, two parties should be charged for 0.0027% of trading levy (round to unit digit) to SFC, Trading levy except for market makers.

Trading fee Two parties should be charged for 0.005% of trading fee (round to unit digit) to exchanges, except for market makers. System access fee Two parties should be charged for 0.005% of access fee (round to unit digit) to exchanges, except for market makers. Transfer fee 2.5 HKD per contract paid by buyers no matter how many contracts dealt. Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

Figure 26、Average Trading Volume and Contracts of Figure 27、Change in Trading Fee and System Access Equity Securities in SEHK Fee of Spot Sector

From the beginning of the Stock Connect, Northbound and Southbound trading remains active. In 2018, ADT of Northbound trading and Southbound via the Connect increased 113% and 30% respectively compared to those in 2017. Average daily trading volume of the Connect is HKD12.707 billion, and average trading volume of the Stock connect is RMB 20.41 billion. The proportion of the Southbound trading in trading volume of Hong Kong market increases from 0.2% on November 2014 to 12% recently, while the Northbound increases from 0.23% to 5%. HKEx is continuing to enhance the Connect by many different methods, such as expanding the daily trading quota, introducing an identification code model for the Northbound investors, reaching agreement with SSE and SZSE on the inclusion of companies with different voting right structures into the Connect.

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Figure 28、Yearly Trading Amount of the Stock Figure 29、ADT of the Stock Connect Connect and its Proportion in HKEx

In 2018, the market participant rate of the Bond Connect increases gradually. By the end of 2018, foreign institutions hold 1729.9 billion RMB domestic bonds, 7482 lots were traded for a year, total amount reached 884.1 billion RMB, average daily trading volume is 3.6 billion RMB with an increase of 64% comparing to 2017.

Figure 30、Holding of Northbound Bond Connect（2017.6-2019.1）

Source: Wind, China Industrial Securities Research Institute of Economics and Finance

On June 2018, MSCI officially included China A-share into emerging market index and All-Country World Equity index. The world second largest index company, FTSE Russell, announced to promote China A-share to Secondary Emerging market status on September 2018. On January 2018, Bloomberg Barclays Index Aggregate announced that the inclusion of 363 Chinese bonds would take steps from April. The inclusion of stock and bond from Mainland China into global index makes Chinese capital market accelerate the integration with mainstream of the global financial system and brings more attention matching the influence in asset allocation of international investors in China’s huge capital market. As the bridge between Mainland China market and the global market, Hong Kong market would have more opportunities for foreign investors

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investing increasingly in Chinese stocks and bonds via Hong Kong market and enhancing the vitality of spot market.

With the continuous internationalization of the Mainland China market and expansion and deepening of the Connect, the proportion of trade involving Chinese investors keeps increasing. There are significant differences between A-share market and Hong Kong market in investors structures and investment methods, for example, A-share market contains a lot of individual investors preferring high turnover ratio and high risk. As for now, the turnover ratio of A-share market is four times higher than that of Hong Kong market. The need for fund from mainland to allocate in foreign assets is increasing, and the style of high turnover may influence Hong Kong and bring more trading volume of average trading volume in Hong Kong stock market.

In addition, finance and real estate industries take up large parts of Hong Kong market, while new economic industries, like information technology, and health care, take up large parts of US market. Because stocks in finance, real estate, energy industries are heavy-weighted stocks with large market capitalization, the turnover ratio of Hong Kong market is lower than that of US market. With the continuous reformation of regulation to attract the new economic corporates to go public in Hong Kong, the future of structure of Hong Kong stock market would change and the proportion of new economic corporates would increase, leading to improvement of turnover.

Figure 31、2018 Trading Amount and Market Figure 32、Turnover Ratio of Main Exchanges（2018） Capitalization of Hong Kong Listed Companies

Source: HKEx, China Industrial Securities Research Institute of Source: Wind, China Industrial Securities Research Institute of Economics and Finance Economics and Finance

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Figure 33、Industry Distribution of Market Figure 34、Industry Distribution of Market capitalization in HK（2018） capitalization in US（2018）

Source: Wind, China Industrial Securities Research Institute of Source: Wind, China Industrial Securities Research Institute of Economics and Finance Economics and Finance

According to Strategic Plan 2019-2021, in the next three years, HKEx would seek to work with the onshore exchanges on a win-win basis in each area to go deepen and further to bring some vitality and revenue to spot sector. HKEx would gradually expand product coverage across more stocks( including international companies (ETFs, listed bonds (including convertible bonds) and primary issuance (primary connect), introduce market microstructure improvements, and work with onshore regulators to introduce stock borrowing and lending for Southbound holdings and to allow short-selling by Northbound capital under existing mechanism on the onshore markets. With the richness the product types and optimization of trading mechanism, the trading activity of Hong Kong market would increase steadily.

3.2、IPO of Breakthrough Growth, HKEx Revitalized

The listing fee of spot sector mainly includes the annual fee paid by listed companies on SEHK and the initial and subsequent listing fee. In 2018, the first and subsequent listing fees of SEHK were 150 million HKD, up 13% on a year-on-year basis. The increase in the number of new listed companies brought up the revenue. Revenue from annual fee increased with the total number of listed companies, from 687 million HKD in 2017 to 740 million HKD in 2018 on a year-on-year growth rate of 8%.

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Figure 35、Hong Kong Market IPO Figure 36、Listing Fee of Spot Sector

In 2018, HKEx ranked first in the area of the number of new listed companies and the fund raising from IPOs. The number of new listed companies reached historical high level of 218, while raising fund was 288 billion RMB with a year-on-year growth rate of 124%. The reformation performed by HKEx on April 2018 allows biotechnology companies that failed to meet the financial qualified test of mainstream, companies with weighted voting right, Chinese companies listed in US market to go public in Hong Kong market. HKEx undertook the most significant reforms to the listing regime in 25 years, leading to boost the fund raising from IPO. There are total 7 companies with different voting rights or biotechnology companies went public according to the new chapter of Listing Rules and raised fund of 94 billion RMB.

Table 5、Fee paid for IPO Fee Brokerage fee Trading levy for SFC Trading fee for exchange

Rules 1% 0.0027% 0.005%

Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

Table 6、Modification of Mainboard Listing Rule of HKEx Type Content Biotech companies mainly focus on research ·at least one core product passing the idea development process ·Market capitalization: at least 1.5 billion HKD Biotech ·Focus on research and development of core products ·Gain enough investment from other professional investors ·4 areas: Molecular drugs, Biological Drugs, Instruments with level 2 and above, others High earning and innovation companies ·Companies must have high earning ability in innovation industries ·Different voting right only can benefit individuals, who must be shareholders and have big contribution to companies Different voting right ·Financial testing: at least 10 billion HKD of market capitalization or 1 billion HKD of earning (if market cap<40 billion HKD) ·Gain enough investment from other professional investors ·Satisfy the addition listing requirement and shareholder protection measures. Chinese companies listing in High earning and innovation companies Hong Kong on a secondary ·Allow Chinese companies to list in Hong Kong on a secondary basis

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basis ·Financial testing: at least 10 billion HKD of market capitalization or 1 billion HKD of earning (if market cap<40 billion HKD) ·have been listed in LSE, NYSE, or NASDAQ at least for 2 financial years with good performance. Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

The companies from Mainland China becomes the main resources of IPO in Hong Kong market, and the funds raising from Hong Kong market for those companies IPO account for over 90 per cent of IPO in Hong Kong market, with a total amount of 271.6 billion HKD. The three largest IPO, China Tower, Xiaomi, and Meituan, all raised over 30 billion HKD. Together with Pingan Good Doctor and Jiangxi Bank, top 5 IPO in Hong Kong market raised funds of 151.9 billion HKD. Xiaomi, ranked second in IPO, is the first company listed after the modification of listing rules on companies with different voting right structures.

Among the newly listed companies, the top 5 industries accounts for 94% of raising funds in Hong Kong market. Within these industries, TMT industries accounts for highest proportion of raising funds of 42% in Hong Kong market. The importance of new economic corporates becomes increasingly prominent, the companies like technology, medicine and biochemistry companies would draw more attention from public. More new economic corporates would go public in Hong Kong market and boost the listing fee for HKEx under the situation that HKEx keeps reforming to create condition for these companies.

Figure 37、Hong Kong IPO Funds Raising Ranking by Figure 38、Top 10 IPO in 2018 industries in 2017-2018

According to Strategic Plan 2019-2021, HKEx would build upon the 2018 Listing Reforms by further enhancing the structure of the IPO regime, including pursing measures to streamline the IPO process, shortening the IPO settlement cycle, and addressing microstructural frictions. HKEx would work with relevant regulators on

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introducing the changes to the listing regime as well as the Remote Participantship arrangement to develop a listing and capital raising hub for major global and regional companies on either a primary or secondary basis, thereby attracting global investment seeking exposure to Asia Pacific companies and Mainland investors seeking international exposure. ADT of main board of HKEx is positively correlated to HSI. From April 2018, ADT of HKEx keeps increasing when HSI goes down. From July to September in 2018, IPO of Xiaomi, China Tower and Meituan boosted ADT, when HSI decreased. When leading technical companies, such as Alibaba, join Hong Kong market, ADT of HKEX is expected to increase.

Figure 39、Number of Stock Traded in Mainboard and Figure 40、in 2018 Number of Stock Traded in HSI Mainboard and HSI

4、Innovating Derivative Market

In 2018, the operating income of equity securities and financial derivatives products sector is 3.503 billion HKD with a year-on-year growth rate of about 60%, while EBT is 2.851 billion HKD with a year-on-year growth rate of 74.59%. The market uncertainty led to active trading and hedging activities, the number of contracts of equity securities derivatives products reached historical high and the volume of index futures and options traded increased a lot.

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Figure 41、Operating Income and Growth of Equity Figure 42、Revenue Structure of Equity Securities Securities and Financial Derivatives and Financial Derivatives Sector

Source: Annual report, China Industrial Securities Research Source: Annual report, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance

Equity securities and derivatives products sector is derivatives products and other relevant business traded in SEHK and HKFE. The business includes providing and maintaining the trading platforms for different kinds of equity securities and financial derivatives products (such as index futures, option, derivative warrant, callable bull and bear contract and warrant), and sales of relevant market data. Revenue mainly comes from trading fee for derivatives, access fee for trading platforms and market data fee.

Table 7、Fee Charged by Derivatives Sector Product Fee title Detail

Options and futures on HSI 10.54 HKD per party per contract

Options and futures on MHI 2.1-3.6 HKD per party per contract

Derivatives on HS index Options and futures on HHI 4.04 HKD per party per contract Options and futures on MCH 1.54-2.1 HKD per party per contract Futures on DHS 3.54 HKD per party per contract Futures on DHH 2.04 HKD per party per contract Futures on VHS 10.54 HKD per party per contract Derivatives on stocks Options and futures on stock index 0.5-3.1 HKD per party per contract Futures on interest rate Futures on HKD 5.54 HKD per party per contract Futures on bonds Futures on 5-year China bonds 5.5 RMB per party per contract Futures on options on USD/CNH 8 RMB per party per contract Derivatives on RMB Futures on Euro/CNH, JPY/CNH, AUD/CNH 5 RMB per party per contract Futures on CHN/USD 0.6 USD per party per contract CES 120 10.54 HKD per party per contract Others BRICS futures 10.54 HKD per party per contract MICEX index futures, FTSE/JSE TOP40futures 5.54 HKD per party per contract Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

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Hong Kong derivatives market includes 13 different kinds of equity derivatives like index futures and option, stock futures and option. The rich product ranges can provide investors with different risk management tools. Now the securitized derivatives products include security warrant, callable bull and bear contract and equity linked note. As the world largest market for security warrant and callable bull and bear contract, Hong Kong can provide institution and individual investors with diversified choices. After several years of development, security warrant market contains not only individual stocks, but also HSI, DJSI, and commodity futures. The trading volume of securitized derivatives products ranks first over the world for 12 consecutive years.

Listing fee of SEHK mainly comes from listing fee of derivative warrant and callable bull and bear contract on both a primary and secondary basis. In 2018, listing fee of HKEx rose up by 317 million RMB with a year-on-year growth rate of 63%. In 2018, the number of security warrant and callable bull and bear contract new listed reached historical high, and new callable null and bear contract is 26678 contracts and new security warrant is 11794 contracts with a growth rate of 101.5% and 47.63% respectively.

Figure 43、Number of New Listed Security Warrants Figure 44、Listing Fee in SEHK and Callable Bull and Bear Contracts

Trading fee and using fee of trading system mainly include the fee of trading derivative products (security warrant, callable bull and bear contract, warrant and option) in SEHK and the fee of trading future and option in HKFE.

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Figure 45、Structure of Trading Fee and System Figure 46、Revenue from Trading Fee and System Access Fee Access Fee of Derivatives Sector

Source: Annual report, China Industrial Securities Research Source: Annual report, China Industrial Securities Research Institute of Economics and Finance Institute of Economics and Finance

By the end of 2018, HKEx has listed 6763 security warrants with a total market capitalization of 70.5 billion HKD. Total trading volume of the year is 3.87 trillion HKD, accounting for 14.7% of quarterly Hong Kong main board trading volume. 2847 callable bull and bear contract has been listed on HKEx with annual total trading volume of 66.3 billion HKD, accounting for 7.0% of quarterly Hong Kong main board trading volume. Structured products play an increasingly important role in Hong Kong market. From 2012 till now, average daily trading volume of security warrant, callable bull and bear contract and warrant increase with a compound growth rate of 10.3%. In 2018, average daily trading volume of security warrant, callable bull and bear contract and warrant is 23.2 billion HKD with a year-on-year growth rate of 36.5%.

Figure 47、ADT of Security Warrants, Callable Bull, Figure 48、Proportion of Security Warrants and Bear Contracts and Warrants Callable Bull and Bear Contracts

Due to fluctuation of the market, investors increased the purchase of derivatives to manage risk in 2018. Comparing to 2017, in 2018 the average daily deals of contracts

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of HKFE and stock options rise up by 56% and 21%, respectively. In 2018, the number of contracts of futures and options in HKFE reached historical high of 296 million with a year-on-year growth rate of 38%.

Figure 49、ADT of Derivatives Contracts Figure 50、ADT of Stock Options Contracts

Derivatives related to index become the most popular product in Hong Kong market, and trading volume and amount increased rapidly. In 2018, ADT of HSI, H-share futures and options is 0.537 million, accounting for 78.4% of Hong Kong derivative market.

Figure 51、ADT of Futures and Options on HSI and Figure 52、ADT of Futures and Options on H-share YoY Growth and YoY Growth

HKEx is accelerating the pace of development of new products across derivatives and structured products and adopting a holistic product development approach across our entire product ecosystem, by shortening our product development cycle, filling the remaining product gaps in the Asia time zone. Coordinating with the spot market, HKEx is evolving its derivative products across single shares, ETFs, structured

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products, and futures and options.

Table 8、Main Products and Plans in 2018 Time Content January 22, 2018 Narrow the gap between exercise price of stock index options March 5, 2018 Extent the time to maturity of futures and options on HSI and HHI

June 11, 2018 Introduce MSCI Asia (except for Japan) net return futures Introduce optimization plans for market, including implementing three-level fee structure, introducing liquidity supplier plan July 3, 2018 and calculation method for final modification price Introduce futures on DHS and DHH Introduce 16 new stock futures and 13 new stock options, including two companies with different voting right (Meituan and November 5, 2018 Xiaomi) Improve existing application process of futures and options to enhance user experience Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

HKEx continues to follow up the preparation for introducing A-share index futures. According to company announcement of March 11, 2019, HKFE has signed an agreement with MSCI to gain the authority to offer the futures contract on the MSCI A-share index. If regulator approves, HKFE can the offer the futures contracts on MSCI A-share index based on market conditions. MSCI A-share index covers large and medium size A shares which can trade via the Connect. When the inclusion of A-share finished in November 2019, MSCI A-share index would expect to cover 421 stocks. The only foreign futures tracking on Chinese A-share is the FTSE China A50 index futures in Singapore. The futures products offered by HKEx can satisfy the hedging needs for global investors who invest in A-share, bring up the proportion of A-share in international based index, and make futures market and spot market more active.

The foreign exchange derivatives now listed in HKEx include USD/CNY, EUR/CNY, AUD/CNY, JPY/CNY, CNY/USD futures and USD/CNY option. Except USD/CNY futures, the other 5 types of contracts were introduced after 2016. In 2018, Trade War made exchange rate fluctuate. The demand for risk management on CNY increases, and the trades of CNY derivatives break many records in HKEx. The number of contracts on USD/ CNY futures was 1,755,130, a new record from September 2012, breaking the record of 732,569 in 2017. The number of contracts on USD/ \CNY futures with open position was 10,827, setting a new record at September 14, 2019. HKEx would offer new settlement services on USD/HKD cross currency swap, USD/CNY and USD/HKD foreign exchange contracts in 2019.

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Figure 53、ADT of USD/CNH Futures and YoY Figure 54、The Number of USD/CNH Futures with Growth Open Interest and YoY Growth

HKEx provides after-hour trading mechanism for some derivatives for the convenience of investors to trade or hedge beyond regular hours, which can bring more vitality and more brokerage revenue for participants in after-hour trading. This mechanism has been introduced for 5 years and is suitable for the derivatives like HSI futures and options, H-share index futures and options, small-size HSI futures and options, small-size H-share index futures and options, and futures on foreign exchange from 17:15 p.m. to 1:00 a.m. next day.

Table 9、Measure to Improve After-hour Trading

Step Time Measure

First level November 6, 2017 Extent the T+1 trading hour of HSI, MHI, HHI, MCH from 5:15pm to 11:45pm to 5:15pm to 1am next day

May 14, 2018 Stock index options was included in after-hour trading Second level December 3, 2018 MHI was included in after-hour trading

Third level Expected in 2019 Extent trading hour to 3am next day

Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

Most mature markets have the mechanism for both before-hour and after-hour trading, mainly aiming at reflecting the price due to the disclosure of important information in non-trading hour, reducing the fluctuation in trading hour by unexpected events, and reduce risk for investors. Over the past 5 years, trading volume in after-hour trading rose by 12 times.

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Figure 55、The Number of Average Daily After-hour Trading Contracts and YoY Growth

Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

5、QME，A Warehouse in Mainland China for Contracts in London

Commodity sector includes London Metal Exchange (LME), operating the exchange for future and option contracts on basic metal and noble metal in UK, and Qianhai Mercantile Exchange (QME), which was launched recently in Shenzhen. The sector also includes Asia commodity contracts, gold futures contracts, and iron ore futures contracts. The revenue mainly comes from trading fee for commodity, commodity market data fee and fees from other relevant business.

The metal contracts of HKEx are mainly traded in LME, including Cu, Al, Pb, Zn, Ni and Al alloy. After acquiring the LME and commercializing the Exchange, HKEx plays an important role in world’s commodity trading market. LME has made good progress in continuing to implement all aspects of Strategic Path made in 2017. LME introduced a pricing function and other related functions via electron trading system to help users make choices and improve the participant rates.

Table 10、 LME Strategy

Time Strategy

2017 Reduce fee for swap，introduce OTC trading fee and discuss minimum price fluctuation

First half of 2018 Introduce financial OTC book fee；introduce broker membership；hold B-share，flexible T2 trading mode Second half of Introduce new products；implied price，and close price trading 2018

2019 Enhance clearing service and electric trading system

Source: LME website, China Industrial Securities Research Institute of Economics and Finance

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In 2018, the transaction charged by LME had an average daily trading amount of 629,566 lots with an increase of 5% YoY. The average daily trading amount of main products in LME like Cu, Al, Pb, Zn, Ni and Al alloy increases 10% to 25% comparing to 2017. By the end of 2018, the number of contracts with open interest is around 2 million with a decrease of 11% YoY.

Figure 56、ADT of Metal Contracts of LME and Figure 57、Metal Contracts Structure of LME YoY Growth

In the first quarter of 2019, ADT of metal contracts in HKEx is 0.71 million lots with a decrease of 2% YoY. ADT of Al contracts is 0.29 million lots, accounting for 40%, while ADT of Cu contracts is 0.15 million lots, accounting for 22%.

Figure 58、ADT of Metal Contracts of LME Figure 59、Metal Contracts Classification of LME

QME of HKEx was launched in October 2018 and offered products with trial. QME provides trading and settlement service for alumina spot. From its launched to the end of 2018, QME realized total trading amount of 77000 tons, total trading volume of 244.2 billion RMB, and related physical settlement of 75000 tons. Commodity trading

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is an important part of development strategy of HKEx, and the launch of QME is a big step for HKEx to develop commodity trading. QME would learn from LME’s experience to serve the economy as its responsibility is to develop spot market for institutional investors.

QME aims at serving institutional investors, especially for companies from medium to small industries to satisfy their individualized risk management need. There are three approaches. First, QME would build reliable warehouse and convenience logistics with settlement network and industry credit like LME. Second, QME would provide safe and efficient series of services like commodity spot trading, financing, warehouse logistics and supply chain management for commodity users, trader, logistics providers, and financial intermediaries to satisfy their needs. Third, QME would innovate its service model to reduce the capital costs and trading costs for companies and provide them with individualized services. On the first day of trading on October 19, 2018, China Aluminum International Corporate made a deal with Xiamen Xiangyu Group on 300 tons alumina spot with the price of 3030 RMB per ton, which is the first base price for China market depending on real settlement of Aluminum oxide spot. The success opening of QME is expected to fill the vacancies in relevant field in Mainland China market and help HKEx to internationalize.

Figure 60、QME Strategic Plan

Source: Company information China Industrial Securities Research Institute of Economics and Finance

Table 11、QME current products ranges Product Delisting Names Listing date Delivery month location type date Factory AO 象屿孝义 1904 2019-04-01 2019-04-30 2019-05 山西省孝义市大孝堡乡芦南村堆场 type AO 象屿三门峡 1904 2019-04-01 2019-04-30 2019-05 河南省三门峡市湖滨区斜桥新村 2-3 组西侧

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AO 象屿昌吉 1904 2019-04-01 2019-04-30 2019-05 新疆昌吉州昌吉市三工镇昌吉火车站铁道南侧 AO 中铝郑州 1904 2019-04-01 2019-04-30 2019-05 河南省郑州市上街区厂前路 22 号 AO 中铝焦作 1904 2019-04-01 2019-04-30 2019-05 河南省焦作市七贤镇 AO 中铝淄博 1904 2019-04-01 2019-04-30 2019-05 山东省淄博市张店区南定镇工业路 32 号 AO 中铝交口 1904 2019-04-01 2019-04-30 2019-05 山西省吕梁市交口县温泉工业园 Warehouse AO 新疆众和仓 2019-10-19 新疆乌鲁木齐市新市区东站路 637 号 type Source: QME website, China Industrial Securities Research Institute of Economics and Finance

According to Strategic Plan 2019-2021, HKEx would offer an expanded commodities product suite in LME precious (gold, silver, platinum), ferrous (hot-rolled coil, iron ore options, molybdenum), alumina and battery metals (lithium and cobalt). HKEx would extend LME trading into the Asian time zone and expand the commodity spot price discovery capacities by leveraging London, Hong Kong and onshore (QME) platforms; this will be done through acquisitions, partnerships and/or organic build-outs of spot trading platforms (utilizing QME and LMEbullion) and developing Price Reporting Agency capacities, thereby creating reliable global and China spot prices that can be used as reference price for derivatives. HKEx would extend the onshore commodities capacities in the Mainland, by exploring with onshore regulators the possibility of establishing LME licensed warehouses onshore to enhance the global competitiveness of Chinese commodities enterprises, developing QME to discover a reliable China spot price and eventually enabling international investors to get access to QME trading by extending our Commodities Connect program and potentially launching futures on QME spot prices in Hong Kong and London.

6、Technology Boosts Settlement Revenue

Settlement sector includes operations of 5 settlement companies under HKEx. 5 settlement companies take charge of clearance, settlement, and custody business of exchanges and Stock Connect under the Connect, also includes settlement of OTC derivatives contracts. Revenue mainly comes from settlement, clearance, depository, custody, and agency business, and net investment profit from margin account and clearing funds.

Table 12、Fee of Settlement Sector Products Fee Detail Settlement instruction 1 HKD per time, investor settlement instruction 1 HKD per time, Clearing fee transfer instruction 1 HKD per time, individual account transfer instruction 1 HKD per time Stock SEHK trading 1-100 HKD per transaction, settlement instruction 2-100 HKD per Settlement fee transaction Transfer fee 2-200 HKD Settlement fee for electric Settlement fee 0.5-12.8 HKD per contracts + service fee 100 HKD per time

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trade Depository and agency Extract fee 3.5 HKD per transaction + depository fee 0.012 HKD per transaction + transfer service fee 1.5 HKD per transaction Clearing fee 1 HKD each time Stock Connect Settlement fee 1-100 HKD per transaction Stock 0.45-2 HKD per contract Stock index 0.5-30 HKD per contract Futures Interest rate 5 HKD or RMB per contract Metal 2-12 RMB or 1-2 USD per contract Currency 5-8 RMB or 0.6 USD per contract Option on HKD 2 HKD per contract Options Options on RMB 2 RMB per contract Annual fee 0-5 million HKD OTC derivatives Booking fee 0.001%-0.0085% of notional amount Maintenance fee 0.00004%-0.00008%/ of notional amount Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

In 2018, as the Connect deepened, the market activities increases a lot. ADT of SEHK reached 15.97 billion lots with an increase of 29% YoY, while ADT of Securities Settlement Instruction reached 1.03 billion lots with an increase of 11% YoY.

Figure 61、Average Daily Trading Amount of SEHK Figure 62、Average Trading Amount by CCASS

As the number of transaction increases and average fee for each spot market transaction and each settlement rose up by 2% and 4% respectively, charged fee increased by 31% and 16% comparing to 2017. The number of transactions on derivatives and options increased significantly, leading to an increase in settlement fee. Service fee of depository, custody, and agency business rose up to 87 million RMB with an increase of 10% YoY. Average capital increased by 13.4% YoY, and interest rate of Hong Kong rose, leading to a huge boost in margin net investment profit by 70.2%. In 2018, settlement sector realized revenue of HKD 6.17 billion with an increase of 28% YoY.

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Figure 63、Revenue Structure of Settlement Sector Figure 64、Average Margin Account Amount

Now HKEx is actively investing in technology to improve the fundamental infrastructure for settlement systems, trading efficiency and customer experience. On February 2018, HKEx introduced a new version of securities trading system. On August 2018, settlement system for Bond Connect upgraded, which realized the real-time payment arrangement to enhance the efficiency and safety of Bond Connect settlement service. In the same month, HKEx launched an innovation lab, and acquired 51% of Shenzhen Ronghuitongjin Technology Co., Ltd, a subsidiary of Shenzhen Kingdom Sci-tech Co., Ltd. In 2019, the company would keep upgrading the system for derivatives, HKATS and derivative products clearance and settlement system are arranged for the second quarter in 2019.

In the next three years, HKEx plans to launch a new version of trading platform, together with settlement house in Hong Kong to improve settlement, clearance and depository of spots and derivatives transactions, to upgrade fundamental infrastructure for post-transaction, cover all transaction procedures and systems and increase efficiency of capital market and operation. HKEx expects to enhance technology strength by acquiring or cooperate with emerging technology companies, covering new technology applications like block chain and cloud computing.

Table 13、HKEx Plan for Applying New Technology Plan Content Integrating Hong Kong settlement house, improving infrastructure for settlement, clearing and depository of spot and Launch a new version of derivatives, improving the capital and operating efficiency of HK market. trading platform, and Upgrading Genium derivatives trading platform, grouping LME and Hong Kong derivatives market into Orion trading upgrade core system platform. Use new innovation lab, Make good use of innovation lab, follow the new trends in technology, cooperate with partnership via mergers and Acquire technology acquisitions, enhance technical ability, accelerate the speed on technical projects like block chain in the Connect. companies Introduce client’s platform, Introduce Client Connect for the convenience of cross-sale products, digital workflow and direct trading procedures Build big database for participants.

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Integrate the internal data system to realize the digitalization and automation of Group’s process to centralize data management, reduce operating costs and improve service efficiency Build large Data Marketplace by sharing data and analysis through business pricing mechanism Source: HKEx, China Industrial Securities Research Institute of Economics and Finance

7、Financial Analysis and Forecasting

7.1、Major Financial Indicators

In the first quarter of 2019, HKEx realized operating income of 4.29 billion HKD with an increase of 3.3% YoY; EBT of 3.03 billion HKD with an increase of 0.6% YoY; net profit attributable to shareholders of 2.61 billion HKD with an increase of 1.8% YoY; EPS of 2.1 HKD with an increase of 1.0% YoY. Operating income of the company climbed up by 3% in 2019 Q1, thanks to the increase in investment and margin and interest revenue, which is higher than the decrease in trading fee. In 2019Q1, investment gain boost up by 486% YoY to 0.5 billion HKD dues to the influence of return from external portfolio investment. The global market recovered in 2019Q1 and transaction turned warm. ADT of SEHK in the first quarter is 101.1 billion HKD, 18% higher than that of 2018 Q4, but 31% lower than that of 2018Q1.

Figure 66、Net Profit Attributable to Shareholders Figure 65、Operating Income and YoY Growth and YoY Growth

ADT of HKEx in 2019Q1 is 101.1 billion HKD with a decrease of 31% YoY. ADT of equity securities is 101.1 billion HKD with a decrease of 34% YoY, accounting for 73% of total trading amount. As the inclusion of China A-share into MSCI, FTSE Russell index and SP index, the Stock Connect recorded a historical high ADT of 20.7 billion RMB with 90% YoY increase in the first quarter. The Bond Connect realized a 5.9 billion RMB of ADT with an increase of 119% YoY.

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Figure 67、ADT Amount of HKEx and YoY Growth Figure 68、ADT of Equity Securities

In 2019Q1, ADT of security warrants, callable bull and bear contracts and warrants is 26.8 billion HKD with a decrease of 18% YoY. ADT of derivatives contracts in HKFE is 0.66 million lots with a decrease of 3% YoY, while ADT of stock option contracts in SEHK is 0.53 million lots with a decrease of 21% YoY. The number of newly listed security warrants and callable bull and bear contracts is 9432 with a decrease of 10% YoY.

Figure 69、ADT of Securities, Callable Bull and Figure 70、Number of Contracts on Derivatives and Bear Contracts, and Warrants Options in HKFE

From the aspect of expenses, in 2019Q1, HKEx operating expenses increased by 4% YoY, mainly due to 12% increase of employee fees and 19% increase of consulting fee YoY. Meanwhile, the company adopted a new accounting standard, property expenditure decreased significantly by 69% YoY. In2019Q1, operating profit margin is 28.4%, with an increase of 1.5 per cents YoY and a quarter-on-quarter decrease of 9.5 per cents.

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Table 14、Revenues and Expenses Structure of HKEx in 2018（Million HKD） Year 2018 each quarter Q4 2018 Quarter 2017 2018 YoY Q1 Q2 Q3 Q4 proportion on Quarter Operating income 13180 15867 100% 20% 4150 4044 4102 3571 -13% Trading and system 4856 6339 40% 31% 1794 1540 1515 1490 -2% fee Listing fee 1333 1721 11% 29% 460 395 456 410 -10% Clearing and 2691 3281 21% 22% 917 830 784 750 -4% settlement fee Net profit from 1599 1584 10% -1% 795 553 236 -57% investment Depository and 892 979 6% 10% 150 368 295 166 -44% service fee Market data fee 857 899 6% 5% 219 224 232 224 -3% Other revenues 952 1064 7% 12% 610 -108 267 295 10% Operating Expenses 3566 4110 100% 15% 935 983 1025 1167 14% Employment fee 2273 2540 62% 12% 599 606 640 695 9% Information and 433 508 12% 17% 120 121 137 130 -5% maintenance fee Property expenses 354 437 11% 23% 100 102 118 117 -1% Marketing and 506 625 15% 24% 116 154 130 225 73% lawsuit expenses Proportions 34% 31% / / 27% 29% 30% 38% / Source: Company information, China Industrial Securities Research Institute of Economics and Finance

Table 15、Revenues and Expenses Structure of HKEx in 2019Q1（Million HKD） 2018Q1 2018Q4 2019Q1 同比环比 2019Q1 占比 Operating income 4150 3571 4288 3% 20% 100% Trading and system fee 1794 1490 1491 -17% 0% 35% Listing fee 460 410 453 -2% 10% 11% Clearing and settlement 917 750 834 -9% 11% 19% fee Net profit from 390 267 882 126% 230% 21% investment Depository and service 150 166 140 -7% -16% 3% fee Market data fee 219 224 229 5% 2% 5% Other revenues 220 264 259 18% -2% 6% Operating Expenses 935 1167 970 4% -17% 100% Employment fee 599 695 669 12% -4% 69% Information and 120 130 143 19% 10% 15% maintenance fee Property expenses 100 117 31 -69% -74% 3% Marketing and lawsuit 116 225 127 9% -44% 13% expenses Proportions 26.9% 37.9% 28.4% / / / Source: Company information, China Industrial Securities Research Institute of Economics and Finance

In 2019Q1, gross profit margin of HKEx is 70.6% with a decrease of 3.5 per cents YoY, while net profit margin is 60.8% with an increase of 2.2 per cents YoY. In 2019 Q1, debt to equity ratio of company is 85% with an increase of 1 per cent YoY.

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Figure 71、Gross Profit and Net Profit Margin (%) Figure 72、Debt/Asset Ratio

7.2、Profit Forecast

In the first quarter of 2019, HKEx realized an operating income of 4.29 billion HKD with an increase of 3.3% YoY, and net profit attributable to shareholders of 2.61 billion HKD with an increase of 1.8% YoY. Under the situation that weight of A-share internationalization improves, the Connect speeds up and Guangdong-Hong Kong-Macao Greater Bay Area begins, HKEx keeps reforming the market regulation actively and increases investment in Fintech and different asset classes. HKEx released Strategic Plan 2019-2021 on February 2019 aiming at becoming the global markets leader in the Asia time zone from three focuses: China anchored, globally connected and technology empowered. When carrying the Strategic Plan, HKEx is still working on controlling the cost to bring stable and sustained compound growth return to shareholders and investors.

From the beginning of the Connect, Northbound and Southbound trading keeps increasing, contribution of the Connect program to ADT of Hong Kong market appears gradually. Trading volume of the Stock Connect accounts for 5% of that of Hong Kong market now, while on November 2014 this number was only 0.5%. The turnover ratio of Hong Kong market is only 0.59, which is much lower than 1.32 of SSE and 2.48 of SZSE. With the deepen of the Connect, the style of high turnover may influence Hong Kong and bring more trading volume of average trading volume in Hong Kong stock market. We expect that when turnover ratio of HKEx increases by 10%, the total trading volume would rise by 13 billion HKD, leading to an increase of 0.5 billion HKD revenue per year and 0.4 billion HKD profit per year. By 2018, in Chinese bonds market the total amount of bond outstanding is 12 trillion USD, where interbank

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transaction takes up 90% and exchanges hold 10%. This amount is 87% of GDP, but only 2% of the bonds held by foreign investors, which is at a low level comparing to global market. Since return of Chinese bond is higher than that of developed market and Chinese market can satisfy the diversification need in different geography and different asset classes for foreign investors, global demand for Chinese bond market would increase as beginning of the Bond connect and inclusion of emerging bond index.

Hong Kong derivatives market includes 13 different kinds of equity derivatives. The trading volume of securitized derivatives products (security warrant, callable bull and bear contract) ranks first over the world for 12 consecutive years. HKEx continues to follow up the preparation for introducing A-share index futures. According to company announcement of March 11, 2019, HKFE has signed an agreement with MSCI to gain the authority to offer the futures contract on the MSCI A-share index. If regulator approves, HKFE can the offer the futures contracts on MSCI A-share index based on market conditions. MSCI A-share index covers large and medium size A shares which can trade via the Connect. When the inclusion of A-share finished in November 2019, MSCI A-share index would expect to cover 421 stocks. The only foreign futures tracking on Chinese A-share is the FTSE China A50 index futures in Singapore. The futures products offered by HKEx can satisfy the hedging needs for global investors who invest in A-share, bring up the proportion of A-share in international based index, and make futures market and spot market more active.

The foreign exchange derivatives now listed in HKEx include USD/CNY, EUR/ CNY, AUD/ CNY, JPY/ CNY, CNY /USD futures and USD/ CNY option. Except USD/ CNY futures, the other 5 types of contracts were introduced after 2016. In 2018, Trade War made exchange rate fluctuate. The demand for risk management on CNY increases, and the trades of CNY derivatives break many records in HKEx. The number of contracts on USD/ CNY futures was 1,755,130, a new record from September 2012, breaking the record of 732,569 in 2017. The number of contracts on USD/ CNY futures with open position was 10,827, setting a new record at September 14, 2019. HKEx would offer new settlement services on USD/HKD cross currency swap, USD/ CNY and USD/HKD foreign exchange contracts in 2019. Company also interconnects Chinese and foreign futures and spot markets vis LME and QME.

In addition, HKEx would corporate with onshore regulators to prepare for completing the Connect, develop new products (like ETF Connect, New Share Connect, futures on A-share index, bonds and commodities), expand the trading infrastructure, improve

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market micro-structure, improve the efficiency between Mainland and Hong Kong market, activate more potentials and strengthen the global competitiveness. In technology, HKEx aims at improving settlement efficiency by Block chains and cloud computing.

Based on the above, we expect operating revenues of HKEx from 2019 to 2021 are 17.46, 19.26, and 21.55 billion HKD respectively with a YoY growth of 10.0%, 10.3%, and 11.9% respectively. Net profit attributable to shareholders of HKEx from 2019 to 2021 are 10.63, 11.61, and 12.95 billion HKD respectively with a YoY growth of 14.1%, 9.2%, and 11.6% respectively. From 2019 to 2021, trading fee and system assess fee are 7.3, 8.12, and 8.78 billion HKD; listing fee of SEHK are 2.0, 2.36, and 2.81 billion HKD; settlement fee are 3.79, 4.55, and 5.29 billion HKD.

Table 16、Revenue forecasting Projects 2018A 2019E 2020E 2021E Company overall

Operating income（100 million HKD） 159 175 193 216 YoY（%） 20.4 10.0 10.3 11.9 Net profit attributable to shareholders 93 106 116 130 （100 million HKD） YoY（%） 25.8 14.1 9.2 11.6 Trading fee and system access fee（100 63.4 73.0 81.2 87.8 million HKD） Listing fee（100 million HKD） 17.2 20.0 23.6 28.1 Clearing and settlement fee（100 million 32.8 37.9 45.5 52.9 HKD） Source: Company information, China Industrial Securities Research Institute of Economics and Finance

8、Valuation and Rating

Because securities industry is periodic industry, HKEx’s profit would fluctuate a lot along with the market. PE of HKEx moves together with capital market, but PB ratio remains stable. By June 28, 2019, PE and PB of 2018 are 37.1 and 8.8 respectively, both under historical average.

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Figure 73、Historical PE Figure 74、Historical PB

Source: Wind, China Industrial Securities Research Institute of Source: Wind, China Industrial Securities Research Institute of Economics and Finance Economics and Finance

Comparing to other listed Exchanges, in 2018, ROE of HKEx is 23.9 due to low-asset operating, which is much higher than the second, LSE, of 14.6%. PE of HKEx is also lower than that of LSE.

Table 17、Valuation of exchanges (By July 3, 2019)

Market Market PB PE Code Company Stock price ROE Capitalization Capitalization (MRQ) FY2018 （HKD）（Billion HKD）（Billion HKD） 0388.HK HKEx 279.6 351.77 351.77 23.9 8.9 37.8 （USD）（Billion USD）（Billion HKD）

ICE.N ICE 87.4 49.27 384.95 11.7 2.9 24.8 CME.O CME 199.8 71.51 558.72 8.1 2.7 36.4 NDAQ.O NASDAQ 99.7 16.51 129.02 8.1 3.0 36.1 （Billion （Pound）（Billion HKD） Pound） LSE.L LSE 5,676.0 19.85 196.08 14.6 5.9 41.4 Average 13.27 4.69 35.28

Source: Wind, China Industrial Securities Research Institute of Economics and Finance

HKEx has an excellent level of ROE and earning ability would continue in the future. Based on the above, we initiate coverage on HKEx with a BUY rating and target price of 319.15 HKD. TP/EPS is37.3,34.1 and 30.6 from 2019 to 2021. TP/BVPS is 9.5, 9.2 and 8.9 from 2019 to 2021. Compared to current price, HKEx’s current price has a potential of 14.1% increase.

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Figure 75、PE Figure 76、PB

Source: Wind, China Industrial Securities Research Institute of Source: Wind, China Industrial Securities Research Institute of Economics and Finance Economics and Finance

Table 18、Valuation in Security Industry (By July 3, 2019)

Market BVPS PB Code Company Price capitalization 2017A 2018A 2017A 2018A （Billion （HKD）（RMB）（RMB） HKD） 3908.HK CICC 15.6 26.92 9.2 10.1 1.49 1.36 Guotai Junan 1.4 10.57 1.6 1.4 0.77 0.83 1788.HK International Haitong 2.5 14.71 4.6 4.5 0.48 0.50 0665.HK International China Everbright 11.7 19.68 24.1 23.7 0.43 0.43 0165.HK Group Shenwan 1.4 2.15 2.7 2.8 0.45 0.44 0218.HK Hongyuan Securities Industrial 0.6 2.28 1.1 1.1 0.46 0.46 6058.HK Securities International Average 0.68 0.67 6030.HK CITIC 16.2 36.86 12.4 12.6 1.15 1.13 6886.HK HTSC 13.6 23.34 12.2 12.5 0.98 0.95 Guotai Junan 14.0 19.46 14.1 14.2 0.87 0.87 2611.HK Securities Haitong 8.6 29.19 10.2 10.2 0.74 0.74 6837.HK Securities Guangfa 9.4 15.96 11.1 11.2 0.74 0.74 1776.HK Securities China Merchants 9.4 9.23 11.8 12.0 0.70 0.69 6099.HK Securities 6066.HK China Securities 5.7 7.23 6.0 6.2 0.84 0.81 3958.HK Orient Securities 5.1 5.27 7.6 7.4 0.60 0.61 6881.HK China Galaxy 4.7 17.27 6.4 6.5 0.65 0.63 Everbright 6.1 4.31 10.5 10.2 0.51 0.53 6178.HK Securities Central China 1.8 2.15 2.6 2.6 0.61 0.62 1375.HK Securities Hengtou 3.9 1.76 4.1 3.7 0.85 0.94 1476.HK securities

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Guolian 2.6 1.17 4.0 4.0 0.58 0.58 1456.HK Securities Average 0.75 0.76 Source: Wind, China Industrial Securities Research Institute of Economics and Finance

9、Potential risk

1). ADT decrease significantly; 2). Policy of Connect between China and Hong Kong fall below expectation; 3). Decrease in IPO

***This is a direct English translation from the original Chinese version <香港交易所（388.HK）海外公司深度研究报告：连接中国与世界，打造亚洲交易时钟> issued by Industrial Securities on 4th July, 2019 for reference only. In case of any discrepancy between the two texts, the Chinese version shall prevail. ***

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Appendix

Balance Sheet Mn/HKD Income Statement Mn/HKD

FY 2018A 2019E 2020E 2021E FY 2018A 2019E 2020E 2021E

Current Assets 2,559 2,589 2,667 2,634 Operating Income 159 175 193 216

Cash and Cash Equivalent 1,212 1,385 1,365 1,211 Trading Fee and System access fee 63 73 81 88

Trading Financial Assets 610 536 540 540 Listing fee 17 20 24 28

Available-for-sale Financial Assets 315 230 298 389 Clearing and settlement fee 33 38 45 53

Account Receivables 183 208 232 255 Net profit from investment 16 11 8 9

Intangible Assets 180 182 185 188 Other revenues 10 13 14 16

Fixed Assets 16.3 16.6 17.5 18.8 Employment expenses -25 -29 -32 -36

Total Liabilities 2,150 2,169 2,235 2,189 IT and maintenance expenses -4 -5 -6 -7

Current Liabilities 539 475 480 479 Operating profit 109 124 136 151

Margin Accounts 1,237 1,291 1,321 1,255 Income Tax -16 -18 -20 -22

Account Payables 148 155 159 151 Net Profit 93 106 116 129

Loans 11.7 12.2 12.9 13.5 Minority Interest Income 0 0 0 0

Provisions 1.8 1.2 1.3 1.3 Net profit attributable to shareholders 93 106 116 130

HKEx Shareholders 407 418 431 444 EPS-basic 7.50 8.56 9.35 10.43

Minority Interest 1.74 1.50 1.23 0.93

Total Shareholders’ Equity 409 420 432 445 Key Financial Ratio Total Liabilities and Equity 2,559 2,589 2,667 2,634 FY 2018A 2019E 2020E 2021E Growth(%) Growth rate of trading fee 30.5 15.2 11.2 8.2

Cash Flow Statement Mn/HKD Growth rate of listing fee 29.1 16.1 18.0 19.3

FY 2018A 2019E 2020E 2021E Growth rate of clearing and settlement fee 21.9 15.5 20.0 16.3 Growth rate of profit attributable to Net Profit 109 124 136 151 25.8 14.1 9.2 11.6 shareholders Interest -17 -10 -7 -8 Solvency (%)

Net Changes in Margin 0 53 31 -66 Asset-liability Ratio 84.0 83.8 83.8 83.1

Other Changes in Liabilities 21.7 19.5 24.8 23.8 Operation Capacity (%) Tax Paid -13.2 -14.8 -19.8 -20.4 ROE 23.9 25.7 27.3 29.6 CFO 94.8 166.8 157.4 64.2 Stock Info(HKD) CFI -53 102 -72 -101 EPS 7.50 8.56 9.35 10.43 CFF -65 -96 -105 -117 BVPS 32.8 33.7 34.7 35.8 Net Change in Cash -24 173 -20 -154 Valuation Ratio Beginning Balance of Cash 135 112 1,385 1,365 PE 37.3 32.7 29.9 26.8 Ending Balance of Cash 112 1,385 1,365 1,211 PB 8.5 8.3 8.1 7.8

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Introduction of Share Investment Rating

Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmarks (HSI, Hang Seng Index) within twelve months after the release of the report, we define the terms as follows: Overweight：Industry performs better than that of the whole market； Neutral：Industry performs about the same as that of the whole market； Underweight：Industry performs worse than that of the whole market

Company Investment Rating: When measuring the difference between the markup of the company stock price and that of the market’s benchmarks (HSI, Hang Seng Index) within twelve months after the release of this report, we define the terms as follows: Buy：With a markup more than 15% better than that of the market; Outperform：With a markup 5% to 15% better than that of the market； Neutral：With a markup less than 5% better or worse than that of the market； Underperform：With a markup more than 5% worse than that of the market

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【Disclaimer】 The report is prepared by the Company, a qualified securities investment consulting business approved by the China Securities Regulatory Commission. The report is distributed in Hong Kong by China Industrial Securities International Brokerage Ltd., which is regulated by the Hong Kong Securities and Futures Commission (HKSFC CE No. AYE823). Queries concerning the report from readers in Hong Kong should be directed to our Hong Kong sales managers. The report will be provided in other countries and regions according to local rules and regulations. The Company will not treat unauthorized receivers of this report as its clients. The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of research opinions, which are subject to the complete report released on the Company’s website (http://www.xyzq.com.cn). The clients may ask for follow-up explanations if they so wish. Based on different assumptions or standards and with different analytical approaches, the Company’s salespersons, traders and other professionals may express views, written or oral, towards market trend and securities trading which are inconsistent with opinions and recommendations contained herein. The views in this report are subject to change, and the Company has no obligation to update its information with all receivers of the report. The Company’s asset management department, proprietary business department and other investment-related departments may make independent investment decisions based on investment that are inconsistent with opinions and recommendations contained herein. The report is not delivered to investors, including but not limited to US residents, who may mislead the Company to violate local laws and regulations of any counties, regions or jurisdictional areas (except for the “major U.S. institutional investors” specified in Rule 15a-6 under the Securities Exchange Act of 1934). The report may contain hyperlinks to external websites. The Company has not referred to and will not be responsible for the contents on the external websites. The hyperlinks are only provided for the convenience and reference for the receivers. The contents on the external websites do not constitute a component of the report or implying any recommendation of securities. The receivers should treat them cautiously and solely at their own risk. The report is based on public information; however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials and opinions contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any securities. The clients should make investment decisions independently and solely at their own risks. Under the legal framework, the Company may take positions in and trade stocks of the companies referred to herein, which may also receive investment banking services from the Company. The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on the report. Independent investment consultant should be consulted before any investment decision is rendered based on this report or at any request of explanation for this report where the receiver of this report is not a client of the Company. The Company possesses all copyrights of this report and reserves all rights related to this report. Unless otherwise indicated in writing, all the copyrights of all the materials herein belong to the Company. In the absence of any prior authorization by the Company in writing, no part of this report shall be copied, photocopied, replicated or redistributed to any other person in any form by any means, or be used in any other ways which will infringe upon the copyrights of the Company. No one shall have the right to redistribute and use the report at any circumstances without the prior consent of the Company.

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＃Title＃ the Global Markets Leader in the Asian Time Zone Market＃Marketdata Data ＃ ＃Createtime1＃ Date 2019.07.03 in July 8, 2019

＃Title＃ the Global Markets Leader in the Asian Time Zone Market＃Marketdata Data ＃＃Createtime1＃ Date 2019.07.03 in July 8, 2019