Citi Research lowered its target price for HKEX (00388) to HK$210 from HK$285 and downgraded its rating to "sell" from "buy" on London Stock Exchange (LSE) acquisition.
The research house said HKEX's acquisition price values LSE at 2019 P/E of 42x, which is much higher than the historical average P/E of 22x.
LSE was only up 5% yesterday, suggesting the market is pricing in either uncertainty around the deal going through, particularly the risks on regulatory approvals; or potential pullback in HKEX share price reducing the premium LSE shareholders will receive.
Citi expects cost synergies to be realized first and revenue synergies could take time to realise. LSE would benefit from access to derivatives trading as well as access to a key Asian market.
While valuation is compelling for LSE, regulatory risks are high for LSE+HKEx. Similar exchange M&A transactions were not fructified for LSE (with Intercontinental Exchange as well as Deutsche Borse), Citi added.
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