Goldman Sachs Reaffirms Buy on HKEX, Sets Target at HK$540, Bullish on Offshore Government Bond Futures Opportunities

Overview

Goldman Sachs has issued a research report reaffirming its “buy” rating for Hong Kong Exchanges and Clearing (0388.HK), setting a target price of HK$540, which implies about 40.8% upside from the current level. The core thesis is that as RMB internationalization advances and capital accounts open, the introduction of offshore RMB government bond futures will serve as a key catalyst. This not only addresses the pain point of foreign investors lacking effective interest-rate risk management tools but will also deliver significant revenue growth and diversify HKEX’s income stream. Meanwhile, HKEX’s core equity listing and trading businesses remain robust, and its current valuation is at historical lows, offering an attractive risk-reward profile.

Core views

Offshore government bond futures are a critical catalyst for attracting foreign capital back into the market. Currently, foreign investors hold only about 2% of Chinese government bonds, well below the 5% peak seen in 2018/2022 and significantly lower than the 11–12% weighting of Chinese bonds in the Bloomberg Global Aggregate Index and the FTSE World Government Bond Index. The under-allocation is largely due to recent unfavorable interest-rate conditions and the lack of effective risk-management tools. Although the CSRC has allowed QFII/RQFII investors access to onshore government bond futures, Goldman Sachs believes foreign investors prefer offshore markets because they involve less operational friction and do not require maintaining complex onshore bond positions for hedging purposes. Offshore government bond futures can more directly track the government bond yield curve, reduce basis risk, and—being exchange-traded—offer higher capital efficiency and narrower bid-ask spreads. The potential for revenue growth and diversification is substantial. Based on 2025 data, if foreign participation rises from 2% to 10% and derivatives market penetration increases from 1% to 10%, HKEX could see an additional HK$3.6 billion (US$460 million) in revenue, equivalent to 12% of its FY25 earnings. At present, HKEX’s revenue is heavily reliant on the equity market (45% in FY25), with derivatives contributing less than 20%. The development of the offshore interest-rate derivatives market would rebalance its revenue mix, bringing it closer to global peers. By comparing the depth of the interest-rate derivatives market to that of the FX derivatives market, assuming offshore market share reaches 20%, the ratio of interest-rate derivatives volume to FX volume would rise from today’s 0.2x to 1.0x—a level still below Japan’s 0.4x and the U.S.’s 2.3x, indicating substantial room for growth. Policy support is expected to be gradual and sustained. Initially, only 5-year tenors of offshore government bond futures will be launched, so the initial impact may be modest, as long-dated products (e.g., 10-year, 30-year) are what foreign investors prefer for hedging long-end bonds. Drawing on onshore experience, after introducing 10-year and 30-year instruments in 2015 and 2023, trading liquidity shifted toward the long end. Goldman Sachs views this process through the lens of RMB internationalization and anticipates further policy support, similar to the “Connect” initiatives and the evolution of the offshore FX derivatives market, gradually expanding market access and product tenors. Core equity business remains strong, and valuation is attractive. Despite a 6% year-to-date decline in the stock price, the underlying equity story remains intact. As of May 2026, the pipeline of companies awaiting listing has grown to 494 (compared to 316 at year-end 2025), with tech firms accounting for 37%. In the first five months, 61 companies listed, raising HK$167 billion—already 60% of the 2025 full-year total—with new listings delivering strong average returns (+68%). Market turnover increased 39% year-on-year, and June’s daily average turnover climbed to HK$311 billion. In terms of valuation, HKEX trades at a 25x forward P/E based on 2027 earnings estimates, below its historical average of 34x and near the low end of its peer group’s valuation range.

Analysis framework

Goldman Sachs employed a comprehensive analytical framework combining macro policy drivers, micro-level quantitative modeling, and fundamental validation. First, at the macro level, it identified trends in RMB internationalization and capital account liberalization, highlighting that the core challenge for foreign investors under-allocating to Chinese bonds is the absence of efficient risk-hedging instruments—namely, offshore government bond futures. Next, using quantitative models, it estimated potential revenue upside by projecting increases in foreign ownership (from 2% to 10%) and derivatives penetration (from 1% to 10%), cross-validating these assumptions against the ratio of interest-rate derivatives to FX derivatives trading volumes to arrive at roughly 12% additional revenue. Finally, returning to the company’s fundamentals, it analyzed high-frequency data such as the IPO pipeline, market turnover, and new-stock performance to confirm the resilience of the core equity business, while benchmarking against historical P/E averages to support its buy call.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Analysis of Derivatives Market Development Stage

  The report assesses China’s offshore interest-rate derivatives market as being in an early stage of development by comparing its depth relative to FX derivatives (IRD/FX turnover ratio) versus mature markets like the U.S. and Japan, thereby inferring future growth potential and opportunities for penetration improvement.

• Valuation MethodDDM Dividend Discount Model

  Three-Stage DDM Valuation Model

  Goldman Sachs used a three-stage dividend discount model (DDM) to calculate HKEX’s target price, embedding a 34x forward P/E for 2027. This approach is suitable for large financial institutions with stable cash flows and clear dividend policies, effectively capturing long-term intrinsic value.

• Macroeconomic framework

  Transmission of RMB Internationalization and Capital Account Liberalization

  The report frames innovations in offshore financial products (such as offshore government bond futures) within the broader context of RMB internationalization, viewing them as crucial steps to solve the “last mile” problem of foreign investor asset allocation—risk management—and expects policy support to deepen progressively along lines similar to the “Connect” mechanisms.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hong Kong Exchanges and Clearing (0388.HK)

  Direct beneficiary. If offshore government bond futures trade on HKEX or its affiliated platforms, they will directly boost the company’s derivatives trading fees, clearing fees, and margin interest income.

  Strengths

  Strong equity franchise, robust IPO pipeline with a high proportion of tech stocks; valuation below historical norms; benefits from RMB internationalization policies.

  Weaknesses

  Revenue structure remains heavily dependent on the equity market; initial offshore government bond futures will likely focus on 5-year tenors, limiting near-term revenue contributions.

  Comparison

  Compared with other Asian exchanges, HKEX enjoys a unique competitive advantage as the preeminent offshore RMB center; its valuation is among the lowest relative to global peers.

  Risks

  Competition with onshore capital markets; persistent deflationary pressures in China may dampen trading activity.

Key data

• 12-Month Target PriceHK$540.00Calculated using a three-stage DDM model, implying 40.8% upside
• Potential Additional RevenueHK$3.6 billion (US$460 million)Assumes foreign participation rises to 10% and derivatives penetration to 10%, representing about 12% of FY25 revenue
• Foreign Ownership of Chinese Government BondsAbout 2%Far below the 11–12% weighting in global indices, leaving significant room for catch-up
• IPO Proceeds for the First Five Months of 2026HK$167 billionRepresents 60% of the 2025 full-year total, signaling robust listing activity
• Expected P/E Ratio for 202725xBelow the historical average of 34x, making the valuation attractive
• Number of Companies in the IPO Pipeline494As of May 2026, a significant increase from 316 at year-end 2025

Impact & implications

For HKEX, the launch of offshore government bond futures marks not just the introduction of a single new product but also a pivotal milestone in the rise of its FICC (Fixed Income, Currencies, and Commodities) segment. This will help reduce the company’s reliance on traditional equity trading revenue, optimize its revenue mix, and enhance its cyclical resilience. For investors, the current stock price does not yet fully reflect this long-term structural benefit, nor the recent recovery in the short-term equity business, presenting a favorable entry opportunity. Over the longer term, as RMB internationalization deepens, HKEX is poised to become a hub for offshore RMB risk management, redefining the value of its platform.

Risks

• Intensified competition with onshore capital market operations
• Slower pace or reduced activity in cash markets
• Fee pressure stemming from declining onshore charges in China
• China’s ongoing deflationary economic environment

What to watch

• The exact timing of the offshore government bond futures launch and the initial product tenors (whether they will expand to 10-year or 30-year maturities)
• The actual scale and growth rate of foreign participation in offshore government bond futures
• Changes in the IPO pipeline and the progress of tech-focused listings
• Sustained levels of average daily turnover (ADT)