Hong Kong Exchanges and Clearing , the world's most highly valued exchange with a staggering $36 billion capitalization, is still an attractive investment, given its strategic value will rise as its ties with mainland China inevitably deepen.

Its appeal also lies in its detachment from the rush of industry consolidation, with major exchanges merging as their customers demand cheaper trading costs, access to the biggest liquidity pools and the ability to do deals across asset classes.

The rise in HKEx's share price -- which have tripled in value so far this year -- has been driven predominantly by the prospect of more flows from the Chinese savings pool.

The rising correlation between the Hong Kong and mainland stock market has also been pivotal, as Hong Kong-listed China companies play catch up with their more expensive counterparts listed in Shanghai and Shenzhen

It's a monopoly that's at a historic juncture, said Steve Cheng, associate director at Shenyin Wanguo. The shares haven't reflected all the potential.

Even without a merger premium, HKEx shares are already valued at over 70 times its 2007 profit, or about twice that of the Australian Securities Exchange Ltd and eclipsing the Singapore Exchange's multiple of 40 times earnings.

HKEx's market value just beats that of CME Group Inc, the parent of the Chicago Mercantile Exchange, the world's largest futures exchange, and tops London Stock Exchange Group's $10 billion and NYSE Euronext's $25 billion.

But Asia's largest listed exchange has said it is not interested in mergers or cross-border tie-ups, even as a landmark joint venture between Tokyo and London stock exchanges announced this week underlines the rapid pace of global bourse consolidation.

SITS OUT THE DANCE

With its unique franchise in linking global investors to China's sizzling growth, HKEx would appear to have little reason to team up with anyone and every reason to guard its monopoly.

There's always strategic value here, because there's the alignment of global exchanges. But ultimately, this is probably the best position to participate in the deepening of the Chinese capital markets and the ownership of exchanges, said Chris Esson, an analyst with Macquarie Bank.

As an international capital market, HKEx is the logical conduit through which China can funnel trillions of dollars in cash and execute other capital market reforms.

Turnover at the exchange has been boosted as more fund managers and brokerages have been given the green light by Beijing to invest overseas.

And in August, China said it will allow individual Chinese investors buy Hong Kong-listed securities for the first time, sparking a buying frenzy in Hong Kong-listed Chinese companies

Although the proposal looked set for a delay after Chinese Premier Wen Jiabao's cautionary comments analysts say the program will eventually take off.

Market watchers also reckon that Beijing is considering allowing share swaps between the Hong Kong and Shanghai exchanges, although such a mechanism may be scuppered by China's capital controls for now.

CROWN JEWELS

Many see the Hong Kong government's recent purchase of more shares in HKEx -- taking its stake to 5.9 percent -- as Hong Kong safeguarding its influence, particularly in any future tie-up with mainland exchanges.

HKEx's shares have shot up roughly 70 percent since the announcement.

Reports that Beijing was also accumulating a stake in the exchange by way of the new $200 billion sovereign wealth fund -- a move the fund denied -- underlines the view that HKEx is Hong Kong's crown jewel as its economy increasingly relies on financial services.

You can sense that behind the scenes there's a lot going on, said John Schofield, a hedge fund manager at Tempus Investment. It's a sense that something must come out eventually and that the HKEx will have value.

Although some analysts say the stellar growth in turnover justifies its valuation, others say the usual metrics used to value companies no longer apply.

I don't think the fundamentals are relevant now. HKEx has become some kind of pawn in some strategic game. I don't think strategic buyers are price sensitive, Schofield said.

They're not thinking about how much revenue they're getting over the next 12 months.

Ben Kwong, chief operating officer at KGI Asia Ltd, agreed, saying its future was driven by strategic investors positioning themselves as mainland China opens up its financial system.

It's complicated. It's not just valuations -- it's like game theory, said referring to a branch of applied mathematics that studies interactions.

The government bought shares to maintain their profile, in order to gear up the cooperation between the two markets, Kwong added. Investors believe in the prospects and the potential of a cooperation between the two exchanges.

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