SGX - RHB Invest 2016-07-22: Looking Forward To Shenzhen-Hong Kong Connect

SGinvestors.io

SINGAPORE EXCHANGE LIMITED SGX S68.SI 

SGX - Looking Forward To Shenzhen-Hong Kong Connect

• Whilst SGX’s 4QFY16 earnings will be unexciting, we remain bullish on this counter. This is on the back of a potential pickup in SADV in the later part of 2016. 
• The impending commencement of the Shenzhen-Hong Kong Connect could also catalyse more trading of the China A50 Index Futures, which accounts for a high-teens percentage share of its revenue. 
• Maintain BUY and SGD9.04 TP (16% upside), pegged to 26x FY17F P/E, which is 1SD above the 1.5-year mean of 23.1x.

SGX will be releasing its FY16 (Jun) results on 27 Jul. 

• We are lowering our FY16 net profit forecast for Singapore Exchange (SGX) by 3% to SGD352m. This is to factor in 4QFY16’s weaker-than-expected securities average daily value (SADV) of SGD1bn.

While the SADV is unexciting for now, we are optimistic going forward.

• For 4QFY16, SGX’s SADV of SGD1bn was 15% lower QoQ, while the full year’s SGD1.06bn was only marginally lower than FY15’s SGD1.08bn.
• Yet, whilst the SADV remained weak in the first half of July, we believe a recovery in equity activity could take place before the end of 2016. Hence, we maintain our assumption of FY17 SADV to hit SGD1.27bn.

More trading volume for China A50 Index Futures going forward? 

• For the derivatives business, 4QFY16 derivatives average daily volume (DADV) of 692,000 was down 16% QoQ. 
• The key contributor to weakness was the China A50 Index Futures’ average daily volume of 271,000 (-24% QoQ). 
• Whilst the short-term trading volume weakness may persist, we believe the impending commencement of the Shenzhen-Hong Kong Stock Connect could help raise trading volumes in the China A50 Index Futures. Thus, we are forecasting for FY17 DADV of 782,000, an increase of 5% YoY.

SGX remains attractive. 

• We have fine-tuned our FY17-18 net profit forecasts. We peg our TP to a target 26x FY17F P/E (1SD above the 1.5 year mean of 23.1x). This gives us a TP of SGD9.04.
• At the same time, our DCF methodology leads to a slightly higher SGD9.17 fair value. Note that SGX’s dividend yield of 4% is attractive, compared with the sovereign 10-year bond yield of 1.67%. 
• We maintain our BUY recommendation. 
• The key risk to our call would be global economic trends.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-22

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.04 Same 9.04