Singapore Exchange - Phillip Securities 2019-07-12: Derivatives Remain SGX’s Forte

SINGAPORE EXCHANGE LIMITED (SGX:S68) | SGinvestors.io SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Derivatives Remain SGX’s Forte

  • Volatility is a favourable backdrop for derivatives with Singapore Exchange (SGX:S68)’s DDAV spiking 32.9% y-o-y in 4Q19.
  • Diversified product suite sets Singapore Exchange apart from other domestic-centric exchanges.
  • While HKEX’s launch of A-share contracts may pose headwinds, a larger trading ecosystem from both exchanges may limit downside.
  • Maintain ACCUMULATE with an unchanged Target Price of S$8.09. We believe that volume, fees and open interest will continue to see growth.



Company Background

  • As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, Singapore Exchange is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.
  • With about 40% of listed companies and 80% of listed bonds originating outside of Singapore, Singapore Exchange is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, Singapore Exchange is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.


Investment Merits/Outlook


Volatility - a very favourable backdrop for derivatives.

  • With increased volatility due to trade uncertainties and geopolitical tensions, investors tend to hedge more In 4Q19, Singapore Exchange’s DDAV spiked 32.9% y-o-y due to the resurgence of trade uncertainties. The heightened trade tensions between the US and China may have also contributed to Singapore Exchange’s China A50 index futures volume surge of 82.3% y-o-y.
  • We believe market volatility will keep derivatives volume firm by creating demand for trading and hedging, and opportunities for arbitrage and speculation.

Diversified product suite.

  • Singapore Exchange has a well-diversified asset class over many equity index products in numerous markets, as well as FX futures (16 pairs) and commodities. Singapore Exchange’s diversity of products sets it apart from other domestic-centric exchanges because the majority of Singapore Exchange’s customers are international clients with high demand to hedge their risks in the global market.

HKEX’s introduction of MSCI China A Index Futures.

  • Singapore Exchange’s derivatives business contributed to 50% of total revenue in 9M19, with the main driver being FTSE China A50 Index Futures, which accounted for 45% of total trading volume YTD.
  • While HKEX’s launch of A-share contracts may pose headwinds, a larger trading ecosystem from both exchanges may limit downside.

Room for growth in the financial futures market.

  • As more funds move into emerging markets, there is a higher need to hedge their portfolio exposures in countries such as China, India and Indonesia. As the emerging market portfolio grows, the demand for hedging increases and the financial futures market will grow in tandem.


Recommendation

  • Maintain ACCUMULATE with an unchanged Target Price of S$8.09.
  • We believe that volume, fees and open interest will continue to see growth. Stock market volatility driven by trade tensions, rising interest rates and geopolitical events should benefit derivatives turnover as seen from the record highs in derivatives volume in the past few quarters. The boost in derivatives business volume and product offerings will be more than sufficient in supporting earnings growth.
  • We like Singapore Exchange because of its diversified earnings and stable dividends.





Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-07-12
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 8.090 SAME 8.090



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