Singapore Exchange - Phillip Securities 2019-10-01: Riding On The Wave Of Structural Global Growth In Derivatives

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SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Riding On The Wave Of Structural Global Growth In Derivatives

• Globally, derivative volumes have been growing at CAGR of 10% in the past 5 years.
• FTSE China A50 Index Futures remain the main driver of Singapore Exchange (SGX:S68)’s volume, accounting for 44% of total trading volume in FY2019.
• Diversification efforts have seen derivative volumes from non-equity - FX futures and Iron ore - grow from virtually non-existent in FY2014 to 15% of total volumes in FY2019.
• HKEX’s launch of MSCI China A-share futures contract yet to be approved.
• Singapore Exchange and NSE to end arbitration, and launch IFSC-SGX Connect in GIFT City by end FY2020.
• We maintain ACCUMULATE at a higher target price of S$8.60 (previously S$8.07). We peg our Target Price to 22x P/E, 0.5 SD below Singapore Exchange’s 5-year mean (previously 21x). The higher Target Price is due to an upward adjustment in our FY20-21 DDAV forecast by +2% and +4% respectively.

1. Structural growth in derivatives in Asia

• The rising popularity of derivatives is a trend observed in emerging markets in the Asia Pacific region (APAC) and not just in Singapore. In our opinion, the growth of derivatives will be sustained by ever-increasing interconnectedness and globalisation of markets, and institutions that require risk management and hedging tools. Singapore Exchange’s diversified product suite allowed investors to access otherwise hard-to-reach onshore market in emerging markets, namely Singapore Exchange’s India and China equity derivatives.

2. Revenue contribution from derivatives grew from 30% in FY2014 to 51% in FY2019

• Revenue contribution from derivatives grew from 30% in FY2014 to 51% in FY2019, while total revenue grew 32% during the same period. Derivatives revenue tripled to S$460mn in the last decade with CAGR of 11%. Ten years ago, securities dominated Singapore Exchange’s revenues and accounted for 40% of revenue (FY19: 20%).

3. The FTSE China A50 Index Futures remain the main driver of SGX’s volume

• The FTSE China A50 Index Futures remain the main driver of Singapore Exchange’s volume, accounting for 44% of total derivatives volume in FY19. It makes Singapore Exchange vulnerable in the face of competition from Hong Kong Stock Exchange (HKEX)’s proposed MSCI A futures contract. A loss of revenue from China A50 has the potential to impact earnings.
• Among all of Singapore Exchange’s equity index futures, the FTSE China A50 Index futures contributed the most - at 56% of total equity index futures in FY19, due to Singapore Exchange being the only offshore futures contract tracking the China A-share market.

4. Steady diversification in derivatives to offset competitive pressures

• Singapore Exchange continues to diversify its revenue streams not just away from the securities business but within derivatives as well. While equity derivatives remain the heavy-weight, we see other segments catching up (e.g. FX Futures and Iron ore contributed 17% and 5% respectively to the growth in FY19).
• Derivative volumes from FX futures and Iron ore grew from virtually non-existent in FY2014 to 15% of total volumes in FY2019. Moving forward, top-line growth will largely depend on derivative product diversification.

5. Other Updates

End of the spat between SGX and NSE

• In August 2019, Singapore Exchange (SGX) and NSE announced that they are discontinuing the arbitration. In the meanwhile, both parties agreed to jointly launch the trading of derivatives based on the Nifty 50 stock index and its constituents at the Gujarat International Finance Tec-City (GIFT), through a platform called the NSE International Financial Service Centre (IFSC)-SGX Connect by end FY2020. The joint proposal will include a revenue-sharing model and more will be unveiled by end FY2020.
• Nifty 50 Index Futures accounted for 9% of total trading volume in FY19. We expect minimal CAPEX of around S$5mn to operationalise the IFSC-SGX Connect to fall within the S$45-50mn guidance for FY2020. Assuming the IFSC-SGX Connect takes off with no hiccups by end FY2020, there is potential for the partnership to boost Singapore Exchange’s Nifty 50 Index Futures volume.

HKEX’s bid for London Stock Exchange (LSE) a potential negative for SGX

• HKEX’s bid to takeover LSE for US$36.6bn was contingent on LSE terminating its proposed US$27bn acquisition of financial data analytics provider, Refinitiv Holdings Ltd. LSE views Refinitive to be of high strategic merit as they aim to expand their financial data capabilities, and of lower risk as compared to the political risks that come with HKEX’s bid.
• In our view, given that HKEX’s move to takeover LSE came at a time of high tension in Hong Kong regarding China’s political influence, it could be subjected to a high level of political objection. A successful takeover of LSE by HKEX may not be good news for Singapore Exchange as LSE owns the FTSE Indexes from which Singapore Exchange licenses the FTSE China A50 Index Futures.

SGX’s Organisational Restructuring

• On 27 June 2019, Singapore Exchange announced a new business realignment that consists of four main business units. We do not expect the restructuring to be of significant change to business fundamentals. The new financial statement outlook will be implemented on 1 July 2019 and 1Q20’s financials will disclose the new outlook.
• The restructuring is not expected to incur additional costs nor disrupt staff headcount. Instead, it aims to achieve potential cost efficiencies. Efforts will be put into the DCI and FICC business units to double in size in the next 5 years.
  1. Fixed Income, Currencies & Commodities (FICC) – Bond listing business and commodities, FX and Index derivatives.
  2. Equities (Cash & Equities Derivatives) – Equities will be focused as a single asset class to form an enlarged platform.
  3. Data, Connectivity and Indices (DCI) – Renamed from the old Market Data & Connectivity unit.
  4. Global Sales and Origination (GSO) – Combines the equities and debt capital markets.

Investment Actions

We maintain ACCUMULATE at a higher Target Price of S$8.60 (previously S$8.07).

• We peg our Target Price to 22x P/E, 0.5 SD below Singapore Exchange’s 5-year mean (previously 21x).
• The higher Target Price is due to an upward adjustment in our FY20-21 DDAV forecast by +2% (to 1,140k) and +4% (to 1,283k) respectively.
• Our new FY20 and FY21 DDAV forecasts represent growth of 15% y-o-y and 13% y-o-y respectively, as compared to FY19’s 22% y-o-y.

Rationale:

• We are positive that Singapore Exchange’s diversified suite of derivative products will sustain growth in 2020. Some of the structural tailwinds Singapore Exchange is benefiting includes the increased global flows into Asian equities, currency transaction moving into exchange platform and broader range of commodity futures products.

Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-10-01

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 8.60 UP 8.090