SINGAPORE EXCHANGE LIMITED (SGX:S68)
Singapore Exchange - Upcoming A50 Contract Competition
- SGX's share price decline since our SELL call on 5th August, further weaker bias expected with the long awaited China A50 index futures contract competition from HKEx materializing, which will commence trading from 18th October 2021.
- Recent transition from MSCI ex-SG to FTSE product suite has been encouraging for SGX (SGX:S68), key to see whether this may also be replicated to some extent in the future for the China A50 index contracts. At the same time, we believe the market should be supportive of growth for both products.
- Fair value estimate for SGX is reduced to S$10.20. While near term negative impact is expected, SGX should continue to mitigate this over time through its ongoing efforts to diversify its revenue mix and growth drivers (e.g. from the FICC division).
Long awaited China A50 contract competition from HKEx has materialised.
- Since our SELL call on 5th August (Singapore Exchange - OCBC Investment 2021-08-05: Closing FY21 On A Softer Note; Market depth remains a longer term structural concern) due to extended valuations and concern over potential future competition risks to its China FTSE A50 futures trading income, SGX's share price has weakened.
- Long awaited China A50 contract competition from HKEx has just materialized and will commence trading from 18th October. We see further softness for SGX's share price near term, following the latest announcement that the Hong Kong Securities and Futures Commmission has approved a MSCI A-share derivative product that will be launched by HKEx, which is expected on 18th October (HKEX press release). Along with SGX’s FTSE A50 futures contract, this new product from HKEX should widen the pool of risk management tools available to offshore investors for A-share portfolios and help address one of MSCI’s concerns on limited access to hedging and derivatives for the Chinese A-share market.
Recent transition from MSCI ex-SG to FTSE suite of products (especially for key Taiwan index futures) has been encouraging
- Recent transition from MSCI ex-SG to FTSE suite of products (especially for key Taiwan index futures) has been encouraging for SGX in terms of retaining clients’ stickiness, key to see whether this may also be replicated to some extent in the future for the China A50 index contracts (some concerns as the upcoming HKEX product may be more diversified and hence, could serve as a more representative hedging instrument for some investors).
- In SGX's announcement (in May 2020) of the loss of the MSCI ex-SG contract suite, management indicated the MSCI suite contributed ~12% of total derivative volumes and had a pro-forma impact on bottom line of about 10-15% before mitigating actions. The previous launch of non-China related equity dervivative products had a limited impact on SGX, which was able to migrate to the FTSE product suite and maintain its leading market share particulary for Taiwan index contracts.
Fair value for SGX is reduced to S$10.20
- Fair value estimate for SGX is reduced to S$10.20 (implying a lower multiple of 22.2x FY23E PER) in view of increased competitive pressures, although we expect SGX should continue to mitigate the impact from ongoing efforts to diversify its revenue mix and growth drivers (e.g. from the FICC division).
- While we see some negative implications to SGX from the latest announcement as competition should heat up after the launch of HKEX’s product from 18th October, over the medium term the market should be big enough to support growth for two offshore China A50 products. The addition of MSCI A50 contracts by HKEx will add as an offshore alternative product to SGX’s FTSE A50 contract (currently its largest equity derivative contract, which is estimated to contribute approximately a fifth of its FY21 derivative revenues and ~53% of its FY21 equity derivative volumes).
- A decline of ~10% in its FTSE China A50 futures volume may have a low single digit impact on its total revenue and net profit, assuming no promotional pricing, which needs to be further assessed given limited details at this point. We see increased near term margin pressure and some downside risks to its securities DAV ahead as competition heats up for market share.
- Over the medium term, the growth potential should be sufficient to allow both products (FTSE and MSCI China A50 index futures) to grow. In the meantime, we expect SGX's previously announced plans to diverisify its growth drivers to continue with focus on the FICC business. The company has guided that medium term revenue mix could shift to favour FICC and DCI (potentially 25% & 15% of total revenues respectively, vs FY21’s 20% and 14% proportion).
Prior updates:
- Focus ahead will be on executing its recent FICC investments and partnerships (e.g. TrumidXT, Marketnode, Climate Impact X and upcoming ECB – FX electronic communication network), which should enable the company to support clients looking to gain exposure on growing trends that include digitalization and sustainability. As SGX announced previously, it will be launching a new global carbon exchange in Singapore by year end, backed by banks DBS and Standard Chartered and Temasek Holdings. The proposed Singapore based exchange and marketplace, Climate Impact X (CIX), aims to launch by year end and will leverage satellite monitoring and blockchain technology to ensure transparency, liquidity and high quality of carbon credits, and is anticipated to benefit over the medium term from its proximity to Southeast Asia and increasing global focus on carbon commitments. CIX’s initial focus is expected to be on natural climate solutions (protection of natural ecosystems-forests, wetlands and mangroves).
- Higher capex guided for FY22, which should increase to between S$60mn-65mn due to spending related to its near term investments, digitalization, partnership & other growth initiatives.
Market depth remains a longer term structural concern
- Market depth remains a longer term structural concern as well, with one new equity listing and seven delistings in the past month and bond listings remaining as the key contributing source of new fund raising activities, although the company continues to work on initiatives to broaden its future revenue sources. This includes potential partnership with FTSE to open up new opportunities on other index futures products, REIT and ESG related indices, and ongoing plans to deepen its FX and commonities product offering (e.g. KRW and S$ products), building on the customer base from BidFX and its dominant share in INR/US$ and US$/CNH fx futures (estimated market shares of ~65% and 82% respectively as of 1HFY21 results). New ferrous products are also expected to be launched by SGX.
- See
OCBC Research Team
OCBC Investment Research
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https://www.iocbc.com/
2021-08-23
SGX Stock
Analyst Report
10.20
DOWN
11.300
