Singapore Exchange - UOB Kay Hian 2021-08-26: Competition Looms

SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Competition Looms

HKEX recently announced the launch of a new MSCI A share index futures contract which is the direct competitor to SGX’s FTSE A50 index. While the FTSE A50 index has a relatively large turnover volume, the group’s multi-asset suite of product offerings could allow for customer stickiness while we also note that HKEX’s previous MSCI product launches have been fairly lacklustre.
Maintain HOLD with a target price of S$11.65.

HKEX (388 HK) announced that it will launch a new China A- share index futures contract – on 18 Oct 21, with licensing from MSCI. This is a futures contract based on the performance of 50 key Shanghai and Shenzhen stocks and is the direct offshore competitor to Singapore Exchange (SGX, SGX:S68)’s FTSE A50 derivatives contract.

SGX’s FTSE A50 index futures have a daily traded value of US$7b with open interest of US$12b. Investors are able to hedge their positions in the Chinese markets by taking a position on the index futures. In FY21, FTSE A50 index futures accounted for approximately 52% of SGX’s equities derivatives volume traded. As the equities derivatives segment forms about 27% of the group’s revenue contribution in FY21, this suggests FTSE A50 has a revenue impact of 10-15% for SGX.
Average fee per contract for SGX’s equity, currency and commodity derivatives came in at S$1.34 in FY21, in which there were introductory fees for FTSE Asia expansion suite (eg. FTSE Taiwan Index). We opine that introductory fees were implemented during a competitive phase with HKEX (when HKEX was launching its MSCI Taiwan index futures).

Assessing HKEX’s MSCI derivative China. Since HKEX’s launch of Stock Connect in 2014, it has been the key channel for international investors to access the A-shares market. Northbound average value traded has increased to RMB118b in 2021, growing at a CAGR of 72% since 2015. This is in line with the higher market capitalisation weightage of Chinese counters in the MSCI Emerging Markets Index. Ultimately, an A- shares derivative offering in the primary A-shares exchange in HKEX will put forth a challenge to SGX’s FTSE A50 volumes.

Recent volatility still a boost for FTSE A50. Recent volatility in the Chinese markets will likely still be a near-term boost. In Jul 21, FTSE A50 volume traded rose 20% m-o-m. A sensitivity analysis of the change in FTSE A50 volumes and contract fees is detailed in report attached below.

Maintain HOLD with a target price of S$11.65. Our target could re-rate SGX alongside peers.
See
On a DDM basis (ROE: 30%, COE: 7%, growth: 4%), SGX's share price would trade at close to S$12.15, or an implied P/E of 30x FY22F earnings.

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 11.650 SAME 11.650