Singapore Exchange - OCBC Investment 2021-11-15: Staying Focused On Its Core Strategies


Singapore Exchange - Staying Focused On Its Core Strategies

  • Long awaited China A50 contract competition from HKEx commenced trading from 18th October, with HKEx’s market share last estimated at ~22%.
  • While near term sentiment should stay subdued given the quick start in HKEx’s A50 product, the market should continue to expand over time and provide growth opportunities to both players.
  • Staying focused on its core strategies to advance its multi-asset exchange platform, widen its partnership network and grow its international presence, with the goal to increase diversification of its revenues.

October was a softer month for SGX trading

  • October was a softer month for SGX (SGX:S68)'s trading volume following the heightened market volatility in the previous quarter triggered by worries over the health of the Chinese property market. October’s equities SDAV (securities daily average value) of ~S$1.16bn was lower from September’s ~S$1.23bn. Derivatives DDAV (derivatives daily average volume) of 0.992m was also lower than September’s 1.029m. For 4MFY22 (financial year ends in June), SGX's equities SDAV and DDAV are tracking at ~S$1.208bn and ~0.965m respectively.
  • Two-player market for A50 futures contracts is still evolving, SGX has a first mover advantage (15 years offering the SGX FTSE China A50 contract) although HKEx has seen an encouraging start. Over the past fifteen years of offering the SGX FTSE China A50 contract as an offshore risk management tool for Chinese equities, SGX has emjoyed a first mover advantage which should result in some client stickiness, supported by the suite of products offered in the SGX ecosystem, which include US$-CNH futures and iron ore contracts.
  • The long awaited China A50 contract competition from HKEx has also commenced trading from 18th October, which has resulted in HKEx taking market share of about 22% as of 12th November. HKEx has waived its trading fee on China A50 until June 2022 to encourage take up. November will be the first full month following HKEX’s China A50 futures trading, but will also coincide with Singapore’s rebalancing which will see foreign listing inclusion factor increased from 25% to 50%.
  • In its recent investor update, SGX’s management highlighted that its longer trading hours (opens before and closes after other exchanges) and relatively narrow screen bid offer spread of ~21bps (as of 11th November) has supported many investors’ preference for the FTSE A50. Despite some market share gains by HKEX for A50, SGX’s total volumes has not reduced, which supports its view that the overall market pie/total volumes of A50 market should continue to expand, providing growth opportunities in a two-player market. FTSE is reported to be reviewing the possibility of expanding the A50 index from 50 to 100 stocks, which SGX is not in direct dialogue with FTSE here but the firm believes this supports the view that there is further room to enhance an already well received and liquid product.
  • Staying focused on executing its core strategies to advance its multi-asset exchange platform, widen its partnerships and network and grow its international presence. In terms of statistics, SGX's CEO highlighted last week that China volumes have grown by 14% on average over the past five years, with almost 100m contracts traded this year. CNH volumes have risen almost 20 times during the past five years. Revenues of FICC and DCI are now a combined ~34% of total revenues in 2021, up from 21% in 2016.
  • Medium term outlook SGX continues to focus on building up its non-equity business and expect it to grow from the current rough one-third towards around 50% (FICC and DCI around 25% and 15% respectively). Foreign exchange business will be one of SGX’s key growth drivers, following the acquisition of BidFX (multi-dealer streaming platform), Maxxtrader (complements BidFX with its direct streaming capabilities) and establishment of ECN (introducing anonymous pools of trading). To date, acquisitions are performing in line or slightly better than expected. It is currently a meaningful plaer in the bond market, and plans to continue to form partnerships (be it contracts jointly traded/connects etc) and to expand its international presence to upsell to existing clients or expand its client base. Cost guidance from three months ago for the full year was maintained.
  • Addressing potential scrip dividend concerns SGX also addressed some concerns around the scrip dividend, highlighting no decision has been made but any discount will be limited in view of dilution concerns and the need to deliver shareholder returns. Investors are expected to still have the choice to receive their dividends fully in cash, even if scrip were implemented.
  • HOLD rating following share price correction since our Sell call on 5th August due to extended valuations and concern over potential future competition risks to its China FTSE A50 futures trading income. As highlighted before, the addition of A50 contracts by HKEx serves 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. While we see some negative implications to SGX on higher competition following the launch of HKEX’s product from 18th October, over the medium term the addressable market should continue to expand and remain largeg enough to support growth for two offshore China A50 products. SGX is also expected to continue mitigating the impact from ongoing efforts to diversify its revenue mix and growth drivers (e.g. from the FICC division).

SGX - ESG updates

  • SGX pegs the firm at the top of its industry peers and is incorporated in our fair value via a valuation premium to its historical average multiple. Its ESG rating is driven by a strong governance structure and pegs SGX at the top tier amongst global industry peers.
  • Key positives include ongoing efforts to expand its product suite and market hedging activities expected in a sustained low-rate environment. The solid rating is driven by SGX’s strong governance structure through board oversight and positive track record in productivity and morale issues, which the firm maintains through staff training and employee engagement surveys. SGX’s board has an independent majority, separate CEO and chairman roles, independent chairman and female directors representation. Executive pay is also reviewed independently, with clawback provisions to curtail governance risks. Policies are also in place to pre-empt business malpractices.
  • First Asian exchange to commit to 1.5°C-aligned science-based emission reduction targets SGX has announced in mid July 2021 its commitment to a 42% reduction in Scope 2 emissions by FY2031 from the base as at FY2021 (July 2020 to June 2021), pledging to set science-based emissions reduction targets that are consistent with keeping global warming to 1.5°C above pre-industrial levels. For Scope 3 emissions, SGX will engage its co-location data centre supplier for them to set science-based targets within five years. The commitments are based on the criteria and recommendations of the Science Based Targets initiative (SBTi-collaboration between CDP, UN Global Compact, World Resources Institute/WRI and World Wide Fund for Nature/WWF), making SGX the first Asian exchange to join Race to Zero and Business Ambition for 1.5°C.
  • SGX will submit its verifiable targets to SBTi for validation. Its Scope 1 emissions(direct emissions from owned/controlled sources) are less than 2% of combined Scope 1 & 2 (indirect from generation of electricity/steam/ heating/cooling consumed by reporting company) emissions and are excluded fro targets due to immateriality. Planned initiatives to achieve the Scope 2 reductions include: improving the energy efficiency and reducing the carbon intensity of our data processing requirements in line with best practices, introducing energy-efficient equipment, processes and policies, and; purchasing Renewable Energy Certificates that meet the Scope 2 greenhouse gas (GHG) Protocol quality criteria through its subsidiary Energy Market Company.
  • See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-11-15
SGX Stock Analyst Report HOLD MAINTAIN HOLD 10.200 SAME 10.200