Singapore Exchange - UOB Kay Hian 2022-06-14: Robust Performance Amid Macro Uncertainty

SINGAPORE EXCHANGE LIMITED (SGX:S68)

Singapore Exchange - Robust Performance Amid Macro Uncertainty

In May 22, Singapore Exchange (SGX, SGX:S68) saw an expected decline in securities daily average value (SDAV) while derivatives daily average volume (DDAV) grew, driven by higher volatility.
SGX’s FTSE China A50 Index volumes continue to hold up well against HKEX’s MSCI China A50 Index futures.

Forex futures surged to record highs while commodity derivatives increased y-o-y due to improved sentiment on China’s economic outlook.
Maintain HOLD with a slightly higher target price of S$9.55 (up from S$9.33).

Within expectations, SGX's SDAV continued its decline in May 22 at S$1.51b (-5.5% y-o-y, +18.4% m-o-m) even as new IPOs such as NIO Inc. recorded the highest trading volumes upon introduction.
We expect SGX's SDAV to hit a floor in 2QFY23 (Oct-Dec 22), barring any unexpected surge in trading volatility. On a m-o-m basis, the +18.4% m-o-m SDAV growth was impressive given that May 22 had one less trading day.

Slightly above expectations, SGX's DDAV surged (+18.8% y-o-y, +3.2% m-o-m), driven by elevated volatility from the ongoing Ukraine-Russia conflict and renewed optimism over China’s economic recovery. Total equity index futures surged (+20.9% y-o-y, +3.8% m-o-m) as major contracts posted robust growth.
FTSE China A50 Index volumes continued its uptrend at 8.6m contracts (+24.5% y-o-y, -5.7% m-o-m) as SGX’s commanding market share continues to hold up well against HKEX’s MSCI China A50 Index futures. Other equity index futures such as MSCI Singapore Index (+22.6% y-o-y, +20.5% m-o-m), FTSE Nikkei 225 Index (+4.4% y-o-y, +25.2% m-o-m) and FTSE Nifty 50 Index (+42.0% y-o-y, +20.2% m-o-m) also outperformed.

Above expectations, total forex futures volumes skyrocketed 62.0% y-o-y, the highest volume recorded as both US$/CNH futures (+77.3% y-o-y, +27.2% m-o-m) and INR/US$ futures (+53.9% y-o-y, +9.9% m-o-m) surged to record highs. Total commodity derivatives volumes increased y-o-y on the back of improving sentiment on China’s economic outlook.
Iron ore futures (+5.6% y-o-y, +15.7% m-o-m) climbed to 2.1m contracts while other commodities such as petrochemicals and rubber derivatives also performed well.

As trading volatility remains elevated, the Fixed Income, Currencies and Commodities (FICC) segment is poised for robust revenue growth in FY22F, contributed largely by the currencies and commodities sub-segments. Driven by increased demand for risk management, record-high currency trading volumes for Apr 22 and May 22 have surpassed expectations, with Jan-May 22 currency trading volumes up 12.0% y-o-y.
Supply chain disruptions, concerns facing China’s recovery and macro-economic uncertainty have also led to a surge in commodity trading volumes. For Jan-May 22, iron ore derivatives, one of SGX’s key commodity contracts, have seen trading volumes climb 27.7% y-o-y.
Trading volumes for other contracts such as Forward Freight Agreement (FFA) futures (+4.4% y-o-y) have also grown while monthly trading volumes for the newly introduced dairy futures contracts have increased steadily from 19,174 in Jan 22 to 35,265 in May 22.

Completed in Jan 22, revenue contribution from the completed MaxxTrader acquisition is expected to boost trading and clearing revenue. Coupled with its wholly-owned subsidiary, BidFX, SGX has soft-launched its Forex Electronic Communication Network (ECN) on Nov 21. The ECN serves as a platform for clients to trade OTC Forex contracts directly among themselves.
With both acquisitions now catering to buy-side and sell-side clientele, SGX has become Asia’s largest one-stop venue for Forex OTC and futures participants. Eventually, SGX aims to integrate its futures trading into the ECN, which in our view, would likely happen in FY24- 25 and would lead to increased volumes for the futures contracts.
Also, due to SGX’s attractive multi-asset offerings, some customers from the ECN have also started trading other asset classes on the exchange, leading to some customer stickiness.

We expect revenue from the FICC segment to grow 23.2% y-o-y and form around 24% of SGX’s total FY22F revenue (from 15% in FY19), catching up to the Equity Derivatives (~28%) and Cash Equities segments (~34%).

We increase our FY22-24F PATMI forecasts for SGX slightly by the China A50 Index futures market would be muted moving forward.
See
We think significant revenue from new initiatives such as SGX’s Forex Electronic Communication Network would take time to gestate, and major success from these initiatives could re-rate SGX to trade at levels similar to peers’ average (28.2x).

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-06-14

SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.55 UP 9.330