Singapore Exchange - UOB Kay Hian 2022-11-17: Monthly Performance Largely In Line, Forex & Commodities Outperformed


Singapore Exchange - Monthly Performance Largely In Line, Forex & Commodities Outperformed

  • For Oct 22, Singapore Exchange (SGX)'s SDAV softened slightly while DDAV rose sharply, driven by the equity, forex and commodities segments.
  • SGX’s equity index futures surged from higher FTSE China A50 index futures volumes. The forex and commodities derivatives continued their outperformance as volumes reached record highs.
  • In view of a lack of near-term catalysts, we maintain HOLD recommendation on SGX.

Securities turnover value softened.

  • See SGX's Announcement dated 14 Nov 2022 – In line with expectations, SGX's Oct 2022 Securities Daily Average Value (SDAV) dropped slightly (-0.3% y-o-y, -1.5% m-o-m), supported by an increase in market turnover value for structured warrants and daily leverage certificates (+71% m-o-m). Assuming flat growth from these two securities, SDAV would have fallen 2.4% y-o-y.
  • Barring any unforeseen spike in trading volatility, we expect SGX's SDAV to continue its downtrend.

Record-high derivatives volume in line.

  • SGX's Derivatives Daily Average Volume (DDAV) surged (+23.0% y-o-y, +16.8% m-o-m) to a record high since Mar 20, driven by higher total volumes across equity, forex and commodities derivatives. Concerns over China’s economic outlook, along with optimism over a slowdown in interest-rate hikes led to increased trading activity.
  • Total equity index futures volumes grew 14.7% y-o-y, contributed by
    • increased FTSE China A50 index futures volumes (+15.2% y-o-y, +8.3% m-o-m) and
    • increased China H50 index futures volumes (+78.0% y-o-y, +40.0% m-o-m).
  • Other major equity indexes such as the FTSE Taiwan index futures (+16.8% y-o-y, +11.8% m-o-m) and MSCI Singapore index futures (+33.5% y-o-y, +9.8% m-o-m) also grew, with the latter at an all-time high.

Forex and commodities outperformed.

  • Above expectations, total forex futures volumes surged (+48.8% y-o-y, -4.8% m-o-m) as SGX’s three major forex contracts outperformed. Average daily volume (ADV) of US$/CNH futures (+96.7% y-o-y, - 2.7% m-o-m), KRW/US$ futures (+44.7% y-o-y, +19.3% m-o-m) and INR/US$ futures (+16.5% y-o-y, -8.3% m-o-m) climbed from elevated institutional hedging demand, in response to heightened inflation expectations and sustained US dollar strength.
  • Keeping up with forex futures, commodity derivatives volumes also increased 52.6% y-o-y as iron ore futures climbed climbed (+78.6% y-o-y, -2.4% m-o-m) on the back of increased hedging demand, while dairy futures urged (+60% y-o-y, +19.6% m-o-m) from increasing adoption.
  • FICC becoming a major revenue contributor… Earmarked as SGX’s future revenue growth driver, revenue from the fixed income, currencies and commodities (FICC) segment has been growing at a robust CAGR of 22.1% since FY19. Revenue from the FICC segment formed around 23% of SGX’s total FY22 revenue (from 15% in FY19), catching up to the equity derivatives (28% of FY22) and cash equities segments (35% of FY22). Based on our estimates, we expect FICC’s segmental revenue to continue its upward momentum as revenue for both its commodities and forex derivatives grow.
  • …with commodities as vital as forex for future sustained growth. Total volumes for both the sub-segments have been growing steadily, backed by increasing adoption and demand for risk management. Historically, the volume mix has been largely similar between the two sub-segments since pre-COVID-19 (Sep 19), and commodities/forex derivatives formed 46.8%/53.2% of total volumes respectively in Oct 22, implying roughly equal contributions for FICC’s robust growth.
  • For the FICC segment to continue and maintain its strong revenue growth momentum moving forward, growth from the higher-yielding commodities derivatives volumes has to match with the record-high volumes the forex futures have been achieving.

Outperforming iron ore and rubber derivatives.

  • Contributing around 90% of total commodities volumes, iron ore (about 85%) and rubber derivatives (about 5%) have been the main growth engines for the commodities segment. Having a commanding market share for iron ore derivatives, SGX’s volumes have been increasing sharply, reaching a record-high 8.8m contracts in 1QFY23.
  • SGX’s SICOM rubber futures, the world’s pricing bellwether for natural rubber, has outperformed as well, growing 61.3% y-o-y in Sep 22 to near record highs.
  • With an expected global recession approaching, along with China’s uncertain economic developments, trading volatility is expected to be elevated in the subsequent quarters, benefitting macro proxies such as iron ore and rubber derivatives.

New commodity derivatives to drive medium to long-term growth.

  • In response to supercharged growth in electric vehicles and decarbonisation, SGX launched a suite of energy metal derivatives in Sep 22, providing market participants with price discovery of battery raw materials such as cobalt and lithium.
  • SGX also launched Shanghai rebar futures in Oct 22, providing market participants with capital-efficient access to China, the world’s largest producer and consumer of steel.
  • Although it is still early days, we opine that these new derivatives have the potential to grow similarly to the recently launched dairy derivatives. Since its inception, SGX has seen robust growth of 31x from Nov 21 to Oct 22, with 1QFY23 dairy derivatives volumes increasing by 36.9% y-o-y and 13.7% q-o-q.

SGX – Earnings forecast and recommendation

  • No changes to our forecasts. Maintain HOLD with the unchanged PE-based target price for SGX.
  • Despite robust contributions from forex and commodities derivatives, we reckon that there are no near-term catalysts to justify a higher valuation for SGX. Higher treasury income from interest rate hikes is expected to start from 2HFY23, which we reckon has already been priced in.
  • See SGX's Dividend History – With a moderate yield of about 3%, we like still SGX for its resilient business model that benefits from the global economic uncertainty, but recommend waiting for better entry points.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 10.04 SAME 10.04