Singapore Exchange Ltd (SGX SP) Softening in April’s market activities

Fair value lifted to SGD11.30


• April market activity softened across securities and derivatives.
• Launching a new global carbon exchange in Singapore by year end, partnering with banks DBS and Standard Chartered and Temasek Holdings.
• Fair value lifted to SGD11.30 reflecting a slight premium in view of its ESG performance, which is driven by its strong governance structure and pegs SGX at the top tier amongst global industry peers.
• Hold rating is maintained in view of fair valuations while key concern remains on potential future competition risks to its China FTSE A50 futures trading income.


April market activity softened across securities and derivatives
SGX’s market data for April showed slower market activity across securities and derivatives, which saw turnover decline -9% yoy/-30% mom and +5% yoy/-24% mom respectively.


Derivative volumes (key segment that contributes close to half of revenues) reached the lowest point in the past half year with decline in equity index futures (major contributor to total volume) of -26% mom, while commodity derivatives grew 25% yoy driven by iron ore and forward freight derivatives that reflected tigher supply chain dynamics in dry bulk markets. FY21 to date (FYTD) DDAV of 926k contracts fell 5% yoy.


Securities turnover (~contributes close to a fifth of revenues) for April declined 30% from previous month and represented a decline of 9% yoy, with FYTD SDAV of SGD1.34bn representing 6% increase from a year ago.


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).


Fair value lifted to SGD11.30 (implying 26.3x FY22E PER) reflecting a slight premium in view of ESG performance, which is driven by its 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.


Our Hold rating is maintained in view of fair valuations while a key concern remains on potential future competition risks to its China FTSE
A50 futures trading income


While we are positive on SGX’s latest initiatives (which will take time to bear fruit) and believe near term revenues should see support from an expected fee recovery in the Taiwan contacts, recent upward fee adjustments to FTSE China A50 and MSCI Singapore contracts (from beginning of this calendar year) and continued growth contribution from BidFx supported by client base expansion, one key concern remains on the impending launch of a competing product to SGX’s China A50 index futures (~42% of 1HFY21 derivative volumes).


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 commodities product offering (e.g. KRW and SGD products), building on the customer base from BidFX and its dominant share in INR/USD and USD/CNH fx futures (estimated market shares of ~65% and 82% respectively as of 1HFY21 results). New ferrous products are also expected to be launched in the near future. HOLD. (Research Team)