Robust Performance Amid Macro Uncertainty
In May 22, SGX 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 yoy 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).
WHAT’S NEW
• Securities volume fell yoy. Within expectations, SDAV continued its decline in May 22
at S$1.51b (-5.5% yoy, +18.4% mom) even as new IPOs such as NIO Inc. recorded the
highest trading volumes upon introduction. We expect SDAV to hit a floor in 2QFY23
(Oct-Dec 22), barring any unexpected surge in trading volatility. On a mom basis, the
+18.4% mom SDAV growth was impressive given that May 22 had one less trading day.
• Robust growth for derivatives. Slightly above expectations, DDAV surged (+18.8% yoy,
+3.2% mom), 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% yoy, +3.8% mom) as major contracts posted robust growth. FTSE China A50
Index volumes continued its uptrend at 8.6m contracts (+24.5% yoy, -5.7% mom) 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%
yoy, +20.5% mom), FTSE Nikkei 225 Index (+4.4% yoy, +25.2% mom) and FTSE Nifty 50
Index (+42.0% yoy, +20.2% mom) also outperformed.
• Forex outperformance surprised while commodities rebounded. Above expectations,
total forex futures volumes skyrocketed 62.0% yoy, the highest volume recorded as both
USD/CNH futures (+77.3% yoy, +27.2% mom) and INR/USD futures (+53.9% yoy, +9.9%
mom) surged to record highs. Total commodity derivatives volumes increased yoy on the
back of improving sentiment on China’s economic outlook. Iron ore futures (+5.6% yoy,
+15.7% mom) climbed to 2.1m contracts while other commodities such as petrochemicals
and rubber derivatives also performed well.
STOCK IMPACT
• FICC segment: Record-high volumes. 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% yoy. 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% yoy. Trading volumes for other contracts such as Forward
Freight Agreement (FFA) futures (+4.4% yoy) 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.
• Upcoming contribution from MaxxTrader. 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.
• Late bloomer. We expect revenue from the FICC segment to grow 23.2% yoy 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%).
EARNINGS REVISION/RISK
• We increase our FY22-24F PATMI forecasts slightly by 2-4% respectively, on the
back of higher growth assumptions for the FICC segment. We now forecast FY22-24F
PATMI at S$431.1m (S$421.3m previously), S$486.3m (S$469.8m previously) and
S$539.0m (S$514.5m previously) respectively.
VALUATION/RECOMMENDATION
• Maintain HOLD with a higher target price of S$9.55, pegging to the same PE multiple
of 23.7x FY22 earnings, +1SD of SGX’s historical forward PE. Currently trading (24.1x
FY22F PE) at +1SD of its historical mean, we reckon that SGX is fully valued at current
price levels and do not see major potential upside. We are becoming more optimistic that
competition in the China A50 Index futures market would be muted moving forward. 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)