November 25, 2021

Assessing The Impact Of HKEX’s MSCI China A50 Connect Index Futures

SGX saw lower trading velocity in Oct 21 although securities trading volumes remained above pre-pandemic levels. Derivatives daily average volumes softened slightly due to the week-long holiday in China in Oct 21. HKEX has launched its MSCI China A50 Connect Index Futures, providing direct competition to SGX’s FTSE China A50 Index Futures. Maintain HOLD with a lower target price of S$9.41 (S$11.65).

WHAT’S NEW

• Softer trading velocity in Oct 21. For Oct 21, total securities turnover value was at S$24.3b (-10.0% mom, +4.8% yoy) while securities daily average value (SDAV) was S$1.16b (-5.8% mom, +9.7% yoy). The lower mom declines were attributed to 19% mom lower total turnover value for financial stocks. Total trading volumes softened by 2.0% mom but is higher by 4.8% yoy and 12.8% from pre-COVID-19 levels (Oct 19). 1QFY22 average fee per securities contract was 2.57bps, down 0.09bps qoq and 0.17 bps yoy.

• Derivatives volumes dropped in Oct 21. Total derivatives trading volume in Oct 21 dropped 14.2% mom largely due to muted activity caused by China’s Golden Week holidays during the first week of Oct 21. However, derivatives daily average volume (DDAV) was up 14.2% yoy, indicating overall growing demand for risk management products. Total futures open interest dipped by 5.9% mom, in line with the lower total trading volume. Total contracts traded for SGX’s FTSE China A50 index futures grew by 22.8% yoy but fell 21.4% mom due to lower activity in the first week. 1QFY22 average fee per derivative contract was S$1.45, up from S$1.43 in 4QFY21 and S$1.36 in 1QFY21.

• Mixed performance from Forex and commodity. Forex daily contracts traded remain robust (+17.3% yoy, -5.3% mom) as inflationary pressures in India, along with regulatory concerns in China, boosted portfolio hedging activity. SGX’s INR/USD and USD/CNH futures volume rose by 13.9% yoy and 6.9% yoy respectively. Tumbling Chinese demand and steel production curbs caused iron ore futures volumes to fall 32.1% mom, marking the lowest monthly performance ytd.

STOCK IMPACT

• Competition for China A50 futures begins. As a recap, HKEX launched its new MSCI China A50 Connect Index Futures product on 18 Oct 21. HKEX’s A50 Futures product is similar to SGX’s main competing product, FTSE China A50 Index Futures, but is instead a sector-balanced index that selects 50 large-mid cap A-share companies and targets two in each sector whereas SGX’s China A50 Index Futures targets the largest 50 A-share companies by full market capitalisation. Trading for HKEX’s MSCI A50 futures has begun and has seen a strong ramp up in contract volumes and open interest.

• FTSE A50 futures volumes to soften. Latest daily statistics from HKEX has shown that daily traded volumes for MSCI A50 futures contracts have increased from 1,395 on launch date (18 Oct 21) to hitting daily highs of 22,000 in Nov 21, equating to about 6m contracts on an annualised basis. Open interest has increased from 269 to roughly 32,000 during the same period. Compared to HKEX’s Hang Seng China Enterprises Index Futures (HSCEI) which tracks major H-shares, MSCI A50 Average Daily Volume (ADV) in Nov 21 (13,504) is already poised to match HSCEI’s ADV of 19,759 on its fourth year of trading. As demand and activity ramps up, we expect ADV for MSCI A50 contracts to eventually surpass HSCEI’s 2020 ADV of 145,608 contracts, equating to roughly 38m contracts and 40% of SGX’s total FY21 FTSE A50 Futures volumes, creating strong headwinds for SGX’s medium-long term earnings. However, given SGX’s commanding market share, we estimate that it would be a multi-year task before HKEX is able to obtain and maintain significant market share.

• Impact of MSCI A50 Index futures on SGX. Although costs savings from SGX’s multi asset offerings as well as strong trading liquidity on its exchange platform creates a strong barrier of entry for competition and encourages customer stickiness, we still opine that SGX is poised to experience loss of FTSE A50 volumes over the medium-long term. According to our estimates, SGX’s FTSE A50 futures product makes up around 52% of total equity derivatives volume and an estimated 12% of FY22 total annual revenue. Assuming volumes shifts from SGX to HKEX, every 10,000 increase in ADV for HKEX A50 would shift our FY22 net profit and PE-based target price downwards by S$2.9m and S$0.06 respectively. Taking a conservative approach, we forecast HKEX FY22 MSCI A50 ADV to be 40,000. However, given robust structural liquidity into China, demand for HKEX’s MSCI A50 futures is set to ramp up further from FY23 onwards.

EARNINGS REVISION/RISK

• Downward revision to FY22-24 earnings as we lower our FY22-24 FTSE A50 volume assumptions from to 91m (98m), 86m (106m) and 77m (110m) and net profit estimates to S$423m (S$429m), S$432m (S$449m) and S$439m (S$469m) respectively.

VALUATION/RECOMMENDATION

• Maintain HOLD with a lower target price of S$9.41 (S$11.65). Currently trading at 22.6x FY22F, we have now pegged our PE multiple to 23.8x (29.0x peers average) FY22F earnings, +1SD of SGX’s historical forward PE. We have lowered our multiple to adjust for SGX’s FTSE A50 futures medium-long term uncertainty. Given expected strong competition from HKEX’s MSCI A50 index futures offering, we remain cautious on the impact of competition on SGX’s future earnings. However, we think that success of new exciting initiatives (OTC Forex offerings, government initiatives, depositary receipt linkages, SPACS) could re-rate SGX to trade similar to peers (29.0x). 

HOLD by UOB Kay Hian Research. Share price closed at $9.25.