September 14, 2021

Treading lightly

■ Aug 21 SDAV of S$1.25bn marked a modest start to FY6/22F, but derivatives DAV was steady at 930k contracts, with highest open interest since Nov 20.

■ We cut FY22-24F EPS by c.2-3% to factor in the loss of revenues and market share from the launch of HKEx’s competing China A50 index futures product.

■ Reiterate Hold, with a lower TP of S$10.40. We think share price could trade sideways as investors await a clearer picture of HKEx’s A50 product impact.

Trading volumes, rebalancing of MSCI SG – SEA

Singapore Exchange (SGX) recorded a SDAV of S$1.25bn in Aug 21 (-11% yoy); this brings average SDAV to S$1.2bn in 2MFY6/22F, marking a modest start to the year, visa-vis our expectations of S$1.4bn in FY22F (FY21: S$1.35bn). We believe the relative slowdown is due to stabilising economic growth prospects (vs. steeper economic reopening hopes in 1QCY21, where SDAV reached S$1.5bn) and, therefore, decreased portfolio rebalancing activity. Meanwhile, total derivatives volumes held relatively steady, with a DAV of 930k contracts in Aug 21 (-0.8% yoy; FY21: 924k). Although DAV was softer on a mom basis, total open interest rose to 5.3m contracts in Aug 21 — the highest since Nov 20. Going forward, we think that scheduled reviews of the MSCI index to implement the inclusion of foreign listings in Nov 21 and Feb 22 should still sustain portfolio rebalancing momentum.

HKEX MSCI A50 competition

In Aug 21, HKEx announced that it will be launching its first A-share derivative product in Oct 21. This crystallises SGX’s key downside risk, as this product will be in direct competition with its FTSE China A50 index futures offering — currently the only A-share risk management tool available offshore. SGX’s FTSE product accounted for c.41% of its total derivatives trading volume and an estimated c.9% of total revenue in FY21. While the extent of SGX’s loss of revenue will depend on the take-up rate of HKEx’s product, which could be sizeable given the intertwined relationship of Hong Kong and China, recall that SGX was very successful in migrating the client base of its then-MSCI Taiwan Index Futures product to its FTSE replacement product in Jul 20, following the expiry of its MSCI licences, whereas HKEx has not succeeded in luring investor interest to its shores for its product. At this point, we cut SGX’s FTSE China A50 index’s FY22-24F futures trading revenues by c.30-40%, translating into a c.2-3% impact on FY22-24F EPS.

Reiterate Hold, with a lower TP of S$10.40

Notwithstanding the headwinds from derivatives, SGX has positioned its FICC segment as its key driver of growth going forward, as it combines the capabilities of MaxxTrader with BidFX. While SGX targets high-single-digit revenue growth in the medium term (FY15-20 CAGR: c.6%), meaningful contribution to the bottom line will likely take longer, given the lower margins of this segment (c.40% EBITDA margin for BidFX and Scientific Beta vs. c.60% at group level). Downside risks include execution risks in rolling out its FICC platforms. Our TP is pegged to 25x CY22F P/E, c.1 s.d. above 10-year mean.

HOLD by CGS-CIMB Research. Share price closed at $10.05.