A biased and opinionated defence of SGX
Please note that this author already holds a position in SGX and may be intending to acquire more if there is volatility in stock prices. The views of this author are his own and do not constitute as financial advice. Readers are suggested to do their own diligence before proceeding.
1) Strong
balance sheet
Management reiterated its commitment to a progressive dividend policy. Strong
balance sheet suggest the ability to support dividends and concise valuation via
Dividend discount model
2) Perceived
negative Impact on SGX derivatives revenue stream
MSCI contracts make up about 15% of its equity derivatives daily average volumes (DAV) and about 12% of total derivatives DAV.
=> 15% * 51 = 7.65% drop in revenue in the worst case (assuming no change)
=> So why are you so worried?
3) Perceived tailwinds for HKEX surely present headwinds to SGX
HKEx has signed an agreement with MSCI to introduce new products based on MSCI
Asia and EM indices. While date of MSCI China A potential launch by HKEx is
uncertain, it poses concerns given SGX’s
FTSE China A50 contracts make up about 37% of total volumes.
=> The news is NOT new news at all. The intention of HKEX into ChinaA50 Futures is already made known since last year
=> There is no evidence to suggest
derivatives market cannot support 2 futures providers concurrently. The
derivatives market is not constrained by supply factors as long as someone is
willing to underwrite the contract.
=> There is no evidence to suggest that demand for derivatives will die down
in the future. With heightened geopolitical risks and <new-normal> low interest
rate conditions, companies and institutional
seek to increase their hedging needs or gain exposure to asset classes, and
derivatives. For the quantitative inclined, the BIS and SGX market data will present
data points to monitor trading volume.
https://stats.bis.org/statx/toc/DER.html
https://www2.sgx.com/research-education/historical-data/market-statistics
=> The biggest risk to derivatives market is political and legal risk
(Derivatives prohibition). As long as people continue to be greedy or fearful, and
seek to hedge / gain exposure to specific risks, the growth in demand of
derivatives is not compromised.
4) Perceived immediate and certain drop in profitability to SGX
Apart from the direct loss of MSCI-related income, we think there could be
indirect impact arising from competitive headwinds
=> new contracts (from HKEX) typically take a few years to gain sufficient liquidity.
=> With MSCI out of the way, SGX can always go to other index providers
such as FTSE for index licensing needs. There is competitive relationship between FTSE and MSCI
as evidenced in the Blackrock MSCI Ishares and the Vanguard
FTSE index funds.
5) Equally Biased numbers from professional analysts
We cut our SGX's
FY20-22F EPS by 2.2-10.0% to reflect lacklustre Apr-May market statistics and the MSCI licence
expiring on Feb 2021.
=> Cherry picking numbers in April and May, whereby the heightened trading volume
in Mar-Apr is close to the 2009 GFC.
=> There could be new waves in outbreaks
in overseas countries which has spillover effects on investor sentiments in local
market which may affect trading volume, as well as demand for risk management products.
6) Huge addressable growth segments in index licensing
The index licensing space is a huge market with hefty profit margins, and is
mainly dominated by S&P Dow Jones Indices, MSCI, FTSE, Russell, and
Bloomberg.
The highly lucrative business of licensing generic equity benchmarks to asset
managers is ripe for disruption. Morningstar says index-licensing fees are
rising at a time when asset managers are already facing relentless cost-cutting
pressures owing to falling fee income and squeezed margins. What’s more,
managers have little choice but to pay the fees.
It’s not just a problem for passive funds. Even active managers need to license benchmarks, as these managers formally compare their own performance to the indexes, listing them in legal documents and for use with consultants.
7) Share Buyback and increased
insider holding (Limited sample size)
Negatives
Equity
listing and corporate actions revenue fell 4% y-o-y on poorer market sentiments.
While primary and secondary funds raised in the
first three quarters exceeded entire FY19 (primary listing: S$2.2bn vs FY19 of
S$1.7bn and secondary listing: S$7.6bn vs FY19 of S$4.7bn), capital-raising activity is expected to slump on weaker market valuations in the current climate.
This is especially true as companies choose to list on larger exchanges such as HKEX as it has larger market
depth and liquidity, as well as strong market practices and huge investor base
from Southbound Stock and Bond connect
Conclusion
It is a fact that HKEX will enjoy considerable tailwinds for the foreseeable future as it has a huge hinterland of potential investors via the Southbound Connect scheme that will be more affluent over time, as well as immediate improvement IPO revenue from the US-listed Chinese companies.
But competition between the 2 ASEAN exchanges is not necessarily a zero sum game. Why choose between those two? Why not both? Any investment is a good investment at the right price. Price is what you pay, value is what you get!
Links
https://research.sginvestors.io/2020/05/singapore-exchange-ocbc-investment-research-2020-05-28.html
https://research.sginvestors.io/2020/05/singapore-exchange-cgs-cimb-research-2020-05-27.html
https://links.sgx.com/1.0.0/corporate-announcements/F6MP7S2AJY71ENDW/34e7ce758455854c0bd9495f4018ab7baad9e3e4dc602082fbbb85c8c9d1459a
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