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Singapore Exchange: Making up for lost cause is challenging (OTCMKTS: SPXCY)



Elevator Pitch

I maintain my neutral rating on the listed exchange operator Singapore Exchange Limited (OTCPK: SPXCY) (OTCPK: SPXCF) [SGX:SP] or SGX.

It came as a negative surprise that MSCI Inc (MSCI) has chosen to partner with Hong Kong Exchanges and Clearing Limited (OTCPK: HKXCY) (OTCPK: HKXCF) [388:HK] or HKEX, rather than SGX, for derivatives related to indices from Asian and emerging markets after February 2021. In addition, the launch of HKEX's MSCI China A Index future contracts in the short term will also pose further disadvantages to earnings for SGX.

On the flip side, SGX has tried to make up for lost ground with acquisitions and new partnerships. It is not easy to offset the significant loss of revenue and earnings from the expiring MSCI derivative contracts, but it is also premature to judge whether SGX is able to exceed market expectations with new products and value-adding mergers and acquisitions in the short to medium term. . In particular, SGX has been able to prove that detractors are wrong, and swing from a stock-centric exchange to a multimaterial exchange by increasing the derivatives' income contribution from about 20% to 40% over the past decade.

As such, I think a neutral rating for SGX is fair.

This is an update of my previous article on SGX published May 14, 2020. SGX's share price has decreased by -16% from $ 9.89 as of May 13, 2020 to S $ 8.35 as of July 9, 2020 since my last update. . SGX trades at 22.3 times consensus going forward over the next twelve months P / E, representing a small premium to the historical average of five years and 10 years consensus ahead of the next twelve months P / E multiples of 21.7 times, respectively. 21.8 times. The stock also offers a consensus forward FY2021 (YE June) dividend of 3.9%.

Readers have the option to trade in SGX shares listed either on the Over-the-Counter Bulletin Board / OTCBB as ADRs with tickers SPXCY and SPXCF or on the Singapore Stock Exchange with the ticker SGX: SP. For the shares listed as ADRs on the OTCBB, please note that liquidity is low and bid / ask spread is wide.

For the shares listed in Singapore, there are limited risks associated with buying or selling the shares when it comes to trading, given that the Singapore Stock Exchange is one of the largest internationally recognized stock exchanges and is sufficient trading liquidity. The average daily trading value over the past three months exceeds $ 30 million and the market value is over $ 6.3 billion, which is comparable to the majority of the shares traded on the US stock exchanges. Institutional investors who own SGX shares listed in Singapore include The Vanguard Group, BlackRock, Norges Bank Investment Management and APG Asset Management. Investors can invest in key Asian stock markets, either using US brokers with international coverage, such as Interactive Brokers, Fidelity or Charles Schwab, or local brokers operating in their respective domestic markets.

Negative Surprise From MSCI

SGX announced on May 27, 2020 that the license agreement with MSCI Inc will be limited to MSCI Singapore index products after February 2021. On the same day, HKEX, SGX's peers and rival, revealed that it plans to launch 37 new derivative contracts for Asian and emerging markets. indexes with a new 10-year license agreement with MSCI. This came as a negative surprise, as MSCI has clearly preferred HKEX over SGX as its preferred partner in reaching out to investors around the world in terms of risk management products targeting Asia and other emerging markets.

More importantly, SGX advised that the company's FY2021 net profit is expected to decrease by -10% -15% on a pro-forma basis assuming a full-year impact (in fact, it only affects three to four months of FY2021 revenue as of February 2021) loss of income from MSCI derivative contracts. These MSCI derivative contracts, which SGX will no longer be able to offer after February 2021, accounted for approximately 15% and 12% of the company's daily average volume for equity derivatives and total derivatives, respectively.

Market consensus expects SGX's earnings to fall with lower -7% YoY in FY2021. This is because the company does not want to see a full-year impact on the revenue loss from the MSCI derivative contracts in FY2021, and it has also partly made up for lost grounds with acquisitions and new partnerships as described in the subsequent sections of this article.

Looking ahead, the most important downside risk to SGX's short-term revenue and earnings is the launch of HKEX's future contracts with the MSCI China A Index. HKEX had previously announced in March 2019 that it has secured a new license agreement with MSCI, which allows it to introduce new derivatives for the MSCI China A Index.

The launch of HKEX's future contracts with the MSCI China A Index is still pending government approval, but future contracts for the MSCI China A Index are expected to represent strong competition for SGX's FTSE China A50 index futures. Today, the FTSE China A50 Index futures account for more than one-third of SGX's total derivative average trading volume, and they are also the only offshore futures tracking the Chinese A stock market.

Takes full control of the FX trading platform and collaborates with FTSE

SGX has actively made up for lost terrain over the past one to two months.

29. In June 2020, SGX announced that it is taking full control of BidFX, a cloud-based platform for foreign exchange, by increasing its stake in the company from 20% to 100%. SGX first purchased its original 20% stake in BidFX in March 2019, and is now paying $ 128 million to acquire the remaining 80% stake in BidFX.

BidFX operates in Australia, Hong Kong, Singapore, the United Kingdom, Italy and the United States, and has more than 100 global institutional customers using its platform. BidFX has grown rapidly in the last three and a half years since it was launched in January 2017, with an average daily volume of $ 31 billion in May 2020, representing a 57% CAGR; the company's turnover CAGR was in excess of + 60% in the same period.

SGX increases its stake in BidFX with the aim of leveraging the company to expand its presence in the global foreign exchange market, which is 50 times as large as the exchange-traded currency derivatives market. More than a quarter of BidFX's average daily volume is derived from Asian currencies, which means there are synergies between SGX's current offering of currency derivatives and BidFX. More importantly, SGX has previously set a target of doubling its interest rates, currencies and commodities, or the FICC business in the medium term, making the recent acquisition of BidFX and a previous acquisition of smart beta index company Scientific Beta a critical one role in inorganic growth.

Nevertheless, it is noteworthy that SGX noted in its investment presentation regarding the acquisition of BidFX that the increased stake in BidFX will be earnings accretive, but it is "not expected to have a material impact on SGX's financial performance in FY2021." an indication of how challenging it is for SGX to offset the loss of revenue and earnings from the expired MSCI derivative contracts.

Separately, SGX revealed on July 1, 2020 that it will introduce a new futures contract on the FTSE Taiwan RIC Capped Index on July 20, 2020. This is positive in the sense that it shows that MSCI is not "the only game in town" and SGX has other opportunities for partnering with competing players such as FTSE. However, it should be noted that SGX did not refer to the potential revenue and earnings contribution from the new Taiwan futures contract in the announcement. As a result, it is reasonable to assume that the new Taiwan futures contract is unlikely to have a material impact on the company's FY2021 top line and bottom line.

Valuation And Dividends

SGX trades 19.6 times after twelve months P / E and 22.3 times consensus for the next twelve months P / E based on the $ 8.35 share price as of July 9, 2020. As a By comparison, the stock's historical average five-year and 10-year consensus for the next twelve-month P / E multiples was 21.7 times and 21.8 times, respectively.

SGX offers future consensus FY2020 (YE June) and FY2021 dividend yield of 3.8% and 3.9% respectively. Market consensus expects SGX's dividend per share to increase from HK $ 0.300 in FY2019 to HK $ 0.321 and HK $ 0.324 in FY2020 (YE June) and FY2021 respectively.

Risk Factors

The main risk factors for SGX include stiffer than expected competition from HKEX and other stock exchange operators for specific derivative products, the company's future acquisitions that do not create shareholder value, lower than expected trading volume going forward, and a cut in the company's dividend payments. future.

Note that readers who choose to trade in SGX shares listed as ADRs on OTCBB (rather than shares listed in Singapore) can potentially suffer from lower liquidity and broader bid / ask spread.

Disclosure: I / We have no positions in said shares and no plans to start any positions in the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than Seeking Alpha). I have no business relationship with a company that has the shares mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a large US stock exchange. Be aware of the risks associated with these stocks.


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