Singapore Exchange - Bottomed out
- We expect SGX’s share price to bottom out as recent market volatility could sustain better securities trading volume in the near to medium term.
- However, we are not convinced of material upside from here as demand for its derivatives products continues to be reliant on volatility in China's A-share market.
- Maintain Hold. At 21x FY18F P/E, the negatives have largely been priced in, in our view. Our DDM-based target price stays unchanged at S$7.23.
Recent pickup in securities ADVT could sustain
- Securities daily traded value shot up to as high as S$1.9bn on 9 Nov and 11 Nov on the back of higher market volatility after Trump’s victory in the US presidential elections.
- On a blended basis, we expect Nov-Dec to record securities average daily value traded (ADVT) of S$1.1bn-S$1.2bn. We expect this level to sustain for the rest of FY17.
- We think the conclusion of the US presidential elections and more certainty of a US Fed hike in Dec after the recent positive jobs data removed some macro uncertainties; this should lead to more trading activity as the market shifts into risk-on mode.
Less positive on derivative demand; still reliant on China
- SGX’s key derivative products are dependent on the Chinese market, especially the China A50 futures which formed 49% of total derivative traded volume in FY16. China A50 futures demand was especially strong during the A-share market rally and crash in 2015. Since then, its volume has halved, and another equally strong rally or sell-off is required for such volumes to return.
- Meanwhile, margin pressure remains for its iron ore contracts as SGX responds to competition from CME.
- While iron ore is not a major contributor to total derivative volumes, its average fee per contract is higher, which makes it a significant contributor to derivative revenue.
- While we have turned more positive on SGX recently with the pickup in securities ADVT and the less demanding valuations, we think its challenges remain.
- We expect SGX’s share price to trade sideways, due to the following factors:
- Delistings continue to exceed IPOs, which could limit upside to trading volumes.
- It is difficult to see demand for key derivative products to return meaningfully in the near term in the absence of an event to trigger a strong rally or sell-off in China's Ashare market.
- For exposure to financials, institutional funds could switch out of SGX into banks as a play on rising rates.
- We maintain our Hold call and DDM-based target price of S$7.23. Dividend yield of 4% is decent.
- We believe that at 21x FY18F P/E, the market has priced in securities ADVT of S$1.1bn-1.2bn, in line with our forecast over the next few quarters.
- Upside risk could come from better outlook in China, which would drive derivative demand.
- Downside risk could stem from further global macro uncertainty should Trump’s policies disappoint, as this could lead to markets returning to a risk-off mode.