Monthly statistical updates

DDAV growth for January and February contracted to 2.4% YoY and 1.4% YoY respectively as compared to 24.1% YoY jump in 2Q19 (Oct’18 – Dec’18). The recovering global markets at the start of 2019 was a stark contrast to extremely volatile conditions in 2018. As a result, there has been a contraction in derivatives volume due to lower hedging activities. Hence, we cut our forecast for FY19e derivatives revenue growth from 27.4% YoY to 22.1% YoY. Meanwhile, SDAV showed no signs of recovery and contracted 38.6% YoY in February.

Recent events

The Hong Kong Stock Exchange (HKEX) announced on 11 March 2019 its plans to launch futures contracts on the MSCI China A Index, subject to relevant regulatory approvals. The MSCI futures contracts will allow investors to hedge their A-share equity exposures. Currently, SGX’s FTSE China A50 Index Futures is the only offshore futures contract tracking the Chinese A-share market.

Impact on SGX

SGX’s derivatives business contributed to 50% of total revenue in 6M19 with the main driver being FTSE China A50 Index Futures which accounted for 43% of total trading volume YTD which puts SGX in a vulnerable position. If HKEX succeeds in its plans to introduce MSCI China A Index futures, SGX could face some competition as some customers will make the switch to HKEX and derivatives revenue might be dampened in the long term. SGX’s China A50 Index futures represents about 13% of total revenue. Assuming SGX loses 50% of its China A50 revenue, the impact to PATMI is around 8%.

However, we do not expect HKEX’s plans to have a significant impact on SGX’s derivatives revenue for the FY19-20. Firstly, if HKEX obtains relevant approvals, the launch should be in November 2019. Secondly, HKEX will take months to build up liquidity and onboarding of clients’ systems. Thirdly, SGX’s derivatives platform provides high customer retention due to its (i) deep liquidity as a first mover; (ii) allows customers to carry out margin offsets across their various derivatives assets; (iii) caters to customers’ needs to hedge currency exposures with SGX’s diverse FX exchange especially the USD-CNH and INR-USD FX futures.

Outlook

HKEX’s plans to introduce futures contracts on the MSCI China A Index has been in the works for the past 12-18 months, and the announcement did not come as a surprise for SGX. HKEX’s plans could create a larger ecosystem for China equity derivatives which should deepen liquidity and increase volumes with arbitrage between the exchanges.

Potential risks

(i) Larger than expected switch of customers from SGX to HKEX, (ii) quickened regulatory approval timeline for HKEX’s plans, and (iii) HKEX competes on pricing.

Potential catalysts

(i) Introduction of new derivative products by SGX; (ii) delayed the launch of HKEX’s MSCI China A Index futures; (iii) stronger than expected growth in DDAV and SDAV.

Investment Actions

We downgrade to Accumulate at a lower TP of S$8.17 (previously S$8.36) as we peg our TP to an unchanged 23.2x P/E, at SGX’s 5-year mean. The reduction in TP was due to our lowered forecast for FY19e derivatives revenue growth from 27.4% YoY to 22.1% YoY and cut our FY19e earnings by 2%.