SGX’s revenue reclassification
The new revenue reclassification for SGX’s income statement was put into effect in 1Q20 to reflect a new organisation structure that is now into three revenue categories: Fixed Income, Currencies and Commodities (FICC), Equities (Cash & Derivatives) and Data, Connectivity and Indices (DCI). SGX guided FICC and DCI to grow at a faster pace as efforts will be put into both business units to double in size in the next 5 years.
Model update
Following the reclassification of SGX’s income statement, we updated our model accordingly to reflect the respective changes as seen in Figure 3. We have kept our assumptions relatively unchanged. However, the main change lies in the derivative revenue line. The previous largest revenue generator – derivatives – is now split between each derivative component in FICC (Currency and Commodities – derivatives) and Equities (Equities – Derivatives) as seen in Figure 3. Hence, the newly reclassified equities revenue segment which combined both cash equities and equity derivatives is now the largest revenue contributor. Equity derivatives remain the key driver of volumes, contributing to 78% of total volumes in 1Q20 as compared to 84% a year ago.
October market statistics & 1Q20 update
Derivatives: October’s total derivatives volume fell 24% YoY, and Derivatives Daily Average Volume (DDAV) fell 22% YoY to 0.855mn. October saw lower volatility as compared to the two most volatile months (May and August) this year when Trump unleashed his tariff hikes, as evident in DDAV spiking 54% and 33% YoY respectively.
On a quarterly basis, 1Q20’s average fee per contract increased from $1.05 to $1.15 due to a change in product mix traded and more higher-fee paying customers. 1Q20’s total derivative volume and DDAV grew 14% and 12% YoY respectively. Equity derivative volumes increased 6% YoY to 48mn contracts due to increased volume in Nifty 50 (+17% YoY), Nikkei 225 (15% YoY) and MSCI Singapore index futures contracts (22% YoY). Commodities and currencies futures volumes rose 78% and 40% YoY respectively to a total of 14mn contracts, making up 22% of total volumes. We forecast DDAV for FY20-21E of 1.023mn and 1.106mn respectively.
Securities: SGX’s 1Q20 SDAV came in at S$1.062bn and its YoY growth recovered to -1% as compared to the quarterly average contraction of -16% YoY in FY19. Average clearing fees for cash equities declined to 2.68bps in 1Q20 as compared to 2.88bps a year ago. 1Q20 SDAV exceeded our estimates by 3% due to better than expected impact on equities from the stabilisation in global markets. We forecast SDAV for FY20-21E of S$1.078bn and S$1.122mn respectively.
FY2020 expense and CAPEX guidance
SGX guided total expenditure in FY20 to be in the range of S$465mn to S$475mn; while technology-related CAPEX is expected to be between S$45mn to S$50mn. As of 1Q20, total expenses was well contained at S$113mn (making up 24% of guidance), and CAPEX of S$7mn was 29% lower as compared to a year ago.
We expect operating expense to be higher in 2020 due to three factors; increase headcount, larger depreciation expenses from new systems launched in FY19 and higher royalties and processing fees due to higher derivatives volume expected in 2020.
Structural growth in global derivatives to sustain earnings
Besides benefiting from the occasional volatility due to trade tensions between the U.S. and China, the underlying growth in demand for derivatives will be sustained by increasing interconnectedness and globalisation of markets. Institutions’ demand for risk management and hedging tools will increase and SGX’s diversified product suite is well-posed to offer access to otherwise hard-to-reach onshore market in emerging markets, namely SGX’s India and China equity derivatives. SGX’s derivative products capture global flows and are not as reliant on local liquidity as the securities business.
Other Updates
SGX-IISL arbitration
SGX is optimistic that the joint proposal submitted by NSE and SGX will receive support from regulatory authorities. No timeline was announced and we await further updates.
Outlook
We are positive that SGX’s diversified product suite will support derivatives volume growth and open interest in 2020. Market volatility has proven to be favourable for derivatives volume and the strength in derivatives growth should offset weaknesses in equities revenue. SGX’s derivatives business contributed to 51% of total revenue in FY19, with the main driver being FTSE China A50 Index Futures, which accounted for 44% of total trading volume in FY19 (1Q20: 37%). While HKEX’s launch of A-share contracts may pose headwinds, a larger trading ecosystem from both exchanges may limit downsides.
Investment Actions
We downgrade to NEUTRAL at an unchanged TP of S$8.60. Our TP is pegged to 22x P/E, 1 SD below SGX’s 5-year mean. The downgrade is due to share price movement. SGX is enjoying structural growth in the derivatives business as it captures global flows into Asian equities, commodities and currencies.
Rationale: We are positive that SGX’s diversified suite of derivative products will sustain growth in 2020. Some of the structural tailwinds SGX is benefiting includes the increased global flows into Asian equities, currency transaction moving into exchange platform and a broader range of commodity futures products.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
Min Ying covers the Banking and Finance sectors. She has experience in external audit and corporate tax roles.
She graduated with a Bachelor of Accountancy with a major in Finance from SMU.
