18 October 2016 Asia Pacific/Singapore Equity Research Diversified Financial Services Singapore Exchange Limited
(SGXL.SI / SGX SP) Rating NEUTRAL Price (14 Oct 16, S$) 7.25 INITIATION Target price (S$) 7.60 Upside/downside (%) 4.8
Mkt cap (S$/US$ mn) 7,769 / 5,589 Lacks near-term catalysts Enterprise value (S$ mn) 6,887 Number of shares (mn) 1,072 ■ We initiate coverage on Singapore Exchange with a NEUTRAL rating Free float (%) 71.3 and target price of S$7.60. The key investment case for SGX is longer-term 52-wk price range (S$) 8.05-6.65 ADTO-6M (US$ mn) 10.3 growth through both equities and success in its strategy to become an Asian *Stock ratings are relative to the relevant country benchmark. regional gateway, with derivatives being the medium-term driver, in our view. ¹Target price is for 12 months. Nearer-term, its fortunes are more linked to the current level of market activity, Research Analysts which remains uninspiring, with a risk of further seasonal slowdown in 4Q. Rikin Shah 65 6212 3098 ■ Securities business remains subdued. Securities turnover and revenue hit [email protected] the decade low in FY16. The subdued turnover is mainly a result of declining
velocity (peak-to-date -43%), but a dearth of IPOs and an increase in privatisation deals have further exacerbated the situation. We discuss a few structural drivers like higher free float and high frequency trading, which could improve velocity in the long term. ■ Derivatives growth secular and less volatile. Derivatives' revenue growth of 18% CAGR in the past five years has been a great stabiliser—more than offsetting a 7% fall in securities revenue. In the near term, FTSE China A50 contracts would be an indirect beneficiary of the HK-Shenzhen stock connect, as SGX is the only offshore market for trading China A50 futures. Currency futures, new commodity products (LNG derivatives and FFA) and newly launched MSCI China futures should drive incremental derivatives' growth in the longer run. ■ Our DDM-based target price of S$7.60 implies an upside of 5%. The stock is trading at a 12-month forward P/E of 21.1x, in-line with its long-term average, and dividend yield of 4.0% provides the support. Key upside risk to our view is higher-than-expected ADT, whereas the launch of China-focused derivatives by competitors and subdued turnover are the key downside risks. We could turn more constructive on the stock if the cash turnover improves and capital market activity picks up meaningfully from the current levels.
Share price performance Financial and valuation metrics
Year 6/16A 6/17E 6/18E 6/19E Revenue (S$ mn) 818.1 851.4 921.7 984.9 EBITDA (S$ mn) 467.8 483.8 534.1 573.3 EBIT (S$ mn) 416.0 431.0 480.0 518.3 Net profit (S$ mn) 349.0 362.1 403.2 435.3 EPS (CS adj.) (S$) 0.33 0.34 0.38 0.41 Change from previous EPS (%) n.a. - - - Consensus EPS (S$) n.a. 0.34 0.37 0.39 EPS growth (%) 0.2 3.7 11.4 8.0 The price relative chart measures performance against the P/E (x) 22.3 21.5 19.3 17.9 FTSE STRAITS TIMES IDX which closed at 2,815.24 on Dividend yield (%) 3.9 4.0 4.4 4.8 14/10/16. On 14/10/16 the spot exchange rate was EV/EBITDA (x) 14.8 14.2 12.7 11.7 S$1.39/US$1 P/B (x) 7.85 7.13 6.29 5.52
Performance 1M 3M 12M ROE (%) 35.5 34.8 34.7 33.0 Absolute (%) -3.1 -6.3 -3.7 Net debt/equity (%) Net cash Net cash Net cash Net cash
Relative (%) -3.3 -2.6 2.9 Source: Company data, Thomson Reuters, Credit Suisse estimates
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
18 October 2016
Singapore Exchange Limited (SGXL.SI / SGX SP) Price (14 Oct 2016): S$7.25; Rating: NEUTRAL; Target Price: S$7.60; Analyst: Rikin Shah Income Statement (S$ mn) 06/16A 06/17E 06/18E 06/19E Company Background Sales revenue 818 851 922 985 Singapore Exchange owns and operates Singapore's Securities and Cost of goods sold 0 0 0 0 derivatives exchange and their related clearing houses. The EBITDA 468 484 534 573 Company also provides ancillary securities processing and EBIT 416 431 480 518 information technology services to participants in the financial sector Net interest expense/(inc.) 0 0 0 0 Recurring PBT 416 431 480 518 Blue/Grey Sky Scenario Profit after tax 349 362 403 435 Reported net profit 349 362 403 435 Net profit (Credit Suisse) 349 362 403 435 Balance Sheet (S$ mn) 06/16A 06/17E 06/18E 06/19E Cash & cash equivalents 866 920 981 1,047 Current receivables 930 976 1,025 1,077 Inventories 0 0 0 0 Other current assets 45 45 54 80 Current assets 1,841 1,942 2,061 2,204 Property, plant & equip. 217 217 262 384 Investments 9 9 11 17 Intangibles 0 0 0 0 Other non-current assets 38 38 42 42 Total assets 2,105 2,206 2,376 2,646 Current liabilities 1,023 1,023 1,049 1,145 Total liabilities 1,116 1,117 1,142 1,238 Shareholders' equity 990 1,089 1,235 1,408 Minority interests 0 0 0 0 Total liabilities & equity 2,105 2,206 2,376 2,646 Cash Flow (S$ mn) 06/16A 06/17E 06/18E 06/19E EBIT 416 431 480 518 Net interest 0 0 0 0 Tax paid (70) (69) (77) (83) Working capital 16 (56) (36) 24 Other cash & non-cash items 62 75 69 65 Our Blue Sky Scenario (S$) 9.88 Operating cash flow 423 381 436 525 Our blue sky scenario target price of S$9.88 assumes that leverage Capex 0 0 0 0 to rising markets may likely lead to earnings and multiple expansion. Free cash flow to the firm 423 381 436 525 Investing cash flow (63) (29) (65) (120) Our Grey Sky Scenario (S$) 5.32 Equity raised 0 0 0 0 Our grey sky scenario target price of S$5.32 assumes leverage to Dividends paid 0 0 0 0 falling markets and subdued turnover. Financing cash flow (345) (298) (310) (339) Total cash flow 15 54 61 66 Share price performance Adjustments 0 0 0 0 Net change in cash 15 54 61 66 Per share 06/16A 06/17E 06/18E 06/19E Shares (wtd avg.) (mn) 1,074 1,074 1,074 1,074 EPS (Credit Suisse) (S$) 0.33 0.34 0.38 0.41 DPS (S$) 0.28 0.29 0.32 0.34 Operating CFPS (S$) 0.39 0.35 0.41 0.49 Earnings 06/16A 06/17E 06/18E 06/19E Growth (%) Sales revenue 5.0 4.1 8.3 6.9 EBIT 1.1 3.6 11.4 8.0 EPS 0.2 3.7 11.4 8.0 Margins (%) EBITDA 57.2 56.8 57.9 58.2 EBIT 50.8 50.6 52.1 52.6 The price relative chart measures performance against the FTSE STRAITS Valuation (x) 06/16A 06/17E 06/18E 06/19E TIMES IDX which closed at 2,815.24 on 14-Oct-2016 P/E 22.3 21.5 19.3 17.9 On 14-Oct-2016 the spot exchange rate was S$1.39/US$1 P/B 7.85 7.13 6.29 5.52 Dividend yield (%) 3.9 4.0 4.4 4.8 EV/sales 8.4 8.0 7.4 6.8 EV/EBITDA 14.8 14.2 12.7 11.7 EV/EBIT 16.6 15.9 14.1 13.0 ROE analysis (%) 06/16A 06/17E 06/18E 06/19E ROE 35.5 34.8 34.7 33.0 ROIC 223.8 247.4 190.8 141.9 Credit ratios 06/16A 06/17E 06/18E 06/19E Net debt/equity (%) (87.5) (84.5) (79.5) (74.4) Net debt/EBITDA (x) (1.85) (1.90) (1.84) (1.83)
Source: Company data, Thomson Reuters, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 2 18 October 2016
Focus charts Figure 1: Derivatives' growth less volatile… Figure 2: …and accounts for 40% of total revenue
60.0 as of FY 2016 Others 50.0 11% Securities market 40.0 Listing fees 25% 10% 30.0
20.0 Depository services 14% 10.0 Derivatives market 40%
0.0
2Q12 3Q13 1Q12 3Q12 4Q12 1Q13 2Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17E
Nikkei 225 China A50 MSCI Taiwan Nifty Others Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 3: FTSE A50 volumes should benefit from the Figure 4: …but market activity remains uninspiring launch of HK-Shenzhen connect… with a risk of further seasonal slowdown in Dec-qtr
35 (contracts in mn) FTSE China A50 volumes S$ bn Turnover (LHS) Velocity (RHS) % 32 200 100 HK - Shenzhen 30 28 stock connect 180 90 launch likely by 160 80 end of the year 25 140 70 HK - Shanghai stock 21 connect launched in 120 60 20 November 2014 17 18 17 17 100 50 16 15 80 40 11 60 30 10 7 40 20 6 6 6 5 5 5 4 20 10 2 2 2
1 1 - 0
2Q03 2Q08 2Q13 2Q05 2Q06 2Q07 2Q09 2Q10 2Q11 2Q12 2Q14 2Q15 2Q16 2Q17E 0 0 1 1 2Q04 0 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 5: SGX is trading in-line with its long-term Figure 6: …but has de-rated slightly relative to other historical average in terms of P/E… Asian peers recently
35.0 40.0x SGX Asia
35.0x 30.0
sd +1 30.0x 25.0 Asian exchanges
Avg. 25.0x 20.0 20.0x sd -1 SGX 15.0 15.0x
10.0 10.0x Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15
Source: I/B/E/S consensus forecasts (12-month forward), Credit Suisse estimates Source: I/B/E/S consensus forecasts (12-month forward), Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 3 18 October 2016
Lacks near-term catalysts Securities' business remains subdued… Securities turnover and Securities market turnover and revenue hit the decade low in FY16. The subdued turnover revenue at decade low is mainly a result of declining velocity (peak-to-date -43%). Additionally, the dearth of IPOs and an increase in privatisation deals have further exacerbated the situation. Consequently, the contribution of securities' revenue to total revenue has halved from 51% in FY08 to 25% in FY16. Various market microstructure reforms introduced by SGX in the past three years have failed to lift volumes. But on the contrary, clearing fees have declined 22 bp, mainly due to rebates provided to market makers and liquidity providers. We discuss a few structural drivers like higher free float and high frequency trading in this report, which can provide an opportunity for velocity to improve over the longer run. …but derivatives growth secular and less volatile SGX’s FTSE A50 Despite significant headwinds in the securities business, the derivatives market has been a volumes to benefit in the great revenue stabiliser. We note that derivatives' revenue has posted an 18% CAGR in the near term from the past five years, more than offsetting the 7% decline in securities' revenue during this period. launch of HK-Shenzhen In the near term, we expect SGX’s FTSE China A50 contracts to benefit from the likely launch stock connect of the HK-Shenzhen stock connect by the end of the year. Please recollect that FTSE A50 volumes had almost trebled to 17 mn contracts post the launch of the HK-Shanghai stock connect in November 2014. The volume upside would come from investors wanting to gain exposure to A-shares and to hedge positions due to the absence of intra-day selling in Mainland China. SGX stands to benefit from this, as it is the only offshore market in the world
for trading China A50 futures. However, we expect the volume impact to be relatively low this
time, since Shenzhen-listed stocks constitute only 13% of total weight of the FTSE A50 index.
MSCI China index In the longer run, incremental derivatives' growth could likely be driven by newly launched futures, currency futures MSCI China index futures, currency futures (strength in INR futures and a greater focus on and replication of iron-ore RMB and ASEAN currencies) and the replication of iron-ore success to other commodities' success to other derivatives (LNG derivatives and FFA). While we are watchful of the rising competition, commodities key to SGX’s proven track record of identifying product niches and maintaining market shares future derivatives growth give us a confidence that SGX will be able to manage competitive incursions from other commodities' exchanges (ICE and CLTX) and launch new products from time to time. Near-term market headwinds Current market activities Market activity has continued to slow down in 1Q17 (Jul-2016 to Sep-2016) in both equity remain uninspiring, with a (-3% QoQ) and derivative markets (-6% QoQ). As of 1Q17, both SDAV (S$1.0 bn) and DDAV risk of seasonal (0.64 mn contracts) are running behind our full-year expectations of S$1.1 bn and S$0.77mn slowdown in 4Q… contracts, respectively. The risk of further seasonal slowdown in the December quarter could likely cap the stock price performance near term in our opinion. However, we see merit in SGX’s strategy to become Asia’s multi-asset exchange. It has diversified its business mix by …but longer-term starting the Index Edge business, which does bespoke index calculations, has launched positioning remains BondPro (a dark pool for fixed income trading), and has become Asia's Masala bond hub. attractive While it is still early days, SGX's ultimate aim is to expand product range and thus cover the entire fixed-income value chain, including trading, clearing and settlement and custody. Valuations fair, and dividend yield provides a floor Valuations are fair, and We initiate coverage on SGX with a NEUTRAL rating and a TP of S$7.60 (potential upside dividend yield provides a 5%). It is trading at 12-month forward P/E of 21.1x, in-line with its long-term average, and the floor dividend yield of 4.0% provides a floor. Key upside risk to our view is higher-than-expected ADT, whereas the launch of China-focused derivatives by competitors and subdued turnover are key downside risks. We could turn more constructive on the stock if the cash turnover improves and the capital market activity picks up meaningfully from the current levels.
Singapore Exchange Limited (SGXL.SI / SGX SP) 4 18 October 2016
Securities business remains subdued… Securities revenue and SGX has been facing significant headwinds in its securities business over the past few years. turnover at decade low Securities' turnover and revenue of S$275 bn and S$205 mn, respectively, in FY16 were the lowest in the past decade. Please note that securities' revenue has declined at a 7% CAGR over the past five years (FY11 to FY16) vs a 10% CAGR growth in five years prior to that (FY06 to FY11). As a result, the contribution of securities' revenue to the total revenue has halved to 25% from the peak of 51% in FY08 (and 44% in FY11). Despite the slowdown in the securities' business, total revenue has still grown at 4% in the last five years, driven by strong growth in its derivatives' business (18% CAGR in past five years). Figure 7: Strong growth in derivative revenue has more than offset decline in securities revenue
Securities market Derivatives market Other revenue Total revenue 20.0 18.0
15.0 13.0 11.7 10.0 10.1 8.2 10.0 8.1 7.2 7.9 6.2 6.4 4.6 4.4 4.4 5.0 1.3 0.0
-5.0
-6.6 -10.0 FY2006 - FY2011 CAGR FY2011 - FY2016 CAGR 10Y CAGR FY2017E - FY2019E CAGR
Note: FY16 refers to period from July-2015 to June-2016. Source: Company data, Credit Suisse estimates
As a result, derivatives' revenue has grown to become the largest contributor to top line, accounting for 40% of the total revenue. On the other hand, the contribution of securities' revenue has halved to 25% from 51% in FY08.
Figure 8: Securities revenue was the major Figure 9: …but securities' revenue contribution has component of revenue until 1Q15 and contributed halved to 25% since then, and derivatives' revenue as much as 51% to total revenue back in FY08… now accounts for 40% of total revenue SGX's revenue mix as of FY08 SGX's revenue mix as of FY16
as of FY 2008 as of FY 2016 Others Others 8% 11% Securities market Listing fees 25% 11% Listing fees 10% Depository Securities services market 10% 51% Depository services 14% Derivatives Derivatives market market 20% 40%
Note: FY08 refers period from July-2007 to June-2008. Note: FY016 refers period from July-2015 to June-2016. Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 5 18 October 2016
Why are trends in the securities market important? Strong correlation Approximately 50% of SGX's revenue is related directly to the level of securities' market's between the value of activity, either via value (25% from equities market), or the volume of trades (14% from shares traded and SGX’s depository services), or the level of capital raisings (10% related to market capitalisation stock price performance and capital raisings). Moreover, with the availability of volumes/value traded data on a real-time basis, market participants use this information to trade the stock. Unsurprisingly, there is a strong positive correlation of 81% between the value of shares traded and SGX's stock price performance. However, this correlation has weakened since the past couple of years, as derivatives' revenue, which has been relatively sticky, has now become the biggest component of the overall revenue. Nonetheless, the outlook for securities' turnover remains one of the key determinants of share price performance.
Figure 10: There is a strong correlation of 81% between value of shares traded and SGX stock price Value of shares traded (LHS, S$ bn) vs SGX stock price (S$)
175 14.0
150 12.0
125 10.0
100 8.0
75 6.0
Share price ($) price Share Turnover (S$ bn) (S$ Turnover 50 4.0
25 2.0
- 0.0
1Q09 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17
Source: Company data, Credit Suisse estimates
One of the main challenges that SGX is facing is that securities' revenue has declined at an 8% CAGR in the past eight years, and hence the overall revenue has remained broadly flattish despite growth elsewhere. As shown in the chart below, securities' revenue has declined on a year-on-year basis in six out of the last eight years, with FY10 and FY13 being the only exceptions. This decline in securities' revenue has been mainly driven by the subdued cash turnover, which has declined at a 4% CAGR during this period. However, we also note that while turnover was down only 4% YoY in FY15 and flat in FY16, securities' related revenue actually declined 8% YoY and 2% YoY, respectively. This was due to the reduction in clearing fees by 0.75 bp to 3.25 bp of the contract value. Furthermore, the exchange had introduced market makers (MMs) and liquidity providers (LPs) to improve the liquidity and increase the depth in the market. However, market makers and liquidity providers also enjoy clearing fee rebates on their trades after reaching a minimum traded value threshold in a specific stock, and thus have also been responsible for dragging clearing fee per contract lower to 2.9 bp (one way). While liquidity providers generally enjoy a rebate of 20-30%, market makers can get a rebate of as high as 100% on proprietary trades. We build a decline of 5 bp in the clearing fee for FY17E, and a further decline of 1 bp in FY18E.
Singapore Exchange Limited (SGXL.SI / SGX SP) 6 18 October 2016
Figure 11: Securities' revenue has declined due to subdued turnover… Breakdown of securities revenue (LHS, S$ mn) and securities daily average turnover (RHS, S$ bn)
450 Clearing fees Processing fees Access fees Daily turnover (S$ bn, RHS) 2.5
400
350 2.0
300 1.5 250
200 1.0 150
100 0.5 50
0 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Source: Company data, Credit Suisse estimates
Subdued turnover is due We attribute this subdued turnover to falling velocity, which has declined from 73% in to falling velocity FY08 to 30% in FY16, as equity market capitalisation has actually grown at a 3% CAGR since FY08. Higher market volatility often leads to increased demand for trading and hedging, and may create additional opportunities for arbitrage and speculation. This is corroborated by the LHS chart below, which shows positive correlation between 'velocity' and 'volatility'. Furthermore, the RHS chart shows that there is an inverse relationship between volatility and market performance. Generally, higher volatility corresponds to a higher probability of a declining market, and vice versa. However, sustained periods of low volatility, especially in bearish conditions, may result in even lower levels of market activity, which we believe is the current case for SGX.
Figure 12: …due to a decline in 'velocity,' which in- Figure 13: …and volatility is inversely related to turn is driven by falling volatility market performance FSSTI's 30 day VIX (LHS) vs. SGX's monthly velocity (RHS) FSSTI's 90 day VIX (LHS) vs. FSSTI index (RHS, reverse)
70 110.0 50 1000
100.0 45 60 1500 90.0 40 50 35 80.0 2000 30 40 70.0 25 2500 30 60.0 20 50.0 3000 20 15 40.0 10 3500 10 30.0 5 0 20.0 0 4000 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Monthly 30D VIX Monthly SGX velocity (RHS) VIX (90 days, LHS) STI Index (RHS, reverse)
Source: Company data, Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 7 18 October 2016
The charts below show that subdued volatility is not specific to the Singapore market only, but is a common phenomenon across most of the Asian markets. However, Singapore has seen the highest peak-to-date (as of 2015) decline in share turnover (-47%) among peers. Figure 14: The value of shares traded has been falling…
1200 2007 2008 2009 2010 2011 2012 2013 2014 2015 Peak-to-date -33%
1000 Peak-to-date +5%
800 Peak-to-date -24% Peak-to-date -47% Peak-to-date -19% 600 Peak-to-date -42%
400
Annual turnover in US$ mn (2003=100)mnUS$in turnover Annual 200
0 HKEx ASX SGX Bursa SET IDX
Source: World Federation of Exchanges, Credit Suisse estimates
Figure 15: …despite market capitalisation growing…
1200 HKEx ASX SGX Bursa SET IDX
1000
800
600
400
200 Market capitalisation in US$ bn (2003=100)bn US$in capitalisation Market 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: World Federation of Exchanges, Credit Suisse estimates
Figure 16: …as this is a result of falling velocity
140 2007 2008 2009 2010 2011 2012 2013 2014 2015
120 Peak-to-date -27% Peak-to-date -37% Peak-to-date -39% 100
Peak-to-date -39% 80 Peak-to-date -23% Peak-to-date -36% 60
40
Annual securities velocity (%) Annual securities 20
0 HKEx ASX SGX Bursa SET IDX
Source: World Federation of Exchanges, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 8 18 October 2016
So what can improve velocity structurally? SGX’s velocity is lower SGX's major weakness among its Asian peers in our opinion is relatively low levels of than other Asian peers velocity. The low velocity is despite the various market microstructure changes undertaken in the past few years to improve retail participation like the lowering of board lot size from 1,000 to 100 shares, the introduction of market makers (MMs) and liquidity providers (LPs), cutting clearing fees from 4 bp to 3.25 bp, and setting the minimum trading price of S$0.20 for companies listed on mainboard.
Figure 17: SGX's velocity is lower than its Asian peers 450 411 January - August 2016 400
350
300
250 200 200 135 150 121 Average velocity 91% 100 79 65 62 46 42 33 28 50 22 15 13 0
Source: World Federation of Exchanges, Credit Suisse estimates
While we do not expect velocity to improve meaningfully in the near term, we identify three factors that could lead to structural improvement in velocity over the longer run, and will look out for the developments in the same. IPOs can help buoy Increasing market capitalisation as hitherto unlisted companies go public. In capital markets and addition to the increasing market capitalisation, a tide of primary issuances via the IPO increase market cap market could help buoy capital markets, which, in turn, could likely create the necessary trading depth to generate meaningful listing, placement and clearing fees.
Figure 18: SGX's market capitalisation is also lower than its Asian peers Asian exchanges: Market capitalisation (US$ bn)
6,000 As of August 2016 4,969 5,000 4,052 4,000 3,365 3,310
3,000
2,000 1,627 Average market capitalisation $1.7 tn 1,366 1,330 906 1,000 668 442 437 408 282 91 0
Source: World Federation of Exchanges, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 9 18 October 2016
Dearth of IPOs and a rise However, in the past few quarters, the Singapore equity market has been plagued not in privatisation deals has only by a dearth of IPOs, but on the contrary has also witnessed a rise in privatisation plagued Singapore deals. We believe the dearth of IPOs in Singapore is partly due to firms circumventing equity market recently the need for raising funds via public markets because of ample funding available from private equity firms, and partly due to the start-ups with rich valuations resorting to M&A deals as an exit strategy vis-à-vis IPO path. On the other hand, the rise of privatisation deals has meant more number of significant de-listings vs fewer number of new listings on SGX. Moreover, the year-to- date new listings have mainly been on Catalist (10) vs Mainboard (6). As per Bloomberg, about 13 companies with a combined market value of S$4.5 bn had announced plans to delist from SGX in 1H16, more than the value of new listings during this period. The delisted companies include Keppel Land, Tiger Airways, NOL, and OSIM among others. We believe this rise in privatisation deals is an outcome of the convergence of: (1) exceptionally low cost of debt, thanks to the extraordinary accommodative monetary policy of the Western World since GFC, which gives PE firms and corporates enough dry powder to pursue buyouts, and (2) cheaper valuations of publicly listed companies due to a general slowdown in the economy.
Figure 19: SGX has the highest IPOs YTD in ASEAN, Figure 20: Significant de-listings have outpaced but lags far behind other Asian peers… relatively small new listings on SGX Number of new companies listed through an IPO YTD as of August-16 New equity listings vs. de-listings
70 50 62 Domestic Foreign No. of IPOs No. of de-listings 60 45 43 60 5 56 5 40 36 50 44 44 35 40 35 32 40 1 29 30 27 27 24 24 25 23 30 57 60 25 22 51 20 19 44 44 20 18 20 39 16 11 10 9 15 25 6 7 10 3 2 2 10 8 8 10 11 10 6 7 0 2 2 5
0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FYTD17
Source: World Federation of Exchanges, Credit Suisse estimates Note: FYTD refers to financial year to date. Source: Company data, Credit Suisse estimates
SGX has undertaken a few initiatives to turn this around. For instance, SGX's Listing Advisory Committee (LAC) has recently voted in favour of permitting dual-class share structures to list on SGX. While the SGX's proposal is undergoing a public SGX is considering consultation process, if passed, it would aid the exchange in attracting high-quality permitting dual-class companies, which may not otherwise consider Singapore as a listing venue, in our share structure listings opinion. To be sure, the jury is still out on whether companies with such structures should be allowed to list in Singapore. Please recollect that HKEx had halted its bid to loosen shareholder voting rights last year after China Securities Regulatory Commission (CSRC) opposed the proposal on the grounds of the lack of assurance that a company would treat its investors fairly. This rejection had consequently led Alibaba to turn to the NYSE for an IPO that raised US$25 bn, making it the largest IPO in history. However, we note that some of the world's largest companies like Facebook and Alphabet, which are listed on NASDAQ and NYSE, respectively, have multiple share classes as well, which usually allows minority shareholders (founders) to have majority voting rights. Additionally, SGX has reinforced its listings' proposition recently to broaden beyond Singapore’s established sector strengths in REITs and business trusts, to promote fast growing industries such as Healthcare and Technology.
Singapore Exchange Limited (SGXL.SI / SGX SP) 10 18 October 2016
Singapore’s (and Asia’s) A secular shift in free float as controlling shareholders reduce their stakes, including free float is far behind the governments and government-linked funds and companies (GLCs). The greater the US and Europe percentage of free float shares of companies, the greater the liquidity of their stock, the number of buyers and their frequency of transactions as compared to companies that have a lower percentage of free float shares. Greater liquidity also lowers trading costs for investors, which in turn bodes well for turnover. Singapore's free float as a percentage of market capitalisation (54%) is broadly in-line with Asia's average, but trails far behind the average of American (93%) and European markets (80%). However, in the absence of any catalysts, the market free float is unlikely to change in the near term, in our opinion.
Figure 21: Asia's free float trails that of the US and European exchanges
100 95 91 Free float as a % of market capitalisation 90 84 80 72 67 70 60 55 55 54 48 50 43 40 36 34 40 31 30 20 10 0
Source: Bloomberg, Credit Suisse estimates
HFT adds liquidity, Technology-driven velocity increase. SGX had launched an ultra-fast trading reduces trading costs engine, "Reach" in August 2011, to attract the high frequency traders. High frequency and increases velocity trades (HFT) have added liquidity to the markets, reduced trading costs and increased velocity as trades are executed in micro-seconds. HFT trades as the proportion of Asian cash equity volumes have been relatively small as compared to almost 50-70% for US exchanges and almost half of that for European exchanges. As against that, HFT trades account for only 15-20% of volume in the cash equity market, and 25-30% of the derivatives market at SGX. We believe high transaction costs and no market fragmentation, which limits the arbitrage opportunities, have been the key reasons for the lack of a pick-up in HFT. We sense the rising participation of high frequency traders, as the average number of colocation racks have almost tripled in the past five years to 152 as of FY16. The co-location service refers to investors keeping their trading computers near the exchange's servers, which helps them expedite trading by cutting reaction time (latency). It is becoming increasingly important in today’s market for a trader to be faster than his rivals, and indeed many traders are now functioning in the smaller realm of microseconds. Delays are no longer an option. The need for greater capacity and more efficiency of time to trade is thus increasingly important. SGX is further planning to expand its colocation facility by 70% to meet continued demand for its colocation and hosting services. The above three factors could be potential drivers for lifting velocity in the longer run and may manifest in higher turnover. However, please note that we are not modelling any increases in velocity over next few years from the current low levels. Higher-than-expected velocity would boost turnover and thus poses an upside risk to our estimates.
Singapore Exchange Limited (SGXL.SI / SGX SP) 11 18 October 2016
Key earning drivers for securities market We expect average market capitalisation to post a 4% CAGR and velocity to be broadly flat over the next three years. Clearing fees should decline as the participation of liquidity providers and market makers increases further.
Figure 22: We forecast average market cap to grow Figure 23: …and model a slight decline in clearing 3% and velocity to be broadly flat in FY17E… and access (trading) fees… Market capitalisation (LHS, S$ bn) and velocity (RHS, %) Clearing, other and access fees (bp)
1,200 Market capitalisation (S$ bn) Velocity (%) 100% 7.0 Clearing fee (bp) Other fees (bp) Access fee (bp)
1,017 1,026 6.0 1,000 980 960 80% 943 899 928 872 831 5.0 800 731 707 60% 4.0 600 3.0 457 40% 400 2.0 20% 200 1.0
0 0% 0.0
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We expect average daily turnover to be broadly flat for the fourth year in a row, resulting in flattish overall securities revenue growth.
Figure 24: …leading to 2% growth in turnover and Figure 25: …resulting in broadly flattish securities 11 bp of decline in total fees (both ways)… revenue this year Securities turnover (LHS, S$ bn) and securities fees (bp) Breakdown of securities revenue (LHS, S$ bn) and growth (RHS, %)
450 80% 600 Securities turnover (S$ bn) Fee per $ of turnover (bp) 8.5 Clearing fees Other fees Access fees Growth (RHS, %) 533 400 8.0 60% 500 350 409 7.5 40% 400 387 300 363 332 20% 318 7.0 250 309 304 300 286 280 274 274 200 6.5 0%
200 150 6.0 -20% 100 100 5.5 -40% 50
0 5.0 0 -60%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 12 18 October 2016
…but derivatives growth secular and less volatile SGX is the world's most liquid offshore pan-Asian derivatives market for the benchmark equity indices of China, India, Japan and ASEAN, and is also the leading commodities exchange for contracts on iron ore and rubber. The exchange offers a plethora of derivatives in the equity, fixed income, currency and commodity space. Its derivatives business has acted as a useful revenue stabiliser amid subdued securities business.
Figure 26: Derivatives volumes witnessing secular, less volatile growth Breakdown of total revenue (LHS, S$ mn) and derivative YoY growth and 8-year CAGR (RHS, %)
1,050 60 900
750 40 8yr CAGR = 10% pa 600 20
450 0 300
-20 150
0 -40 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Securities market Derivatives market Listing fees Others Derivative growth YoY 8 year derivative CAGR Source: Company data, Credit Suisse estimates
The importance of the derivative market is reflected in the volume of contracts traded on the SGX, which have consistently been in excess of 25 mn over the past 15 quarters and has helped cushion earnings from the weakness in the securities market.
Figure 27: Derivative volumes consistently in Figure 28: … with China A50 contracts still a major excess of 25 mn over the past 15 quarters… component (40%) followed by 'others' (18%) Derivative market quarterly turnover (million) Derivative market quarterly turnover mix
60.0 100% 90%
50.0 80%
70% 40.0 60%
30.0 50%
40% 20.0 30%
10.0 20% 10%
0.0
2Q12 3Q13 3Q12 4Q12 1Q13 2Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17E
1Q12 0%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17E
Nikkei 225 China A50 MSCI Taiwan Nifty Others Nikkei 225 China A50 MSCI Taiwan Nifty Others Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 13 18 October 2016
Diversified product suite has enabled steady growth SGX offers a plethora of Over the years, SGX has been launching products strategically and widening its Asian derivatives in the equity, product suite. SGX Nikkei 225 Index futures contracts are being traded on SGX for the fixed income, currency past 30 years, and FY16 marked the completion of ten years for both FTSE China A50 and commodity space Index futures and SGX AsiaClear as an OTC clearing house. The exchange offers a plethora of derivatives in the equity, fixed income, currency and commodity space Derivative product offerings across equity, interest, currency and commodities segments have helped the exchange compensate a slack in a particular contract with a pick-up in other contracts. We note that the derivative market has been noticeably strong since Abe-san’s successful election led to a spike in demand for Nikkei 225 Futures in Jan-2013 (or 3Q FY13). Even though traded volume of the Nikkei 225 futures has since slipped, the spectacular growth in China A50 futures has ensured that over 500,000 contracts are traded daily on the SGX. At its peak in FY4Q15/1Q16, China A50 futures contracts alone recorded an average daily volume of around 490,000 contracts, and contributed to 55-60% of total derivative volumes. While the growth in A50 contracts has relatively slowed down since then, growth in 'other' contracts has picked up post that. 'Other' contracts mainly consist of derivative options, AsiaClear and forex futures. AsiaClear volumes are dominated by iron ore future contracts (roughly 96% of total AsiaClear), whereas forex futures are dominated by INR contracts (roughly 92% of total forex). Thus, we believe it is this diverse product offering that has led to a secular and less volatile growth in the derivatives business for SGX. What shall be the drivers of growth going forward? We have already noted that derivatives' revenues have been the fastest area of top-line growth for SGX over the past five years. While the derivatives business has been a great stabiliser so far, it is necessary to ascertain the drivers of future growth. We expect FTSE A50 volumes, which have been declining in the past two quarters, to rebound in the near term on the launch of the Hong Kong–Shenzhen stock connect. In the medium-to-long- term, incremental derivatives growth would likely depend on the success of the newly launched MSCI China index futures, currency futures and replication of iron-ore success to other commodities derivatives. We discuss each in more detail below: 1. China linked equity index futures SGX is currently offering two China-related equity index futures, viz., FTSE China A50 index futures and the newly launched MSCI China Index futures. We discuss the future potential of both these contracts below: FTSE China A50 (a) An indirect beneficiary of Hong Kong-Shenzhen stock connect: Please recollect volumes should benefit that post the launch of Hong Kong-Shanghai stock connect in November 2014, SGX’s from an increase in FTSE A50 volumes had almost trebled to 17 mn contracts in the December quarter hedging demand on the from the average of around 6 mn contracts in the preceding quarters. The higher launch of HK-Shenzhen volumes were attributable to getting an exposure to a basket of Shanghai listed stocks stock connect and to hedge the positions. On similar lines, we expect SGX’s FTSE A50 contracts to be an indirect beneficiary of the likely launch of Hong Kong-Shenzhen stock connect, which is expected to be launched by the end of the current calendar year. However, we expect the volume impact to be relatively lower this time, since Shenzhen-listed stocks constitute only 13% of the total weight of the FTSE A50 index. The volume upside should likely come from an increasing need for hedging positions due to the absence of intra-day selling in Mainland China, and SGX stands to benefit from this as it is the only offshore market in the world for trading China A50 futures currently.
Singapore Exchange Limited (SGXL.SI / SGX SP) 14 18 October 2016
Figure 29: FTSE A50 volumes should benefit from the launch of HK-Shenzhen connect, similar to when HK-Shanghai connect was launched in Nov-14
35 (contracts in million) FTSE China A50 volumes 32
30 28 HK - Shenzhen stock connect launch likely 25 by end of the year HK - Shanghai stock connect 21 launched in November 2014 20 17 18 17 17 16 15 11 10 7 6 6 6 5 5 5 4 2 2 1 2 0 0 1 1 1 0 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17
Source: Company data, Credit Suisse estimates
SGX’s FTSE A50 contracts, which can be traded across the time zones, act as a hedging tool for product issuers (30-40% of total volumes), as an arbitrage tool for traders between related products and onshore equities (another 30-40%), and as an investment tool for investors who want to gain exposure to A-shares (remaining 20- 25%). We expect demand for SGX’s A50 contracts to remain resilient in the future due to SGX's ability to provide investors a single platform to comprehensively manage their Chinese equity exposure (via A50 contracts) and currency exposures (via USD/CNH and CNY/USD futures). This is important because it enables investors to enjoy portfolio efficiencies across SGX's products in the form of margin offsets. It is also noteworthy that SGX has been steadily gaining market share in this contract, which has risen from 0.8% in FY14 to 3.9% in FY16.
Figure 30: SGX steadily gaining market share in A50 and Nifty futures; whereas, volumes for Nikkei and Taiwan futures are broadly flat despite a decline in market share in the past few years Japan Nikkei 225 futures MSCI Taiwan futures China A50 futures India Nifty futures FY16 17.3% 19.1% 3.9% 43.9% FY15 18.9% 22.8% 1.3% 43.8% FY14 21.5% 27.7% 0.8% 36.1% FY13 25.5% 26.4% 0.7% 33.5% FY12 28.5% 23.0% 0.5% 21.0% FY11 28.0% 24.0% 0.4% 15.0% FY10 26.0% 24.3% 0.0% 9.9% Source: Company data, Credit Suisse estimates
This contract gives (b) MSCI China Index futures: In May 2016, SGX further launched F&O contracts on exposure to China’s new MSCI China Free index, which comprise large- and mid-cap Chinese companies listed industries outside of Mainland China including US-listed ADRs such as Baidu and Alibaba. The contract is yet to garner meaningful investor interest, but we see good future potential, since this contract can be used as a risk management tool for managing exposure to the new industries driving the next stage of China’s economic growth. It has a very broad representation of sectors, including financials (35%), information technology (24%) and consumer companies (9%), among others. Moreover, investors trading this contract can approximately get up to 60% margin offsets with FTSE China A50 index futures.
Singapore Exchange Limited (SGXL.SI / SGX SP) 15 18 October 2016
2. Currency futures FX volumes almost SGX had launched Asian forex futures in 2013 to complement its highly liquid financial and trebled in FY16 commodity contracts, thereby maximising customers' operational and capital efficiencies. The total number of currency futures contracts traded in FY16 almost trebled to 5.8 mn contracts from 2.1 mn a year ago, mainly driven by INR contracts, which constitute ~93% of the total forex turnover on the exchange. Under the new CEO, the exchange intends to launch more forex contracts with a focus on RMB and ASEAN currencies. We expect RMB futures contracts' take-up rate to increase during the periods of volatility to hedge exposures and also as RMB gains a status of global reserve currency following its inclusion into the Special Drawing Right (SDR) basket recently. Consequently, we expect the contribution of forex volumes to increase over next few years from 4% currently.
Figure 31: FX futures led by INR contracts contribute ~4% to derivatives volume
1,800 (in '000s) INR RMB Others 1,551 1,528 1,600 1,454 1,334 1,365 89 89 1,400 120 96 109 1,200 1,000 805 699 800 22 1,432 1,423 600 24 1,222 1,240 1,309 402 400 31 761 195 610 200 0 11 37 43 354 180 0 6 28 35 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Source: Company data, Credit Suisse estimates
3. Replicating iron-ore’s success story to other commodity products SGX enjoys 93% market We have seen SGX dominating global on-exchange trade of iron products since the share in the global on- launch of iron ore options (September 2012) and futures (April 2013), which continues to exchange trade of iron grow in volume. Iron ore futures volume jumped 160% YoY in FY16, whereas iron ore ore products options cleared almost quadrupled in the past year. Despite being the second most traded commodity in the world after oil, only a small proportion of all iron ore trades are cleared on-exchange, while the majority are still OTC bilateral trades. Singapore Exchange enjoys 93% market share in the global on-exchange trade of iron ore products. With the push towards on-exchange clearing in the future, we expect SGX to be a major beneficiary.
Figure 32: SGX enjoys 93% market share in the global on-exchange trade of iron ore products
3,500 (in '000s) Iron ore futures 3,052 3,000 2,786 2,560 2,500 1,907 1,901 2,000
1,500 1,224 953 1,035 1,000 421 493 500 182 1 3 62 0 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 16 18 October 2016
SGX will launch SGX recently announced that it will launch more liquefied natural gas (LNG) derivatives derivatives based on its contracts in 2Q17. These contracts will be based on its new North Asia price index based North Asia LNG price on LNG cargoes delivered to ports in Japan, Korea, Taiwan and China. These economies index together account for 60% of total global LNG demand. After the North Asia Sling (Singapore LNG Index Group) accumulates more pricing data, SGX intends to introduce swaps and futures based on the marker, which could be used as a hedging tool by market participants. While various players are competing to create a pricing product that will gain acceptance among LNG players in Asia, we believe commodity pricing benchmarks are a winner-takes-all game; an established contract would attract even more liquidity. The existing North-east Asian price indices do not enjoy the same level of liquidity as the Henry Hub in the US and NBP in the UK, giving SGX a shot at success. Baltic exchange With the recent Baltic exchange acquisition, SGX hopes to replicate its success of on- acquisition will help SGX exchange trading of iron ore swaps with the freight forward agreement (FFA) derivative secure a foothold in the market. SGX can now earn licence fees from other major clearing houses (LCH, Nordic, dry bulk FFA trades SME and Nasdaq) that also clear the dry bulk FFA trades. While we do not expect Freight Forward derivative volumes (currently 0.3% of total derivatives volume) to grow meaningfully as the global trade remains lacklustre, we view this acquisition as allowing SGX to secure a foothold in the dry bulk FFA business and provide an opportunity to develop dry bulk FFA as a product for market data. We see no meaningful impact on SGX's bottom-line in the near future; as part of the post-acquisition commitments, SGX will have to maintain membership subscription fees, end user Baltic data fees and SGX clearing fees of FFA contracts at current levels for at least five years. Thus, both the above initiatives could potentially add to derivatives' volumes in the future and thereby reduce the dependence on equity index futures, which currently constitute ~82% of total derivative volumes. However, in the near term, derivatives' volume trajectory will continue to be determined by equity index futures only. ICE/SMX, EEX/CLTX We also remain watchful of increasing competition in the commodities' segment from and NASDAQ pose a ICE/SMX, EEX/CLTX and NASDAQ. While these are credible threats, especially in OTC threat in commodity commodities, we believe SGX will continue to dominate as it remains the de-facto venue derivatives business for price discovery in contracts like iron ore. SGX still has a 93% market share in iron ore swaps and futures and has responded to the competition by lowering its fees. Overall, we believe SGX has a proven track record of identifying product niches and maintaining market share. This gives us confidence that it will be able to manage competitive incursions from other commodities' exchanges and launch new products from time to time.
Figure 33: We expect derivatives' volume to post 8% CAGR, but trading fees to decline by 10 bp over the next three years
250 Derivatives turnover (LHS, mn contracts) Derivatives trading fee (RHS, bp)
232 2.6 200 211 192 183 2.2 150 161
1.8 100 101 104 76 50 66 1.4 58 57
0 1.0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 17 18 October 2016
Near-term market headwinds… We highlight that the market activity has continued to slow down in 1Q17 from 4Q16 in both the equity and derivative markets, driven mainly by lower turnover velocity, given that the market capitalisation has been up 2% QoQ. We also note that the December quarter is usually seasonally slower in terms of overall market activity, which could cap the stock performance in the near term, in our view. Securities market income (25% of group revenues) While the average market capitalisation has been up 2% QoQ in 1Q17, average securities' turnover is down 3%. As fees are based on value, the fall is due to a reduction in trading velocity to 27% from 29% in 4Q16 and 33% in 1Q16.
Figure 34: Equity turnover is slowing in 1Q17… Figure 35: …due to declining velocity Securities market quarterly turnover (S$ bn) Securities market quarterly velocity (%)
200 150% 100.0
180 125% 90.0 80.0 160 100% 140 70.0 75% 120 60.0 50% 100 50.0 25% 80 8yr CAGR 40.0 0% 60 30.0 40 -25% 20.0 20 -50% 10.0
-
1Q03 1Q11 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
- -75% 1Q04
1Q10 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Derivatives market income (40% of group revenues) We also highlight that derivatives' volumes have been slowing in 1Q17, with total derivative volumes down 6% QoQ, driven by weaker China A50, Nikkei 225 and Nifty futures.
Figure 36: …similar for derivative volumes Figure 37: …driven by weakness in A50 and Nikkei Derivative market quarterly turnover (mn) Breakdown of derivative market quarterly turnover (mn)
60.0 125% 60.0 160% Nikkei 225 China A50 MSCI Taiwan 100% Nifty Other YoY growth 135% 50.0 50.0 75% 110% 40.0 40.0 50% 85%
30.0 8yr CAGR 25% 30.0 60%
0% 35% 20.0 20.0 -25% 10% 10.0 10.0 -50% -15%
0.0 -75% 0.0 -40%
3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16
3Q14 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 1Q15 3Q15 1Q16 3Q16 1Q17
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 18 18 October 2016
Listing fees (10% of group revenues) We highlight that while the number of new listings doubled in this quarter to eight IPOs, there were an equal number of de-listings resulting in a flat number of listed companies QoQ.
Figure 38: Market capitalisation steady … Figure 39: ...with no. of listings and de-listings flat SGX market capitalisation (S$ bn, LHS) and listed companies (RHS) New funds raised (S$ mn, LHS) and new listings (RHS)
1,200 790 70,000 Equities Bonds New listings 28
60,000 24 1,000 780 50,000 20 800 770 40,000 16 600 760 30,000 12
400 750 20,000 8
200 740 10,000 4
- 0
3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17
0 730 1Q10
1Q11 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 40: SGX monthly and quarterly key trends QUARTERLY MONTHLY
1Q17 4Q16 QoQ % 1Q16 YoY % Sep-16 Aug-16 MoM % Sep-15 YoY %
Securities market (25% revenues) Securities market (25% revenues) Straits Times index 2,869 2,841 1.0% 2,791 2.8% Straits Times index 2,869 2,821 1.7% 2,791 2.8% Equities turnover (S$bn) 62.2 65.1 -4.4% 74.8 -16.8% Equities turnover (S$bn) 20.7 20.6 0.4% 22.5 -8.2% Velocity (%) 27 29 -6.1% 33 -16.6% Velocity (%) 27 27 -0.6% 31 -12.4% Avg daily t/o (S$bn) 1.0 1.0 -2.9% 1.2 -19.4% Avg daily t/o (S$bn) 0.98 0.94 5.1% 1.13 -12.5% Market capitalisation (S$bn) 913 897 1.8% 915 -0.2% Market capitalisation (S$bn) 918 910 1.0% 876 4.8%
Derivatives market (40% revenues) Derivatives market (40% revenues) Structured warrants (S$bn) 2.3 1.9 20.8% 1.0 large Structured warrants (S$bn) 769 825 -6.8% 311 large Derivative volumes (mn) 40.1 42.5 -5.6% 52.5 -23.6% Derivative volumes (mn) 13.4 13.8 -3.0% 14.1 -4.7% - Futures volumes 38.0 39.7 -4.3% 50.8 -25.3% - Futures volumes 12.8 13.1 -1.9% 13.5 -5.0% - Option volumes 2.1 2.8 -23.4% 1.6 36.5% - Option volumes 0.6 0.7 -22.6% 0.5 11.5%
Depositary services (15% revenues) Depositary services (15% revenues) Equity volume (mn) 24,101 24,965 -3.5% 28,866 -16.5% Equity volume (mn) 34,918 30,805 13.4% 27,819 25.5% Clients 74,461 87,496 -14.9% 82,701 -10.0% Clients 74,461 83,493 -10.8% 82,701 -10.0%
Listings (10% revenues) Listings (10% revenues) No listed companies 763 763 0.0% 772 -1.2% No listed companies 763 767 -0.5% 772 -1.2% New listings 8 4 100.0% 6 33.3% New listings 0 2 -100.0% 1 Funds raised (S$mn) 648 1,549 -58.2% 61 962.3% Funds raised (S$mn) 0 203 -100.0% 17 Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 19 18 October 2016
…but longer-term attractive positioning SGX has positioned itself as a multi-asset exchange, emerging as a place of choice for certain sectors such as REITs and offshore Indian bond listings, and has around 40% of listed companies and 80% of listed bonds originating outside Singapore. It has started the Index Edge business, which does bespoke index calculations, has launched BondPro (a dark pool for institutional fixed income trading), has opened wholesale bond markets to retail investors via its Bond Seasoning Framework, and is currently Asia's Masala bond hub. While it is still early days, SGX's ultimate aim is to expand its product range and thus cover the entire fixed-income value chain, including trading, clearing and settlement and custody. Below we discuss these initiatives briefly, which can be revenue-accretive, but is not factored in our earnings forecast. Index business: An under-tapped market in Asia SGX Index Edge delivers SGX Index Edge was set up last year to deliver bespoke indexing solutions for issuers, bespoke indexing asset managers and investors in Asia. Following the launch of SGX Thematic Indices in solutions late 2015, the exchange also rolled out SGX Sustainability Indices in May 2016. As recent as last week, SGX partnered with Nikkei to develop and manage the headline Nikkei300 Index (Nikkei's exclusive list of Asia's biggest and fastest-growing companies from 11 markets) and related indices under SGX Index Edge. It is still too early to see how the market will respond to SGX Index Edge, but there is a trend of growing demand for index- based investment products around the world—and the exchange is already seeing good traction in the take-up rate so far. SGX BondPro: A dark pool for institutional fixed income trading SGX had launched the BondPro trading platform in December last year with an aim to develop the secondary market for institutional fixed-income trading. To clarify, this platform is for bonds (not for equities) and is available to only institutional and accredited investors such as global asset managers, private banks and investment banks. SGX already operates a bond-trading platform for individual investors separately. As with any other dark pool, BondPro trading platform allows traders to flag interest in a security without Global banks are pulling indicating the size or the price of their desired transaction, and is designed to minimise the back from their traditional price impact of buy and sell orders. We see a good potential in this business as global roles as fixed-income banks are pulling back from their traditional roles as fixed-income market makers due to market makers due to tougher bank regulations. Currently, only Asian corporate bonds in G3 currencies are tougher bank regulations being traded on this platform. SGX has been recruiting more participants to its bond trading venue in the past few months and is also dedicating more resources to enable more trades in Asian notes during European and US time zones as 40-45% of Asian G3- currency bonds are transacted outside Asian trading hours as per SGX's internal surveys. With about US$10.8 tn (as per Bloomberg) worth of notes outstanding denominated in the G3 currencies issued by companies and governments in the APAC region, we see enough scope for SGX to scale-up its business. While it is still early days, SGX's ultimate aim is to expand product range and thus cover the entire fixed-income value chain, including trading, clearing and settlement and custody. However, going by SGX's own past experience, we note that dark pools may not be everyone's cup of tea. SGX had a go at setting up a dark pool (Chi-East) for trading large blocks of shares in 2010 through an equal joint venture with Chi-X Global. The intention was to allow money managers to anonymously trade large blocks of selected stocks from Singapore, Hong Kong, Japan and Australia on an electronic platform. But the joint venture folded in May 2012 because of a lack of volumes. Bond Seasoning framework: Opening wholesale bond market to retail investors SGX established the Bond Seasoning Framework in May 2016, allowing retail investors to access wholesale bonds that were hitherto available only to accredited investors. SGX has 1,935 wholesale listed bonds, which were earlier available only in large denominations of
Singapore Exchange Limited (SGXL.SI / SGX SP) 20 18 October 2016
at least $200,000, and/or offered to institutions or accredited investors. Under the new framework, they are still offered only to these groups in the first six months after being listed on the SGX. But after that "seasoning" period, retail investors will be able to invest in Retail investors can now them too, with outlays as little as $1,000. The new framework also allows eligible issuers invest in wholesale to make subsequent direct offers of bonds, called a "re-tap", to retail investors under the bonds same terms as the existing wholesale bonds without a prospectus, following the six-month seasoning period. An exempt bond issuer framework was also introduced to allow certain eligible issuers to offer bonds directly to investors at the onset without a prospectus. These frameworks should widen the range of fixed income products and enable retail investors to access 1,900 plus wholesale bonds listed on SGX, further strengthening SGX's status as Asia's leading bond-listing platform. Asia's Masala bond hub With nearly 8% of debt securities listed on SGX issued by Indian companies, and about US$66 bn raised, SGX accounts for about 80% of overseas bond listings by Indian companies. The exchange aims to be the home for Masala bonds globally after becoming a hub in Asia with more than 150 active bonds in total from Indian issuers listed to date. SGX accounts for about India's capital requirement for infrastructure financing remains huge and it is expected that 80% of overseas bond many of India's top corporations would be heading for international financing through listings by Indian bonds as the government wants them to raise funding from international and domestic companies markets. With supporting policies by the Indian government, the newly accessible Masala bond market provides Indian corporates with a global investor base, opening up an avenue for Indian rupee denominated bonds to be traded overseas. Masala bonds are denominated in Indian rupee, with the issuer company having no foreign exchange exposure, i.e., the currency-risk is transferred to investors buying these bonds. On 16 September, Indiabulls Housing Finance, one of India's biggest mortgage lenders, listed its first Masala bond with SGX. The pipeline of issuers of Masala bonds remains robust and the investor spectrum is broad-based, from fund managers to insurers, sovereign wealth funds, banks and private banks. As Asia emerges as a core investor base for Masala bond issuers, we find SGX to be well-positioned to capture increasing issuer demand for bond market access and the growing appetite for Masala bonds. Inorganic growth opportunities Since the failed bid of ASX in 2010, there is growing realisation that cross-border consolidation of exchanges is difficult without the harmonisation of regulations across national borders. However, since the bid, SGX has developed capabilities for listing of commodity-focused companies, trading/clearing of OTC commodity derivatives and also developed a platform for trading of fixed income products. As such, the strategic rationale for acquisition has diminished and it is quite unlikely that SGX will look towards buying another exchange in Asia ceteris paribus. That said, we do not exclude the possibility of SGX expanding inorganically by acquiring capabilities in derivatives or fixed income. A fixed income quotation platform will be a logical step before becoming a clearing house for fixed income products. As an example, NASDAQ OMX acquired eSpeed—an established electronic platform for trading US Treasury Securities in April 2013. Such acquisitions could potentially serve as building blocks to develop revenues from fixed income products. It would diversify the revenue stream and further lower reliance on the securities market. In its FY16 annual report, SGX had mentioned: “SGX is exploring inorganic opportunities, partnerships and joint ventures that would offer synergies, especially in product development and internationalising our distribution.” However, we note that the exchange does not have any stated acquisition plans currently.
Singapore Exchange Limited (SGXL.SI / SGX SP) 21 18 October 2016
Valuations fair, DY provides a floor We value SGX on a ten-year, two-stage dividend discount model. We assume a cost of equity of 7.5%, predicated on a risk-free rate of 2.5%, a market risk premium of 5.0%, and beta of 1.00. Our DDM assumes terminal growth of 3.0% from year 10. The stock is trading at a 12-month forward P/E of 21.1x, in line with its historical long-term average for a FY17E ROE of 36%.
Figure 41: SGX—Dividend discount based valuations 12M fair FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E Terminal value Diluted EPS (S$) 0.34 0.38 0.41 0.43 0.45 0.47 0.49 0.52 0.54 0.57 growth 4% 11% 8% 5% 5% 5% 5% 5% 5% 5% Payout ratio 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% DPS (S$) 0.29 0.32 0.34 0.36 0.38 0.40 0.42 0.44 0.46 0.48 10.78 Discounting factor 0.70 1.70 2.70 3.70 4.70 5.70 6.70 7.70 8.70 9.70 10.70 Discounted DPS (S$) 0.27 0.28 0.28 0.28 0.27 0.26 0.26 0.25 0.25 0.24 4.97 7.62 Source: Company data, Credit Suisse estimates Valuation sensitivity We highlight SGX's sensitivity to average daily turnover assumptions below (noting our FY17E base case is S$1.1 bn vs S$1.1 bn in FY16).
Figure 42: Valuation sensitivity to average daily turnover (FY17E = S$1.1 bn) Securities daily average turnover (S$ bn) - FY2017E PE (x) 0.5 0.7 0.9 Base= 1.1 1.3 1.5 1.7 14x 3.49 3.90 4.31 4.72 5.13 5.53 5.95 16x 3.99 4.46 4.93 5.40 5.86 6.32 6.79 18x 4.49 5.02 5.54 6.07 6.59 7.11 7.64 20x 4.99 5.58 6.16 6.74 7.33 7.91 8.49 22x 5.49 6.14 6.77 7.42 8.06 8.70 9.34 24x 5.99 6.69 7.39 8.09 8.79 9.49 10.19 26x 6.49 7.25 8.01 8.77 9.52 10.28 11.04 28x 6.99 7.81 8.62 9.44 10.26 11.07 11.89 30x 7.49 8.37 9.24 10.12 10.99 11.86 12.74 32x 7.98 8.93 9.85 10.79 11.72 12.65 13.59 Source: Company data, Credit Suisse estimates
SGX’s sensitivity to securities daily average value (SDAV) and derivatives daily average value (DDAV) assumptions for FY17E is as below.
Figure 43: Valuation sensitivity to SDAV and DDAV assumptions for 2017E DDAV (mn SDAV (S$ bn) contracts) 0.5 0.7 0.9 1.1 1.3 1.5 1.7 0.57 4.4 5.0 5.6 6.1 6.7 7.3 7.8 0.62 4.7 5.3 5.9 6.5 7.0 7.6 8.2 0.67 5.1 5.7 6.2 6.8 7.4 7.9 8.5 0.72 5.4 6.0 6.6 7.1 7.7 8.3 8.9 0.77 5.8 6.3 6.9 7.5 8.1 8.6 9.2 0.82 6.1 6.7 7.3 7.8 8.4 9.0 9.5 0.87 6.5 7.0 7.6 8.2 8.7 9.3 9.9 0.92 6.8 7.4 7.9 8.5 9.1 9.6 10.2 0.97 7.1 7.7 8.3 8.8 9.4 10.0 10.6 Note: “SDAV” refers to securities daily average value and “DDAV” refers to derivatives daily average value. Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 22 18 October 2016
Key risks Lower-than-expected securities average daily turnover (ADT). Any negative development that hinders cash market turnover poses a downside risk to our estimates. A further decline in velocity from the current levels would also drag down the value of shares traded on SGX for a given level of market capitalisation. A repeat of the penny-stock crash of October 2013 could also weigh on investor sentiments and thus impact ADT. On the other hand, higher-than-expected ADT poses an upside risk to our view. Competition from new entrants namely ICE/SMX, EEX/CLTX and NASDAQ. Intercontinental Exchange (ICE) had acquired Singapore Mercantile Exchange (SMX), a pan-Asian currency and commodity derivatives exchange with a clearing arm in February 2014. Post-acquisition, ICE had delisted all SMX contracts and later relaunched as ICE Futures Singapore in November 2015. European Energy Exchange (EEX), owned by Deutsche Borse, had acquired a 52% stake in Cleartrade Exchange (CLTX) in January 2014 and further acquired the remainder 48% earlier this year. CLTX, which was founded in 2010 in Singapore and is regulated by MAS, specialises in metals, agricultural, energy and freight markets. More recently, NASDAQ also received a licence from MAS and plans to offer China commodity futures (freight, iron ore and crude oil). While these are credible threats, especially in OTC commodities, we believe SGX will continue to dominate as it remains the de- facto venue for price discovery in contracts like iron ore. SGX still has 93% market share in iron ore swaps and futures, and has responded to the competition by lowering its fees. Launch of CSI300 futures contract by competitors. China market turmoil in the second half of last year had stalled Hong Kong Exchange's (HKEx) plan to launch CSI300 futures contract. The CSI300 is the equity index launched together by Shanghai and Shenzhen stock exchanges and is one of the most traded contracts globally. The plan had run into difficulties because of growing opposition from within the China Financial Futures Exchange (CFFEX), whose CSI300 contracts are only available to onshore traders. There were concerns within CFFEX that a contract trading on two exchanges in the same time zone wouldn’t work, and one of the contracts would usually die. Please recollect that CSRC had partly blamed the China sell-off last year to "malicious" short selling, had made borrowing for trading futures more difficult and had also limited trading in some contracts. If market turmoil were to recur, then it would be harder for the CSRC to control shorting if the contracts traded in Hong Kong, which the regulator would not like to dispense with in our opinion. Hence, if the plan to launch CSI300 futures contract were to be set in motion again, then it could pose a risk to SGX's FTSE A50 futures. However, the impact remains unclear as SGX's FTSE A50 customers (global institutional investors) may stay with SGX for not only ease in trading multiple products at the same place, but also, more importantly, to enjoy margin offsets.
Singapore Exchange Limited (SGXL.SI / SGX SP) 23 18 October 2016
HOLT® view on the Singapore Exchange Limited (SGXL) (Note: Credit Suisse HOLT is an objective, model driven analytical tool for analysing company values and is not a part of Equity Research.)
HOLT is a value-based, return on capital framework proprietary to Credit Suisse. HOLT provides an objective view of over 20,000 companies in 65 countries using a methodology that examines accounting information, converts it to cash, and then values that cash, allowing investors to identify key drivers of value. SGXL delivered an average Cash Flow Return on Investment (CFROI®) of 31% over the last ten years. This is expected to further improve to 33% by 2018, based on consensus EPS forecast. Currently, the stock is priced at 36.5% CFROI over the next ten years, indicating that investors are optimistic CFROI improvements can be maintained over the long term.
Figure 44: SGXL’s historical, forecast and market implied CFROI
Source: Credit Suisse HOLT LensTM.
Compared to global financial exchanges, SGXL’s historical CFROI is around peer group median level. However, its market-implied expectation (relative to history) is one of the most demanding and second only to HKEx.
Figure 45: SGXL vs global financial exchanges
Source: Credit Suisse HOLT LensTM.
Singapore Exchange Limited (SGXL.SI / SGX SP) 24 18 October 2016
Using IBES consensus revenue growth and EBITDA margins for 2017 and 2018 and further extending the forecast to 2026 (ten-year forecast window); SGXL has a HOLT fair value of S$7.40 per share, similar to its current share price (link to HOLT Scenario).
Figure 46: SGXL’s has a HOLT fair value of S$7.40 if 2018 consensus revenue growth and EBITDA margins forecast are extended to 2026
Source: Credit Suisse HOLT LensTM.
Singapore Exchange Limited (SGXL.SI / SGX SP) 25 18 October 2016
Key management Mr Loh Boon Chye, CEO: Mr. Loh Boon Chye was appointed Chief Executive Officer of SGX on 14 July 2015. Apart from his directorship on the SGX Board from October 2003 to September 2012, he has also been a Director on the Board of GIC Pte Ltd since November 2012. Prior to his appointment as the CEO of SGX, he worked at Bank of America-Merrill Lynch from December 2012 to March 2015 as Head of Asia Pacific Global Markets. Mr Loh began his career as an Investment Officer with the Monetary Authority of Singapore in 1989. He joined the Singapore branch of Morgan Guaranty Trust Co. of New York in 1992, managing its Southeast Asia fixed-income and derivatives business. From 1995 to 2012, he was with Deutsche Bank AG, where he held various leadership roles including Head of Corporate & Investment Banking for Asia Pacific, Head of Global Markets for Asia, and Chief Executive of Global Markets at Deutsche Bank AG in Singapore. Mr Muthukrishnan Ramaswami, President. Muthukrishnan Ramaswami joined SGX as Senior Executive Vice President and Chief Operations Officer on 1 July 2007, and was appointed Co-President in July 2010 and President in May 2012. In this role, Mr Ramaswami oversees SGX’s membership & international coverage, market data & connectivity businesses, the operations & technology functions supporting both the derivatives and the equities & fixed income businesses, and providing exchange-wide support on technology services. He joined SGX from Citigroup where he held senior positions across operations, technology and transaction banking in various locations including Mumbai, Singapore, Hong Kong, London and New York. Mr Chng Lay Chew, CFO. Chng Lay Chew is Chief Financial Officer of SGX where he oversees finance, treasury and investor relations. In his role, he also manages the facilities management unit. Mr Chng has more than 30 years of experience in accounting and financial management, including leadership positions in leading local and international banks. In his previous role, he was responsible for the finance functions of DBS Group’s operations in all countries outside Singapore. He was also previously CFO of the bank’s Greater China business, supporting the integration and growth of the Hong Kong operations and the expansion into China. His earlier roles include senior finance positions in J.P. Morgan’s Singapore, Tokyo and New York offices.
Singapore Exchange Limited (SGXL.SI / SGX SP) 26 18 October 2016
SGX: Valuation focus charts Figure 47: SGX’s price is highly correlated to market Figure 48: 85% payout ratio gives valuation support SGX share price (LHS) versus FTSE Straits Times index (RHS) SGX dividend yield (% p.a.) 17.5 4,500 7.0%
15.0 4,000 6.0% Straits Times index 12.5 3,500
5.0% sd +1 10.0 3,000 Avg.
7.5 2,500 4.0% SGX 5.0 2,000 sd -1 3.0% 2.5 1,500
0.0 1,000 2.0% Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16
Figure 49: P/E ratio at historical average … Figure 50: … declining from one sd above market SGX historical P/E ratio (x) – consensus 12-month fwd estimates P/E ratio relative to FTSE Straits Times index (%) 35.0 100%
90%
30.0 80% sd +1
70% sd +1 25.0 60%. Avg.
Avg. 50%
20.0 40% sd -1 30% sd -1 15.0 20% 10%
10.0 0% Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15
Figure 51: Price-to-book near long-term average Figure 52: Strong correlation to market volumes SGX price to book value (LHS, x) vs. ROE (RHS, %) SGX equity market volumes (LHS, S$ bn) vs. share price (RHS)
17.5 80% 175 14.0
15.0 70% 150 12.0
12.5 sd +1 60% 125 10.0
10.0 50% 100 8.0 Avg.
7.5 40% 75 6.0 sd -1 ROE (%pa) 50 4.0 5.0 30%
25 2.0 2.5 20%
- 0.0
1Q07 1Q12 1Q05 1Q06 1Q08 1Q09 1Q10 1Q11 1Q13 1Q14 1Q15 1Q16 1Q17 - 10% 1Q04 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15
Source for Figures 46-51: Company data, I/B/E/S consensus forecasts (12-month forward), Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 27 18 October 2016
SGX: Key financials Figure 53: SGX income statement Year-end 30 June (S$ mn) FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E Income statement Clearing fees 213 178 164 159 159 172 180 -3% 0% 8% 5% Processing fees 4 8 8 9 9 10 10 9% 1% 9% 5% Access fees 51 40 38 38 38 41 43 0% 2% 7% 5% Securities market income 267 227 209 205 206 223 233 -2% 1% 8% 5%
Derivatives fees 201 209 296 325 337 365 390 10% 4% 8% 7% Structured w arrants fees 2 0 0 0 0 0 0 Derivatives market income 203 209 296 325 337 365 390 10% 4% 8% 7%
Depository services 94 95 104 118 127 140 153 13% 8% 10% 10% Listing fees / issuer services 65 78 88 83 86 90 95 -6% 4% 5% 5% Member services / connectivity 48 42 45 49 55 60 66 9% 12% 10% 10% Market data 34 35 37 38 41 44 48 5% 7% 8% 8% Other revenue 3 1 1 0 0 0 0 Total stable revenue 245 251 274 288 308 334 362 5% 7% 8% 8%
Total operating income 715 687 779 818 851 922 985 5% 4% 8% 7%
Staff costs -123 -127 -150 -159 -164 -173 -184 6% 3% 5% 6% Premises -18 -20 -23 -25 -27 -29 -32 9% 8% 9% 9% IT related -61 -59 -62 -72 -79 -83 -88 16% 9% 5% 6% Other -61 -66 -91 -101 -106 -111 -116 11% 5% 4% 5% Total operating expenses -263 -271 -326 -357 -376 -396 -420 10% 5% 5% 6%
EBITDA 452 416 453 461 476 526 565 2% 3% 11% 7%
Investment gains/losses -10 5 7 6 8 8 8 -21% 40% 0% 0% Depreciation -38 -44 -51 -52 -53 -54 -55 3% 2% 2% 2% Profit before tax 404 377 410 415 431 480 518 1% 4% 11% 8%
Taxes -72 -59 -63 -67 -69 -77 -83 6% 3% 11% 8% Underlying net profit 332 318 347 348 362 403 435 0% 4% 11% 8%
Associates 4 2 2 1 0 0 0 Exceptionals 0 0 0 0 0 0 0 Reported profit 336 320 349 349 362 403 435 0% 4% 11% 8%
Revenue breakdown (%) Securities market 37% 33% 27% 25% 24% 24% 24% -2% -1% 0% 0% Derivatives market 28% 30% 38% 40% 40% 40% 40% 2% 0% 0% 0% Depository services 13% 14% 13% 14% 15% 15% 16% 1% 0% 0% 0% Listing fees 9% 11% 11% 10% 10% 10% 10% -1% 0% 0% 0% Other 12% 11% 11% 11% 11% 11% 12% 0% 1% 0% 0% Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 28 18 October 2016
SGX: Key financials (continued) Figure 54: SGX—key financial ratios, operating metrics and balance sheet Year-end 30 June (S$ mn) FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E Key financial ratios (%) Shares 1,072 1,074 1,074 1,074 1,074 1,074 1,074 0% 0% 0% 0% Underlying EPS 0.31 0.30 0.32 0.33 0.34 0.38 0.41 0% 4% 11% 8% PE (x) 23.1x 24.3x 22.3x 22.3x 21.5x 19.3x 17.9x
DPS 0.28 0.28 0.28 0.28 0.29 0.32 0.34 0% 3% 11% 8% Payout ratio (%) 89% 94% 86% 86% 85% 85% 85% 0% -1% 0% 0% Dividend yield (%) 3.9% 3.9% 3.9% 3.9% 4.0% 4.4% 4.8%
Price to book value (x) 8.7x 8.4x 8.0x 7.9x 7.1x 6.3x 5.5x Return on equity (%) 39.4% 35.4% 37.1% 35.2% 36.2% 35.9% 34.2% -2% 1% 0% -2% Return on assets (%) 19.4% 18.5% 19.5% 18.5% 17.8% 18.4% 18.2% -1% -1% 1% 0%
Key operating ratios (%) EBITDA margin (%) 63% 61% 58% 56% 56% 57% 57% -2% 0% 1% 0% Operating profit margin (%) 58% 54% 52% 50% 50% 51% 52% -2% 0% 2% 1% Cost to income ratio (%) 37% 39% 42% 44% 44% 43% 43% 2% 0% -1% 0% Tax rate (%) 18% 15% 15% 16% 16% 16% 16% 1% 0% 0% 0%
Avg. daily equity t/o (S$ bn) 1.46 1.14 1.09 1.10 1.12 1.22 1.27 0% 2% 9% 5% Avg equity market cap (S$ bn) 943 960 1,017 899 928 980 1,026 -12% 3% 6% 5% Equity turnover velocity (%) 39 30 27 30 30 31 31 13% -1% 3% 0% Securities fee (bp) 7.4 7.9 7.6 7.5 7.4 7.3 7.3 -2% -1% -1% 0%
Avg. daily derivatives t/o ('000) 404 415 642 732 767 844 928 14% 5% 10% 10% Fee per derivative contract (S$) 2.00 2.00 1.83 1.78 1.76 1.73 1.68 -3% -1% -2% -3%
Balance sheet Cash 763 757 790 866 920 981 1,047 10% 6% 7% 7% Receivables 757 572 654 930 976 1,025 1,077 42% 5% 5% 5% Fixed assets & softw are 136 173 201 217 217 262 384 8% 0% 21% 46% Intangibles Other 139 139 157 92 92 108 138 -41% 0% 16% 28% Total assets 1,794 1,641 1,802 2,105 2,206 2,376 2,646 17% 5% 8% 11%
Payables 783 616 718 1,013 1,014 1,039 1,136 41% 0% 2% 9% Provisions 7 8 9 10 10 10 10 4% 0% 0% 0% Other 115 95 97 93 93 93 93 -4% 0% 0% 0% Total liabilities 906 719 825 1,116 1,117 1,142 1,238 35% 0% 2% 8%
Net assets 889 922 976 990 1,089 1,235 1,408 1% 10% 13% 14% BPS 0.83 0.86 0.91 0.92 1.01 1.15 1.31 1% 10% 13% 14% Net tangible assets 889 922 976 990 1,089 1,235 1,408 1% 10% 13% 14% Source: Company data, Credit Suisse estimates
Singapore Exchange Limited (SGXL.SI / SGX SP) 29 18 October 2016
Companies Mentioned (Price as of 14-Oct-2016) ASX (ASX.AX, A$47.57) ATHEX (EXCr.AT, €4.44) Alibaba Group Holding Limited (BABA.N, $101.85) Alphabet (GOOGL.OQ, $804.6) BM&F Bovespa (BVMF3.SA, R$17.7) Bolsa Mexicana de Valores (BOLSAA.MX, MXN31.52) Bolsas Y Mercados Espanoles (BME.MC, €26.54) Bursa Malaysia (BMYS.KL, RM8.76) CBOE Holdings Inc. (CBOE.OQ, $66.09) CME Group Inc. (CME.OQ, $105.44) Cetip (CTIP3.SA, R$43.77) Computershare (CPU.AX, A$10.59) Deutsche Boerse (DB1Gn.F, €68.33) Dubai Financial Market (DFM.DU, Dhs1.23) Euronext NV (ENX.PA, €37.16) Facebook Inc. (FB.OQ, $127.88) GPW (GPW.WA, zł36.72) Hong Kong Exchanges and Clearing (0388.HK, HK$205.4) ICAP Plc (IAP.L, 469.5p) IRESS (IRE.AX, A$11.86) IntercontinentalExchange, Inc. (ICE.N, $271.29) JSE (JSEJ.J, R155.68) Japan Exchange Group (8697.T, ¥1,572) Keppel Land (KLAN.SI^G15, S$4.45) London Stock Exchange (LSE.L, 2843.0p) MarketAxess (MKTX.OQ, $154.22) Moscow Exchange (MOEX.MM, Rbl124.27) Multi Commodity Exchange of India (MCEI.BO, Rs1341.7) NASDAQ Group Inc. (NDAQ.OQ, $67.24) NZX (NZX.NZ, NZ$1.03) Neptune Orient Lines (NEPS.SI, S$1.3) OSIM International (OSIL.SI, S$1.39) PH Stock Exch (PSE.PS, P260.0) Singapore Exchange Limited (SGXL.SI, S$7.25, NEUTRAL, TP S$7.6) TMX Grp (X.TO, C$61.71) Tiger Airways (TAHL.SI^E16, S$0.46)
Disclosure Appendix Important Global Disclosures I, Rikin Shah, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Singapore Exchange Limited (SGXL.SI)
SGXL.SI Closing Price Target Price Date (S$) (S$) Rating 17-Oct-13 7.29 9.25 O 04-Dec-13 7.12 8.25 N 10-Feb-14 6.72 7.75 03-Jul-14 6.96 7.50 06-Feb-15 8.14 7.75 22-Apr-15 8.52 8.25 06-May-15 8.37 10.00 O 07-Dec-15 7.65 8.00 N 22-Jan-16 6.82 * 04-Aug-16 7.55 NC OUTPERFORM * Asterisk signifies initiation or assumption of coverage. NEUTRAL NOT COVERED Effective July 3, 2016, NC denotes termination of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
Singapore Exchange Limited (SGXL.SI / SGX SP) 30 18 October 2016
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 53% (55% banking clients) Neutral/Hold* 29% (24% banking clients) Underperform/Sell* 18% (44% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Singapore Exchange Limited (SGXL.SI)
Method: Our target price of S$7.60 for Singapore Exchange is based on two-staged DDM (dividend discount model) methodology equating to a 12- month forward P/E (price-to-earnings) of 22x. We have a NEUTRAL rating on SGX as we expect market volume related business to be weak given the current market environment, but the share price is supported by its dividend yield of 4.0%. Risk: The primary risk to our S$7.60 target price and NEUTRAL rating for Singapore Exchange is a downturn in securities and derivatives market volumes and duration of the decline, due to a general economic downturn in Singapore and the Southeast Asian region, which might negatively affect the equities market sentiment. SGX also faces competition from its peers, in terms of attracting new companies to list in respective exchanges and products offered, which would directly affect its revenue.
Singapore Exchange Limited (SGXL.SI / SGX SP) 31 18 October 2016
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See the Companies Mentioned section for full company names The subject company (BME.MC, IAP.L, DB1Gn.F, LSE.L, NDAQ.OQ, CTIP3.SA, ICE.N, CME.OQ, BABA.N, GOOGL.OQ, FB.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ICE.N, BABA.N, GOOGL.OQ, FB.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (IAP.L) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (GOOGL.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (ICE.N, BABA.N, GOOGL.OQ, FB.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (SGXL.SI, CPU.AX, BME.MC, DB1Gn.F, LSE.L, MKTX.OQ, NDAQ.OQ, CTIP3.SA, BOLSAA.MX, ICE.N, CME.OQ, BABA.N, GOOGL.OQ, FB.OQ) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (IAP.L) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (CBOE.OQ, NDAQ.OQ, ICE.N, CME.OQ, GOOGL.OQ, FB.OQ). Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (MCEI.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (IAP.L, LSE.L, CTIP3.SA). Credit Suisse has a material conflict of interest with the subject company (ICE.N) . Credit Suisse acted as a principal advisor to Interactive Data Corporation in Intercontinental Exchange's acquisition of Interactive Data Corporation. Credit Suisse has a material conflict of interest with the subject company (FB.OQ) . Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook, Inc.’s May 2012 initial public offering. Credit Suisse’s practice is not to comment in research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits.
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Singapore Exchange Limited (SGXL.SI / SGX SP) 33 18 October 2016
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