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.