KUALA LUMPUR, Feb 12 — China may be slowing but it has not impacted SGX when it comes to China A50 futures trading. The investing community, however, is not confident about sustainability of these volumes.
The Singapore Exchange has accelerated investments into derivatives and fixed income.
These are in additional to on‐going investments including a new generation post‐trade system for securities.
It now expects FY15 technology‐related capital expenditure to be between S$70 million (RM186 million) and S$75 million, up from S$50 million to S$55 million.
Operating expenses is now expected to be between S$360 million and S$370 million, 10 per cent more than previously forecast.
Phillip Capital Research trimmed its FY15-FY16 EPS estimates by six per cent-five per cent to reflect higher operating expenses.
It says dividend yield is still attractive at 3.8 per cent, and hence, it maintained a BUY rating with revised target price of S$8.50.
The analyst further says that key re-rating catalysts are sustainably high derivatives volume and meaningful improvement of securities daily average value.
Research houses, CIMB and DMG OSK, are NEUTRAL on the stock with a target price of S$8.08 and S$7.65, respectively, as they believe the positives have been priced in.
The company recently announced earnings for Q2 FY15:
Revenue: +19 per cent to S$195 million
Profit: +16 per cent to S$87 million
Cash flow from operations: S$183.3 million vs S$169.7 million
Dividend: four cents per share vs four cents per share
While Average daily value (ADV) for securities market improved eight per cent QoQ and four per cent YoY to S$1.04 billion, earnings were lifted by a surge in traded volumes of the China A50 futures in December after the launch of the Shanghai-Hong Kong Stock Connect.
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1. Can it mitigate the risk of dependency on China A50 futures?
Derivatives revenue grew 42.2 per cent QoQ and 45.65 YoY to S$76.4 million, and it contributed 39.2 per cent to revenue versus 26.5 per cent by securities.
Q2 volume rose to 40 million contracts vs 28.8 million in Q1 FY15 and 26.3 million in Q2 FY14.
The rise was mainly due to higher volumes in China A50 Index futures driven by the liberalisation of the Shanghai stock market, and iron ore product.
Phillip Capital Research says derivatives volumes must be sustainable as it is the key growth driver.
Meanwhile, an analyst at UBS is worried about the growth in derivatives volume, especially from China A50 futures.
Aakash Rawat says “the close correlation of A50 volumes with the mainland stock market suggests that the recent growth might prove to be unsustainable.”
In fact, he also said that A50, being a low margin product for SGX, can lead to a significant decline in the blended average revenue per contract for derivatives.
Average yield per contract dropped to S$1.30 on volume shift towards FTSE China A50, according to Benjamin Ong from Phillip Capital.
Management Reply: There is corresponding long-term secular interest on the part of global investors in increase capital allocations to Chinese markets; SGX China A50 futures is a unique access product: hard currency, cleared in a very safe clearing house, longest trading hours of any China access product (almost 24 hours); price movements in the SGX futures are naturally closely correlated to China onshore market.
At the same time, clearing volumes linked to volatility of trading conditions will tend to be episodic, and related to the underlying volatility in China onshore markets.
Clearing volumes that are linked to open interest will tend to be driven by offshore structural access needs, as well as capital formation in China onshore markets.
2. When will it reap benefits from accelerating investments in derivatives and fixed income businesses?
SGX revised its technology-related capex guidance for FY15 to S$70 million- S$75 million from S$50 million-S$55 million previously.
The funds will be used to invest in a new derivatives clearing platform, which will increase its capacity to handle orders and enable investors to trade certain products such as the China A50 futures 24 hours a day.
It will also invest in a bond-trading platform which will be available to the market in Q3 2015.
Operating expense guidance was also revised to S$360 million-S$370 million from S$330 million-S$340 million previously.
Half the increase is in anticipation of higher variable costs, in line with higher traded volumes, and the other half is to account for expenses associated with its newly acquired subsidiary Energy Market Company (EMC).
Management Reply: We will continue to invest in growth areas and these initiatives will take time to bear fruits. It is not our practice to forecast our growth.
3. Will IPO listings continue in Q3?
Issuer Services revenue was up 24 per cent YoY to S$21 million with 14 IPOs and 131 new bond listings.
But it fell 9 per cent versus Q1 FY15 or by same percentage when compared to Q4 FY14 as revenue for both quarters were S$23 million.
Funds raised grew by 38 per cent YoY to S$48 billion.
But again, it was 10 per cent below Q1, and Q1 was 16 per cent below Q4 FY14.
However, the funds raised in Q4 FY14 were highest since Q1 FY11 to S$62.6 billion.
In addition, funds raised were highest in the fourth quarter for the last two fiscal years.
Also, all second quarters have raised the least amount of funds versus other quarters since FY11.
Management Reply: We are seeing a healthy level of interest from companies across various industries wishing to list here, but we aren’t able to give any projections for the number of IPOs or amount of funds likely to be raised in Q3.
4. Will attention move to high-priced stocks, at the expense of low-priced ones?
SGX reduced board lot sizes from a minimum 1,000 shares per trade to 100 on January 19.
SGX observed that of the eight Straits Times Index component stocks priced above S$10 each, 70 per cent of the orders were of 1,000 shares and below.
This compared with an average of 51 per cent of orders at the minimum 1,000-share lot in October to December 2014
Phillip Capital thinks it is still premature to assess the potential impact on securities revenue.
But this makes us wonder whether increased participation in high priced stocks will come at the expense of lower-priced ones. The SGX would hope and argue that there is increased interest, not cannibalisation of interest.
Management Reply: It’s early days since smaller board lots were introduced on 19 January, but we believe that the smaller board lot initiative will increase overall retail investor participation. It’s still too early to say if there has been a discernible shift in retail investment behaviour from low-priced to higher-priced stocks that haven’t been as affordable previously.
We have stepped up our investor education efforts to help investors make informed investment decisions and become financially independent. One such initiative was the SGX My First Stock Carnival last weekend (Feb 6-8), where we partnered with brokers to provide new investors with education and information on investing. Targeted at NIBIs (Never Invested But Interested) aged 18-30, the event attracted around 6,000 visitors. Over the weekend, some 780 new trading/CDP accounts were opened and there were 1,700 sign-ups to our investor education portal, My Gateway. Since its launch at the carnival, SGX Mobile App has attracted around 5,400 downloads.
Over the next six months, SGX will be working with brokers to organise mobile roadshows to encourage tertiary students to invest and will also hold an SGX Investor Education Day at UniSIM. This complements the more than 300 seminars and courses run by SGX Academy yearly.
5. When is the review of November disruption by the enquiry committee expected?
SGX said that expenses related to the technology-related service disruptions would not be too significant, at about S$3 million to S$4 million, which will be recognised as and when incurred.
It has appointed independent experts to assist the SGX Board Committee of Inquiry in its investigations into the 5 November 2014 breakdown, including the review of SGX’s technical, operational management and communications issues.
Management Reply: SGX’s Board has set up a Board Committee of Inquiry (BCOI) to look into the November 5, 2014 incident. The BCOI expects to submit its reports to the SGX Board and the Monetary Authority of Singapore by the end of March 2015.
We thank Benjamin Tan, Vice President Marketing & Communications, for his response.
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