I remembered once attended a seminar whereby the speaker put out a thought-provoking question to the audience – if there could be only just one stock that you can buy, what would it be? The answer was subsequently revealed to be Singapore Exchange (SGX), as the speaker went on to explain that SGX earns clearing fees from investors when they buy and sell shares. In other words, SGX could profit from both purchases and sales trades no matter which directions the market was going. Furthermore being the sole exchange in Singapore, SGX gets to enjoy a monopolistic advantage on all transactions executed.
This got us intrigued, and we dug deeper to explore if there could be any elements of truth to the above statement.
Declining Securities Trading Volumes
Securities trading volumes in the local bourse had dwindled significantly over the last few years in comparison to what it used to be before the sub-prime crisis ten years ago. Despite numerous measures implemented by SGX in the last few years attempting to rekindle investors’ interest, including the reduction of board lot sizes, removing and reinstatement of lunch break as well as the shortening of settlement cycle, the group was unsuccessful at bringing traders back into the markets.
According to SGX’s FY19 financial results, the securities daily average traded value (SDAV) for the year stood at $1.04 billion and securities total traded value was around $259 billion. This was nowhere close to its golden years when SGX achieved a more than double SDAV of $2.1 billion in FY08. In fact over the last eleven years, SDAV was shrinking at a compounded annual growth rate (CAGR) of negative 6.2 percent annually. This situation has not seen any improvement with SGX’s revenue from its equities and fixed income segment sinking a further 14.5 percent from $406.6 million in FY18 to $347.5 million in FY19.
Uncertainties In The Derivatives Business
Despite the shrinking profit from equities, SGX managed to register record high revenue and net profit in FY19 mainly driven by the stronger performances of its derivative business. Last financial year, SGX’s derivatives segment saw strong growth with total volumes surging 21.3 percent to 240.3 million contracts from a year ago. Correspondingly, derivatives revenue increased significantly by 35.3 percent to $459.7 million in FY19. Most notably, SGX’s derivatives segment has now become the group’s primary revenue generator accounting for around 50.5 percent of the group’s top-line in FY19.
Nevertheless, the derivatives segment faces its fair share of challenges as well. For instance, SGX FTSE China A50 Index futures took up a large portion of the total derivative trading volumes at more than 44 percent. In times of heightening trade tensions and weakening economic data from China, any dwindling investing interests in China could potentially dealt a heavy blow to SGX’s derivatives income. Hence, we are not so sure if the strong momentum seen over the last few years in SGX’s derivatives growth could be sustained in the years to come.
In addition, Nifty derivatives which was the third most actively traded futures contracts contributing 8.8 percent to FY19 volume, were confronted with the threats of discontinuation when India’s domestic exchanges ended agreements to provide market data to overseas exchanges in February 2018. Fortunately in a media briefing in April this year, chief executive officer Loh Boon Chye revealed that SGX and India’s National Stock Exchange appeared to have reach an agreement on a way to resolve the disputes.
Competition From Regional Exchanges
While SGX may be the only exchange in Singapore’s equities market, if we were to take a step back and look at the bigger picture from a regional perspective, we would come to realise that the local bourse actually faces stiff competition from the neighboring exchanges. One would have recalled that in the last couple of years, a number of companies which were already listed in Singapore are seeking secondary listing in Hong Kong in search of greater liquidity and better valuations. LHN, ISDN Holdings, Centurion Corporation and CNMC Goldmine Holdings were but a few names that came to mind. In particular the most memorable of them all would be none other than the news of local-grown computer gaming accessories maker Razer moving out of Singapore choosing to go public in Hong Kong instead.
Statistically, SGX managed to clinch 20 new equity listings in FY19 raising $1.7 billion. In contrast, Hong Kong Stock Exchange (HKEX) was way ahead winning over 84 newly listed companies in just the first six months of year 2019 alone, raising HK$69.5 billion ($12.5 billion) through IPOs which is more than 10 times over the figures that of SGX’s.
The main draw of HKEX over SGX would be the former’s access to Chinese capital and an opportunity to gain exposure to China’s growth potential, given its proximity to the mainland. As a matter of fact, SGX also lost out to HKEX by measure of most yardsticks. The vast differences in market capitalisation and number of listed companies aside, HKEX also has far superior liquidity attaining an average securities daily turnover of HK$97.9 billion ($17.6 billion) for 1H19. That was almost 17 times SGX’s SDAV for FY19.
In terms of valuation, SGX looked reasonably-priced when put alongside with its regional counterparts with a price-to-earnings ratio of 21.7 times and a price-to-book ratio of 7.7 times. However, to say that SGX is the best stock that we could buy simply on the grounds that it may profit from both up and down markets is, in our opinion, an overstatement considering that there are still better investment options out there.
|Company||Price||Mkt Cap||P/E||P/B||Yield (%)|
|Hong Kong Exchange||HKD246.60||HKD310,240m||32.9||7.6||2.7|
Source: Author’s Compilation, updated 7 August 2019