Singapore Exchange is your gateway to the ASEAN region

A recession soap opera is bad
A long-drawn recession is SGX’s bane. Although SGX benefits from current volatility, volumes suffer in a protracted recession when market interest peters out. Current share price have factored in that anticipated market lethargy though.

We maintain our Neutral call, albeit with a lower DDM-based target price (r: 9.5%, g: 3.5%). Being overly bearish at this stage assumes REACH and derivatives initiatives will fail – too bearish. We cut FY12-14 ADT assumptions by 16-18% and earnings fall 12-14%. We would be convicted buyers at 16x CY13 P/E, or S$4.67.

New initiatives in place for longer-term growth
Since his appointment in 2009, CEO Magnus Bocker has introduced various new initiatives to take SGX to the next level. SGX now boasts of the world’s fastest trading engine. It has also introduced new products and services and had some success in wooing international listings. We recognise these initiatives as management’s efforts to improve market breadth. As long as the listing pie grows and new participants come on-board, the structural limits to revenue continue to be pushed out.

Putting in the building blocks for structural franchise-building

Our view would change if share price changed or earnings prospects changed. Without the tailwinds of a bull market to drive earnings, earnings can only prosper if there is success from its growth initiatives. SGX does not have the advantages of Hong Kong, but one should not simply assume that it will lose to Hong Kong. On the macro front, a bet on Singapore furthering its status as an international financial hub is not a long shot. It is already a magnet for AUM (assets-under-management) and the turmoil in Europe only helps.

As ASEAN companies expand across the region, SGX stands as a gateway for companies to sell its ASEAN footprint to international funds - a recent example is Parkson Retail Asia. SGX could also attract listings from western companies who want to grow an Asian target market. Recent examples are the proposed listings of Manchester United and Fitness First. One can see that the attraction of SGX for companies selling into the ‘Asian market’, in contrast to the value proposition of HKSE’s ‘China market’.

Thus far, SGX has been reasonably successful in attracting regional listings in Singapore. While SGX pales in comparison to Hong Kong in attracting Chinese firms (HKSE’s 340 vs SGX’s 113), it has listed 49 international companies compared to HKSE’s 14 to date, according to Bloomberg. In terms of total market capitalization, HKSE’s has won the bragging rights by leaps and bounds,
listing international behemoths such as Glencore, Prada and Loccitane as compared to SGX’s smaller listings. Going forward, management intends to court larger international listings in Singapore by marketing SGX as a gateway to the ASEAN region, similar to Hong Kong’s status as gateway to China.

1Q12 earnings preview SGX will be releasing its 1Q12 results next Monday, 17 Oct, after the market closes. We expect 1Q12 earnings to come in at S$83.4m (+12% yoy, +6% qoq), taking into consideration stronger trading activities in the quarter. Based on SGX’s monthly disclosures, securities DAV came in at S$1.58bn (+1.4% yoy, +8.4% qoq). In the quarter, SGX cleared 20.5m derivative contracts (+29% qoq).