Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


Singapore Exchange - Monthly Performance Largely in Line, Dragged by Equity Derivatives

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  • For Aug 22, SGX's SDAV softened as trading volatility eases while DDAV grew, driven by the forex and commodities segment. SGX’s equity index futures moderated in Aug 22, dragged by lower FTSE China A50 Index volumes, while the forex and commodities derivatives continued their outperformance.
  • From a lack of near-term catalysts, we downgrade SGX to HOLD with a lower target price of S$10.04 (S$10.85 previously).

SGX Reports Market Statistics for Aug 22

  • Refer to SGX's announcement dated 12-Sep-2022 for Aug 22 market statistics.
  • Securities turnover value fell. In line with expectations, Securities Daily Average Value (SDAV) continued its downward momentum (-11.6% y-o-y, +22.6% m-o-m). However, on an m-o-m basis, SDAV was driven by a resilient corporate earnings season along with a strong month-end rebalancing by institutions, leading an estimated S$750m in net inflows for Aug 22. Barring any unforeseen spike in trading volatility, we expect SDAV to continue its downtrend.
  • Equity derivatives softened. Derivatives Daily Average Volume (DDAV) rose slightly (+2.0% y-o-y, -6.6% m-o-m), driven by uncertainty over China’s economic outlook and the Fed’s unprecedented interest rate hikes. However, below expectations, total equity index futures volumes fell (-4.2% y-o-y, -0.1% m-o-m), dragged by lower FTSE China A50 Index volumes (- 10.2% y-o-y, +2.2% m-o-m) whereas other major equity index futures such as FTSE Nifty 50 Index futures (+14.4% y-o-y, -2.2% m-o-m), FTSE Nikkei 225 Index futures (+17.3% y-o-y, -4.7% m-o-m) and MSCI Singapore Index futures grew (+7.8% y-o-y, +6.9% m-o-m), supporting volumes.
  • Forex and commodities surged. In line with expectations, total forex futures volumes surged 30.8% y-o-y as US$/CNH futures (+44.7% y-o-y, +3.6% m-o-m) and INR/US$ futures (+17.2% y-o-y, +3.4% m-o-m) grew from elevated institutional hedging demand. Total commodity derivatives volumes also increased 29.0% y-o-y with increased adoption. Iron ore futures (+34.6% y-o-y, -10.5% m-o-m) climbed while Singapore Exchange (SGX) SICOM rubber futures increased 22.0% y-o-y to 167,000 contracts.

SGX Announced New Partnership With NYSE

  • Announced in Jul 22, SGX has teamed up with the New York Stock Exchange (NYSE) to facilitate dual listing of companies on both exchanges, allowing companies to tap on two different capital markets. This is on top of an existing agreement that SGX has with NASDAQ which serves the same purpose.
  • In our view, SGX stands to benefit from this new partnership as US-listed technology companies on the NYSE such as SEA Ltd (SEA) may weigh secondary homecoming listings on SGX as it becomes more accessible. However, impact from these partnerships may be minimal as we think more SGX-listed companies would list on NYSE/NASDAQ than vice versa due to lower trading liquidity on the SGX.

Potential Beneficiary of Heightened Geopolitical Tensions

  • After the signing of the US Holding Foreign Companies Accountable Act in Dec 20, US-listed Chinese companies have faced increased regulatory scrutiny and delisting risks due to disagreements with audit access requirements. Several notable Chinese tech firms such as Alibaba and JD.com have been added to US Securities and Exchange Commission’s watch list, facing possible expulsion while five Chinese state-owned companies have already voluntarily delisted from the NYSE.
  • Although regulators from both sides have recently signed an agreement to increase cooperation, we reckon alternative listing venues such as SGX would see increased demand as potential Chinese issuers shun the US capital markets. The recent listing of Shanghai-based electric vehicle firm NIO Inc. (SGX:NIO) on SGX is a good start for the bourse.

Muted Impact of Homecoming Dual Listings on SGX's Earnings and Target Price

  • Among the three US-listed companies headquartered in Singapore, we reckon that a homecoming dual listing from SEA would have the most impact for SGX, albeit insignificant.
  • SEA currently trades at a year-to-date SDAV of about S$1.2b on the NYSE, similar to the overall combined SDAV on the SGX for FY22. Assuming that SEA trades at the same SDAV of around S$1.2b on the SGX, our FY23 net profit and P/E-based target price would increase by 22% due to higher trading and clearing revenue based on our estimates.
  • NIO, with secondary listings on the SGX and HKEX, trades at a year-to-date SDAV on the SGX (around S$5m) that is about 0.3% of what it trades on the NYSE (around S$1.7b). Due to lower trading liquidity on the SGX, we estimate that SDAV for SEA on the SGX would be around 5% of the NYSE. If so, our new FY23 net profit estimate and PE-based target price would only increase by 1%.

SGX - Earnings Forecast Revision and Recommendation

  • No changes to our forecasts. Downgrade SGX to HOLD with a lower P/E-based target price of S$10.04.
  • We have pegged our P/E multiple to 22.2x (23.5x previously) FY23F earnings, SGX’s historical forward mean P/E (+1 standard deviation of SGX’s historical forward P/E).
  • Despite robust contributions from forex and commodities derivatives, we reckon that there are no near-term catalysts to justify a higher valuation. Higher treasury income from interest rate hikes is expected to start from 2HFY23, which we reckon has already been priced in.
  • With a moderate yield of about 3%, we like still SGX for its resilient business model that benefits from the global economic uncertainty, but recommend waiting for better entry points.

Source: UOB Kay Hian Research - 15 Sep 2022

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