SGX has been on an uptrend the past seven months, rallying from a low of $6.80. The shares closed at $8.63 yesterday after gaining 26.9%. In comparison, the STI had only added 8.1% across the same period. Macquarie Equities Research (MER) hosted an investor lunch with Jenny Chiam, Head of Securities, SGX last Thursday (14 May). Read on for excerpts from MER’s report published on 15 May 2015 to see what was discussed…..
 
Key points and conclusion – (i) Higher retail participation is key, SGX believes, but this may take some time, MER thinks (ii) SGX seeks to build a bond franchise (iii) The potential for China stock connect depends mainly on China's decision. Overall, SGX is starting on a few new initiatives, including building of a bonds franchise and crowd funding platform. However, these will not have any material near-term revenue impact, in MER’s view.
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Impact
Higher retail participation is key, SGX believes – However, MER thinks it may take some time before retail participation significantly increases, in the absence of any catalyst such as a China-Singapore Stock connect. Management attribute the weakness in the securities market mainly to lower retail participation, particularly after the penny stock incident in Oct 2013. SGX believes that increasing both information awareness, in other words knowing the fundamentals of the stocks they are trading, and education, would be key to increasing retail participation. These would however not be near term revenue drivers MER believes.
 
Building a bond franchise – While SGX is now mainly a derivatives and securities business, SGX hopes to also grow a bond franchise to be the third main business. This includes trading of wholesale bonds, and some retail bonds (bonds typically denominated in lot sizes of S$1k each). However, building a bond franchise would not be without challenges MER believes. For wholesale bond, banks are unlikely to give up the bonds business without a fight due to the high margins currently earned from bond transactions. Retail investors may not understand the risk and pricing structure of bonds. Bond defaults in particular – which happens sometimes in the bond market - may result in reputational risk for SGX in the absence of adequate education, in MER’s view.
 
China stock connect? – Whether the China-Singapore stock connect could happen would be for China to decide, SGX believes. MER continues to believe that the good relationship between Singapore and China, and sufficient RMB liquidity, could increase the chances of this materializing.
 
Other points MER found to be interesting – SGX has implemented the minimum share price of S$0.20 to improve market quality. CPF money cannot be used to purchase stocks trading below this minimum share price, or for stocks which are on the SGX watchlist. SGX aims to increase the participation for the exchange-traded funds (ETFs), and believes that the assets under management of the Singapore ETFs can double from S$0.6bn to S$1.2bn.
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MER’s action and recommendation
MER maintains its Outperform rating on SGX – 12-month target price S$10.00.
 
MER found the lunch meeting to be interesting and educational. However, it would take time for the impact from the new initiatives to materialize, in MER’s view.
 
For now, MER expects SGX to benefit from higher A50 futures volumes from increased volatility in China. Structurally, SGX will continue to benefit from a shift of derivatives to the exchange-traded platform, MER believes.
 
SGX’s ability to generate high operating cashflow and zero debt on its balance sheet is a major support for future dividend payouts of >90%, and dividend yields of >3% in MER’s view.

Source: Macquarie Research - 22 May 2015