• HKEX recently announced the launch of a new MSCI A share index futures contract which is the direct competitor to SGX’s FTSE A50 index. While the FTSE A50 index has a relatively large turnover volume, the group’s multi-asset suite of product offerings could allow for customer stickiness while we also note that HKEX’s previous MSCI product launches have been fairly lacklustre.
• Maintain HOLD with a target price of S$11.65.

Hong Kong Exchanges and Clearing Limited (HKEX) Launches New MSCI a Share Index Futures Contract

• HKEX (388 HK) announced that it will launch a new China A- share index futures contract – on 18 Oct 21, with licensing from MSCI. This is a futures contract based on the performance of 50 key Shanghai and Shenzhen stocks and is the direct offshore competitor to Singapore Exchange (SGX, SGX:S68)’s FTSE A50 derivatives contract.

FTSE A50 futures with a relatively sizeable volume.

• SGX’s FTSE A50 index futures have a daily traded value of US$7b with open interest of US$12b. Investors are able to hedge their positions in the Chinese markets by taking a position on the index futures. In FY21, FTSE A50 index futures accounted for approximately 52% of SGX’s equities derivatives volume traded. As the equities derivatives segment forms about 27% of the group’s revenue contribution in FY21, this suggests FTSE A50 has a revenue impact of 10-15% for SGX.
• Average fee per contract for SGX’s equity, currency and commodity derivatives came in at S$1.34 in FY21, in which there were introductory fees for FTSE Asia expansion suite (eg. FTSE Taiwan Index). We opine that introductory fees were implemented during a competitive phase with HKEX (when HKEX was launching its MSCI Taiwan index futures).

Stock Impact

• Assessing HKEX’s MSCI derivative China. Since HKEX’s launch of Stock Connect in 2014, it has been the key channel for international investors to access the A-shares market. Northbound average value traded has increased to RMB118b in 2021, growing at a CAGR of 72% since 2015. This is in line with the higher market capitalisation weightage of Chinese counters in the MSCI Emerging Markets Index. Ultimately, an A- shares derivative offering in the primary A-shares exchange in HKEX will put forth a challenge to SGX’s FTSE A50 volumes.

Earnings Revision & Risk

• Recent volatility still a boost for FTSE A50. Recent volatility in the Chinese markets will likely still be a near-term boost. In Jul 21, FTSE A50 volume traded rose 20% m-o-m. A sensitivity analysis of the change in FTSE A50 volumes and contract fees is detailed in report attached below.

Valuation & Recommendation

• Maintain HOLD with a target price of S$11.65. Our target could re-rate SGX alongside peers.

• On a DDM basis (ROE: 30%, COE: 7%, growth: 4%), SGX's share price would trade at close to S$12.15, or an implied P/E of 30x FY22F earnings.

Share Price Catalyst

• Secondary listings of foreign-listed entities.
• Longer-than-expected period of trading volatility.
• M&As.

Source: UOB Kay Hian Research - 26 Aug 2021