Revising fees structure... SGX announced it will be rolling out revisions to its clearing and depository fee structure from 2 May  The  clearing fee will  be  reduced  to  0.0325%  of  contract  value  from  0.04%,  while  the SGD600  cap  on  this  fee  for  contracts  of  SGD1.5m  or  more  will  be removed.  Transfers  and  onward  settlements  pursuant  to  on-exchange trades  will  be  charged  a  SGD30  fee,  while  transfers  and  settlements pursuant  to  off-exchange  trades  will  be  charged  a  fee  of  0.015%  of  the value of the transaction, subject to a minimum of SGD75.

... and giving  incentives  to  market  makers.  SGX  will  also  introduce incentives  to  facilitate  the  participation  of  market  makers  and  liquidity providers.  To  qualify  for  incentives,  participants  will  have  to  provide competitive  two-way  quotes,  which  will  help  to  smoothen  the  execution of orders and add liquidity to the market. 

Impact not expected to be significant. We believe the above changes form part of SGX's ongoing reforms to improve the securities market microstructure, with the end result being lower costs, better liquidity and market  depth.  The  revised  clearing  fees  would  generally  benefit  retail investors and should be positive in boosting retail participation as well as turnover velocity. Retail investors accounted for about  48% of the share of  daily  volume  in  FY13  while  turnover  velocity  stood  at  52%.  As  for institutional investors, the cost of trading for larger institutional investors may go up due to the removal of the clearing fee cap. 

Forecasts.  SGX  guided  that  the  implementation  of  the  fee  revisions  is expected  to  be  broadly  revenue  neutral.  Thus,  we  are  leaving  our earnings forecasts unchanged for now.

Investment case. No change to our SGD7.80  FV, which is based on a target  CY14  P/E  of  23x  (10%  discount  to  the  average  P/E  of  25x). NEUTRAL call maintained.

Reforming securities market microstructure

Fees structure revised. SGX announced it will be rolling out revisions to its clearing and  depository  fee  structure  from  2  May  2014.  The  clearing  fee  will  be  reduced  to 0.0325% of the contract value from 0.04%, while the cap of SGD600 on this fee for contracts  amounting  to  SGD1.5m  or  more,  will  be  removed.  Transfers  and  onward settlements  pursuant  to  on-exchange  trades  will  be  charged  a  SGD30  fee  while transfers  and  settlements  pursuant  to  off-exchange  trades  will  be  charged  a  fee  of 0.015% of the value of the transaction, subject to a minimum of SGD75.

Market makers to get incentives. SGX will also introduce incentives to facilitate the participation  of  market  makers  and  liquidity  providers.  To  qualify  for  incentives, participants  will  have  to  provide  competitive  two-way  quotes,  which  will  help  to smoothen the execution of orders and add liquidity to the market.

Impact not expected to be significant. We believe the above changes are part of SGX's ongoing reforms to improve the securities market microstructure, with the end result  being  lower  costs  and  better  liquidity  and  market  depth.  The  revised  clearing fee structure would generally benefit retail investors and should be positive in helping to raise retail participation, one of SGX's key area of focus for the securities market, and improve turnover velocity. Retail investors accounted for about 48% of the share of  daily  volumes  in  FY13  while  turnover  velocity  was  52%.  However,  the  cost  of trading among the larger institutional investors may go up due to the removal of the clearing fee cap.

The  key  risk,  in  our  view,  is  weaker-than-expected  securities  daily  average  value (SDAV)  given  that  securities  revenue  is  still  a  major  component  of  total  revenue. Other  risks  include  slower-than-expected  growth  in  derivatives  revenue  as  well  as higher-than-expected overheads.

The  last  revision  of  the  securities  fee  structure  was  back  in  March  2007,  when  the clearing  fee  was  reduced  to  0.04%  from  0.05%.  Despite  the  reduction,  we  estimate that  the average  clearing  fee  subsequently  rose  by  up  to  0.3bps  (in  FY10)  between FY08-13,  compared  with  2.76bps  in  FY07.  In  the  meantime,  turnover  velocity improved to 72% in FY08 from 65% in FY07, but has since been on a declining trend. Velocity stood at 52% in FY13.

Overall,  SGX  guided  that  the  fee  revisions  are  expected  to  be  broadly  revenue neutral.  We  leave  our  earnings  forecasts  unchanged  for  now.  Securities  revenue made up 35% of 1HFY14 total revenue. We are assuming a securities daily average value  of  SGD1.5bn  for  FY14F,  which  implies  a  pickup  in  2H  (1HFY14:  SGD1.2bn). We see this as a key risk to our net profit forecast as SDAV has had a slow start this year (YTD: SGD1.1bn). We also factor in a lower average clearing fee of 2.8bps for FY14F vs 2013's 2.9bps.

No  change  to  our  SGD7.80  FV,  which  is  based  on  a  target  CY14  P/E  of  23x  (10% discount to average P/E of 25x). We view the SGX's reforms to the securities market microstructure  as  well  as  continuous  rollout  of  new  products  for  its  derivatives business  positively,  as  these  would  help  support  growth  of  both  securities  and derivative revenue going forward. That said, the impact from some of these initiatives may  take  time,  and  in  the  near  term,  the  lack  of  a meaningful  pickup  in  SDAV  may weigh down its share price performance. Thus, we are keeping our NEUTRAL call.

Recommendation Chart

Source: OSK