Goldman Sachs downgrades SGX as HKEx to launch A-shares futures

SGX building on Shenton Way in SingaporeSGX building on Shenton Way in Singapore

Goldman Sachs downgraded shares of Singapore Exchange (SGX) to Neutral from Buy on the news Hong Kong Exchanges and Clearing (HKEx) will launch an index futures contract based on the new MSCI China A 50 Connect Index in October, which could dampen interest in SGX’s competing futures contract tracing A-shares.

“We believe there is pent-up demand for this product in Hong Kong. Furthermore, we don’t think that the demand was being fully satisfied by SGX’s FTSE China A50 futures,” Goldman Sachs said in a note Monday.

In Hong Kong, North-bound cash holdings, or trade in A-shares via HKEx, and average daily trading volume are at US$380 billion and US$10 billion, respectively, compared with US$7 billion average daily trade in SGX’s FTSE China A50 futures, Goldman said.

“This implied under-penetration of the SGX’s product when measured against North-bound activity as well as when contextualised against benchmarking index futures penetration in Hong Kong, makes us believe rapid adoption of the new HKEx product is likely,” the note said, adding it expected HKEx’s product would get most of the trading interest.

Goldman lowered SGX’s fiscal 2022-25 earnings per share by up to 14 percent to factor in reduced A50 trading activity and connected trading fees as well as treasury income, cutting its target price to S$10.50 from S$13.90.

“Given the confluence of negative headwinds from potential fee and volume competition from HKEX on a product that forms around 40 percent of SGX’s entire derivatives trading, the impact could be meaningfully negative over the medium term. Hence, we expect the stock valuations to stay depressed,” Goldman said.

Goldman upgraded shares of HKEx to Buy from Neutral and raised its target price to HK$601 from HK$506 after increasing its 2022-25 earnings per share forecasts by up to 11 percent to factor in higher trading fees and investment income from the new product.

Shares of SGX were down 0.49 percent at S$10.24 at 10:30 a.m. SGT; HKEx shares were up 1.3 percent at HK$491 at 10:16 a.m. SGT.