UOB KH: SGX China futures may prove sticky despite HKEx launching competing products

Stock ticker at SGX building on Shenton Way; taken October 2018.Stock ticker at SGX building.

Singapore Exchange’s (SGX) product offerings could help it retain customers for its FTSE A50 index futures contract despite Hong Kong Exchanges and Clearing’s (HKEx) plan to launch a competing index futures contract based on the new MSCI China A 50 Connect Index in October, UOB Kay Hian said in a note Thursday.

“SGX’s strength lies in its multi asset exchange platform which provides for complementary product offerings. Iron ore futures as well as RMB forex futures, proxies for China’s economic growth, have a significantly larger volume traded and liquidity as compared with HKEx’s current offerings,” UOB Kay Hian said. “Cross asset margin offsets result in customer cost savings for SGX’s clients.”

In addition, “HKEx’s MSCI equity futures product launches have been fairly muted since they began in July,” the brokerage said.

UOB Kay Hian noted SGX’s FTSE Taiwan index futures have retained an around 90 percent share of the market despite HKEx launching a competing MSCI-based product.

“By our count, we note at least 40 MSCI index futures launched by HKEx, in which accumulated volumes are about 10 percent of SGX’s FTSE equity futures launches. Currently, HKEx derivatives volume largely consists of Hang Seng index futures and individual stock options. Its new MSCI suite of derivative products contributes only 1 percent of the total derivatives volume traded on HKEx,” the note said.

The FTSE A50 index futures contract has an outsized revenue impact for SGX, making its ability to compete with HKEx important for its earnings outlook.

UOB KayHian noted that the FTSE A50 index futures accounted for around 52 percent of SGX’s equity derivatives volume in fiscal 2021, suggesting it accounts for about 10-15 percent of revenue.

The brokerage kept a Hold call on SGX’s shares, with a target price of S$11.65.

“We still like the group’s medium-term growth prospects from its acquisitions as well as potential new initiatives such as SPACs (currently awaiting regulatory approval and secondary listings), which could re-rate SGX alongside peers,” the brokerage said.