SGX target price slashed by UOB-KH on China A50 futures concerns

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

UOB Kay Hian has lowered its earnings forecasts for Singapore Exchange and cut its target price, citing the competition SGX’s FTSE China A50 Index Futures face from the launch of HKEx‘s similar MSCI China A50 Connect Index Futures.

The brokerage cut its fiscal 2022-2024 FTSE A50 volume assumptions and lowered its net profit estimates for fiscal 2022, 2023 and 2024 by 1.4 percent, 3.8 percent and 6.4 percent, respectively.

In addition, UOB Kay Hian slashed its target price on SGX to S$9.41 from S$11.65, after lowering its price-to-earnings ratio valuation peg to 23.8 times, compared with peers’ 29 times average, but kept a Hold call.

“Given expected strong competition from HKEX’s MSCI A50 index futures offering, we remain cautious on the impact of competition on SGX’s future earnings. However, we think that success of new exciting initiatives (OTC Forex offerings, government initiatives, depositary receipt linkages, SPACS) could re-rate SGX,” UOB Kay Hian said in a note Thursday.

In October, total contracts traded for SGX’s FTSE China A50 Index Futures grew 22.8 percent on-year, but fell 21.4 percent on-month, largely on China’s Golden Week Holidays, the brokerage said.

UOB Kay Hian estimated SGX’s FTSE A50 futures product makes up around 52 percent of total equities derivatives volume and around 12 percent of fiscal 2022’s annual revenue.

HKEx launched its A50 futures product on 18 October, with 1,395 contracts on launch day, then rising to daily highs of 22,000 in November, the note said.

As demand and activity on HKEx’s product ramps up, that will likely create “strong headwinds” for SGX’s medium- and long-term earnings, the note said.

“However, given SGX’s commanding market share, we estimate that it would be a multi-year task before HKEx is able to obtain and maintain significant market share,” UOB Kay Hian said.

“Although costs savings from SGX’s multi asset offerings as well as strong trading liquidity on its exchange platform creates a strong barrier of entry for competition and encourages customer stickiness, we still opine that SGX is poised to experience loss of FTSE A50 volumes over the medium-long term,” the brokerage added.

Shares of SGX ended Thursday down 0.43 percent at S$9.25.