In May 2020, Singapore Exchange (SGX) announced the departure of its partnership with MSCI as the American company has decided to host its equity index futures and options outside of Singapore starting February 2021. The market reacted negatively to the news as SGX estimated a potential 10-15% drop in its 2021 revenue as a result of this.
At the same time, HKEX inked a deal with MSCI to launch derivatives from Asia and emerging markets. Further, the HKEX continues to draw investors’ attention with its upcoming high-profile IPO of Ant Group. So how does SGX aim to grow in the future?
Here are five things I learned from the 2020 SGX AGM.
1. Over the past five years, revenue and net profit grew at compound annual growth rates (CAGRs) of 7% and 8% in 2020 respectively. Revenue and net profit recorded 16% and 21% year-on-year growth in 2020 respectively because of double-digit growth across all of its operating segments. SGX witnessed higher trading activities in March due to the sharp market sell-off in response to the COVID-19 pandemic.
2. The Equities segment made up 72% of SGX’s revenue in 2020, followed by Fixed income, currencies, and commodities (FICC); and Data, connectivity, and indices (DCI) at 16% and 12% respectively. The Equities segmental revenue grew 13.7% year-on-year in 2020 because of increased trading and clearing revenue; and higher securities settlement volume from cash equities products and futures contracts.
The growth in revenue from the FICC segment was partly due to the higher trading volume of the iron ore derivatives contracts. In July 2020, SGX acquired the remaining 80% stake in BidFX Systems Ltd. to expand SGX’s foreign exchange futures contracts into the over-the-counter (OTC) market. SGX wants to consolidate its on-exchange market with BidFX’s OTC space into an integrated one.
The increased contribution from the newly acquired Scientific Beta Pte. Ltd. in January 2020 has largely boosted the DCI segmental revenue by 18.6% year-on-year. SGX aims to leverage on Scientific Beta’s expertise in smart beta strategies to grow its index business by incorporating elements like sustainable investing. CEO Loh Boon Chye also foresees the growth of passive investing and the increased demand for ETFs and related products in the future. In September 2020, SGX launched ICBC CSOP FTSE Chinese Government Bond Index ETF, the world’s largest pure-Chinese government bonds ETF.
3. The equities segment recorded slower growth compared to the FICC and the DCI segments. According to a report released by Deloitte, the number of IPOs on the SGX dropped from nine in 1H 2019 to six in 1H 2020 while the IPO amount raised halved from $1.6 billion to $725 million year-on-year. In the meantime, SGX positions itself as a multi-asset exchange by diversifying into derivative products including the launch of single stock futures and SGX FTSE Taiwan Index futures. The release of these products is timely to wean off the dependence on non-Singapore MSCI product licences that are about to expire in February 2021. According to Loh, the FICC and the DCI segments will continue to drive SGX’s growth.
4. In light of COVID-19, SGX has rolled out a number of measures to help Singapore-listed companies meet its listing obligations. These include the extension of deadlines for announcing unaudited financial results and holding AGMs remotely. During the pandemic, SGX strives to keep markets accessible to its participants. Participants from the U.S. and Europe made up of 20% of its total derivative customers. Expenses wise, 65% of SGX’s expenses were fixed, which was largely similar compared to a year ago.
5. SGX paid a total dividend of 30.5 cents per share for FY2020. Based on SGX’s share price of S$9.12 (as of 20 October 2020), its dividend yield worked out to be 3.3%. SGX has paid steady and rising dividend amounts over the last five years which remains sustainable as its dividend payout ratio has consistently stayed below 100% during the period.
The fifth perspective
As it is practically a monopoly in Singapore, the SGX will continue to hum along nicely and pay steady dividends to investors. However, it faces long-term challenges when it comes to sparking interest in Singapore’s stock market due to the country’s relatively subdued entrepreneurial scene and small domestic market. In response, the company’s pivot towards derivatives and being a multi-asset exchange has been successful thus far and will be a main driver of growth for the SGX in the near to midterm.
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