SGX: 8 Things I Learned from its AGM 2015

It has been two years since the penny stock saga of Blumont broke. The valuation of the scandal-hit company plunged by 90% in a week – wiping out billions of dollars overnight in shareholder value.

To date, the case remain under investigation. Tan Boon Gin, SGX’s new chief regulatory officer and ex-director of the Commercial Affairs Department (CAD) and Singapore Police Force had this to say:

“This is a complex investigation and in fact, the biggest securities fraud investigation that CAD has ever conducted.”

Mano Sabnani, a well-known investor in the local scene, demanded an update on the investigation during the AGM. To his disappointment, Tan declined to reveal any confidential information regarding the investigation.

(An extremely disgruntled shareholder expressively shouted and ranted his anger toward the board for a solid ten-minutes regarding this issue and actually verbally attacked the personal life of the chairman!)

Since the Blumont saga, SGX has undertaken a proactive initiative of implementing a minimum-trading price of 20 cents for companies listed on the mainboard starting next year. The idea is to reduce the amount of penny stocks which are particularly vulnerable to price manipulation.

Why is the role of the SGX so crucial here? The answer and other important takeaways I learned from the meeting:

8 Things I Learned from the SGX AGM 2015:

  1. SGX has a dual-role as a regulator which protects the interests of shareholders of publicly listed companies in Singapore and as a profit-driven enterprise that is held accountable to its own shareholders. This unique structure is very different from the United States where an independent body, the Securities and Exchange Commission (SEC), oversees market exchanges like the NYSE and NASDAQ. A critic has argued that this structure may fundamentally cause a conflict of self-interests.
  2. The new CEO of SGX, Loh Boon Chye, addressed his speech by pointing to the two main challenges facing the IPO market – which is SGX’s bread and butter business and accounts for 58% of total profit. According to Loh, firstly, more companies are delaying their listing applications as market volatility continues to grow. Secondly, venture capital and private equity firms have been actively funding start-ups and growth companies which reduces the number of companies wanting to raise capital via an IPO. In fact, total capital raised via IPOs have fallen 13% globally. Despite the challenges, SGX remains a highly profitable company and is likely to do so in the future simply because it has a virtual monopoly. Simply said, public-listed companies and investors have no choice but to use the SGX as it is the only stock market exchange in Singapore.
  3. SGX is the largest stock market exchange in Southeast Asia with a market capitalization of more than $1 trillion. Out of which, nearly 40% of the listed companies are based in foreign countries. As there are several successful local companies that have yet to be listed, the SGX will continue to play its role in attracting them to go public while seeking growth in overseas markets.
  4. The only stable recurring business for SGX is market data which contributes 10% of the revenue and corporate action services (i.e. processing dividends) which contributes 4.6% of revenue. Securities and derivatives trading depend on volume and market sentiment. In short, revenue from securities derivatives and trading can be uneven.
  5. The SGX lowered the minimum lot size from 1,000 to 100 shares early this year. The result? The monthly average number of retail participants trading the Straits Time Index increased 9% six months after implementation. This move not only improved the tradability of Singapore stocks, it also improved the spreads between bid and ask prices – which narrowed by 11%.
  6. The derivatives market remains a key driver for SGX in 2015 and profitability from this segment grew by 30% to $152 million. An investor, Mano Sabnani, mentioned that SGX’s derivative products are concentrated in China and with the Chinese economy slowing down recently and trading volume falling nearly three quarters due to the China stock market crash, revenue from this segment may be affected going forward. The CEO addressed these concerns by stating that its derivative products are not just primarily derived from China’s A50 index but from other regions as well. Basically, SGX’s derivatives are well-diversified and the management would continue to diversify them further.
  7. The next phase of growth from the next phase of growth for SGX is fixed-income investment products. CEO Loh Boon Chye’s vision is to consolidate SGX’s position as the premier debt-listing venue in Asia. If this segment grows as impressively as the derivatives segment ($26 million in revenue to $295 million in five years) when led by former CEO, Magnus Böcker, then shareholders are likely to see higher profits and dividends.
  8. SGX has a dividend policy where the company pays out 80% of earnings or a minimum of 16 cents per share. From 2016, the board aims to declare a new base dividend of 5 cents per share every quarter. In other words, shareholders would be glad to hear that they’ll be receiving at least a minimum of 20 cents dividend per share next year – a 25% increase.

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Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Rusmin is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur and is the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple’s iBooks. Rusmin was actually a former SIAEC scholar who gave up his scholarship and a cushy career to follow his itch of learning how to be a better investor and ultimately lead a life of financial independence. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.