If you are interested in the Singapore stock market, then you have to invest via the Singapore Exchange Limited (SGX: S68), or more commonly known as SGX. SGX, which is listed in Singapore and is part of the 30 companies that make up the Straits Times Index (STI). The exchange is the largest in Southeast Asia and houses more than 700 companies. It is the only stock exchange in Singapore. This means that it is essentially a monopoly here in the city-state.
Here are 7 things you need to know about Singapore Exchange Limited.
TICKER SYMBOL: SGX:S68
MARKET CAP: S$7.8 billion
INDUSTRY: Stock Exchange
Singapore Exchange (SGX) operates through 3 business segments which can be seen in the diagram below. The diagram also shows the breakdown within each segment.
Source: Company Website
SGX’s clearing house business earns revenue every time a transaction on the Singapore market takes place. This means each time a purchase or sale is made SGX is earning 0.028% of the transaction cost as fees. While this seems like a very small percentage, however on average every day the total transactions on SGX amount almost $S1 billion.
Other than the clearing business, SGX is also the only listing venue in Singapore. This means that every time a new company goes public SGX makes a small cut from listing fees.
SGX also makes money from its derivatives business. Roughly 40 million derivatives are traded on the SGX every quarter and being the only place investors can invest in derivatives puts it in a sweet spot.
Lastly, since it is the only exchange in Singapore SGX makes money by offering market data and connectivity services which are usually bought by banks and institutions. This brings in about 12% of its revenue every year. This business can be seen as relatively stable as participants need to have connectivity to the exchange if they want to invest.
As seen from the diagram, the Equities and Fixed income segment contribute the most to SGX’s 2016 revenue followed by the Derivatives segment and lastly the Market Data and connectivity segment.
The 3 segments brought in revenue totaling S$818 million in the financial year 2016, with a profit after tax clocking in at S$349 million. SGX also pays a dividend of S$0.28 per share which has been consistent for the past 4 years.
3. Key Opportunities
Only Clearinghouse in Singapore
As the only clearing house in Singapore, SGX is in an advantageous position as every transaction that takes place must go through them. Also, any listings in Singapore can only happen on the SGX, this means it is the only exchange available for companies that want to go public. This is different from the US where there are multiple exchanges and companies can decide which exchange they want to be listed on.
By being the only exchange in Singapore, it basically means SGX is a monopoly. As such, this puts it in a very competitive position to drive business for the future.
Expansion in the UK (Baltic Exchange)
In late 2016, SGX announced that it had purchased the Baltic Exchange. The Baltic exchange is a UK bourse that deals in shipping. In simple terms, the Baltic exchange does for commodities what SGX does for stocks listed in Singapore. It provides an avenue for the investors to invest into commodity products.
The Baltic earns its revenue from charging members such as shipper, brokers, maritime lawyers, and insurers to name a few an annual fee. In exchange for the fee, the exchange acts as a regulator, lobbyist and mediator in shipping disputes and as an information provider.
This acquisition gives SGX a stepping stone into the shipping market in Europe and possibility globally. This is a shift away from its Asia focus and thus potentially opens many markets for it to grow. SGX also mentioned that is plans to marry the UK exchanges domination in compiling the Baltic Dry Index which charts the cost of transporting commodities such as iron ore and grain in bulk to develop an Asian benchmark for pricing.
As such, this acquisition could potentially be the starting point for future growth.
4. Key Risks
Rise of other Asian bourses
In the past, Singapore was an attractive destination for companies to list their business. This is mainly due to its strong financial regulations. Also, Singapore offered a path for companies to enter into the Asia market which was not as developed yet. However, this is now changing. With the rise of bigger Asian economies such as China and Hong Kong, companies prefer to list directly on the China markets which are closer to their potential customers.
Also, bigger bourses bring with it more investors and more money, this means that companies could potentially have an easier time raising funds in the future if it is required for expansion or other reasons.
What this means is that fewer companies might be attracted to list on the Singapore market to get exposure to Asia and that could result in lower listing fees for SGX.
Drop in trading volume
The competitions from other bourses also bring with it a second potential issue and that is lower transaction volume which would reduce clearing fees. Clearing fee is one of the major revenue contributors for SGX. If trading volumes drop this would have a negative impact on this segment of the business.
Also, if the SGX cannot attract investors, especially institutional investors, to its markets it could mean that its derivatives business might also suffer. This is simply because it’s easier for investors to trade all the product offers from a single account as opposed to having multiple accounts. Thus, if it is not attractive for investors to be on SGX they might forego it totally.
Singapore Exchange currently trades at a Price to Earnings (PE) ratio of 23.8 and provides a 3.81% dividend yield for its investors. That is roughly in line with its average valuation for the past 5 years, which is around 24.1 times its earnings. The company has an 5-year average dividend yield of 3.8%.
Investor Relation Material:
For Investor Enquiries
2 Shenton Way,
#02-02 SGX Centre 1,
Top Shareholders (2nd August 2016)
- SEL Holdings Pte Ltd – 23.37%
- Citibank Nominees Singapore – 21.14%
- DBS Nominees Pte Ltd – 9.18%
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity. It does not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.
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