Following the announcement by Hong Kong Exchanges and Clearing (HKEX) on the launch of a new China A-share index futures contract on August 20, analysts anticipate this will have a negative impact for Singapore Exchange (SGX).
HKEX will be launching the long-awaited MSCI China A50 Connect Index - a US dollar futures contract based on the performance of 50 key Shanghai and Shenzhen stocks - on October 18. The contract will be a direct offshore competitor for SGX’s FTSE A50 derivatives contract.
Following the announcement, PhillipCapital kept its “neutral” rating for SGX with a lower target price of $10.78, down from $11.54 previously. OCBC Investment Research also reduced its target price to $10.20 while keeping its “hold” rating.
See also: SGX's earnings could dip 19.4% in FY22 on higher expenses: PhillipCapital
Meanwhile, UOB Kay Hian kept its “hold” rating and target price of $11.65 unchanged.
For PhillipCapital senior Research analyst Terence Chua, the new derivative by HKEX would help to plug a gap in cross-border finance between China and Hong Kong, noting that Shanghai-Hong Kong Stock Connect handles about HK$5 billion ($0.87 billion) a day in cross-border transactions.
The A-share futures will enable offshore investors to hedge risks by taking contrarian positions to their underlying assets.
To that end, he sees potential for trading volume to be diverted away from the FTSE A50 Index Futures on the SGX, which has been the only A share futures available for offshore investors to date. This in turn could negatively impact earnings. “Even though SGX does not provide a revenue for its China A50 contract, we estimate it contributed about 20% to its overall derivatives revenue and 10% to its overall revenue in FY2021,” Chua says.
However, Chua also points out that SGX’s transition away from the MSCI to FTSE’s suite of products could potentially enhance client’s stickiness. “We have seen this for its Taiwan index futures. The previous launch of a non-China related equity derivatives product by HKEX had a limited impact on SGX’s derivatives volume, as it was able to migrate to the FTSE product suite and maintain its leadership in Taiwan index contracts,” he explains.
UOB Kay Hian analyst Lucas Teng echoes Chua’s reference to FTSE Taiwan and notes that SGX has “a good multi-asset offering for clients which allows for customer stickiness”.
Teng notes that the FTSE A50 contributes some 50% of its equity derivatives contracts. He estimates that it makes up 15%of the group’s earnings contribution. “Assuming the worst case scenario, with zero FTSE A50 contracts traded, our target price, based on 29 times forward earnings, would shift to $9.90,” he remarks.
Meanwhile, the research team at OCBC expect a further weaker bias to SGX’s share price in the near term following the announcement. Their target price for SGX has been reduced to $10.20 in view of the increased competitive pressures.
Nonetheless, the team anticipates SGX will mitigate this over time through its ongoing efforts to diversify its revenue mix and growth drivers.
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In addition, similar to Chua and Teng, the team notes the possibility of retaining client stickiness through its transition to FTSE suite of products, while also highlighting that the market should be supportive of growth for both products.
As at 1.51pm, shares in SGX are down 4 cents or 0.39% lower at $10.25.
Photo: Bloomberg
