The three largest exchanges in the world are the New York Stock Exchange (NYSE), Nasdaq and the Hong Kong Exchange and Clearing (HKEX) in that order (see Table 1). The NYSE and Nasdaq represent the deepest, most liquid capital markets in the world while HKEX represents the world’s up and coming and potentially largest capital market in the future, Greater China. HKEX is also the world’s largest exchange by its own market capitalisation (see Table 2). The Shanghai Stock Exchange is the fourth largest exchange by market capitalisation of its listed stocks and the Shenzhen Stock Exchange is the seventh-largest globally by market capitalisation of its listed stocks.
In comparison, the Singapore Exchange (SGX) is not on the list because the total market capitalisation of all its listed stocks is less than US$1 trillion ($1.3 trillion). Although SGX is not privy to a large domestic market like China, it plans to carve its own unique growth path with an M&A strategy that will continue to grow its revenue, maintain its margins and profitability.
According to SGX CEO Loh Boon Chye, the bourse’s strategy of ensuring it continues to grow well into the future is by being a multi-asset exchange and striking a balance between equities, fixed income, currencies and commodities, derivatives and eventually digital assets.
“We’ve evolved from an Asian gateway to an international multi-asset exchange offering access into the Asian markets,” he said in an interview on June 16.
A path less travelled
Indeed, exchanges appear to be a dime a dozen these days. The Edge Singapore has featured a private exchange that trades whisky tokens, a wine exchange and several cryptocurrency exchanges. A quick trawl through the annual reports of SGX and HKEX indicates that once a critical size is attained, profit margins are hefty (see Table 3 on Page 11) as are returns on equity. Exchanges are mainly fee-based businesses and fees are usually viewed as annuity-type returns for investors because of their stability and — as in the case of SGX and HKEX — their growth although both exchanges are taking very different paths to get there.
SGX’s strategy has gained some traction among investors. Its share price is up more than 40% and the stock has returned more than 123% including dividends reinvested in the past 10 years according to Bloomberg data. However, unlike HKEX which has the depth, breadth and, some would even say, the might of China backing its growth, SGX has to find a different route.
As Loh indicates, SGX plans to execute its multi-asset strategy through acquisitions, partnerships and joint ventures. M&A of exchanges can be tough though, with bourses often seen as national symbols with governments reluctant to see them sold to foreigners. SGX found that out in 2011 when its proposed tie-up with ASX was scuppered by Australia.
However, in the past two years, SGX has acquired BidFX and Scientific Beta, formed a joint-venture with Trumid and Hillhouse Capital, and taken a 10% stake in DBS Digital Exchange (DDEx), a private exchange for DBS’s private banking, investment banking and institutional customers to originate and list tokenised assets.
DDEx was launched in December 2020. Unlike cryptocurrency exchanges, DDEx includes deal origination, market making, tokenisation and trading. On May 31, DBS announced it had priced a $15 million digital bond, marking DDEx’s first Security Token Offering (STO). The DBS Digital Bond, which comes with a six-month tenor and coupon rate of 0.60% per annum, was done by way of a private placement and is traded in board lots of $10,000.
Four and a half years ago, SGX also acquired the Baltic Exchange which technically isn’t an exchange but a membership-based provider of global logistics pricing indexes and benchmarks. The acquisition makes sense because the exchange fits into the steel value chain as SGX offers iron ore derivatives.
On May 20, DBS Group Holdings, together with SGX, Standard Chartered Bank and Temasek Holdings announced the launch of Climate Impact X, a carbon exchange that goes live later this year (See Competition in carbon exchanges heats up on Page 10).
“Any acquisition that we look at must augment our current offering or it should expand our client relationship. Very importantly, we need to exercise financial discipline and that is by looking at CAGR on revenue growth. We like its CAGR to grow at 10% yearly on a three-year basis and have a return that exceeds our costs of capital and is accretive to earnings in three years,” Loh explains.
As Loh tells it, SGX requires an all-weather and enduring M&A strategy that captures macroeconomic trends that are both cyclical and secular.
SGX has also partnered with Temasek Holdings to form Marketnode, a digital asset issuance, depository and servicing platform that uses distributed ledger technology. Marketnode is complementary to SGX Bond Pro, a screen-based institution-only bond trading platform. On June 16, United Overseas Bank (UOB) announced it had piloted a digital bond issuance on Marketnode.
Other synergies with Marketnode include growth opportunities in the digitalisation of market platforms between OTC and listed futures. “We mentioned that many times but now we are really scaling that up with a joint venture in Marketnode and starting that off with fixed income,” Loh adds.
China and India, two of the largest five economies in the world, have only 2%–3% foreign fixed income ownership, according to Lee Beng Hong, head of fixed incomes, currencies and commodities (FICC) at SGX.
“With index inclusion progressing in China and being considered for India, we think that we are now at the start of a secular trend for more demand for products and services to serve all these opportunities,” Lee says of the fixed income space.
Balance between equities and derivatives
Two years ago, SGX combined its cash equities and equity derivatives segments. Together, they currently account for 67% to 70% of revenue.
“The combination allows our participants from one platform, say derivatives, to be able to signal and participate in the securities market, and vice versa, the result of which is more market makers and active traders. The outcome that we want to achieve is obviously higher turnover velocity, which leads to higher volume and thereby liquidity, backed by a pipeline of IPOs that we see are coming to the market,” Loh elaborates.
As a result, he believes that companies in the region, including unicorns and tech companies are looking at secondary listings on SGX. “Infrastructure-wise, we’re able to have fungibility and transfer securities, either a share or depository receipt across time zones and exchanges or across time zones and depositories. For some of these [securities], it can almost be 24-hour price discovery,” he explains. And, of course, SGX will be announcing its listing framework for SPACs (special purpose acquisition companies) in the coming weeks, which will broaden the appeal and addressable market further.
SGX expects its revenue mix from the equities/FICC/data, connectivity & indices segments to shift towards 60%/25%/15% in the medium term. As of 1HFY2021 ended December 2020, the respective ratio was 67%/19%/14% and its FY2020 ratio of 72% equities (both cash and derivatives) 16% FICC and 12% DCI.
Capital markets tied to growth
As an economy develops, companies are needed to support economic growth and capital markets are useful in supporting corporate growth. This virtuous value chain is driving IPOs and market capitalisation of listed entities on HKEX and the Shanghai and Shenzhen stock exchanges.
Not surprisingly, HKEX ranked second globally for IPO fundraisings in 2020, with 154 companies raising a total of HK$400.2 billion ($68.4 billion), the highest amount since 2010.
“The group welcomed some of the world’s biggest IPOs [in 2020] including the secondary listings of JD.com and NetEase in June 2020, raising HK$35 billion and HK$24 billion respectively. The IPO pipeline remains very strong going into 2021,” HKEX says in its latest annual report.
As at end May, HKEX has already raised some HK$20 billion from new listings on its exchanges, including GEM, which is a lower-tier board designed to be a more accessible platform for growth companies to list.
Unlike HKEX, SGX does not have the luxury of a steady pipeline of multi-billion dollar IPOs. The listing of Thai Beverage’s beer business, reportedly worth some US$10 billion, would have fit the bill but on April 16, the company announced that this widely-anticipated listing has been “deferred”, citing “uncertain market conditions and volatile outlook”.
As such, it would be a near impossible challenge for SGX to compete with HKEX, especially with China opening up its capital account. In 2020, Stock Connect’s Northbound and Southbound traffic hit record turnovers of RMB21.1 trillion ($4.4 trillion) and HK$5.5 trillion respectively, and recorded average daily turnover (ADT) of RMB91.3 billion and HK$24.4 billion respectively for the year.
Bond Connect turnover also saw a record-high with ADT reaching RMB19.8 billion in 2020, increasing by 85% y-o-y despite the pandemic. Hong Kong again remained the world’s largest structured products market for the 14th consecutive year.
In FY2020, listing fees contributed some HK$1.9 billion to HKEX’s total revenue of HK$19.2 billion or around 10%. The largest contributors to revenue were trading fees and tariffs, of almost HK$7 billion and clearing and settlement fees of HK$4.4 billion. In all, securities-related revenue accounts for more than 80% of HKEX’s total revenue.
In contrast, for SGX’s FY2020, listing revenue was 4% of its total revenue of $1.05 billion. This disparity is not surprising, given how SGX typically does not enjoy a big crop of new listings. For 2020, SGX had just 11 IPOs, which raised around $1.5 billion in total. Of this, Catalist listings comprised $43.13 million, Mainboard listings excluding REITs comprised $685.7 million and the two REITs raised the equivalent of around $775 million. The listing of Nanofilm Technologies International in late 2020 sparked hopes that there will be a slew of big tech companies following suit. For now, the momentum had seemingly faltered, after Grab, the Singapore-based internet company, chose to list in the US via a SPAC instead, although a consolation prize of a secondary listing back in Singapore has been floated. The list of companies reportedly eyeing an IPO includes solar energy player Sunseap and the relisting of electronics parts manufacturer PCI. Thus far this year, SGX has had three IPOs — Econ Healthcare, Aztech Global and OTS Holdings.
SGX a ‘little bit impacted’ by pandemic
On his part, Loh acknowledges that no thanks to the pandemic, the market was “obviously a little bit impacted”.
Even the REITs sector was not immuned. SGX, after all, is seen as the largest international REIT platform in Asia but there wasn’t a REIT IPO in the past year. “Now with the recovery in the economy globally and the region, we are seeing the REIT pipeline coming back,” Loh says.
In 2020, REITs raised $5.4 billion through secondary offerings. And this year, secondary follow-ons for acquisitions by the REITs is keeping the local capital market humming along. A couple of REIT IPOs that are in the pipeline could include a commercial income REIT with commercial properties in Australia with well-known Korean and Japanese promoters, a commercial REIT with UK properties backed by City Developments, and possibly a Blackstone-backed REIT with biotech and tech-related properties. Blackstone-managed funds acquired Sand Crawler and properties that were once owned by the recently privatised Soilbuild Business Space REIT such as Solaris@One North and Eightrium. Bloomberg has also reported that Digital Realty Trust could list a data centre REIT on SGX, raising some US$300 million.
Since China’s accession to the WTO, HKEX has leapfrogged SGX, obviously concomitant with China’s rise. Still, as Loh likes to point out that IPOs alone do not make a market what it is. “An IPO is a journey, not a destination.”
Nevertheless, as a fee-based business with fat margins, exchanges are still among the best places for investors to park their hard-earned money.
Of the 11 analysts with a recent recommendation on SGX as compiled by Bloomberg, seven are calling investors to “buy” the stock, with three recommending “hold” or equivalent and just one — Morgan Stanley — urging investors to “sell”, giving a target price of $9.19. The most bullish call is also from JP Morgan with a $12.30 target price.
Photos: Left image - Albert Chua/The Edge Singapore; right image - Bloomberg
