Singapore Exchange

Kim Eng on 9 Apr 2012

Targeting retail participation. Our recent discussions with the management of Singapore Exchange (SGX) suggest that the bourse is putting a lot of effort into the retail market segment in a bid to grow this slice of the pie, whose latent potential is hard to ignore. We are positive on this development as it reinforces our argument that SGX has structural growth potential.

Huge potential beckons. SGX’s internal studies show that despite Singapore’s reputation as a financial hub, its retail market is underpenetrated compared to its regional peers. The Republic has only 350,000 active Central Depository (CDP) accounts out of a resident population of 3.79m. This penetration rate of about 9% pales in comparison to Hong Kong’s 35% and Australia’s 43%, not to mention that Singapore has a higher GDP per capita than the two markets.

Impact of similar penetration. We estimate that about 18% of the current SDAV is generated by retail clients (based on the assumption that one-third of the 55% trading value from contract sizes less than S$1.5m is from retail clients). Our sensitivity analysis shows that SDAV should be at least S$2.1b today if local retail  participation matches

Hong Kong’s. This is excluding the knock-on effect of greater market buoyancy. In this scenario, the bottomline for SGX may hit S$390m. Property curbs, casino fatigue will benefit SGX. Anecdotal evidence suggests that poor retail participation over the past 24 months may be partly attributable to more investments into real estate and the “casino effect”. However, with more property curbs being rolled out and the novelty of the two new casinos (which opened around mid-2010) wearing off, we think SGX may get more traction in its retail initiatives going forward. In turn, this will benefit SDAV.

Maintain Buy. We roll forward our valuations to 2013F and peg our target price of $8.00 to 25x earnings. We assume SDAV of S$1.4b for FY12F and S$1.6b for FY13F. With structural growth potential, we believe SGX will remain attractive vis-à-vis its regional peers.