Singapore Exchange Limited (SGX: S68), or SGX, is Singapore’s sole stock exchange, and the group provides a platform for the trading of securities such as equities, fixed income and derivatives. SGX also provides listing, clearing, settlement, depository and data services.
While SGX exists as a monopoly business as there are no other stock exchanges operating in Singapore, it is also not immune to risks and competitive threats. Singapore is a small country compared to many of its Asian counterparts, and this fact makes it difficult for SGX to attract capital to list here, apart from its specialisation in REITs and business trusts.
Here are two major risks confronting SGX in its efforts to grow its business over time.
A slowdown in SDAV and decline in revenue for equities division
For the equities and fixed income division, revenue has been declining over the years as a result of the 2013 penny stock crash, which greatly dampened interest in small and mid-cap shares. Trading volumes and securities daily average traded value (SDAV) also continued to decline as fund managers shifted their funds and attention to other major markets such as Hong Kong and China.
Below is a snapshot of SGX’s revenue for the equities and fixed income division over the last four fiscal years:
While revenue has remained fairly constant over the last few years, the 9M 2019 revenue showed a 16.2% year-on-year decline, which is cause for concern. The moribund state of the local stock market may result in even lower revenues for this division moving forward unless SGX reverses the trend somehow. Below is a snapshot of the SDAV over the last 11 quarters:
It can be seen that SDAV in the last three quarters has been showing a steady year-on-year decline, and this also portends bad news for the overall equities division.
Stiff competition from regional exchanges such as HKEX
Though SGX has been growing its derivatives division steadily over the last few years, regional exchanges such as the Hong Kong Exchanges and Clearing Limited (HKG: 0388) (HKEX) continue to provide stiff competition. Recently, HKEX announced that it was partnering with MSCI to offer China A Shares Index Futures. This will be in direct competition with SGX’s FTSE China A50 Index Futures, which account for around 40% of SGX’s total derivatives volume and is the only index future on the A-Shares market thus far.
Should HKEX come up with more of such products to challenge SGX’s dominance, SGX may witness a shrinkage in its derivatives volumes, which will adversely impact its derivatives revenue stream.
Dominant position with a great dividend yield
Investors can take comfort in the fact that SGX remains in a dominant position within Asia and still manages to attract significant amounts of capital due to Singapore’s track record of strong governance. The local stock exchange pays a quarterly dividend of 7.5 Singapore cents, for a total annual dividend of 30 Singapore cents. At SGX’s closing share price of S$7.99 on Friday, it had a historical dividend yield of 3.8%.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore recommends shares of Singapore Exchange Limited. Motley Fool Singapore contributor Royston Yang owns shares in Singapore Exchange.