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Broker's take: Citi Research downgrades SGX to 'sell' as HKSE's China futures contract product may curb profits

CITI Research has downgraded its call on bourse operator Singapore Exchange (SGX) to "sell" and lowered its target price from S$7.80 to S$7.00 on the Hong Kong Stock Exchange's (HKSE) plans to introduce MSCI China A Index futures, which could eat into demand for SGX's China A50 Index futures.

SGX's China A50 Index futures is currently the only offshore futures contract tracking the Chinese A-share market.

Index compiler MSCI and the HKSE said on Monday they will launch futures contracts on the MSCI China A Index to provide a hedging tool as global investor interest in Chinese mainland shares surges.

Citi analyst Robert Kong noted that while the "timing of such a product launch is still uncertain, the expectation is months rather than years".

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While it is difficult to predict the precise impact on SGX’s China A50 contract, Citi downgraded SGX as the contract has been "the most important driver of SGX derivatives growth in recent years". It accounted for around 38 per cent of total contract volumes for FY2018.

Citi added that "derivatives growth has been the key driver of SGX revenues (and earnings) in recent years as equities turnover has struggled to break out of the S$1.1 billion to S$1.2 billion per day range".

Therefore, Citi has cut FY2019 to estimated 2021 forecasts between 6 and 17 per cent mainly on lower derivatives growth.

"SGX has committed to a sustainable dividend of S$0.30 per share which we view provides support around S$7.00."

As at 11.43am, SGX's shares were trading down S$0.05 or 0.7 per cent at S$7.42. The counter closed down S$0.29 or 3.7 per cent at S$7.47 on Monday.