China stock surge to boost SGX profit on derivatives demand

[SINGAPORE] A world-beating rally in Chinese equities is boosting derivatives revenue at Singapore Exchange, spurring analysts to predict the first quarterly profit growth for Southeast Asia's biggest bourse in more than a year.

Derivatives volume climbed to an all-time high in the three months ended Dec 31 as trading of FTSE China A-50 futures contracts jumped 183 per cent from a year earlier, according to data from the exchange operator. SGX is today expected to report net income of S$87 million (US$65 million) for the quarter, according to the average of six analyst estimates compiled by Bloomberg, compared with S$75 million a year ago.

The Singapore bourse is benefiting from efforts to attract investors across a broader range of asset classes as appetite for trading shares in the city-state stagnates. Contributions from derivatives have been growing, accounting for about 30 per cent of SGX's revenue in the year ended June compared with 21 per cent three years earlier, data compiled by Bloomberg show.

"We've seen a massive spike in volumes on China A-50 futures as Chinese equities rallied and that's going to boost the derivatives revenue significantly," Marcus Liu, an analyst at CLSA in Hong Kong, said by phone. "We would expect to see quite a large jump in SGX earnings during the quarter despite the cash equity market still being relatively lackluster." Capital Controls The Shanghai Composite Index soared 37 per cent in the three months through Dec. 31, the biggest advance among the 93 global indexes tracked by Bloomberg. China's capital controls restrict direct investment, with Singapore and Hong Kong competing as alternative venues for asset managers.

SGX has reported a year-on-year decline in quarterly profit for the past four quarters as cash-equity trading volumes decreased after a slump in the share prices of three commodity companies erased US$6.9 billion in market value over three days in October 2013.

Stock trading remains subdued, with shares worth an average S$1.04 billion changing hands daily during the quarter, according to data compiled by Bloomberg. While turnover increased 4.1 per cent from a year earlier, it remained 15 per cent lower than the same period in 2012, the data show. Derivatives transactions climbed 52 per cent to a record 40 million in the three months ended Dec 31, with trading of China A-50 futures increasing to 17.5 million contracts from 6.2 million contracts a year ago, according to SGX data.

The China A-50 contracts, SGX's most-actively traded, along with futures on Japan's Nikkei 225 Stock Average are the main reasons for optimism on SGX's earnings outlook, according to Phillip Securities Pte. The cash equities market has also started to turn around and will continue to recover after the bourse this month lowered the minimum board lots for stock transactions to 100 shares from 1,000 shares to boost participation from individual investors, the brokerage said in a note to clients dated Jan. 9.

"SGX has been largely unappreciated by the market for the better part of 2014," Benjamin Ong, an analyst at Phillip Securities, wrote in the note. "We believe that with securities market volumes turning around and derivatives volume swelling, earnings recovery has arrived and it's time to buy back into SGX." The bourse operator's own shares rallied 7.6 per cent last year, while the Straits Times Index climbed 6.2 per cent. SGX shares climbed 0.6 per cent to S$7.83 as of 10:25 am in Singapore, heading for a one-week high, while the benchmark gauge added 0.3 per cent.

The reduction in minimum board lots won't be enough to lift share trading volume, Arjan Van Veen, a Hong Kong-based analyst at Credit Suisse Group AG said by e-mail. David Gerald, president of the Securities Investors Association of Singapore, agreed.

Investor Confidence "Many investors have lost their trust in the stock market because of the S-chips experience," Gerald said on Jan 12, referring to the accounting scandals and debt defaults involving Chinese companies such as FerroChina and Sino Techfibre that have since been delisted or suspended from trading. "They fear that money invested in the market will get stuck." Singapore's strengthening of securities rules to restore confidence has been drawing individuals back the market, according to the bourse.

"The breadth of retail investor participation in the market is growing," Chew Sutat, executive vice president of SGX, said last week. "The reduction in board lot sizes may encourage more people to come in."

BLOOMBERG