no, macqueria wrote about the possible of china-singapore connect
The STI added 0.4% last Friday and all eyes were on SGX which surged 2.8% for the day. The shares managed to trade past the $8 mark to close at $8.21 on volumes higher than the 15-day moving average. Macquarie Equities Research (MER) released a research report before the trading session last Friday (10th April), stating that a Singapore-China stock connect could be a possibility in the next 12-18 months. MER has an ‘Outperform’ rating on SGX with a 12-month target price of $8.50. Excerpts from the research report as shown….
Event
The value of trades from Mainland China to Hong Kong (the “southbound trades“) on the China-HK connect soared to a daily record of HK$26bn (S$4.3bn) on 9 April 2015.
MER thinks a similar connect mechanism, the Singapore-China stock connect, could be a possibility in the next 12-18 months, and a tailwind for the stock.
Impact
What a Singapore-China stock connect could be – The stock connect could allow China investors to trade stocks listed on SGX. Similarly, investors could directly buy China stocks through SGX.
Why will China choose Singapore/SGX? – (i) Good relationship with China. Singapore was the 2nd - after Hong Kong - to offer RMB clearing services. (ii) Sufficient RMB liquidity. As one of the top offshore RMB hubs, Singapore would have the ability to clear these transactions settled in RMB.
What does SGX have to offer China investors? – (i) REITs and business trusts. The high dividend yields could attract them. (ii) China-related companies listed on SGX. China investors have shown – for now – a preference for familiar names. (iii) ASEAN exposure. Companies in ASEAN (Indo, Thai) could offer higher earnings growth potential compared to China.
How much revenue potential for SGX? – Net profit could increase by 8% from MER’s base case. This is based on MER’s assumption of a 30% increase in securities trading activities, 50% profit sharing agreement, and no China stocks bought through SGX.
When this could happen? – 7 months was the time it took, between the formal announcement by China, and the launch of the China-HK connect. SGX could potentially launch a similar connection in a similar time frame.
So… what is missing? – China may only be focused on connecting further with Hong Kong. However, China can benefit from a wider outreach as it continues to liberalise, MER believes. Both can be done concurrently, MER thinks.
Earnings and target price revision
No change.
Price catalyst
12-month price target: S$8.50 based on a dividend discount model (DDM) methodology.
Catalyst: Newsflow on Singapore-China stock connect, new CEO, regulations
MER’s action and recommendation
MER has an Outperform rating on SGX – Target Price S$8.50.
For now, MER expects SGX to benefit from higher A50 futures volumes from increased volatility in China. Structurally, SGX will continue to benefit from a shift of derivatives to the exchange-traded platform, we believe.
SGX’s ability to generate high operating cashflow and zero debt on its balance sheet is a major support for future dividend payouts of >90%, and dividend yields of >3.5% in MER’s view.