Digital Disruptions And Asian Market Shifts Will Weaken Traditional Exchanges

Key Takeaways

• Intensifying competition from digital finance and other Asian exchanges threatens SGX's relevance, market share, and ability to attract capital and new listings.
  
• Overdependence on derivatives heightens earnings volatility, while tech innovation and cybersecurity pressures risk increased costs and diminishing profitability.
  
• Diverse asset growth, regional financial tailwinds, innovation, prudent capital management, and favorable regulatory reforms position SGX for sustained earnings growth and competitive strength.

Catalysts

An investment holding, engages in the operation of integrated securities and derivatives exchange, related clearing houses, and an electricity market in Singapore.

• The rise of decentralized finance and the proliferation of cross-border electronic trading platforms threaten to erode SGX's relevance as global investors and regional institutions increasingly bypass traditional centralized exchanges, putting long-term pressure on revenue growth and reducing the ability to attract and retain liquidity.
  
• Persistent expansion and deepening of North Asian capital markets like China and Hong Kong are diverting capital flows and global investor attention, increasingly marginalizing Singapore's position and leading to declining market share for SGX, which jeopardizes both future listing and trading revenues.
  
• The IPO pipeline remains structurally weak, as SGX faces ongoing challenges in attracting large, high-growth listings, particularly in technology and ESG sectors, resulting in limited growth opportunities for listing and clearing fees and stunting long-term earnings expansion.
  
• Excessive reliance on derivatives and FX trading for profits significantly heightens earnings risk, as any pronounced downturn in derivatives volumes or adverse regulatory shifts could lead to rapid net margin compression and increased volatility in core profitability.
  
• Rapid digitalization and the growing adoption of tokenized or blockchain-based assets, coupled with mounting cybersecurity costs and risks, may outpace SGX's ability to innovate and adapt, thereby driving up costs, undermining operational leverage, and potentially damaging reputation and trust in SGX's infrastructure, all of which could lead to lower margins and earnings in the years ahead.

Singapore Exchange Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Singapore Exchange compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Singapore Exchange's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 47.3% today to 49.4% in 3 years time.
• The bearish analysts expect earnings to reach SGD 753.8 million (and earnings per share of SGD 0.7) by about August 2028, up from SGD 648.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, down from 26.7x today. This future PE is greater than the current PE for the SG Capital Markets industry at 11.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

Singapore Exchange Future Earnings Per Share Growth

Risks

• SGX's sustained multi-asset growth strategy-encompassing cash equities, derivatives, FICC, and OTC FX-has enabled broad-based revenue and profit expansion, ensuring the business is not overly dependent on any single cycle or asset class and supporting ongoing top-line and net margin growth.
  
• Secular tailwinds such as increasing Asian wealth, capital flow shifts to Asia, and Singapore's reputation as a safe financial hub are driving record trading interest, high secondary market volumes, and robust IPO pipelines, which bolster revenue, market share, and future earnings potential.
  
• Aggressive platform and product innovation, including expansion into new derivatives, the launch of new ETF and structured product offerings, and ongoing technology investments, will likely enhance SGX's competitiveness, client acquisition, and operational efficiency, leading to higher revenues and improved profit margins over the long term.
  
• SGX's strong balance sheet, disciplined cost management, and clear capital allocation strategy-including steady dividend increases and the capacity for strategic acquisitions-supports both shareholder returns and reinvestment for future growth, which can help sustain earnings despite industry or rate headwinds.
  
• Regulatory and market structure reforms, such as measures from the MAS equity market review group, the upcoming EQDP fund deployment, and streamlined IPO processes, are increasing institutional participation, improving market liquidity, and fueling a strong new listing pipeline, making it likely that SGX can achieve or exceed its medium-term revenue and earnings forecasts.

Valuation

• The assumed bearish price target for Singapore Exchange is SGD11.51, which represents two standard deviations below the consensus price target of SGD15.52. This valuation is based on what can be assumed as the expectations of Singapore Exchange's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD18.2, and the most bearish reporting a price target of just SGD10.3.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SGD1.5 billion, earnings will come to SGD753.8 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 7.0%.
• Given the current share price of SGD16.16, the bearish analyst price target of SGD11.51 is 40.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.