March 27, 2008

SINGAPORE EQUITY
Investment Research

INITIAL COVERAGE Private Circulation Only

FINANCE
NEUTRAL Initiate
Leng Seng Choon, CFA
+65 6232 3890
SGX Price SGD7.40
seng-choon.leng@dmgaps.com.sg
Target SGD6.60

Recent weak stockmarket turnover a negative

Stock Profile/Statistics
Bloomberg Ticker SGX SP
STI 2995.2 Revenue very dependent on securities market turnover. Securities clearing fees
Issued Share Capital (m) 1066.2 accounted for 38.3% of FY07 SGX operating revenue, and the share has risen further to
Market Capitalisation (SGDm) 7890.1 40.8% for 2QFY08. Securities market average daily turnover (ADT), which hit a peak of
52 week H L Price (SGD) 17.20 6.25
Average Volume (3m) '000 11742.6
S$3.03b in Oct 07, has fallen to S$1.77b & S$1.80b in Feb & Mar 08 respectively. We are
YTD Returns (%) -44.9 assuming ADT of S$2.05b for FY09, which represents a 15% yoy fall from our FY08 estimate
Net gearing (x) -0.91 of S$2.41b. This primarily explains our expectations of lower FY09 revenues.
Altman Z-score NA
ROCE/WACC 2.84 Derivatives clearing fees is another major revenue contributor. Derivatives clearing fees
Book Value/share (S cents) 68.0 accounted for 19% of 2QFY08 operating revenue. 89% of the trading volume comes from
Asian Equity Derivatives, with half of this due to the Nikkei 225 stock index. We have also
assumed weaker futures trading volume in FY09 due to expectations of general weakness for
Major Shareholders regional financial markets.
SEL Holdings 23.5%
Current weakness in securities market turnover similar to FY05 period. In FY05, when
SGX recorded a 15% yoy fall in securities market turnover (and hence lower earnings), SGX
traded at an average PE rating of 16x. We are projecting a decline in FY09 securities market
turnover, which makes this period similar to that of FY05. However, taking into consideration
the initiatives by SGX management (eg reduction of minimum bids and planned introduction of
Share Performance (%) new trading engine), we have applied a premium and peg SGX fair price to 18x FY09. This
Month Absolute Relative yields our fair price of S$6.60. Initiate coverage with a NEUTRAL call. BUY below S$5.60.
1M -15.5% -13.3%
3M -45.3% -31.9% Risk of capital loss outweighs attractive dividend yield. SGX has guided a dividend policy
6M -46.4% -29.8% as follows : (a) payout ratio of at least 80%; or (b) 12¢ per share, whichever is higher.
12M 13.8% 19.3%
Applying a 90% payout ratio (similar to FY07 payout), we derive a FY09 dividend of 33¢ per
share, which gives a yield of 4.5%. This attractiveness, especially when compared against 3-
Share Price Performance mth SIBOR of 1.4%, is offset by the risk of weaker securities market turnover should the
economic weakness in the US persist for a longer time.
(S$)
18.00

16.00 Our sensitivity analysis shows that a 10% fall in ADT (from our FY09 base of S$2.05b) will
14.00 translate to SGX fair price falling to S$6.10.
12.00
FYE Jun (S$m) FY05 FY06 FY07 FY08f FY09f
10.00 Turnover 274.7 407.6 576.2 774.6 698.5
8.00 Net Profit 104.4 187.6 421.8 477.3 392.0
% chg YoY -21.5% 79.8% 124.8% 13.2% -17.9%
6.00
EPS (cents) 10.1 18.0 40.0 44.8 36.8
4.00
DPS (cents) 24.6 16.2 36.0 37.5 33.1
2.00 Div Yield 3.3% 2.2% 4.9% 5.1% 4.5%
-
ROE 23.1% 32.0% 37.5% 54.9% 42.2%
9-Oct-07 8-Nov-07 8-Dec-07 7-Jan-08 6-Feb-08 7-Mar-08 ROA 10.3% 18.9% 22.2% 25.8% 20.8%
PER (x) 73.3 41.2 18.5 16.5 20.1
P/BV (x) 16.2 13.2 9.5 8.7 8.3

Source: Company, DMG estimates

FY07 ROE & ROA excludes one-time items

DMG
OSK Research
See important disclosures at the end of this publication 1
 TABLE OF CONTENTS

Earnings Dependent on Stockmarket Turnover Value 3

Derivatives Clearing Fees is also Important 5

SGX is Fairly Valued 6

Profit & Loss 8

Balance Sheet 9

Cash Flow 10

Disclaimer 11

DMG
OSK Research
See important disclosures at the end of this publication 2
 Earnings Dependent on Stockmarket Turnover Value

The securities market clearing fees is an important component of SGX’s revenue. In FY07, securities
clearing fees accounted for 38.3% of revenue, and this has risen to 40.8% in 2QFY08. Effective 1 Mar 07,
the security clearing fee rate was lowered from 0.05% to 0.04%, and the cap raised from S$200 to S$600.
Securities market turnover, which has been volatile over the past 2-3 years, is the key determinant of
securities market clearing fees. In the recent months, securities market turnover has fallen eg Feb 08 ADT
is down 19% yoy and 22% mom.

Fig 1 : Operating revenue breakdown

FY05 FY06 FY07 FY08F FY09F
Operating Revenue
Clearing fees (net of rebates) 145.5 234.4 337.8 463.0 406.0
- Securities clearing fees 95.9 138.8 220.9 332.0 282.0
- Derivatives clearing fees 49.6 95.6 117.0 131.0 124.0
Access & terminal fees 34.4 50.4 74.9 107.6 93.5
A/C maintenance & processing fees 43.2 55.3 83.1 111.0 106.0
Listing and membership fees 22.4 33.1 38.5 46.0 45.0
Price information fees 15.8 19.1 23.0 27.0 27.0
Software & computer services 7.0 7.5 10.1 11.0 11.0
Others 6.4 7.8 8.8 9.0 10.0
Total 274.7 407.6 576.2 774.6 698.5

Clearing fees as % of revenue 53.0 57.5 58.6 59.8 58.1

Securities as % of total clearing fees 65.9 59.2 65.4 71.7 69.5
Derivatives as % of total clearing fees 34.1 40.8 34.6 28.3 30.5
Securities clearing fees as % of revenue 34.9 34.1 38.3 42.9 40.4
Derivatives clearing fees as % of revenue 18.1 23.5 20.3 16.9 17.8
Access & terminal fees as % of revenue 12.5 12.4 13.0 13.9 13.4
A/C maintenance & processing fees as % of revenue15.7 13.6 14.4 14.3 15.2
Listing and membership fees as % of revenue 8.2 8.1 6.7 5.9 6.4
Price information fees as % of revenue 5.8 4.7 4.0 3.5 3.9
Software & computer services as % of revenue 2.6 1.8 1.7 1.4 1.6
Others 2.3 1.9 1.5 1.2 1.4
Total 100.0 100.0 100.0 100.0 100.0

Source : Company, DMG estimates

Fig 2 : Securities Market Average Daily Turnover

(S$m) ADT

Jul06 895
Aug06 964
Sep06 959
Oct06 1,221
Nov06 1,348
Dec06 1,320
Jan07 1,986
Feb07 2,185
Mar07 1,834
Apr07 2,213
May07 2,194
Jun07 2,568
Jul07 2,953
Aug07 2,650
Sep07 2,288
Oct07 3,032
Nov07 2,424
Dec07 1,787
Jan08 2,265
Feb08 1,774
Mar08* 1,797

* Till 25 Mar 08
Source : Bloomberg

DMG Research
See important disclosures at the end of this publication 3
 Fig 3 : Securities market turnover has fallen in recent months

Securities Market Average Daily Turnover

3,500

3,000

2,500

2,000
S$m

1,500

1,000

500

0
Oct05 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jul07 Oct07 Jan08

Source : Bloomberg

QDII investments in SGX-listed equities. In late Jan 08, the Monetary Authority of Singapore said it had
agreed on a supervisory cooperation agreement with the China Banking Regulatory Commission (CBRC)
to allow Chinese commercial banks to conduct investments for their clients under the Qualified Domestic
Institutional Investor (QDII) programme. This could potentially generate growth for stockmarket turnover in
the future. However, there was no mention of when QDII funds could start investing in Singapore, and
CBRC also said it would sign similar pacts with the US, Germany and Japan. Overall, we have assumed
muted impact over the next few quarters.

More IPOs in 1HFY08. There were 44 new listings in 1HFY08 (versus 28 in 1HFY07) with a total market
capitalization of S$14.7b, raising S$4.9b. The REITs sector was also bolstered by the listing of SGX’s first
Japanese REIT. This brought the total market capitalization of the 19 REITs to S$26.7b. However, given
the weak market conditions in 2HFY08, we expect the number of IPOs to slow down in the months ahead.

Fig 4 : IPOs on SGX

1HFY07 2HFY07 1HFY08
Total new listings 28 21 44
IPO market capitalisation 13.0 8.9 14.7
(S$m)
New foreign listings 22 (8 China) 13 (8 China) 32 (22 China)
IPO market capitalisation 10.8 7.5 11.7
Source : Company

The minimum bids were reduced in Dec 07 to improve trading efficiency and market liquidity. Also, the
recently revamped STI and the new indices should stimulate the development of more index-related
products. The planned introduction of the new trading engine in Jul 08 will help drive more algorithmic
trading in the market as well.

DMG Research
See important disclosures at the end of this publication 4
 We assume marginal pick-up in stockmarket turnover from current levels. Given the likely
development of more index-related products, we are assuming FY09 securities market ADT of S$2.05b,
slightly stronger than the S$1.80b recorded for Mar 08. However, this is sharply lower than Oct 07’s ADT
peak of S$3.03b. Our assumption is consistent with the recent trend of stockmarket turnover velocity
having fallen from as high as 1.0x in Oct 07 to Feb 08’s 0.5x.

Fig 5 : Turnover velocity has shrunk

SGX Turnover Velocity

1.2

1.0

0.8

0.6

0.4

0.2

0.0
Oct05 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jul07 Oct07 Jan08

Source : Bloomberg

Derivatives clearing fees is also important

2QFY08 derivatives clearing fees of S$38.6m was 40% higher yoy, due to growth in futures trading volume
and structured warrants turnover. However, its share of operating revenue fell to 19% in 2QFY08 (from
FY07’s 20.3%) due to the stronger growth in securities clearing fees.

Fig 6 : Breakdown of Futures Trading Volume

Futures Trading Volume (m contracts) FY05 FY06 FY07 1Q08 2Q08

Asian Equity Derivatives 17.4 28.7 32.4 11.4 10.6
- Nikkei 225 Stock Index 8.6 16.9 18.2 6.5 5.6
- MSCI Taiwan Index 7.1 9.9 11.3 3.7 3.9
- MSCI Singapore Index 1.7 1.9 2.9 1.2 1.1
Euroyen 2.4 3.5 2.8 0.4 0.3
Eurodollar 1.8 0.0 0.0
Others 1.2 1.7 2.2 0.5 1.0
Total 22.8 33.9 37.4 12.3 11.9

Futures Trading Volume (% of total volume)

Asian Equity Derivatives 76.3 84.7 86.6 92.7 89.1
- Nikkei 225 Stock Index 37.7 49.9 48.7 52.8 47.1
- MSCI Taiwan Index 31.1 29.2 30.2 30.1 32.8
- MSCI Singapore Index 7.5 5.6 7.8 9.8 9.2
Euroyen 10.5 10.3 7.5 3.3 2.5
Eurodollar 7.9 0.0 0.0 0.0 0.0
Others 5.3 5.0 5.9 4.1 8.4
Total 100.0 100.0 100.0 100.0 100.0

Source : Company

DMG Research
See important disclosures at the end of this publication 5
 SGX is fairly valued

We are forecasting weaker FY09 net profit, primarily due to expectations of lower securities market
turnover. This period is thus similar to that in FY05, when securities market turnover also declined yoy.

Over the past 2-3 years, SGX has been recording rising earnings on the back of growth in securities market
turnover and its PE ratio over this period is in the 25x region - we feel that pegging target price to this ratio
is not appropriate as we are in a period of earnings decline. We observe that SGX recorded a 15% fall in
securities market turnover value in FY05, which consequently led to earnings decline – and SGX traded at
16x PE for FY05. However, given SGX’s initiatives to promote securities trading, we are applying a higher
18x PE ratio to our FY09 earnings forecast, which yields our price target of S$6.60. Initiate coverage with a
NEUTRAL call. BUY below S$5.60.

Fig 7 : SGX PE ratio has fallen sharply YTD

SGX PE

45

40

35

30

25
(x)

20

15

10

0
1/1/04 7/1/04 1/1/05 7/1/05 1/1/06 7/1/06 1/1/07 7/1/07 1/1/08

Source : Bloomberg

Fig 8 : Yoy% changes in securities market ADT

FY04 100.3
FY05 (14.5)
FY06 61.0
FY07 56.8

Source : Bloomberg

We assume 90% dividend payout ratio. SGX aims to declare a base dividend of at least 3¢ per quarter.
SGX has also guided (1) a dividend payout ratio of at least 80%, or (2) 12¢ per share, whichever is higher.
For FY07, SGX’s dividend of 36¢ per share represents a 90% dividend payout ratio, and we have
consequently assumed the same 90% payout for our forecasts. For FY08, we have applied a 90% payout
ratio – excluding the S$34m transferred to Derivatives clearing fund reserve that is not available for
distribution as dividends. Our FY09 dividend forecast is 33¢, which gives a 4.5% dividend yield. This may
appear attractive. But we believe this is offsetted by the risk of lower securities market turnover (due to
economic uncertainties in the US).

DMG Research
See important disclosures at the end of this publication 6
 As stockmarket turnover values can be volatile, we have constructed a sensitivity table showing scenarios
with different stockmarket turnover values. Our base case target price of S$6.60 is based on FY09
average daily stockmarket turnover of S$2.05b. However, if turnover is 10% higher, then a fairer SGX price
would be S$7.10. If, on the other hand, turnover is 10% lower, then SGX fair price would be S$6.10.

Fig 9 : Share price sensitivity to stockmarket turnover

FY09F % higher % higher % higher % higher % higher

Stockmarket turnover % rise over base case Base case 10 20 30 (10) (20)
Avg Daily Stockmarket turnover (S$b) 2.05 2.25 2.46 2.66 1.84 1.64
Revenue (S$m) 698.5 736.7 774.8 813.0 660.3 622.2
Net profit (S$m) 392.0 421.5 451.0 480.6 362.4 332.9
EPS (S¢) 36.8 39.5 42.3 45.1 34.0 31.2
Target PE rating 18 18 18 18 18 18
Target Price (S$) 6.6 7.1 7.6 8.1 6.1 5.6

Source : DMG estimates

Fig 10 : Peer comparison

Name Local Price @ Mkt Cap PE (x) PE (x) PE (x) Yield

Curr 27Mar08 (US$m) Hist Curr Fwd (%)

388 HK Equity HKEx HKD 127.00 17,484.9 22.0 21.5 18.2 4.0
SGX SP Equity SGX SGD 7.28 5,628.3 14.0 17.2 16.3 5.1
BURSA MK Equity BMB MYR 8.70 1,424.9 18.8 17.5 15.2 3.6
ASX AU Equity ASX AUD 38.34 6,039.8 21.8 17.6 16.3 7.0

Source : Bloomberg
Note : Forecast PE based on consensus figures

DMG Research
See important disclosures at the end of this publication 7
 Fig 11 : Profit &Loss

Year end : Jun (S$m) FY05 FY06 FY07 FY08F FY09F

Turnover 274.7 407.6 576.2 774.6 698.5

EBIDTA 149.9 251.5 381.5 555.0 492.0

Depreciation (15.2) (14.3) (16.3) (18.0) (19.0)
Interest & other income 2.4 2.7 6.4 3.0 3.0
Investment Income 0.6 10.5 10.7 2.0 2.0
Associated Companies (0.0) (0.9) (2.5) 0.0 0.0
Exceptional item 0.0 0.0 110.5 34.0 0.0

EBIT 134.7 237.2 365.1 537.0 473.0

Pre-tax Profit 134.6 236.1 490.3 576.0 478.0

Tax (30.2) (48.5) (68.6) (98.7) (86.0)
Net Profit 104.4 187.6 421.8 477.3 392.0

EPS (cts) 10.1 18.0 40.0 44.8 36.8

DPS (cts) 24.6 16.2 36.0 37.5 33.1
Book/sh (cts) 45.5 55.9 78.2 85.2 88.9
Div Payout (x) 2.43 0.90 0.90 0.90 0.90

Growth (%)
Turnover (13.1) 48.4 41.4 34.4 (9.8)
EBITDA (18.8) 67.8 51.7 45.5 (11.3)
Pre-tax Profit (18.9) 75.4 107.7 17.5 (17.0)
Net Profit (21.5) 79.8 124.8 13.2 (17.9)

Profitability (%)
EBITDA Margin 54.6 61.7 66.2 71.7 70.4
Pre-tax Margin 49.0 57.9 85.1 74.4 68.4
Net Margin 38.0 46.0 73.2 61.6 56.1

Future & option turnover (units)(m) 22.8 33.9 37.0 45.0 43.0
Stock-market turnover (S$b) 173.6 267.5 418.7 602.0 512.0
Daily avg stock-mkt turnover (S$b) 0.69 1.07 1.67 2.41 2.05

Source : Company, DMG estimates

DMG Research
See important disclosures at the end of this publication 8
 Fig 12 : Balance Sheet

Year end : Jun (S$m) FY05 FY06 FY07 FY08F FY09F

Fixed assets 228.7 228.2 70.4 74.4 78.4

Other non-current assets 3.0 4.6 78.6 6.5 8.0

Current Assets
Trade Debtors 490.8 290.0 913.0 879.0 893.0
Bank Deposits & Cash 117.9 246.0 613.7 699.8 745.2
Accounts under fund management 152.2 151.9 138.7 138.7 138.7
Others 36.2 36.7 37.0 54.0 55.0
Total current assets 797.1 724.5 1,702.3 1,771.5 1,831.9

Total assets 1,028.8 957.3 1,851.4 1,852.4 1,918.3

Current Liabilities
Trade Creditors 490.6 296.0 921.8 911.8 945.8
Others 59.6 70.8 96.7 26.9 17.6
Total current liabilities 550.2 366.8 1,018.5 938.7 963.4

Long term liabilities 4.1 3.6 2.5 5.0 7.0

Share capital 10.4 378.5 398.5 398.5 398.5

Reserves 464.1 208.4 431.8 510.2 549.4
Total shareholders funds 474.6 586.9 830.4 908.7 947.9

Minority interests 0.0 0.0 0.0 0.0 0.0

Total liabilities & equity 1,028.8 957.3 1,851.4 1,852.4 1,918.3

Source : Company, DMG estimates

DMG Research
See important disclosures at the end of this publication 9
 Fig 13 : Cash Flow

Year end : Jun (S$m) FY05 FY06 FY07 FY08F FY09F

Cash flow from operating activities

Profit before tax & share of JV 134.6 237.1 492.8 576.0 478.0
Adjustments for :
- Depreciation 15.2 14.3 16.3 18.0 19.0
- Net loss (gain) on investment (0.5) (10.3) (10.8) 0.0 0.0
- Share based payment expense 5.1 4.2 8.6 4.0 4.0
- Interest income (3.8) (5.1) (9.5) (3.0) (3.0)
- Others (2.9) 2.2 (110.3) 0.0 0.0
Operating cash flow before WC change 147.8 242.4 387.2 595.0 498.0

- Trade & other receivables (206.9) 211.5 (617.8) 34.0 (14.0)

- Trade & other payables 195.5 (196.5) 629.5 (10.0) 34.0
- Income tax paid (35.6) (30.3) (44.3) (98.7) (86.0)
- Dividends paid 0.0 0.0 0.0 0.0 0.0
Net cash from operating activities 100.8 227.2 354.6 520.3 432.0

Cash flow from investing activities

- Payments for ppty, plant & equipment (16.0) (18.5) (14.5) (22.0) (23.0)
- Interest received 3.9 4.8 9.4 3.0 3.0
- Receipt from investments' sale 7.3 77.5 19.9 0.0 0.0
- Others (154.2) (81.9) 189.3 0.0 0.0
Net cash from investing activities (159.0) (18.0) 204.1 (19.0) (20.0)

Cash flow from financing activities

- Net proceeds from issue of shares 12.3 12.3 17.5 0.0 0.0
- Dividends paid (287.0) (91.9) (186.2) (415.2) (367.6)
- Contributions from MI (1.4) (1.5) (22.4) 0.0 0.0
Net cash from financing activities (276.1) (81.1) (191.1) (415.2) (367.6)

Net increase / (decrease) in cash held (334.4) 128.1 367.7 86.1 44.4
Cash at the beginning of the period 452.3 117.9 246.0 613.7 699.8
Effects of exchange rate changes 0.0 0.0 0.0 0.0 1.0
Cash at the end of the period 117.9 246.0 613.7 699.8 745.2

Source : Company, DMG estimates

DMG Research
See important disclosures at the end of this publication 10
DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage

This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of
any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser
before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor
accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to
change without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their
directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this
report.

DMG & Partners Securities Pte Ltd is a participant in the SGX-MAS Research Incentive Scheme and receives a compensation of S$5,000 per stock
per annum covered under the Scheme.

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DMG
OSK Research
See important disclosures at the end of this publication 11