Singapore Exchange Limited (S68) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Thank you for attending our virtual FY2020 full year results briefing. The gentlemen for this evening is as follows: first, we'll start with a presentation of our financial highlights and performance by our CFO, Chng Lay Chew; followed by business update by our CEO, Loh Boon Chye. After that, we'll end up with a question-and-answer session with the panel comprising senior executives from SGX. So in addition to our CEO and CFO, we have with us today Ng Yao Loong, our Deputy CFO; Lee Beng Hong, Head of Fixed Income, Currencies and Commodities; Michael Syn, Head of Equities; Ng Kin Yee, Head of Data, Connectivity and Indices, Chew Sutat, Head of Global Sales and Origination; Agnes Koh, our Chief Risk Officer; and Tan Boon Gin, the CEO of SGX Regulation. So without further delay, let me now invite Mr. Chng to deliver our financial highlights. Chng?

Good evening to everyone on the webcast. Thank you for taking the time to join us at our virtual full year FY '20 results briefing. I will be presenting our financial performance for the year, after which I'll hand it to Boon Chye, our CEO, to present a business update. Let me begin with some of our key financial highlights. SGX delivered a very strong set of results for the year with robust growth in all business segments. Revenues crossed $1 billion for the first time at $1.05 billion. This was an increase of 16% year-on-year and the highest since our listing. Net profit increased 21% to $472 million, and EBITDA was up 25% to $656 million. This past year saw higher activity in our Currencies and Commodities business as volumes increased 24% to 51.2 million contracts. Volumes in Equity Derivatives declined by 3%. However, the traded value on our Cash Equities market was $332 billion, an increase of 28%. Total expenses increased 8% and to $487 million. The Board has proposed a final quarterly dividend of $0.08 per share for the fourth quarter. Earnings per share was $0.441 for the year. This next slide shows the annual trend for revenue, total expenses, EBITDA and net profit for the past 5 years. As you can see, SGX's revenue, EBITDA and net profit show long-term positive growing trends. Our compound annual growth rate for revenue was 7%, while EBITDA and net profit grew at 9% and 8%, respectively. CAGR for total expenses was 4% as we remained disciplined in managing our costs. Our jaw ratio in FY '20 was 7%. This next slide shows our full year revenue movement year-on-year. As mentioned earlier, our top line revenue grew 16% to $1.05 billion, with double-digit percentage growth in all business segments. Our Fixed Income, Currencies and Commodities business recorded a 23% increase in revenue to $171 million. This is mainly from higher Currencies and Commodities revenue. It accounted for 16% of total revenue compared to 15% a year ago. Currencies and Commodities revenue increased 25% to $159 million. Revenue from Trading and Clearing rose 27% to $108 million. Commodity futures volumes increased 22%, and currency volumes rose 27%. In the second half of FY '20, COVID-19 led to heightened market uncertainty and volatility. This has resulted in an increase in volumes. We were also successful in cross-selling and acquiring new customers during the year. Treasury and other revenue increased 22% to $51 million mainly from higher Treasury income. This was primarily due to an increase in margin balances and a small increase in net yield. Our Equities business recorded revenues of $760 million, up 14%. This business is made up of our Cash Equities and our Equity Derivatives business segments and accounted for 72% of total revenue. The Cash Equities revenue rose 19% to $399 million. Trading and Clearing revenue increased 30%. Total traded value on our Cash Equities market rose 28%. And the average clearing fee increased marginally to 2.69 basis points. This was due to an increase in the proportion of trades from higher-yielding cash equity products. Securities, Settlement and Depository Management revenue increased 18% to cross the $100 million mark. The increase was mainly due to a higher subsequent settlement activities. Next, on Equity Derivatives, the revenue was up 8% to $360 million. Within Equity Derivatives, Trading and Clearing revenue increased 2% to $212 million. We saw higher volumes in most of our equity derivative contracts, including our SIMSCI, NIKKEI 225, NIFTY and MSCI Taiwan futures contracts. Overall, Equity Derivatives volumes declined by 3%. This was due to lower volumes in our FTSE China A50 contract. Volumes last year were elevated driven by positive sentiments arising from portfolio rebalancing following the partial inclusion of A-Shares into the MSCI Indices. Treasury, License and Other revenue within Equity Derivatives grew 18% to $148 million mainly for -- from higher treasury income for the same reasons that I explained earlier. The average blended fee per contract for our Derivative business increased by 8% to $1.18 per contract. This was mainly due to an increase in the proportion of volume from higher fee-paying customers. Next, our Data, Connectivity and Indices business recorded a 19% increase in revenues to $122 million. This business accounted for 12% of total revenue. Market Data and Indices revenue increased 38%. This was mainly due to the consolidation of revenue from Scientific Beta, which we acquired in January of this year. Excluding revenues from Scientific Beta, the Market Data and Indices revenue would have increased by 5% or $2 million. Connectivity revenue increased 5% to $62 million mainly due to continued growth of our colocation business and higher derivatives connectivity subscriptions. Next slide. So this shows the quarterly revenue movement year-on-year. Revenue increased in the fourth quarter by 12% to $278 million. Revenue for our FICC business was comparable. Currency volumes increased 10% to 6 million contracts, while Commodity volumes were lower by 7 million -- by 7% to 6 million contracts. The Equities business recorded revenues of $201 million, up 11%. Revenues for our Cash Equities business increased 27% as traded value rose 42% to $95 billion. The blended average fee increased from 2.66 basis points to 2.74 basis points for the quarter. Equity Derivatives revenue was lower by 4% to $89 million. And there was a decline -- a 23% decline in volumes to 42 million contracts partially offset by higher average fee per contract. Treasury income, however, increased due to higher collateral balances. Our Data, Connectivity and Indices business recorded a 40% increase in revenue to $36 million, mainly from the consolidation of Scientific Beta as well as higher data revenue. Next, we go to expenses. So this chart shows the movement of our full year expenses year-on-year. Total expenses rose by 8% to $487 million. A few reasons here. One was higher fixed staff costs, which included 34 staff from Scientific Beta, higher variable costs in the form of variable staff costs and royalty expenses and an increase in depreciation due to new systems that went live. Excluding the costs associated with Scientific Beta, total expenses would have increased by 6%. Within the various components of our expenses, staff costs increased 12%, the fixed staff costs had increased by 6% mainly due to the consolidation of staff from Scientific Beta that I mentioned earlier. There was also the annual salary increment as well as an increase in head count. Average head count was 872 for the year and included the staff from Scientific Beta. Provisions for variable staff costs increased 25%, in line with the higher profitability for the year. Technology expenses declined by 13%. And premises expenses declined by 50%. Both of these were mainly due to the adoption of the new accounting standard this year on leases. And excluding the impact of this change in accounting standard, technology expenses would have been comparable, and premises expenses would have increased by 10%. Processing and royalties increased 14% to $54 million, in line with higher derivative volumes. Other expenses increased $2 million to $36 million mainly from SGX Care Package that SGX introduced to assist listed companies affected by the COVID-19 pandemic. This was partially offset by a decline in discretionary marketing and traveling expenses. Depreciation and amortization increased 44% to $90 million. Again, this was due to the adoption of the new accounting standard on leases, excluding which, depreciation and amortization increased by 12% to $70 million. This was mainly due to 2 reasons. One was the higher depreciation from the new systems and the amortization of intangible assets relating to the acquisition of Scientific Beta. Next slide, please. So this is the fourth quarter expenses, again, year-on-year waterfall chart. Expenses increased $5 million or 3% to $130 million. We consolidated the full quarter of Scientific Beta's expenses provided for higher variable staff costs and incurred higher professional fees. These were partially offset by the credit from the government's job support scheme and lower discretionary marketing and traveling expenses. This next slide shows the trend in our technology CapEx and depreciation over the last 5 years. Our past investments have advanced our technology capabilities and enabled SGX with greater capacity for growth. Examples include the modernization of our infrastructure such as the Titan derivatives platform, the post-trade system, our securities and bond trading platforms. CapEx for FY '20 was $41 million, below our CapEx guidance of $45 million to $50 million. During the year, we enhanced our key technology infrastructure, digitized our retail investor services and upgraded our Titan OTC commodities trade reporting system. Depreciation expenses of $55 million was 8% higher from a year ago due to the implementation of new systems. This is a slide on capital management. Our capital structure now comprises of both debt and equity. We borrowed the equivalent of $300 million of euro bank loans to fund the acquisition of Scientific Beta. And earlier this month, we acquired the remaining 80% of BidFX for $128 million. This was also fully funded with U.S. dollar bank loans. Given SGX's strong cash flow, we can easily service these loans. And together with our strong balance sheet, we have the ability to borrow and invest in growth opportunities going forward. As mentioned earlier, the Board has proposed a final quarterly dividend of $0.08 per share for the fourth quarter. This is an increase of $0.005 or 7% on the current quarterly dividend of $0.075 per share. This brings the total FY '20 dividend to $0.305 per share. We will pay quarterly dividends of $0.08 or annualized dividend of $0.32 per share going forward. This represents a 7% increase, and it is broadly in line with our policy to pay a sustainable and growing dividend over time, consistent with our long-term growth prospects. Note that the final dividend is subject to approval at the Annual General Meeting to be held on the 24th of September this year. Lastly, our slide on the robust financial indicators that we see for SGX. We achieved the highest EBITDA margin, operating profit margin and ROE in the last 5 years at 62%, 54% and 40%, respectively. I'll now hand over to our CEO, Boon Chye, to provide the business update.

A very good evening, everyone. You have just heard from our CFO, Mr. Chng, who have shared with you our results. It is a strong set of results, but what is also significant has been what we have put in place during the financial year that will put us in an even stronger position to serve our customers and for the future growth. We also maintain robustness of SGX ecosystem and accessibility of our markets amid COVID-19. At the start of the financial year, we set up a new organization structure that capitalizes on our strength as an international multi-asset exchange to pursue growth opportunities and build scale in multiple asset classes. We have made strong progress in these areas. First, we have made key acquisitions that strengthen the Fixed Income, Currencies and Commodities business units and the Data, Connectivity and Indices business unit. In January, we acquired Scientific Beta to bolster our growing Index business. Scientific Beta provides investable smart beta indices underpinned by rigorous research. Smart beta investing is part of factor investing which has seen significant growth in recent years. It has been a record year for foreign exchange and commodities, and we intend to accelerate that with the completion of the acquisition of BidFX earlier this month. BidFX cloud-based front-end trading platform connects market participants across a range of FX instruments and enable them with more efficiency. Very soon, the combined clientele of SGX and BidFX can enjoy better FX price transparency, liquidity and workflows. Second, we are creating synergies between Cash Equities and Equity Derivatives with an enlarged platform. The launch of the Singapore Single Stock Futures and the continued broadening of our daily leveraged certificates, product shelf is a step in this direction. Third, we have increased global customers' adoption across our products. I'll share more about customer adoption in the next slide. Our current acquisition efforts is led by the global sales and origination unit, which is an integrated client-facing group that serves all our client segments with a full spectrum of SGX products and services across asset classes. As a multi-asset exchange, we're able to offer our customers multiple effective ways to invest in Asia. For example, an investor can express the view through our cash equities market, one of the most international globally, or our suite of equity derivative products as well as hedge a currency exposure through our suite of currency features. They could also express a macro view on Asia through our suite of industrial and freight commodity futures from iron ore to ruble to freight. Our cross-selling efforts to enable more participants to access Asia through SGX and trade more products has been strong. We continue to add new customers too. Let me share some examples. 7% and 9% of volumes in FX and India single stock futures are from new customers. Activity from financial market participants in our Commodity Derivatives business increased by more than 35% as participants use our iron ore contract as a macroeconomic proxy to Asia's industrial activity. Our international offices have been important to growing our distribution. Equity Derivatives total overnight volume grew by more than 25% against last year. For foreign exchange, it was up 53% year-over-year. And 44% and 38% of the overnight volume in Equity Derivatives and FX, respectively, are from the U.S. and European customers. We believe that there's further room to grow as U.S. and European customers make up 20% of total number of derivatives customers. On this slide, you've seen the results earlier. Just to recap, total revenue of $1.05 billion for the financial year, it is the highest since we listed in the year 2000. All our business segments under the new organization structure achieved double-digit growth. The revenue of $122 million for the DCI business includes contribution from Scientific Beta. Let me now move on to our respective business lines. In Fixed Income, the number of bond listing is slightly lower by 3% to 1,032. However, the total issuance amount is comparable at $452 billion. Bond listing activities were higher in the first half as interest rate ease but declined since February due to the market uncertainties amid COVID-19 pandemic. We remain Asia's most international listing venue for bonds with a global issuer base. In addition to issuers across Asia Pacific, including emerging economies like Vietnam and Laos, we have also attracted issuers outside Asia, such as Latin America countries. In tandem with the ongoing interest for sustainable capital and finance in Asia, we saw continued listing of sustainability bonds led by issuers from South Korea, China and India. In Currencies, volumes was up 27% year-over-year to over 26 million contracts, and notional value traded was close to $1.5 trillion. We have seen double-digit compounding growth in volume over the last 3 years. We've shown that over the year how we have become a liquid venue for participants to trade and risk manage Asian currency exposure. For example, we recorded a record single-day volume of over 100,000 contracts or notional value of grade of over USD 10 billion for our dollar CNH futures earlier in August of last year. We also saw a record FX futures open interest as COVID-19 led to a sharp increase in currency volatility and fuel demand for FX risk management. Overnight volume increased by 53%, reflecting the very global nature of our currency derivatives market. We are very excited by the prospect of deepening and broadening our FX franchise with the acquisition of BidFX to serve a wider FX community with more comprehensive solutions and enhanced distribution capabilities while bringing together the 2 growing and mutually reinforcing pools of liquidity. In Commodities, the iron ore volumes increased by 25% year-over-year to 21 million contracts, with close to 100% market share. SGX iron ore contract has become the CE bond reference, adding to our market benchmark positions in rubber and freight pricing. It is also growing as a macroeconomic proxy with more than 35% of activity coming from financial market participants in FY '20. This increased screen trading activity now accounts for about 20% of all iron ore futures contracts traded. We will increase the financialization of our Commodities suite as macroeconomic proxies to Asia's growth through our Titan Pro platform and Titan Hub. Titan Hub is an information and community portal that provides news, insights and analytics for clients interested to trade in SGX derivatives product. Moving down to Equities and starting off with Equity Derivatives. Volumes were slightly lower by 3% to 192 million contracts. We saw higher volumes in our futures contracts that provide access to the equity markets of India and Japan. As well as Singapore and Taiwan. These were offset by lower volumes in our FTSE China A50 Futures. It clearly demonstrates the value of a broad suite of liquid futures contract that offer investors access to idiosyncratic investment opportunities across Asian countries that meet their investment objectives. We will continue to build on and expand our product shelf to meet the evolving needs of our customers. In our very own Singapore market, we launched 10 Singapore single stock futures during this quarter in response to growing client demand for a broader suite of Singapore linked equity products. Our new SGX FTSE Taiwan Index Futures started trading on 20th July and has now exceeded USD 1.5 billion in the first week of trading. With group participation by customers and clearing members. SGX intends to bring to clients even greater benefits from a multi-asset portfolio amidst this environment. We will launch a new and expanded derivative suite well before the expiry of our licensing agreement with MSCI in February 2021. Moving on to Cash Equities. There were 10 new equity listings. Total primary fundraising of $2.3 billion exceeded that of fiscal year 2019. Fundraising slowed in the last quarter of the financial year, as issuers postponed their IPO plans amidst the pandemic. An area that we've been focusing on has been to facilitate cross listings to enable companies to access multiple pools of liquidity with speed to market and trading in extended time zone. The application and listing of AMTD International in April was completed in around a month. Secondary funds rate was $16.5 billion, up from $4.7 billion in the previous year as we supported our listed companies in capital raising to position for growth post COVID-19. In Cash Equity Trading and Clearing, total traded value was $332 billion, an increase of 28% year-over-year. This growth has been broad-based with higher activities from all customer segments. In the other products category, new underlyings, including Alibaba, NetEase and Meituan on or daily leverage certificates were introduced recently, which brings the number of DLCs to more than 100, offering investors exposure to key Asian indices and single stock names. Throughout the year, we continue to enhance the ecosystem to make it easier to trade on SGX. We enhanced our securities and borrowing program to give borrowers access to a wider range of securities, including small and mid-cap stocks with real-time lending pool availability. We also launched the Investor Portal, a one-stop and mobile-friendly portal that supports individual investors with their investment decisions. Amongst others, the Investor Portals provide access to stock research and a stock screener as well as to CDP internet with access to real-time portfolio, e-statements and CDP notification as well as management of the currency conversion service. And earlier this month, we launched a revised market maker and liquidity provider program to further improve market liquidity. More than 30 participants are currently on the program. Moving on to Data, Connectivity and Indices business. Revenue grew 19% year-on-year to $122 million. Market Data and Indices revenue is up 38% year-on-year to $59 million, while Connectivity revenue is up 5% to $62 million. Scientific Beta contributed $14 million in revenues since February. We look forward to realizing the benefits of Scientific Beta's strong thought leadership in the development of smart beta indices and ESG solutions, with significant opportunities for close collaboration with other SGX businesses in developing new solutions in this area. That concludes the review of the business units, and we will now look ahead to FY 2021. Our operating expense guide for FY 2021 is between $535 million and $545 million, including Scientific Beta and BidFX. Excluding costs associated with these 2 subsidiaries, total expenses would have been lower by $15 million year-over-year. And in fiscal year 2021, capital expenditure is projected to be between $55 million to $60 million as we continue to invest in growth. A key part is the inclusion of the capital expenditure of BidFX, excluding which capital expenditure would be lower by $11 million. We are excited looking ahead to FY '21 as we advance to our next phase of our multi-asset strategy with our customers and execute our plans across all business and client units. The acquisitions of BidFX and Scientific Beta provide us with a strong platform to scale in the currencies asset class and in our Index business, respectively. Focus will be on realizing the combined strength of these subsidiaries and the SGX Group. In our Equity business, we will have a new and expanded suite of Derivatives products well ahead of the expiry of our non-Singapore MSCI product licenses in February 2021. And in line with increasing interest from our clients for sustainable investments, we will also introduce ESG-related investment opportunities. Our product shelf of daily leverage certificates and single stock futures will also be expanded. Our business units will be supported by the GSO unit as we continue to acquire new customers through our international footprint and leveraging on our overseas offices and local partners. This concludes our presentation, and we'll now move into Q&A.

Okay. So the first question from GTS. With your increase in dividend and now that SGX is drawing debt, does this acknowledge a change in the way you think about your debt equity structure? And at the same time, can we expect $0.08 per quarter going forward?

This is Chng. I'll take the question. Yes, we plan to pay a quarterly dividend of $0.08 per quarter. This is in line with our policy of paying a sustainable and growing dividend over time and consistent with our long-term growth prospects. We have taken on debt due to our recent acquisitions, and it reflects a modest tilt in terms of our capital structure. I had mentioned earlier that our strong cash flow business model does enable us to amply service this debt and, together with our robust balance sheet, provides us with options in funding future growth.

Thank you for that. Yes. Can you please share some details in the retail participation trends in the market? And how much was...

Dominic, you're breaking up.

Okay. Can you hear me now?

Yes.

Right. So this question is from UBS. Can you please share some details on the retail participation trends in your market? And how much was their contribution to Q4 revenue? This event has been quite big for some other exchanges such as Bursa Malaysia.

Yes, Mike?

I'm sorry, I was on mute. So let me profile the -- just the FY. The key activity or the key increase in activity in retail was in our index stocks, in our REIT. So if you think about what happened last FY versus the previous one, the percentage of volume that was traded was 85% in index and REITs, previously was 81%. Within that, the index stocks and the REITs, retail participation increased tremendously in REITs by 150% and increase in the index stocks by 50%. And this is characterized by the retail thinking that they saw stocks that, I guess, individual investors wanted to buy for some time, had seen the market run up, saw a sharp pullback and had a view as to the sustainability on the investment quality of these stocks, and they piled in. Over the year, the net flow was plus $7 billion from retail. So retail was net buyer in our stock market, and institutions were net sellers. Over the year also, we saw not just existing investors participate, but we saw a significant number of new investors come to the market. 64,000 new accounts opened in the year, whereas in the previous year, was more like 45,000. So overall, the fraction of retail participation in our Cash Equities went up from 15% to 21%. I think if I compare it to other ASEAN markets, it is in line and, in some segments, even, I think, more extraordinary than some of the other markets.

Thank you, Mike. So there's a question from Crédit Suisse, actually 2 questions. The first question is, did you have to seek MAS approval for increasing your dividend, given MAS has just capped dividends for banks? And the second question is, could you share some financial numbers for Scientific Beta? Firstly, on asset under replication, revenue and operating profit.

I'll take the first question on dividends. SGX does not need to seek approval from MAS in terms of the dividends that we pay. What we do is to make sure that we observe the regulatory capital conditions as well as internally to just make sure that we look at our forecast carefully and make sure that the quarterly dividends that we announce can be sustained on a going-forward basis.

Let me take the second question. This is Kin Yee, Head of the Data, Connectivity, Index business. On the AUM question as with global asset prices, Scientific Beta's index portfolio also experienced a drop during the market sell-off. But we saw some recovery as some economies started to resume economic activities. But obviously, depending on the geographic areas, they vary. On the revenue question, you can probably work out the revenue from the statement that we have sent, is about $14 million or so contribution for the financial year. We prefer to report the revenue instead of AUM since it probably reflects better indication of the performance of Scientific Beta.

Okay. Thank you for that. The next question is from DBS. Could you provide more color on the investor take-up and trading of your FTSE Taiwan contract in terms of volumes as well as absolute amount? First, is SGX confident to move most, if not all, customers over from the existing MSCI Taiwan contract? If you think so, is there any change in terms of what you have guided earlier on the impact of MSCI Taiwan contract?

Okay. So I'll start with this. In terms of the performance of the FTSE Taiwan contracts, it's just less than 2 weeks old contract. We are very happy, and we deeply appreciate more than 70 global customers who are providing liquidity and trading in both our T as well as our T+1 session, and especially the early adopters who are already establishing open interest in our new Taiwan contract as far as December. So this has been a very good support with customers from all over the world as well as across different segments as an initial start, but it is really the first 2 weeks.

Maybe I can add a little color on the 24-hour trading of this contract. As Sutat mentioned, it's only been 2 weeks. We've been very gratified by the interest that customers have shown in this new FTSE contract. It's been -- we've been fortunate in some ways because, as you may know, in the recent week, there has been a special activity this index because of news flow about Intel and then consequently on TSMC, which is a very large component of all Taiwan indices. And because of this, we've had interest to trade our FTSE product both in the morning session and the evening session. And I think the analysts will also know that we had told the market last week that our FTSE Taiwan product is approved by the U.S. regulator for distribution into the U.S. Electronic distribution, CFTC approved, where the Hong Kong product is not. Having said that, the Taiwan product is over 20 years old in MSCI and 2 weeks old in FTSE, so we don't want to take any customers for granted. I think it is -- the duty of care is on us to prove continuously over a period of weeks that the order book will continue to function as they seek it to function. And then we believe that open interest will migrate over through time because there is a time horizon towards the end of the year in which that needs to happen.

Okay. Thanks for that. Next question is from Morgan Stanley. Can you please elaborate on the strong threshold on Equity Derivatives in the fourth quarter against [indiscernible] lower risk costs in '21?

Okay. This is Chng. I'll take that question. Treasury income has increased due to higher collateral balances as we grew our business as well as the mix in the currencies of the collateral. The blended net yield has also increased on a year-on-year basis. So both of these reasons have accounted for the higher treasury income that you see in that particular revenue line. In terms of the questions on the impact of the lower interest rates, we do expect low interest rate environment to somewhat lower our treasury income in FY '21. However, we plan to mitigate that by growing our business and our overnight interest and also to grow revenues from our other business streams.

Okay. Thank you very much. The next question is from Macquarie. Could you kindly provide some further information about BidFX, how much more has it contributed to your business and how does it compare to the existing business that you have?

Yes. This is Boon Chye, and I'll let Ben Hong, who's responsible for FICC, to supplement. I've been truly impressed the customers that BidFX have. The key buy-side and hedge funds community that are in financial markets clients of BidFX. And in my conversation with them in the recent weeks, they only have good things to talk about the platform, its technology that's been provided and the many functionality. Some of the customers are new to SGX, some are common customers, so that entails the opportunities for us to really have cross-sell opportunities. Many of the increases that I highlighted earlier was through the very strong efforts of our GSO unit and the international offices. Beng Hong, you want to add anything?