Stock thesis:

 

Singapore Exchange Limited (SGX: S68 or OTCMKTS: SPXCY) is an investment holding company located in Singapore that provides different services related to securities and derivatives trading and others. It is the only trading exchange platform in Singapore.

 

With monopoly status in Singapore trading market, Singapore Exchange Limited offers stable business model and solid dividend yields.

 

Reasons to buy:

 

  1. Monopoly status and stability:

 

Singapore Exchange Limited is a de facto monopoly in Singapore stock exchange market. As with most of exchange markets in other countries, it enjoys stable business models via monopoly, with its business divided into the following three categories: Equities and Fixed Income, Derivatives, and Market Data and Connectivity.

 

SGX revenue by business segment

Source: Frigalyouthinvests.com

 

The decrease in revenue from Equities and Fixed Income segment is largely offset by the increase in Derivatives segment in 2019, with overall revenue showing an increasing trend.

 

SGX not only has a strong sponsor of Singapore government, but also has an authority over pricing of its services as it faces no threats of having market share eaten away by potential competitors.

 

The only downside would be that it has a local competitor, Hong Kong Exchanges and Clearing Market (HKEX). While HKEX clearly has an advantage over IPO and stock exchanges because of its geographical proximity to mainland China, I do believe that Singapore benefits from different market focus (e.g. Singapore is a hub of commodity trading) and political stability (e.g. Hong Kong is suffering from political instability from Chinese influence), which makes Singapore a more stable place in the long run.

 

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  1. Diversification of financial products:

 

Knowing its weakness in IPO business and equity listings, SGX has been trying to create an exchange that is a hub for investors to trade bonds, foreign exchange, commodities and derivatives.

 

While it is true that stock listings in Singapore have been lackluster and quite a number of companies have delisted from Singapore, it is still preferred place for companies to IPO in Southeast Asia due to stable economy and rule of law in Singapore.

 

According to press release, SGX is introducing more derivatives products, such as currency futures and FTSE international tracking the Taiwanese stock market, which contributed close to 10% of total derivatives volume. It is also diversifying into other areas such as regional fixed income platform with the launch of its bond trading platform.

 

In other words, SGX has a number of initiatives in pipeline to make up for the decreasing revenue from equity and IPO markets. The fact that SGX knows where its weakness lies and how to make up for it paints a bright future.

 

 

  1. Solid dividend yield:

 

One of the biggest strengths of Singapore stocks is high and stable dividend payment.

 

SGX has been able to maintain its dividend yield within the range of 3% to 4%, with the current yield standing at about 4%.

 

SGX dividend yield

Source: Capital IQ

 

The greatest strength of SGX’s balance sheet is that it has no loans, but still generates about 800 million SGD free cash flow on average from 2015 to 2019. While the dividend payout ratio is about 80% in 2019, the fact that it has a stable source of revenue and has no debt payment makes its dividend payment safe.

 

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Chart:

 

I would like to draw attention to recent share price of SGX.

SGX share price

Source: Capital IQ

 

SGX has shown a stable share price up until May 2020 when MSCI Inc announced that it will move licensing for derivatives products on a host of gauges to Hong Kong from Singapore next year, which is expected to decrease SGX potential profit hit of 10% to 15% next year.

 

However, SGX soon recovered much of the downfall when it announced its 2Q 2020 earnings surprise and increase in dividend on July 31, demonstrating that its strategy in diversifying business and maintaining dividend is working.

 

Stock price shot up 5% right before publication of this article. This reduces room for further capital appreciation, but again shows the strength of SGX.

 

Overall, I believe that a solid dividend growth combined with a room for slight upside potential makes SGX an attractive investment in the long term.

 

 

Risk:

 

There are a number of risks to buying Singapore Exchange Limited stock.

  • Prolonged economic recession in Singapore caused by the COVID-19 pandemic;
  • Increasing number of delisting from SGX; and
  • Intensifying competition from other exchange market, especially Hong Kong;

 

 

Conclusion:

 

Singapore Exchange Limited benefits from monopoly of the exchange market in Singapore. Although I do not believe that there is much room for stock price appreciation, the solid business model with strong cash flow makes it suitable for a long-term dividend play.

 

With diversification of its financial products coupled with stability, I strongly believe that SGX can be a good long-term investment for both stable dividend and potential capital appreciation.

 

 

Disclosure: I am long SGX. I wrote this article to myself, and it expresses my own opinions. I am not receiving compensation for it other than from Macrotrend. I have no business relationship with any company whose stock is mentioned in this article.

 

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