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Steven Chen
Steven Chen
Articles (105)  | Author's Website |

Singapore Exchange: A Wide-Moat Marketplace to Benefit From the Rise of Asia

An easy-to-understand business with a moderate risk profile

Singapore Exchange (SGX:S68) is Asia’s leading multi-asset exchange covering equity, fixed income and derivatives with a vertically integrated business model. The $7 billion market-cap business employs roughly 800 staff in its 11 offices around the globe and leverages asset-light operations to generate sales primarily from recurring activities, including trading, clearing, corporate action, settlement, membership, license and subscription. As of fiscal 2019, The Derivatives business accounted for approximately 51% of total revenue, followed by 38% from Equities and Fixed Income and 11% from Market Data and Connectivity.

Singapore Exchange claims to be Asia’s most international exchange, with nearly 40% of listed companies and more than 80% of listed bonds originating outside of Singapore. The business is a classic marketplace with network effect between capital-seekers and capital-providers as well as among trading parties. The exchange possesses a diversified coverage across major asset classes with the provision of multiple services along the value chain. In the meantime, it is the world’s only pan-Asian derivatives exchange offering single-point access into key Asian markets.

According to the chart below, the company has consistently earned industry-beating free cash return on assets, having outperformed its major peers, including London Stock Exchange (LSE:LSE), Hong Kong Exchange and Clearing Limited (HKSE:00388), Intercontinental Exchange (NYSE:ICE) and Euronext (XPAR:ENX) for more than a decade now. The track record signals the management’s superior capital allocation and the durability of the company’s competitive advantages.

As displayed in the chart below, the business at Singapore Exchange can be heavily impacted during an economic downturn. The annual sales and operating income were down 22% and 30% respectively between fiscal 2008 and 2009 due to considerable decreases in trading activities as well as listing and corporate action activities.

Going forward, the management will focus on international expansion to fuel organic development with the new offices set up in New York, San Francisco and Shanghai over the last few years. Meanwhile, propelling the secular growth further are several macro trends, including faster economic growth in the region than in the rest of the world and the gradual opening up of emerging financial markets in Asia.

At the same time, it is worth pointing out that the company’s growth faces a couple of downside risks, such as increasing competition from private markets as the capital provider and disruptive technologies causing changes to the industry landscape.

On top of organic growth, the management expressed interest in exploring acquisition-driven synergy opportunities, which we think that shareholders should keep their close eyes on in terms of long-term impact on capital efficiency and profitability.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


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