03-04-2014, 11:29 AM
Let me chip in on the topic. Feel free to comment if any mistake.
No one doubts on the company profitability. It is perfectly logical, with its net profit of 40-50%, ROA/ROE of 19%/38% and its monopoly operation in Singapore.
The doubts are mainly on the following
- growth rate in the near term of 3-5 years.
- price i.e. PE
Let's start with the growth rate. There are two major drivers of SGX, securities, and derivative markets.
Derivative market is growing in revenue in the past few years, each year growth numbers I got are 8% (2011), 11% (2012) and 20% (2013). Will the growth sustaining in the next few years? It should be with the current effort of SGX. In FY2013, the derivative market was 1/3 of total revenue, so it is a significant contributor to overall revenue. There is definitely good reason for YZJ to establish its trading office in Singapore, and the same for other international traders.
Next is the securities market. First of all, the chances of bull market in the next few years is definitely high. Next question is, will SGX attract sufficient business amid competition from neighbouring exchanges? After research on China reform, more SOEs will be securitized, and the exchanges of choice? IMO, SEHK and SGX are the prime choices, due to their offshore yuan centers status. There are good reasons for Haitong Securities to establish office in Singapore, IMO
In size, SGX securities business is half of SEHK, and also about half overall revenue. It is illogical to assume SGX business is saturated in years from now.
The final point is the pricing. Is PE 20 a fair price, after comparing with its closest competitor, SEHK which priced at PE of 32? I recalled the quote below. A PE 20 seems a fair price to pay for SGX, not a wonderful price, I admit.
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
No one doubts on the company profitability. It is perfectly logical, with its net profit of 40-50%, ROA/ROE of 19%/38% and its monopoly operation in Singapore.
The doubts are mainly on the following
- growth rate in the near term of 3-5 years.
- price i.e. PE
Let's start with the growth rate. There are two major drivers of SGX, securities, and derivative markets.
Derivative market is growing in revenue in the past few years, each year growth numbers I got are 8% (2011), 11% (2012) and 20% (2013). Will the growth sustaining in the next few years? It should be with the current effort of SGX. In FY2013, the derivative market was 1/3 of total revenue, so it is a significant contributor to overall revenue. There is definitely good reason for YZJ to establish its trading office in Singapore, and the same for other international traders.
Next is the securities market. First of all, the chances of bull market in the next few years is definitely high. Next question is, will SGX attract sufficient business amid competition from neighbouring exchanges? After research on China reform, more SOEs will be securitized, and the exchanges of choice? IMO, SEHK and SGX are the prime choices, due to their offshore yuan centers status. There are good reasons for Haitong Securities to establish office in Singapore, IMO
In size, SGX securities business is half of SEHK, and also about half overall revenue. It is illogical to assume SGX business is saturated in years from now.
The final point is the pricing. Is PE 20 a fair price, after comparing with its closest competitor, SEHK which priced at PE of 32? I recalled the quote below. A PE 20 seems a fair price to pay for SGX, not a wonderful price, I admit.
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."