Singapore Exchange Limited

Good morning, ladies and gentlemen. Welcome to SGX Group's first half FY2023 results briefing. Today's agenda will be as follows. First, we'll start off with an update on our financial performance by our CFO, Mr. Ng Yau Lung, followed by a business update by our CEO, Mr. Lo Bun Chai. We'll then end off with a question and answer session. We'll be quite grateful if you identify yourself before asking a question. So now let me hand over to Yau Lung for the financial performance update. Yau Lung, please.

A very good morning, and thank you for joining us this morning as we present our first half FY23 results. So on a headline basis, our group revenue increased 50 million, or 10%, year on year. It was a resilient operating performance in a rather challenging economic environment. Our derivatives franchise was the key growth driver, which I will talk about a little bit more later. Headline expenses also grew 10% year-on-year, or $25 million. And if we exclude MaxTrader, revenue on a like-for-like basis would have grown 7%, expenses at a lower rate of 6%. And we acquired MaxTrader in January of 2022, and so it wasn't in the first half FY22 results. Group earnings on a headline basis up 30% to $285 million. There are several non-cash items, which I will again talk about later. If we adjust some of these items out, the earnings would have increased 7% to $237 million. Now let me run through the details of our financial performance. So derivatives, if I aggregate the revenue across the different asset classes, it grew 28% of $52 million. So derivatives as a whole contributed 44% to our group revenues, includes both trading and clearing, and also the associated treasury income. The outperformance of this segment reflects the value that global investors place on SGX as a platform for Asian access and portfolio risk management. The growth was broad-based across all asset classes, equities, currencies, and commodities, and we saw growth also from higher volumes and average fee increases. The DDAV, or the Daily Average Volume, rose 10% year-on-year to over a million contracts. I see that the momentum has carried on to the new year in January, where DDAV rose 18% month-on-month and 6% year-on-year. Average fees increased 5% year-on-year to $1.58, Thank you very much. While not surprising, like many other cash markets, our securities trading and capital raising activities slowed. We saw lower growth in fixed income listing, IPOs, cash equities trading, and post-trade activities. We have been disclosing adjusted earnings to facilitate investors' understanding of our numbers. As a recap, these adjusted numbers gives a better representation of our underlying performance. And this chart or slide shows the reconciliation between the reported, the GAAP numbers, and the adjusted earnings. So you can see the difference is largely due to the non-cash items in the red box as follows. First, we had a fair value gain of $27 million from our investment in a private equity fund managed by 7Rich. This is a fund that is invested solely in the trading software provider trading technologies. This investment was made almost a year ago, December 2021, and the fair value adjustment reflects the strong operating performance of TT, or trading technologies. This adjustment, or the mark-to-market, flows through our P&L, given its accounting classification. Next is a $10 million recognition of our stake in Climate Impact X, or CIX, which we received as a result of our contribution. As a market operator, we contributed towards the development of the auction matching platform and also advisory work on how to operate the marketplace. And just to recap, CIX is a global carbon exchange and marketplace platform for voluntary carbon credits. It was established jointly by SGX, DBS, Standard Chartered, and Temasek. And then finally, we wrote back $15 million of the earn-out revenue relating to the acquisition of MaxTrader, as the calendar year 2022 revenue did not meet the qualifying threshold. And the earn-out is a mechanism precisely designed to protect us as the acquirer from overpaying and to help bridge the price differences between the buyer and seller at the point of acquisition. And what this means is that we do not have to pay that $15 million in cash to the seller, and there's actually no impact to the carrying value of MaxTrader on our books. So back to something that's a little bit more familiar, our segment reporting, FICC, equities, and DCI. Our FICC business, fixed income currencies and commodities, grew 35% year-on-year, driven by our FX business, both from the exchange trader and OTC space, and the commodities business. And if we exclude max trader, FICC revenue will still be up 25%. In the FX space, exchange-traded currency volumes grew strongly, 48%, from higher activity in our flagship CNH and INR contracts. As for our OTCFX business, the headline ADV, or average daily volume, was up 34% to $68 billion, largely also due to the consolidation of MaxTrader. And so if we look on a half-on-half basis, which is the second half of FY22, versus first half of FY23. Those two periods will include MaxTrader. ADV was slightly lower at about 3%, but this decline wasn't unexpected. This was due to BitFX's focused efforts in migrating their customers to a new FX trading platform and getting the customers a used to the new system. And this migration is necessary to lay the foundation for growing our OTC FX business. This has since been completed, the migration, and both entities, BitFX and MaxTrader, are now focused on acquiring new clients across our key geographies. And we see momentum coming back in January. We continue to be the largest player in the offshore iron ore futures market. The DAV for iron ore rose almost 50% to a six-month high of about 130,000 contracts. We broaden our market participants, including having more screen trading. Moving on to equities, equity derivatives revenue up 21% or $30 million. mainly due to higher trading and clearing revenue and also treasury income. Fees was higher due to our Nifty 50 and FTSE contracts. Daily average volume was up 1% to about 720,000 contracts. Revenue for cash equities, 10% lower or $20 million down. Not surprising, as I said, activity level measured in terms of SDAV was down 7% to about $1.1 billion. We saw lower trading activity in the small and mid-cap segments. In terms of fee, the average clearing fee was down by 3% to about 2.53 basis points. We saw a higher proportion of value traded from our market makers. Revenue from DCI was flat, mainly due to lower revenue from our index business. This was offset by higher connectivity revenue. from a higher or increase in subscription of our co-location services. Expenses on a headline basis increased 10%, but as I say, if we exclude MaxTrader, it's lower at 6%. So the cost increase largely, not a surprise, staff cost went up 7% or $8 million from salary adjustments. We also had a headcount increase as we brought in MaxTrader, about 100 staff from MaxTrader. So this led to a 12% increase in average headcount over the period. Technology expenses also up 17% of $6 million from the consolidation of MaxTrader and higher costs of utilities. Processing and royalties rose 12%. We're not surprised because we got higher volumes across our key contracts such as iron ore. Expenses went up 9% of $7 million. We saw resumption of traveling expenses. We saw greater marketing activities and also the consolidation of MaxTrader. Our first half EBITDA margins was comparable at about 58.5% to a year ago. So at the core, the securities and derivatives platform level, we saw improved margins. But the overall group margins remain comparable, as our new business pillars like OTCFX have lower margins compared to the core business. Financial strength remains, I would say, very healthy, which is very important in an environment where interest rates are a lot higher. Absolute debt levels have come off as we repaid our bank loans. Leverage ratio declined from about 1.4 times a year ago down to 1.1 times. interest coverage ratio remains strong at more than 100 times. The Board of Directors has declared an interim quarterly dividend of $0.08 per share, bringing total dividend for the half year to $0.16 per share. We will make, as part of our regular assessments on the dividend levels towards the end of the financial year, where we would have a full financial year performance and also better visibility on the next financial year. So with that, I will now hand over to our CEO, Mr. Lo Bun Chai, who will deliver this business update.

Good morning, everyone, and once again, thank you for joining us for the first half FY23 results briefing. As Yaolong had shared, we delivered a resilient and robust performance in the first half of FY23. And you can see that our multi-asset strategy provided participants with a diverse portfolio of risk management tools in a very challenging macro environment. Our multi-asset platform also provided revenue diversification in an inflationary and cautious economic backdrop with strong performance in the derivatives business across equity, commodities and FX, and no doubt a softer cash market business performance as the rising interest rate environment and uncertainty weigh on sentiments globally. Our directives platform, as you heard earlier, registered higher volumes, and that's across all asset classes, equities, currency, and commodities. And the daily average volume increased 10% year over year to now over a million contracts, clearly demonstrating the strength of our multi-asset platform and the relevance of of our portfolio risk management solutions for global investors. In this regard, very glad and excited the SGX was named Global Exchange of the Year at the FOW International Awards 2022, capping a year of many accolades from major media publications covering different asset classes across the international derivatives industry. Notably, we registered record volumes across the various asset classes in equities, clearly a venue of choice by the institutional clients as demonstrated in the growth across the different contracts. For the calendar year itself, 2022, our flagship China, India and Singapore contracts saw record volumes, both in the Asian markets. and non-Asian trading hours. Most notably, the SGX FTSE China A50 index futures exceeded 100 million contracts for the calendar year itself, calendar year 2022. It clearly provides global investors liquidity availability round the clock via a trusted and efficient venue. In FX, the foreign exchange, there were also record volumes for the month of November itself with a total notional of over $200 million traded in the flagship CNH futures contract. In the R&L effect switches contract, volume traded exceeded $42 billion. And even in the current one contract, which we have been incubating for a while now, we saw volume across $3 billion. In the commodity space, DAV was up close to 40% as we strengthened our position as a global price discovery center for key commodities. We can expect our commodity suite to continue to garner interest as a macroeconomic proxy for market cycles, enabling market participants to manage their risks and investments as the economic landscape evolves and optimism rises surrounding China's reopening. Financialization of the I&R Contract What you see on the screen here, I think, perfectly represents our commitment and approach to building a trusted and vibrant ecosystem for our clients globally. Thank you. As a recap, we launched our INR contract almost 15 years ago. Today, the SGX INR market is a very vibrant trading venue and a focal point for liquidity in a commodity that has gained significance as a macroeconomic proxy through market cycles. This success clearly is not alone by SGX. It's really a collective effort of an ecosystem coming together from producers, traders, consumers, brokers, and clearing members. To advance the market, we have introduced over the years market microstructure changes, including adjustment to the thick size of the contract and adding new functionalities which cater to more diverse trading strategies. In the last few years, we've expanded the ecosystem, which is what we've been talking about, financialization of iron ore. We've expanded the ecosystem to reach more financial market participants such as asset managers and hedge funds. So the outcome has been an increasing proportion of screen trading and growing interest in trading iron ore outside of Asia, as represented by the higher proportion of trading in the non-Asian hours. So for the whole of calendar year 22, screen trading accounted for 37% of the total trading activity. Volume in the T plus one session accounted for 19% of the screen volume in calendar year 22, and that was up from 12% in calendar year 21. And in the first half of financial year 23, screen trading accounted for 42% of the total trading activity, as you can see from the slide. So the total iron ore derivatives volume crossed 3 billion tons, and that is equivalent to roughly a DAV of close to 100,000 contracts a year. And indeed, for calendar year 22, that was a record. So what does 3 billion tons of iron ore being traded kind of represent? So for context, 3 billion tons of iron ore Thank you very much. of our journey to grow and entrench our key commodities, not only iron ore, but also freight as macroeconomic proxies. We'll continue to grow the ecosystem and as liquidity deepens, drive further adoption of our contracts in benchmark indices that could potentially lead to the issuance of structured products for investors. Thank you very much. Let me share with you the progress in growing this pillar. To recap in this context, when we define OTCFX pillar, that comprises BitFX, MaxTrader, and our own SGX currency node. The combined OTCFX pillar contributes about 6% of the group's revenue. And in the first half of FY23, the ADV reached close to $70 billion, you heard from Yao Lung. There was a very slight decline, half over half, and that's because we migrated clients to a new platform, new access, and there was clear focus on migration of the client. But please report that for January, where we just released our market stats this morning, the average daily volume has reached the U.S. $80 billion. We continue to enhance our client and product ecosystem for both BitFX and MaxTrader by onboarding new clients and expanding our geographical reach across Asia Pacific and Europe. We also transition, as you heard, the clients to this new web-based BitCentral platform. This platform is unique. And in September of 2022, to complement the overall FX OTC pillar, we launched SGX Currency Note. with the trading of NDFs, non-durable forwards. And this now completes the build-out of the SGXFX OTC infrastructure. CurrencyNote will build on the strength of BitFX and MaxTrader. It will combine both the buy side and sell side onto one platform. And clients can access multiple sources of OTCFX liquidity anonymously through a single venue. It adopts a central prime brokerage model where the central prime broker bridges participants without the need for them to have direct credit lines with each other. With relative strength in Asian economies, we continue to enhance mutual market connectivity to deepen access to Asia's leading economies and broaden our ecosystem. Clearly making good progress on our mutual market connectivity and the various initiatives. In the coming months, we will commence the full-scale operations of the NSC-IFSC-SGX Connect initiative. And that is for the Nifty 50 contract, which will bring us closer to combining the growing domestic liquidity in India in GIF and the international liquidity that SGX brings to this combined trading on the GIF venue. Secondly, you have seen that XGX Group and Shenzhen Stock Exchange welcomed three participating ETFs under our ETF product link that was launched in the first half of FY23, and the listing of those ETFs happened in December 2022. Clearly deepening the financial collaboration between China and Singapore. And we look forward to continuing to grow the ETF product link. Besides cash equities, we are also deepening our access to China across other asset classes. So, for example, in fixed income, We entered into a strategic cooperation agreement with China Central Depository and Clearing, CCDC, to promote SGX as the offshore bond listing venue of choice for Pearl Bonds. Pearl Bonds are bonds that are cleared. by CCDC and can be subscribed by investors in China's free trade zone and also by the offshore investors. To date, 12 of such Pearl Bonds have been listed on SGX. And in Southeast Asia, which is clearly a vibrant and growing region, while making progress in the SET Stock Exchange of Thailand, the SET SGX Depository Receipt Linkage, and target to launch it by the end of this financial year. Under this linkage, investors in Thailand and Singapore will be able to participate in the other market via a DR or deposit receipt through their local broker and in their domestic currency. Such linkages will enable us to continue to broaden our product shelf. In the cash equity product shell, this allows investors, for example, via ETFs to help and facilitate portfolio allocation. And also in our DLCs, which has now been listed for a while, enable them to really navigate and manage a volatile market environment. So in ETFs itself, we did see inflows in the first half of FY23, and we look towards broadening that shelf further in the months ahead. Also saw good turnover in the DLC, which actually the volume in DLC doubled as market participants used this instrument to gain exposure to China-related indices and stocks. We are not stopping here. We are further strengthening our commodities business. So in September of 2022, we added two variants of the Cobalt and two lithium contracts to add to our virtual electric car complex. We have also launched the Shanghai Steel Rebar Futures to complete the virtual steel mill and to complement our iron ore contracts. Later this month, we'll be launching the container derivatives, building on our position as the largest dry forward freight agreement or FFA clearing venue. Last but not least, we'll continue to broaden the ecosystem in sustainability. We'll launch initiatives to enable companies, issuers to showcase their sustainability practices through the launch of ES Genome Portal as well as the SGX Sustainable Fixed Income Portal. These are two separate initiatives that will enable investors to better understand the sustainability efforts of companies. We've also entered into an agreement with MSCI to license the recently launched MSCI Climate Action Initiative for Listed Futures Contract. So looking ahead, the reopening of China's border could potentially boost global GDP this year. Also, the inflationary outlook of the environment remains uncertain and could provide opportunities for higher portfolio risk management and market access activities by our digital platform. For the cash equities, near-term uncertainty may continue to persist as inflation and interest rate risk concerns may impact growth and corporate earnings. We remain very focused on extending our mutual market connectivity initiatives. And as I said earlier, in the coming months, we will commence the full-scale trading of the NSC IFSC SGX GiveConnect. Our guidance for the FY2023 expenses remain unchanged. And barring any unforeseen risks, we expect full-year expense growth to be at the lower end of our guidance. And our capital expenditure guidance for the year remains unchanged at $70 to $75 million. So looking forward to building on this resilient and robust first half 23 performance and importantly, helping our clients navigate the evolving environment while delivering value to our shareholders and stakeholders. With that, I conclude my presentation and we'll move into the Q&A segment. Thank you. Anyone here with the first question? Yes, Nick.