SGX – A shrinking capital market

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The SGX continues to shrink. Companies are being delisted, trading volume is down, liquidity is waning and it struggles to compete with regional alternatives.

By John Pennington

The Singapore Exchange (SGX) is a shrinking capital market. The decline over recent years has been clear and pronounced. The number of companies listed on the market has dropped. Some listed elsewhere. Others went private, snapped up by bigger corporations or controlling shareholders. There were 27 privatisations in 2016 which lost the SGX an estimated S$15.5 billion (US$ 11.2 billion).

Source: SGX

The SGX lost a number of high-profile companies in 2016 and already in 2017, 10 companies have delisted, 10 more have confirmed acquisition offers or do not meet listing rules. On the other hand, there have been just four Initial Public Offerings (IPOs) this year.

Companies such as Neptune Orient Lines and SMRT Corp bailed out of SGX for a number of reasons including the absence of IPOs, little confidence in the local equities market, and a drop in trading volume. “One can focus purely on the number of listings versus the number of delistings…I think it’s important to look at funds raised as an additional parameter,” SGX chief executive Loh Boon Chye argued. It is a balancing act: while those losses cost the SGX S$13.4 billion (US$ 9.69 billion) in 2016, the money raised from IPOs amounted to S$13.2 billion (US$ 9.55 billion).

Foreign companies are also waving SGX goodbye

Foreign companies also delisted from the SGX. Among them were Chinese start-ups that wanted to save compliance costs and management resources. Some Chinese firms favoured the Hong Kong stock exchange instead. Listing in Shanghai or Hong Kong helps them build brand and product recognition closer to home, particularly if the stocks generated little interest in Singapore.

The drop in trading volume had a knock-on effect. “Weak economic growth has pressured corporate earnings growth, which dampened investor interest, which then hurt valuation and turned away IPOs (initial public offerings),” explained IG market analyst Bernard Aw. “The market is locked in a vicious circle now,” he added.

Fees are uncompetitive

Changes to fees were introduced in 2014 to raise liquidity. Those changes came after the penny stock crash of 2013, where S$8 billion (US$5.74 billion) of market value was lost. The SGX proposed measures designed to prevent a repeat and to try to prevent a loss of confidence in the market. Confidence in the market is still low.

An Ernst & Young report from 2012 showed that even then, in comparison with the Hong Kong exchange (HKEx), fees to list on the SGX were higher.

Sources: Ernst & Young  and HKEx  

Trading fees for traders and retail traders are also higher. In addition to a clearing fee of 0.0325%, the current trading fee on the SGX is 0.0075% of contract value, higher than the 0.005% charged by the HKEx and the 0.00487% charged by the Shanghai Stock Exchange. Furthermore, most trading platforms such as Phillip Securities (POEMS), UOB Kay Hian and and CIMB Securities have a minimum brokerage fee of $25, excluding GST. Thus, these higher fees also contribute to a lack of liquidity.

Listing Fees were hiked again in 2013 so the minimum equity market listing fee stood at US$72,318 while the fees to list on the HKEx remained the same. The result of continual delisting, low trading volume, and barriers to entry is that the firms that are still listed are weakened and generally what can be termed as ‘Old Economy’ firms. Without big IPOs to excite interest, the exchange is static.

The SGX now faces increased competition

China, Hong Kong, the US (NASDAQ), and other exchanges are now more attractive options than the SGX because their barriers to entry are often lower, they have more companies listed and they trade in bigger volumes. The mutual trading link between Hong Kong and China further strengthens their proposition over Singapore’s.

No longer one of the world’s biggest bourses, the SGX has fallen to be the ninth biggest in Asia. Emerging stock markets such as those in Indonesia, Malaysia, and Thailand are growing rapidly and instead of listing on the SGX, firms are listing in their own countries.

Source: Sustainable Stock Exchanges Initiative (December 2016)

IPOs are up, but it may not be enough for the SGX

The lack of IPOs on the SGX is one factor companies cited when delisting. However, globally, the volume of IPOs is on the up. The number of IPOs in the first two quarters of 2017 is higher than it was at the same point last year. Hence, Loh is optimistic, adding, “I cannot look forward to know how many delistings there will be. I can tell you my pipeline of potential IPOs is better than what it was, so that’s the relative comparison.”

IPOs on the SGX raised S$454 million (US$329 million) in the first two quarters of 2017, and experts say the total for the year will surpass that of last year. “Singapore’s first-half 2017 numbers suggest that, apart from REITs and business trusts, niche sectors in the consumer space and professional services will be the next big growth opportunity for the local exchange,” predicted Tham Tuck Seng, Capital Markets Leader at PwC Singapore.

Sources: Business Times and Today Online  

The volume of IPOs may be up, but it is not just about quantity. They will not guarantee investment, particularly if the IPOs are not attractive enough, and not big enough.

Dual-class shares could push SGX into a better position

The SGX launched a dual-class share consultation which ended earlier this year. Although this could make the exchange a more attractive option, it is not without pitfalls. Hong Kong plans to introduce a third exchange with dual-class share options. It is a race to get to the market first.

Although dual-class shares could open up a “global race to the bottom” by diluting investor rights, the SGX will demand more regulatory control than other bourses, which could deter firms from listing. “I don’t think what we have envisaged for dual-class share structure is until that extent, where investors are merely financial investors and have no say in the direction of the company,” SGX head of capital market development Mohammed Nasser Ismail said.

SGX might try to engage companies early

In Thailand, there is a platform enabling the trading of start-ups while in Indonesia, start-ups are guided towards going for IPOs. The SGX has started to work with companies in the early stages in the hope of getting them listed when they are ready.

It is an approach that could bear fruit, although only in the long-term. “Ultimately, local entrepreneurial companies have a penchant to list on SGX as a platform for growth,” Loh believed. “The sectors with listing potential in Singapore include consumer products, industrials, health care and REITs.”

One option is to look to serve the interests of companies that are not served elsewhere. Trading has moved on from the days when one exchange suited every company. Flexibility and diversity is key. Singapore led the way by developing the real estate investment trust (REIT) market and could do a similar thing by identifying and catering for specific niches.

However, as is true in most areas of business, standing still means the SGX is in fact losing ground compared to its competitors. If the IPOs Loh talks about do not materialise, or they are not big enough, as other exchanges continue to expand rapidly, then the exchange will shrink even further and fall even further behind regional alternatives.