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MER: A Shanghai-Singapore Connect In 12 Months?
Aspire, Investments | 20 April 2015
By: Vance Wong
Articles (74) Profile

The Shanghai-Hong Kong Stock Connect that was just launched last November proved to be the chief enabler of the recent Hang Seng Index (HSI) rally. The rally has seen the HSE hit a seven-year high.

The above graph clearly shows clearly that southbound capital flows grew sharply as quota balances for that flow fell.

As such, Macquarie Equities Research (MER) believes that China would want to continue liberalising its market for more access to foreign stocks. MER thinks that Singapore could be the future destination for a similar Connect programme.

Singapore’s RMB Clearing Attractive To China

MER highlights two important characteristics of the Singapore economic landscape that will be attractive to China: Renminbi (RMB) clearing services, and sufficient and ready liquidity.

Singapore is the third after Hong Kong and Taiwan to offer RMB clearing services. Furthermore, Singapore is one of the top offshore RMB hubs with the ability to clear RMB-denominated transactions readily.

The trading liquidity readily available in Singapore’s market brings another reason to the table for MER’s belief in a possible connect programme.

In addition, Singapore has a history of successful economic collaborations with China, some of these include the Sino-Singapore Tianjin Eco-city project and China-Singapore Suzhou Industrial Park.

Therefore, MER thinks that the good economic ties between China and Singapore could be a very good reason for the two to get into talks of a connect.

China Investors’ Benefits With SGX Access

Chinese companies listed on SGX can prove to be quite attractive as research from MER has shown that China investors have a preference for familiar China-related names. Some examples are Yanzijiang Shipping, COSCO Corporation Singapore and China Everbright.

Singapore’s Real Estate Investment Trusts (REIT) and business trusts provide high dividend yields, which is probably one of the biggest point of attraction for China. China does not have a large market for high dividend yield stocks, making the prospects of the connect even better if it materialises.

Last but not least, the ASEAN exposure that the Singapore stock market can provide to China investors “could offer higher earnings growth potential compared to China.”

SGX Net Profit To Rise by 8%

Based on MER’s assumption of 30 percent increase in securities trading activities and 50 percent in profit sharing agreement, MER believes that SGX’s net profit could increase by 8 percent. This is not considering that China stocks could be bought through SGX.

In view of the Shanghai-Hong Kong connect, which took seven months to take effect, MER thinks that “SGX could potentially launch a similar connection in a similar time frame.”

However, MER does not rule out the fact that China might be interested in focusing only on its ties with Hong Kong at the moment.

Nevertheless, MER believes that as China liberalises further, its benefits will be more extensive in terms of increased trading volume and exposure to foreign equities.

That being said, MER highlights that the Singapore-China connect could be done concurrently with the Shanghai-Hong Kong connect.

SGX Strong Balance Sheet

MER points out that SGX’s balance sheet shows great potential in its “ability to generate high operating cash flow” and no outstanding debts. This most probably means that the future dividend yields could hit beyond 3.5 percent.

The continued interest in China and Hong Kong shares could boost derivative trading volumes on the SGX. This is particularly true for the A50 futures.

As such, MER maintains their “Outperform” rating on SGX and a 12-month target price of $8.50.

Source: FactSet Fundamentals

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.

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