Singapore Exchange Limited

Executive Summary

Investment Thesis (3 Sentences)

Singapore Exchange operates as a monopoly on Singapore's capital markets, collecting toll-like fees on every trade, clearing, and listing in the city-state. The business generates 30%+ ROE consistently with 54% operating margins and minimal capital requirements, making it a textbook "toll gate" business. However, at P/E 28.6x and near all-time highs, the stock offers no margin of safety for new investors.

Key Metrics Dashboard

Decision: WAIT

Strong Buy Price: SGD 12.00 (30% below IV) Accumulate Price: SGD 13.70 (20% below IV) Fair Value: SGD 17.15 Current Price: SGD 17.26 (0.6% premium to FV)

Reason: Exceptional T1 Fortress business, but currently trading at fair value with no margin of safety. Wait for pullback.

---

Phase 0: Opportunity Identification (Klarman)

Why Does This Opportunity Exist?

Current Assessment: NO OPPORTUNITY AT PRESENT PRICE

The stock is priced efficiently because:

1. Monopoly status is well-recognized - Investors understand SGX is the only exchange in Singapore
2. Record earnings - FY2025 net profit of SGD 648M was an all-time high
3. Positive momentum - Stock up 39% in past 12 months
4. Strong tailwinds - Dual-listing partnership with Nasdaq, crypto futures launch, best IPO pipeline in years

Why is there no discount?

• Analysts have ~16 coverage with "Hold" consensus
• Morningstar fair value estimate: SGD 14.50 (stock trading 19% above this)
• Simply Wall St fair value: SGD 16.74 (stock trading 3% above)
• Record performance already priced in

Conclusion: Mr. Market is correctly valuing this high-quality monopoly. No mispricing exists.

---

Phase 1: Risk Analysis (Inversion)

How Could This Investment Fail Permanently?

1. Regulatory Disruption Risk: LOW

• Probability: 10%
• Impact: 40% value destruction
• Expected Loss: 4%

SGX operates under MAS (Monetary Authority of Singapore) oversight. Singapore's pro-business government has never shown inclination to break the monopoly. If anything, regulatory initiatives (dual-listing with Nasdaq) enhance SGX's position.

Mitigant: Government aligned with SGX success for financial hub status.

2. Hong Kong/Regional Competition Risk: MODERATE

• Probability: 25%
• Impact: 20% value erosion over 5 years
• Expected Loss: 5%

HKEX has launched competing A-share derivatives. Previously, SGX held monopoly on offshore China A50 derivatives (40% of derivatives volume). HKEX copying this product could erode volumes.

Mitigant: SGX has 18+ years of liquidity advantage; traders follow liquidity. FICC and equity derivatives grew 17-28% YoY in FY2025 despite HKEX threat.

3. Listing Drought Risk: MODERATE

• Probability: 40%
• Impact: 5% revenue impact
• Expected Loss: 2%

Singapore listings have declined to 2-decade lows. Companies prefer US/HK for larger investor pools.

Mitigant: Listing fees are only 2% of revenue. SGX has successfully pivoted to derivatives/FICC (51% of revenue now).

4. Technology Disruption (DeFi/Blockchain): LOW

• Probability: 5%
• Impact: 50% over 10+ years
• Expected Loss: 2.5%

Decentralized exchanges could theoretically disintermediate traditional exchanges.

Mitigant: Institutional adoption requires regulated venues. SGX launching crypto perpetuals shows adaptation. Central clearing (trust) hard to replicate in DeFi.

Inversion Summary

If I were short this stock, my 3-sentence bear case: "SGX trades at 28x earnings, a 20% premium to historical averages, with Hong Kong Exchange directly attacking its derivatives cash cow. Listing business is structurally impaired as Singapore loses to New York/Hong Kong. At near all-time highs, any disappointment gets punished severely."

Pre-Defined Sell Triggers (Non-Price):

1. HKEX A-share derivatives take >30% market share from SGX
2. Regulatory change allowing competing exchange in Singapore
3. Operating margin declines below 45% for 2 consecutive years
4. Dividend cut

---

Phase 2: Financial Analysis

Historical Financial Performance (SGD Millions)

Key Observations:

1. Revenue growing ~7% annually despite listing headwinds
2. Operating leverage evident - operating income CAGR (9.1%) > revenue CAGR (6.7%)
3. FCF growth (11.1%) exceeds net income growth - high-quality earnings
4. FY2023 FCF dip due to working capital timing, not operational issue

Profitability Analysis

Assessment: SGX earns extraordinarily high returns on invested capital. A 32.7% average ROE indicates a genuine economic moat - capital is not being competed away.

DuPont Decomposition (FY2025)

ROE = Net Margin × Asset Turnover × Equity Multiplier
31.15% = 47.28% × 0.34 × 1.88

Interpretation:
- Net Margin (47%) → Extreme pricing power (monopoly)
- Asset Turnover (0.34) → Low capital intensity (good for exchange)
- Equity Multiplier (1.88) → Modest leverage (conservative)

Owner Earnings Calculation

Net Income (FY2025):                     SGD 648M
+ Depreciation/Amortization:             SGD ~80M (estimated)
- Maintenance CapEx:                     SGD (50M) (estimated)
- Working Capital Changes:               SGD (30M) (estimated)
─────────────────────────────────────────────────────
Owner Earnings:                          SGD ~648M
Per Share:                               SGD 0.60

Note: For an exchange, D&A roughly equals maintenance capex (IT systems). Owner earnings approximate net income.

Balance Sheet Quality

Assessment: Near-perfect balance sheet. Net cash position, minimal debt, high liquidity. SGX could pay off all debt with less than 1 year's earnings.

---

Phase 3: Valuation

Method 1: Graham Number

Graham Number = sqrt(22.5 × EPS × BVPS)
             = sqrt(22.5 × 0.60 × 2.06)
             = sqrt(27.81)
             = SGD 5.27

Current Price = SGD 17.26
Premium to Graham = 228%

Interpretation: SGX fails Graham's defensive investor criteria on valuation. This is expected for high-ROE companies.

Method 2: Owner Earnings Valuation

Owner Earnings Per Share = SGD 0.60
Conservative Multiple (10x) = SGD 6.00
Fair Multiple (15x) = SGD 9.00
Premium Multiple (20x) = SGD 12.00
Current Multiple = 28.6x

Interpretation: At 28.6x earnings, SGX trades at a substantial premium to what Graham/Buffett would pay.

Method 3: Discounted Cash Flow (10-Year)

Assumptions:

• FCF Year 0: SGD 774M
• Growth Years 1-5: 6% (in-line with historical revenue growth)
• Growth Years 6-10: 4% (maturing)
• Terminal Growth: 2.5% (SGP nominal GDP)
• Discount Rate: 8% (low beta, monopoly = low risk premium)

Year    FCF (M)    PV Factor    PV (M)
1       820        0.926        759
2       869        0.857        745
3       921        0.794        731
4       977        0.735        718
5       1,035      0.681        705
6       1,077      0.630        679
7       1,120      0.583        653
8       1,165      0.540        629
9       1,211      0.500        606
10      1,260      0.463        583
─────────────────────────────────────
PV of FCF (10 yrs):              6,808

Terminal Value = 1,260 × 1.025 / (0.08 - 0.025) = 23,482
PV of Terminal = 23,482 × 0.463 = 10,872

Enterprise Value = 6,808 + 10,872 = 17,680
+ Net Cash = 821
Equity Value = 18,501

Shares Outstanding = 1,070M
Intrinsic Value Per Share = SGD 17.29

DCF Fair Value: SGD 17.29

Method 4: Relative Valuation

Assessment: SGX trades in-line with global exchange peers on P/E. Given higher ROE than most peers, valuation is not stretched vs. comparables.

Method 5: Private Market Value

Recent exchange M&A multiples:

• LSE acquired Refinitiv at ~15x revenue
• Nasdaq acquired Verafin at ~10x revenue
• CME typically trades at 20-25x EBITDA

SGX Private Market Value:

• EBITDA ~SGD 828M
• At 18-22x EBITDA → Enterprise Value SGD 14.9B - 18.2B
• Plus Net Cash SGD 821M → Equity Value SGD 15.7B - 19.0B
• Per Share: SGD 14.67 - 17.76

Valuation Summary

Weighted Intrinsic Value: SGD 17.15 (Weights: DCF 50%, Private Market 30%, Owner Earnings 20x 20%)

Price Targets

Current Price (SGD 17.26) = 0.6% ABOVE Fair Value → NO MARGIN OF SAFETY

---

Phase 4: Moat Analysis

Moat Sources

1. Legal Monopoly (Strongest Source)

Measurement: 100% market share in Singapore securities trading/clearing

SGX is the ONLY licensed exchange in Singapore. Any company wanting to list publicly in Singapore must use SGX. Any institutional investor wanting to trade Singapore securities must route through SGX. This is not just an economic advantage - it is a government-granted monopoly.

Durability: HIGH (20+ years)

• MAS shows no inclination to license competitors
• Singapore benefits from single exchange (liquidity concentration)
• New Nasdaq partnership reinforces SGX's position

2. Network Effects (Secondary)

Measurement: Liquidity begets liquidity

Derivatives traders congregate where liquidity is deepest. SGX's FTSE China A50 futures have $5B daily turnover and $12B open interest - the deepest offshore A-share liquidity pool. Traders won't move to HKEX's competing product until HKEX has equal liquidity (chicken-egg problem).

Durability: MODERATE (5-10 years)

• HKEX is determined to break this advantage
• Some liquidity fragmentation inevitable over time
• But SGX has 18-year head start

3. Switching Costs (Supporting)

Measurement: Connectivity, compliance, familiarity

Brokers have invested in SGX connectivity, trained staff on SGX systems, and built compliance processes around SGX rules. Switching to a hypothetical competitor would require significant reinvestment.

Durability: MODERATE

• Relevant only if competitor emerges
• Currently not a primary moat driver

Moat Durability Assessment

Moat Trajectory: STABLE to WIDENING

SGX is actively widening its moat through:

1. Nasdaq dual-listing partnership - Makes SGX more attractive for listings
2. Crypto perpetuals - Captures new asset class
3. FICC expansion - Diversifies beyond equities
4. Data/connectivity revenue - Recurring, high-margin

---

Phase 5: Management & Incentive Analysis

Compensation Structure

SGX CEO Loh Boon Chye's compensation is not fully disclosed in easily accessible sources, but Singapore exchange executives typically receive:

• Base salary
• Variable bonus tied to financial KPIs (revenue, profit, ROE)
• Long-term incentive shares

Assessment: Compensation appears reasonable for a Singapore financial institution. No red flags in terms of excessive pay or perverse incentives.

Capital Allocation Track Record

Assessment: Excellent capital allocation. SGX returns half of FCF to shareholders via dividends, maintains a fortress balance sheet, and invests modestly in growth. No empire-building or value-destructive M&A.

Dividend Track Record

Dividend Growth CAGR (5 years): ~5%

SGX has raised dividends consistently with a ~60% payout ratio, leaving room for growth and safety margin.

---

Phase 6: Catalyst Analysis

Potential Catalysts

No Catalyst Assessment

Without a specific catalyst, investors are paying fair value for steady 6-8% earnings growth. This implies ~8-10% total returns (earnings growth + dividend yield), which is reasonable but not exceptional.

Decision: With no compelling near-term catalyst and the stock at fair value, WAIT for better entry.

---

Phase 7: Megatrend Resilience

Total Score: +6 (Just below T1 threshold of +7) Tier: T1 Fortress (No scores below 0)

Resilience Assessment: SGX is extremely well-positioned for macro headwinds. Singapore's neutrality, the company's net cash position, and non-discretionary nature of trading make this a genuinely defensive holding.

---

Recommendation

+-------------------------------------------------------------+
|                  INVESTMENT RECOMMENDATION                   |
+-------------------------------------------------------------+
| Company: Singapore Exchange Limited     Ticker: S68.SI       |
| Current Price: SGD 17.26               Date: Dec 25, 2025    |
+-------------------------------------------------------------+
| VALUATION SUMMARY                                            |
| +-------------------------+-----------+-------------------+  |
| | Method                  | Value     | vs Current Price  |  |
| +-------------------------+-----------+-------------------+  |
| | Graham Number           | SGD 5.27  | -69% (expected)   |  |
| | Owner Earnings (20x)    | SGD 12.00 | -30%              |  |
| | DCF (Conservative)      | SGD 17.29 | +0.2%             |  |
| | Private Market Value    | SGD 16.36 | -5%               |  |
| | Analyst Consensus       | SGD 18.27 | +6%               |  |
| +-------------------------+-----------+-------------------+  |
|                                                              |
| INTRINSIC VALUE ESTIMATE: SGD 17.15 (weighted average)       |
| MARGIN OF SAFETY: -0.6% (stock above fair value)             |
+-------------------------------------------------------------+
| RECOMMENDATION:  [ ] BUY  [ ] HOLD  [ ] SELL  [X] WAIT       |
+-------------------------------------------------------------+
| STRONG BUY PRICE:    SGD 12.00 (30% below IV)                |
| ACCUMULATE PRICE:    SGD 13.70 (20% below IV)                |
| FAIR VALUE:          SGD 17.15                               |
| TAKE PROFITS PRICE:  SGD 20.58 (20% above IV)                |
| SELL PRICE:          SGD 25.73 (50% above IV)                |
+-------------------------------------------------------------+
| POSITION SIZE: 3% of portfolio (when entry price reached)    |
| CATALYST: Nasdaq dual-listing success (12-24 months)         |
| PRIMARY RISK: HKEX derivatives competition                   |
| SELL TRIGGER: Operating margin below 45% for 2 years         |
+-------------------------------------------------------------+

---

Verdict

=== VERDICT: S68 | WAIT | Strong Buy: S$12.00 | Accumulate: S$13.70 | Fair Value at current price ===

Summary: Singapore Exchange is a T1 Fortress business with an unassailable monopoly on Singapore capital markets. The company generates 31% ROE, 54% operating margins, and maintains a fortress balance sheet with net cash. It is exactly the type of "toll gate" business that Buffett loves.

However, Mr. Market knows all of this. At SGD 17.26, the stock trades at fair value with zero margin of safety. Near all-time highs after a 39% rally, there is no opportunity for value investors today.

Action:

1. Add S68.SI to WAIT list with price alerts at SGD 13.70 and SGD 12.00
2. Monitor HKEX competition for derivatives
3. Revisit if market correction brings stock to accumulate range
4. If already owned: HOLD - this is a quality compounder for the long term

---

Sources Used

Data Validation:

• Revenue FY2025 (SGD 1,371M): Confirmed across multiple sources
• ROE (31%): Confirmed via Stock Analysis
• P/E (28.6x): Confirmed via Yahoo Finance
• Dividend (SGD 0.43): Confirmed via Stock Analysis dividend page

---

Appendix: Graham Criteria Assessment

Graham Assessment: SGX passes quality criteria but fails valuation criteria. This is the classic "wonderful company at fair price" scenario.