Published August 25, 2008

Listed Asian bourses brace for headwinds

Poor trading volumes, fall in new listings set tone for weaker second half

By LYNETTE KHOO
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(SINGAPORE) The sharp drop in stock market volumes and listings have left stock exchanges in the Asia-Pacific reeling with an earnings slump in the quarter ended June 30.

'If things turn around, shares of these exchanges will be excellent plays but the market obviously hasn't turned around.'
- Hugh Young,
Aberdeen Asset Management Asia's managing director

These bourses, whose lifeline is in market volumes, are set for more headwinds as risks in market and economic conditions are heightened.

'They are all tarred with the same brush,' said Hugh Young, Aberdeen Asset Management Asia's managing director. 'If things turn around, shares of these exchanges will be excellent plays but the market obviously hasn't turned around.'

Mr Young noted that while the balance sheets of these exchanges remain strong, they fall victim to market conditions far more than any other corporates.

Over the past two weeks, most listed stock exchanges in the region - Singapore Exchange (SGX), Bursa Malaysia and Hong Kong Exchanges & Clearing (HKEx) - reported earnings decline. Poor trading volumes and fewer capital raisings are now setting the tone for a weaker second half.

Asia's largest listed bourse, HKEx posted a 6 per cent fall in earnings for the second quarter to HK$1.32 billion on flagging trading volumes and investment income.



Its rival SGX reported a 48.7 per cent slump in net profit to S$90.4 million for its fiscal fourth quarter from a year ago as income from securities business fell on lower trading volumes and fewer listings. For the full year ended June 30, SGX's net profit rose 13.4 per cent to S$478.3 million.

In a sombre tone, Bursa Malaysia said last week that it expects to miss its full-year targets, after its profit plunged 56 per cent to RM28.6 million (S$12 million) in the second quarter ended June.

It noted that the weak performance of the Malaysian market - which has fallen more than a fifth so far this year - will likely persist. Though these exchanges are beefing up their derivatives business, this market segment is not able to fully pick up the slack from the equities side as yet. Their diversification efforts into new products will also take some time, analysts say.

Prompted by the poor showing, analysts have scaled back their earnings projections. Morgan Stanley and Credit Suisse cut their earnings forecasts for SGX by 5 per cent for FY09. Credit Suisse reduced its earnings forecast for HKEx by 2 per cent each for FY08 and FY09.

Bursa saw the biggest earnings downgrades, with CIMB-GK shaving its estimates for FY08-10 by 10-20 per cent and downgrading its rating from 'trading sell' to 'underperform'. Citi cut its earnings forecasts for Bursa by 8 per cent for FY08-10.

Bucking the trend, Australian Securities Exchange (ASX) - Asia-Pacific's second-largest listed stock exchange - posted a 2.7 per cent rise in net profit for second-half ended June 30 to A$178.5 million (S$218.5 million) and a 16.9 per cent jump for its full fiscal year to A$365.9 million. This prompted Credit Suisse to raise its earnings forecasts for ASX by about 4 per cent for FY09.

But ASX had joined its regional rivals in predicting a challenging year ahead.

'The earnings of the ASX generally hold up better than other Asian exchanges as volumes are less volatile due to the mix of business,' said Andrew Mattock, a fund manager with Henderson Global Investors. ASX listings are predominated by energy and resources-related plays.

Exchanges, due to their monopoly status, generally trade on large price-to-earnings premiums. But they offer an attractive proposition at the right price, Mr Mattock said.

'Unfortunately the markets in Asia are going through a de-rating in terms of the price people are willing to pay for companies,' he added.

That de-rating is being seen in their share-price slump. Year-to-date, the market values of SGX, HKEx and Bursa have more than halved while ASX shed some 43.6 per cent in its market cap. Most are still trading above bear market lows of 2001 and 2004, with the exception of Bursa which was only listed in 2005.

With further volatility seen in their earnings, that element could continue to be reflected in their share prices.

Stocks in Asia-Pacific, as measured by the MSCI AC Asia-Pacific ex-Japan index, have fallen 27 per cent this year. IPO volumes in Asia ex-Japan totalled $22.8 billion in the first half of the year, a 42 per cent drop from the year- ago period, according to Thomson Reuters.

'We expect markets to remain erratic but ultimately weak as investors discount a protracted US recession, slowing regional growth, earnings disappointment and general uncertainty persists,' Morgan Stanley said in a report.