SGX’s 3Q09 earnings of S$55.3m came ahead of CLSA expectations as market volumes remained robust underpinned by the recent rally. With current equity volumes continuing to display resilience we raise our FY09 average daily volume assumptions by 52% to S$1.07bn and our FY09-11 earnings by 44-78%. Nevertheless, trading at 25x FY09 earnings vs. 19x for global peers our new target price of S$3.80 (up from S$1.80) implies 39% downside. Maintain SELL.

Average daily traded value for 3Q09 fell 52% YoY and 12% QoQ. But the rate of the QoQ fall slowed as volumes picked up from the market rally over the past two months. Indeed, March 2009 volumes expanded 18% MoM. Market velocity improved to 69% in March from 56% a month earlier. So far in April, average daily value traded runs at S$1.3bn. As a result, we raise our FY09 average daily value assumptions to S$1.07bn from S$0.7bn. We remain less sanguine on the medium term especially as fundamental macro pressures remain unresolved. Hence we expect FY10 volumes to contract 11% YoY to S$0.95bn. This is a velocity of 63%; similar to the average velocity since January 2008- the start of the bear market.

3Q09 derivative clearing revenues fell 20% YoY and 27% QoQ, mostly on the back of falling futures contract volumes (-20.5% YoY). Almost all major contracts including the MSCI Taiwan (-21% YoY), MSCI Singapore (-28% YoY), Nifty (-51% YoY) saw significant volume declines. Rising redemptions along with falling AUMs and higher volatility should see many market participants in this space remain sidelined. Similarly, structured warrant turnover fell 62% YoY and 33% QoQ. While Management has seen a positive take-up of single stock derivatives since their launch in February 2009, this will have no material impact in the medium term, we believe.

Fee income for 3Q09 contracted 12% YoY as account maintenance and corporate actions diminished (-25% YoY). Similarly, with just 2 IPOs (vs. 9 in 3Q08) listing and membership fees fell 20% YoY. However, the Group’s shift towards adding value for price information services show positive results with fees here increasing 12% YoY. Nevertheless, this alone will not be enough to arrest the decline in SGX’s other fee sources as macro conditions deteriorate. We expect total fee income to fall 10% YoY in FY09.

Management claims the new derivatives clearing system is on-track to be launched by December 2009. Together with the recently launched equity clearing system, overall depreciation costs should increase ~50% YoY in FY09. However, overall opex should fall 11% YoY as bonus provisioning declines in FY09.

In light of our upgrades to average daily value assumptions we increase our FY09-11 earnings by 44-78%. As a result, we raise our DCF-based target price from S$1.80 to S$3.80. Nevertheless, trading at 25x FY09 earnings vs. 19x for peers, SGX remains expensive. Similarly, compare 7.8x FY09 PB vs. 4.1x for peers. Our target price implies 39% downside. Maintain SELL.