We expect foreign inflows to Asia to continue because of its better economic growth prospects relative to the west. Additionally, we think local retail participation in Singapore’s equity market could rebound after having fallen from an average of 15.2% of household wealth in 2003-07 to an estimated 9.3% at the end of 2008. However, we believe this will be offset by fewer Chinese listings because of the better valuation premium commanded by similar listings in China.
We believe SGX’s main risk, the potential break-up of its monopoly, has been mitigated by its announcement of a joint venture with Chi-X to set up the first exchange-backed “dark pool” in Asia. We think this partnership should eliminate criticism of SGX’s monopoly status and allow it to defend its market share.
We continue to derive our price target using a DCF-based methodology, explicitly forecasting long-term valuation drivers with UBS’s VCAM tool. Our new price target reflects our higher estimates. Our key assumptions include a WACC of 8.9% (previously 8.6%) and a long-term growth rate of 3%. The change in WACC is due to higher beta.
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