"divergence with its price chart and the Acc/Dist chart." ?

Makes widely-anticipated BSE stake acquisition

SGX announced that it is buying a 5% stake in the Bombay Stock Exchange (BSE) for

US$42.7m. It has an obligation to invest another US$17.3m to acquire additional shares

to maintain its shareholding at 5% in the event of dilution. The total consideration is to be

paid in cash. The purchase had been widely anticipated. We understand that the

Deutsche Bourse also acquired a 5% stake on 14 Feb for US$42.4m.(BSE) for

US$42.7m. It has an obligation to invest another US$17.3m to acquire additional shares

to maintain its shareholding at 5% in the event of dilution. The total consideration is to be

paid in cash. The purchase had been widely anticipated. We understand that the

Deutsche Bourse also acquired a 5% stake on 14 Feb for US$42.4m.

Comments

Financially not a stretch. Estimated valuations are hazy due to the lack of public data.

Based on BSE?s FY3/06 earnings, we estimate that BSE has been valued at 43x CY06

P/E. The CY07 acquisition P/E would probably be in the range of 32-35x. The purchase of

this small stake is not expected to stretch SGX?s balance sheet. Even if the initial cost of

S$65m escalates to S$92m, this should still be well-covered by SGX?s cash hoard of

S$216m and its S$132m worth of hedge-fund investments. Furthermore, SGX potentially

has another S$207m coming in from the sale of two floors in SGX Center. We do not

expect the BSE purchase to jeopardise SGX?s ability to pay dividends.Estimated valuations are hazy due to the lack of public data.

Based on BSE?s FY3/06 earnings, we estimate that BSE has been valued at 43x CY06

P/E. The CY07 acquisition P/E would probably be in the range of 32-35x. The purchase of

this small stake is not expected to stretch SGX?s balance sheet. Even if the initial cost of

S$65m escalates to S$92m, this should still be well-covered by SGX?s cash hoard of

S$216m and its S$132m worth of hedge-fund investments. Furthermore, SGX potentially

has another S$207m coming in from the sale of two floors in SGX Center. We do not

expect the BSE purchase to jeopardise SGX?s ability to pay dividends.

Strategic initiative to further develop Asian Gateway. In previous conversations with

SGX, we understand that the BSE is not intended to be a financial investment. Nor does

SGX have any intention of launching an eventual takeover in the longer term. Stock

exchanges do not necessarily need to own one another in order to benefit from the flows

in mutual markets. Often, well-structured collaboration will do the trick, at much lower

costs. We see the BSE purchase as more strategically-driven than financially-driven.

Avenues for co-operation include:-

1) Dual listings and cross-border listings (this is likely to benefit SGX more)

2) Trading links (akin to ASX and Bursa) and clearing links (SGX intends to

increase its fee income by undertaking clearing facilities for peers)

3) Non-equity products i.e. derivatives and commodities (BSE a beneficiary here).In previous conversations with

SGX, we understand that the BSE is not intended to be a financial investment. Nor does

SGX have any intention of launching an eventual takeover in the longer term. Stock

exchanges do not necessarily need to own one another in order to benefit from the flows

in mutual markets. Often, well-structured collaboration will do the trick, at much lower

costs. We see the BSE purchase as more strategically-driven than financially-driven.

Avenues for co-operation include:-

1) Dual listings and cross-border listings (this is likely to benefit SGX more)

2) Trading links (akin to ASX and Bursa) and clearing links (SGX intends to

increase its fee income by undertaking clearing facilities for peers)

3) Non-equity products i.e. derivatives and commodities (BSE a beneficiary here).

No significant earnings contribution at this point. Previously, the JADE collaboration

with CBOT had clear benefits. In that we could see SGX leveraging CBOT?s commodity

expertise to develop its range of commodity products. Similarly, the cross-trading tie-up

with Bursa (if it ever comes about) has the clear potential to increase trading volumes,

given investors? mutual familiarity on both sides of the Causeway.

With the BSE tie-up, we see less obvious benefits for SGX. SGX?s cross-trade tie-up with

ASX never quite produced any success as investors were unfamiliar with the opposite

markets. This is likely to be the case if SGX and BSE ever try to set up a cross-trading

platform. As for attracting listings, the only Indian stock listed on the SGX never quite

garnered investors? attention. We see the 5% stake more as a long-tail option a laPreviously, the JADE collaboration

with CBOT had clear benefits. In that we could see SGX leveraging CBOT?s commodity

expertise to develop its range of commodity products. Similarly, the cross-trading tie-up

with Bursa (if it ever comes about) has the clear potential to increase trading volumes,

given investors? mutual familiarity on both sides of the Causeway.

With the BSE tie-up, we see less obvious benefits for SGX. SGX?s cross-trade tie-up with

ASX never quite produced any success as investors were unfamiliar with the opposite

markets. This is likely to be the case if SGX and BSE ever try to set up a cross-trading

platform. As for attracting listings, the only Indian stock listed on the SGX never quite

garnered investors? attention. We see the 5% stake more as a long-tail option a laa la

SingTel?s multi-associate strategy. In the long run, if the Indian capital markets become

developed, SGX would have a more valuable little stake. We see little necessity to amend

our earnings estimates at the moment.

Likelihood of a very strong 3Q07. The strong market volumes in Jan-Mar 07 could

produce a very strong 3Q for SGX and we are reviewing our earnings estimates because

of this. Average securities daily value traded in 2Q07 (Oct-Dec 06) was S$1.3bn, but this

had ballooned to S$2.1bn in Jan-Feb 07. We think SGX could surprise current market

estimates when it reports in April.The strong market volumes in Jan-Mar 07 could

produce a very strong 3Q for SGX and we are reviewing our earnings estimates because

of this. Average securities daily value traded in 2Q07 (Oct-Dec 06) was S$1.3bn, but this

had ballooned to S$2.1bn in Jan-Feb 07. We think SGX could surprise current market

estimates when it reports in April.

But fortunes hinge on sustained volatility. Interestingly, while March?s average

securities daily value traded rocketed further to S$2.6bn, SGX?s stock was one of theInterestingly, while March?s average

securities daily value traded rocketed further to S$2.6bn, SGX?s stock was one of the

[ 4 ]

worst hit in the recent sell-off. In our opinion, the selldown could be attributed to: 1) overvaluation;

and/or 2) expectations of a bear market bringing down forward average

securities daily value traded.

We maintain our Underperform rating, noting that the recent sell-down has only

brought valuations down to 30x CY08 P/E and less than 4% yields, not low enough for us

to be excited on the stock yet. While the BSE stake is positive news, we would be worried

if the SGX continues to take minor stakes in regional exchanges, depleting its capital to

the extent that dividends are threatened. Our target price remains S$5.11, based on

DDM., noting that the recent sell-down has only

brought valuations down to 30x CY08 P/E and less than 4% yields, not low enough for us

to be excited on the stock yet. While the BSE stake is positive news, we would be worried

if the SGX continues to take minor stakes in regional exchanges, depleting its capital to

the extent that dividends are threatened. Our target price remains S$5.11, based on

DDM.