The SGX and the New Capital Market

By Stefanie Yuen Thio
and Chee Chin Wi
and Leon Lim V-King

We bemoan the lacklustre stock exchange and complain that the government isn’t doing enough. We point to greener trading pastures in Hong Kong. Is it time to re-look at the role of the stock market and how we benchmark ourselves?

This February, Bloomberg published an article headlined The Incredible Shrinking Singapore Stock Market, which stated that over the past five years, more companies had exited than joined the SGX, leading the bourse to suffer a net outflow of S$19.2 billion in market value last year alone.

Some high-profile delistings underlined the trend. In 2016, homegrown massage chair-maker Osim International famously quit the SGX after a buyout led by founder Ron Sim. In the same year, household-name traditional Chinese medicine company Eu Yan Sang bowed out via a take-private launched by a consortium comprising its chief executive, Temasek Holdings and private equity (PE) firm Tower Capital.

Comparisons with Hong Kong are inevitable. Boosted by mega IPOs, its well-performing stock exchange, the HKEX, saw 2018 profits surging 26 per cent to a record high. Fuelling further fears that Singapore had lost out to its rival as a listing destination, Osim revealed that it was attempting a relisting in Hong Kong, presumably to seek higher valuations there. And the successful HKEX IPO of Singapore’s very own unicorn, gaming hardware maker Razer, was yet another blow for the SGX.

Amid the gloom, a silver lining: one sector in which Singapore clearly leads is in real estate investment trusts (REITs), where its 51 listed REITs and business trusts cast Hong Kong’s paltry 10 into the shadows. Nonetheless, these factors have led commentators to worry that Singapore will cease to be a market for growth companies, turning instead into a specialised exchange for safe yield-play stocks.

But what in fact ails the market? And is Hong Kong the real bogeyman?

Are the barriers to a Singapore listing too high?

Market participants complain that listing in Singapore has become onerous – the cost is too high, the regulatory framework, too stringent.

Global scandals have certainly contributed to escalating listing costs in the past decade. However, these have affected Hong Kong too, and its IPO expenses far outstrip those of Singapore’s (to illustrate: for better value many Hong Kong IPO aspirants outsource a chunk of the prospectus drafting to Singapore lawyers). Its regulatory burden is also in reality heavier than Singapore’s, a common complaint of Hong Kong IPO sponsors.

Regardless, earlier this year the Monetary Authority of Singapore (MAS) launched the S$75 million Grant for Equity Market Singapore (GEMS) to defray IPO costs, with companies in the “New Tech” and “High Growth” sectors benefitting the most. Under this scheme, if Razer had listed in Singapore instead, the MAS would have picked up 70 per cent of the tab, capped at S$1 million.

Punters also grouse about insufficient after-market support and the paucity of analyst coverage – the result of cost-cutting at profit-squeezed brokerage firms – which retail investors rely on to gain insight into newly listed companies. A second component of GEMs aims to address the issue, with the MAS co-funding up to 70 per cent of equity research analysts’ salary to encourage brokers to hire more of them, facilitating price discovery and liquidity.

Is Hong Kong the real bogeyman?

A tougher nut to crack is the valuation gulf between SGX and HKEX listed companies.

Critics lament the lack of sovereign wealth support as one cause for low liquidity and valuations. Temasek Holdings used to focus on local companies – witness the prevalence of “Temasek-linked companies” listed in the ’80s and ’90s. In recent years it has, in line with Singapore’s growing international influence, instead flexed its financial muscle overseas, taking stakes in global institutions like Goldman Sachs and Morgan Stanley. In 2004, 52 per cent of Temasek’s net portfolio value resided in Singapore assets. This ratio was almost halved in 2018.

But the tide appears to be turning, with wholly owned Heliconia Capital investing in various local businesses, including restaurant-operator Jumbo, coffee-shop operator Kimly, water solutions provider Sanli Environmental, F&B group RE&S Holdings and recruitment firm HRnetGroup.

But the real reason for the delta in trading valuations is China’s ready capital.

Hong Kong’s integration into the People’s Republic made its stock exchange a natural venue for Mainland capital flows. There is no better example than Stock Connect. The cross-boundary initiative allows international and mainland Chinese investors to trade securities on the Hong Kong, Shanghai and Shenzhen exchanges, and opened up avenues for big money to move to these markets.

As of end-2018, total turnover on Hong Kong’s tieup with Shanghai (over its four-year lifespan) and Shenzhen (over two years) was RMB 10.31 trillion (about S$2 trillion) and RMB 4.15 trillion (about S$840 billion) respectively. Clearly this has provided a financial shot in the arm for the HKEX that has no equivalent in Singapore.

But will this last? US-China trade tensions have put a dampener on Chinese markets, with Shanghai’s stock benchmark ending 2018 as the world’s worst market performer for a second year, falling 24.6 per cent (compared to the STI’s 9.8 per cent slide). Volatility is clearly the flipside of massive capital flows.

In any event, the HKEX is not necessarily a natural alternative to listing in Singapore. The Fragrant Harbour does not always welcome our companies with open arms – Osim’s aborted bid to launch its listing there is a case in point. Arguably, the more immediate competitor to an SGX listing is PE money.

Many of the recent privatisations have been initiated or supported by PE funds. Last October, The Business Times reported robust activity in PE and venture capital deals in Singapore, with US$739 million spent on 20 deals in Q2 2018 alone, including the top deal, the S$414 million privatisation of crane supplier Tat Hong Holdings. Other recent deals involving PE money include the privatisations of warehouse operator GLP (S$16.3 billion), ARA Asset Management (S$1.8 billion) and logistics company Poh Tiong Choon (S$276 million).

A successful privatisation often indicates a positive corporate story.

HNA Group’s S$1.4 billion offer for CWT Limited in 2017 provided a 12.6 per cent premium for the logistics company. In 2015, French shipping firm CMA CGM made an even more jaw-dropping offer for Neptune Orient Lines, priced at a 48.6 per cent premium.

Being grown and traded on the SGX had conceivably enhanced the value of these companies, enabling shareholders to exit with a healthy profit.

What next?

Perhaps it is time for us to stop viewing the HKEX as a trading nemesis. Just as we do not compare our bourse to the Shanghai exchange, so the HKEX is just one of the three principal Chinese exchanges.

And for the SGX to forge a new path. With companies seeking to raise capital now enjoying a plethora of options from crowdfunding platforms to PE money, the public equity market will need to get comfortable with the idea that it is no longer a principal funding forum. The SGX has started reinventing its role with its initiatives to help grow young companies not yet ready for listing, and by linking up with international exchanges to provide seamless cross-border trading access.

Singapore investors also need to acclimatise to new models of valuation, moving away from pure price-earnings valuations to metrics that better suit high-growth tech companies. How many of the FAANG companies (Facebook, Amazon, Apple, Netflix, Google) would have had a successful take-up if they had IPO’ed in Singapore? It is hoped that expanding the pool of research analysts will help to accomplish this.

Even as the government takes steps to encourage listings, we must attune to a new normal – where an IPO is not the last stop on the journey to corporate growth, and where Singapore is seen as a pitstop on our companies’ path to achieving international recognition.


TSMP law corporation