university home work - moex revenue decline analysis

7/25/2019 University home work - MOEX revenue decline analysis

1/12

Situation:

Moscow Exchange

Stock Market, Main Equity Market

Problem:

Liquidity of the main equity market is decreasing

There is evidence of the clients outflow to other international exchanges, i.e. LSE

Questions:1. Understand the nature of such decline

2. Suggest options on how to improve liquidity on the equity market

Student: Ivan Shapochkin

1


2/12

Analysis of internal and externalenvironment

1

2


3/12

Main drivers of growth are operations with REPO securities; mainequity market has fallen down by 64% from its peak in 2009

bln rub

At the moment the main equity market is in the crisis positions, nonetheless the overall stock market isgrowing.

Source: Moscow Exchange data analysis

Analysis of operations volume executed by the Top 25 operators of the stock market within 2008 2013.

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

nov

jan

mar

may

july

semp

nov

jan

mar

may

july

semp

nov

jan

mar

may

july

semp

nov

jan

mar

may

july

semp

nov

jan

mar

'08 2009 2010 2011 2012 2013

Bonds

Bonds: Main market and negotiation deals

Equities: Main market

Bonds: REPO

Equities: Negotiation deals

~1,9 bln rub decrease64%

2928

1056

Equities: REPO

3


4/12

Equity market decrease is not the local problem, overall market isexperiencing decline as well. Bottom line economical downturn.

Analysis of evolution of the worlds traditional equity market by the geographical areas.

However, the main equity market of the Moscow Exchange fell down twice as much European industry.

LSE equity market lost ~25% of operational volume in 2012.

Source: Report of World Federation of Exchanges for 20124

Total

volumeofoperationsbygeographicalareas.

0

1

2

3

4

5

6

0

2

4

6

8

10

Decline ~35%

Totalvolumeofoperations,bln$

Total Americas Asia-Pacific EU and Middle East


5/12

Identification of the reasons foroperations volume decline

2

5


6/12

What is the reason of such fast Moscow Exchanges mainequity market decline vs. competitors?

Volume ofOperations

Market Capitalization

Number of issuers Number of equities

How the number of issuers was

changing during this time frame?What are the segments of the

issuers?

Which companies have the

largest capitalization? How the capitalization was

changing?

Turnover Ratio

Number of savers Savers activity

What was the behavior of saverswithin given timeframe?

What are the types of savers?

How activity of the savers waschanging?

Was the activity changing in linewith client base growth?

1

2

Segmentation of the main drivers of volume of operations on the main equity market.

6


7/12

Main equity market capitalization is growing, but there is evidenceof outflow of companies within the last two years

Market Capitalization

0

50

100

150

200

250

300

350

400

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

bln rub quantity of issuers

Analysis of equity market capitalization trends.

Decline of the quantity ofissuers in 2012 is causedby the shrinkage ofsecond and third tiresegments, while theblue chip segment isgrowing.

The main driver of themarket growth is the A1segment.

Despite the decrease ofquantity of issuers in Band C lists, the marketcapitalization is growingdue to the new emissions

by the blue chips.

212

62

17

17

198

63

11

25

194

66

14

27

293

69

13

31

241

67

11

33

223

57

13

34

A1

A2

B

C

Capitalization of companies byquotation lists:

Quantity of issuers:

Total quantity of issuers

Quantity of issuers by thequotation lists

Why quotation lists B and C are loosing companies?

Given the fact that capitalization of list C is insignificant in respect to other lists, we will approach list B only.

Number of issuersNumber of

equities

Source: Moscow Exchange data, Reporting of companies - issuers7


8/12

In 2012-2013 the amount of companies in the list B decreased by18% (12 companies)

Market Capitalization Number of issuersNumber of

equities

Issuers1. Companies, which have already been traded on theexchange in the list C, wishing to join the list B.

2. New clients companies, which have appropriateresources to join the B list.

3. Companies whishing to continue its trading in B list /including clients with decreasing financial performance

4. Companies, traded already in list B whishing to join thelist A2.

Analysis of the client segments with the highest churn of issuers.

Competitive threat of international exchanges because of thehigh buyers power (access to international clients, T+Ntrading, reputational factors).

Risks

Leaving the exchange due to low internal economicalperformance and inability to maintain Exchanges listing

requirements.

Low financial performance of the companies. Inability to join theB list.

Former client of segment 3: JSC Kuzbasenergo, left quotationlist B in 2013y.Capitalization: 6,12 bln rubRevenue: 31 mln rub (2011)Profit: - 2 mln rub (2011)

The company is experiencing internal economical downturn andcan not maintain Moscow Exchanges listing requirements.

Potential client of segment 2: Mail.Ru Group.Listed on LSE from 2010y.Capitalization: 7 bln USDRevenue: 466 mln USD (2011)Profit: 31 mln USD (2011)

The company preferred listing on LSE because of majoradvantages of Londons exchange.

It is highly recommended to focus on retaining the companies of segment 2 and profitable companies of segment 3, whichpotentially have high risk to issue stock outside Russia, because of strong advantages of their competitors. These companies havepotential to significantly increase capitalization and volume of operations on the exchange.

Clients of segment 3, which are leaving the exchange because of financial difficulties shall not be a priority at the moment as theyhave not got enough resources to increase the volume of operations.

Source: The Companies annual reports, LSE data 8

!


9/12

Why Russian companies prefer listing on LSE to MoscowExchange?

To the moment 46% of the IPO volume of Russian companies accounts for the Main Market and AIM of LSE. LSEs AIM is targeted at emerging and developing companies and could be considered as a direct competitor of

quotation list B of Moscow Exchange.

Weak points of Moscow Exchange vs. London Stock Exchange:

pricing: MB commission in 2013 was 1,3 base points (after its reduction in Jan 2013), LSE 0,7 b.p. + ITservices/clearing = 0,9 1,0 b.p; the marginal requirements of LSE are lower.

width of the market: LSE has wider client base and offeres more instruments (investors can create complex

structures using multiple assets). infrastructure: LSE has smooth and well-adjusted internal infrastructure (central securities depositary, central

counter party, risk management, T+2 mode etc), Moscow Exchange is making the first steps in it.

To retain and attract clients to Russian markets it is crucial to develop at least the same conditions, which are offeredby the international exchanges, specifically:

Significantly improve infrastructure (finish implementation of T+N on equities market, develop a system ofcentral counter party).

Reduce pricing of the services, as this has become one of the main factors in the industry as international wallswere erased. The exchange has got huge potential to decrease pricing through the reduction of internal coststructure.

To create inflow of international investors to grow the client base and increase turnover of the instruments.

Market Capitalization Number of issuersNumber of

equities

Source: IPO prospect of Moscow Exchange, analysis of IC Aton, Moscow Exchange strategy, LSE data

9


10/12

Savers became less active at the main equity market due todownturn in the Russian economy

Turnover ratio Number of savers Savers activity

10,16711,609

10,343

7,9476,787

0

100

200

300

400

500

600

700

800

900

1000

0

2

4

6

8

10

12

14

16

18

20

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Trust Management Clients

Non-residents

Legal Entities

Individuals (x10)

Total number of uniqe savers

Number of active savers *(000)

Number of unique savers **(000)

Analysis of savers activity.

41%

Average volume of each deal is also declining for every customer segment.

Low activity of non-residents is caused by absence of state-of-the-art infrastructure of Moscow Exchange.

The decline in savers activity is in the first place linked with their cautiousness (both individuals and companies), which areinvesting in more risk free instruments (such as bonds) and show less activity on the market given the unfavorable economicalenvironment.

* savers, which conduct at least one operation per

month

** savers registered in the system

Source: Moscow Exchange reports10


11/12

Summary

3

11


12/12

The only way to increase liquidity of the main equity market is toimprove the Moscow Exchanges trading conditions up to the levelof international exchanges

Decline of operational volume on the main equity market of Moscow Exchange happens on thebackground of significant destabilization of European economy. However, there are some internalfactors, which are affecting existing customers, improvement of which could help to return theliquidity:

Internal issues (could be improved):

Outflow of the clients (both savers and issuers) to the world markets caused by the competitiveadvantages of international exchanges (lower commissions, broader market, state-of-the-artinfrastructure). Improving such factors could stimulate the growth of operations on the market,which could lead to overall liquidity increasing.

If existing situation with infrastructure would not be solved, the outflow of savers and issuers tothe international markets will continue, which will downturn further the state of main equitymarket and as a consequence Russian economy in general.

External issues (Exchange has got to face it): The key reason for decline in operational volume of the main market are the non-favorable macro

economical trends; the savers face the lack of mid-term and long-term motivation for revival oftheir activity in buying companies shares and the companies for equity emission.

12

university home work - moex revenue decline analysis

Documents