ENTER THE CLOCK-BUILDER
A management shake-up at the Singapore Exchange is leading to a new take on pressing challenges. Justin Wood talks to the CFO.
By Justin Wood

As the new finance chief of Singapore Exchange (SGX), Seck Wai Kwong has an interesting view of his recent appointment. "I see myself as a clock-builder," he says with beguiling simplicity. But don't be fooled. Seck's apparent modesty conceals a bold ambition.

His words refer to a book called Built to Last in which authors James Collins and Jerry Porras try to describe the traits of exceptional organizations. One of their themes is the difference between "clock-building" and "time-telling". Visionary, charismatic leaders tell the time, argue the authors, whereas truly great managers build clocks. In other words, they create companies that can flourish well beyond the term of any one leader or the life of a single product.

And that's what Seck and SGX's CEO, Hsieh Fu Hua, are aiming to do at Singapore's combined stockmarket and derivatives exchange. Both were hired earlier this year after a management shake-up - Hsieh joined in March and Seck, a former banker, in June - and they haven't wasted any time getting to grips with the springs, sprockets and gears of their new charge.

What they've found is both encouraging and challenging. Parts of SGX's S$218 million-a-year (US$125 million) operations are highly successful and efficient. Other bits of the mechanism, however, need repair. More worryingly, some observers even wonder if SGX will keep ticking amid regional and global competitive pressures. The challenges of overcoming Singapore's small size and attracting business from China, of slashing costs and retooling the organization are great. Nonetheless, Seck and his boss are confident they have what it takes to build their exchange into the Rolex of regional bourses.

Their first few months in office have seen sweeping changes. For a start, the whole structure of SGX has been reorganized around customers rather than products. In the past, clients used to deal with many different departments at SGX - one for buying and selling shares, another for trading futures, a third for getting hold of price information and so on. Today, each major customer group, from listed companies to traders to investors, is served by its own team that handles the full range of products.

Seck says that SGX's product focus was a legacy of the company's past. Five years ago, Singapore's stock exchange and its derivatives market were separate entities. It was only in November 1999 that both were demutualized and merged. A year later, the new group was floated as SGX, but old divisions remained within the firm. "Restructuring to focus on customer groups was really just the last stage in the merger," says Seck. In the process, SGX was able to shed 67 staff, or 9 percent of the total. Elsewhere, the company has shut down unprofitable operations and put on hold certain new product launches.

And that's not all. Besides cutting costs and boosting customer focus, Seck has focused on a third, equally important area: improving the firm's capital efficiency. For three years SGX has been sitting on a pile of cash - amounting to almost S$600 million when Seck joined the firm. SGX raised the money at its IPO with the intention of buying another exchange overseas, but no good opportunities arose. Equally importantly, SGX owns a good deal of property, valued at S$280 million at the end of fiscal year 2002.

As Seck saw it, both the property and the cash were weighing heavily on SGX's balance sheet and diluting its returns. Something had to be done. So it was that, when he unveiled his first set of results as CFO of SGX on September 11, Seck also announced several measures to retool capital management. First, he announced a special dividend designed to return almost half of the firm's cash to its shareholders. Second, Seck decided to take a massive 21 percent write-down on the value of SGX's property portfolio to reflect the depressed real estate market in Singapore. In the process, he recorded a one-off hit to earnings of S$50 million. What's more, Seck says: "SGX is willing to sell its property entirely if the right opportunity arises. We no longer consider it a core asset."

Needless to say, the property write-down - coupled with a charge of S$12 million for sacking staff and closing down operations - almost entirely wiped out SGX's operating profit for 2003 of S$64 million.

"The new management kitchen-sinked their first set of results to get a fresh start," says one analyst at an investment bank who preferred to remain anonymous. More charitably, the analyst adds: "It's good to see new managers being proactive within the first 100 days. That's always a good sign."

This Clock's Losing Time

The measures taken so far will all help to improve returns at SGX. But the exchange has a long way to go. Data from the World Federation of Exchanges, an industry club, shows that the average return on capital for its 50 members was 12 percent in 2002. And for its ten listed members, the average return was 20 percent. By contrast, SGX - a listed exchange - posted a return on equity (ROE) in 2002 of just 7.9 percent. This year, SGX's performance was little better at 9.2 percent, a figure that excludes exceptional items.

Of course, Seck is confident that he and the rest of the management team at SGX can raise the exchange's returns. How high, exactly, remains to be seen. At the company's results announcement, CEO Hsieh declined to state what his ROE targets were, claiming that he didn't "know the business well enough yet". Seck is equally tight-lipped, although by shrinking the capital employed in the business, Seck has already effectively raised returns to around 12.5 percent. Cost savings from staff lay-offs and the closure of unprofitable businesses will lift returns even further as the savings filter through in the coming year.

Nonetheless, the steps taken so far at SGX have arguably been low-hanging fruit. To move beyond this positive start, Seck and his colleagues will need to overcome some giant hurdles, almost all of which relate to size.

Pocket Watch Not Clock Tower

By global standards, SGX is a tiny exchange, ranking 25th in the world by the market capitalization of its listed companies and 27th in the world by the value of its share trading. Even within Asia, SGX is no big fish, ranking 11th by both market capitalization and by trading value. The reasons are obvious. For one, the population in Singapore only numbers 3.2 million, so the investor base is small. For another, the supply of local companies looking to list their shares on the exchange is limited.

But exchanges thrive on size. The main role of any stockmarket is to provide liquidity - the deeper the better. Big markets with lots of investors attract companies looking to raise capital. And in turn, as more companies are attracted to an exchange, so even more investors are lured in. Size and liquidity go hand-in-hand in a virtuous circle.

"The lack of breadth and depth in the Singapore market has been one of the most serious problems for SGX," notes Tan Sin Mui, an analyst at Merrill Lynch. With many bigger, more liquid exchanges in the region, adds Tan, "Singapore's biggest challenge is how to avoid being marginalized."

Size matters in another important way too: it brings economies of scale. Exchanges tend to have high fixed costs that bear little relation to the size of the market. Every bourse, for example, has to invest in a trading engine that costs the same to operate whether it processes 1 million trades or 10 million. With exchanges taking a small commission on every trade, it helps to operate in a large market that generates high trading volumes.

Robert Kong, an analyst at Citigroup, reckons between 80 and 90 percent of SGX's costs are fixed, creating substantial operating leverage. In a big market, that doesn't matter, but in a small one the onset of bear conditions - and a subsequent drop in trading activity and hence revenues - means fixed costs quickly eat into profits.

Overcoming the limitations of a small market is a perennial problem for many of Singapore's companies, and the traditional solution has been to make overseas acquisitions. Once upon a time, managers at SGX believed they could do the same too. Buying another exchange, they said, would increase economies of scale as one set of costs served two markets. But that was easier said than done.

Despite looking closely at a number of options, SGX has been unable to make an acquisition. Partly that's because most exchanges are still mutually owned by local stockbrokers who are reluctant to disturb their cozy arrangement by selling out. What's more, of the few bourses that have demutualized and been floated - in Asia just Hong Kong, Australia and SGX - politics prevent a takeover bid. With little chance of making an acquisition, SGX is having to explore other routes to transcend its national borders.

Time to Grow

One important scheme centers on trying to attract foreign firms to list on SGX. In particular, the exchange is busy wooing firms from China. After several years of marketing, SGX appears to be making some headway, with nine Chinese companies listing in Singapore so far this year.

In targeting China, SGX is pitting itself firmly against the stockmarkets of Shenzen, Shanghai, and Hong Kong. Without question, these exchanges are attracting more listings than Singapore, and certainly all of the biggest ones. Whether or not SGX can continue to compete in China is a much-debated issue.

Another initiative focuses on product innovation. For example, Singapore stole a march on it competitors in 2002 by being the first exchange in Asia outside Australia and Japan to bring a real estate investment trust (REIT) to market. Since then, a second Singaporean REIT has listed on SGX, as has one from Hong Kong.

But it isn't just new listings that SGX is after. The exchange is hunting down new investors too, and here SGX is being helped by government plans to turn Singapore into a regional hub for financial services. For the past ten years, the government has tried to attract foreign fund managers by offering them special tax rates. On top of that, the government has also set aside billions of dollars to be invested by fund managers that make Singapore their home. The effort has paid off. Ten years ago the value of assets managed by Singapore-based financial institutions - excluding the Government of Singapore Investment Corporation - amounted to S$38 billion.Today that figure has grown to S$344 billion.

For its part, SGX has also taken steps to boost liquidity by establishing trading links with other exchanges. The most prominent is with the Australian Stock Exchange, whereby investors in Australia can buy and sell companies listed in Singapore and vice versa. The result, says Seck, is deeper liquidity on both exchanges.

A second project has been to improve information flow in the local market. On June 23, SGX teamed up with the Monetary Authority and unveiled a fund of S$7.5 million to promote research coverage by brokers of listed companies. Each participating firm receives S$60,000 in return for covering 15 stocks. As for the listed companies, for an annual fee of S$4,000 they are guaranteed to be researched by at least two firms. The aim is to encourage more trading in smaller companies that investors rarely hear about.

And liquidity isn't the only matter on Seck's mind. As CFO, he's also charged with cutting costs and improving overall efficiency. Seck is launching a new cost accounting system to bring more discipline to the company. "Without it, we'll never really know which parts of the company are making money and which aren't," he says.

Tied in to this new approach, Seck has also set up a program management office (PMO) tasked with monitoring new projects. From conception through to implementation and beyond, the PMO will keep tabs on every initiative. "We're trying to embed processes and controls within the company that raise our chances of success," Seck explains. "That's what clock-building is all about."

Justin Wood is managing editor of CFO Asia.