Stock Focus ASX (ASX)

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SEEING UPSIDE THROUGH THE FOG

RECOMMENDATION : POSITIVE

We initiate on ASX Limited (ASX) with a Positive recommendation and $35.86 blended valuation.

EARNINGS CAN GROW DESPITE COMPETITION

ASX has been mired in the fog of a cyclical downturn and structural risks. We expect new entrants will eventually emerge in derivatives, settlements and clearing, leading to margin and share decline in these segments.

But we look through this and see a medium-term opportunity to buy a high margin, well-diversified franchise at depressed prices with:

(i) Upside from cyclical recovery, multiple growth options and pricing

power in uncontested segments; and

(ii) Consolidation opportunities.

MULTIPLE GROWTH OPTIONS

Growth options include OTC derivatives clearing; listing of government bonds, international securities, managed funds, and ETFs; ASX Data Centre

co-location; expanded trading times; and expanded product functionality.

RISK/REWARD EQUATION FIRMLY IN YOUR FAVOUR

Scenario analysis (bear case valuation $30.07, bull case $40.26) suggests upside outweighs downside by more than a 3:1 ratio from current levels.

Cyclical and structural concerns mean it may take time for the share price to bridge the valuation gap. Catalysts could include: (i) equity capital markets cyclical recovery; (ii) improved regulatory and competitive outlook visibility; or (iii) traction in growth options.

In the meantime, ASX’s 90% payout ratio translates to a 6.6% FY13 cash yield – investors are being paid to wait for a cyclical recovery with multiple

free growth options.

Trading Data

Last Price $31.33

12 month range $27.15 - $33.20

Market Cap $5,487m

Free Float $5,465m (99.6%)

Avg. Daily Volume 0.7m

Avg. Daily Value $23.7m

12 month return (historical) 0.2%

A mix of volume growth and pricing power in uncontested

revenue lines to drive return on capital higher.

High operating leverage and monopoly-like positions in various segments translate to high operating profit margins.

Earnings Forecasts

Yr to June 09A 10A 11A 12E 13E 14E

EBITDA ($m) 400.2 454.0 482.1 487.9 550.3 569.7

Rep NPAT ($m) 313.6 328.1 352.3 361.6 400.9 408.5

Adj NPAT ($m) 313.6 332.6 356.6 361.6 400.9 408.5

EPS (¢) 183.2 193.0 204.0 206.4 228.9 233.3

EPS Gth (%) (14.4) 5.3 5.7 1.2 10.9 1.9

PER (x) 17.1 16.2 15.4 15.2 13.7 13.4

PEG Ratio (x) 1.5 2.3 1.3 1.2

DPS (¢) 164.9 173.1 183.2 185.7 205.9 209.8

Yield (%) 5.3 5.5 5.8 5.9 6.6 6.7

Franking (%) 100% 100% 100% 100% 100% 100%

ROE (%) 11% 12% 12% 12% 13% 13%

EV/EBITDA (x) 10.4 9.9 7.9 7.8 6.9 6.7

Net Debt/EBITDA (x) (3.3) (2.2) (3.5) (3.5) (3.1) (3.0)

Int. Cover (x) (7.3) (14.8) (12.2) (10.5) (11.7) (11.9)

Valuation (blended) $35.86

George Gabriel, CFA ggabriel@evansandpartners.com.au

April 12, 2012 +61 3 9631 9853

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CONTENTS

1 SUMMARY INVESTMENT CONSIDERATIONS 3

2. VALUATION 5

EAP valuation

Key value drivers

Bear/Base/Bull cases

Historical valuation perspectives

Global comparables

3. COMPETITION 10

Contested revenue lines

o Equities trading

o Clearing

o Settlements

o Derivatives

Competitive response

o ASX alternative trading facilities

o Pricing strategies

o Growth options

Key competitor overview

4. COMPANY OVERVIEW 14

Business overview

Segmental overview

o Derivatives

o Listing and Issuer Services

o Cash Market

o Information Services

o Technical Services

o Austraclear

o Other revenue

Sector consolidation

o ASX as acquirer

o ASX as target

o International consolidation

5. KEY RISKS 23

Regulatory risk

o “Best execution”

o OTC Derivatives clearing

Cyclical outlook

Competition

6. FINANCIAL SUMMARY 24

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1. SUMMARY INVESTMENT CONSIDERATIONS

ASX is currently trading on bottom-of-cycle FY13F PE of 13.7x, with a 6.6% fully franked yield, offering cyclical recovery upside and multiple free growth options.

1. Undemanding valuation reflects uncertain regulatory, competitive and cyclical outlooks.

a. PE discount. ASX is trading at a discount to its average PE since 2000 of ~18x. Chart 3.

b. Domestic peer-relative discount. ASX is trading at a discount relative to the ASX Industrials, compared to its premium from Mar 2005. Chart 4.

c. Global peer-relative discount. ASX’s PE is in line with European and North American peers, who are already post-competition, which supports the view that ASX’s share price already discounts the impact of competition. Chart 7-8.

2. Positive risk/reward ratio

a. ASX offers a positive risk/reward ratio of 3.3x (assuming a $31.50 purchase price).

b. Our valuation scenarios quantify a range of key drivers: market value; market share loss; pricing discounts (ie. margin decline) and price increases in uncontested segments.

c. Table 1 summarises our bear, bull and base cases. Our $30.07 bear case valuation factors in low

market cap growth, market share loss (in derivatives, clearing, settlement and cash market trading),

pricing discount in competed segments and price increases in uncontested segments.

3. Effective pricing strategies

a. Pricing power exercised in uncontested segments. Prices have increased for annual listings;

secondary raisings; cash equities settlement and registry services.

b. Derivatives and market data pricing reviews are soon to be announced. c. Price discounting in cash equities trading. In June 2010, ASX pre-emptively reduced cash equities

trading fees in anticipation of the arrival of competition. We do not expect further material price reductions given ASX is already pricing is at the lower end of international exchange pricing.

d. Annual pricing reviews. ASX has committed to at least an annual review of pricing across its business portfolio.

4. High sensitivity to cyclical recovery

a. A 10% increase in the total listed equity market cap translates to ~ 9.1% FY13F EPS

increase for ASX. Key drivers are futures & options, daily cash equities, CHESS statements and terminals. Table 5.

5. Multiple growth options mitigate headwinds in a post-monopoly competitive environment.

a. Competition is currently only in cash equities trading, comprising 6.2% of 1H12 revenues.

b. Our base case assumes new entrants in derivatives, settlement and clearing by FY15. c. Medium-term growth options exist including OTC derivatives clearing; listing of government bonds,

international securities, managed funds, and ETFs; ASX Data Centre co-location; expanded trading

times; and expanded product functionality.

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6. Consolidation options.

a. As an acquirer, ASX has a wide range of options including: (i) smaller offshore exchanges; (ii) bolt-on acquisitions in its various revenue lines; or (iii) a larger acquisition such as the purchase of Computershare (registry business), IRESS (market information services, 18.9% owned by ASX) etc.. The new CEO is yet to articulate his M&A agenda.

b. A takeover/merger with the ASX is unlikely in the short-medium term. On 8 April 2011, SGX’s acquisition of ASX was rejected on national interest grounds. The existing 15% shareholder cap

requires political consent for removal, which is currently unlikely. c. However, the Council of Financial Regulators’ (CFR) recommendations are potentially

creating the conditions for long-term consolidation. The recommendations of step-in rights and mandatory onshore location of clearing and settlement infrastructure address some of the concerns highlighted in consideration of the proposed SGX-ASX takeover.

7. What’s next?

a. Council of Financial Regulators (CFR) report due “shortly” on whether clearing and settlement should be opened up to competition.

b. ASX Data Centre expected for completion in 2Q 2012. This facility will accommodate co-location of

customers’ IT infrastructure with ASX for the purposes of increasing execution speed. c. OTC Equity Clear will be launched in May 2012, allowing institutional investors to trade equity

options with any expiry date and electable strike price without any ISDA requirements.

d. OTC equity derivatives clearing on track to go live in 2H12.

e. OTC interest rate swap clearing subject to evolving regulatory framework. f. Listing international depositary receipts by July 2012, subject to ASIC approval. ASX plans to

offer depositary receipts in Xstrata, BHP Billiton, Rio Tinto, HSBC Holdings, with other depositary receipts issued on demand.

g. New product launches (electricity derivatives targeted 2H12; equity index derivatives expected

1H13; exchange traded option enhancements due FY13; carbon trading end of FY13). h. Mandatory “best execution” review in March 2013. ASIC will decide whether “best execution”

effectively compels all brokers to sign up with Chi-X.

i. Managed fund trading service from FY13. ASX is looking to use existing technology to allow

investors to apply for and redeem unlisted managed funds. j. Review “dark pool” minimum order size in April 2015. If dark pool market share becomes

excessive, ASIC will increase the minimum order size to $50k (compared to ASX average of ~$7.6k per trade). ASX wants immediate introduction of the $50k dark pool minimum trade size.

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2. VALUATION

EAP Valuation Our base case blended valuation of $35.86 is comprised as set out in Table 1:

TABLE 1: EAP BLENDED VALUATION

Methodology Key Inputs Value ($ps)

Discounted Cash Flow 11.0% WACC $34.58

Capitalisation of Earnings 3-yr EV/EBITDA average $37.34

Market Relative 3-yr average PE $35.66

Average $35.86

Source: EAP Research estimates

Key Value Drivers The key drivers of ASX shareholder value are: (i) Market value growth; (ii) Market share loss to new entrants; (iii) Product pricing; and (iv) Growth options.

Base Case

Our base case assumptions for each value driver are summarised below. (i) Market Value

We assume cross-cycle market index value growth of 7.0% pa, in line with the 6.8% 20-year average. Chart 2.

CHART 1: ASX200 INDEX LEVEL CHART 2: ANNUAL CHANGE IN ASX200

(ii) Market Share Loss

We expect that ASX will eventually lose market share to new entrants in Derivatives, Clearing and Settlements (even though there are no current competitors). See Sections 3 and 4 of this report for a comprehensive discussion of competitive threats & an overview of each segment, respectively.

Derivatives – 10% market share loss by 1H15.

o We believe Derivatives is less susceptible than other segments to competition given the challenge of drawing liquidity to a new entrant (network effect), greater perceived counter-party risk (given longer contract terms) and cash margining requirements.

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Clearing – 20% share loss by 1H15.

o LCH Clearnet has expressed an interest in entering the local market. o The regulator is expected to release a policy report “shortly”. With the Council for Financial Regulators

recommending mandatory onshore clearing infrastructure, barriers for new entrants are being elevated.

Settlement – 30% market share loss by 1H15. o We believe cash equities settlement is the most commoditised segment and so faces the greatest

volume and margin risk.

Cash Market Trading – 30% market share loss by 1H14.

o Market share loss is the sum of both dark pools and Chi-X market share gains. o Currently, Chi-X has ~2% market share and dark pools ~10%. o We note that in Canada (the most comparable market to Australia), Chi-X only gained ~10% share,

implying some upside risk to EAP’s base case. (iii) Product Pricing

Beyond already announced near-term price increases (see Section 3 of this report for a summary), our base case assumes 4% pa price increases in uncontested segments and price declines of between 10% (trading, clearing, derivatives) and 30% (settlement) in segments which we believe will ultimately face competition.

(iv) Growth Options

Our base case does not include growth options, providing a key source of upside risk (refer Section 3 “Growth options”).

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Bear and Bull cases

In our view, the bear case valuation of $30.07 discounts a highly pessimistic scenario. Buyers of ASX stock at around $30 will enjoy a significant margin of safety. Whilst the $40.26 bull case valuation is possible, the share price is unlikely to reach these levels until there is some

visibility on the competitive outlook for Derivatives, Clearing and Settlements.

TABLE 2: BEAR AND BULL CASE SUMMARY

Driver DescriptionBear

case

Base

case

Bull

case Comments

Market value Annual market index growth

from 1H144% 7% 10%

Market value growth is a key

revenue driver for a number of

segments including Listings &

Capital Raisings, Cash Market

Trading Value, Information &

Technical Services.

Market share loss Derivatives – market share

loss by 1H1530% 10% 0%

Clearing – market share loss

by 1H1540% 20% 10%

Settlement – market share

loss by 1H1550% 30% 20%

Cash market trading –

market share loss by 1H1450% 30% 15%

Pricing discountsTrading – additional price

discount in 1H1330% 10% 0%

Clearing – price discount in

1H14. 20% 10% 0%

Settlement – price discount

in FY14 as competition

commoditises this service

50% 30% 0%

Derivatives –price discount

in 1H1525% 10% 0%

Price increasesAnnual price increases in all

other segments  3% 4% 5%

Our base case includes

announced price increases in

certain segments. We also

assume uncontested segments

will increase prices over time.

Blended valuation $30.07 $35.86 $40.26

Source: EAP

Our base case sees market

share losses in 4 segments:

derivatives, clearing,

settlements and cash market

equities.

Our base case also includes

price discounting in segments

which we believe will ultimately

face competition.

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Historical valuation perspectives

ASX’s depressed valuation reflects the overhang of cyclical and structural concerns. We note the following valuation trends:

o PE declining from 25x to ~14.0x FY13F. Chart 3.

o PE discount to the ASX Industrials. Chart 4. o Price/book valuation multiple of ~1.6x at bottom of historical range. Chart 5. o EV/EBITDA multiple of 10.0x at bottom of historical range. Chart 6.

CHART 3: 12 MONTH FORWARD PE RATIO CHART 4: PER RELATIVE TO ASX INDUSTRIALS

12.5

15.0

17.5

20.0

22.5

25.0

27.5

Source: Bloomberg0.6

0.8

1.0

1.2

1.4

1.6

1.8

Source: Bloomberg, EAP

CHART 5: P/B VALUE (POST SFE MERGER) CHART 6: EV TO EBITDA

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11

Source: Factset, EAP

Global comparables

ASX’s PE is in line with European and North American exchanges which are already post-competition. Charts 7-8. Table 3. However, it is not clear that ASX will suffer the same degree of market share loss as its North American and European exchange incumbents given:

o ASX is more broadly diversified. o ASX retains multiple growth options. o ASX could capture growing Asian capital flows through a strategic alliance or international listings. o ASX’s pre-emptive competitive responses may mitigate share loss (refer Section 3 “Competitive response”

below).

o Rising barriers to entry in clearing and settlement decrease the likelihood of new entrants.

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CHART 7: PER RELATIVE TO GLOBAL COMPS CHART 8: PER RELATIVE TO GLOBAL COMPS

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Exc

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OE

BM

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Bo

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ASX War

saw

SE

Joh

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sbu

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TMX

Gro

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NYS

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che

Bo

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LSE

Nas

daq

OM

X0.0

5.0

10.0

15.0

20.0

25.0

30.0Source: Factset

TABLE 3: GLOBAL COMPARABLES

2012 2013 2012 2013 2012 2013 2012 2013 2012 2013

Asia-Pac

Australian Stock Exchange AUD 31.33 5487 4851 15.2 13.7 8.3 7.4 5.9 6.6 1.2 10.9 12.0 13.2

HK Exchanges and Clearing HKD 128.5 138768 93530 25.8 23.4 15.1 13.5 3.5 3.9 5.7 10.4 56.5 57.3

Singapore Exchange SGD 6.74 7223 6530 23.4 21.1 17.7 15.8 3.9 4.3 -3.0 11.1 37.0 39.9

Bursa Malaysia MYR 7.06 3755 3221 24.8 21.9 15.6 13.7 4.8 5.4 4.4 13.0 17.4 19.5

Osaka Securities Exchange JPY 459000 123930 82288

NZX NZD 2.78 336 323 18.9 16.4 13.4 11.8 4.4 4.9 22.5 15.6 25.3 27.0

Average Asia-Pac 23.2 20.7 15.4 13.7 4.2 4.6 7.4 12.5 34.1 35.9

Americas

CME USD 282.09 18742 19759 16.1 13.9 9.3 8.1 4.2 4.3 2.4 15.3 5.4 6.0

BM&F Bovespa BRL 11.13 22037 21016 13.5 11.9 16.1 14.0 4.5 5.5 3.2 13.2 7.1 7.9

NYSE Euronext USD 27.48 7098 8741 11.2 9.2 8.7 7.4 4.5 4.6 -1.5 22.2 9.2 10.1

Intercontintenal exchange USD 132.18 9595 9660 16.5 14.7 10.8 9.4 0.0 0.0 14.5 12.0 17.5 17.6

Nasdaq OMX USD 24.59 4264 5596 9.1 8.0 7.1 6.3 0.0 0.3 7.8 13.5 9.4 10.2

TMX Group CAD 44.2 3301 3240 11.5 10.5 8.3 7.6 3.7 3.8 4.4 9.7 21.8 20.7

CBOE USD 27 2397 2262 16.4 14.3 8.3 7.2 1.9 2.1 5.9 14.7 54.9 45.0

Bolsa Mexicana MXN 25.94 15382 13339 20.3 16.6 12.4 9.8 4.5 5.5 12.3 21.9 14.4 17.1

Average Americas 14.3 12.4 10.1 8.7 2.9 3.3 6.1 15.3 17.4 16.8

Europe

Deustche Borse EUR 49.135 9483 10035 10.4 9.6 8.0 7.5 4.9 5.2 2.9 8.6 24.9 23.7

London Stock Exchange GBp 1023 277344 277576 11.4 11.4 6.9 7.2 2.9 3.1 38.9 0.2 20.1 17.4

Warsaw Stock Exchange PLN 39.2 1054 876 13.5 12.1 6.3 5.6 5.4 6.2 -9.8 12.0 23.1 24.2

Bolsas y Mercados Espanoles EUR 18.3 1530 1174 10.5 10.6 5.8 5.7 9.1 8.8 -3.3 -0.9 32.3 31.5

Oslo Bors NOK 66 2838 1945

Average Europe 11.5 10.9 6.7 6.5 5.6 5.8 7.2 5.0 25.1 24.2

Other

Dubai Financial Market AED 1.21 9680 9018 80.7 43.2 162.6 48.9 1.3 2.2 400.0 86.7 1.4 2.8

Johanesburg Stock Exchange ZAr 8000 695021 694006 13.5 12.2 11.6 10.7 4.0 4.9 6.7 10.4 31.8 29.8

Average other 47.1 27.7 87.1 29.8 2.7 3.5 203.4 48.5 16.6 16.3

Source: EAP, Bloomberg

ASX global comparable

companies

ROE (%)Crncy

Share

priceMkt cap

Ent.

Value

P/E RATIO EV/EBIT (x) YIELD EPS GROWTH (%)

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3. COMPETITION

Contested Revenue Lines Currently, only Cash Equities Trading faces competition from a new entrant, Chi-X. However, our base case

assumes competition will progressively arrive over time to FY15F in Equities Clearing, Equities Settlements and Derivatives. We consider each of these segments below. (i) Cash Equities Trading This segment is now less relevant to ASX given it contributed only 6.2% of 1H12 revenues. Table 4. Our base case

assumes an additional 10% price decline in 1H13 and 30% share loss by 1H14 comprising: (i) dark pool market share of 15% (currently ~10%); and (ii) Chi-X share of 15% (currently ~2%). There is an upside risk that ASX retains greater market share than our base case because:

o ASX pre-emptively cut its pricing such that it is now priced at the bottom end of international peers (refer section 3 “Pricing strategies”).

o ASX’s vertically integrated trading, clearing and settlement offers customers a convenient “one-stop-shop” trading solution.

o Incurring capex to adopt new trading platforms makes less sense when equities trading prices are already declining.

o It is unclear whether brokers will be mandatorily required to adopt new entrant trading platforms. ASIC appears to be moving towards the view that “best execution” does not dictate that brokers must mandatorily adopt new entrants’ trading platforms (refer section 5 “Regulatory Change”).

Equities Trading – international experience of new entrants New entrants have captured as little as 3% share (Tokyo) and as high as 36% (FTSE100).

o London. Within the first 12 months, Chi-X Europe/BATS captured 20%+ of FTSE100 share and currently

has ~36%. o Toronto. The Toronto Stock Exchange lost ~ 35% share to new trading venues. o Tokyo. After its debut last year, Chi-X’s market share remains less than 3%. However, Japanese regulation

prevents new entrants from exceeding 10% share, which may have limited the interest of market participants.

(ii) Clearing

Although ASX Clear is currently the monopoly clearing house, our base case view assumes (i) 5% share loss in 1H14 which stabilises at 20% share in 1H15; and (ii) 10% price decline in 1H14. Price decline is mitigated by the

fact that clearing requires counter-party risk acceptance and so clearers will likely price for their perceived financial stability. We expect that clearing houses with global ambitions such as European Multilateral Clearing Facility (EMCF) and

LCH Clearnet will eventually enter the Australian market. However, smaller players such as LSE’s Turquoise, Six-x-clear, EuroCCP, Nasdaq OMX and Burgundy Exchange are increasingly less likely to do so as the CFR’s regulatory entry barriers are raised. Regionally, BNP Paribas offers clearing and custody solutions in India, Hong Kong and Singapore. It already offers third-party clearing for listed derivatives in Australia and hopes to offer third-party clearing services for cash

equities in Australia by end of 2012, subject to regulatory approval. Council of Financial Regulators (CFR) recommendations

In March 2012, the Australian Consumer and Competition Commission (ACCC) and the CFR (comprising the Reserve Bank of Australia, Treasury, APRA and ASIC) proposed significant changes to Australia’s financial market infrastructure regulation: (i) Clearing and settlement infrastructure must be physically located in Australia; (ii)

Regulator’s “step in” powers to take control of systemically important financial institutions such as the ASX in the event of a systemic crisis.

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The next stage of the CFR’s review is to consider whether clearing and settlement should be opened up to competition – a report is close to being finalised.

(iii) Settlements Our base case view is: (i) 30% cash equities settlements share loss by 1H15; and (ii) 30% price declines in FY14 as this segment becomes commoditised. (iv) Derivatives

Our base case view is: (i) 10% market share loss; and (ii) 10% price decline by 1H15. Share loss is mitigated by: (i) the network effect of incumbent exchange’s liquidity maintaining share; and (ii) derivatives are seen to have

greater counterparty risk due to longer contract duration and margining requirements.

Competitive Responses ASX’s competitive responses include the following: (i) launching Alternative Trading Facilities; (ii) pricing strategies; (iii) creating growth options; and (iv) product innovations. ASX Alternative Trading Facilities (ATF)

ASX has launched two ATFs: (i) VolumeMatch - an anonymous large order execution venue; (ii) PureMatch - an execution venue aimed at high frequency traders to compete directly with Chi-X for HFT order flow. Neither ATF has gained traction and both are being reviewed. Pricing strategies

ASX is adopting an effective range of pricing strategies to simultaneously pre-empt competition, retain volumes

and maximise profitability across its business portfolio. Pricing strategies include: (i) price discounting in contested revenue lines; (ii) exercising pricing power in uncontested revenue lines; and (iii) rebates. It has committed to annual pricing reviews across its business portfolio.

Price discounts

In June 2010, ASX announced changes to its cash equities trading execution fees and rebates.

o Price discounts in cash market equities trading: (i) headline trading prices cut from 0.28bp to 0.15bp per

side; (ii) on-market crossing fees from 0.15bp to 0.1bp; and (iii) off-market crossing fees from 0.75bp to 0.05bp.

o Rebates for large participants in cash market equities were terminated, whilst rebates for futures customers remained.

We expect minimal further downside on cash equities pricing given ASX is more competitively priced than many European exchanges (eg. Spain’s BME and Germany’s Deutsche Boerse and UK’s LSE range from 0.71% to 1.39%) and is only slightly above US exchanges (NYSE 0.13% and Nasdaq 0.13%).

Price increases

Price increases in uncontested revenue lines highlight ASX’s pricing power in certain segments. A pricing review in Derivatives is soon to be announced. Increases include:

o Annual listing fees–increased from 1 July 2012

o ~23% price increase for companies with a market cap of greater than $10bn o ~26% increase for a market cap between $1bn-$10bn.

o Secondary raising fee increases of ~10% from July 2012.

o Cash equities settlement fees increased by between 9 – 50% from Feb 2012.

o Registry services fees (CHESS) increased +10% from $1 to $1.10 from April 2012, for the first time in 7 years.

o Market connectivity fees increased for the first time since Oct 2006 for equities and Jan 2003 for futures from June 2010.

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Growth options

We describe below 9 growth options ASX is currently developing. International securities

The ASX CEO has said the quoting of international securities (such as BP, Royal Dutch Shell or HSBC) is a key strategic goal over the next year. ASX could either: (i) attract primary listings from other jurisdictions; or (ii) form cross-listing alliances with other exchanges. ASX is currently in talks with the LSE about a cross-listing

alliance. By July 2012, subject to ASIC approval, ASX plans to offer depositary receipts in Xstrata, BHP, Rio Tinto and

HSBC, with other depositary receipts issued on demand. Richard Murphy, ASX GM Equity Markets, says this is a “game changer for the shape of the Australian market”.

Exchange Traded Funds (ETFs)

BetaShares estimates that there are ~75 listed ETFs, with the market cap increasing $51m to $5.2bn in Feb 2012 (~$9m of new listings), compared to 60 listed ETFs in Feb 2012. Blackrock’s iShares and Russell Investments recently launched the first 6 fixed-interest ETFs on the ASX. Vanguard and State Street have also indicated they intend to release products in the first half of the year 2012.

Commonwealth Government Securities (CGS)

Retail CGS listing is targeted for FY13.

Enhancing capital raising flexibility

ASX proposes listed companies with market cap of less than $300m be able to issue up to 25% of its value,

comprising 15% without shareholder approval and an additional 10% at a maximum discount of 25% within 12 months of gaining investor consent. This expands the existing position which restricts raisings to a maximum of 15%. This measure would bring the ASX in line with Canada’s existing 25% limit and NY and HK’s 20% limits.

Expanded trading times

ASX intends to increase its relevance to Perth and mining stocks. Of the 2200 ASX listed companies, 830 are

WA-based of which 614 (28% of total listed stocks) are resources stocks. Perth is supposed to be a gateway to Asia, but the ASX closes at Asia’s lunchtime. ASX is considering extending operating hours by two hours.

Flow-through share scheme

A flow-through enables the transfer of tax deductions of individual small exploration companies to individual investors, which arguably facilitates equity funding for miners. ASX is discussing this proposal with the Government but expects it is a 3-5 year project given Budgetary constraints. Flow-through share schemes would harmonise ASX capital raising rules with HK, Toronto, London and Singapore exchanges.

Managed Fund Service

ASX is looking to use existing technology to allow investors to apply for and redeem unlisted managed funds, with a launch date targeted in FY13.

OTC clearing

ASX plans to develop OTC clearing facilities: (i) OTC equity derivative clearing “on track” to go live in 2H12;

and (ii) OTC interest rate swap clearing dependant on regulatory framework.

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ASX Data Centre

Expected for completion in 2Q 2012, this facility will accommodate co-location of customers’ IT infrastructure with ASX for the purposes of increasing execution speed.

Product innovation CentrePoint

CentrePoint is a new order crossing type aimed at reducing market impact costs (by allowing order entry at the mid-point of quoted bid-ask spreads).

Equity options liberalisation

OTC Equity Clear will be launched in May 2012, allowing institutional investors to trade equity options with

any expiry date and electable strike price without any ISDA requirements. ASX hopes Australian institutional investors will embrace equity options to the same extent as their American peers. In the US in 2000, total option volume was ~60% individual investors/40% institutional. In 2012, this has reversed to 60% institutional/40% individual. In Australia, the mix is ~25% institutional/75% retail.

Derivatives

Electricity derivatives are targeted for 2H12; equity index derivatives expected 1H13; exchange traded option enhancements due FY13; and carbon trading is expected in FY13.

Key competitor overview

Dark pools “Dark pools” allow funds managers to execute block trades with minimal price/volume disclosure away from

primary exchanges. Dark pool operators include: (i) Major stockbroking firms’ in-house dark pools; (ii) Liquidnet;

and (iii) Instinet.

Approx. ~10% of equities is traded via dark pools. ASIC recently suggested dark pool market share should be

capped at 20%. In April 2015, ASIC will consider imposition of a minimum $50k per trade value in dark pools. ASX

wants immediate introduction of the $50k dark pool minimum whilst the broking industry body Australian Financial

Markets Association (AFMA) proposes ASIC only limit trading on a stock by stock basis, with only those stocks

exhibiting share price volatility be banned from dark pools.

Chi-X

Chi-X offers a “lit” execution venue for ASX200 stocks, with operating hours (945am to 430pm) slightly longer (10am to 4pm) than the ASX, targeting high frequency traders. It commenced trading Australian equities on 4 May 2011 and currently has ~2% share. Participants expect it will capture ~15% within 6 months as confidence in its reliability grows. Chi-X is adopting liquidity based differential pricing strategies to attract liquidity suppliers to the market,

which means participants who initially place a buy or sell order (“liquidity providers”) pay the lower fee of 0.06bp whilst liquidity sellers pay 0.12bp. It is owned by Chi-X Global, which also operates Chi-X Canada and Chi-X Japan. Until recently Chi-X Global was

wholly owned by the Nomura Group. However, a minority stake has now been taken by BofA Merrill Lynch, Goldman Sachs, Morgan Stanley, GETCO and Quantlab.

14

4. COMPANY OVERVIEW

Business overview

ASX Limited (ASX) was formed by the merger of the Australian Stock Exchange (ASX) and the Sydney Futures Exchange (SFE) in July 2006. It performs four types of services:

(i) Market Services (primary, secondary and derivative market trading services); (ii) Clearing Services for both equities and derivatives; (iii) Settlement Services for equities (ASX Settlement), derivatives (ASX Clear (Futures)) and fixed

income (Austraclear); and

(iv) Compliance Services which include ongoing monitoring and enforcement of compliance with the market operating rules (ASX Compliance brand).

Table 4 summarises revenue trends across ASX’s 7 revenue lines. Table 5 summarises key revenue drivers and the revenue model per segment. We analyse key segment trends below.

TABLE 4: DIVISIONAL REVENUE TREND ANALYSIS

Revenue% 1H08

total1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12

% 1H12

total

%

segment

mix

CAGR

since

1H09 (%)

Derivatives

Derivatives 13.1 12.4 15.1 16.5 15.1 15.4 14.8 4.7% 15.3% 4.3%

Futures & Options 56.9 51.4 57.0 58.6 67.4 74.7 81.8 26.0% 84.7% 12.9%

Subtotal - Derivatives 26.4% 83.1 83.8 70.1 63.6 71.9 75.9 82.4 89.8 96.6 30.7% 100.0% 11.3%

Derivatives -5.0% 21.7% 9.1% -8.2% 1.8% -4.0%

Futures & Options -9.6% 10.9% 2.9% 15.0% 10.8% 9.6%

Subtotal - Derivatives -9.3% 13.0% 5.5% 8.6% 9.0% 7.6%

Listings and Issuer Services

Annual listing fees 24.1 25.2 23.4 23.6 26.3 26.6 28.8 29.0 30.2 9.6% 44.0% 8.9%

Secondary raising fees 24.9 21.2 26.2 21.8 32.7 17.6 23.9 20.7 17.7 5.6% 25.8% -12.3%

Registry service fees 16.0 13.1 13.3 10.9 16.8 13.8 15.6 12.7 12.4 3.9% 18.1% -2.4%

Warrants fees 7.3 5.6 4.5 2.2 2.9 3.2 3.0 3.6 4.6 1.5% 6.7% 0.7%

Initial listing fees 10.3 1.6 1.8 0.6 3.4 2.9 8.2 4.9 3.7 1.2% 5.4% 27.1%

Subtotal - L & I Services 26.3% 82.6 66.8 69.2 59.1 82.1 64.0 79.5 70.9 68.6 21.8% 100.0% -0.3%

Annual listing fees 4.6% -7.1% 0.9% 11.4% 1.1% 8.3% 0.7% 4.1%

Secondary raising fees -14.9% 23.6% -16.8% 50.0% -46.2% 35.8% -13.4% -14.5%

Registry service fees -18.2% 1.6% -18.2% 54.2% -18.2% 13.0% -18.2% -2.6%

Initial listing fees -84.5% 12.5% -66.7% 466.7% -14.7% 182.8% -40.2% -24.5%

Warrants fees -22.3% -20.2% -51.8% 31.9% 10.5% -5.2% 18.4% 29.5%

Subtotal - L & I Services -19.2% 3.7% -14.7% 38.9% -22.0% 24.1% -10.8% -3.2%

Cash market

Clearing 25.0 24.6 25.1 8.0% 37.5%

Settlement 22.2 23.3 22.2 7.0% 33.2%

Trading 19.5 19.2 19.6 6.2% 29.3%

Subtotal - Cash market 25.5% 80.2 79.4 75.9 62.9 77.5 73.3 66.8 67.1 66.9 21.2% 100.0% -4.1%

Clearing -1.7% 1.9%

Settlement 4.9% -4.7%

Trading -1.8% 2.2%

Subtotal - Cash market 0.5% -0.3%

Information services 10.6% 33.3 34.7 37.0 34.1 35.3 33.4 35.2 35.7 34.6 11.0% -2.2%

% growth 4.1% 6.6% -7.9% 3.7% -5.3% 5.1% 1.6% -3.2%

Technical services 4.2% 13.2 14.5 14.4 14.2 14.7 15.2 18.9 21.4 22.6 7.2% 16.3%

% growth 9.5% -0.6% -0.9% 3.0% 3.4% 24.7% 13.3% 5.4%

Austraclear services 3.5% 11.0 10.9 11.8 12.9 14.8 16.4 16.9 16.9 17.8 5.6% 14.8%

% growth -1.5% 8.3% 10.0% 14.6% 10.6% 3.2% -0.3% 5.6%

Other 3.6% 11.2 10.1 7.9 5.3 6.4 7.2 8.4 7.7 8.0 2.5% 0.5%

% growth -10.0% -21.9% -32.4% 21.1% 12.0% 16.2% -7.9% 3.5%

Total operating revenue 100.0% 314.7 300.0 286.3 252.1 302.8 285.5 308.1 309.6 315.1 100.0% 3.2%

% growth -4.7% -4.6% -11.9% 20.1% -5.7% 7.9% 0.5% 1.8%

Source: ASX Reports, EAP

15

TABLE 5: DIVISIONAL REVENUE CONTRIBUTION, SERVICES, REVENUE MODEL

Segment % 1H12 revenue

Services Drivers and revenue model Trends

Derivatives 30.7% Trading of exchange traded equity options (ETOs), futures and index options.

Futures and options (F&O) trading.

Contract volumes Fixed $ fee for each side of a

trade.

Derivatives (ETOs) revenues are down on higher volumes but lower margins. Plans for new products. F&O revenue grew with increased pricing offsetting declining volume.

Listings & Issuer Services

21.8% Securities lodgement, holding statement production, registry updates and amendments etc

Five segments: Annual listing fees - % of market

cap on regressive sliding scale Secondary raising fees - % of

value raised on regressive sliding scale

Registry service fees - flat fee per request

Initial listing fees - % of market cap on regressive sliding scale

Warrants fees - Charge per new series + annual fixed fee plus % of value.

Annual listing fee increased in March 2012.

Secondary capital

raised declining since the 1H10 peak during the post-GFC recapitalization

IPO value remains depressed

Cash Market 21.2% Secondary equity market trading, clearing and settlements services.

Three segments: Clearing - % value traded. Settlement - Fixed charge per

request. Trading - % value traded

(0.15% standard) capped at $75 per trade.

Cash market trading impacted by competition, but only 6.0% 1H12 revenue.

Information Services

11.0% Access to products and market data from ASX’s equities and derivatives trading systems, live access to company releases and other related fundamental information

Revenues are driven by the total number of terminal connections.

Professional data usage was stable, but retail data usage (including day traders) was down.

Technical Services

7.2% Provides trade execution and data services businesses including ASX Net (high speed fibre optic communication network) and ASX Best.

ASX Data Centre, expected for completion in 2Q 2012, which will greatly increase hosting

and connectivity services.

Fees are charged per workstation, open interface and network used to access both the cash and derivatives markets.

ASX Data Centre a growth option

Austraclear 5.6% Depository, settlement and registry services for fixed income securities.

Revenue driven by settlement

volume & securities holdings

Listing of CGS a growth option.

Other revenue

2.5% Fees on delayed settlements

ASX and Austraclear participation fees.

Fee per delay; fee per participant Revenues have remained flat since the cyclical low of 1H09

Source: EAP

16

Segmental overview

The current impact of competition is minimal, with only cash equities trading (6.2% of 1H12 revenue) being currently contested. However, EAP’s base case assumes new entrants in: Derivatives (from 2H14), clearing (from 1H14) and settlements (from 1H14).

Segment 1 – Derivatives

Derivatives has been a strong segment, up from 26.4% total revenue in 1H08 to 30.7% in 1H12. Chart 11.

Group Derivatives comprises two segments:

(i) Derivatives (ETOs and index options); and (ii) Futures & Options (F&O).

Group Derivatives revenues have increased 37.7% since 2H09, a 3 year CAGR of 11.3%, with F&O

being the key growth driver.

o Derivatives (ETOs and index options) revenues are down on higher volumes but lower margins. The key driver of 18.2% hoh growth in 1H12 total derivatives volume was index options growth of +61%. However, the decline in average fee per contract has driven 1H12 revenue down $0.6m to $14.8m. Charts 11-12.

o F&O revenue grew with increased average pricing offsetting declining volume. Average fee per contract was up 15.1% to $1.60 in 1H12 whilst daily average contracts declined 6.3%. Chart 13.

CHART 11: GROUP DERIVATIVES REVENUE

56.951.4

57.0 58.667.4

74.781.8

13.112.4

15.1 16.5

15.1

15.4

14.8

0.0

20.0

40.0

60.0

80.0

100.0

1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12

Derivatives Revenue Futures & Options Revenue

$m

Source: ASX Reports, EAP CHART 12: DERIVATIVES (ETOs and INDEX Options) CHART 13: FUTURES & OPTIONS

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

0

20

40

60

80

100

120

Derivative Average Daily Contracts Derivatives Average Fee per Contract

Source: ASX Reports, EAP

000's

$0.10

$0.30

$0.50

$0.70

$0.90

$1.10

$1.30

$1.50

$1.70

$1.90

0

50

100

150

200

250

300

350

400

450

Average Daily Contracts Average Fee per Contract

Source: ASX Reports, EAP

000's

17

Segment 2 - Listings & Issuer Services

ASX’s second largest segment, it generates revenue from five separate segments:

(i) Annual listing fees (44.0% of segment revenues); (ii) Secondary raising fees (25.8% segment); (iii) Registry services fees (18.1% of segment);

(iv) Initial listing fees (5.4% segment); and (v) Warrants fees (6.7% segment).

L&I Group Revenue has been mostly flat since 1H09, with growth in annual listing fees and warrants

fees offsetting declines in secondary raising fees. Earnings cyclicality is evident in Chart 14.

CHART 14: LISTINGS & ISSUER SERVICES REVENUES

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1H 08 2H 08 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12

Registry service fees

Warrants & Debt

Secondary Listing Fees

Initial Listing Fees

Annual Listing Fees

Total Capital Raised (RHS)

Source: ASX Reports, EAP

$m $m

Annual Listing Fees

Annual Listing Fees are driven by: (i) the number of listed entities; and (ii) total market capitalization, with fees charges as a % of market cap on a regressive sliding scale. Group L&I Services revenues have been flat since

2H09, with a constant number of listed entities since Mar 08 and a declining market index offset by increased fees. Key trends are:

o New listing numbers declined 32.1% from 84 in 1H11 to 57 in 1H12. Table 6. o The number of de-listings has accelerated in 1H12 to 82. Table 6.

o Total Listings have increased slightly in 2H12, though the trend over the year to February 2012 is largely flat.

CHART 15: NUMBER OF LISTED ENTITIES CHART 16: ASX 200 INDEX LEVEL

1,450

1,550

1,650

1,750

1,850

1,950

2,050

2,150

2,250

2,350

Source: ASX Reports, EAP

1,450

2,450

3,450

4,450

5,450

6,450

7,450

Source: IRESS, EAP

Points

TABLE 6: ASX LISTINGS

Listings 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12

Domestic Market Cap $bn $969 $1,098 $1,403 $1,254 $1,419 $1,349 $1,136

Listings - Opening Balance 2226 2223 2198 2181 2192 2216 2247

Number of New Listings 34 11 50 43 84 76 57

Nuber of Delistings -37 -36 -67 -32 -60 -45 -82

Listings at end 2223 2198 2181 2192 2216 2247 2222

Growth -0.1% -1.1% -0.8% 0.5% 1.1% 1.4% -1.1%

Source: ASX Reports, EAP

18

Secondary Listing Fees

Secondary Listing Fees are driven by the value of secondary capital and dividend reinvestment plans (DRPs) raised, with fees charged as a % of the dollar

value raised on a regressive sliding scale. Table 5. Secondary raising fees have been declining since the 1H10 peak of $32.7m during the post-GFC recapitalization to $17.7m in 1H12.

CHART 17: SECONDARY CAPITAL RAISED & ASX FEES

0.0

7.5

15.0

22.5

30.0

37.5

45.0

0

10,000

20,000

30,000

40,000

50,000

60,000

Secondary Capital Raised A$m (LHS) Secondary Listing Fees (RHS)

Source: ASX Reports, EAP

$m $m

Registry Service Fees Registry Service Fees are driven by the number of listed securities, with services charged per request. Volumes

generally move in line with the broader L&I Services Group.

Warrants Fees

Warrants Fees are driven by the number of new series listed & value of the series, with fees charged per new series listed & an annual fee. Warrants is a growing segment, up 112% from $2.2m in 2H09 to $4.6m in 1H12. Chart 18.

CHART 18: WARRANTS & ASX FEES

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Number of New Warrants Series ASX Structured Products Fees A$m (RHS)

Source: ASX Reports, EAP

Initial Listing Fees

Initial Listing Fees are the smallest revenue contributor to the L&I Services segment (1.2% segment total), with revenues driven by IPO value and fees are charged as a % of the IPO value. IPO capital raised is highly cyclical, and most recently is down 70.4% in FY12 to A$6,791m. However, the previous corresponding period included QRN ($6.2bn) & WRT ($8.4bn). Chart 19.

CHART 19: INITIAL CAPITAL RAISED & ASX FEES

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

5,000

10,000

15,000

20,000

25,000

Initial Capital Raised A$m (LHS) Initial Listing Fees (RHS)

Source: ASX Reports, EAP

$m $m

19

Segment 3 – Cash Market

ASX’s third second largest segment, driven by volume and value traded, it generates revenue from three separate

segments:

o Clearing (37.5% of segment revenues; 8.0% Group revenues); o Settlement (33.2% segment; 7.0% Group revenues); and o Trading (29.3% segment; 6.2% Group revenues).

Revenues are down 19.9% since 1H08 peak of $80.2m to $66.9m in 1H12, with a -4.1% CAGR since

1H09.

Clearing

Clearing revenues are a % of the executed trade value. Clearing revenues have remained flat since 1H11 at ~$25.1m.

Settlement

Revenue is driven by volume traded, with revenue generated as a fixed charge payable per settlement request.

Trading

This segment has been directly impacted by loss of market share, lower margins and slowing cyclical volumes. Revenue is generated as a percentage of the traded value with a maximum cap per trade of $75. Average daily

traded value has been flat at ~$5bn since 1H10, whilst revenues have steadily declined since 1H10 then

remained stable since 1H11. Chart 20. The number of daily trades has increased from ~117k in Jan 06 to ~633k in Feb 12, whilst the value per trade has declined from ~$28k to ~$7.6k, driven by high frequency and algorithmic trading. Chart 21.

CHART 20: DAILY VALUE TRADED & CASH MARKET FEES

0.0

15.0

30.0

45.0

60.0

75.0

90.0

105.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Average Daily value traded $m (LHS) Cash Market Fees (RHS)

Source: ASX Reports, EAP

$bn $m

CHART 21: AVERAGE DAILY TRADING (A$b) CHART 22: MARKET CAP& VELOCITY (VAL/MKT CAP)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0

100

200

300

400

500

600

700

800

900

Average Daily Transactions LHS ('000s) Value per trade RHS ($)

Source: ASX Reports, EAP

85%

90%

95%

100%

105%

110%

115%

120%

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

Market Capitalisation LHS ($bn) Trading Velocity RHS (%)

Source: ASX Reports, EAP

$bn %

20

Segment 4 - Information Services

This segment provides access to products and market data from ASX’s equities and derivatives trading systems, live access to company releases and other related fundamental information. Revenues are driven by the total number of terminal connections, with ~84% of revenue related to cash market and equity options trading and ~16% relating to futures and options trading.

In 1H12, ASX observed that professional data usage was stable, but retail data usage (including day traders) was down. The number of ASX terminals declined 13% in 1H12, reducing revenues by 3.2%. Chart 23.

CHART 23: INFORMATION SERVICES

16.0

20.0

24.0

28.0

32.0

36.0

40.0

0

20,000

40,000

60,000

80,000

100,000

120,000

ASX & SFE Terminals LHS Information Services Revenue RHS ($m)

Source: ASX Reports, EAP Segment 5 - Technical Services

This segment provides trade execution and data services: o Connectivity fees are charged on workstations, open interfaces and networks used to access the cash and

derivatives markets. o Co-location hosting services are also offered, allowing ASX members to place their infrastructure within the

same physical data centre as the ASX primary matching engines.

This segment has been growing steadily, with a CAGR of 16.3% since 1H09. The number of devices installed with customers has increased steadily since 2H09, up 18.5% to 1H12, driven by increased demand for terminals as well as new products, including ASX Net commissioned during FY11. Growth options include the ASX Data Centre, expected for completion in 2Q 2012, which will greatly increase hosting and connectivity services.

CHART 24: TECHNICAL SERVICES

0.0

5.0

10.0

15.0

20.0

25.0

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

Total devices LHS Technical Services Fee Revenue RHS ($m)

Source: ASX Reports, EAP

21

Segment 6 - Austraclear

Austraclear provides depository, settlement and registry services for fixed income securities. It is a growing segment, up 14.8% CAGR since 2H09, with both volumes and revenue increasing. 1H12 revenues were 5.6% higher hoh, with transaction volumes +5.6% and holding balances on average +8.7% higher than 2H11. Charts 25-26.

CHART 25: SETTLEMENT VOLUMES, FEEREVENUE CHART 26: AUSTRACLEAR HOLDING BALANCES

0.0

3.0

6.0

9.0

12.0

15.0

18.0

21.0

24.0

4,800

5,000

5,200

5,400

5,600

5,800

6,000

6,200

6,400

Average daily settlement volume LHS Austraclear Fee Revenue RHS ($m)

Source: ASX Reports, EAP

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

600

700

800

900

1,000

1,100

1,200

1,300

1,400

Holdings ($bn) LHS Growth (%) RHS

Source: ASX Reports, EAP Segment 7 - Other Revenue

Other revenues include (i) fees on delayed settlements and (ii) ASX and Austraclear participation fees. Revenues have remained flat since the cyclical low of 1H09.

Sector consolidation

Sector consolidation is being driven by exchange incumbents’ market share loss, margin decline and rising IT capex spend. As the cash equities trading segment is becoming a competitive, low-margin commodity service, one possible response is seeking acquisitions to increase operating leverage.

ASX as acquirer

The new CEO is yet to articulate his M&A agenda. However, as an acquirer, ASX has a wide range of options

including: (i) smaller offshore exchanges; (ii) bolt-on acquisitions to complement existing revenue lines; (iii) larger

acquisitions such as Computershare (registry business) or IRESS (market information services, 18.9% owned by ASX); and (iv) expansion into adjacent segments such as investor relations advisory or the wider range of businesses within the CPU portfolio.

ASX as target

In our view, a takeover of the ASX is unlikely for at least the next 2 years. However, the CFR’s March 2012 recommendations are incrementally creating the conditions for ASX to become a longer-term target.

On 8 April 2011, SGX’s proposed acquisition of ASX was rejected due to (i) national interest grounds; and (ii) concern regarding local market integrity during a systemic crisis. This prompted the Government to review the applicable regulatory framework. The CFR’s recommendations for mandatory domestic location of markets infrastructure and step-in rights during a systemic risk event could provide appropriate safeguards

even if the ASX were foreign-owned. The remaining obstacle for ASX as a target would be political support.

22

International consolidation

Currently, there is resistance to international mergers of national incumbent exchanges, driven by a combination of: (i) parochial interests; (ii) anti-trust concerns; and (iii) fear of further international integration post-GFC. However, we expect consolidation pressures will re-emerge as (i) GFC memories fade; (ii) global corporations push for global equity capital markets solutions as debt capital becomes scarcer in a de-leveraging, Basel 3 world; and (iii) incumbent exchanges become less relevant as new entrants capture market share and develop regional or global platforms.

Several intra-national exchange mergers have occurred including: (i) Micex and RTS (Russia); (ii) US exchanges (CME, CBOT and NYMEX; Nasdaq and Philadelphia Exchange; NYSE and American Stock Exchange); and (iii) European exchanges (eg. Euronext; NOREX).

Some international mergers have occurred: (i) Nasdaq OMX (Stockholm); and (ii) NYSE Euronext (Frankfurt, Paris, Brussels exchanges). However, international consolidation has mostly been resisted including:

o ASX’s proposed merger with NZX in 2001 was rejected by NZX. o Deustche Borse and NYSE Euronext proposed’s Feb 2012 merger was blocked by the European Commission

on fears it would create a monopoly in derivatives and clearing. o SGX and ASX was blocked on fears of systemic risk in the event of a financial crisis. o London Stock Exchange (LSE)’s proposed merger in 2011 with Canada’s TMX Group was abandoned after a

negative domestic reaction.

o LSE rejected bids by Deutsche Borse in 1999 and 2000 and then Nasdaq in 2006 and 2007. o Nasdaq OMX and Intercontintental Exchange’s hostile bid in 2011 for NYSE Euronext was stopped by the US

Justice Department.

23

5. KEY RISKS

Regulatory Risk

Best execution

ASIC has introduced new Market Integrity Rules which require brokers to deliver “best execution” for their clients. Given Chi-X's main selling point is its cheaper pricing, for retail orders “best execution” may mean retail brokers

would be compelled to join Chi-X. However, ASIC recently announced (i) a delay to introduction of mandatory “best execution” from 1 October 2012

to 1 March 2013; and (ii) brokers may avoid alternative trading platforms altogether if it would not provide a better result for clients. The risks of mandatory “best execution” to ASX are mitigated by the fact that ASX’s cash equities trading business

only contributed 6.2% of 1H12 revenues.

OTC Derivatives clearing

Global regulatory change, such as the US’s Dodd-Frank Act and Europe’s market infrastructure regulation, is driving over-the-counter (OTC) derivatives onto electronic platforms that will have to be cleared by central counterparties. Central clearing of OTC derivatives is an upside risk for ASX, particularly considering the CFR’s recommendation of mandatory onshore infrastructure raises barriers to entry .

Cyclical risks

A 10% increase in the total listed equity market cap translates to ~ 9.1% FY13F EPS increase for ASX (and vice versa). Key drivers are futures & options, daily cash equities, CHESS statements and terminals. Table 5.

Competition

We have included the arrival of competition in derivatives, settlements and clearing into our base case valuation, even though there is no current competitor in these segments.

24

FINANCIAL SUMMARY

ASX ASX

As at: 12/04/2012 Recommendation: Positive Share Price $31.33

Year end June 2011A 2012E 2013E 2014E

INCOME STATEMENT

Sales Revenue $m 618 634 708 733 Consolidated EBITDA $m 482 488 550 570 D&A $m (23) (28) (36) (44) Consolidated EBIT $m 459 460 515 525 Net Interest $m 38 44 44 44 Tax Expense $m 150 152 168 171 Associates/Minorities $m 0 0 0 0

Adj NPAT $m 357 362 401 409

NRIs $m (4) 0 0 0 Reported NPAT $m 352 362 401 409

Shares on Issue (end period) m 175 175 175 175 EFPOWA m 175 175 175 175

EPS ¢ 204.0 206.4 228.9 233.3

DPS ¢ 183.2 185.7 205.9 209.8 Franking % 100% 100% 100% 100%

GROWTH/PROFITABILITY RATIOS

Sales Growth % 5.0% 2.7% 11.6% 3.6% EBITDA Growth % 6.2% 1.2% 12.8% 3.5% EBIT Growth % 5.4% 0.2% 11.9% 2.1%

EPS Growth % 5.7% 1.2% 10.9% 1.9%

EBITDA/Sales % 78.1% 76.9% 77.8% 77.7% EBIT/Sales % 74.3% 72.5% 72.7% 71.6% EBIT Interest Cover x (12.2) (10.5) (11.7) (11.9) Tax Rate % 29.6% 29.6% 29.5% 29.5%

ROE % 12.0% 12.0% 13.2% 13.3% ROFE % 28.2% 34.7% 38.2% 37.9%

CASH FLOW

EBITDA $m 482 488 550 570 Change in Working Capital $m 12 (12) 0 0 Other $m (17) 0 0 0

Gross Operating Cash Flow $m 477 475 550 570

Net Interest Paid $m 36 45 44 44 Tax Paid $m (142) (152) (168) (171)

Net Operating Cash Flow $m 371 368 427 443

Maintenance Capex $m

Free Cash Flow $m 371 368 427 443

Dividends Paid $m (304) (325) (361) (361) Expansionary Capex $m (47) (54) (69) (86) Acquisitions $m Asset Sales $m 0 0 0 0 Dividends Received $m 10 10 10 10 Shares Issues/Buybacks $m 45 0 0 0 Other $m (474) 0 0 0

Increase in Net Cash/(Debt) $m (398) (1) 7 7

GOCF/EBITDA % 99% 97% 100% 100% Total Capex/Sales % 7.6% 8.5% 9.7% 11.7% Total Capex/Depreciation x 2.0 1.9 1.9 1.9

Year end June 2011A 2012E 2013E 2014E

VALUATION METRICS PER x 15.4 15.2 13.7 13.4 P/EG (2YR) x 1.3 1.2 Dividend Yield % 5.8% 5.9% 6.6% 6.7% EV/EBITDA x 7.9 7.8 6.9 6.7 EV/EBIT x 8.3 8.3 7.4 7.2 P/FCF x 14.8 14.9 12.9 12.4 P/BV x 1.8 1.8 1.8 1.8

BALANCE SHEET

Assets Cash $m 1,952 1,937 1,944 1,944 Working Capital $m 267 133 133 133 PP&E $m 57 81 114 156 Intangibles $m 2,318 2,316 2,316 2,316 Investments $m 1,581 2,073 2,073 2,073 Other $m 8 10 10 10

Total Assets $m 6,182 6,550 6,590 6,631

Liabilities Debt $m 250 250 250 250 Working Capital $m 258 104 104 104 Other $m 2,532 3,096 3,096 3,096

Total Liabilities $m 3,161 3,532 3,532 3,532 Equity $m 3,021 3,018 3,058 3,099 Capital Employed $m 1,319 1,332 1,365 1,406

Net Debt/(Cash) $m (1,702) (1,687) (1,694) (1,694) Net Debt/Equity % (56.3%) (55.9%) (55.4%) (54.6%)

Net Debt/Debt+Equity % (129)% (127)% (124)% (120)%

Net Debt/EBITDA x (3.5) (3.5) (3.1) (3.0) Working Capital/Sales % 1.4% 4.6% 4.1% 4.0% D&A/PP&E % 40.8% 34.4% 31.1% 28.5%

DCF VALUATION $m $/share

Risk Free Rate 5.5% Equity Value 5,504 $31.42 Market Risk Premium 5.5% (Net Debt)/Cash 552 $3.15 Beta 1.00 Franking Credits $

WACC 11.0% DCF Valuation $34.58

Listings & Issuer Services $m 150 140 167 179 Cash Market $m 134 131 134 116 Derivatives $m 172 194 213 227 Information Services $m 71 71 86 95 Technical Services $m 40 47 52 57

Group Revenue $m 618 634 708 733

DIVISIONAL SUMMARY

69%

71%

73%

75%

77%

79%

81%

2010 2011 2012 2013 2014

Margin Trends

EBITDA/Sales EBIT/Sales

-16

-15

-14

-13

-12

-11

-10

-135%

-120%

-105%

-90%

-75%

-60%

-45%

2010 2011 2012 2013 2014

Gearing & Interest Cover

Net Debt/Net Debt+Equity (%) EBIT Interest Cover (x)

4%

10%

16%

22%

28%

34%

40%

2010 2011 2012 2013 2014

Return Trends

ROE ROA ROFE - Reported

25

RESEARCH RECOMMENDATION DEFINITIONS Positive Stock is expected to outperform the S&P/ASX 200 over the coming 24 months

Neutral Stock expected to perform in line with the S&P/ASX 200 over the coming 24 months Negative Stock is expected to underperform the S&P/ASX 200 over the coming 24 months Speculative Stock has limited history from which to derive a fundamental investment view or its prospects

are highly dependent on event risk, eg. Successful exploration, scientific breakthrough, high commodity prices, regulatory change, etc.

Suspended Stock is temporarily suspended due to compliance with applicable regulatory and/or Evans &

Partners policies in circumstances where Evans & Partners is acting in an advisory capacity. Not Rated Stock is not included in our investment research universe. Research Criteria Definitions

Recommendations are primarily determined with reference to how a stock ranks relative to the S&P/ASX 200 on the following criteria: Valuation Rolling 12 month prospective multiples (composite of Price-to-Earnings Ratio, Dividend

Yield and EV/EBITDA), or long-term NPV for resource stocks.

Earnings Outlook Forecast 2 year EPS growth. Earnings Momentum Percentage change in the current consensus EPS estimate for the stock (rolling 1 year

forward basis) over the consensus EPS estimate for the stock 3 months ago. Shareholder Returns Composite of forecast ROE (rolling 1 year forward basis) and the percentage change in

ROE over 2 years.

Debt Servicing Capacity Rolling 12 month EBIT Interest Cover ratio. Cyclical Risk Qualitative assessment of the 2 year outlook for a stock/industry’s profit cycle. Industry Quality Qualitative assessment of an industry’s growth/returns potential and company specific

management capability.

Financial Transparency If we don’t understand it, we won’t recommend it. For stocks where Evans & Partners does not generate its own forecasts, Bloomberg consensus data is used.

Analysts can introduce other factors when determining their recommendation, with any material factors stated in the written research where appropriate.

26

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