Deutsche Bank

Markets Research

Rating Company Date

7 December 2017
Hold ASX Ltd
Company Update
Australasia
Australia
Reuters Bloomberg Exchange Ticker Price at 6 Dec 2017 56.95
Investment & Financial ASX.AX ASX AU ASX ASX
Price target - 12mth 54.50
Services
ADR Ticker ISIN 52 week range (AUD) 57.33 - 47.91
ASXFY US00212E1038
ALL ORDINARIES 6,076

Blockchain - A Primer
Ross Curran
Research Analyst
(+61) 2 8258 2844
DLT provides growth platform for future ross.curran@db.com
ASX will replace its CHESS clearing and settlement platform with Distributed
Ledger Technology. This is likely to have limited near term impact, but medium
Price/price relative
term opens up significant opportunities for growth. We maintain a HOLD on
ASX. We like its strong market position and pristine balance sheet, but with 60
cost growth currently running double revenue growth we think the stock is 56
fairly valued. 52
48
ASX will replace the CHESS platform with Distributed Ledger Technology 44

The group made $104m in revenue from Clearing and Settlement services in 40
36
FY17. Longer term the implementation of Distributed Ledger Technology may 12/15 6/16 12/16 6/17
open up new revenue streams for the group, for example registry ASX Ltd
maintenance, but in the short to medium term the focus is likely to be on ALL ORDINARIES (Rebased)
market stability and integrity.
Performance (%) 1m 3m 12m
Limited near term impact, potentially significant long term Absolute 4.4 6.5 18.6
The group will enter a testing phase at the end of March, but this is voluntary
ALL ORDINARIES -0.3 5.2 9.7
for market participants. Settlement times will remain at T+2, despite the
technology allowing faster settlement. D&A charges are likely to increase as Source: Deutsche Bank

CHESS was fully depreciated. IT expenses are likely to increase as ASX is

licensing the technology from DAH. However, being a monopoly provider of
Settlement and Clearing functions these cost burdens are unlikely to trouble
ASX shareholders. At this stage we have no visibility on the increase in either
expense lines. This will likely become clearer with the February results.
Retain Hold
Our valuation is unchanged for ASX at $54.50. This is based on a blended DCF
(WACC 9.9%, terminal growth of 3.0% is in line with long-run growth of the
Australian economy) and a PE Relative (125% of the market PE). The risks to our
price target will depend on if trading levels vary significantly from trend levels, if
they are higher than expectations it provides upside risk, if they are lower it is
downside risk. Any unexpected regulatory changes could also provide risk to our
price target over the medium term.

Forecasts And Ratios

Year End Jun 30 2016A 2017A 2018E 2019E 2020E
Sales (AUDm) 746 764 793 828 866
EBITDA (AUDm) 576 583 597 625 655
Net Profit (AUDm) 426 434 442 462 486
EPS (AUD) 2.20 2.24 2.28 2.39 2.51
PER (x) 18.9 22.1 25.0 23.8 22.7
EV/EBITDA (x) 9.4 8.8 8.9 8.4 7.9
DPS (net) (AUD) 1.98 2.01 2.03 2.02 2.05
Franking (%) 100 100 100 100 100
Source: Deutsche Bank estimates, company data
1
Pre-exceptionals/extraordinaries
2
Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses
the year end close
________________________________________________________________________________________________________________
Deutsche Bank AG/Sydney Distributed on: 07/12/2017 09:24:34 GMT
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.
0bed7b6cf11c
7 December 2017
Investment & Financial Services
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M o del updated: 05 September 2017 Fiscal year end 30-Jun 2015 2016 2017 2018E 2019E 2020E
Running the Numbers Financial Sum m ary
No rmalised EP S (A $ ) 2.083 2.202 2.242 2.281 2.389 2.510
Asia Pacific
P /E Ratio no rmalised (A $ ) 18.5 18.9 22.1 25.0 23.8 22.7
Australia No rmalised EP S gro wth (A $ ) 5.0 5.7 1.9 1.7 4.7 5.1
EP S FD (A $ ) 2.027 2.202 2.242 2.281 2.389 2.510
Div Finance
P E Ratio FD (A $ ) 19.0 18.9 22.1 25.0 23.8 22.7
Operating CFP S (A $ ) 2.443 2.218 2.426 2.500 2.617 2.741
P /CFP S (A $ ) 15.7 18.7 20.5 22.8 21.8 20.8
ASX Ltd DP S (A $ ) 1.874 1.981 2.010 2.032 2.023 2.053

Reuters: ASX.AX Bloomberg: ASX AU Dividend Yield (A $ ) 4.9 4.8 4.0 3.6 3.6 3.6
P rice/B V (A $ ) 1.98 2.10 2.46 2.79 2.76 2.72
Hold Enterprise value (A $ m) 5,142 5,409 5,134 5,312 5,250 5,181
EV/EB ITDA (A $ m) 9.4 9.4 8.8 8.9 8.4 7.9
Price (6 Dec 17) A$ 56.95 EV/EB IT (A $ m) 10.1 10.1 9.6 9.6 9.1 8.5
Target price A$ 54.50
Revenue by divisions
Listing fees 184 193 193 209 224 239
Equities trading, clearing & settlement 128 143 151 152 153 154
Derivative trading, clearing & settlement 206 217 219 218 225 231
M arket data 74 80 83 87 93 98

Other 109 113 119 126 134 143

C o m pa ny D e s c ript io n PROFIT & LOSS (A$m )

A ustralian Sto ck Exchange Limited o perates A ustralia's primary natio nal Sales revenue 701 746 764 793 828 866
sto ck exchange and derivatives markets. The A SX o perates markets fo r EB ITDA (incl significant items) 541 576 583 597 625 655
equities, fixed-interest securities, derivatives (equities, interest rates,
Depreciatio n/amo rtisatio n -39 -43 -46 -46 -48 -49
currencies and co mmo dities) and is the primary listing venue fo r equities in
the A ustralian market. EB IT (incl significant items) 502 533 537 551 577 606
Net interest inco me (expense) 72 73 79 75 79 83
Inco me tax expense 171 180 182 185 193 203
A sso ciates/affiliates 0 0 0 0 0 0
M ino rities/preference dividends 0 0 0 0 0 0
Repo rted pro fit 403 426 434 442 462 486
Significant items -5 0 0 0 0 0
Net pro fit (excl significant items) 409 426 434 442 462 486
EB IT (excl significant items) 510 533 537 551 577 606

Ross Curran
612 8258 2844 ro ss.curran@db.co m CASH FLOW (A$m )
Cash flo w fro m o peratio ns 473 429 470 484 507 531
M o vement in net wo rking capital 15 -15 -1 -4 -4 -4
Capex -44 -50 -47 -49 -49 -50
Free cash flo w 429 379 423 435 458 481
Other investing activities -67 0 0 0 0 0
Equity raised/(bo ught back) 0 0 0 0 0 0
Dividends paid -352 -376 -389 -392 -406 -426
Net inc/(dec) in bo rro wings 0 0 0 0 0 0
Absolute Price Return (%)
Other financing cash flo ws 0 0 0 0 0 0
0% 5% 10% 15% 20% To tal cash flo ws fro m financing -352 -376 -389 -392 -406 -426
Net cash flo w 9 4 34 44 51 54
1m 4%
M o vement in net debt/(cash) -9 -4 -34 -44 -51 -54
3m 9%

12m 19% Balance Sheet (A$m )

Cash and o ther liquid assets 1,989 3,276 5,684 5,742 5,809 5,879
Tangible fixed assets 55 52 47 56 57 58
Go o dwill 0 0 0 0 0 0
Other intangible A ssets 2,410 2,421 2,439 2,439 2,439 2,439
A sso ciates/investments 3,266 4,221 3,900 2,227 2,692 3,157
52-week High/ Low: A$ 57.33 – 47.91 Other assets 338 482 1,143 1,212 1,270 1,334
M arket Cap (m) A$11,025 To tal assets 8,059 10,452 13,212 11,676 12,267 12,867
USD$8,342 Interest bearing debt 3,686 5,888 7,885 6,175 6,599 7,021
Other liabilities 613 739 1,419 1,549 1,669 1,798
D C F V A LU A T I O N ( A $) To tal liabilities 4,299 6,628 9,304 7,724 8,268 8,819
Bet a (M RP - 6.00) 1.00 Shareho lders' equity 3,760 3,824 3,908 3,952 3,999 4,047
Debt / mkt value rat io (%) 15.0 M ino rities/o ther 0 0 0 0 0 0
WACC (6.25%bond yield) 11.4 To tal shareho lders' equity 3,760 3,824 3,908 3,952 3,999 4,047
Net wo rking capital 16 31 33 36 40 44
Net value per share ($) 54 . 50 Net debt/cash -1,989 -3,276 -5,684 -5,742 -5,809 -5,879
Price/ NPV (x) 1.04

So urce: Co mpany data, Deutsche B ank estimates RATIO ANALYSIS

Sales gro wth (%) 6.4 6.5 2.4 3.8 4.4 4.6
EB ITDA /Sales (%) 78.3 77.1 76.3 75.4 75.5 75.7
EB IT/Sales (%) 72.7 71.4 70.3 69.5 69.7 70.0
P ayo ut ratio (%) 90.0 90.0 89.6 89.1 84.7 81.8
ROA (%) 8.4 8.9 8.7 8.2 9.4 9.1
ROE (%) 10.9 11.2 11.2 11.2 11.6 12.1
Operating return o n Capital (%) 20.6 70.8 -21.0 -21.6 -22.4 -23.3
Tax Rate 29.7 29.7 29.6 29.5 29.5 29.5
Capex/sales (%) 6.3 6.7 6.1 6.1 5.9 5.7
Capex/depreciatio n (x) 1.2 1.2 1.0 1.0 1.0 1.0
Net debt/equity (%) -52.9 -85.7 -145.4 -145.3 -145.3 -145.3
Net interest co ver (x) -8.6 -8.9 -8.2 -9.1 -9.1 -9.1

12mth Fwd P/E Relative (x) Return Ratios (%) Net Debt (Cash) / Equity (%)
80
0 0
1.12

60 -1000 -20

-40
40 -2000
-60
-3000
20 -80
-4000
0 -100
-5000
-120
(20 )
-6000 -140

1.12 (40 ) -7000 -160

8/13 8/14 8/15 8/16 8/17 15 16 17 18 E 19 E 20 E 15 16 17 18E 19E 20E

RO E (% ) RO A (%) Net Debt / Cash (A$)

PE Rel ativ e L-T average Op ROE (%) Net Debt / Equity

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Blockchain
An Overview

One of the key pieces of technology that the ASX has been investigating in
recent years has been Distributed Ledger Technology (commonly referred to as
Blockchain technology). The former CEO Elmer Funke Kupper stated that
“Distributed Ledger Technology could provide a once in a generation
opportunity to reduce cost, time and complexity in the post-trade environment
of Australia’s equity market,”. The group has invested in a US based company
called Digital Asset Holdings and this company’s technology is expected to
replace the ASX’s CHESS platform in coming periods.

A Quick Introduction
A blockchain is a distributed database that is comprised of a decentralised list
of transactions that is shared between computers instead of being stored in a
central server. Each record in the growing list is called a block. The data store
typically contains financial transactions over a peer-to-peer network and uses
cryptography and digital signatures to prove identity, verify authenticity and
enforce read/write access rights. Data is replicated across a number of
systems in almost real-time and has mechanisms to make it difficult to change
historical records. This means that users now have a common, authoritative
prime record, to which multiple participants can refer to without the need of a
centralised server as an intermediary.

Implications for ASX

The ASX is currently undergoing a transition from a client-server model to this
type of Distributed Ledger data store for the purpose of replacing decades-old
CHESS clearing and settlement software. While pre-trade order-routing and
electronic trading of financial assets is effectively frictionless and low cost with
trading responsiveness in the range of milliseconds, clearing, settlement and
custody processes have not reached similar levels. The result is a settlement
latency, with securities transactions held in a clearing process for 2 business
days. This two day settlement window is expected to be maintained at least in
the short term. The longer settlement period allows market participants to
open and close positions in the same trading day without posting capital (day-
trading). This is beneficial for ASX volumes, and in particular High Frequency
Traders.

Digital Asset Holdings (DAH, a software company that develops and builds
ledger technology solutions) is the firm implementing the new blockchain
platform, Digital Asset Platform (DAP). The ASX has an equity investment in
DAH and is actively working with them to help develop a suitable technology
platform which can be implemented in multiple markets.

The platform is implemented using the Digital Asset Modeling Language

(DAML, the language in which logic and behaviour for the DAP is written).
Given the modern regulated financial market’s transactional activity is built
upon a shared hierarchical foundation, it is important to consider the existence
of the following hierarchy to design a new type of data store:

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 Base layer of national legal systems or agreed international standards

providing security of legal contract between parties and predictable
mechanisms in the case of dispute resolution
 Layer above of agreed market rules that are enforced by central
market operators or through bilateral trading agreements between
relevant organisations
 Top layer of standard form legal agreements incorporating common
activities and trades within these markets

DAH is designing its blockchain platform such that the code used for
automation must remain subservient to legal systems and dispute resolution,
market rules and commonly understood legal prose. This allows their platform
to enable the implementation of the aforementioned hierarchy to deliver the
benefits of automated workflows whilst ensuring parties continue to have the
certainty afforded to them today by the common legal foundation they all
share, without compromising confidentiality.

DAP programming language has an agnostic application programming

interface that conforms to web standards. This allows DAP to be easily built on
through the development of applications and programs to run on the DAP.
Ultimately this should allow adoption to be less difficult and reduce the cost of
integration with legacy systems.

NASDAQ, in January this year, successfully completed a test using blockchain

technology to run proxy voting on its Estonian exchange. In that same month,
Tokyo Stock Exchange received approval to use blockchain technology as a
trading platform to increase trade efficiency. Additionally, HKex announced in
February this year that it plans to adopt blockchain to keep track of private
investors in startup firms.

According to a recent report by Bain & Company, approximately 80% of

surveyed financial markets executives say the technology will transform their
industry and expect their firms to adopt it by 2020.

How does it work?

To perform a financial transaction, a new block must be created. In order to
create a new block, the transaction is sent to a miner (a verifier of transactions
that creates blocks). If the transaction is valid and not already spent, the miner
will broadcast the transaction as a block to all connected verifiers, who then
accept the block. The transaction will then occur. For the block to actually be
created, miners have to solve a difficult problem to obtain a hash code (a
fingerprint allows users to ensure that blocks validly connect to each other,
allowing the system to be secure and immutable). Once they solve it, they are
rewarded to provide them incentive to do so. In Bitcoin, the incentive is
currently 12.5 bitcoins. This process repeats for any further transactions, with
the next block built on the aforementioned block, thereby forming a “chain”.

In the case of Bitcoin, the transaction would be one individual sending bitcoins
(a digital currency based on cryptography) to another. However in the case of
the ASX the recorded transactions involves wholesale securities clearing and
settlement and derivatives processing. Consequently, the process of a
blockchain system for such data storage and communication related to such
activities is more complicated. The terms and conditions of individual

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agreements between parties associated with such transactional activities is

captured by DAH’s developed platform.

A blockchain itself is just a data structure. That is, how data is logically
structured and stored. Other data structures include databases (containing
rows, columns and tables), text files, comma separated values (csv) and so on.
A blockchain can be seen as competing most closely with a database.

The blocks in a chain can be viewed as pages in a book. With the financial
transaction parallel to the story of the book, each block (page) holds financial
transaction data (the story). A page will have information about itself. This
includes the page and chapter number at the bottom of the page as well as the
title of the book at the top of the page. Similarly, each block in a chain also has
information about itself (metadata). This includes technical information about
the block, a reference to the previous block in the chain and a hash of the data
in this block.

In the same way a page number implicitly references the previous page
number (page 59 comes after page 58), each block references the previous
block but instead of block number, an aforementioned hash is used. This hash
is effectively a large, complicated permutation (ordered combination) of
characters and digits. This allows for many unique permutations and therefore,
a negligible chance of any participant to accidentally match the hash of
another one. This fingerprint is determined by the contents of the block and
each fingerprint is unique to its respective block’s content. Solving a
complicated problem in order to deduce the hash code is how blocks are
created. This allows for participants to validate the data. If fingerprints are
consistent with the data on the block, and the fingerprints join up in a chain,
then the blockchain is deemed to be internally consistent.

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Figure 1: Blockchain Flow Chart

Source: Deutsche Bank

For anyone wishing to modify any of the data ex post, they would have to
regenerate all hashes from that point forwards and the blockchain will appear
different, allowing users to detect modification. A fingerprint which is difficult
or takes a large amount of time to create means that it is more likely the
corresponding blockchain will be more difficult or slow to re-write.
Consequently, anyone who wishes to re-write parts of such a blockchain will
require a long time and they would have to first catchup with and then
overtake the rest of the honest network. The unfeasibility of such a situation
would make a blockchain immutable, which is desirable as it means the ex
post data is incorruptible. Even in the case a blockchain is not immutable, the
peer-to-peer data sharing mechanism in addition to the fingerprinting system
makes it obvious when a user attempts to alter some data. This is more
relevant for Bitcoin rather than DAP, since anyone under a pseudonym can
participate in the former while the latter only involves vetted, pre-approved
participants whose details can be detected.

Peer-to-peer vs client-server
It is important to compare the peer-to-peer model with the traditional client-
server model. Most of the internet follows the latter model, whereby a certain
website is held on the central server and anyone wishing to access it must use
the central server. However, the issue is that this model involves siloed
databases maintained by every participant.

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Figure 2: Potential Market Structure

Source: Deutsche Bank

The redundant and repetitive storing of common information gives rise to

expensive and time-consuming reconciliation activities between siloed data
stores as each market participant attempts to ensure their database matches
those of other users. Such activities are necessary because there are no other
methods of mutually agreeing on the status of important data. The resultant is
operational cost, significant delays and impact on capital.

Figure 3: Central Depository Market Structure

Source: Deutsche Bank

The other method is the peer-to-peer model. A good example is the resilient
BitTorrent network, where seeders and leechers share files without a central
server.

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Figure 4: Peer to Peer Market Structure

Source: Deutsche Bank

This model resembles a highly efficient “gossip network” where each

participant has, or almost has, 100% of the data with updates being shared
around in almost real-time. In the context of the ASX, DAP allows the terms
and conditions of individual agreements between parties in transactional
activities to be updated in such a fashion, thereby providing absolute certainty
of obligations between parties at all times throughout the asset lifecycle. This
significantly simplifies complex actions such as buyer protection processes
and significantly lowers the risks associated with participant failure. In terms of
the entire life cycle of a trade, the execution, netting of multiple trades against
each other and reconciliation process can occur at the trade entry level.
Therefore, the total addressable market for such a concept is in the trillions.
Furthermore, each peer is more independent and in the event the rest of the
network disconnects, that peer can continue operating to some extent.
Moreover, given that there is no central server that can be controlled, shutting
down a peer-to-peer network is more difficult.

However, this model is not without its disadvantages. Peer-to-peer is less

efficient in some ways relative to the client-server model because data is
replicated many times over (once per machine) and any modification of data
creates a large amount of noisy “gossip”. In an untrustworthy peer-to-peer
network, it can be difficult to ensure the system cannot be easily corrupted by
bad peers. Additionally, even if all participants are trusted, there can be issues
regarding consensus. If the speed at which each peer is updating differs and
they have slightly different states, there can be issues determining the true
state of data.

Types of blockchain (private vs public)

The technologies required for the operation of Distributed Ledgers can differ
depending on whether the relevant blockchain is public or private.
Respectively, this refers to whether anyone is allowed to write and read on the
blockchain or if only known, pre-approved participants are allowed to do so.
Since public blockchains’ participants are not vetted and can add to the ledger
without any form of approval, there needs to be mechanisms of arbitrating
discrepancies (as there is no central system to decide) and defence

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mechanisms against malicious attacks. Since a private blockchain network is

comprised of trusted participants whose identity are known (such as traders in
the ASX), some of the mechanisms used in private networks are not needed in
private blockchains, or they are replaced with enforced legal contracts.

Bitcoin follows the public blockchain model, allowing anyone to read and write
on its system. It also allows users to perform transactions under
pseudonymity. For these reasons that Bitcoin is well known for a method of
payment.

However, this lack of privacy and confidentiality as well as pseudonymous

nature of Bitcoin makes it unsuitable and non-compliant for the regulated
financial services applications required by ASX. The DAP has the same
confidentiality guarantee as physically separated ledgers but has the same
data integrity assurances of typical blockchain applications. Participants are
physically segregated and confidential contractual details are stored locally
while with sensitive data and execution commitments, a globally replicated
record of only hashes are shared. The key feature is that these hashes are one-
way functions that match a participant’s data according to a very complex
formulation but itself does not contain any type of information about the
confidential data nor the participants.

Wallets, stores and logs

A bitcoin wallet can be seen as an equivalent of a bank account. It allows a
user to receive, store and transfer bitcoins to others. It does so by storing the
private keys required to access a bitcoin address and sign transactions.

Given that the ASX has different data requirements, the closest equivalents to
a Bitcoin wallet is a platform known as the Distributed Ledger in the DAP. It is
composed of the Private Contract Store (PCS) and the Global Synchronisation
Log (GSL).

Each user has his/her own PCS holding all contracts, that have been validated,
to which the user is participating in. This is similar to a list of transactions in a
bank account. “Contract” here is referring to business logic (the programming
that manages communication between an end user application and a
database), including parameters in relation to transactions, rights and
obligations. This reflects the encoded terms of relevant legal agreements that
the users are subject to. The PCS is locally stored and includes only contractual
agreements the user is permitted to hold and access. It is important to note
that PCS does not process the executable business logic itself. This action is
undertaken at the Business Logic Layer. This Layer is made up of mainly
DAML Libraries (which contains the business logic rules for distinct use cases
or functions) and DAML Execution Engine, which will be explained in
Examples of trade flow below.

Participants in exchanges/networks.
Since the PCS holds a record of all active and inactive executable contracts
relating to a participant, these contracts must be paired with corresponding
active evidences in the GSL in order to actually construct the PCS.

The GSL is a log of commitments and notifications that assures that the
distributed data stores maintain integrity and remains in a state that allows
auditing. The GSL sets up a common and full set of valid transactions which
are combined with the matching relevant private contract data in the PCS (as

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aforementioned), comprising the Distributed Ledger. The GSL is used as a

communication layer to deliver integrity guarantees of transaction
commitments and notifications across the blockchain network. Furthermore,
GSL takes advantage of blockchain’s privacy-preserving uniqueness
mechanism and also includes an integrated notification system.

The GSL has three primary roles

 To judge the relative order between dependent transactions

 To ensure the uniqueness of mutually exclusive events and maintain
the state of the transaction data on the ledger
 To be an assured notification mechanism so that relevant users
affected by a change in the state of data or contracts will be notified,
that is, have the assurance that they will be notified that the change in
state has occurred

Bitcoin exchanges form an integral part of the virtual currency world. Some
prominent examples include Bitstamp, Coinbase and Mt.Gox (now defunct).
These platforms perform important roles such as:

 Facilitating the instant buying and selling of bitcoins (available in fiat

and other digital currencies)
 Facilitating the deposits and withdrawals of fiat currencies and other
digital currencies
 Provision of advanced trading tools such as margin trading, short
selling and liquidity swaps (to buy or sell bitcoins)

Features of a bitcoin exchange can be seen in Digital Asset’s deployment in

ASX’s network. In this network there are two primary roles: Operator and
Participant. Operators have responsibilities across the blockchain network
including maintaining the GSL, formulating and distributing the digital rulebook
of its domain, and validating a superset of the network’s transaction data. This
resembles the bitcoin exchange market infrastructure that is responsible for
processing transactions. In this circumstance, there may be only one Operator
in the network, at least initially but in actuality, there can be multiple. A
Participant is a user that has been allowed to join the network by the
Operator(s). A key fact is that Participants themselves are actually given the
opportunity to be in charge of and maintain their own local instance (one
server running the DAP stack) on the larger blockchain network. This includes
reading and then validating all transactions it is participating in, storing both
private and publicly replicated information locally, and cryptographically
authorising its transactions and updates to the ledger.

Both roles are able to delegate operations to a third party in the network. A
Participant may choose to directly authorise some actions while delegating
third parties to perform other tasks, that is, become an Operator and assign the
role of Participant to another user. This permits migration of Participants into
the network to be flexible and also allows for tiered levels of control and
disclosure.

To permit roles to change as more users join the blockchain network over time
and take into account the likelihood that not all users will adopt blockchain
concurrently, each entity’s role in the DAP can easily be migrated and remains
flexible. Another consideration is that for some institutions, the benefits of

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independent validation are more than offset by the cost of switching to this
system. The consequence is that they may never choose to become
Participants. To solve this issue, the DAP permits institutions to continue to
transact with the market in the same way as they currently do by being (or
more accurately, remaining) Indirect Participants. This group communicates
via existing messaging protocols without the need to view a GSL, maintain a
PCS or private keys. For them to actually engage in the market, they must
select a Network Participant to be their delegate and instruct them about the
effectuation of their actions. There are two types of Network Participants they
can engage with:

 A Network Participant that provides market access as a service, such

as a post-trade service provider.
 An Operator, just as they currently do with a counterparty clearing
house

There can even be the case were the DAP is implemented as a centralised
solution. Only the Operator adopts the technology, with Indirect Participants
communicating through the same messaging protocols that they currently use.
This allows the Operator to replace aging, inflexible and opaque mechanisms,
prepares the Operator’s infrastructure for the adoption of a distributed system
in the future and has almost no effect on customers. However, this does not
provide the efficiency benefits of independent, decentralised ledger validation
to the Operator’s clients.

Also, institutions choosing different roles may co-exist. A result of this

flexibility is that the issue of network effect required for the successful
adoption of Digital Ledger Technology is alleviated.

What does the system allow?

Each user in the network, depending on their role, can perform one or more of
these following actions.

Distributed reading refers to monitoring and receiving data from the digital
ledger and reapplying the business logic that produced the sequence of
events. This is done in order to understand and validate the data. The
Participants can be authorised to access all information, or just partial
information that is relevant to them. The former would occur with a market
operator or regulator while the latter would occur with a market participant.
Every participant undertakes reading and verification of the ledger’s integrity
by reapplying the DAML commands they are part of. This is similar to how
Bitcoin participants must verify that every transaction in their network is valid
and subsequently add them to their ledger if it is.

Distributed signing refers to the validation and authorisation of transactions

using private keys. This makes it necessary for users to maintain their personal
key security. For a user to directly sign his/her own transactions, he/she must
additionally undertake distributed reading to verify the transaction that is being
authorised.

Distributed writing involves the committal of evidences of data discovered in

the PCS to the GSL. In the case of centralised market structures, distributed
writing is not needed in order to gain the upsides associated with a Distributed
Ledger. Examples include those with a central securities depository or central
counterparties. Additionally, for over the counter market or bilateral structures,

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it is likely that using a trusted market utility as a transaction validator can be a

less risky alternative and better performing option relative to a multi-Operator
solution in the near future. Converting from today’s infrastructure
characterised by centralisation to such a multi-Operator network system
depending upon a type of algorithm to determine a consensus in situations of
disagreement may increase vulnerability by raising the potential amount of
opportunities for the blockchain network to be exploited. The implication of
this is that it would likely be more difficult to receive approval from regulators
in the near future.

More detail about Participants

Participants are involved in both Distributed Reading and Signing. Participants
can view and validate their transactions on the GSL. They do this by
independently auditing and verifying the outputs of the transaction as well as
their own signatures, thereby performing a role that goes beyond merely
passive consumers of Operators’s data. This allows for the ledger’s
authenticity and integrity to remain intact. Any data that is claimed to be
relevant to the Participant, but not already locally stored, can be requested
from an Operator directly or any other stakeholders involved in the transaction.
If the request is granted, Participants can subsequently independently verify
that the information is accurate. This creates a sophisticated and self-validating
Distributed Ledger network that ensures privacy. In addition to this, there is a
class of Participant who specialises in verifying certain events and notifications
in the blockchain network. This optional role can undertaken by neutral entities
or regulators in order to ensure that the network is functioning as expected
and to supervise certain actions. This can be seen as similar to a Bitcoin miner
who only chooses to mine new blocks and chooses not to actually participate
in network transactions.

More detail about Operators

Operators’ tasks include codifying and distributing market rules. Only
Operators can participate in Writing and there may be more than one Operator
in a given network. In a network just a single Operator, it is not possible for
Participants to prevent fraud or error committed by the Operator. Nevertheless,
they are still able to detect such activities independently when they authorise
and authenticate their own transactions and validate the blockchain ledger.
This means Participants can still rely on the Distributed Ledger for their own
internal records, meaning there are no reconciliation requirements against the
records of other Participants. For those markets which currently do not have a
central entity, some market participants can undertake the Operator role and
participate in Distributed Writing.

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Figure 5: Example of Trade Flow

Source: Deutsche Bank

The figure above shows the process that occurs post-trade between an
Indirect Participant (who is only using the currently existing messaging
protocols) and Network Participants through an Operator (an exchange in this
example) under the DAP platform.

As shown in the flow diagram, the following process occurs:

1. An instruction is sent to the Market Application via an execution

venue.
2. A DAML command is sent to the Operator’s DAML Execution Engine
(DAMLe, engine that converts actions triggered on the user’s display
into events in the Distributed Ledger layer).
3. The Operator processes that command, instantiates the relevant
contracts, integrates them to his/her own PCS, and adds a hash
evidence onto the GSL to evidence that the transaction occurred.
4. The evidence is distributed on the network’s GSL to all Participants.
5. Participants that are affected by this transaction are notified privately.
6. The Participants contacts the Operator (or any other counterparty) for
receipt of the relevant contracts and then verifies that the contracts
are accurate against the hash (from step 3) on the network’s GSL. If it
is deemed accurate, then the contents of the contracts are executed in
the Participants’ DAMLe to validate the contract business logic
independently. The contracts are then persisted to its PCS.

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7. A DAML Event is sent to the Participant’s local display.

8. Participants are notified via ISO (universal financial industry message
scheme), FIX (messaging specifications used in trade
communications) or through the application programming interfaces.
The Operator notifies Indirect Participant in the same way that they are
used to.

Rule changes
In any peer-to-peer network, there are rules that must be agreed up front on.
For instance, the data must be in the correct format and the same transaction
should not occur twice. A challenge arises when rules evolve over time
because a portion of a network may disagree on whether or not a particular
transaction is valid. While a private, controlled network has someone to control
rule upgrades, a public, uncontrolled network such as Bitcoin does not have
this solution.

If the majority of the Bitcoin network chooses to run an updated version of the
software, then the new-style blocks will be created at a faster rate than those
created by the minority. Consequently, the minority will be forced to switch or
become irrelevant.

In the context of the DAP, the DAML enforces the market’s rules through
software and is used to model contractual rights and obligations in executable
code within the borders of those rules. The language also has safeguards to
assist this process. For instance, a contract cannot be written without the
counterparty’s explicit authorisation.

Defence
Public networks can be attacked by any individual. Subsequently, there must
be a way to make the network trustworthy as a whole, even if certain
participants are not.

Dishonest miners can refuse to relay valid transactions to other miner nodes.
This is only seriously damaging if the attacker has enough block creation
power. This would mean transactions can be delayed through the refusal of
the attacker to include it in their blocks. Other honest miner nodes will include
it in their blocks.

They can also attempt to create blocks that include or exclude transactions of
their choosing. Again, the extent of damage is determined by the amount of
block creation power, as honest nodes will be able to hear about valid
transactions from other honest nodes while refusing to include inaccurate
blocks in their ledger.

Given that the extent of damage caused by malicious attackers depends on

their ability to create more blocks, a logical defense mechanism would be to
make it difficult and/or expensive for such attackers to add blocks. In Bitcoin,
this is done by forcing miners to use large amounts of computer processing
power to generate new blocks. This translates to large financial expenses
because computers need to be purchased and maintained. This is done
through Bitcoin’s self-regulating system: where the number of blocks created
exceeds a certain threshold, the difficulty of mining (creating new blocks)
increases to decrease the number of blocks created and vice versa. However,
this type of approach is too expensive due to the energy consumption and
inherently too slow for DAP.

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Although Network Participants need to be vetted and pre-approved in order to

join a DAH’s blockchain network, it is still possible that Participants may
disagree on a sequence of transactions. This could be due to an error in
communication, misunderstanding or even one or more of the Participant
behaving maliciously. Consider two Participants that have been permissioned
to be Participants by an Operator and have received identical copies of the GSL
from that Operator. They are now each running their own Platform Instance
within one Operator Instance. If there are two of these Operator Instances
which both initially received identical copies of that GSL, there may be
disagreement or discrepancies between these Instances which may be due to
malicious behaviour by Participants. Thus, an agreement on the sequence of
transactions that will be written on the GSL must be reached and so a Fault
Tolerant Consensus Algorithm must be used (NOT a Byzantine Fault Tolerant
Consensus Algorithm). This term refers to a mechanism for reaching an
agreement on a consistent view of the state of a blockchain ledger in the
occurrence of distributed writing via aversion of censorship and arbitration of
conflicting instances. It must tolerate Operator failure(s). Consensus
Algorithms are currently an area of research and impact throughput scalability
and capacity.

In cases with numerous Operators in the same network who do not trust each
other, a Byzantine Fault Tolerant (BFT) Consensus Algorithm (same as Fault
Tolerant Consensus Algorithm, except this mechanism has the additional
requirement to avert the network from ceasing operation if malicious
behaviour by a minority of Operators occurs) is needed to achieve a consistent
state of the ledger for all users to ensure resilience against dishonest users
while remaining operational. BFT Consensus Algorithms are currently a source
of latency its potential is being further developed via research. These
algorithms permit Operators to agree about the order and validity of
transactions on the Distributed Ledger. This averts defective, malicious, or
compromised Operators from entering invalid transactions and/or censoring
the blockchain network.

Consensus: multiple blocks created simultaneously

A common occurrence is the event that numerous miners create blocks at
approximately the same time. Since blocks take some time to be shared across
the blockchain network, the problem here is which one to consider the
legitimate block.

Consider the following situation. At the same time, two miners create a block
each, both of which are meant to represent the 5th block.

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Figure 6: Block Mining – Simultaneous Creation Situation

Source: Deutsche Bank

Recall that both versions of the 5th block will look slightly different. One
solution to this, which is adopted by Bitcoin, is the longest chain rule.
Eventually, another miner will build on one of two versions of the 5th block. Say
the green version is built on. Other miners will observe this and follow the rule,
which dictates that the longest chain is to be built on. The following result will
be observed.

Figure 7: Block Mining – Simultaneous Creation Resolution

Source: Deutsche Bank

The same result will apply if there are more than two sub-chains but only two
have been used here for simplicity. The key takeaway here is that if most
participants follow this rule, then most participants will formally recognise the
dark blue block as the legitimate block in the system. Those who do not do so
will eventually be forced to recognise the dark blue block as legitimate or else
be out of date with the ledger. This may not apply in the case where one user
has 51% of block-producing power (known as “hashing power”, because a
hash must be solved for in order for the block to be produced). In an extreme
case, a dishonest miner can “restart” an abandoned sub-chain to make it
longer than the currently longer sub-chain and invoke the longest chain rule to
make the now shorter sub-chain redundant, thereby unwinding transactions.

Conclusion
Digital Asset Holdings intends to open source DAML. This should fuel
innovation, lower costs and allow for critical inspection of the source code. The
overarching objective in this is to promote standardisation, encourage
interoperability across distinct platforms and ledgers, and hence drive
adoption. We believe over the medium to long term this technology offers the
very real possibility of structurally changing the post trade environment for all
participants.

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Valuation and risks

Valuation

We value ASX using a blended DCF and PE Relative valuation approach. Our
DCF uses a terminal growth rate of 3%, in line with broader economic growth
for Australia. We assume a 9.9% WACC. Our DCF gives us a value for ASX of
$50.67. We also use a PE relative to the ASX 200 Industrials Ex Banks index.
We use the long run premium to this multiple of 25% to reflect ASX’s strong
balance sheet, monopoly market position and historic premium. This gives us a
value of $54.64 on a PE basis.

On a blended basis our price target for ASX is $54.50 (weighted towards PE
relative measure).

Figure 8: ASX Valuation Assumptions

DCF Assumptions
Forecast cashflow years 5
Terminal growth rate 3.00%
Risk free rate 6.00%
Equity market risk premium 4.50%
Beta (x) 0.90
Cost of debt 6.00%
WACC 9.90%
Franking Rate 100%
Franking credit adjustment 50%

DCF Summary
NPV of operating cash flows (5yrs) 12.21
Terminal multiple (x) 14.5
Terminal value 27.29
Total Value 39.50
Less net debt 6.50
IRESS investment 1.97
Group valuation 47.97
12mth roll-forward less dividends 50.67

PE Rel to market 1.25

Market PE 18.3
Implied PE 22.9
12mth fwd EPS 2.39
PE Rel valuation 54.64

Price target 54.50

Source: Deutsche Bank

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ASX Ltd

Risks

Key upside risks to our hold rating include:

 Trading activity. Any significant change in the trading activity and market
capitalisation would impact the listing revenues and capital raising activity.
A lift in trading would be a positive for the group.
 Velocity. Lift in equity trading velocity consistent with offshore market
trends following the introduction of competition and success of the low
latency ALC would be a positive for ASX and result in upside risk to our
valuation.
Key downside risks to our hold rating include:

 Trading activity. Any significant change in the trading activity and market
capitalisation would impact the listing revenues and capital raising activity.
A drop in trading would be a negative.
 Competition. ASX is currently the only licensed clearing and settlement
facility for cash equities in Australia. If the Government looks to introduce
competition into these business segments, this could give rise to downside
risk for ASX.
 Technology. As a technology-based company, ASX has a risk of disruption
from new technologies such as blockchain. Failure to keep up with the
changing technologies could result in loss of market share.

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ASX Ltd

Appendix 1
Important Disclosures
*Other information available upon request

Disclosure checklist
Company Ticker Recent price* Disclosure
ASX Ltd ASX.AX 56.95 (AUD) 6 Dec 17 NA
Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other
information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the
primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=ASX.AX

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the
subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive
any compensation for providing a specific recommendation or view in this report. Ross Curran

Deutsche Bank AG/Sydney Page 19

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Investment & Financial Services
ASX Ltd

Historical recommendations and target price: ASX Ltd (ASX.AX)

(as of 12/6/2017)

70.00 Previous Recommendations

Strong Buy
60.00 Buy
10 11
8 9 Market Perform
6 7
5 Underperform
50.00
Not Rated
1 2 4 Suspended Rating
Security Price

3
40.00
Current Recommendations

Buy
30.00
Hold
Sell
20.00 Not Rated
Suspended Rating
*New Recommendation Structure
10.00
as of September 9,2002

**Analyst is no longer at Deutsche

0.00 Bank
Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17
Date

1. 07/01/2016: Hold, Target Price Change AUD40.00 Kieren 7. 21/03/2017: No Recommendation, Target Price Change AUD0.00
Chidgey** Kieren Chidgey**
2. 03/02/2016: Hold, Target Price Change AUD39.45 Kieren 8. 15/05/2017: Upgrade to Hold, Target Price Change AUD51.40 Ross
Chidgey** Curran
3. 11/02/2016: Hold, Target Price Change AUD39.80 Kieren 9. 05/06/2017: Hold, Target Price Change AUD51.00 Ross Curran
Chidgey**
4. 14/04/2016: Hold, Target Price Change AUD39.85 Kieren 10. 05/07/2017: Hold, Target Price Change AUD51.50 Ross Curran
Chidgey**
5. 05/07/2016: Hold, Target Price Change AUD44.00 Kieren 11. 17/08/2017: Hold, Target Price Change AUD54.50 Ross Curran
Chidgey**
6. 18/08/2016: Hold, Target Price Change AUD48.70 Kieren
Chidgey**

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total 120
share-holder return (TSR = percentage change in 53 %
100
share price from current price to projected target price
80
plus pro-jected dividend yield ) , we recommend that 34 %
investors buy the stock. 60
40 13 %
Sell: Based on a current 12-month view of total share- 28 % 19 %
20 4%
holder return, we recommend that investors sell the
0
stock
Buy Hold Sell
Hold: We take a neutral view on the stock 12-months
out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship
recommend either a Buy or Sell.
Australia Universe
Newly issued research recommendations and target
prices supersede previously published research.

Page 20 Deutsche Bank AG/Sydney

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Additional Information

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Deutsche Bank AG/Sydney Page 23

7 December 2017
Investment & Financial Services
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Page 24 Deutsche Bank AG/Sydney

 David Folkerts-Landau
Group Chief Economist and Global Head of Research

Raj Hindocha Michael Spencer Steve Pollard

Global Chief Operating Officer Head of APAC Research Head of Americas Research
Research Global Head of Economics Global Head of Equity Research

Anthony Klarman Paul Reynolds Dave Clark Pam Finelli

Global Head of Head of EMEA Head of APAC Global Head of
Debt Research Equity Research Equity Research Equity Derivatives Research

Andreas Neubauer Spyros Mesomeris

Head of Research - Germany Global Head of Quantitative
and QIS Research

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