iFast Corporation - CGS-CIMB Research 2020-06-19: Digital Hope; Initiate Coverage With ADD

SGinvestors.io

IFAST CORPORATION LTD. (SGX:AIY)

iFast Corporation - Digital Hope; Initiate Coverage With ADD

• iFast Corporation offers direct exposure to the fintech and wealth management segments in Singapore. The company boasts +13.3% CAGR in AUA growth since 2014.
• A virtual wholesale banking licence is a key re-rating catalyst as it has met the MAS eligibility criteria required to progress to the next stage assessment.
• Strong levels of recurring revenue ( > 80% of income) should sustain its net cash position. Better market sentiment should drive investor activity and AUA.
• We initiate coverage on iFast Corporation with an ADD rating and Target Price of S$1.65 on SOP.

iFast Corporation - Company Background

Leveraging on fintech to power its platforms.

• iFast Corporation (SGX:AIY) was incorporated in Singapore in 2000, and listed on the Singapore Exchange on 11 Dec 2014.
• iFast Corporation evolved from an online unit trust distribution business based in Singapore, to a regional business offering over 10,000 investment products including unit trusts, bonds, stocks & ETFs, and insurance products. The group has also since branched out into cash management services, as well as fintech solutions & IT development and maintenance.
• Most of iFast Corporation's investment products are provided by fund houses, with over 260 distribution agreements globally.

Regional player in the wealth management space.

• iFast Corporation conducts its core business in Singapore and Hong Kong, with regional operations in Malaysia, China and India. In FY19, Singapore was the largest net revenue contributor (64%), followed by Hong Kong (26%) and Malaysia (6%). Hong Kong and Malaysia are likely to be key drivers going forward given their earlier growth stages as compared to Singapore.

Higher costs and stiff competition widens losses in China.

• Since the start-up of iFast’s Chinese operations in 2014, net revenue expanded at a CAGR of +10% over the past five years while AUA grew +13.3%. However, high opex in China continues to weigh down on earnings, widening losses from this entity on a y-o-y basis.
• Excluding China, iFast’s net profit would have expanded +5.5% (CAGR) over FY14-19, compared to the -1.9% recorded on its books. Notably, operating expenses in China are elevated compared to other geographies, and competition from incumbents has capped substantive growth of iFast’s platform. The group’s operating licence in China is also limited to the B2B segment.
• Management expects its operations in China to remain loss-making for the time-being as it scales up.
• iFast has an ambitious growth outlook, targeting S$100bn in AUA by 2028F – implying a 29.2% CAGR over the upcoming nine years.

Business updates across iFast’s regional operations:

• Singapore. FSMOne.com launched a service for clients to trade selected ETFs across SGX, HKex and US exchanges via a regular savings plan – subscriptions were priced from S$50/month in Nov 2019. The new iFast Global Markets (iGM) mobile app was launched in 2H19, which has since spurred interest in its platform’s investment capabilities.
• Hong Kong. iFast continually refreshes its digital platforms. Most recently in 4Q19, the group revamped its web portal for B2B clients on iFast Central and iFast Global Prestige, as well as rolled out its iGM mobile app to better serve clients in Hong Kong. BondExpress is iFast’s flagship product on the B2C front – offering sophisticated investors a platform to trade bonds in ticket sizes as low as US$5,000.
• Malaysia. As with its other regional operations, Malaysia’s B2B platforms (website and mobile application) were most recently revamped in Oct 2019. We understand that its iGM division is gaining traction, registering healthy growth in its number of representatives signed up with iFast, and consequently, AUA.
• China. There are more than 90 fund houses, and over 3,800 funds signed up on iFast’s platform as at FY19. In this market, the group’s focus lies in the acquisition and onboarding of new clients given its early growth stage. At present, iFast’s licence restricts it to operating a B2B business. A suite of offshore wealth management products are its key differentiators in penetrating the Chinese market.

iFast Corporation - Company Milestones

• iFast was incorporated in Singapore in 2000 as “Fundsupermart Holdings”, renamed to “iFast Corporationt” in 2003, and expanded to Hong Kong in 2007, Malaysia in 2008 and China in 2014. The business began from an observation by the founders in 1999 that the then dominant distribution channels in the unit trust industry could be made more efficient and cost-effective via the use of the Internet. This observation led to the founders, one of whom is Mr. Lim Chung Chun, to establish Fundsupermart.com in 2000, a website that offers investment products, research, a strong emphasis on customer service, and a competitive and transparent fee structure.
• Since inception, iFast has established a reputation for providing easy access to investment products, as well as providing a competitively priced platform. iFast Financial, a wholly-owned subsidiary, is also an investment administrator under the CPF investment scheme in Singapore.

iFast Corporation - Business Model

• iFast operates in both the B2B and B2C market, with the B2B accounting for the lion’s share of c.68% of FY19 net revenue while the B2C accounted for the remainder. The group has over 420,000 B2B adviser-assisted and B2C customer accounts.

On B2B

• On B2B, there are over 400 financial advisors, financial institutions and banks, along with multinational corporations. The biggest clients for the B2B revenue include Financial Alliance, Professional Investment Advisor Services and IPP Financial Advisers. Financial adviser’s institutions include Manulife and Great Eastern. Banks include regional and local banks such as Bank of China and CIMB.
• To utilise the B2B platform, investors are assisted by financial advisers. The group provides a suite of services including a wide range of investment products, fee collections, operational support, IT solutions, and wrap account services.
• As part of the B2B business, the group also provides regular research updates on investment products, as well as Internet-based tools and mobile-friendly applications for financial institutions and financial advisors to utilise in their portfolio and investment planning. iFast launched its B2B business in Singapore in 2002, and expanded this to Hong Kong in 2007, and Malaysia in 2008.

On B2C

• On B2C - Fundsupermart.com targets self-directed investors. The B2C business began in Singapore in 2000, launched in Hong Kong in 2007, and subsequently Malaysia in 2008. The FSMOne.com multi-product transactional platform is operational in Singapore, Hong Kong and Malaysia. It includes investment products, a user-friendly website, mobile app and research content.
• The B2C business targets DIY investors seeking alternative investment channels that provide them with more control in the decision-making and execution process of investing. Products and services offered via Fundsupermart.com, the B2C platform, include the offering of investment products, free switching of unit trusts, and bond unit trusts sold at 0% upfront sales charge.
• Management expects B2C verticals of
  1. trading stocks, bonds, ETFs,
  2. product offering across advisory, wealth and cash management, and
  3. entry into new markets to add to medium to longer term earnings growth.

B2B2C

• iFast has a third customer group which it terms as the business-to-business-to-consumer (B2B2C). For this segment, iFast offers fintech solutions to institutional clients looking to improve their B2C Fintech capabilities.

iFast Corporation - Revenue Model

• iFast reports its revenue in two buckets:
  1. recurring net revenue, and
  2. non-recurring net revenue.

a) Recurring net revenue

• Recurring net revenue is based on Assets under Administration (AUA). It comprises trailer fees, platform fees, wrap fees and other sources like the net spread on the cash balances. Trailer fees, platform fees and wrap fees, are calculated based on a percentage of the average AUA of investment products.
• Trailer fees range up to 0.9% per annum of average AUA, and they are charged to the group’s suppliers, the fund houses, for the B2B business only. Suppliers include Aberdeen Asset Management, Eastspring Investments, First State Investments and Schroder Investment Management. Trailer fees are determined by business volume, AUA, the relationship with the relevant supplier and the support/services that the group provides to the supplier. The trailer fee is paid by the fund house ("product suppliers") to iFast. It is a portion, usually 50%, of the annual management fee of the fund.
• Platform fees range up to 0.5% per annum of average AUA, and are fees that are paid by both adviser-assisted investors (B2B) and DIY investors (B2C), to the group for the services that they provide.
• Wrap fees range up to 0.2% per annum of average AUA, and are collected from the B2B business. Wrap fees are the fees that the group receives from adviser-assisted investors for the services provided to them by the financial advisors (FAs) and the group. Wrap fees are collected based on a nominal amount of the unit trusts, and the value equivalent to the wrap fees is deducted from the unit holdings of the investors, which minimises non-payment. The wrap fee income for iFast is received from the B2B customers. It is a cut of the wrap fees paid by the investors to the FA firms for providing investment advice, research and brokerage services. This cut varies from firm to firm.
• Net interest income refers to the sum of interest income from money market funds, bank deposits and clients bank account, minus the interest expense on borrowings, which is recognised on the profit and loss using the effective interest method.

b) Non-recurring net revenue

• Non-recurring net revenue comprises the upfront commission from client onboarding, fees arising from currency conversion and administration services provided to FA firms, advertising fee and IT solution fees. It also includes brokerage commission and ETF/stock trading fees.
• Transaction fees refer to commission income derived mainly from investment subscriptions via upfront commissions or processing fees. Commissions, fee income and service fees are recognised upon completion of services rendered.
• FX conversions refers to service fees from the provision of currency conversion administration services to adviser-assisted investors and the provision of administration services to financial advisors.
• Fintech solutions IT development fees refer to the provision of innovative and customisable fintech solutions to institutional clients and business partners to develop and improve their B2C fintech capabilities. This division was launched in 2017; iFast counts Malaysia’s Employee’s Provident Fund as a key client of the segment, and is engaged to build a system to enable the online transactions of unit trusts.
• Insurance commissions refer to fees collected from insurance subscriptions. The group encourages employees to plan for insurance coverage for themselves and provides commission rebates to employees for general insurance products, allowing them to enjoy a lower cost. In 2016, the group acquired an insurance brokerage firm in Hong Kong, which was renamed iFast Insurance Brokers (HK).

iFast Corporation - Industry & Outlook

• Singapore as regional safe haven; Rapid wealth formation and rising adoption of online-based investment platforms.
• See attached PDF report for detailed analysis.

Competitive Landscape

• We deem standalone investment platforms as iFast’s main competitors. Aviva’s Navigator (on the B2B side) and PhillipCapital’s Online Electronic Mart System (POEMS) (on the B2C) are strong competitors, in our view.
• Proprietary fund distribution platforms of financial institutions in Singapore are also competitors to iFast. On this end, iFast’s competitive advantage over financial institutions is its lower price point given the absence of higher overhead costs from brick-and-mortar operations. Across Internet-based distribution platforms for the B2C business, iFast, POEMS and PhillipCapital’s Financial Access Made Easy (FAME) charge as low as 8bp (depending on total asset value in customer’s account) in processing fees for buy/sell orders for stocks (as at 17 Jun 2020).
• In Hong Kong, iFast faces stiff competition on the B2C side from banks like HSBC and Hang Seng Bank. In Malaysia, iFast’s main competitor is Public Mutual Berhad, an online distributor of investment products.

Digital Banking Licence

• iFast led a consortium comprising Yillion Group and Hande Group in submitting an application for a digital wholesale banking licence in Singapore. The MAS will be issuing up to 3 wholesale licenses.
  • Yillion Group operates one of four digital banks in China, and counts Hong-Kong listed Meituan Dianping (3690: HK) as one of its key shareholders (as at 3 Jan 2020); the latter is currently the third largest Chinese Internet company based on market capitalisation.
  • Hande Group is a leading fintech company in China; its founder, Dr Cao Tong was the former president of Webank, China’s first digital bank.
• The consortium has been shortlisted by the MAS as 1 of 9 applicants which have progressed to the next stage of assessment for 3 digital wholesale banking licenses, while 5 other groups have been shortlisted for 2 digital full banking licenses. The MAS expects to award the digital licences by end-2020F.
• iFast will own a 65% stake in the proposed digital bank, which it sees as complementary to its current product offerings (e.g. back-end processing and float of its cash management products, etc.). Its target segment will be small and medium enterprises (SMEs), a market believed to be underserved by banks. Backed by its product distribution franchise, the group aims to tap onto Singapore’s position as a global wealth management hub to attract both local and foreign currency deposits, which will then be used to kick-start a lending business.
• A successful bid for the virtual banking licence is a key catalyst for iFast, in our view, although the road to profitability (of the virtual bank) may span several years.
• Strategically, a digital wholesale banking licence in Singapore has a far lower paid-up capital requirement of S$100m, compared to the S$1.5bn for digital full banks – significantly reducing the financial weightlifting required to fulfill this regulation. In our view, the wholesale licence complements its business segmentation of B2B customers accounting for the bulk of its revenues. Technical expertise from its partners, Yillion and Hande Group, would also be extremely beneficial.
• Management targets for its digital bank to achieve an ROE of +20% in five years’ time if granted the licence.
• Other applicants of the digital banking licences include e-commerce, ride-hailing and payments fintechs such as Grab & SingTel (SGX:Z74) (ADD, Target Price of S$3.40, see recent report: SingTel - CGS-CIMB Research 2020-05-29: 4QFY20 In-line But DPS Cut Pre-Emptively), Ant Financial, Razer Fintech, Sea Limited (SE US), and Singapura Finance (SGX:S23) & Matchmove.

iFast Corporation - Financials

Singapore and Hong Kong as key drivers of revenue growth

• iFast’s core markets are Singapore and Hong Kong. This is complemented by its regional operations in Malaysia, China and India. Singapore accounts for the bulk of net revenue (64% of total net revenue in FY19) while Hong Kong contributed 26%.
• China accounted for less than 1% of net revenue in FY19, and remains loss-making at the bottomline. These revenue trends are likely to persist as operations in China scale up. Although AUA balances may see momentary fluctuations during adverse market conditions as exhibited in Mar 20, we expect overall revenue growth to remain intact through FY20F. In our view, this will be underpinned by increased trading and investment activity, partly fuelled by broad-based work-from-home directives amid the Covid-19 lockdowns, and valuation discounts of investment assets given market volatility.
• According to Singapore Exchange, there was a surge in 1Q20 securities daily average value (SDAV) to S$1.6bn (+51% q-o-q, +57% y-o-y) on the back of oil price volatility, virus-related government measures and portfolio repositioning. Overall turnover velocity also improved to 57% in 1Q20 (from 36% in 1Q19).

AUA growth to weather through market volatility

• Revenues are driven by AUA growth (which rose at CAGR of 13.3% over the past five years to S$10bn in FY19); we expect this to expand 10-12% in FY20- 21F on the back of resilient customer volumes as investors reposition their portfolios and redeploy their funds.
• Notably, iFast’s B2C division, FSMOne.com, attracted a record number of new account holders in 1Q20 when border closures came into effect. We understand that the group’s wealth advisors using the B2B and iFast Global Markets (iGM) platforms also saw record wealth inflows (AUA) during this period. We highlight that iFast had recorded a transitory contraction in AUA due the significant market volatility in 1Q20, but these amounts have since more than recovered in Apr 20. Hong Kong and Malaysia are likely to be key drivers of AUA going forward given their earlier growth stages as compared to Singapore.
• We pen in AUA growth assumptions of 10-11% p.a. in FY20-21F.

Strong recurring revenues underline P&L resilience

• iFast’s business model features a significant proportion of recurring revenues, ranging from 81% to 85% over the past five years. The B2B segment accounted for c.70% of recurring revenues over this period, as backed by its vast product distribution network. The B2B segment’s recurring revenues mainly comprise trailer (60%), platform (24%), and wrap (8%) fees, as well as net interest income (9%) from AUA (FY19).
• While the proportion of recurring revenues of total income have stayed stable, we note that absolute revenues are also influenced by the composition of products sold. In FY19, AUAs expanded +24.2% y-o-y while revenues rose only +3.4%. This was due to a higher proportion of stocks and ETFs sold during this period; these newer products yield lower margins compared to unit trusts. We expect unit trust distribution to regain momentum in FY20F, steering revenue growth in tandem with the increase in AUAs.
• Transaction fees and commissions make up the bulk of iFast’s non-recurring income base (57% in FY19). FX margins (22%), fintech solution IT (15%), and other fees (6%) make up the remainder. Margins (measured using net revenue as a proportion of AUA). Transaction fees were particularly strong in 1Q20 given increased retailer interest, and pushed margins from non-recurring income higher to 0.203% during the quarter compared to 0.138% in FY19. We think these margins could continue to rise incrementally as markets stay buoyant, although its impact on net profit may be minimal.

China to remain a drag on operating expenses…

• Staff costs comprise the bulk of iFast’s total expenses (55% of FY19 expenses). These costs include salaries and bonuses as well as performance shares. Other operating expenses comprise costs for platform enhancements (improving the range and depth of investment products) and for scaling up its fintech capabilities.
• iFast’s operations in China remain a drag on costs, accounting for 11% of total opex but less than 3% of AUA. Management expects single-digit opex growth in FY20F, and for capex needs to ease slightly from S$11.9m in FY19 to S$10.8m in FY20F. However, we believe a successful bid for one of five digital banking licences in Singapore should necessitate larger capex amounts.

…but government relief via JSS helps

• We expect total opex to remain largely stable, although we recognise that a portion of FY20F staff costs may be alleviated by the government’s jobs support scheme (JSS) due to the Covid-19 outbreak. While the group employs over 700 people across five markets, Singapore accounted for only 180 of them as at end-2019.
• About 95% of its Singapore-based workforce is eligible for 10 months of JSS (grant varies from 25-75% of monthly salary capped at S$4,600). We estimate that iFast could receive c.S$2.5m of support in FY20F (or about a third of the y-o-y staff cost increase).

iFast Corporation - Net cash position

• iFast’s balance sheet is strong, sustaining a net cash position since being listed. At end-1Q20, it had net cash of S$17.6m or S$0.07 per share. The group has progressively pared down debt over FY19 to S$3.8m from S$37.4m as at end- 2018.
• Moving forward, we believe iFast could further build up its net cash position on the back of improving profitability as China’s losses narrow, although its potential digital banking licence could necessitate higher capex.

Dividend payout ratio raised from 60% to 89% over FY15-19

• While iFast does not maintain a fixed dividend policy, its DPS has been progressively raised from 2.79 Scts in FY15 to 3.15 Scts in FY19. This translates into a dividend payout ratio range of c.60-89% over this period. See iFast Dividend History.
• Although we expect iFast’s income streams to remain resilient despite Covid-19 business disruptions while maintaining its net cash position, we forecast flat DPS growth over FY20-22F. DPS of 3.15 Scts yields 2.8% at current iFast Share Price.

iFast Corporation - Valuation & Recommendation

Initiate coverage with an ADD rating and a Target Price of S$1.65

• We initiate coverage on iFast with an ADD rating and a Target Price of S$1.65 based on Sum of Parts, pegging to its 5-year historical mean at 26x FY21F P/E (S$1.28). P/E is used in the first portion to incorporate near-term risks.
• In addition, we also assume minimal book value of a digital wholesale bank (DWB) license operator to be at S$100m (S$0.37).
• Compared to a basket of closest comparable peers operating in the wealth, fintech, stock exchange and distribution, and payments solution space, iFast is trading at 26x FY21F P/E, which implies a discount of c.25% to its global peer average of 35.4x.
• See iFast Share Price; iFast Target Price; iFast Analyst Reports; iFast Dividend History; iFast Announcements; iFast Latest News.
• Our base case assumption is for DPS to be sustained at 3.15 Scts over FY20-21F, yielding c.3%.
• The awardance of a wholesale digital banking licence in Singapore would be a key re-rating catalyst, in our view.
• A worsening of the group’s market position and managements of its operations in in China (which may lead to to more significant losses) and sustained market weakness resulting in portfolio impairments are key downside risks to our ADD rating.

See attached 29-page PDF report for complete analysis on iFast Corporation (SGX:AIY).

Andrea CHOONG CGS-CIMB Research | Caleb PANG Huan Zhong CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-19

SGX Stock Analyst Report ADD MAINTAIN ADD 1.65 SAME 1.65