iFast Corporation - DBS Research 2020-09-08: Growing FASTer, Catalysed By COVID

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IFAST CORPORATION LTD. (SGX:AIY)

iFast Corporation - Growing FASTer, Catalysed By COVID

• Expect iFAST to grow faster than the industry, riding on its scalable business model and expanded product range.
• Pace of digital adoption increases; AUA growth assumption raised to 15%.
• FY20F/FY21F earnings upped by 8%/11%.
• Catalysts: award of MPFA project, digital bank licence; China turnaround.

Acceleration of Fintech services adoption pace

• COVID-19 has accelerated the pace of digitalisation. The recent iFAST Corporation (SGX:AIY)'s 2Q20 results, which saw asset under administration (AUA) grew 11.5% YTD, is a testament of the growing adoption of Fintech services.
• Recent developments bode well for iFAST. The group is in the bidding for more large-scale projects, which could be a game changer if awarded.

1) Bidding for Hong Kong pension scheme project

Part of one of the two consortiums in the race.

• It was reported in the press that Hong Kong has shortlisted finalists to digitise its retirement funds system, paving the way to lower fees for more than four million savers.
• It is now down to two finalists and the winner is expected to be announced soon. One of the finalists is a consortium led by Oneconnect Financial Technology – backed by Ping An Insurance Group, and working with a French technology partner, Atos. The other player is a group led by PCCW, and iFAST is their technology partner.

MPFA to have a centralised platform.

• The Mandatory Provident Fund Schemes Authority (MPFA) is seeking to update its systems by creating an electronic platform that will centralise the data of its 4.3 million members by 2022. The goal is to allow users to consolidate multiple accounts, switch between plans and to lower fees. The centralised platform operator would be able to generate fee income from the MPFA platform.

Not new to iFAST.

• This is similar to the FSMOne platform that iFAST has in Singapore, where users just need to have one account to trade multiple products. iFAST was also involved in a similar platform for The Employees Provident Fund (EPF) in Malaysia and is also the investment administrator for The Central Provident Fund Board in Singapore.

Contribution to iFAST could be significant if it wins the MPFA contract.

• There are no details on this potential contract. We assume iFAST could get a cut of the fee income. As at June 2020, MPFA had net assets worth HK$967.8bn. Based on a 20-basis point calculation, this works out to c.HK$2bn (S$357m) per year. Assuming if iFAST gets a 3-5% cut of the fee income, contribution to bottom line could be in excess of S$10m.

2) Approval for securities dealing in Malaysia

• iFAST’s Malaysia operation, iFAST Capital Sdn Bhd ("iFAST Malaysia"), has obtained approval-in-principle to carry out the regulated activity of dealing in securities from the Securities Commission Malaysia. This service is expected to be launched by early 2021.
• iFAST Malaysia currently offers unit trusts, bonds, managed portfolios and insurance products to wealth advisers and DIY clients, via its iFAST Business-to-Business (B2B) platform, and its FSMOne.com Business-to-Consumer (B2C) platform respectively.

Growing contribution from Stocks & ETFs.

• Though stocks and ETFs still account for a small percentage of iFAST’s total AUA, contribution has been growing in recent quarters.
• In terms of product breakdown by AUA, stocks and ETFs accounted for 9.5% of total AUA as at end-2Q20, vs only 5% a year ago. This is yet another of the group’s effort to expand its breadth and depth of its product offerings, in order to obtain operational leverage from its scalable business model.

Expanding geographical footprint.

• Currently, iFAST offers trading of Stocks and ETFs in Singapore, Hong Kong and Malaysia by early 2021. Going forward, iFAST plans to expand to China via Shanghai/Shenzhen/Hong Kong Stock Connect. Stock Connect allows international and Mainland Chinese investors to trade securities in each other's markets through the trading and clearing facilities of their home exchange.

3) Gunning for digital bank licence in Singapore

Digital licence to broaden range of products and services.

• The group is also currently pursuing a digital banking licence in Singapore. Securing this licence would allow the group to further broaden its services to include the ability to provide cash management and related wealth management services to variouss companies in the digital economy, including payment players and e-commerce players. The lending capabilities would be another additional revenue stream for the group.

iFAST among nine digital wholesale bank applicants shortlisted for next stage of assessment.

• iFAST is among the nine digital wholesale bank (DWB) applicants shortlisted to progress to the next stage of assessment. The timeline for the award of the digital bank licences would be by the end of this year, and MAS will issue up to three DWB licences.

Decent chance of moving to the next stage.

• We believe iFAST has a decent chance of clearing this stage of assessment. iFAST is one of the few profitable Fintech companies in Singapore and around the region. Furthermore, it has formed partnership with industry veterans Yillion Group (which operates one of the four digital banks in China and has Hong Kong-listed Meituan Dianping as one of its key shareholders) and Hande Group (a leading Fintech company in China, founded by Dr Cao Tong, the former President of Webank, China’s first digital bank).

Technical competency for platform business.

• Furthermore, iFAST already has its own in-house IT team to handle the technical aspect of the platform business, hence it could launch the new banking platform at a lower cost compared to its competitors.

Funding required; operating expense to increase by c.10% in 2022 if awarded.

• About S$80-100m capital is needed, to be funded via a combination of cash, equity and debt financing. As at end-June 2020, iFAST had net cash of S$21.6m. Based on estimates, the digital bank launch is expected to add between 9-11% to the Group’s operating expenses in 2022. The estimated percentage is based on the Group’s effective shareholding of 65% in the proposed digital bank.

What is the potential if iFAST wins the digital bank licence?

80% of SMEs are underbanked and underserved.

• One of the rationales to bid for this licence is to serve the underserved SMEs. According to the 2019 e-Conomy SEA report, launched by Google, Temasek and Bain & Company, approximately 80% of surveyed small-and medium-sized enterprises (SMEs) say they need to borrow but lack access to affordable credit. Millions of Southeast Asia’s SMEs face large funding gaps. SMEs remain a largely underbanked segment in most markets.

Huge addressable market in SEA.

• On the consumer banking front, > 70% of the adult population is underbanked or unbanked today, with limited access to financial services. The report believes that in Southeast Asia (SEA), digital-only banks will play a larger role in addressing the needs of the underbanked than of banked consumers. Hence, the potential market for iFAST is huge, with c.98m population in SEA!
• Established financial services companies have been unable to serve this segment well, due to challenges, including higher cost, limited credit history and low savings rate.

Outlook

Expect iFAST to grow faster than the industry, riding on its scalable business model and expanded product range.

• In the earlier years of business building, iFAST’s AUA growth roughly tracked the industry’s growth, judging from the assets under management (AUM) in Singapore. However, in recent years, with the expansion of product range both in depth and in breadth, coupled with the launch of the FSMOne in Singapore in FY16, AUA for iFAST grew at a 3- year CAGR (FY16-FY19) of 18%, vs 12% from FY16-FY18 for the industry. Given iFAST’s scalable business model, we expect growth to continue to outpace the industry going forward.
• The number of products for unit trusts and bonds grew at a CAGR of 4% in recent years while more than 490,000 customer accounts have been opened across the five markets the Group operates in.

iFAST - Earnings & Recommendation

Increasing non-recurring revenue as the pace of digital adoption increases.

• The increasing adoption of Fintech Solutions within most countries should lead to more opportunities for iFAST to expand its non-recurring revenue. With its technology expertise and in-house technology team, iFAST is in a sweet spot to expand its market share.
• The proportion of non-recurring income, which includes fees from providing Fintech-related services, stocks and ETFs, has been rising recently. Management targets a 70:30 revenue split of recurring vs non-recurring revenue in the longer term, vs historical average of 80:20. In 1H20, non-recurring revenue accounted for 23.4% of total revenue. We have imputed a 70:30 revenue split of recurring vs non-recurring revenue, in line with the management’s longer-term target.
• We have adjusted the non-recurring net revenue/AUA to 0.22% for FY20F and FY21F, from 0.21% previously. In 1H20, non-recurring revenue accounted for 0.214% of AUA, vs 0.138% in FY19.

Raised AUA growth assumption to 15% each in FY20F and FY21F, from 12% previously.

• For the recurring revenue segment, iFAST has made significant progress in the last few years to expand its range of products and service. We raised our AUA growth assumption to 15% each in FY20F and FY21F, from 12% previously.
• We believe that there is still room for growth as the current AUA level remains low, at about 10% of the c.S$100bn in AUM of the authorised and recognised collective investment schemes in Singapore.

FY20F/FY21F earnings upped by 8%/11%

• Overall, we have tweaked iFAST's earnings for FY20F up by 8% and 11% for FY21F. We have not factored in the potential award of the Hong Kong MPFA project and the digital bank licence in Singapore.
• iFAST has been paying at least 60% dividend payout ratio since listing at end-2014. See iFast Dividend History. Cash and near cash equivalents of c.S$42m as at end June 2020 is more than sufficient to support the dividend payout of c.S$15m for FY20F. Greater digital adoption in the wealth management industry should continue to bode well for iFAST’s online-based business model going forward and to drive earnings higher to achieve our iFast Target Price. Though iFast's share price currently trades at close to +2SD from its 4-year average PE, it is one of the few profitable Fintech plays that pays dividends. Maintain BUY.
• See iFast Share Price; iFast Target Price; iFast Analyst Reports; iFast Dividend History; iFast Announcements; iFast Latest News.

Catalysts: China turnaround, besides the award of the Hong Kong MPFA project and the digital bank licence in Singapore.

Ample opportunities in China….

• iFAST is still in the early stages of building its brand among potential clients and investment practitioners in China’s wealth management industry. The outlook could be promising once the group starts to reap the fruits of its labour in China. But for now, iFAST is still incurring a loss of slightly over S$1m per quarter for its China operation.
• We expect the Group's China operation to break even only in FY22F onwards. iFAST could explore more JVs, like the recent tie-up with Raffles Family Office to better serve the booming ultra-high-net-worth market, to fast track its business in China.

….but losses in initial years inevitable.

• Incurring losses in the initial years of business in a new market is not new for iFAST. Its Hong Kong operation, where FSM Hong Kong was launched on 30 July 2007, took about five years to break even while its Malaysia business took even longer, about eight years to become profitable since the FSM Malaysia was launched in September 2008.
• Though we expect its China operation to turn around only in FY22F at the earliest, a breakeven in China could add S$4-5m to the bottom line.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-09-08

SGX Stock Analyst Report BUY MAINTAIN BUY 2.60 UP 2.350