Singapore Strategy - CGS-CIMB Research 2020-12-05: The Digital Game Begins

Singapore Strategy - CGS-CIMB Research  SGinvestors.io IFAST CORPORATION LTD. (SGX:AIY) SINGTEL (SGX:Z74)

Singapore Strategy - The Digital Game Begins

  • The MAS awarded four digital banking licences - 2 full bank licences to Grab/SingTel and Sea Ltd, and 2 wholesale licences to Greenland’s consortium and Ant Group.
  • Pressure points of stiffer deposit competition and pressure on payments income will only materialise in the longer term, in our view, given SG banks’ tech advancements.
  • Positive for SingTel (SGX:Z74), benefitting from Grab’s sticky ecosystem of services. Slight positive for SEA as banking complements its e-commerce business. Negative for iFAST (SGX:AIY).

4 new (banking) kids on the block

  • The Monetary Authority of Singapore has concluded its year-long deliberation on digital bank applicants ahead of the Singapore Fintech Festival next week – awarding two digital full bank (DFB) licences to a consortium comprising Grab and SingTel, and SEA Ltd, as well as two digital wholesale banking licences (DWB) to a consortium comprising Greenland Financial Holdings, Linklogis Hong Kong and Beijing Co-operative Equity Investment Fund Management, as well as Ant Group.
  • The awardees were selected from a total of 14 shortlisted applicants announced in Jun 20.
  • The MAS had awarded only 2 out of three available DWB licences, and will review whether to grant more of these licences going forward. The new digital banks are expected to be operational from early-2022.

Limited near-term impact on incumbent banks

  • Pressure points on incumbent banks from these new digital players will come in the form of stiffer deposit-taking competition (recall c.6.8% 3-month fixed deposit rates when digital banks commenced operations in HK in Jan 20) and mounting pressure on payment-related fees (eg. loss of interchange fees and float), but we believe this to only be a longer-term prospect as operations ramp up. The MAS’s aversion towards ‘predatory’ practices may also hinder aggressive customer acquisition.
  • Challenges that new digital banks will likely face are progressive technological upgrades of local banks (with DBS (SGX:D05)’s development of Digibank and UOB (SGX:U11)’s TMRW bank), and the stickiness factor of customers to these banks.
  • We expect iFAST (SGX:AIY) to de-rate on the back of its unsuccessful bid as market exuberance fades away. It remains in the running (part of PCCW’s consortium) to operate HK’s e- MPF (Monetary Provident Fund) platform; award of the licence is likely by end-20.
  • Our last call on iFAST is a HOLD, with target price of S$3.41; our SOP-based valuation includes S$100m in paid-in capital for the DWB licence. See iFAST Corporation - CGS-CIMB Research 2020-10-23: Beneficiary Of The Work-From-Home Norm.
  • See iFAST Share Price; iFAST Target Price; iFAST Analyst Reports; iFAST Dividend History; iFAST Announcements; iFAST Latest News.

A leg up for SingTel (and Grab)

  • For SingTel (SGX:Z74) (ADD, target price S$3.10), the DFB licence win represents an expansion into a potentially profitable business over the medium-to long-term, and a diversification away from its mature telco businesses. The partnership with Grab allows both parties to leverage each other’s sizeable customer base (i.e. faster-to-market, wider customer acquisition channels and lower related costs) and digital capabilities.
  • In terms of capital requirements, its share (40% of consortium) may be a minimum of S$600m in 3-5 years. Assuming annual investment of S$200m p.a. over 3 years, net debt/group EBITDA would only be slightly higher at 1.53x-1.56x at end-FY23-25F (we forecast 1.48x-1.50x) and hence unlikely to affect dividend paying capacity.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Differentiated products await SEA, but margins may be pressured

  • SEA's SeaMoney is already an emerging e-wallet player, with 17.8m quarterly paying users (QAU) transacting more than US$2.1bn using the wallet services in 3Q20. Leveraging its gaming and e-commerce ecosystem, we believe that SEA has a niche understanding of the needs of millennials and SMEs in the region.
  • We believe that the DFB licence will allow SEA to offer differentiated products targeting the unmet needs of these users, allowing it to further build up more revenue streams in its financial services segment. However, aggressive expansion into this segment may put pressure on margins for its digital financial services in the medium term.

LIM Siew Khee CGS-CIMB Research | Andrea CHOONG CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.410 SAME 3.410