Credit Bureau Asia - CGS-CIMB Research 2021-03-16: Resilient Through Peaks & Troughs; Initiate Coverage With ADD

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CREDIT BUREAU ASIA LIMITED (SGX:TCU)

Credit Bureau Asia - Resilient Through Peaks And Troughs; Initiate Coverage With ADD

• Credit Bureau Asia’s value proposition lies in the need for credit information to assess counterparty risks across periods of economic growth and market uncertainty.
• Its resilient business model held revenues steady through COVID-19, rising 7% y-o-y in FY20 as bulk risk reviews offset weaker credit application volumes.
• We initiate coverage on Credit Bureau Asia with a target price of S$1.53. The commencement of the commercial credit info business under its Financial Institutions (FI) Data Business is a key catalyst.

CREDIT BUREAU ASIA - COMPANY BACKGROUND

• Credit Bureau Asia (CBA, SGX:TCU) is Singapore’s market leader (by revenue) in the credit and risk information solutions (CRIS) space. Its subsidiary Credit Bureau (Singapore) Pte Ltd (CBS) aggregates credit information from Financial Institutions (FI), commercial entities and public sources, and repackages such information into credit reports and data packets for resale back to FIs and commercial customers, as well as individuals. The credit profiles obtained are then used to assess counterparty risks and the financial health status of potential borrowers, suppliers and employees for regulatory checks, as well as for other customer due diligence purposes.
• Credit Bureau Asia’s business can broadly be categorised into 2 segments:
  • FI Data Business, and
  • Non-FI Data Business.

FI Data Business

• Credit Bureau Asia has established credit bureaus in Singapore, Cambodia, and Myanmar through JVs with local and international partners.
• Credit Bureau Asia operates its FI Data Business in Singapore through Credit Bureau (Singapore) Pte Ltd (CBS), which was founded in Singapore in 1995.
• Credit Bureau Asia then expanded its operations into
  • Malaysia (via Credit Bureau Malaysia Sdn. Bhd. (CBM). The sale of its stake was completed in Jun 2020.),
  • Cambodia (via Credit Bureau (Cambodia) Co., Ltd (CBC)) in 2012 and, most recently,
  • Myanmar (via Myanmar Credit Bureau Limited (MMCB)) in 2020.

Non-FI Data Business

• Credit Bureau Asia has a long-standing JV with D&B via D&B Singapore.
• D&B Singapore has been offering commercial credit information services (Non-FI Data Business) in Singapore and Malaysia since 2000.
  • In Singapore, the CRIS services are offered mainly through the Singapore Commercial Credit Bureau (SCCB) and Global Credit Risk Management Services (GCRMS) platforms, all of which are operated through D&B Singapore.
  • In Malaysia, CRIS services are provided by D&B Malaysia Sdn Bhd (D&B Malaysia).
• See chart of Credit Bureau Asia’s group structure in report attached below (figure 36).
• Credit Bureau Asia (excluding CBC and MMCB) had a total of 170 full-time staff as at end-Jun 20.

CREDIT BUREAU ASIA - BUSINESS OPERATIONS

• Credit Bureau Asia's revenue contribution from the Non-FI Data Business has gradually expanded over the past few years, accounting for 59% of total revenue in FY20.

FI Data Business

• The FI Data Business includes activities of
  • Credit Bureau (Singapore) Pte Ltd (CBS),
  • Credit Bureau (Cambodia) Co., Ltd (CBC), and
  • Myanmar Credit Bureau Limited (MMCB).
• Its main operations comprise the sale of credit reports to FIs to assess the creditworthiness of potential borrowers, as well as for the monitoring of credit risk of existing lending portfolios. Credit Bureau Asia’s FI Data Business in Singapore (operated through CBS) is underpinned by CBS’s significant 18-year credit history bank and bureau member base of 31 FIs (vs. Experian’s four members) (as of 2020). Consequently, CBS is Singapore’s only comprehensive consumer credit bureau with full industry uploads from its members, comprising all retail banks and major FIs in Singapore.
• In late-2020, CBS was awarded a tender by the Ministry of Law to develop, establish, and operate the Moneylenders Credit Bureau in Singapore. Regionally, CBC and MMCB respectively operate the sole credit bureaus in Cambodia and Myanmar.
• Other revenue from the FI Data Business stems from data analytics and debt consolidation reports.
• Key customers comprise both bank and non-bank FIs, who subscribe as members of their respective credit bureaus. Of note, only banks, credit providers and finance companies are eligible to be members of CBS due to MAS’s regulations. On the other hand, members of CBC and MMCB include microfinance, leasing companies and rural credit institutions as well.
• As at end-Jun 20, Credit Bureau Asia’s FI Data Business in Singapore comprised 31 members, including banks such as DBS Bank Ltd and Citibank Singapore Ltd, credit providers such as American Express International Inc., as well as finance companies such as Hong Leong Finance Ltd. In Cambodia, CBC serves 165 participating members.
• Aside from outstanding credit facilities in the market, Credit Bureau Asia offers rating systems for consumer and commercial credit scores. Credit Bureau Asia also caters to individual customers who require credit reports for compliance processes, employee screenings and KYC checks. In Singapore, MAS regulations require credit health checks for those seeking employment in FIs for financial soundness, while the Casino Regulatory Authority imposes the same checks to be done on potential staff members.
• Credit Bureau Asia is a leading player in the CRIS market in Southeast Asia, which has a combined population of more than 108m across Singapore, Malaysia, Cambodia and Myanmar as at 31 Dec 2019. Key growth drivers of the FI Data Business include credit growth (through an increase in mortgages, credit card applications, etc.) and the addition of new bureau members (increase in rate of CRIS market penetration).

Non-FI Data Business

• Credit Bureau Asia’s Non-FI Data Business is conducted through D&B Singapore and D&B Malaysia. There are three main sub-segments:
  1. global credit risk management solutions (GCRMS),
  2. Singapore Commercial Credit Bureau (SCCB) and other bureaus, and
  3. sales/marketing solutions, receivables management services, and other revenue.

Global Credit Risk Management Solutions

• Under the GCRMS sub-segment, Credit Bureau Asia sells reports through the proprietary D&B database, called the GCRMS platform, to end-users in Singapore and Malaysia and to international customers. Concurrently, the group purchases reports and data from D&B. Reports generated under this sub-segment include financial stress scores, ownership structure reports and global family tree reports.

Singapore Commercial Credit Bureau and other bureaus

• Credit Bureau Asia provides risk management solutions from business information sourced from its own proprietary database, third-party sources and reports branded under SCCB’s umbrella. Products include commercial enquiries, payment assessments, individual searches and winding-up search reports.
• A notable offering in this sub-segment is the Telco Credit Bureau Singapore platform, which provides information on consumer’s telecommunication payment defaults. We understand that data collection from other industries, such as insurance, securities firms and moneylenders, are a likely feature going forward.

Sales/marketing solutions, receivables management services, and other revenue

• Credit Bureau Asia also offers sales and marketing solutions to help businesses get leads and grow sales revenue by providing access to marketing data. There are also debt recovery services through lawful and legitimate channels, such as dunning letters and monthly status reports. Also, the group offers business education services, which include training programmes on topics ranging from finance to human resource.

CREDIT BUREAU ASIA - INVESTMENT THESIS

Defensive business model through peaks and troughs of economic cycles

• We view Credit Bureau Asia’s business model as resilient across the different phases of the economic cycle – through periods of credit expansion and recessionary troughs. Credit Bureau Asia’s operations depend greatly on the demand for credit information reports required by both financial institutions (FI) and non-financial institutions (non-FI) in assessing counterparty credit risk (whether for the extension of loans and credit lines, supply chain management, or for credit quality assessments), whereby GDP growth rates can be indicative of revenue growth in rising cycles.
• Counterintuitively, the demand for credit information remains inelastic through economic downtrends given the value of continuously assessing creditors’ abilities to service debt obligations. Apart from one-off reports for loan applications, pre-employment checks and pre-screening of business partners, Credit Bureau Asia offers customised monitoring services for higher-risk exposures, which provide sustained revenue streams despite the limited credit growth in the system – as exhibited in FY20 through the COVID-19 pandemic.
• Earnings momentum held steady through the height of global border closures; revenues rose 7% y-o-y to S$43.4m in FY20. This was driven by elevated demand for risk management reviews globally, which offset the lower volume of new loan applications.
• COVID-19 disruptions had necessitated government intervention globally and these measures included wage support schemes, loan and insurance moratoriums as well as loan restructuring directives – all of which would expire over the coming year.
• In our view, Credit Bureau Asia is well-placed to be a defensive play in both a prolonged business downturn and the eventual economic recovery given the essential nature of credit and risk information. We forecast revenue growth of ~8-11% over FY21-23F (FY17-20: ~4-9%) as compounded by the addition of new bureau members (4 digital bank licences awarded in Dec 20, onboarding of members in Myanmar), strong economic recovery and the rising emphasis on CRIS.

Strong cash generation; asset-light operating model

• Credit Bureau Asia has a strong balance sheet, maintaining its net cash position. Its capex needs are largely confined to the upgrading of IT, digital, compliance, and cybersecurity infrastructure, given the asset-light nature of its operations. This includes costs to upgrade its computer software every 3-5 years (we expect ~S$4m in FY21F, normalising to ~S$1.5m thereafter).
• We expect Credit Bureau Asia’s net cash position to continue to strengthen in FY20-22F, given its strong free cash flow generation, and believe that this will be more than sufficient to cover its future development capex.
• Credit Bureau Asia recorded operating cashflow of S$20.6m in FY20; we expect this to rise towards S$28.8m in FY23F on the back of improving business momentum.

Market leader in Singapore; first-mover and sole credit bureau in Cambodia and Myanmar

• In Singapore, MAS requires financial institutions (FIs) to make enquiries with a credit reporting bureau prior to the commencement of lending operations. Credit Bureau (Singapore) Pte Ltd (CBS)’s long-operating track record allows for the breadth of credit history required for systemic default analysis across business cycles. It is the leading credit bureau in Singapore with a 99.9% market share of the FI Data Business (by revenue) in 2019.
• We estimate that CBS’s closest FI Data Business competitor, Experian (EXPN:LON), has limited scope in organically garnering significant market share, given its limited membership base of four banks currently, giving rise to significant switching costs.
• MAS’s requirements for FIs in Singapore to conduct pre-employment credit health screenings to ensure financial soundness in its staff force, as well as the Casino Regulatory Authority’s similar prerogative to conduct these checks in Singapore, further strengthens CBS’s stronghold in the market.
• In the Non-FI Data Business, Frost & Sullivan (F&S) reported that, for 2018, Dun & Bradstreet (Singapore) Pte. Ltd. (D&B Singapore) — Credit Bureau Asia’s JV with Dun & Bradstreet (D&B) — held 40% of the market share (by revenue) of the Non-FI Data Business, a close second behind Experian’s 57%.
• Credit Bureau (Cambodia) Co., Ltd (CBC), an indirect JV of Credit Bureau Asia (Credit Bureau Asia holds a ~49% stake in Equifax Cambodia Holdings Pte. Ltd, which in turn holds a ~49% stake in CBC), currently operates as Cambodia’s sole market player in the FI Data Business – giving Credit Bureau Asia a first-mover advantage in this space.
• Myanmar Credit Bureau Limited (MMCB) commenced operations in the fourth quarter of 2020 as Myanmar’s first and sole credit bureau in the FI Data Business space.
• The credit bureau licences in Cambodia and Myanmar are non-exclusive, but we believe that Credit Bureau Asia’s experience in offering credit and risk information solutions is likely to provide it sufficient operating runway ahead of potential incoming competitors. Credit Bureau Asia estimates Myanmar operations to break even in 18-24 months from Dec 2020.

Latent population growth and unbanked population to drive credit demand

• Credit demand is driven by a combination of the interest rate environment, intra-regional trade agreements, unemployment and inflation rates and, to an extent, relative development levels and urbanisation of an economy. To this end, the recent cut of the Federal Reserve rates to the 0-0.25% range by the United States Federal Reserve in Mar 2020 provides a conducive environment to leverage cheaper lending rates across the region, spurring credit growth.
• Credit Bureau Asia’s home market in Singapore offers income stability for CBS, given its leading market position. Notwithstanding the city state’s lower population growth rate at 0.6% (CAGR over FY19-24F as per F&S), the modest growth is offset by elevated income levels (~S$82.7k GDP per capita in FY19), allowing for greater disposable income and stronger purchasing power.
• Meanwhile, the large unbanked (and under-banked) population and relatively fast macro-economic growth, combined with advancement of domestic financial markets and banking systems in Cambodia, Myanmar, and to a lesser extent, in Malaysia, provide growth opportunities for credit and risk information solutions.
• According to the Global Findex Database by the World Bank, only 22% of adults in Cambodia had a bank (or other FI) account — a stark contrast to the ~98% in Singapore (as of 2017). Malaysia and Myanmar had bank account penetration rates of 85% and 26%, respectively, as of 2017. We expect the progressive urbanisation of these regional economies is expected to lead to an increased uptake of financial products beyond current accounts and savings accounts, thereby boosting credit growth.

Larger marketplace as digital banks come onstream

• We expect Credit Bureau Asia to directly benefit from the issuance of four new digital banking licences in Singapore at end-2020. Apart from expanding the marketplace of both suppliers and customers for Credit Bureau Asia upon the commencement of operations in 2022 (as per the Monetary Authority of Singapore’s guidelines), we believe that the eventual regional expansion of these digital banks will offer significant financial inclusion benefits in regional economies (namely, Cambodia and Myanmar spurring a quicker pace of credit growth in these markets given the asset-light operating model of digital banks. We expect the National Bank of Cambodia’s (NBC) blockchain-based P2P platform (Project Bakong: announced on 22 Jul 2019 by NBC) to similarly promote financial inclusion, supporting the growth of CRIS.

Higher barriers of entry from implementation of Credit Bureau Act in Singapore

• In Singapore, the FI Data Business is currently confined to consumer credit data. When the Credit Bureau Act comes into force (the effective date is yet to be announced), any person who desires to carry out a consumer or corporate credit reporting business must apply to MAS for a licence.
• Pursuant to the upcoming commencement of the Credit Bureau Act, management guides that Credit Bureau Asia’s subsidiary CBS is making preparations to apply for a commercial credit bureau licence, in addition to the planned application for a licence for its existing consumer credit reporting business. A liberalisation of this limitation in Singapore is a potential catalyst for Credit Bureau Asia, in our view.
• In Cambodia and Myanmar, the FI Data Business comprises both consumer and commercial credit data.

CREDIT BUREAU ASIA - INDUSTRY OVERVIEW

Trade and business growth as an enabler of CRIS

• The aftermath of the global financial crisis (GFC) prompted governments around the world to require financial institutions and commercial entities to establish more robust risk management frameworks to uphold financial stability according to Frost & Sullivan (F&S). A by-product of this was the rise of the credit and risk information solutions (CRIS) industry.
• In the years following the GFC, growth in the East Asia and Pacific region picked up to an average 4.5% p.a. over 2010 to 2018, from a dismal 1.4% in 2009, according to data from the World Bank as the region saw an improvement in consumer sentiment and a pick-up in trade and business activities. The elevated demand for credit information stemmed from two ends — FIs needing to assess the creditworthiness of their borrowers, and businesses requiring information on their suppliers, vendors, partners and customers to assess counterparty risks, according to F&S.

Rising population and urbanisation in SEA will spur growth of credit demand

• In addition to Singapore, Credit Bureau Asia’s operations span Malaysia, Cambodia, and Myanmar. These regional countries provide sizeable credit growth potential, given their population growth trajectories and rising urbanisation rates.
• Population growth of these economies is likely to increase steadily, with Cambodia leading the pack at a forecasted CAGR of 1.5% over the next five years to 17.8m (according to F&S). Meanwhile, the human capital base of Singapore, Malaysia and Myanmar are expected by F&S to grow at CAGRs of 0.6%/1.2%/0.6% to reach 5.8m/34.9m/54.7m people.
• Notably, the increased urbanisation of developing economies via a rise in financial inclusion and education levels also bodes well for credit growth. On this end, there is much to expect from Cambodia (26% urbanisation in 2020) and Myanmar (33%) going forward, given the room for expansion of the economy.

Stable operating environment and high income levels are key drivers of CRIS in Singapore

• As South-east Asia’s most developed economy, solid macroeconomic foundations underpin high income levels and strong purchasing power among Singapore’s citizens. In turn, this drives demand for credit facilities and, consequently, the CRIS market in the city state.

Rising personal consumption and trade to drive FI Data Business growth

• The CRIS industry in Singapore is estimated to be worth S$73.0m in 2019, representing a 8.3% CAGR since 2015, according to F&S. This was primarily driven by rising demand from customers and the introduction of new products and services by CRIS providers, according to F&S.
• The FI Data Business is primarily driven by an increase in private consumption (hard assets and financial products) from population growth and a rise in financial sophistication, as well as higher trade volumes, according to F&S. The upcoming introduction of digital banking licences (four digital wholesale and full banking licences) should improve transaction speeds and the wider adoption of cashless payment methods, adding to overall credit growth in the longer run, in our view. F&S expects the industry in Singapore to expand 10.3% over the next five years to S$119.4m by 2024.
• Broadly, we see mortgage loan growth, credit card transactions, working capital business loans, as well as trade volumes (given Singapore’s position as an economic hub), to be the main segments leading credit growth and, therefore, CRIS growth. Supported by refinancing activity and liquidity drawdowns, we project Singapore banking system loan growth to recover to ~4-5% in 2021F (vs. 2020: 4.2%).

Healthy housing loan growth an indicator of a flourishing economy

• Singapore’s ~6 million population (as of 2020) supports a steady housing loan growth, rising 2.5% annually over the FY16-20 (according to MAS data on housing loans in the domestic banking unit). CGS-CIMB projects private primary transaction volumes of ~9,000-10,000 units in 2021F, which would support mortgage growth in the city state in anticipation of rising demand from its growing adult population.

Discretionary spending via credit cards present financing growth opportunities

• Fuelled by the rise of e-commerce and online transactions, total credit card billings in Singapore rose 8.7% over the past five years. Worldpay’s Global Payment Report 2020 estimates that credit card transactions accounted for 56% of e-commerce transactions in Singapore in 2019, making it the city state’s preferred medium of payment.
• That said, Singapore had the lowest credit card penetration rate for individuals aged 15 years and above at 49%, which was lower than the average of ~65% in other developed nations of Australia, UK, US and Japan in 2017. We believe there are significant opportunities of growth for credit card penetration to spur larger transaction volumes and card spend.
• We believe the onset of digital banks and financial technology (fintech) in ASEAN will aid the movement towards becoming a cashless society, raising the number of digital payment transactions. We think that customer due diligence will be a necessity in this pursuit, raising the demand for CRIS services from banks and merchants alike.

Significant trade volumes to support CRIS demand, given Singapore’s open economy

• Singapore’s economy is highly trade dependent and has one of the largest number of free trade agreements (FTA) in the APAC region, according to F&S. According to the Asian Development Bank, Singapore penned 36 of these agreements with trade partners in 2019, more than major APAC economies such as China and India, both with 30 FTAs each. To this end, Singapore recorded a total trade value of S$1,022.2b (or ~2.2x of GDP) in 2019, according to F&S.
• Data from the World Bank showed that Singapore’s trade-to-GDP ratio of ~319% in 2019 is among the highest globally, above the world average of ~60%. While COVID-19 has put a dampener on expansionary credit growth and trade volumes, given the prolonged border closures globally, credit bureaus are well placed to benefit from the influx of credit information requests surrounding concerns of credit worthiness and cash flow pressures faced by businesses due to operational disruptions.
• We believe that CRIS monitoring services will take centre stage in the near to medium term as economies recover from the pandemic, offsetting near-term declines in expansionary-driven credit information sales.

18-year credit history bank base results in high barriers of entry into FI Data Business

• Credit bureaus in Singapore are governed by three main policies.
  • Firsty, the Personal Data Protection Act 2012 requires Credit Bureau Asia to abide by general data protection laws when handling data received from its suppliers.
  • Secondly, under the Banking Act in Singapore, credit bureaus can only disclose the credit and risk information collected to member institutions and are subjected to regulatory oversight from MAS. Credit Bureau Asia’s position as a leader in the FI Data Business in Singapore is further underpinned by its 18-year credit history bank and bureau member base of 31 FIs. New entrants into the FI Data Business in Singapore will face the challenge of accumulating years of credit information given the lack of scale of bureau membership. At present, CBS is Singapore’s only comprehensive consumer credit bureau with full industry uploads from its members, which comprise all retail banks and major FIs in Singapore. Notably, the Association of Banks Singapore is also a shareholder of CBS.
  • Any person that desires to carry out a credit reporting business in Singapore is required to be licensed under the Credit Bureau Act when it comes into effect (the Credit Bureau Act was passed in parliament in November 2016 but the effective date has not been announced). The Credit Bureau Act permits credit bureaus to collect and use FI data regarding individuals, but does not presently regulate the Non-FI Data Business of commercial credit information.
• The Credit Bureau Act will cover the following once formalised:
  • MAS will have the authority to issue, review, suspend and revoke credit bureau licences.
  • MAS will exercise supervisory oversight and regulate the industry for breach of the Credit Bureau Act.
  • The formalisation of existing and upcoming standards for licensed credit bureaus and their members.
  • The reinforcement of consumers’ right to access, including the ability to review and rectify credit records.
• Under the Non-FI Data Business, in relation to Telco Credit Bureau Singapore, the Telecom Competitions Code governs the use of end-user service information by telecoms in Singapore. Telecom providers are required to protect all information obtained from end-users as a result of them providing services, such as customer usage patterns, telephone number and network configuration, address and credit history.

Fragmented operating landscape in Malaysia

Strong growth trajectory of CRIS industry in Malaysia

• The enactment of the Credit Reporting Agencies Act (CRA Act) in 2010 effectively spurred the growth of the CRIS industry in Malaysia. The industry was estimated to be worth RM219m in 2019, according to F&S. The ramp-up of these services was primarily driven by rising adoption rates of credit information by both FIs and commercial entities in business operations, according to F&S. The developing status of Malaysia underpins the latent demand for credit facilities from a growing working class and the increased sophistication of financial knowledge market participants.
• From the perspective of credit growth, F&S estimates the average household disposable income per capita in Malaysia to reach RM36,100 in FY24F (from RM23,800 in FY18). We believe that the progression in wealth accumulation, alongside the nation’s 1.3% population growth rate (forecasted CAGR over FY19-24F by F&S, should support underlying demand for credit information on individuals in coming years.
• On the commercial side, SMEs (small and medium enterprises) form a vital component of the Malaysian economy — SME Corporation Malaysia estimates that these businesses contributed ~38% to GDP in FY18. The central bank states that more than 90% of SMEs’ financing needs were met through bank loans, and these accounted for half of the financial system’s total loans in FY18, according to F&S. While we expect this segment to remain as the driver of loan growth in Malaysia, we are cognisant of the accompanying risks associated with SMEs.
• On both sides of the coin, credit reporting agencies (CRAs) are crucial in assessing the creditworthiness of an entity for due diligence in the extension of new facilities, as well as for the monitoring of cashflow during periods of weaker economic sentiment. We believe the latter to be especially prominent in months to come in the aftermath of the COVID-19 pandemic as businesses adjust to a new economy.

Alternative lending channels to boost CRIS demand

• In addition to the formal banking system, we also expect alternative lending channels to provide a boost for CRIS demand in Malaysia. The Securities Commission of Malaysia introduced P2P (peer-to-peer) financing in 2016 to expand financing options for SMEs and to enable greater financial inclusion through the use of fintech, according to F&S. P2P financing is a digital platform facilitating businesses to raise funds from both retail and sophisticated investors.
• While helpful in providing an additional means to obtain financing, we understand that businesses seeking financing via P2P platforms may have had challenges in obtaining bank loans, be it due to unproven business models or relatively short operating track records. According to market research by F&S, P2P platforms require these bids to be accompanied by verified business information and assigned risk scores — both of which will drive the need for CRIS in Malaysia.

Fragmented operating landscape in Malaysia due to liberal regulatory environment

• Malaysia’s CRIS provider landscape comprises a number of public and private CRAs. Public agencies such as Central Credit Reference Information System (CCRIS) are under the direct supervision of Bank Negara Malaysia, while private ones, including CTOS Data Systems, Credit Bureau Malaysia (CBM) and D&B Malaysia, are regulated under the CRA Act 2010.
• F&S reports that CTOS and CBM dominate the private credit reporting agencies (CRAs) space, accounting for ~77% of private CRIS revenue in Malaysia in FY18. D&B Malaysia is a relatively small player in this regard, with a market share of ~2% (in 2020). Credit Bureau Asia has completed the sale of its equity interest in CBM to Sunway Holdings Sdn. Bhd. for RM3.5m (or ~S$1.1m) on 3 Jun 2020. Credit Bureau Asia now offers only Non-FI Data CRIS services in Malaysia via D&B Malaysia.
• CRAs in Malaysia are governed under the CRA Act. The CRA Act provides a legal framework to facilitate the sharing of credit and risk information as well as to protect consumers’ right to privacy. The Registrar Office of Credit Reporting Agencies (operating under the Ministry of Finance) is the enforcer of the CRA Act and regulates the CRAs. All registered CRAs may purchase FI data from CCRIS.
• Unlike Singapore, CRAs in Malaysia are allowed to collect data on both individuals and companies. The difference between the CRAs in Malaysia depends on whether they are regulated or not. Non-regulated CRAs are not allowed to collect and provide credit and risk information from and to any Malaysian individual or company. Hence, unregulated CRAs are confined to serving customers wishing to purchase credit information regarding foreign entities.

Capturing growth in Cambodia’s emerging credit sector

• Cambodia is one of the fastest-growing economies in South-East Asia, with its GDP expanding 7.0% in FY19, according to F&S. Growth is expected to remain strong given a robust construction sector and continued demand for exports, according to F&S. Cambodia boasts a young workforce (~71% of its population being younger than 40 years of age by 2024, according to estimates from the United Nations Department of Economic and Social Affairs) with high unbanked and underbanked levels (World Bank estimated that ~22% of adults had a bank account in 2017), thereby laying the groundwork for significant growth potential for CBC as the sole credit bureau in Cambodia.
• Notably, Cambodia’s CRIS industry comprised only consumer credit reporting up until 2019, as commercial credit reporting began only in Jul 2019.

Fragmented landscape cements importance of centralised CRIS database

• According to F&S, Cambodia’s CRIS industry was estimated to be worth US$7.4m in 2019, representing a robust ~16% average annual growth from US$4.2m in 2015. As a growing economy, Cambodia’s banking system is fragmented and comprises a myriad of 432 commercial, specialised, and representative offices of foreign commercial banks, as well as microfinance, microfinance deposit-taking and rural credit institutions, and includes financial leasing and payment companies as at 2019, according to F&S.
• Against this backdrop, we believe that Credit Bureau (Cambodia) Co., Ltd (CBC) plays a crucial role as a centralised and regulated database of credit information in Cambodia to facilitate efficient economic growth (enabling efficient lending to creditworthy entities) while safeguarding financial stability (through the monitoring of repayment capabilities).
• At present, only 165 of the mentioned institutions of Cambodia’s banking system are members of CBC (as at 30 Jun 2020), thus presenting ample opportunity for an enlarged business scope for CBC.

Microfinance institutions as a key driver of CRIS demand

• The National Bank of Cambodia (NBC) in its 2018 annual report reported credit growth of 20.1% y-o-y to US$19.6bn in FY18, and we expect continued growth in the financial sector to underpin the demand for CRIS services going forward. In addition to banks, microfinance institutions play a critical role in easing the access to credit in Cambodia.
• As MFIs (microfinance institutions) typically take on higher risks given their target customer profiles of lower-income individuals and businesses, we believe it is likely that CRIS services will remain, or become, an integral part of their risk management processes.

Significant lending growth potential from large unbanked population

• The World Bank reported in its Findex Database 2017 that only 22% of adults in Cambodia owned a bank account – this is relatively low compared to regional peers such as Laos’ 29% and Vietnam’s 31%. As the population gets increasingly urbanised, we expect the banked population in Cambodia to grow in tandem. Consequently, we expect this to raise demand of banking and financial services by consumers which will drive the demand for credit information.

Regulatory environment supportive of CRIS development

• The National Bank of Cambodia (NBC) monitors and regulates credit reporting systems providers (CRSP). In turn, CRSPs are governed by a Prakas (Regulation Issued by the Minister or Governor of Bank of Cambodia) on credit reporting, which came into effect in May 2011. Under the Prakas, all FIs in Cambodia are required to provide data to credit bureaus, whether positive or negative.
• In 2019, NBC granted the approval for CBC to carry out commercial credit reporting activities in Cambodia. With such approval, CBC started serving commercial credit information to businesses as part of its offerings in Jul 2019, further cementing its stronghold in the industry as the sole CRA.
• In addition, CBC enjoys strong institutional support from its stakeholders, including NBC, FIs in Cambodia, the Association of Banks in Cambodia and Cambodia Microfinance Association.

First-mover advantage in Myanmar

Structural reforms will improve the outlook for trade

• In 2019, Myanmar was ranked 171st out of 190 economies by World Bank in terms of ease of doing business. F&S expects Myanmar’s National League for Democracy (NLD) to continue pushing for reforms in the country to reduce bureaucracy and corruption to create a conducive environment to conduct trade to boost overall economic activity. The NLD also established three special economic zones (SEZ) namely the Thilawa SEZ, Dawei SEZ and Kyauk Phyu SEZ, aimed at attracting foreign investments into the country. In addition, the National Export Strategy 2020-2025 aims to address competitiveness constraints and modernise regulatory systems to boost Myanmar’s industries to increase their exports.

Myanmar CRIS FI data industry is primed for exponential growth

• Myanmar Credit Bureau Limited (MMCB) was granted a licence in 2018 by the Central Bank of Myanmar to establish a credit bureau, and the entity is projected to be operational by 4Q2020.
• According to F&S, Myanmar’s FI Data Business is forecasted to be worth US$1.5m in FY20F and to log exponential growth of ~69% to reach a market value of US$12.3m by FY24F, as MMCB collects and distributes credit and risk information to member FIs. Other industry drivers, such as rising economic growth (average GDP growth of 6.4% over FY17-19), a growing banked population (the World Bank reports that only 26% of adults had a bank account in Myanmar in FY17) and the adoption of technology, should also contribute positively to the expansion of the industry.

First-mover advantage in Myanmar’s FI Data Business

• The Central Bank of Myanmar regulates and has direct supervision over credit bureaus in Myanmar. As the representative of banks in the country, the Myanmar Banks Association works in partnership with credit bureaus for the provision of CRIS services. Under the Financial Institution Law 2016, credit bureaus may provide credit information to member FIs only.
• Myanmar Credit Bureau Limited (MMCB) was established in 2018 after having successfully obtained the sole FI Data Business licence from the Central Bank of Myanmar. Two other Non-FI Data Business players operate in Myanmar. There are 220 FIs in Myanmar, which would potentially become members of MMCB and suppliers and customers of MMCB when MMCB commences operations.

CREDIT BUREAU ASIA - KEY RISKS

• Regulatory requirements, licences and approvals under the Credit Bureau Act.
• Reliance on minority stakes and JV service agreements.
• Customer concentration risk.
• Cybersecurity risk.
• See further details in report attached below.

CREDIT BUREAU ASIA - FINANCIALS

Resilient earnings across economic cycles

• We factor in sustained demand for credit information in FY21-23F as credit demand picks up pace in tandem with progressive economic recovery post-COVID-19 uncertainties. Credit Bureau Asia’s operating trends were resilient through the regional lockdowns, with revenues rising +7.2% y-o-y to S$43.4m in FY20.
  • Topline earnings stability was most apparent in Credit Bureau Asia’s Non-FI Data Business, where revenue rose +8.2% y-o-y to S$25.7m in FY20, driven by increased demand from compliance and risk management reviews.
  • While Credit Bureau Asia similarly recorded stronger demand for bulk review reports from FI customers, reduced volumes of new loan applications had slowed overall FI Data Business revenue growth in FY20 (+4.7% y-o-y to S$17.7m in FY20). Adjusting for ~S$1.4m in listing expenses, PATMI rose 11% y-o-y to S$8.2m in FY20.
• Going forward, we factor in ~8-11% y-o-y revenue growth for Credit Bureau Asia over FY21-23F as we account for rising volumes of new loan applications (we expect ~5-6% in FY21- 22F vs the ~1% contraction in FY20) and trade transactions, offsetting a gradual reduction of risk review reports as market uncertainties ease. This translates to core net profit growth of ~8-16% y-o-y for Credit Bureau Asia in FY21-23F.
• Quicker traction in regional operations, an additional revenue stream from the commencement of commercial credit bureau operations (under the FI Data Business segment), and the incoming digital banks in Singapore as suppliers and customers of the FI Data Business are key catalysts to our estimates.

Strong operating cashflow generation

• Credit Bureau Asia is in the business of aggregating market credit information to be repackaged and transformed into useable reports and data packets. The information is supplied to customers on a subscription basis, but one-off requests are available as well. Credit reports and data packet subscriptions are customised to parameters required by customers, and are drawn-down upon until exhausted. Top-ups of subscription packages are on a needs basis, based on increased credit demand or additional monitoring needs.
• Notably, about a third of fees from the Non-FI Data Business in Singapore are received in advance and sales contracts are non-cancellable. Deferred income came up to S$9.6m in FY20 (~22% of FY20 revenue) — comparable to the S$9.7m as at end-Dec 19 and S$9.6m as at end-Dec 18 — providing revenue visibility over the coming 12 months.
• Credit Bureau Asia’s capex needs are largely confined to the replacement and upgrading of IT, digital, compliance and cybersecurity infrastructure, given the asset-light nature of its operations. This includes costs to upgrade computer software every three to five years (FY19: S$3.1m, FY17-18: S$1.3-1.5m).
• We expect Credit Bureau Asia’s net cash position to continue to strengthen in FY20-22F, given its strong free cashflow generation, and believe that this will be more than sufficient to cover future development capex (~S$4m in FY21F, normalising to ~S$1.5m thereafter). We expect Credit Bureau Asia’s free cashfows to rise from S$9.4m in FY20 to ~S$16m in FY23F, amply covering capex needs.

Singapore as main driver of growth as regional operations ramp up

• Credit Bureau Asia’s home market of Singapore drives the bulk of its earnings, recording 93% of PBT in FY20, and its business in Malaysia turned profitable having completed the disposal of its stake in CBM in Jun 20. Contributions from Cambodia accounted for 6% of this base.
• Going forward, we expect the proportion of regional contributions to rise as business sentiments improve with the eventual reopening of country borders post-COVID-19. Increased credit quality surveillance as regional moratoriums taper off and the ramp-up of MMCB (given Credit Bureau Asia’s proven track record of generating a positive PAT within two years with CBC) underpin our view of a more diversified earnings stream in the medium term.

Consistent contributions from both business segments

• The Non-FI Data Business made up a larger 59% of revenue in FY20. Slightly more than half of this came from the GCRMS sub-segment (sale of reports and data on Singapore and Malaysia entities, as well as those on foreign entities purchased from D&B for resale), while close to a third comprised those from SCCB (commercial, individual and litigation reports; customers largely based in Singapore and Malaysia).
• Conversely, revenue from the FI Data Business amounted to 41% of revenue, primarily driven by the increase in bulk review reports as a result of an increase in the frequency of periodic reviews by FIs during the period of heightened credit risk. In FY20, these risk reviews offset the lower sales of consumer credit reports to CBS’s members for new credit applications (mortgage, credit cards, etc.) and bulk monitoring reviews.
• Notably, Credit Bureau Asia’s pricing structure for both business segments has stayed stable over the past few years. The pricing structure of these reports and data packets depends on the complexity of information requested (e.g. breadth, monitoring period, country of domicile, etc.) and take-up volumes.

Minimal capex requirements; largely confined to technology upgrades

• Aside from staff costs, the major components of Credit Bureau Asia’s operating expenses are royalties to data suppliers, report costs and data purchases, as well as the upgrade of digital and IT infrastructure. Notably, royalties are directly correlated with the sale of credit reports — the fee structure of royalties payable is largely based on a fixed percentage of sales (15-18% of total operating expenses in FY17-19), while report costs and purchases of data packages are direct input costs for the Non-FI Data Business. Consequently, EBITDA margins are largely correlated to revenue.
• Adjusting for the reclassification of leases due to the adoption of IFRS16, Credit Bureau Asia’s operating expenses (excluding staff costs) have been well contained at ~S$9m in FY19-20. Technology refreshes, as well as storage, hardware and software upgrades, comprise Credit Bureau Asia’s largest capex needs. To this end, we factor in higher capex costs of ~S$4m in FY21F, and ~S$1.5m p.a. thereafter due to product end-of-life cycles and staggered upgrades of equipment.
• Further, our FY21F net profit estimate incorporates ~S$300,000 in government aid via the jobs support scheme, using Credit Bureau Asia’s staff force of approximately 114 employees (of a total of 170) based in Singapore as the basis of our calculations.
• We expect EBITDA growth of 9-14% over FY21-23F, and for EBITDA margins to trend higher to ~60-61% over FY21-23F (FY20: 57%) as portfolio risk reviews lead revenue growth.
• Management guides that it is likely to recommend a dividend payout ratio of ~90% in FY21-22F.

CREDIT BUREAU ASIA - VALUATION

Discounted cashflow methodology

• Our DCF approach offers a fair value of S$311m for Credit Bureau Asia, derived from our projected cashflow for FY21-23F, translating into a target price of S$1.53, implying 30x FY22F P/E. Our estimate is based on a risk-free rate of 1.5%, cost of equity of 7.0%, beta of 0.9x, and long-term growth rate of 1.3% (anchored on Singapore population growth rate and inflation). See details in report attached below.
• We assume that Credit Bureau Asia will maintain minimal bank borrowings (FY20: S$0.6m). The DCF method was used to reflect Credit Bureau Asia’s stable and recurring revenue streams.
• See
  • Credit Bureau Asia Share Price;
  • Credit Bureau Asia Target Price;
  • Credit Bureau Asia Analyst Reports;
  • Credit Bureau Asia Dividend History;
  • Credit Bureau Asia Announcements;
  • Credit Bureau Asia Latest News.
• See 37-page report attached below for complete analysis on Credit Bureau Asia (SGX:TCU).

Andrea CHOONG CGS-CIMB Research | Darren ONG CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-16

SGX Stock Analyst Report ADD INITIATE ADD 1.53 SAME 1.53