Earnings Call: Q2 2022

Jul 23, 2022

Hi, everyone. Welcome to iFAST Corp Second Quarter and First Half 2022 Results Briefing. We will be starting today's results briefing session soon. I would like to introduce our CEO and Chairman, Mr. Lim Chung Chun, who will be joining us for this results briefing remotely. I will pass the time over to Chung Chun. Hi, everyone. Good morning. I would like to move ahead and present the second quarter results that we have just announced on Saturday. I will start with the key summary. Sorry, before that, can you go back to the content page? Yes. For the purpose of today, I will run through the whole presentation. I will just run through section one and two. Besides that, section three and section four, there are quite a bit of information. I will not run through that. I will leave it to you to run through on your own, and if you have further question, then we can take that later on. Going on to the key summary. For the quarter, the group's AUA declined 5% quarter-on-quarter to SGD 17.7 billion as of 30th June 2022. On year basis, AUA rose just marginally 0.8%. During the quarter, we actually continued to have a positive inflow. During the quarter, we saw a positive net inflow of SGD 0.59 billion. That is still a healthy net inflow number considering the very tough market conditions that we actually have gone through. Typically, for the group, net inflow is actually a number that we track quite closely because we believe that that is actually the best indicator of the overall growth potential for the group in the long run. In the short term, the AUA of the group is actually affected by overall market environment. If the stock market goes up, then there will be a positive benefit that we get. If the stock market goes down, then it will actually be negative. Essentially, during the quarter, we saw that net inflow was actually a positive SGD 0.59 billion. Unfortunately, because stock prices generally saw a significant decline, which is why we actually saw the AUA decline 5.1% during the quarter and on a year-on-year basis we are about flat. During the quarter, total net revenue for the group grew 13.3% year-on-year to almost SGD 30 billion in the second quarter. That is despite the fact that global markets have gone through a very tough period. Of course, the second quarter numbers include an initial contribution of SGD 3.9 billion from the iFAST Global Bank. Recall that we acquired the bank earlier part of the year and the acquisition was completed at the end of March this year. So we started to have the initial quarter of contribution from the bank. The significant development this particular quarter is the fact that iFAST India Holdings, which is an associate company of the group, has decided to exit the onshore platform service business and pivot to focus on global fintech solutions. With that decision and with some restructuring, iFAST Group have provided a one-time estimated impairment allowance of SGD 5.2 million. Because of that, the group reported a net loss of SGD 2.69 million in 2Q 2022. 2022 will be a year where the group will see some overall growth in revenue. That's our expectation. So group revenue, we still see some growth, but net profit will see a substantial decline. This happening as the group incurs impairment charge for the India business, and there's initial operating losses from the bank. Also, overall as a group, we have actually been growing. Because of that, we have been growing our overall headcount as a group. Because of that, operating expenses grew 22% year-on-year. If I strip out the expenses from the bank, operating expenses grew 22% to SGD 22 million during the quarter. Next slide. The group's operating expenses are increasing even as revenue growth moderates in 2022 because the group is preparing for the next couple of years where we expect that the group will be growing quite substantially, particularly the ePension business, which will actually become operational starting 2023. The group is also positioning ourself for the global opportunity arising from a more globalized wealth management platform. So overall, as the group prepare for far more exciting years in the next few years, in the last couple of years, we have actually been gearing up our overall capability as a group. Because of that, overall, headcount, resources, investment, IT infrastructure have grown. That's reflected in the increasing operating expenses. Going forward, beyond 2022, we expect that between 2023 and 2025, we'll see a robust ramp-up in our overall group profitability. So 2022 is a year where we see a significant decline, substantial decline in profitability, but we're essentially preparing for exciting few years ahead. ePension division will start to become a strong contributor from 2023 onwards. So essentially beyond 2022, we expect to see accelerated growth momentum, and we expect that revenues and profitability will reach new high in 2023 as ePension division start to contribute more substantially from 3Q 2023 onwards. Currently, if you recall, we actually have up guidance that we have provided in April 2022, when we released the first quarter result. That guidance at this point in time, or at that point in time, and we have not changed this official guidance, we actually assume that the contribution for ePension project will begin in 4Q. But the way the timeline stands currently, we actually expect that we should see the contribution starting 3Q 2023 instead. But we wait for a later date before we provide any formal change in the guidance for the Hong Kong business. For the second quarter, we have declared a second quarter interim dividend of SGD 0.011 per ordinary share. That's the same as the dividend that we declared one year ago. So despite the fact that during the quarter, we reported a loss, but the group has sufficient accumulated retained profit. We expect that while we are having a bit of a setback in terms of profitability this year, the group remains in a very strong financial position, and growth will resume next year onwards. The group decided that we will maintain the dividend rate of SGD 0.011 per share, the same level as what we reported second quarter last year. Next. This particular chart shows the AUA chart that we will show. As I mentioned earlier, it declined quarter-on-quarter. Essentially, the decline came because of the decline in the value of financial assets globally. Stock markets were tough, bond markets were also tough. As I mentioned earlier, this decline in AUA sort of offset the fact that we continue to have a healthy positive net inflow. Next. On the net inflow number that I was mentioning, this is a chart that shows the net inflow number. In first quarter, we saw a net inflow of SGD 0.59 billion. If you take the first half, we saw a net inflow of SGD 1.26 billion. Lower than what we saw in the first half of last year, because first half of last year, we saw a net inflow of SGD 2.1 billion. But essentially at SGD 1.26 billion, we feel that that is actually still a healthy set of number. Importantly, when net inflow continues to be positive, then in the long run, we expect that the overall AUA is a number that will continue to be able to grow. Next. Next, I will just quickly move on to touch on the key numbers. Revenue during the quarter grew 5.8% year-on-year. That is the gross revenue. Total net revenue with a growth of 13.3%. Of course, in terms of operating expenses, we actually saw that there is a substantial increase of 49.9% during quarter. I mentioned earlier that if we strip out the banking expenses, then expenses for the group grew 22.3%. The rest of the increase came because of the fact that we have an initial first quarter contribution from the iFAST Global Bank. The quarter, as I mentioned earlier, we saw impairment loss of SGD 5.2 billion related to the India business. As a result of that, net loss during the quarter was SGD 2.69 billion. That is a quarter where we go into losses. Going forward, we expect that we will move back into profitability. Next. These are the numbers for the first half. I won't run through the individual detail, but essentially, for first half, we continue to register profitability despite the loss in the second quarter. But of course, there was a substantial decline in first half profitability. Next. This table shows the trend for the last few years. Essentially, overall business and revenue-wise, we have continued to grow. But 2022, we are seeing a step back in terms of overall profitability. This chart shows the overall margin for the group. First half is down because of the fact that, yeah, second Q and first Q hasn't been as good. Next. Return on equity, accordingly, took a step back as we move forward. That also reflected the fact that there was an increase in shareholders' equity in the earlier part of the year because of the 4.8% share placement that we actually did. These financial indicators are self-explanatory. I'll just highlight that we continue to essentially be in a very strong position, as far as the cash position and balance sheet is concerned. No debt, and the shareholders' equity currently is at SGD 226 million. Next. This is a chart that shows the net cash position of the group. The way we have presented this is to show the cash and cash equivalent, but we also show the amount of customer deposit that iFAST Global Bank have. So if you strip that out, as a group, we still have SGD 110 million, excluding customer deposit. So we are certainly in a very strong financial position. This is group operating cash flow, continue to be healthy. SGD 16 million for the first half. Next. Capital expenditure during the first half was about SGD 4.6 million. We are targeting that it'll be SGD 22 million for the year. This is the number of shares. These are the balance sheet. I won't run through the detail. That's the amount of cash that we have. That essentially will be a customer's money, held in trust. Dividend, as I mentioned earlier, 1.1 cent, same as the year before. Next, I will talk through a few key points in terms of development during the quarter. Firstly is regarding the iFAST India associate. The group owns a 41.5% stake in iFAST India. It's a business that we have actually run for quite a number of years, and we were originally quite committed to ensuring that this business will grow to a good position. Unfortunately, late last year, the India regulator announced a new regulation, which essentially was the banning of the pool account, banning of the usage of pool account. Pool account essentially is like a nominee account. If you look at the overall value of a platform, I think a platform's basic value to end investors as well as to advisors, is basically the ability to make things a lot more efficient for the end client as well as an advisor. And one of the key requirements of being able to run a platform efficiently, therefore, will be the ability to actually operate a nominee account or a pool account, and be able to handle things on an omnibus transaction and so on. But unfortunately, the regulations in India have actually, yeah, are moving towards a manner whereby the regulator actually do not want to see the mutual fund transactions being pooled together. They are essentially right now only allowing stock exchanges to be able to perform this operation. All over the world, in most countries, you actually find that Capital Markets Services Licence holder or stockbroking firms have the ability to operate a pool account or a nominee account. So if we can't, then we essentially won't be able to operate a platform profitably or efficiently. So with that change in regulation, we feel that the prospects for the platform business in India, for us, will actually be essentially not in a good position. As such, the group has decided to take this decision, and we're exiting the onshore platform business. So with that, yeah, we have the one-off impairment charge. On a yearly basis at the operating level, in the last two years, we generally have seen a loss of about close to half a million in terms of share of the losses at the associate level. With this discontinuation of our India onshore platform business, we will expect that the operating loss will go away after the second quarter. There is that one upfront impairment charge. Let me now move on to have a recap of our four-year plan. If you recall, when we talk about our iFAST four-year plan, basically we are looking at four main points. One really is to get bigger and better overall as a group. That continues to be an objective that we're committed to, and we are aiming for SGD 100 billion by 2028 in terms of AUA. That remains a goal that we're firmly committed to. Second point really will be to accelerate the growth of our Hong Kong business. To a large extent, that acceleration will come from the ePension division, and that will start to contribute more substantially from 2023 onwards. At the moment, we're looking at that starting the third quarter 2023 onwards. That will be a driving part of the growth for us over the next few years. With that should help to drive our overall group profitability quite substantially as well. The third part really is to add digital banking and other capability to our overall platform. This part is also something that we continue to execute, and we did that at the beginning of this year by acquiring the BFC Bank, which has been renamed iFAST Global Bank. The group is currently preparing to launch the digital bank services, and we're in the midst of preparation and the development of that. In the next two, three quarters, we expect to be launching that. The fourth point really is that we are moving towards being able to have a more truly global business model. What do we mean by that? We essentially believe that in the future, I think the investors from all over the world will be looking for best wealth management platform from around the world, and investors no longer will feel that they just need to invest through platforms in their own country. They'll be looking for platforms from other country as well. iFAST believe that we're in a position to be one of the key wealth management platform, and we have additional banking capability to serve the needs of investors from different parts of the world. That summarize the key four-year plan that we have actually talked about. Next. This last slide, just a bit of a recap in terms of what we have guided for the Hong Kong business as a whole. This is a guidance that we issued on the 23rd of April. This guidance, if you look at the 2023 number, we actually assumed that the ePension division will start contributing in fourth quarter. But the way things are moving, we currently expect that contribution should start in third quarter of 2023. But as of now, we are not officially changing our official guidance as yet. I think in the quarters ahead, then we'll look at the need for any updated guidance. With that, I've completed the section two. Section one and section two is the numbers I wanted to officially run through. The rest, I will leave it to you to look at the details. With that, I'd like to open the floor to any question. Yeah. Hi, everyone. If you have any questions for any one of us, you can post your questions in the Q&A text box, and you can also raise your hands, and we will let you unmute yourself to ask your question. Okay, so we have our first question coming in from Jay. The question is, does it mean that the India related AUA goes away to zero? The answer is yes. The second quarter numbers still included the India AUA. I think India AUA has about 400 over million contribution. Sorry. Can you repeat again? Number from iFAST India AUA contribution to the group. 3Q onwards, that will start to go away and drop to zero. 267. 267, can you repeat for me? It's about 267. 267. SGD 267 million is the contribution from iFAST India AUA. There's some reduction that we see from that. But if you look at the fact that we have essentially every quarter been seeing a positive net inflow, then the decline that come from iFAST India, we can overcome that quite easily. Okay, we have a second question. Can iFAST sell the stake in iFAST India and recoup something back, if any? Yes. We are in the midst of a discussion with some potential buyer of parts of the business. We hope to recoup something back from there. Overall, we expect that on balance, there will still be that significant loss that will be incurred, hence the provision that we have actually made for the second quarter, the SGD 5.2 million. Okay, we have a third question. Could you please share some color on OpEx to come, whether this quarter's figure would be the new run rate going forward? I think you can take this quarter's figure as being roughly the new run rate going forward, because that also include the expenses that we have from the bank and so on. Okay, we have one more question from Nickhing. Will there be further impairment charges for the India business? The second question is, can FY23 be able to achieve operating leverage earnings to grow faster than revenue? We expect that the impairment charge for India should be a one-off impairment charge. At this point in time, we don't expect any further impairment charge for the India business. FY23, we expect to achieve operating leverage earnings to grow faster than revenue. The answer is yes, we expect that, mainly because the ePension division will start to grow substantially. Some of the tougher expenses that we had to take in 2022, we won't see the recurrence of some of this. Essentially, 2023, I think as a whole, we have actually guided that we should see record high revenue and profitability. I think you'll see the big jump mainly starting the quarter next year onwards. Okay. We have a follow-up question on India. To clarify, will iFAST still have operations in India post-restructuring? If yes, what are these? Post-restructuring, we expect that iFAST will only have a very small office in India. We have decided to exit the onshore India business. At the same time, we feel that from the industry, from the advisory community, there will actually be some demand for services related to fintech solutions, related to our global fintech capabilities, as well as related to some offshore services, like digital banking and wealth management platform as well. As we noted, increasingly, there is demand for investors to invest globally and to actually have some investment outside the home country as well. So we are scaling down the bulk of our presence in terms of the physical presence in India, but we still retain a small office so that we can continue to provide some of these fintech solutions and global wealth management services to the different partners. Okay. The next question is: Will iFAST book losses on a quarterly basis for the rest of 2023, or is the group expected to return to profitability for the next quarter on the absence of India impairment charges? We expect that we should return to profitability after second quarter. Okay. We have one question on recurring fees. How have recurring fees been performing? Are margins improving? Yeah. I think for recurring income, if you look at the different component of the recurring income, we have the trailer fee and the platform fee. The trailer fee essentially is holding quite stable. I think as a leading platform, we are in a position to maintain the pricing pretty well. I think if I look at the recurring fee, you will actually note that in the last two years, there was some decline in the recurring income margin coming particularly because of the fact that the interest rate environment was actually declining. So on our part, we have some of the client cash that is a part of the AUA, and for that, the margin that we get from the net interest income was actually declining because interest rates were at almost zero for quite some time. With interest rate environment now swinging up substantially, the net interest income that we are earning from the cash has also started to increase quite significantly. The positive news on the recurring income is that the net interest income contribution is trending up for us, and on the whole, we actually find that our overall net recurring income is actually quite healthy. It is the non-recurring income that in the last couple of quarters have taken a more significant hit from the overall wealth management platform business because transaction volume, et cetera, have actually come down due to the tough market conditions. Okay, we have one question. Could you provide some color on why government grants is still quite high in the first half 2022? What is the nature, and if that will continue? Jimmy, would you like to take that? Government grant of Hong Kong in Q2. Singapore, we already stopped. Singapore, the government grant is lower compared to last year, but in a way offset by the government grant of Hong Kong since Q2. The answer is, government grant, we have that mainly from Singapore last year, but there is still additional contribution coming from Hong Kong in Q2. Any further question? If you have any other questions, you can either key in your questions in the text box, or you can raise hands, and we will invite you to unmute yourself to ask the question. Okay, we have quite a few questions coming in. Okay, I think you might have some text missing in your question, so maybe you can key in your question again. Okay, one more question from Andrea. Is there an updated dividend policy to share? We have not issued a formal dividend policy for the current year. But the general thinking that we have about dividend really is that in the long run, dividend will be able to grow according to how profitability grows. For us, of course, in the current year, we are seeing a step back in terms of profitability. But we are also looking at the overall prospect for ourselves, not just in the current year, but in the next couple of years as well. Because in the next few years, we expect that the overall profitability for the group will improve significantly, and because that will pave the way for higher dividends as well. We are in a very strong financial position. We decided that for 2022, we basically will maintain the dividend at a level similar to what we paid in 2021. Yeah. Then 2023 onwards, we start to look at being able to improve the dividend in line with growth and profitability going forward. Okay, we have a follow-up question from Yong Hong, on the grants. What is the nature of the government grants in Hong Kong? Is that relating to Hong Kong ePension or just grants relating to the pandemic? Will that continue? Grant related to pandemic until we expect some more in Q3. Okay. We'll go on to the next question. What is the nature of other investments of SGD 10 million? This one include because we acquired a UK Bank. Actually, this one, part of it is because in UK Bank they did some investment that eventually they will be more than a year. That's the reason why increasing the investment under the non-current asset. Okay, we have another question. Has your new major shareholder, has Canadian communicates with you what are their plans regarding with their stake? Will they be active looking to work with you or passive? At this point, we haven't had a formal discussion yet with regard to their plans for the stake. They only became the shareholder quite recently. Okay, the next question. What are some of the risks involved towards the guidance of the Hong Kong ePension targets? Originally, the key risk I was concerned about was whether there would be any potential delay in the project, because it is a big project. It is a big system that we have to build, allow for testing, et cetera, to be done, which is why when we issued our official guidance on the target for Hong Kong, we built in some potential delay in the project. We essentially assume a six-month delay. That continue to be a risk that cannot be completely written off, but as we get closer to the project, then we are having the greater clarity in terms of the actual timing. The most recent indication is, we should see that contribution starting third quarter, but we will wait for another quarter or two before we change any official guidance. Okay, the next question. Where do you see the bulk of the SGD 100 billion AUA coming from going forward? Is it going to come from China, or do you see the current AUA percentage split to maintain until SGD 100 billion? We actually expect that the various country will contribute quite a bit. Singapore has been our core market. We expect that Singapore will continue to play a substantial role, but probably not at 60%-over percent. I imagine that Singapore can actually, in the future, continue to contribute something like 30%, 40%. We are actually expecting that Malaysia and Hong Kong will continue to grow as well. Certainly, we expect China to be able to contribute substantially to that number. Of course, not to forget, U.K., given that now we have a bank, and bank is certainly something that can help to grow the overall AUA quite rapidly, because we are talking about the simplest wealth management product, which is basically cash. That is certainly something that can actually help to grow the overall AUA quite significantly. Okay, the next question. Is the Hong Kong projects related fee quantum roughly in middle of 4Q 2021 and 1Q 2022 implies higher than 4Q 2021, but lower than 1Q 2022? Yong Hong, are you referring to the future or you're looking back? Haiyong, would you like to maybe just ask your question directly? I believe this is asking about the Hong Kong project revenue in 2Q 2022. So essentially, the number in 2Q of 2022 was lower than the number in 1Q 2022. Yeah. Okay. We'll move on to the next question. How would wealth management products continue to do in this environment? What would the impact to sales be moving forward? I think in the very short term, certainly, when market conditions are very tough, then certainly there will be some impact on the overall business that we see. If I take the last two quarters, we actually see that on average, the volume that we're seeing on stockbroking especially, that come under some decline. Unit trust as well, we saw some reduction in overall volume, even though that has actually helped out. The unit trust volume helped pull up better for us than on the stockbroking side. You take a business such as bonds, this part will actually have a mixed effect. On the Singapore side, we actually find that the bond business that we have actually had a good second quarter, I think mainly because of the fact that interest rates have become higher. The yields that you're seeing on the bonds have become better too, especially for the investment grade type of name, the better quality company, and that gives investors the appetite to actually buy more into these bonds. Bond business in Hong Kong, however, did poorly because the overall high-yield bond environment in Hong Kong has taken quite a substantial hit because of the problems we're seeing in China. So Hong Kong bond business didn't do well, Singapore bond business did well. Overall, of course, the overall volume that we're seeing for wealth management as a whole didn't do so well. The other part, of course, not to forget, it will be cash and cash management solution. That part actually, in a higher interest rate environment, start to become more interesting because we make better margin, and I think investors will probably find that they probably will be willing to put more money in some of these safe cash solutions that we actually offer. Okay. We have one question coming in. When can the UK Bank turn profitable? What kind of losses should we expect in the near term? As we guided previously, we are targeting for UK Bank to turn profitable in 2024. For 2022, the current year, we have guided that UK Bank will contribute a loss of about SGD 4 million to the group. That guidance remains for 2022. We haven't issued any official guidance for 2023, but I think, hopefully somewhere in the middle here. Okay. The next question. Will iFAST still receive Hong Kong projects related fees in subsequent quarters, and will their quantum be similar to Q2? We will still be seeing the fees on the This will be for the project implementation part for the next few quarters until second quarter 2023. After that, the operation phase will start to kick in, and that's where the bigger part of the revenue will come in. Okay. We have one question that just came in. Is iFAST working on similar pension projects in other countries? Good opportunity there? We don't immediately have any other pension project of a similar scale as Hong Kong or even anywhere close in terms of scale that we're working on as of now. Okay. The next question. Will iFAST look to cut its exposure to any other markets? Which markets is iFAST looking at to enter in the near term? We are not looking to cut exposure to any other market. We are committed to all the other markets that we're in currently. We continue to build on our capability in this market that we are already in. On an immediate basis, the group's priority is to build on our presence in this market that we are already in, including U.K. through the bank, and grow the business from there. We are not immediately looking at physically entering other markets as yet. Okay. I think we have no other questions, so we will end the session here today. If you have any other questions you can Okay, sorry. We have actually one more question that just came in. Are there any guidance on NII or any sensitivity guidance? Net interest income, I think for us, the bigger part of net interest income that we actually have relates to our operation as a platform, not as a bank as yet. So we do not have actual detailed guidance other than to say that net interest income for us as a group, in terms of the margin, hit bottom in first quarter of this year and then start to improve in second quarter, and we are seeing further improvement going forward. The banking side is not a big number as yet as of now, but certainly it is something that we are going to work on to put in quite a bit of effort to ensure that it grows very nicely. So that is what we have at this point in time. Okay. We actually have one more question that is relating to the UK Bank that just came in. Is iFAST UK integrating according to plan so far? Pretty much so on a broad basis. We are working on scaling back certain parts of the existing business, while working on preparing to launch other parts of the business that is in line with our overall wealth management focus. So that is where we are. In the next one to two quarters, we will provide further details on our implementation. Okay. I think there are no further questions. We will end the session today. If you have any other questions, you can always contact us at ir@ifastfinancial.com. Thank you, Chung Chun, and see everyone next quarter. Thanks, everyone.