Earnings Call: Q2 2020

Jul 23, 2020

Okay. Good morning, ladies and gentlemen. Welcome to iFAST Corp's second quarter 2020 and first half 2020 results presentation. I trust that all of you are staying safe and healthy during these times. My name is Jean Paul. I am from the iFAST Corp corporate comms team. Before starting with my portion of the presentation, which is on the key summary, I would also like to share that we have Mr. Lim Chung Chun, CEO and Chairman of iFAST Corp with us today, as well as Mr. David Ng, our CFO, who will be presenting section one and two later on. As my colleague, Julie, has shared in the chat as well, you then can ask questions during the Q&A segment after our presentations. I will begin with a key summary. On slide 4, the group reported a record quarterly net profit of SGD 4.53 million in second quarter, which is an increase of 84.7% year-on-year compared to second quarter of last year. This was achieved on the back of a 21.2% year-on-year increase in net revenue and a 25.8% year-on-year increase in gross revenue. For first half this year, the group's net profit grew 101.4% year-on-year to SGD 8.16 million, which is supported by a 23.1% year-on-year increase in net revenue and a 33.2% year-on-year increase in gross revenue. The improvement in the group's business shows that the group has been a beneficiary of increased digital adoption in the wealth management industry. The improvements have been seen for both our B2C and B2B businesses. The net inflows of client assets registered a record SGD 1.25 billion in the first half, pushing the group's AUA from SGD 10 billion as at end of last year to a new record high of SGD 11.15 billion as at 30th of June this year. Going forward, an acceleration of digital adoption in the wealth management industry will continue to be a positive factor underpinning the growth prospects of the group. The group will continue to work hard on cementing its position as a leading fintech wealth management platform. Barring unforeseen circumstances, the group expects the full year 2020 performance to show healthy growth in profits and revenues compared to 2019. For the second interim dividend for second quarter of this year, the directors declared a dividend of SGD 0.75 cents for ordinary share, which is the same as the second interim dividend for our second quarter of last year. On the next slide, the wealth management industry is undergoing rapid change, driven by the acceleration in digital adoption and transformation in recent times. As a leading fintech wealth management platform in Asia, the increase in the pace of digitalization in the wealth management industry has led to a rise in our business volume across both B2B and B2C divisions. The net inflows of client assets into our platforms hit a record high of SGD 656 million in the second quarter of this year. Subscription excluding switching for the group grew to a record high of SGD 2.39 billion in second quarter, and strong growth was seen in the total sales excluding switching for the Singapore operation in first half 2020. We have a chart on this later on that we will be sharing. Greater digital adoption in the wealth management industry will continue to bode well for the group's online-based business model going forward. This slide shows our group AUA growing by 11.5% year-to-date and 23.4% year-on-year to a record high of SGD 11.15 billion as at June 30, 2020. Here we have our usual charts on the net inflows, firstly, and the subscription excluding switching. As we shared just now, the net inflows numbers have hit a record high for us in first half of this year. Net sales in the first quarter of 2020 was already at a very high level of SGD 590 million, and in second quarter, we saw a further increase in net sales of SGD 656 million at the group level. Similarly, for subscription excluding switching, in the first quarter, the numbers stood at SGD 2.23 billion, and in second quarter, it further increased to SGD 2.39 billion. On the next slide, we have the Singapore business total sales excluding switching. You will notice that in the first quarter of this year, the numbers were significantly higher compared to the few quarters of last year, and this trend was seen for both the B2B and the B2C divisions. In the second quarter, the volume in terms of sales accelerated further for the B2C division and remained strong for the B2B division. In first half of this year, we have seen a very strong sales number for the iFAST Singapore operation. With that, I have wrapped up the key summary points. I will now invite David, our CFO, to run through section one, which is on the financial results. David? Good morning, ladies and gentlemen. I am now going to present the financial result for the group. Firstly, it will be the second quarter 2020 versus second quarter 2019. Our gross revenue for the second quarter of 2020 is about SGD 38.55 million, about close to 26% growth. The net revenue increased by 21% to about SGD 19.4 million. Other income increased significantly to about SGD 1.8 million. Expenses increased by 14% to close to SGD 16 million, SGD 15.9 million. There is a small net finance cost, about SGD 20,000, and a very small share of results associated. Our PBT increased close to 100%, to about SGD 5.7 million. Our PAT increased by 57%, to about SGD 4.5 million. Net profit attribute to owners for the company increased by 84.7%, about SGD 4.5 million, and EPS is about 1.67 cents for second quarter of 2020. We will have the second interim dividend per share is about SGD 0.05 per share. The next slide will be the first half result 2020 versus first half 2019. Our gross revenue increased by 33% to about SGD 78 million. The net revenue increased by 23% to about SGD 38.66 million. You may notice that for the whole second quarter and first half of 2020, there are some significant increase in the revenue and the net revenue. There are a couple of reasons. Firstly, it was mainly due to the significant increase in the stock and ETF processing fee that contributed to an increase of the non-recurring net revenue, and also due to the increase in the currency conversion service provided to our client. For the recurring net revenue, of course, it is also due to the increase in AUA, due to this increase in the net inflow of the investment and also due to the increase in the net interest income for admin fee, cash admin fee. For other income, you may also notice that actually they also increased significantly by about 120% to about SGD 2.4 million. The main reason is mainly due to the Singapore government grant that we received in the first half of 2020. The expenses increased by about 13% to close to SGD 31 million. This was mainly due to, firstly, I think we have increased some staff costs, and we provide some more staff bonus due to the good performance in the first half of 2020, and also some increase of the amortization of development costs. We still record a net finance income for about SGD 140,000 in first half 2020, compared with a net finance cost of about SGD 140,000 in first half of 2019. It was mainly because we paid our bank loan during the first half of 2019. That contributed to a net finance cost in first half 2019, but a net finance income in first half 2020. Due to the improvement of the performance of associates, a smaller amount of the share is associated to about SGD 70,000 for first half of 2020. Our PBT increased by close to 114% of our SGD 10.12 million. Our PAT increased by 105% to about SGD 8.8 million. After excluding the non-controlling interest, net profit attribute to owners of the company, we record 101% growth of about SGD 8.16 million. Our EPS for first half 2020 is about 3.02 cents, 100% increase compared with first half 2019. Our cumulative dividend per share for the first half of 2020 is 1.5 cents, same with last year. This table is showing the first half 2020, including China operation from 2016 until first half 2020. I will not go further in detail. Next one is excluding China operation. Excluding the China operation, our gross revenue for first half is about SGD 76.49 million. Net revenue, SGD 38.13 million. Other income, SGD 2.3 million. Operating expenses, SGD 28 million. Net finance income, SGD 117,000. No change for share of associates. Our PBT excluding China is SGD 12.5 million. PAT is about close to SGD 10.5 million. Same for net profit attribute owners of company. EPS excluding China is about 3.87 cents, and operating cash flow is SGD 21.4 million. These two charts showing the PBT margin for the group based on the net revenue. Left-hand side, including China operation, is about 26.2% for first half of 2020. Excluding China operation is about 32.8% for first half 2020. Next, we will show some financial indicators. For this one, we include the EBITDA. As at first half of 2020, it is SGD 33.71 million. Our net cash position, including the investment in financial asset and our bank and cash and money market fund, and then net of the bank loan is SGD 42.45 million as at end of June 2020. Operating cash flow for the group is SGD 19.5 million. Excluding China operation is SGD 21.4 million. Capital expenditure as at third, sixth month of this year is about SGD 5.06 million. Net current asset, SGD 50.9 million. The shareholders' equity is about SGD 95.37 million. This table show the breakdown of the net cash position. Our cash and cash equivalent as at end of June 2020 is about SGD 26 million. Other investment, mainly the investment in financial asset, is about SGD 20.29 million. Total cash and other investments are SGD 46.29 million. Minus the bank loan, about SGD 3.4 million. Our net cash position, netting off the bank loan, is about SGD 42.45 million. Gross debt to equity ratio is about 4.03%, and we are in net cash position. This chart showing the group operating cash flow, including and excluding China from 2016 until first half 2020. For first half 2020, excluding China is SGD 21.4 million. Including China is about SGD 19.5 million. Capital expenditure, our first half 2020, we spent about SGD 5.06 million. Some update on the operating expenses. At the beginning of this year, the group guided that the operating expenses will amount to approximately between SGD 59.9 million to SGD 61.4 million in 2020. However, given the strong performance of the group in the first half of 2020, and the positive underlying trends that the group is currently seeing, the group now expects the full year 2020 operating expenses to amount to approximately between SGD 63.4 million to SGD 64.9 million. This reflects the increases in IT infrastructure costs, marketing costs, performance-based remuneration, and additional headcounts in Singapore. The group is of the view that, for the long run, it should continue to invest ahead so that it can be ready any time to support new market demand continuously. Our number of issued shares at the end of June is about 271.15 million. The next slide is our consolidated financial position, which is the consolidated balance sheet. At the end of June, our total non-current assets is about SGD 60.9 million, mainly including the intangible assets and goodwill and also the right-of-use assets, which is actually the office premises of our group. Current assets, SGD 152 million, mainly consists of uncompleted contracts for buyers, SGD 66 million, and trade and other receivables, about SGD 38.4 million. Our current bank account at the end of June is about SGD 720 million. So total assets is about SGD 213 million. Next page. Our share equity, SGD 95.37 million. After excluding the non-controlling interest, it's about SGD 94.85 million. Non-current liabilities, about SGD 70 million, mainly will be the lease liability from the right-of-use asset. Current liability of SGD 101 million mainly consists of uncompleted contract sellers and also trade and other receivable. So total liability is about SGD 118 million, and the total equity liability is about SGD 213 million. For the second interim dividend for 2020, dividend per share is SGD 0.75 cents, the same as same quarter of 2019. Ex-dividend date will be 3rd of August 2020. Record date will be 5:00 P.M. on 4th August. Ex-dividend will be 3rd of August, and record date and time will be 4th of August, 5:00 P.M., 2020. Payment day will be on 19th of August 2020. I think that's all for me. Hi, everyone. I will carry on with the next section on the performance trend. On this chart here, it shows a breakdown in terms of our AUA, firstly by market. Singapore currently accounts for 67% of the overall AUA. I think it has gone up slightly from previous quarters, because in the first half of this year, Singapore has actually been particularly strong. If you look at the breakdown by product, the unit trusts continue to be the key asset class for us. We expect that unit trusts will continue to be the core. But the other asset classes are actually, at this point, growing at a faster pace, especially if you look at the stockbroking side, the direct securities, and ETF as well. It is actually growing at a faster pace than unit trusts as well as the overall AUA. That is the kind of trend that we have seen. This chart here on slide 26 shows the net revenue over the last 16, 17 years, with this between the recurring and non-recurring revenue. In the first half of this year, we saw that recurring revenue is about 72% of the overall net revenue, and non-recurring would actually be about 28%. The percentage contributed by recurring revenue has gone down versus the numbers in recent years. The key reason for that is the fact that the contribution from the stockbroking side of the business has actually been growing at a faster pace than the overall AUA of the platform. As a result, we actually find that the non-recurring income actually has grown faster. Even though the recurring income itself has continued to grow, there is a bigger increase in terms of the contribution from stockbroking, the commission income, et cetera. Next. Yeah, this is a slide showing the net revenue as a proportion of overall AUA. You actually note that in terms of the net revenue as a proportion of overall AUA, there has actually been some reduction in terms of the recurring component. However, the overall components have actually, in fact, improved somewhat compared to the previous year. Previously, I think we used to see the recurring component accounting for, say, 80% of the numbers, but now it is dropping to the low 70s. I would say that a split of 70/30 is still a number that we are very comfortable with in terms of the overall contribution to the net revenue. There is a table showing the trend over the last few years. As you can see, in the first half of this year, we have had growth in both recurring and non-recurring, but the growth in non-recurring actually has been much stronger. Incidentally, there is also a question that has been posted here online, asking why was there a discrepancy in terms of the growth rate of recurring net revenue. Why is that only 7.9% while the growth rate for the non-recurring revenue was actually much higher? The key reason is actually because the contribution from stockbroking has become a lot more substantial in the first half of this year. That has actually contributed to a stronger growth in the overall non-recurring revenue. Of course, that also helped the overall net revenue of the group to actually be quite robust. I would say that there's another reason why the growth in recurring net revenue was probably a bit weaker than the growth in average AUA. The reason is because the overall mix of contribution from unit trust has actually reduced compared to the. In terms of the overall percentage contribution by unit trust as a proportion of AUA, has actually reduced. That's why the recurring revenue growth was slightly lagging behind the growth in the overall AUA. I think another factor that contributed during that period was probably the fact that there's a substantial reduction in the overall interest rate environment. In terms of contribution from net interest income from the cash component, that has also not grown at the same pace as AUA. These are some of the reasons to take note. Next. Slide 29 shows the geographical contribution by country from the different markets. I think Singapore has a much bigger base of AUA and net revenue. I think in the last few years, we've tended to see that Singapore growth, in terms of net revenue, has lagged behind the other country. But in this first half, we actually saw that Singapore was actually particularly strong, and Singapore has been a key contributor to the overall strong performance that the group saw in the first half of this year. This chart here shows a split for the B2B business net revenue and the split between the recurring, non-recurring. I'll leave it to you to digest further. Thirty-one is a split for B2C business. The B2C business has actually been stronger than the B2B business during that first half of this year. The reason is because during this recent environment, the COVID situation, we actually found that the growth in the B2C segment was actually a lot stronger. But I think it's important to note as well that we also saw growth in terms of the B2B segment of our business. We actually find that advisers who have been using our platform have actually contributed stronger numbers during the period. Particularly, if you look at markets like Singapore, where you actually find that a lot of the more traditional channel, they are also well-equipped to do business online. They probably have seen some decline in volume. But for us, I think the B2B segment, the advisers who use us, they're well empowered with the digital tools, so they're able to increase the contribution on our platform. Next. These numbers are the breakdown in profitability by different country. I think you can analyze it in further detail yourself. Next. This chart is a chart that we've been showing in the last few quarters in terms of the overall volume that we saw on the bonds business that we actually have. We have seen the growth year on year, though the increase hasn't been as strong as some other products like the stockbroking side of the business. Page 35, just a quick word about our digital banking application. I think about one month ago, we announced that we're one of the nine applicants for the wholesale digital banking license. We have been shortlisted to progress to the next stage. We are in that phase whereby we're presenting to MAS and answering all their various queries. We expect that the announcement as to whether we'll be successful or not will only be known in the fourth quarter. We can't be sure of our success, though we believe that we have some strength on our part that can put ourselves as a strong contender. Firstly, I think we have 20 years of track record as a profitable fintech, or 20 years of profitable growth as a fintech. I think in the fintech industry, we tend to find that most companies are actually loss-making. Getting a business model to work and actually be able to run smoothly is something that we don't see too many companies having achieved in Singapore, in the region. So I think we are unique in that sense. Plus, of course, we've brought in some strong partner as part of the overall application. So we are hopeful as a result of that. One of the questions that I've been getting quite a bit in the recent quarters is what is the cost that we'll spend if we are to be successful in getting the digital banking license? In previous quarters, I have not been able to answer that number. Of course, the exact number and so on remains a number that may shift a bit here and there. But this is one way for us to look at what is the potential cost for us in going to this business. So we are estimating that by the time we fully launch the business, and I think the full year of launch will be 2022. If we're successful in our application, we'll know about it, say, 4Q this year, but by the time it's actually launched at the end of 2021, end of next year. The full impact in terms of the overall cost will actually be in 2022. When we launch the business, then we expect that the digital banking business will add between 9%-11% to the group's overall expenses in 2022. That's based on our effective share of 65%. I'm expressing it this way just so that our investors have a good view or a better view of the potential increase in cost for us as a group, because I imagine that investors generally may be somewhat concerned about whether we're going to put huge amount of money when we go into this digital banking, if we are successful. What we have actually been noting in recent quarter is that we tend to be able to launch a new business at lower cost than most other players in the financial sector, largely because we have our own in-house IT team and so on. But to give a better view of what is the potential number we're looking at, I think, yeah, so this is how we think we can quantify at this point in time, so that addition of 9%-11% to the group's operating expenses. If the overall growth of the group continue as what we are planning for, then certainly this growth in expenses for us to get into digital banking is something that is very much manageable for us. Next. Yeah. In subsequent slides, these are some additional detail on the different market. I'll just mention a few point on each of them. Firstly, on Singapore, I think Singapore has seen a strong first half of this year. I think the COVID situation has actually led to an increase in the pace of digital adoptions. As a result of that, we actually found that the overall business that we have in Singapore has actually improved quite strongly. B2C, FSM Singapore was particularly strong, but it's also interesting that the B2B segment has actually been pretty robust as well, the overall sales volume, confidence, et cetera, that we saw actually increased. I attribute the B2B growth to the fact that I think ourselves as a provider, as a platform for the B2B industry, I think we are more ready for the digital channel. I think the second reason is the fact that, as a platform, we focus on the simple and transparent product. The simple and transparent products are actually doing better in this environment where sales are done online, as opposed to some of the products that tend to be rather opaque. It may be investment product, but if they are opaque product, you lock in the investors, then in the current environment, investors may not be that comfortable. Advisors are doing more of the simple, transparent product, particularly the UT, and probably less of other products like insurance, which tend to be more of a longer-term product. As a result of that, iFAST has actually been a beneficiary. Next. Moving on to Hong Kong. I would say that Hong Kong, among a few of our market, didn't show as strong a pace of growth during the quarter. I think the reason is because Hong Kong seems to have a bigger share of the From a The overall macro perspective, Hong Kong as a market seems to have a bigger share of the negative news compared to most other countries, because most other countries are impacted by the COVID situation. Hong Kong seems to have the additional concern about security law, the conflict that China has with U.S., and all that have actually caused the overall Hong Kong market to actually perform not as well as some of the other markets. As a result of that, we find that our Hong Kong business didn't grow as much as it did in Singapore and, say, Malaysia. I think what typically happened as well is that when investors' concern eases off, I think you stand to find that the volume in the Hong Kong side can actually bounce back very quickly. Nevertheless, during the first half, we continued to show some growth as well year-on-year. Next. Malaysia is a market where we saw a 40% growth in net revenue. Overall, I would say that the growth in the core business has been strong. There's also been a significant contribution from Fintech division. I think our Fintech division is a segment that actually been making significant progress within Malaysia. We're actually helping some of the other companies to develop some of the Fintech solutions that's related to their wealth management needs and so on. So that has actually contributed quite well during the quarter. The overall core business have grown as well. Again, I think the B2C side was stronger than the B2B in terms of the overall growth. China, I would say that China, in 2019, we have seen a tough period. Currently in 2020, in the first two quarters, while the overall numbers from China continue to be small relative to the potential, I think we are seeing some decent improvement in these six months. So AUA revenue have actually grown during that period. We have launched some additional services like a wrap account service and so on, which I think is an important reason why we have been able to see a more interesting improvement in terms of the overall business that we have. Because in China, our business focuses more on the B2B segment, and the launch of wrap account actually helps quite significantly. India did not do as well. I think India, by the way, is a market where we have effective 38% interest in, that the numbers are captured under contribution to associate. It is not profitable as yet. During the quarter, we saw quarter-on-quarter growth, even though year-on-year the numbers still did not look very good. I would say that the overall trend for the industry is still one whereby there is a very good potential as we move on going forward, medium to long-term, for the platform business. Those are the different segments that we actually like to run through formally. I think that is the last slide for us. What I would like to do now is to move on to the question and answer section. I think we already have quite a number of questions that have been there. The first question relates to how does Federal Reserve zero interest rates impact the net interest income for Q2 B2B recurring revenue? Can iFAST maintain the net interest margin from cash held in trust for 2019 compared to 2020 or 2020 compared to 2019? Do you see any challenges or possible to improve further? I would say that the zero interest rate environment in the U.S. has in fact reduced the margin that we are able to get on the net interest income on the cash account that we actually have. Having said that, I think it is worth noting that the margin that we have actually continue to be a pretty healthy margin. We are making use of our ability to deal with the banks on an institutional basis. So on the one hand, we deal with the banks on an institutional basis. On the other hand, we deal directly with the retail customer. So there is some efficiency that we are able to bring to a retail customer. So we continue to be able to bring better rates to the retail customer, yet still maintain a healthy margin for ourself. But the margins are not as high as what we were seeing last year. I would say that the margins that we saw last year were extremely good. It is not a rate that we expect to continue to be the case perpetually. Right now, I think the margin has normalized. So because of that, we find that margins are lower but still healthy. More importantly, I think the overall cash balance that we actually have as a group, that has continued to grow, and that I think in the long term will be still the key determinant of how much net interest income we are actually able to generate as we move on. Second question, since the launch of ETF in 2019, November, in FSMOne, can you provide more details on how this segment is performing? JP, would you like to take that? Yep. I will answer this question. So we have ETFs available for investors to invest in on FSMOne Singapore for the last three years. And, specifically on the November 2019 point, right? So I think maybe you are perhaps referring to the launch of the ETF regular savings plan, which indeed we launched in November of last year. Generally speaking, for ETF business, for Singapore on the FSMOne side especially, the response from our clients has been extremely good. And also the fact that we added the regular savings plan in November of last year for investors, the response has been also very good for that service. And I guess there are a couple of key reasons. One, it is easy to get started for investors in the regular savings plan. So we are looking at SGD 50 per month and above into a select list of ETFs. Also we have been working with our research analysts to provide ideas in terms of what investors can consider as the ETF to invest into to build a globally diversified portfolio. And also in terms of pricing, we are looking at a minimum of just Sing $1 or US $1 or Hong Kong $5, depending on the exchange on which the ETFs are listed on, and the commission fee 0.08%, subject to these minimum fees. So it is a pretty, I think, overall, a high-value kind of service for clients. So I think the response from investors has been pretty good. Next question. B2B segment growth, non-recurring growth was 151% year on year. We need the number? We do not provide B2C. Okay. I think, yeah. Typo there in the segment, in the question. It says B2B segment growth, but I think they are referring to B2C segment growth. Non-recurring growth was 151% year on year. Is this a temporary phenomenon due to COVID and IV? Yeah, I think there is some mix-up in the question. So if you are referring to B2B, then the growth was 52% in terms of non-recurring. That is half. That 151% is actually for the B2C segment of the business. Yeah, the reason why the growth has been pretty strong for B2B, that 50-plus percent, the most important reason is because I think during that period, we have seen an increase in the overall business going to the more digital platform, iFAST, and as a result of that, we have actually been able to benefit. For the B2B business, we also saw improved contribution from some new areas like stockbroking, even though that is not as big a factor that contribute to the increase. If you are talking 151% increase for the B2C, then the most important reason was because stockbroking started to contribute a lot more during that first half. That is why the increase was actually very strong. So the overall account base that we have increased a lot and continue to see a positive trend in terms of new account opening and so on. Next question. Well, you have mentioned that in recent times, the contribution for Fintech solutions, IT fees have become more important. Can you please give us some idea on what percentage of recurring revenue comes from this? IT fees actually are categorized under non-recurring revenue, mainly. So, that is actually one of the component under non-recurring revenue, and as a very rough indication, I would say that the IT fees contributed about 15% to the non-recurring net revenue. That is a very rough indication. It seems we have slowed down in growth for Hong Kong in the second quarter relative to the other market. What is the reason for this? Yes. As I mentioned earlier, I think Hong Kong seems to be a market that got impacted more than most other country. That is how I attribute it too, because more concern beyond just COVID, there was a concern about the security law, about the ongoing dispute between U.S. and China, and that has affected the overall market. As a result of that, I think Hong Kong saw some of that issue. I think the other point to note really is that it has been our observation that our business volume in Hong Kong tends to be more volatile than in other countries, including Singapore. I think perhaps the reason is because in Hong Kong, investors there, and advisors there as well, tend to be more reactive to the momentum in the overall market. So when markets are down, you tend to find that investors seems to react more strongly. When markets are up, they tend to come back sooner and in a bigger way as well. So that is one of the effect that we tend to see in Hong Kong. So, I would say these two reasons are the key reason why Hong Kong didn't grow as well as Singapore and Malaysia. Stockbroking segment seems to be growing stronger. Any threat from zero trading commission? Yeah, I think this zero trading commission is something that has actually happened in U.S., and I think certain players in Hong Kong are starting to do some of that. Our view of the pricing situation is that we want to make sure that we provide the best overall value for money. I think we learned from how we operate our platform business all these years, that if you are a market leader, if you are a strong player, you actually won't be able to be the one with the lowest pricing. We have been a market leader for unit trust platform all this while. We actually find that our competitors have always tried to compete on price. We know that while we want to make sure that we have a competitive pricing, we can never be the lowest because whatever price we set, they will just set lower. Stockbroking, of course, we are a relatively new player. When we started, we want to make sure that we are sufficiently competitive. I think in Singapore, we are still probably most competitive for the Singapore stocks part of the business. Will that situation where we are the most competitive always be the case all the time, especially considering that globally, some players are going on zero commission? I would say that our take of it is that we have to expect that somebody will do the zero commission at some point. On our part, we want to make sure that we are one of the most competitive. On an overall basis, we provide the best value for money. Do we need to go down to zero? Our belief is we actually do not need to. Mainly because pricing is just one consideration. I think the other key factor, a key differentiation that we bring to the market is that we are running an overall wealth management platform. I think that strength should not be underestimated because if all we do is focusing on the transactional part on one asset class, then you actually find that it is very easy for investors to move around. If you focus on aggregating the AUM for multi-asset classes in one platform and make it very easy, very seamless for investors to move among the different asset classes, and yet on an overall basis, we are still the one with the best value for money, then we will be able to ensure that we can cope very well, even as a different player try to move the pricing lower and lower. I suppose, in short, we are actually saying that we have to assume that some player will try zero commission at some point. Will we do it? We think that we are one of the few that have the capability to do it if we need to. Is that the best way to try to tackle competition? My take is that may not be the best way, because I think the players that have gone on zero commission and then relying mainly on net interest income, they start to find that all of a sudden they are caught into this environment, because when the Federal Reserve start to bring interest rate down to zero, then a big chunk of the revenue will start to actually go away. Some of the original thinking seems to be impacted quite significantly. I think the best way to design a revenue model is actually have a revenue model that has multiple components. Have strong recurring income from the unit trust part of the business, from the share of management fee, from the trailer fee, and then a good recurring income from the net interest income, but at the same time, still have a decent level of transactional income while having quite competitive pricing. But I think when you aggregate all the volume, that transactional income can make a significant difference. The other component, of course, is FX margin. FX margin, I think over time will become a number that will be a sizable contributor. Having a more balanced revenue base, that have contribution from all the different component is actually the best way to remain competitive in the long run. All right. Chung Chun, for the next question, I will interrupt it with a retail question from Andra. Andra, you can unmute yourself. Hi, Chung Chun. Thank you for the presentation today. I have a couple of questions. I think the first one is on the You have managed to gain quite substantially from the rebound in markets, and you also benefited from many account openings during the circuit breaker. Wanted to ask how you see volume trends going forward into the second half, and also if it is reasonable to say that you could possibly see softer trends in terms of revenue going forward as the whole euphoria calms down. Or will the recurring portion of your AUA be able to offset that in the second half? Another question would be that I noticed that your fees and commissions paid to third parties, it was down Q on Q by about 5% versus flat revenues. Just wanted to see if there were particular reasons for this reduction and if you expect this reduction to sustain over the full year. Thank you. The second question can you take it? Let me take the first question first about the volume trend for the second half. I would like to say that, one key number for you to pay attention to will actually be the overall net sales, or now we call it net inflow, that we report as a platform. In the first quarter, we reported that net inflow was SGD 590 million, so that was a record. Second quarter, we have just reported a net inflow of SGD 656 million. That is a new record that we have actually seen, which means that for this year, we have actually seen a net inflow of SGD 1.25 billion onto our platform in just six months. Last year, as a whole, for the year as a whole, by comparison, was SGD 976 million. That means the first six months we have already exceeded the net inflow for the whole of last year. Net inflow is a key parameter to watch out for because it will give the best clue about the overall sustainability of revenue for us. I think based on some of the recent trends that we are seeing, we are hopeful, and we believe that net inflow in the second half can continue to remain strong. If that is the case, then we will continue to be able to add on to the group AUA that we have at a decent pace. So I think in the end, you still look at the overall net inflow, and then you look at the overall AUA that we actually have, to decide whether the numbers that we will see going forward into the second half and beyond are sustainable. I think the numbers that we have been reporting, of course, are indicating that things have been strong. The only thing that seems a bit different now is that the recurring component grow at a slower pace than non-recurring. Nevertheless, on the overall AUA that we have, the net overall revenue that we are able to garner has actually been quite robust. That is my answer to the first part of the question. The second part is? Jimmy. Okay. Firstly, I think the business nature is you have B2C and B2B business. Actually, for B2B business, we share our- Can you repeat? What was that question? Sorry, would you mind repeating the question again? Yep, sure. Okay, so just looking at your revenue trends and the fees and your commissions paid to your third parties. I noticed that fees and commissions paid typically make up about 50% of your revenue, and when your revenue grows, that portion of the income statement grows as well. Seeing that in the second quarter, revenues were flattish, but yet I still saw a reduction in the fees and commissions paid out. I wanted to see if there were particular reasons or did you change the benefit structure to your FAs, and whether this can be sustained going forward. The second quarter compared to- Yeah, like on a Q on Q basis, yes. On a Q on Q basis. Okay. Because it may rise and fall quite in the same way, not to the same degree, but in the same kind of trends as in revenue and fees. In this quarter particularly, there was flat revenue, but yet I saw commissions actually contract, so wanted to see if there were particular reasons for the contract. Yeah. The payment to third party, this one will be mainly the share of commission that goes to the financial advisors. That number is dependent on the new sales, tend to be more dependent on the new sales that come about, because when you put in more volume, then there is bigger commission income that would be a bigger portion to the advisor. If you take the B2B business itself, then second quarter number was a bit weaker than the first quarter for the B2B. B2C, second quarter was stronger than the first quarter, but B2B year-on-year growth was pretty good. But second quarter compared to first quarter was a bit weaker, and as a result of that, the commission payment to the financial advisors goes down quarter on quarter. It grows year on year, quite robustly, but quarter on quarter it goes down. There's a reason for that. No other special reason in terms of change in terms of, and so on. Okay, going forward, what would determine it is which segment grows more, and that's what determines how those fees and commissions move as well. Did I get it right? The fees and commission is mainly due to the B2B segment. It will fluctuate according to the level of business there, especially the level of new business, the new flow that comes in during the quarter. Okay, understood. Just one more add-on question too on cost. You did guide that you think 2020 total OpEx will come up higher to about SGD 59 million to SGD 61.4 million, and you gave the reasons for that. Wanted to ask if the cost in the total expenses in second quarter is including the JSS receipts up until June, and also, with your guidance and how you expect the digital cost to add on to cost in 2022, are there any levers for cost reduction between now and 2022, or are these costs already absolute and set in stone? Thank you. Yeah. We would just like to clarify that the amount that we get under JSS scheme, this sort of subsidy from the government, the amount that we get under JSS is actually captured under other income. It is not being offset at the expenses level. So the expenses is not affected by the JSS. But you see some additional other income being booked during that period. So we have recognized some of that in first quarter and second quarter. There will actually be more in third quarter and fourth quarter to be recognized. So that is as far as the JSS is concerned. On the expenses going forward and so on, I think, on our part, we are, in the end, looking how do we balance the overall growth that we have, with the need to control the cost tightly. I think, early this year or end of last year, we thought about wanting to bring down the expenses growth and so on. That was basically initially taking to the assumption that, let us assume business growth is not too strong. If that is the case, then how do we need to manage our expenses? But as it turned out, I think the first half had been strong, and we have reasons to feel positive about second half as well, which is why we feel that it is fine for us to actually start to increase some of the expenses for the current year, while still ensuring that the overall bottom line numbers that we have will be strong. So that is the way we actually look at it. That thinking will prevail as we go into next year as well. We want to make sure that we are able to grow our revenue or net revenue better than the rate at which we can grow our expenses. That essentially means that we are striving to be able to improve our overall margin. There is clearly a goal on the part of the company. As we are able to achieve that goal of being able to improve our margin as we continue to grow, then we will manage our expenses accordingly during that particular year. Okay. Thank you. We have another question from Reggie for asking to unmute. Hi, Reggie, you can ask your question. Hi, Reggie, you can unmute yourself to ask your question. Hello? Can you hear me? Yes. Can? I need clarification on Q2 results, which if you deduct government grant of SGD 1 million, actually Q2, iFAST is doing worse than Q1. If you minus the SGD 1 million grant, your Q2 profit is only about SGD 3.52 million compared to SGD 3.64 million. This is a bit puzzling to me because, first of all, the market in the three countries that you operate in has gone up significantly. Secondly, your average AUA has also gone up. So why does profit seem to be coming down instead? Maybe you can clarify this. Thank you. Yeah. Okay, actually, in terms of the JSS that we book in second quarter is SGD 300,000? One million. One million. First quarter was about 500. So first quarter that is 500, second quarter was 1 million. So there is a difference of half a million. The other point to note is that we actually took the chance to make some bigger provision for certain costs, including bonus pool for the staff. So that certainly, the increase in what we provided certainly is more than half a million. So that is actually one way to look at the reason. I think if you just purely subtract the additional JSS amount, I think that wouldn't explain the full picture. As I mentioned, I think, we took the chance to also provide the additional bonus. That is what we typically do when we have a stronger quarter as well. That is a way to look at it. Otherwise, on the overall, certainly second quarter is stronger than first quarter. Thank you. Hello? Yeah. Hi, Reggie. Yeah. Thank you. I have another question to follow up, which is, has the JV in China been operational? Have you started business in China now that the bank account is already open? Not yet. We are planning to sort of launch that quite soon, but it hasn't officially started. I suppose the main reason is because with the COVID situation, there is some disrupt, some of the plans. Some of that have actually been postponed as a result of that. That's the current status. But we are looking to start quite soon, in a month's time. We will move on to the questions posed on the chat. The next question will be by Umar Benhamdi. This is also related to the JSS scheme. How would the company's bottom line have been excluding the JSS? Yeah. This question, while there has been additional contribution from the JSS, but, at the same time, it's also worth noting that we took the chance to provide some other additional expenses as well. I think the key point to note really is that on an overall basis, the core business without the JSS has actually been robust. I think you look at the net revenue number and so on, that actually shows the real trend. The next question is on cost of sales are rising faster than sales itself. Why is this so? And do you expect the sales cost to flatten at some point in time? Yeah. Cost of sales are mainly coming from the commission payments that are paid to the financial advisors. So when the financial advisors put in some volume on, say, the unit trust, and then they charge some upfront sales charges or upfront commission, that amount gets captured under the revenue. But the part of the upfront commission would actually be paid back or paid to the financial advisors. So when you have new sales, then you actually find that the commission amount actually goes up quite substantially. So when there's sudden increase in new inflow, there will also be a sudden increase in the upfront commission, and therefore a sudden increase in the cost of sales that we actually report. So that is a key reason for that. If we go into a quarter whereby suddenly the net inflow actually gets reduced, then the cost of sales accordingly will actually be reduced. So that's a way to understand the number. I think there isn't any structural reasons of things becoming worse and so on. Yeah, that should be the way to look at it. The next question is on staff costs. Staff costs have increased. What is the expansion for, and which area are expected to have more jobs added? Yeah. Staff costs have increased. The company is actually expanding. We understand that in a COVID situation, most companies have actually tightened up as far as the cost side are concerned for staff. But for us, because the overall volume has actually been strong, and in a sense, it is also a consideration that for us as a company that is doing well during a COVID period, but we do get the JSS from the government. We feel that the best thing that we can do is actually to help to create more employment in Singapore, hire more Singaporeans particularly. And because of that, the number of staff have actually increased. Having said that, of course, we are hiring in anticipation that we actually have that requirement. A bit of hiring in anticipation of a potential success in the digital banking space. But some hiring as well, in consideration of the fact that our overall Singapore business have actually grown quite strongly. And, as I said, one of the consideration is the fact that into this climate, in terms of doing our part for society, I suppose one of the best thing we can do is really helping to create more employment. Our next question is, do you have plans to offer post-paid stockbroking services to be more competitive versus your peers? Yeah. Post-pay as in buy first and then pay later. Our general thinking is we do not expect to offer that service because we feel that if we do that, then it does actually weaken the overall model that we have on the stockbroking side of the business. If you look at our business, especially if you take ourselves in Singapore, we are actually still one of the smallest players in Singapore as far as stockbroking is concerned, because we are the newest or one of the newest. As a trading and clearing member, we are the newest. But we are able to actually have a robust model and be profitable for the stockbroking side of the business. And that comes from the ability to manage the business in a different way. Riding on our overall user base is one, but it is also the way we structure the overall revenue model, the way we try to ensure that we do not have to incur credit losses if the clients do not pay up. And also to ensure that we are earning net interest income rather than having to subsidize the client because the client pay late on the net interest income. So that overall thinking had to go together. As a result of that, we think that we are not keen to offer the post-paid stockbroking services. Our next question is on the digital bank. The question is, the strategy is to draw foreign currency deposits from overseas and lend to SMEs, and both seem to be very new markets with uncertain paths of success. In particular, is the lending in Singapore well banked already and limited risk return? Yeah. As far as digital banking is concerned, when we look at the digital banking space, we are clearly of the view that there is a huge amount of untapped opportunity. It is true that Singapore is already well-banked, as in almost everybody that wants a bank account has a bank account already. But I think that does not mean that there is no opportunity for newer players to come in. I think one example would actually be stockbroking industry. I think if you speak to most of the existing stockbrokers, they will be telling you stockbroking is a tough business because most companies in Singapore are losing money. But that does not mean there is no opportunity for a player to come in. With some more innovative model, they are able to provide a certain value that is not that commonly provided. We have actually demonstrated that we are able to do that, even as we are the newest player in Singapore as a trading and clearing member. If you look at the banking space, my view is actually the opportunity is even clearer than the stockbroking business, than the stockbroking industry. In my mind, actually, this is one area where there is a lot of untapped opportunity because we are talking about an environment where there has not been any new player in the industry for decades. If you are not already a bank, you cannot be a bank in the last few decades. That is the way the world has worked. In that kind of environment, then you start to lead to some kind of complacency among existing players. The existing bank may not be happy to hear this from me, but my view is that is how business environment works. If you do not have new competition coming in, then you will find that certain parts of the business services are not as good as what it can be. With that in mind, we are of the view that there is actually quite a substantial opportunity. We have spoken about the potential for the foreign market because, again, our view is that in the future financial services, fintech will become a more global business. You can set up a business in one country and tap into the world, the way, say, Netflix is actually doing. That opportunity clearly is not tapped into properly. If you look at the foreign currency market, I think the local banks today, they may offer multi-currency account deposit, but they are essentially paying zero interest rates for most or all the foreign currency. That clearly is not an environment whereby opportunities are not available anymore. I think there is quite a substantial opportunity. But within Singapore, the big long-term opportunity in my mind is looking at things from a global basis and then operating it in Singapore. But within Singapore itself, in terms of the opportunity that we see, even for Singaporeans and Singapore residents, we actually feel that there is quite a substantial opportunity for us. In our case, we feel that we are able to make a difference if we are successful in getting the digital banking license, because we already have a very established B2C and B2B channel. We feel that we will be able to tap into the strength of our B2C channel and B2B channel, that ecosystem that we already have, and launch a business where we can actually tap into that opportunity quite well. That is what I would say at this stage. If we are successful, then in the quarters ahead, we will give more details about the actual business there. Next question. The next question is on bonds. Can we have an update about the corporate bond business? Are customers able to trade bonds on all markets? What are the prospect of this product for iFAST? Trade bonds on all markets. Well, in the bonds business, there isn't actually a bonds exchange. In terms of what we're trying to do is we're trying to provide services that allow us to be as close to offering the services of an exchange as possible. Having said that, I think we are already offering bonds that are originated in different countries, whether it's originated in Singapore or Hong Kong or Malaysia, we are actually carrying all those. Investors are able to have access to all these different currency bonds. In that sense, those are already available. We have been seeing a steady growth in our bond business. Though I would say that we have yet to tap into the true potential that we believe is actually available in the bonds business. The next question is, this quarter has a historical high on cash out interest. Is this due to more funds from specific regions that resulted to the increase, specifically HK? If the question is with regard to whether it's cash coming from Hong Kong, and then looking for Singapore as a place to park, I would say, no, that's not the reason. We do have some business inflow coming from our existing client in Hong Kong or from the financial advisers who we work with in Hong Kong, who want to help their client to bring some money into Singapore. That number is there, but that's not something that have become that substantial. The main reason for the increase in cash that we have is especially as a result of the growth of our Singapore business, especially the FSM Singapore business, but the B2B side of business as well, that have actually been growing, and as a result of that, we actually have more clients who have parked money to a cash account as they wait to invest in the different investment products. Next question is, looking at the broader aspect, how likely are Q1 and Q2 results be fitting into Q3 or 4? There seems to be a lot of volatility, which iFAST is a beneficiary. Is that a fair thing to say? Yeah. I would say that, to try to predict the numbers for future quarters, then I think one of the key number to look at is still the AUA. AUA would still be a key measure and parameter that we as a group shoot for. Of course, the other related number will be the net inflow, as I mentioned. Net inflow will, of course, be the most important reason that will lead to higher AUA. Then as AUA increases, then the overall revenue that we actually have increases as well. We know that through the COVID period, in the last six months, I think AUA increased 11.2% in the six months. The reason is essentially because of net inflow. We are hopeful that net inflow will remain strong in the second half, and with AUA already at record high, I think that gives some indication of what to expect as far as the overall revenues are concerned. Yeah. Of course, from quarter to quarter and so on, there's some volatility that's seen in the market that may affect the volume in the stockbroking business. But I think in our case, while the market volatility is one factor that contribute to the increase in the contribution from stockbroking business, the non-recurring income. But I think a bigger factor for us, having the big increase in the overall account base that come in, for those who want to invest in stocks through us, that has actually increased quite substantially. I think that's the most important reason for the increase in the business for us. Most of these reasons are essentially sustainable. The next question is there any estimate on how much additional revenue boost we can expect from the CPF OA and SRS investment in stocks through FSMOne? Is it possible to give some estimates? My take is that there will be some increase, but I would not see that as an important factor in terms of increasing the overall business for us. I think as part of our concerted effort to improve the overall services that we have, these are just some of the efforts, some of the additional service that we introduce along the way to make sure we are complete. As to whether that would be a big impact on the overall business that we have in Singapore, in percentage term, I would say that will not be a strong percentage. We have the next question. Considering that you expect FX margin to be a significant contributor in the future, as you just said, do you have any plans of opening up other markets for stock purchase on FSMOne, for example, Australia, Japan, or any of the European markets? Because more of the markets you support, it will help more with the FX commission revenue. Yeah. Today we have U.S., and we have Hong Kong, and then we have Singapore. We have plans to add Malaysia. We have applied for a license. We are awaiting the approval. We hope we can be successful. If that's the case, I think that will be something that will help our Malaysian business further. If we are successful in the application, then for Singapore, we also consider introducing Malaysian Stocks at some point. We also have plans to add the Shanghai and Shenzhen Connect to our platform. That is a work in progress. As far as the other markets are concerned, it's something that we will evaluate along the way. I think what we would like to highlight is also that if you look at the overall investment environment, we think in terms of not just I think all the different market is one aspect, but I suppose that has to be balanced against what is truly the best way for investors to invest in those markets. If you want to invest in Japan, I suppose the consideration is to what extent will investors directly be buying into Japanese stocks versus buying into some unit trusts or ETF that invest in Japan, for instance. I think what we have found is that the take-up of investment in foreign stocks is the highest for U.S. I think U.S. is a very substantial part of our stockbroking business now. I think the next market will actually be Hong Kong, and eventually China. For the other market, I think that along the way, we'll assess whether it truly makes sense for us to actually add all those markets or will our investors, in fact, prefer to actually have exposure through some of the other investment instruments that we already carry, such as unit trusts and ETF and so on. Because I think in the end, investors need to understand the companies and be familiar with the companies that they invest in before they will buy directly into the stock market. U.S. companies are household names, the big tech firms and so on. These are household names, so Singaporeans or even people in other markets are basically very comfortable investing in U.S. names, but that may not be the case with Japanese names and Australian names and so on. Yeah, that's the way we look at it. Then we have our last question, which is on the digital bank. In earlier calls, if I can recall clearly, Mr. Lim mentioned SGD 60 or SGD 65 million is required to be raised. What ROI would you expect from this raise, and would it be EPS accretive? Yeah. If we are successful in our digital banking application, our share of the upfront capital that we intend to put in on day one is about SGD 80 million. I think I have mentioned before that that would be raised through a combination of some equity issuance as well as existing group resources, as well as some bank borrowing. I don't recall mentioning the SGD 60 or SGD 65 million. I think I was probably talking about a somewhat lower number. The exact number, of course, will be something that we'll plan on when we are eventually successful, maybe going into next year. Will it be EPS accretive? Certainly, we expect to be EPS accretive if you think in terms of going forward the next 3 years, 5 years. If you talk about it on the immediate basis in year one, may not be because we'll be at a build-up stage. If you talk about it over a longer period of time, then certainly we expect that this overall investment into the digital banking will be EPS accretive. We have come to the end of the Q&A session, yeah. Thank you everyone for attending our results briefing, and we have come to the end of the briefing. Yeah. Thanks, everyone. Thank you. Thank you.