AMTD Digital Stock: China Fintech Tailwinds, Lacks Disclosure

The Chinese Fintech industry is predicted to grow with the Digital Assets vertical expected to lead the way with a whopping 50.7% growth expected in 2023 alone. The People’s Bank of China has even released its Fintech Development Plan for 2022-2025. AMTD Digital (NYSE: HKD) is a fintech software, investment and consulting company poised to capitalize on these trends across fintech growth and digital transformation in China. The company was founded in 2019 by Calvin Choi, a former UBS investment banker who is well connected to the financial industry.

AMTD Digital has its IPO in July 2022, and the share price rose by a whopping 21,000% by August. This gave the company a market cap of ~$300 billion making it bigger than companies like Coca-Cola and Costco. With revenues of just $25 million, you can imagine that this bubble didn’t last long and the stock price plummeted. It was believed that currency traders may have confused the HKD ticker symbol with the Hong Kong Dollar. Despite this rollercoaster ride, the company is quite unique, and so I’m going to break down the business model, financials and valuation. Let’s dive in.

Digital business model

AMTD Digital is a company that delivers digital services to customers mainly in the financial industry. The flagship software is called AMTD SpiderNet which it leverages across its four main services;

1. Digital financial services
2. Digital media, content and marketing
3. SpiderNet ecosystem solutions
4. Digital investments

The company delivers digital financial services to both private and corporate customers. The foundation of the business is its “SpiderNet” ecosystem that connects technology companies with Hong Kong-based banks and blue-chip companies. It has a number of digital financial licenses that it can leverage to help its clients. This can also be considered a competitive advantage as some economic licenses in Asia can sometimes be scarce.

The SpiderNet ecosystem also acts as a “superconnector” that can connect entrepreneurs and businesses with capital, technologies, and even mentorship. This service is essential for businesses that are going through a digital transformation and need advice.

The Digital Transformation industry is seeing a “quantum leap” in China. It is forecast to grow at an 18.9% compound annual growth rate between 2022 and 2025. Financial companies are leading this growth, but companies in the manufacturing industry are predicted to follow.

AMTD’s digital investment arm invests directly in businesses that can further complement the SpiderNet ecosystem. The business has established a S$50 million (Singapore dollar) fund with the Singapore FinTech Association.

Stable economy

As a Chinese company that has had a relatively recent IPO with a complex structure, the financial data is quite scarce. The latest SEC filing is dated August 30, 2022, but this is for the end of April 2022. Therefore, this is all we have to go on so far. Revenue from contracts with customers was HK$196,958 (Hong Kong Dollars in thousands) or $25.1 million (US Dollars). This was a rapid increase of 17% from HK$167,547 (thousands) or $21.4 million generated in 2020. However, year-over-year revenue has been fairly flat with only a slight increase.

Working our way down the income statement, one of the biggest expenses is an employee benefits expense of HK$72.4 million, which is quite significant. There is also a fairly high amount of legal and professional expenses of HK$ 23.5 million. The good news is that the company benefited from a significant increase in the fair value of its financial assets. This resulted in a jump from HK$70.3 million in 2021 to HK$132 million by 2022, up a rapid 88% year-on-year. This appears to have been a key factor in driving the operating profit for the year 2022 HK$201.4 million ($25.7 million), which was a rapid increase of 17% from HK$172 million ($21.9 million) in 2021. Amazingly, this was higher than the company’s entire revenue from contracts which was $25.1 million.

AMTD Digital had a solid balance sheet with $53 million in cash and cash equivalents and $396 million in total net assets by April 2022. With virtually no interest-bearing debt.

Post-IPO, umbrella holding company AMTD IDEA Group (AMTD) announced the “injection” of AMTD Assets into AMTD Digital. This business has a portfolio of properties with a fair value of around $500 million. Therefore, AMTD Digital now has a total net asset position of approximately $660 million.

Valuation?

Since the financial data is currently quite limited and the business model is quite unique, we will only look at a few simple valuations. As billionaire investor Warren Buffett would say “I’d rather be roughly right than exactly wrong”.

Here’s what we can estimate if the business has net assets of $660 million and a market cap of $5.64 billion. We can estimate the company value [EV] is ~$5 billion ($4.98 billion). Usually, when we calculate Enterprise Value, we just add debt and minus cash, but in this case I’ll use net assets.

Therefore, we can reason that the business is trading at an EV/Sales = $4.98 billion/$25.1 million = 262, which is not exactly “cheap” by any means. However, as the business generated pre-tax income of $28.7 million (as its investment portfolio increased), we can assume its EV/EBIT = $4.98 billion/$28.7 million = 173 which is better, but still not cheap.

Even if we assume that the business generated slightly higher profits +17% again in the year so far, this still won’t affect the valuation significantly.

Risks

Lack of disclosure

Lack of full financial disclosure is not uncommon among Chinese companies listed in the US. I don’t think the business is hiding anything personally, but we just don’t have the full financial data to really value the business. Looking at the data we have, the stock is extremely overvalued. But the business may have a few tricks up its sleeve through investment portfolio companies, so I wouldn’t rule them out entirely.

China risk/deletion

It seems really strange for the company to list on the New York Stock Exchange, when we are currently going through a time when the SEC has announced plans to delist Chinese companies if they do not comply with US accounting standards.

Final thoughts

AMTD Digital has a strong brand, best-in-class technology and many connections across China’s financial services industry. However, there is still a lack of full information from a financial perspective about the business, and the data we have says the stock is overvalued.