• iFast's 2Q20 results above expectations; growth momentum intact.
• Stronger growth for B2C vs B2B segment; stocks and ETFs growing at faster pace.
• Expect 9-11% increase in operating expenses in 2022 if awarded digital bank licence.
• Higher AUA growth assumption and non-recurring contribution; maintain BUY with higher S$2.35 Target Price.

Growth Momentum Intact; Beneficiary of Acceleration of Fintech Services Adoption Pace

• iFast Corporation (SGX:AIY)'s 2Q20 results is a testament of the growing adoption of Fintech services. Net earnings surged 89% y-o-y on 25.8% rise in revenue. AUA grew 11.5% YTD.
• Going forward, we continue to expect the acceleration of digital adoption in the wealth management industry to be a positive factor underpinning the growth prospects of iFast. The award of the virtual bank licence, if successful, will add another revenue stream of cash management for the group.
• Despite the increase in guidance for operating expenses, we expect the increase in revenue to more than offset the pace of rising costs, given the scalable business model.

IFast's 2Q20 Results Above Expectations; Net Profit Surged 89.3% Y-o-y

• iFast reported 2Q20 net profit of S$4.5m, up 89.3% y-o-y. This was achieved on the back of a 25.8% y-o-y increase in gross revenue to S$38.6m.
• For 1H20, iFast's net profit grew 107% y-o-y supported by a 23.1% increase in revenue, above expectations. 2Q20 net profit accounts for 38% of our forecast while that for 1H20 makes up 68%.
• A second interim DPS of 0.75 Scts was declared, similar to 2Q19.

Stronger growth for B2C vs B2B segment.

• iFast's B2C segment grew at a faster rate of 46.1% y-o-y vs 9.6% for the B2B in terms of net revenue. The strong growth in the B2C division was due mainly to significant increases in transaction fees resulting from increased investment subscription especially in exchange-traded funds (ETFs) and stocks, and service fees arising from the provision of currency conversion from higher clients’ trading volume of ETFs and stocks listed on foreign exchanges.
• The slower growth rate for the B2B segment was partly due to the impact of the COVID-19 circuit breaker measures implemented in 2Q20.
• B2C segment accounted for 38% of the net revenue in 2Q20, vs 31% in 2Q19.
• In terms of AUA, B2C division grew 27.5% y-o-y in 2Q20, vs 13.3% for the B2B segment.

Improvement in margins despite higher operating expenses, helped by higher other income.

• Total operating expenses increased by 5% q-o-q and 14% y-o-y in 2Q20, mainly due to the further enhancement in platform capabilities and also higher staff costs. Together with an increase in other income mainly due to gains from investment in financial assets and support grant from the government, net margins improved to 11.7% vs 9.4% in 1Q20.
• China continues to be loss-making, incurred net loss of S$1.2m, similar to 1Q20.

IFast Expect Higher Operating Expenses in 2020

• Given the strong performance in 1H20 and the positive underlying trends that the Group is currently seeing, iFast now expects the full-year 2020 operating expenses to be between S$63.4m and S$64.9m. vs earlier guidance of between S$59.9m and S$61.4m, up 5.8%. This reflects increases in IT infrastructure costs, marketing costs, performance-based remunerations and additional headcounts in Singapore.

Continued Growth in AUA

• AUA grew 11.5% YTD and 23.4% y-o-y to S$11.15bn as at 30 June 2020. Singapore registered strong growth, with a 67% contribution to total AUA, vs 65.5% in 1Q20. Net inflows for 1H20 of S$1.25bn (S$0.59bn in 1Q20 and S$0.66bn in 2Q20) has already surpassed the S$0.98bn in 2019.

Stocks and ETFs Growing at a Faster Pace, Leading to Higher Non-recurring Income

• In terms of product breakdown, contribution to AUA from stocks and ETFs increased to 9.5% of total AUA, vs 7.4% in 1Q20 and 5% in 2Q19. This has led to a higher proportion of non-recurring net revenue of 30% in 2Q20, vs 19% in 2Q19.
• Going forward, we expect the 30:70 non-recurring vs recurring net revenue trend to continue.

Pursuing Digital Bank Licence, Expect 9-11% Increase in Operating Expenses in 2022 If Awarded

• iFast is among the nine digital wholesale bank applicants shortlisted to progress to the next stage of assessment. The licence would be awarded by the end of this year. Securing the virtual bank licence would further enhance iFast’s business model. A digital banking licence will allow the group to broaden its services to include the ability to provide cash management and related wealth management services. The lending capabilities would be another additional revenue stream for the group.
• If the digital bank licence application is successful, iFast expects to launch its digital banking services by the end of 2021. Based on estimates, the digital bank launch is expected to add between 9-11% to iFast’s operating expenses in 2022. The estimated percentage is based on the Group’s effective shareholding of 65% in the proposed digital bank. About S$80m capital is needed, to be funded via a combination of cash, equity and debt financing.
• To recap, in December last year, iFast led a consortium comprising Yillion Group and Hande Group with a 65% stake to apply for a digital wholesale bank licence in Singapore.
• Yillion Group operates one of the four digital banks in China and has Hong Kong-listed Meituan Dianping as one of its key shareholders. Hande Group is a leading Fintech company in China, founded by Dr Cao Tong, the former President of Webank (微众银行), China’s first digital bank.

Beneficiary of Increased Digital Adoption in the Wealth Management Industry

• In the medium-to-long term, the COVID-19 crisis is expected to lead to an acceleration in the pace of digitalisation of financial services, and the pace of adoption of Fintech services by consumers. Being a platform provider, iFast is expected to benefit from this trend. An acceleration of digital adoption in the wealth management industry will continue to be a positive factor underpinning the growth prospects of iFast.

Higher AUA Growth Assumption and Non-recurring Contribution

• We now project AUA to grow 12% in FY20F and FY21F, vs our earlier projection of an 8% growth. YTD AUA grew 11.5%. We have also pencilled in higher contribution from the non-recurring revenue segment.
• Non-recurring revenues are mainly derived from transaction fees from stocks and ETF, administrative service fees and also IT solution fee from provision of IT Fintech solutions to business partners.

Raised IFast's FY20F/FY21F Earnings by 41%/44%, Maintain BUY With Higher Target Price

• Overall, net earnings for FY20F and FY21F are raised by 41% and 44% respectively. On the back of the higher earnings, our Target Price is raised to S$2.35 (previously S$1.27), still based on the Dividend Discount Model (DDM) valuation methodology, given that it is a cash-led business.
• Maintain BUY on iFast.

Source: DBS Research - 24 Jul 2020