• Net revenue and active clients rose 26% and 24% YoY respectively in 1H18
• A platform business with superior economics through the network
• Social trading is an emerging portfolio advisor and manager with higher transparency, better customer experience and accessibility to the masses.
• Initiate with a BUY and target px of S$0.22. This is based on 6x price/sales of FY18e.

Company Background

Founded in 2009, ayondo is both a platform for social trading and technology solutions provider to other brokers. It has two groups of customers: a) B2C customers that wish to trade in a self-directed manner or replicate the portfolios of other top traders (called social trading). Products available include stock indices, commodities, forex and cryptocurrencies; b) B2B customers are traditional online or mobile brokers wishing to gain access to ayondo platform, products and technology (referred to as white labelling). All ayondo products are contracts for difference (CFD). ayondo customers come from 60 countries. Its largest are from Germany, UK and Spain. It was listed on SGX in Mar2018 at S$0.26.

Investment Merits

ayondo has a platform business that is enjoying fast growth as the concept of social trading as an alternative investment class takes off. It has an opportunity to be a fintech disruptor of traditional online brokerage and wealth management.

1. Superior economics of their platform business. Platforms offer an attractive and superior business model. They erect huge barriers to entry through the network effect. As the number of social trading followers increase on ayondo’s platform, it will attract even more top traders and vice versa. This interaction sets up a virtuous cycle of value creation and linkages on both sides of the network. This can differentiate and protect a business.
2. Fast growth underway. In 1H18, revenue rose 26% YoY. Since 2014, revenue has been up five-fold. We expect future growth to come from new geographical markets, greater awareness of social trading, new products and more white-label B2B contracts.
3. Emerging alternative asset manager. Benefits of social trading over traditional asset-management solutions are several: i) fees are transparent and better linked to returns; ii) client engagement and experience are higher as all investment details are provided real-time; iii) bespoke solutions give investors access to diverse strategies at their preferred risk tolerance; iv) accessibility to an underserved mass market given a reduced minimum investment threshold.

We initiate coverage on ayondo with a BUY and a target price of S$0.22. We value ayondo using price to sales with a discounted benchmark against the listed fintech universe. Of greater significance to us is the potential exponential growth in the value of the network, which can be measured by the number of active users. Revenue can lag the network value.  Risk factors include negative operating cash-flows, reliance of customer BUX BV, Brexit, potential trading book losses and competition (page 8).

Background

The origins of ayondo can be traced back to 2009. Thomas Winkler and Robert Lempka founded the company. In the early years, ayondo was an investment company targeting early-stage fintechs. It was from 2013 onwards that they developed and focused more on white labelling their trading technology and social trading platform.

ayondo provides a platform for users to conduct trades by following top traders (i.e. social trading) under their WeTrade platform. Users that transact independently can use the self-directed trading called TradeHub. All the products traded on both platforms are CFDs. ayondo offers a wide range of instruments that can be traded with CFDs, including stock indices, foreign currency, commodities, equities, fixed income, ETFs and cryptocurrencies. Stock indexes and commodities are the most popular products.

ayondo has licenses in two jurisdictions namely UK (FCA*) and Germany (BaFin**). It also has offices in Singapore, Spain and Switzerland. The BaFin license allows ayondo to provide financial services in Germany including portfolio management license.

Figure 2: The 2-main platforms are WeTrade and TradeHub

Source: PSR

ayondo has 2 types of customers, business to consumer (B2C) and technology partner to business-to-business (B2B). The largest market for its B2C offerings are in Germany and UK. Spain is expected to be the next driver of growth. B2B clients are primarily brokerages and banks, in Europe and Asia. For the B2B business, ayondo is the technology provider for CFD products (called white labelling). When an end-client of a B2B broker executes a trade, this trade will flow into and be processed by the ayondo trading engine.

ayondo was listed on the SGX on 26Mar18. The IPO price was 26 cents.

*Financial Conduct Authority 730 K license to provide CFD brokerage services and carry out trade execution for trades generated by clients.

**Bundesanstalt fuer Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority).

How ayondo makes money? (Details in Appendix 1)

ayondo earns revenue from CFD spreads. Whenever a customer makes a transaction, ayondo will immediately be on the opposite side of the trade. ayondo then has 3 options:

1. hedge out the position and pass the trade to another liquidity provider, such as, banks and thus, earn a smaller spread;
2. keep or warehouse the position in their internal trading book; 
3. offset or squaring off the position with a trade on the opposing side.

ayondo will also earn financing income because CFD products are usually purchased on margin. ayondo can charge interest for the overnight positions.

Types of revenue

We can separate ayondo revenues into 4 segments:

Figure 3: ayondo enjoys 4-types of revenue streams (as at 9M17)

Source: Prospectus

1. Self-directed (12% of revenue): Clients come into the platform (called TradeHub) and conduct trades based on their own investment decisions. Similar to any retail clients that undertake their own DIY execution. TradeHub is a mobile-only platform. Only available in UK and Ireland. It accounted for 50% of ayondo’s revenue in 2014, before the introduction of social trading and B2B partners. Self-directed was 12% of sales (9MSep17).

2. Casual (36% of revenue): This is the largest white-label collaboration with key partner BUX BV.  All revenues from casual comes from BUX BV, which specialises in trading applications through mobile. Transactions from BUX BV are processed through the TradeHub platform. ayondo charges BUX BV commission* for trades handled. BUX BV became a partner in September 2014. ayondo on-board all the clients, performs anti-money laundering checks, client verification/suitability and trade execution. BUX serves 1mn users with a presence in UK, Germany, Netherlands and Italy. As at Sep17, it was 2/3 of ayondo active clients (or 28k). BUX BV clients do not have access to the social trading platform yet. Casual was 36% of sales (9MSep17).

Figure 4: Lowest revenue per active client comes from casual

Source: Prospectus

*commission rates depend on products traded:  cryptocurrencies 22bps, commodities 9bps, stock indices 6.5bps, currencies 1.8bps

3. Introduced (29% of revenue): ayondo will white label their TradeHub platform to B2B partners. For instance, if Broker A wants a CFD platform and rather than build one on its own, it can tap unto TradeHub trading system through a white label agreement. Clients of Broker A, when trading CFDs, will not know this is actually a TradeHub system. ayondo has 25 active B2B partners. Unlike the BUX BV arrangement, a B2B client like KGI contracts directly with end users and undertakes the credit risk. Introduced was 29% of sales (9MSep17).

Figure 5: ayondo B2B customers

Source: Prospectus

4. Social Trading (23% of revenue). Allows clients (or called followers) to follow the trading strategies of other traders and copy it automatically. Social trading is conducted through the WeTrade platform. Followers can track the track record, past trades, risk metrics, number of followers, investment strategies and numerous other data regarding the past performance of the trader (Appendix 4). Followers do not transfer capital to traders they follow. Trader turn into a quasi-portfolio manager. Anyone can become a Top Trader with their own profile and details of past performance. Top traders can be remunerated on a volume or performance metric, depending on their respective grade. There are more than 6,000 active clients on WeTrade from more than 50 countries. Social trading was 23% of sales (9MSep17).

Figure 6: Top Traders compensated like fund managers^#

Source: Prospectus

# Top Traders can elect compensation between volume (% share of spread income generated by the follower) or management fee (1% p.a.) and performance-based remuneration (25% performance fee on high watermark).

Source: Phillip Capital Research - 30 Aug 2018