This article first appeared in The Edge Malaysia Weekly on February 25, 2019 - March 3, 2019

AS most companies put their expansion plans on hold because of slowing global growth and trade protectionism, capital market trading platform provider N2N Connect Bhd is striking while the iron is hot.

Managing director Andrew Tiang Boon Hwa believes now is the time to capitalise on the operation of the next big growth driver for the company — a digital assets platform in Malaysia.

The push for a digital trading platform comes as capital markets look to blockchain technology for a seamless trading experience.

It also follows on the heels of an amendment to the Guidelines on Recognised Markets by the Securities Commission Malaysia (SC) to introduce new requirements for electronic platforms that facilitate the trading of digital assets.

Under the revised guidelines, any person who is interested in operating a digital assets platform is required to seek SC’s approval.

“We are now preparing to submit our bid to operate a digital assets platform before the March 1 deadline given by the SC. We believe we are in a good position to make a pitch for a licence. As we have a full suite of solutions readily available, we will not need to develop it from scratch, and we are able to leverage the expertise of our partner, SBI [Holdings Inc],” Tiang tells The Edge.

Founded in Japan, SBI established the world’s first internet-based financial ecosystem to undertake a broad range of financial services, including securities, banking and insurance. Its subsidiary, SBI Japannext Co Ltd, is the operator of a proprietary trading system that offers after-hours and daytime trading on the Japanese stock market.

“What we intend to do is to form an exchange for securitised tokens,” Tiang explains.

“For example, in an initial public offering (IPO) in a digital environment, instead of issuing shares, the public would be investing in a digital contract or token, which allows them to store data and ownership details [of companies] in a digital form. This would aid companies that want to raise funds, but do not have the track record for an IPO in a conventional exchange.”

Via a private placement, SBI emerged as a substantial shareholder of N2N last September, and the Japanese firm has since upped its stake to 20.36%.

After SBI Japannext bought a further 11.65% stake in N2N, the SBI group replaced Tiang as N2N’s largest shareholder with a 32.01% stake.

Tiang believes that giving up majority shareholding in the company he founded 19 years ago was a sacrifice in the best interest of the company even though it reduced his stake to 22.68%.

“With SBI coming in, N2N can expand rapidly. So, if we have a smaller piece of a bigger pie, it is worth more than a bigger piece of a smaller pie,” he says.

“They being a major shareholder does not disrupt our operations as we are still given management control of N2N’s businesses.”

The digital exchange would be an extension of N2N’s Asian Trading Hub, a platform to facilitate cross-border trading for brokers in the eight countries that N2N operates in.

“The Asia Trading Hub allows brokers to increase their revenue stream by executing more cross-border trades. Naturally, any broker who uses our platforms will get [regional access] to other brokers, so it saves them a lot of time,” says Tiang.

“Currently, we are rolling out phase one of the Asia Trading Hub, which connects Singapore, Malaysia and Hong Kong. The machines in Malaysia and Singapore are ready. Once Hong Kong moves to the new machines, we will be able to link up the three countries. We hope to complete that by the end of this quarter.

“Phase two of the Asia Trading Hub will link up the Philippines, Thailand and Indonesia, while Vietnam and Taiwan will be the final phase.”

Another new source of income for the group is the replacement of legacy back office systems by brokers.

“Brokers in the region, including Malaysia, will be looking to change their back office systems as a lot of the systems are customised to domestic operations, and that has become a bottleneck as it restricts regional trading,” says Tiang.

“Many of these brokers are actually working with us now to convert their back office systems to be able to support, for example, multi-currency and multi-market trades, and that is a new line of business for us.”

N2N currently serves 70% of Malaysian brokerages and around 40% of brokerages in Hong Kong.

“Two years ago, Malaysia made up 85% of our revenue while the rest were from overseas markets. Today, two thirds of N2N’s revenue is from overseas markets, and we believe that in the next two years, three quarters of our revenue will be derived from there,” says Tiang.

“Competition in Hong Kong is tough with 15 to 20 solutions providers, so they are much more fragmented compared with Malaysia. However, when we first started out in Malaysia, there were 13 other players besides us and over the years, the market has consolidated and is down to just two players. I think the strategy in Hong Kong will be similar, whereby we will orchestrate the force of consolidation. Being a Malaysian company, we definitely have a cost advantage to do so.”

‘It would take a tsunami to hit us’

Over the past five years, N2N has seen double-digit percentage growth in its net profit, a trend Tiang expects to continue on the back of a combination of its business model and the new opportunities in hand.

The company derives its revenue from a fixed monthly management fee for its managed services, and additional income is derived from fees charged for every matched trade order executed via its online trading system. More than 90% of N2N’s revenue stream is recurring.

“Our business model and foundation are strong. The moment we go regional, we have a hedge in the sense that even if the local market does not do well, the impact is small as we are spread out across the region,” says Tiang.

“Our revenue model consists of subscriptions, managed services and transaction fees, and it is a robust model. For example, when the market is bad, there are fewer transactions, but we still have our monthly management fees and subscription fees.

“If two brokers merge, we may have a reduction in monthly fee, but there would be more transactions coming through, hence higher transaction fees. So, that is why the model is very robust ... it would take a big tsunami to hit us.”

For the nine months ended Sept 30, 2018, N2N reported a net profit of RM10.29 million, 45% lower than that a year ago, notwithstanding a 15.3% increase in revenue to RM80.25 million.

Its lower profitability was mainly due to unrealised foreign exchange losses and higher taxes. N2N’s core profit before the extraordinary items grew 37% to RM14.32 million.

The group’s net cash position sans its short-term borrowings stood at RM85.85 million as at Sept 30 last year — a comfortable war chest for acquisition activities. N2N’s last major acquisition was in March 2017, when it acquired AFE Solutions Ltd for US$20.6 million.

Analysts like its prospects. All three research houses covering the stock have a “buy” call, with an average target price of RM1.28, an upside of 36% to N2N’s closing price of 94 sen last Thursday. The company’s market capitalisation is RM526.74 million.

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