• Budget 2019 aims to widen the scope of the sales and services tax (SST). On top of the proposed digital tax on imported consumer services (e.g. Spotify, Netflix, Steam) that will be implemented in 2020, there will also be a tax on digital services at the commercial level which will commence in Jan 2019. This is to ensure that local service providers and its foreign competitors are on a level playing field

• Digital tax at the commercial level could potentially impact companies that rely on foreign digital services such as web hosting, cloud storage, payment gateway and customer-relationship management (CRM). Amazon Web Services (AWS), Dropbox, Shopify and Zoho are a few of many foreign suppliers that provide digital services to local companies but do not have a physical presence in Malaysia.

• Operationally, N2N does not rely on foreign web hosting services such as AWS to run its network. The company hosts its servers via third-party local service providers. Instead, the concern may be N2N’s market data subscription (eg. consensus estimate, price quotes and volume) from a foreign supplier which could be subjected to digital tax. These data are featured on its TCPro Global trading platform.

• However, there are still many unanswered questions in regards to the framework and implementation of the digital tax system. For instance, foreign digital service providers may not be compelled to be registered under our local SST system, and there are also queries if the digital tax would be passed on to customers. Due to the ambiguity of this matter, the management is unable to quantify the impact until further clarification from the government in December 2018.

• Based on our back-of-the-envelope calculation, a 10% digital service tax on N2N’s market data subscription could potentially lower our FY19F net core profit by 2%, and subsequently reduce our fair value by 2 sen to RM1.48.

• Thanks to the accretive acquisition of AFE Solutions in FY17, we deem this to be negligible as N2N will potentially see greater savings from the termination of overlapping market data licences over the next 1-2 years upon expiry. Currently, market data subscription makes up circa 25% of the entire group’s cost of sales.

• We continue to like N2N due to: 1) its leading position in the online trading solution space; 2) the acquisition of AFE, which offers tremendous earnings accretion; and 3) the affordability of TCPro Global, which could help the group win market share from global competitors such as Bloomberg and Thomson Reuters.

• We maintain our BUY recommendation with an unchanged fair value of RM1.50/share.

Source: AmInvest Research - 19 Nov 2018