Investment Highlights

• We maintain our BUY recommendation on N2N Connect (N2N) with an unchanged forecasts and fair value of RM1.50/share, pegged to an FY19F PE of 25x.

• During our meeting with N2N yesterday, management further detailed its plans with regard to a potential collaboration with SBI Holdings (SBI). One of the key considerations entails the development of a blockchain-enabled platform to digitise the trading of multiple financial instruments in one venue, including equities, derivatives, currencies, etc. The main benefits of the platform are: 1) The tracing of asset ownership would be instantaneous rather than T+3 under the current system. Blockchain essentially eliminates the need to go through a central depository system (CDS) to keep track of ownership changes due to its peer-to-peer working mechanisms. 2) The platform would allow fractional shares trading. It is a system whereby a fraction of a share can be bought or sold, which increases the affordability of highly priced securities.

• We believe this would potentially revolutionise the current trading practices akin to how electronic trading platforms superseded trading on the exchange floor. In terms of technological expertise, SBI has already started the ball rolling with the launch of Japan’s first bank-backed cryptocurrency exchange, VCTRADE earlier this month. With modifications, the technology can be applied to financial instruments other than currencies. N2N’s main role now is to establish a legal framework for the technology applications and obtain the green light from respective regulators for deployment. Management has indicated that the deployment could begin as early as 2019.

• Back to N2N’s bread and butter, near-term earnings are expected to be driven by an industry-wide replacement of back office systems (BOS). We understand that most brokers’ BOS are 15-25 years old and a replacement is long overdue. The increasing complexity of trading procedures, such as the recent introduction of short-selling, requires a more advanced BOS, thereby necessitating a system upgrade. N2N is currently among 4 bidders tendering for the work to replace BOS for brokers. There are currently 28 brokers in Malaysia, and a traditional BOS typically costs RM8-12mil.

• We reiterate our belief that a Main Market transfer is in the cards given that N2N’s profit track record adequately satisfies Bursa Malaysia's “profit test” requirement. The time frame for the exercise is estimated at about 6 months.

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

Source: AmInvest Research - 28 Jun 2018