INITIATE COVERAGE

www.bursamids.com
Wednesday, September 26, 2018
Sector: Technology
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

N2N Connect Berhad TP: RM1.70 (+33.9%)

Last Traded: RM1.27
Poised for Further Growth via Asia Trading Hub BUY
Wilson Loo, CFA Tel: +603-2167 9606 wilsonloo@ta.com.my www.taonline.com.my

We initiate coverage on N2N Connect Bhd, the largest Asian based financial Stock Return Information

information and trading platform provider, with a BUY recommendation and TP KLCI 1,794.47
Expected Share Price Return (%) 33.9
of RM1.70/share. Key highlights include: Expected Dividend Return (%) 0.8
Expected Total Return (%) 34.7
Largest Asian Based Financial Information and Trading Platform
Provider. N2N operates in 8 countries across Asia with a brokerage network of Share Information
over 100 panel brokers and ~20,000 information and trading terminals deployed. Bloomberg Code N2N MK
Stock Code 0108
Regional Ambitions. N2N is in the midst of forming an Asia Trading Hub that Listing Ace Market

will see all its panel brokers connected via a single financial network so as to Issued Share (mn) 569.5
Market Cap (RMmn) 723.2
facilitate cross border trading seamlessly across the related exchanges and at
52-wk Hi/Lo (RM) 1.37/0.67
lower cost. This will eventually create a new revenue stream for the group. Estimated Free Float (%) 44.3
Beta (x) 0.5
Strategic Partnerships. N2N is currently in talks with its strategic and 3-Month Average Volume ('000) 1609.6
substantial shareholder SBI Holdings Inc, a financial conglomerate in Japan, to enter
into business alliances that will catalyse the formation of the Asia Trading Hub. Top 3 Shareholders (%)
N2N Connect Holdings Sdn Bhd 27.6
M&A. Backed by a robust net cash pile of RM124.4mn (2QFY18), N2N is in a SBI Holdings Inc 20.0
Nikkei Inc 5.3
comfortable position to pursue merger and acquisition. It has been exploring
Quick Corp 5.3
similar businesses abroad and even FinTech start-ups.
Share Performance (%)
Robust Earnings Growth. For FY18/FY19/FY20, we project earnings growth of Price Change N2N FBM KLCI
39.7%/22.5%/13.9% (CAGR: 24.9%) underpinned by: 1) full year contributions from 1 mth 19.8 (0.8)

AFE, 2) traction with the Asia Trading Hub, and 3) cost synergies from the 3 mth 3.3 7.1
12 mth 33.0 1.6
harmonisation of TC and AFE’s suite of products and services.
Financial Info
Deserves a Rich Multiple. In all, we opine that our target PE of 35.0x is
FY18 FY19
warranted premised on N2N’s 1) double-digit earnings growth prospects, 2) new Debt to Equity Ratio 0.1 0.0
revenue stream arising from the formation of the Asia Trading Hub, 3) synergies ROA (%) 7.3 8.2

from strategic partnerships and merger and acquisition, and 4) the latent potential ROE (%) 9.5 9.3
NTA/Share (RM) 0.4 0.4
from the government’s plans to introduce an Alternative Trading System. Price/NTA (x) 3.4 3.1

Earnings Summary (12-Mth) Share Price relative to the FBMKLCI

FYE Dec (RM mn') FY16 FY17 FY18F FY19F FY20F
Revenue 41.8 97.3 107.4 114.6 122.3
EBITDA 18.7 27.3 34.6 37.9 41.0
Depreciation & amortisation (7.4) (10.3) (11.1) (10.7) (10.3)
Net finance cost 0.5 0.3 (0.0) 1.9 2.5
EI (0.0) 7.8 (5.3) 0.0 0.0
PBT 11.8 25.2 18.1 29.1 33.1
Taxation (0.1) (1.4) (1.1) (1.7) (2.0)
MI 0.1 0.2 0.2 0.3 0.3
Core PAT (-MI) 11.8 16.1 22.6 27.6 31.5
Source: Bloomberg
EPS (sen) 2.1 2.8 4.0 4.9 5.5
EPS growth (%) 28.4 37.3 39.7 22.5 13.9
PER (x) 61.5 44.8 32.1 26.2 23.0
DPS (sen) 0.8 0.8 2.8 1.0 1.1
Dividend yield (%) 0.8 0.8 2.1 0.8 0.9

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Background
N2N Connect Bhd (N2N) is principally involved in the research and development
of software packages and provision of design, programming and consultancy
services and related activities catered to the financial securities industry. Its
products and services are all-inclusive, ranging from online trading
portals to hosting and managed network services, and mainly engaged by
investment banks and brokerages to enable their end-users to access real time
financial information and trade cross border (i.e., in various exchanges) and multi
asset classes (i.e., bonds, commodities, derivatives, equities, options and FX).
Today, the group has a panel of over 100 brokers in 8 countries across Asia with
its key markets being Hong Kong and Malaysia and smaller markets comprising
Singapore, Philippines, Indonesia, Vietnam, Macau and Thailand. Its mission is to be
the leading one stop innovative application service provider (ASP) to the financial
industry locally, regionally and globally. Attesting to its capabilities, the group was
awarded Multimedia Super Corridor status on 1 July 2004 and in 2015, won ‘The
Best Shared Service Operation in Outsourcing Malaysia 2015’.

Figure 1: Group Structure

Source: Company, TA Securities

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Table 1: Group Details

Company Country Stake (%) Principal Activities

N2N Connect Pte Ltd Singapore 100 Provide consultancy services, sales, marketing and related activities.

Research and development of software packages and provision of

N2N Global Solutions Sdn Bhd Malaysia 100
design, programming, consultancy services and related services.
Provision of managed network services, consultancy services, sales,
NGN Connection Sdn Bhd Malaysia 100
marketing and related activities.

N2N Advanced Learning Sdn Bhd Malaysia 100 Provision of professional training for remisiers and related fields.

Provision of on-line stock market information, on-line securities

N2N-AFE (Hong Kong) Ltd
Hermes Bos Sdn Bhd
Global Fin Net Sdn Bhd
N2N Connect Australia Pty Ltd
Hong Kong 100 trading systems and business solutions, and associated sales and
maintenance services on microcomputers.
Researcher and developer of software packages and provider of
Malaysia 70
design, programming, consultancy services and related activities.
Provision of data center, system integration, managed network
Malaysia 100
services and related services.
Researcher and developer of software packages and provider of
Australia 100
design, programming, consultancy services and related activities.

NBM Systems Design Ltd Hong Kong 100 Inactive.

The Stock Market Channel Ltd Hong Kong 100 Investment holding.

Sale of computer hardware and software and provision of online

The Stock Market Channel (Macau) Ltd Macau 100
financial information in Macau.
Source: Company, TA Securities

History
N2N’s history dates back to 2000 when its 6 founders, namely Tiang Boon Hwa,
Lai Su Ping, Chua Tiong Hoong, Lim Kok Tean, Low Kah Leong and Chan See Wai,
each possessing extensive experience in e-commerce, marketing and software
development set out to reinvigorate Malaysia’s online stock trading landscape. Back
then, the online stock trading services offered by most local stockbroking
companies were limited relative to regional markets i.e., to basic stock prices and
order execution, lacking the information and tools to facilitate investors in making
informed investment decisions and portfolio management. Moreover, at that point
in time, e-commerce was a nascent and cost-effective avenue for stockbroking
companies to broaden their reach in the face of challenges from thinning
brokerage fees, a smaller remisier pool and lower transactions post the 1997 Asian
financial crisis. Since then, the group had successfully developed and rolled-out a
comprehensive suite of online trading products and services for the e-commerce
and m-commerce market. eBrokerConnectTM is one of its very first e-commerce
solution that was deployed by stockbroking companies to facilitate customers in
online trading, featuring real-time stock prices, research, newsfeed and portfolio
monitoring, among others. It was launched in 2001 with JF Apex Securities Bhd.
Further down the road in 2012, the group implemented TraderConnectTM Pro, a
trading platform with Direct Market Access capability. It replaced the aging Broker
Front End system that served the securities industry for close to 20 years.

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Table 2: Key Milestones

Year Event

• Implemented TraderConnectTM Pro (TC Pro), a trading platform to replace the securities industry’s aging Broker Front End system.
2012 • Engaged by the Philippine Stock Exchange to provide online trading solutions and Direct Market Access to trading participants.
• Selected as preferred regional trading platform provider of CIMB Securities (Singapore) Pte Ltd.

• Formed a strategic partnership with Nikkei Inc and its subsidiary Quick Corp taking a 28% investment stake in N2N.
2014 • Collaboration with Nikkei Inc and Quick Corp will see the introduction of new services in Japan and across Asia.
• Voted as one of the Most Innovative ICT Companies in The Top 10 of Malaysia 2014 Award.

• Won ‘The Best Shared Service Operation in Outsourcing Malaysia 2015’.

• Awarded ISO27001:2013 Certification for best practice framework in information security management system.
2015
• Launched TCProGlobal that incorporated Nikkei’s Asian news and fundamental reporting system and Quick’s advance analytic.
• Obtained certification of conformance from Australia Stock Exchange, Chi-X and Hong Kong Stock Exchange.

2016 • Expanded presence in Philippines via the provision of direct manage services to a leading broker.

• Rolled out new front-end systems i.e., TCProGlobal, TCPlus, TCMobile for smartphone and tablet.
2017 • Rolled out BMS Plus, a broker management system, and low latency OMS Pro, an order management and routing system.
• Acquired a 100% stake in AFE Solutions Ltd, a financial data and trading solutions provider in Hong Kong, Macau and Vietnam.

• Acquired a 28% equity stake in OurMoneyMarket Holdings Pty Ltd, Australia’s first hybrid marketplace lender.
2018
• Completed a 10% private placement to SBI Holdings Inc, a financial conglomerate in Japan.

Source: Company, TA Securities

Key Management
N2N is spearheaded by its co-founder and managing director Tiang Boon Hwa.
He graduated from City and Guilds of London Institute, United Kingdom in 1982
with a Diploma in Computer Studies and possesses over 30 years of experience in
information technology and business operations. In the early days of his career, he
was a programmer and consultant at SGV Goh Tan Pte Ltd, an accounting cum
software house. Later on, he held more senior roles which included, heading the
regional information technology audit division at Citibank NA South Asia, account
manager and managing director at Computer Associates Pte Ltd, regional director
at i2 Technologies Pte Ltd to establish its presence in several countries across
Asia, and setting up the Asia Development Centre at Exact Software Asia Sdn Bhd.
In his current capacity, he is responsible for forging global strategic partnerships,
merger and acquisition, the coaching of next generation leadership building, and
the establishment of the Asia Trading Hub that covers 12 Asian countries with
trading links extending to brokers and exchanges in Europe, Middle East and the
US.
Apart from Tiang Boon Hwa, 4 of the group’s other co-founders also hold key
senior management positions within the group. This includes Lai Su Ping as non-
independent executive director overseeing corporate communication, human
resources and office administration, Chua Tiong Hoong as operation director
and both Lim Kok Tean and Chan See Wai as technical director. The rest of
the team is represented by Low Kok Keong as Network Director, Ang Chun
Hsiung as Senior Product Manager, Lai Wei Suen as Regional Head, Junior Loh as
Head of Sales, Jimmy Tan Kian Keong as Business Process Control Manager, Danny
Lee Tuck Lon as Head of Legal, Li Ka Fuk as Manager for Products and Solutions
Consultancy and Tang Wan Pang as Manager for Technical Operations.

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Substantial Shareholders
Both Tiang Boon Hwa and Lai Su Ping are husband and wife, and also substantial
holders respectively with an indirect stake of 30.7% and 30.6% by virtue of their
interest in N2N Connect Holdings Sdn Bhd (27.6%). Other substantial
shareholders of N2N include SBI Holdings Inc (SBI), Nikkei Inc and Quick Corp, all
of which are based in Japan, respectively with stakes of 20.0%, 5.3% and 5.3%. Note
that SBI had recently emerged as a shareholder following a 10% private placement
in June 2018 and subsequently, increased its stake via the acquisition of shares
from Nikkei Inc and Quick Corp in September 2018.

A Comprehensive Suite of Products and Services

N2N’s products and services cater to the financial securities industry.
They are all-inclusive, ranging from online trading portals to hosting and managed
network services, and mainly engaged by investment banks and brokerages to
enable their end-users to access real time financial information and trade cross
border (i.e., in various exchanges) and multi asset classes (i.e., bonds, commodities,
derivatives, equities, options and FX). Currently, the group has 2 suites of
products and services, respectively under the ‘TC’ and ‘AFE’ brand. Both
suites offer similar functionality (i.e., financial information, trading and settlement)
but differ in terms of architecture as they originated from different sources. The
TC suite which is marketed in Malaysia, Singapore, Philippines and Indonesia was
mostly developed in-house. On the other hand, the AFE suite which is marketed in
Hong Kong, Vietnam and Macau, was adopted following the group’s acquisition of
N2N-AFE (Hong Kong) Ltd (AFE) in 2017 for USD20.9mn (RM93.3mn).
Notwithstanding, efforts are ongoing to realise synergies via the
harmonisation of both suite of products and services with the exercise
expected to complete by the end of 2018. Among others, TCProGlobal is
the group’s flagship and award-winning financial information and trading platform
which has been well received by the market due to its comprehensiveness and
user friendliness. It incorporates Nikkei Asian Review’s news and fundamental
reporting system and Quick Corp’s advance analytic and fundamentals from Capital
IQ, Factsets and Thomson Reuters. Meanwhile, TCBOS is a new back office
settlement system that was rolled out this year. Prospects for the system is
encouraging as brokerages are keen on replacing their legacy back office system
that is costly to maintain and trying to keep up with evolving business demands. As
for AFE, among its key products include the AFE Stock Channel, a financial
information terminal deployed with over 250 banks and brokerages in Hong Kong.

Figure 2: TCProGlobal (Financial Info & Trading System) Figure 3: AFE Stock Channel (Financial Info. Terminal)

Source: Company, TA Securities Source: Company, TA Securities

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Table 3: N2N and AFE’s Products and Services

N2N
• TCProGlobal (Financial Information & Trading System)
• TCPlus (Financial Information & Trading System)
• TCMobile (Financial Information & Trading System)
• TCMarket Maker (Financial Information & Trading System)
• TCPair (Financial Information & Trading System)
• BMS Plus (Broker Management System)
• OMS Pro (Order Management and Routing System)
• TCBOS (Back Office Settlement System)
AFE
• AFE Stock Channel (Financial Information Terminal)
• AFE Stock Market UP (Financial Information Terminal)
• AFE Stock Market PRO (Financial Information Terminal)
• AFE Info PRO (Financial Information Terminal)
• AFE Alert PRO (Financial Information Terminal)
• AFE Securities Front Office (Trading System)
• AFE Back Office System (Settlement System)

Source: Company, TA Securities

Revenue Model
As an ASP, N2N derives its revenue via: 1) a managed network service
model in Malaysia, Singapore, Philippines and Indonesia, and 2) a license
and rental model in Hong Kong, Vietnam and Macau. Under the managed
network service model, it earns: 1) variable transaction fees that are dependent on
the number of trades matched via the trading platform, and 2) fixed monthly
subscription fees for managed network services (i.e., the implementation,
monitoring and maintenance of leased lines, network, servers, data centre hosting
and software updates). On the other hand, under the license and rental model, it
earns: 1) one-off software license fees, and 2) fees from the rental of terminals that
are independent of trade volumes.
With both revenue models combined, we imagine that the bulk of the
group’s revenue is of a recurring nature. This is given that variable
transaction fees stem mainly from the managed network service model and we
gather that the model’s revenue composition is ~80% recurring and ~20% variable.
Ultimately, the viability of the group’s business hinges mainly on 1) the economies
of scale it achieves from the sharing of its information technology expertise and
resources across a pool of investment banks and brokerages, and followed by 2)
the level of capital market trading activity. Down the road however, focus will be
placed on transitioning clients under the license and rental model to the managed
service model.

Largest Asian Based Platform Provider

Today, N2N is the largest Asian based financial information and trading platform
provider. It operates in 8 countries across Asia with a brokerage network
of over 100 panel brokers and ~20,000 information and trading
terminals deployed. Key markets are Hong Kong and Malaysia, which
respectively account for ~50% and ~36% of revenue while smaller markets
comprise Singapore, Philippines, Indonesia, Vietnam, Macau and Thailand. Of note,
the acquisition of AFE in 2017 was instrumental in broadening the group’s
presence in the Asia region, as it brought Hong Kong, Vietnam, Macau and
Thailand under its umbrella.
In Hong Kong, AFE commands a market share of ~35% for the provision of
financial data and ~15% for the provision of trading solutions. Whereas in Malaysia,
where the group has had a strong footing since its early days, it serves ~70% of
brokerages (i.e., 26 brokers comprising 18 equities brokers and 8 futures brokers).
Elsewhere in smaller markets, while revenue contributions are relatively smaller,
continuous efforts are being placed on growing its exposure. Among others, AFE
caters to ~35% of brokerages in Vietnam while in the Philippines, the group has on
several occasions been engaged by the Philippine Stock Exchange.

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Figure 4: Estimated Revenue % Share by Country

Singapore, 6% Others, 3%
Vietnam, 6%

Hong Kong,
50%
Malaysia, 36%

Source: Company, TA Securities

Regional Ambitions via Asia Trading Hub

Post-acquisition of AFE in 2017, N2N is not resting on its laurels and has ambitions
to scale further in Asia via the formation of an Asia Trading Hub that leverages on
its broad and growing brokerage network. In a nutshell, the Asia Trading Hub
is a Pan Asia expansion plan that will see all the group’s panel brokers
across Asia connected via a single financial network (termed N2N
Financial Network) so as to facilitate cross border trading seamlessly
across the related exchanges and at lower cost. Effectively, this will be a
solution to the present challenges for cross border trading, particularly with
regards to the geographical divide and cost. The associated cross border
trading facilitated by the Asia Trading Hub is expected to create a new
revenue stream for the group i.e., one that is based on the volume of
cross border trading.
With targets to complete the entire Asia Trading Hub within 3 years,
the group is then envisioned to have at least 200 panel brokers in 12
countries across Asia connected via the N2N Financial Network with
the total trade volume expected to surpass that of some exchanges.
Currently, Phase 1 of the Asia Trading Hub involving the linking of Hong Kong,
Malaysia and Singapore is in progress. It is targeted to be completed in
4QFY18/1QFY19 and we expect it to be a near term catalyst for the group on the
back of expectations for greater cross border trading volumes and as its enhanced
capabilities attracts the interest of new brokers. We understand that the cost to
set up the Asia Trading Hub is not expected to be onerous with the group’s
overall CAPEX expected to be in range of recent years of RM8-10mn/annum.

Figure 5: Asia Trading Hub

Source: Company, TA Securities

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More to Come from Strategic Partnerships & M&A

There is more to come from N2N via strategic partnerships and merger and
acquisition. With regards to the former, it is currently in talks with its
strategic and substantial shareholder SBI, a financial conglomerate in
Japan with a leading position in the online securities industry, to enter
into business alliances that will leverage on each other’s brokerage network
and financial technology as well as catalyse the formation of the Asia Trading Hub.
To recap, SBI had recently emerged as a substantial shareholder via a private
placement in June 2018 which raised gross proceeds of RM65.1mn for the group.
In the meantime, the group has also been exploring merger and
acquisition opportunities not just in similar businesses abroad but also
FinTech start-ups to future proof its capabilities in the financial services
space. And this includes those involved in blockchain, crowd financing, initial coin
offering and robotic trading, among others. Facilitative of these, the group has a
net cash position of RM124.4mn as at 2QFY18.

Table 4: SBI’s Position Within Japan’s Online Securities Industry

Individual stock Individual margin No. of accounts Deposit assets Operating income
trading value trading ('000) (JPY tn') (JPY tn')
SBI 35.1% 36.4% 4,261 12.9 53,570
RAKUTEN 16.4% 16.7% 2,611 5.0 20,643
MATSUI 11.2% 14.3% 1,136 2.5 18,532
KABU.COM 8.8% 10.4% 1,087 2.3 7,934
MONEX 9.3% 3.7% 1,761 4.2 9,302

Source: Company, TA Securities

Prospects from ATS

Meanwhile, N2N could also benefit from the government’s plans to
introduce an alternative trading system (ATS) as was announced during
Budget 2018. An ATS is essentially a venue for counterparties, typically dealing
with large positions, to trade away from the conventional exchange in an efficient
manner. While the timeline for its establishment remains indeterminate, the group
has participated in preliminary engagements with the local as well as overseas
regulators for its set up and operations as it believes that the ATS could
capitalise on its comprehensive suite of products and services as well as
the eventual extended capabilities from the Asia Trading Hub. Until
further developments, we view this as a medium to longer term catalyst for the
group.

Key Risks
Competition. With the continuous and rapid advancements in information
technology, industry standards, and customer requirements, N2N is at risk of
losing its market share if it fails to keep its solutions relevant in the market. To
defend its position as the number one platform and service provider in Asia,
continuous emphasis is placed on research and development to enhance the
functionality and broaden the suite of its capital market solutions. Equally
important are strategic partnerships such as those that the group have pursued
with Nikkei Inc, Quick Corp and SBI Holdings Inc in Japan.
Security Breaches. As an ASP, N2N deals with the transmission of confidential
information over networks. As such, it is at risk of security breaches by computer
viruses, cyber-attacks and malicious attacks that could affect the group’s
operations and financials. While comprehensive security measures are in place to
protect its network, information and system, there is no assurance that any
security breaches can be entirely eliminated. Of note, the group had demonstrated
Page 8 of 14
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its competency when it successful defended its panel brokers in a cyber-attack
aimed at crashing the trading websites of brokerages in July 2017.
Foreign Exchange Fluctuations. N2N is exposed to foreign exchange
fluctuations as it has operations abroad and foreign denominated loans. The main
currencies it is exposed to include: 1) the HKD as AFE’s operations in Hong Kong
account for ~50% of revenue, and 2) the USD as it has USD denominated loans.
While the group does not hedge its foreign exchange exposure, its USD
denominated loans will be naturally hedged by the operational results of AFE in
Hong Kong which is pegged to the USD.
Economic Downturn. In the event of an economic downturn, there is downside
to contributions from variable transaction fees as any decline in capital market
trading activity could trickle down to the number of trades matched on N2N’s
trading platform. Notwithstanding, the bulk of the group’s revenue is of a recurring
nature.

Financial Highlights
Between FY12 to FY17, revenue and core PAT grew at a CAGR of 29.6% and
54.4% to RM97.3mn and RM16.1mn. This was driven by organic growth in Malaysia
on the back of growing matched trade fees and managed network services as well
as boosted by the acquisition of AFE in FY17. In terms of profitability, net profit
margin quadrupled from 6.9% in FY12 to 28.1% in FY16 alongside the economies
of scale achieved in Malaysia before contracting to 16.6% (-11.5pp YoY) in FY17
due to AFE’s lower margins. Meanwhile, tax rates were mostly in the single digit
percentage range due to the tax incentives granted for Multimedia Super Corridor
qualifying activities.

Figure 6: N2N’s Financials (FY12-FY17)

RM mn'
120 30%
28% 97
100 25%
24%
80 19% 21% 20%
60 17% 15%
39 42
40 31 34 10%
27
7% 12 16
20 6 7 9 5%
2
0 0%
FY12 FY13 FY14 FY15 FY16 FY17
Revenue (LHS) Core PAT (LHS) Net Profit Margin (RHS)

Source: Company, TA Securities

For comparison, Excel Force MSC Bhd (Excel Force) is a local listed peer which
conducts business of a similar nature to N2N’s but with operations mainly in
Malaysia. In terms of operations, N2N’s is of a larger scale with its FY17 revenue
of RM97.3mn over four times that of Excel Force’s of RM22.9mn. While in terms
of profitability, N2N’s net profit margin of 16.6% was 11.0pp lower than that of
Excel Force’s of 27.6% mainly due to AFE’s lower margins. However, when
compared based on FY16’s financials which was the year prior to the acquisition of
AFE, N2N’s revenue of RM41.8mn was double that Excel Force’s of RM22.5mn but
the net profit margin of both were closely in range, respectively at 28.1% and
25.1%.

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Figure 7: N2N & Excel Force’s Revenue (FY12-FY17) Figure 8: N2N & Excel Force’s Net Margin (FY12-FY17)

RM mn'
45%
120 40% 39%
97 35%
100 34%
30% 30%
80 29% 28% 28%
25%
60 24% 25%
20% 21%
39 42 19% 17%
40 31 34 15%
27 22 25 22 23
18 21 10%
20 7%
5%
0 0%
FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17
N2N Connect Excel Force MSC N2N Connect Excel Force MSC

Source: Company, TA Securities Source: Company, TA Securities

More recently in 1HFY18, the robust growth momentum sustained with revenue
and core PAT up 32.7% YoY and 34.3% YoY to RM55.0mn and RM13.0mn. This
was mainly due to the consolidation of AFE following its acquisition on 31 March
2017, albeit partially offset by the weaker HKD against the ringgit, and excludes
the additional tax liability and tax penalty of RM5.3mn for the year of assessment
2012 to 2016 incurred in 2QFY18. Of note, net profit margin in 2QFY18 expanded
6.7pp QoQ and 6.6pp YoY to 26.8% due to higher one-off implementation fees
from Vietnam as well as optimised cost in Hong Kong alongside the harmonisation
of the TC and AFE suite of products and services.

Table 5: 1HFY18 Results Analysis

FYE Dec (RM mn') 2QFY17 1QFY18 2QFY18 QoQ (%) YoY (%) 1HFY17 1HFY18 YoY (%)
Revenue 30.1 25.7 29.3 14.2 (2.5) 41.5 55.0 32.7
EBITDA 8.7 8.1 14.5 79.6 66.9 14.2 22.5 59.1
Depreciation & amortisation (2.9) (2.5) (2.7) 5.5 (6.7) (4.9) (5.2) 5.5
EBIT 5.8 5.5 11.8 >100.0 >100.0 9.2 17.3 87.8
Net finance cost 0.2 (0.3) (0.2) (24.8) >(100.0) 0.4 (0.5) >(100.0)
EI 3.9 1.5 (6.5) >(100.0) >(100.0) 3.9 (5.0) >(100.0)
PBT 9.9 6.7 5.1 (24.4) (48.6) 13.5 11.8 (12.5)
Tax (0.0) (0.1) (3.8) >100.0 >100.0 (0.0) (3.9) >100.0
MI 0.0 0.1 0.1 (10.0) 56.5 0.1 0.2 >100.0
PAT (-MI) 9.9 6.7 1.4 (79.4) (86.1) 13.6 8.1 (40.5)
Core PAT 6.1 5.2 7.9 51.9 29.1 9.7 13.0 34.3

Core EPS (sen) 1.1 0.9 1.4 51.9 29.1 1.7 2.3 34.3
DPS (sen) 0.0 (2.8) 0.0 (100.0) nm 0.0 (2.8) nm

Profitability ratio p.p. p.p. p.p.

EBITDA margin (%) 28.8 31.4 49.4 18.0 20.5 34.2 41.0 6.8
PBT margin (%) 32.9 26.2 17.4 (8.9) (15.6) 32.6 21.5 (11.1)
Tax rate (%) 0.1 1.9 74.3 72.4 74.2 0.2 33.1 32.9
Core PAT margin (%) 20.2 20.2 26.8 6.7 6.6 23.4 23.7 0.3

Source: Company, TA Securities

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Financial Projection
Going forward, we project N2N’s FY18/FY19/FY20 revenue and earnings to grow
by 10.4%/6.7%/6.7% (CAGR: 7.9%) and 39.7%/22.5%/13.9% (CAGR: 24.9%). Our
expectations for the robust earnings growth are underpinned by AFE’s full year
contributions in FY17 and growth in cross border trading on the back of traction
with the Asia Trading Hub. On top of the greater economies of scale achieved
alongside the Asia Trading Hub, we expect the on-going harmonisation of the TC
and AFE suite of products and services to yield further cost synergies and support
net profit margin above 20%.
As for taxes, we expect tax rates to remain in the single digit percentage range as
the group continues to enjoy tax incentives for Multimedia Super Corridor
qualifying activities. The group’s Multimedia Super Corridor status under N2N
Global Solutions Sdn Bhd and NGN Connection Sdn Bhd are respectively expiring
on 11 May 2019 and 3 February 2020 with an option to renew for another 5 years.

Figure 9: N2N’s Revenue Projection Figure 10: N2N’s Margin Projection

RM mn'
50%
140
122 45%
120 115 40%
107
97 35%
100
30%
80
25%
60 20%
42
40 31 15%
23 28
16 10%
20 12
5%
0 0%
FY16 FY17 FY18F FY19F FY20F FY16 FY17 FY18F FY19F FY20F
Revenue Core PAT Net Profit Margin EBITDA Margin PBT Margin

Source: Company, TA Securities Source: Company, TA Securities

In terms of balance sheet strength, the group is in healthy financial standing with a
net cash position of RM124.4mn or 21.8sen/share. Note that this was boosted by
proceeds of RM96.0mn raised from the conversion of warrants (RM30.9mn) and a
private placement exercise (RM65.1mn) during the year. Beyond this, we project
the group’s net cash pile across FY18/FY19/FY20 to remain robust above
RM100mn. This is after factoring in its strong operating cash flows and major cash
outflows from: 1) CAPEX assumed at RM8.5mn/annum, 2) dividend payouts and 3)
the paring of term loan.
While the group does not have a dividend policy, it had paid out at least ~20% of
its reported profit since FY14 and more recently in 1QFY18, declared dividends
which accounted for 85% of our FY18 net profit forecast. As such, we have
assumed a dividend payout ratio of 85%/20%/20% for FY18/FY19/FY20. Above all,
we view that the group will be in a comfortable position to support prospective
business alliances as well as merger and acquisition opportunities to facilitate its
Pan Asia ambitions.

Page 11 of 14
 26-Sep-18

Figure 11: N2N’s Dividend Projection Figure 12: N2N’s Cash Flow Projection

sen RM mn'
3.0 90% 80
80% 60
2.5
70% 40
2.0 60%
50% 20
1.5
40% 0
1.0 30% -20
20%
0.5 -40
10%
0.0 0% -60
FY16 FY17 FY18F FY19F FY20F FY16 FY17 FY18F FY19F FY20F
Adjusted DPS DPR Op. CF Inv. CF Fin. CF Net CF

Source: Company, TA Securities Source: Company, TA Securities

Valuation
We value N2N at a TP of RM1.70/share based on a target PE of 35.0x against
CY19 EPS of 4.9sen. The rich PE assigned is premised on: 1) the group’s double-
digit earnings growth prospects with FY18/FY19/FY20’s projected to grow by
39.7%/22.5%/13.9% (CAGR: 24.9%), 2) traction from the Asia Trading Hub, and 3)
synergies from potential business alliances with SBI and merger and acquisition. On
top of these, we view Malaysia’s government plans to introduce an ATS as a
medium to longer term catalyst for the group. With all these in mind, we initiate
coverage on N2N with a Buy recommendation. Key risks include a delay in the
formation of the Asia Trading Hub.
For comparison, N2N and Excel Force currently trades at a trailing PE (against
FY17) of 44.8x and 51.3x. A comparison based on forward PE cannot be made as
Excel Force is not covered by any house.
On a side note, we note that the group has been actively conducting share buy
backs during the year, especially during April to May 2018 post the massive
exercise of the 2013/2018 warrants in the lead up to its expiry in April 2018. And
with the continued share buy backs of late, this could possibly suggest that
management still views the stock as undervalued. At latest, the group’s cumulative
outstanding treasury shares account for 4.8% of its total number of issued shares
from 1.5% in the year before.

Figure 13: Forward PE Figure 14: Forward PBV

x x
60.0 3.0
55.0
50.0 2.5 +1SD: 2.3x
45.0
40.0 +1SD: 37.9x 2.0
35.0 Mean: 1.9x
Mean: 29.2x
30.0 1.5
-1SD: 1.15
25.0
20.0 1.0
-1SD: 20.6x
15.0
10.0 0.5
May-14

May-15

May-16

May-17

May-18
Sep-13
Jan-14

Sep-14
Jan-15

Sep-15
Jan-16

Sep-16
Jan-17

Sep-17
Jan-18

Sep-18

May-14

May-15

May-16

May-17

May-18
Sep-13
Jan-14

Sep-14
Jan-15

Sep-15
Jan-16

Sep-16
Jan-17

Sep-17
Jan-18

Sep-18

Source: Bloomberg, Company, TA Securities Source: Bloomberg, Company, TA Securities

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 26-Sep-18
Earnings Summary
P&L Balance Sheet
FYE Dec (RM mn') FY16 FY17 FY18F FY19F FY20F FYE Dec (RM mn') FY16 FY17 FY18F FY19F FY20F
Revenue 41.8 97.3 107.4 114.6 122.3 Fixed assets 45.5 47.4 44.7 42.5 40.6
EBITDA 18.7 27.3 34.6 37.9 41.0 Intangible assets 18.1 73.7 73.7 73.8 73.9
Depreciation & amortisation (7.4) (10.3) (11.1) (10.7) (10.3) Others 0.0 0.1 0.1 0.1 0.1
Net finance cost 0.5 0.3 (0.0) 1.9 2.5 LT assets 63.6 121.1 118.5 116.4 114.5
EI (0.0) 7.8 (5.3) 0.0 0.0
PBT 11.8 25.2 18.1 29.1 33.1 Trade & other receivables 16.8 18.5 17.3 18.0 18.8
Taxation (0.1) (1.4) (1.1) (1.7) (2.0) Cash 36.5 53.2 108.9 116.6 137.3
MI 0.1 0.2 0.2 0.3 0.3 Others 73.8 89.8 89.8 89.8 89.8
PAT (-MI) 11.7 24.0 17.2 27.6 31.5 Current assets 127.1 161.5 216.0 224.5 245.9
Core PAT (-MI) 11.8 16.1 22.6 27.6 31.5 Total assets 190.7 282.6 334.5 340.8 360.4
EPS (sen) 2.1 2.8 4.0 4.9 5.5
DPS (sen) 0.8 0.8 2.8 1.0 1.1 Trade & other payables 6.8 16.9 16.3 16.7 17.1
ST borrowings 0.8 40.5 4.9 1.8 0.6
Ratios Others 0.0 1.5 1.5 1.5 1.5
FYE Dec FY16 FY17 FY18F FY19F FY20F Current liabilities 7.7 58.9 22.8 20.0 19.2
Valuations
PER (x) 61.5 44.8 32.1 26.2 23.0 LT borrowings 2.9 28.9 19.8 7.0 2.5
Dividend yield (%) 0.8 0.8 2.1 0.8 0.9 Others 1.3 5.0 5.0 5.0 5.0
PBV (x) 4.0 3.8 2.5 2.3 2.2 LT liabilities 4.1 33.9 24.7 12.0 7.5

Profitability ratios (%) Share capital 163.3 163.6 259.6 259.6 259.6
ROAE 6.6 8.8 9.5 9.3 9.8 Reserves (3.2) (12.7) (12.7) (12.7) (12.7)
ROAA 6.2 6.8 7.3 8.2 9.0 Retained earnings 18.3 38.6 40.0 62.1 87.3
EBITDA margin 44.7 28.1 32.2 33.1 33.5 MI 0.5 0.3 0.1 (0.2) (0.5)
PBT margin 28.2 25.9 16.9 25.4 27.1
Total liabilities & equity 190.7 282.6 334.5 340.8 360.4
Liquidity ratios (x)
Current ratio 16.6 2.7 9.5 11.2 12.8 Cash Flow
Quick ratio 16.6 2.7 9.5 11.2 12.8 FYE Dec (RM mn') FY16 FY17 FY18F FY19F FY20F
PBT 11.8 25.2 18.1 29.1 33.1
Leverage ratios (x) Depreciation & amortisation 7.4 10.3 11.1 10.7 10.3
Total liabilities/equity 0.1 0.5 0.2 0.1 0.1 Net finance cost (0.5) (0.3) 0.0 (1.9) (2.5)
Net gearing Nt. cash Nt. cash Nt. cash Nt. cash Nt. cash Other non-cash (3.3) (9.1) (1.9) (2.4) (2.4)
Int. coverage ratio nm nm 766.0 nm nm Changes in WC (5.4) 13.9 0.6 (0.4) (0.4)
Net finance cost 0.5 0.3 (0.0) 1.9 2.5
Growth ratios (%) Others 2.8 (1.1) 0.8 0.6 0.4
Sales 7.5 132.7 10.4 6.7 6.7 Operational cash flow 13.4 39.2 28.7 37.7 41.1
PBT 13.2 113.6 (27.8) 60.3 13.9
Core PAT (-MI) 28.4 37.3 39.7 22.5 13.9 Capex & R&D (9.8) (8.0) (8.5) (8.5) (8.5)
Total assets 0.9 48.2 18.4 1.9 5.8 Others 18.5 (36.4) 0.0 0.0 0.0
Investing cash flow 8.7 (44.4) (8.5) (8.5) (8.5)

Dividend paid (9.4) (4.7) (15.8) (5.5) (6.3)

Net share issue 4.9 0.3 96.0 0.0 0.0
Net change in debts (0.6) 73.7 (44.7) (15.9) (5.7)
Others (5.4) (44.7) 0.0 (0.0) (0.0)
Financial cash flow (10.5) 24.6 35.5 (21.4) (12.0)

Net cash flow 11.6 19.4 55.7 7.7 20.7

Opening cash flow 24.9 36.5 53.2 108.9 116.6
Forex 0.1 (2.8) 0.0 0.0 0.0
Closing cash flow 36.5 53.2 108.9 116.6 137.3

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(TH I S P A GE IS IN TE N TI ON AL L Y L E F T B L AN K )

Stock Recommendation Guideline

BUY : Total return within the next 12 months exceeds required rate of return by 5%-point.
HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point.
SELL : Total return is lower than the required rate of return.
Not Rated: The company is not under coverage. The report is for information only.
Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return
if dividend discount model valuation is used to avoid double counting.
Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium.

Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without
notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this
document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.

As of Wednesday, September 26, 2018, the analyst, Wilson Loo Jia Chern, who prepared this report, has interest in the following securities covered in this report:
(a) nil

This report has been prepared by TA SECURITIES HOLDINGS BERHAD for purposes of Mid and Small Cap Research Scheme ("MidS") administered by Bursa Malaysia Berhad and will be
compensated to undertake the scheme. TA SECURITIES HOLDINGS BERHAD has produced this report independent of any influence from the MidS or the subject company.
For more information about MidS and other research reports, please visit Bursa Malaysia’s website at:
www.bursamids.com
Kaladher Govindan – Head of Research

TA SECURITIES HOLDINGS BERHAD (14948-M)

A Participating Organisation of Bursa Malaysia Securities Berhad
Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 – 2072 1277 Fax: 603 – 2032 5048
www.ta.com.my

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