• Net revenue declined 16.4% yoy in 2Q16 to S$9.7mn owing to adverse equity market conditions
• Group’s AUA fell 1.5% yoy but rose 2.1% qoq to S$5.63bn
• Staff costs increased 4.0% yoy and other operating expenses declined 1.6% yoy. NPAT declined 65.4% yoy
• 1H16 Revenue/NPAT meet 96.7%/66.5% of our 1H16 estimations
• Maintain “BUY” with unchanged target price of S$1.275, pegged at unchanged 25x PER implying an upside of 41.54% (including dividends) from its last traded price.

Financial and Business Highlights

Contributions from new businesses boost AUA. Group AUA saw contribution from India business, based on an effective 16.1% stake in the India business acquired in April 2016. India Business has an AUA of S$285mn, accounting for 5% of Group AUA. iFAST China business was soft launched in March 2016. One of the strategies is to partner with local Chinese internet companies and online media companies that have well-established online client base. This allows iFAST to leverage on China’s established internet finance landscape to accelerate AUA growth. Geographically, AUA in Singapore declined 2.5% yoy to S$4.08bn, AUA in Hong Kong declined 8.0% yoy to S$1.19bn and AUA in Malaysia increased 32.5% to S$0.32bn.

Net Revenue and NPAT. Singapore net revenue declined 13.3% yoy to S$7.1mn and NPAT declined 35.5% to S$1.9mn due to negative global market sentiment and higher operating costs. Hong Kong net revenue declined 25% yoy to S$2.0mn and NPAT declined 94% yoy to S$0.036mn due to the suspension of the Capital Investment Entrant Scheme (“CIES”) in 2015.  Malaysia net revenue increased 3.7% yoy to S$0.51mn and NPAT declined 44% to $0.014mn.

Continues to expand product offering. iFAST Singapore business received formal registration as a CDP Depository Agent in July 2016. This allows iFAST to eventually introduce stocks into its product mix targeted for end-2016 or early-2017. iFAST China has recruited wealth advisers under their ‘platform-cum-IFA incubator’ strategy. This strategy equips wealth advisers the platform and support to conduct wealth advisory business. The objective is to catalyse these wealth advisers to start their own Financial Advisory firms eventually. iFAST China has thus far signed up more than 20 Fund Houses with over 1000 funds on the platform.

How do we view this?

The margin compression was due to iFAST being ahead in the cost curve in building up capabilities to grow AUM in China and to regain lost ground in Hong Kong due to the suspension of CIES. Capital expenditure increased 42% yoy to S$1.45mn mainly for IT development to cater for the new services. We are not too concerned with the sharp fall in non-recurring revenue because with the inclusion of equities into the product mix, AUA growth and total net revenue growth will be more robust. Moving ahead, we expect recurring revenue to make up a larger portion of the total net revenue.

Investment Actions

Maintain “Buy” with unchanged target price of S$1.275, based on 25x PER on an estimated 5.1 cents FY17F EPS.  We used FY17F EPS because FY16F earnings do not reflect the potential growth from China and India operations. This implies an upside of 41.54% (including dividends) from its last traded price.