N2N (0108) - 8 Key Insights I Learned From N2N’s 2018 AGM - Thomas

N2N Connect Berhad (KLSE: 0108) is principally engaged in the provision of trading solutions to financial services industry, mainly brokerage firms such as CIMB Securities, RHB Invest, Affin Hwang, etc. In my previous post, I’ve shared about the company’s business model and its exciting growth stories. Since then, the share price has gone up from RM1.03 per share to RM1.23 per share at the time of writing. That’s 19.4% gain in less than a month time.
N2N 2018 AGM Chart 1
On 25th May 2018, N2N Connect Berhad (“N2N”) held its 17th Annual General Meeting (“AGM”) for the financial year ended 2017. We went for the AGM to know more information about the company’s business and its future plans. So, here are the 8 key insights I learned from N2N’s 2018 AGM:
In summary, questions raised by shareholders are mainly on 3 areas; 1) N2N’s existing business; 2) Its future growth plans; and 3) the recent share buyback.

N2N’s Existing Business

#1: A shareholder asked about the difference between N2N against its competitors. According to the Managing Director (“MD”), N2N is different from its competitors in two aspects;
  • N2N’s business model. Many of its peers are either selling outright the trading system or adopting a fixed rental-based model which he felt that there is a limit to how much revenue the company could generate. This is because every country has only a handful of brokerage firms. N2N does it differently by partnering with brokerage firms, providing them a comprehensive trading system. In return, it receives a percentage fee for every matched trade orders executed via its trading system. This way, N2N could scale more easily. The more brokerage firms that N2N partner with, the higher percentage of matched trade order fees N2N will receive. This is because each partnered brokerage firm will contribute to the increase in trading volume; and
  • N2N’s trading system. It is a pure browser-based that can be used in any browsers while its peers’ trading system, although it is browser-based, it can only be fully functional in internet explorer which is a browser that currently facing disruption from other well-known ones such Google Chrome and Mozilla Firefox. In addition, the trading system allows the user to access into multiple markets (i.e. NYSE, SGX, HKEX, etc.) without having the user to switch into other trading platforms. The MD added that in the past, brokerage firms required to invest into 3 to 4 different systems for each of their trading activities such as provision of financial information, trading of futures, commodities and forex, etc. With N2N’s trading system, they now only require 1 platform to access into all the said activities. This save a lot of costs for the company’s client.

#2: Another shareholder raises his concern whether heavy capital expenditure is required on one of N2N’s subsidiary, NGN Connection Sdn. Bhd. which provide network, servers & data centres services. The MD replied that NGN Connection started as only serving N2N’s brokerage clients and have since expanded to non-financial institution client. Amongst the non-financial institution clients are Legoland, which the infrastructure is managed by NGN Connection. While there are some major capital investments being incurred, it is not significant as to hurt the company as a whole. The MD reassured that the management are careful and always ensure every investment decision made are able to generate positive returns.
#3: A shareholder asked about the factors that could cause the company to fail and the MD explained that N2N requires to continuously innovate by creating new product to complement its existing ones. That’s why the success of the company depends on its willingness to invest into research & development (“R&D”).
N2N 2018 AGM Chart 2

N2N’s Future Growth Plans

#4: On 31 March 2017, N2N has completed its acquisition of AFE Solutions Ltd (“AFE”) in Hong Kong. AFE operate 2 business segments mainly in Hong Kong; 1) Information services and 2) Trading services. The MD expect the pure information services market to shrink as these are incorporated into the trading system. Nonetheless, AFE has a fairly substantial revenue but it has a high cost structure. As such, the management’s current plan is to carry out internal cost restructuring on AFE to bring down the costs and increase the profit by approx. RM8 mil. However, this will be done in stages so that it does not affect AFE’s existing client’s contract.
#5: In 2018, N2N introduces new Back-Office Settlement system (also known as TcBOS) which will be a new revenue stream for the company. According to the MD, many of the financial institution/ brokerage firms’ back-office system are old and require an upgrade. A shareholder asked whether any N2N’s client have started using the TcBOS and the MD replied that currently the company is at deployment stage where a number of brokers have already signed-up for the TcBOS.
In Philippines, there are already 2 brokerage firms have signed-up and 1 brokerage firm from Thailand. In Malaysia, various brokerage firms have expressed their interest in the TcBOS as well but are still in the midst of discussion and the process of getting the budget approval from the Board of Directors. The MD added that, the back-office system if sell outright, the price is between RM7 mil to RM12 mil. Back-office system is one of the biggest cost centre for the brokerage firms. However, the management is not inclined to sell outright.
#6: On 12 April 2018, the company announced its plan to acquire 28% stakes in OurMoneyMarket Pty Ltd (“OMM”) based in Australia. OMM is Australia’s first hybrid marketplace lender utilising the latest peer-to-peer (P2P) lending technology in combination with traditional structured finance methods to fund high-yielding unsecured loans. It is a platform for borrowers to raise funds at lower interest rates and for investors to invest in debt with higher competitive returns.
According to the MD, there are 2 reasons behind the investment in OMM;
  • It is to create N2N’s presence in Australia since the company does not have the required manpower and resources to penetrate Australia market.
  • The management plans to integrate the OMM platform into N2N’s trading system and convert it into an external margin facility which allow equity investors to borrow money using the OMM platform for their margin facility. In return, N2N will charge administration fee to facilitate the borrowing and lending process. If N2N successfully integrates both the said platform, the management plans to implement in Malaysia and other Asia regions.
#7: A shareholder noticed that the company has recently embarked on aggressive mergers and acquisition (“M&A”) activities and asked the management for the reason behind such action. The MD replied that the reason for M&A activities is mainly to grow N2N’s market share at the fastest rate possible. The MD further explained by giving an example on the acquisition of AFE which provides the company a one-third of market share in Hong Kong. If N2N were to embark on greenfield investment, it might take several years to achieve the one-third market share in Hong Kong. However, the MD reassured that the management only acquires companies that could provide synergy benefits to N2N.

Share Buybacks

#8: Since April 2018 till May 2018, N2N has been aggressively buying back the shares. A shareholder asked whether there are any plans for the company on utilizing its accumulated treasury shares and the MD explained that several fund managers have engaged with the company to invest in these treasury shares. However, the management do not think as of now the company requires any additional capital for its business.
In addition, the MD also claims that some fund managers have expressed their interest in N2N but could not invest in it due to N2N is currently listed on ACE Market and they are not allowed by their company’s policy to invest. As such, the Board has taken these into consideration on the transfer to Main Board. The MD reassured that he will share with shareholders when such decision has been made.