After Ho-Hum Pricing, AMTD Digital Storms Out of the Gate in U.S. Trading Debut

Key Takeaways:

• Hong Kong-based AMTD Digital Raised About $125 million in a New York IPO, becoming the largest New York listing by a Chinese company this year
• The company, which is backed by Hong Kong billionaire Li Ka-shing, is suffering from slowing revenue growth, but boasts higher margins than other fintech stocks

By Warren Yang

There are plenty of China fintech stocks out there, though many are problematic due to China’s ever-tightening regulation of the group. But investors appear to think they’ve found a winner in AMTD Digital Inc. HKD, which is distinguished both by its business model as a sort of fintech incubator, and also the fact that it’s subject to more western-style regulation due to its base in Hong Kong and focus on Southeast Asia.

Last Friday, the digital financial services provider raised about $125 million by selling 16 million shares at $7.80 each in a New York IPO. That made it the largest IPO by a Chinese company in New York this year, and one of the largest since such listings came to a near-halt last July following a regulatory onslaught by both China and U.S. officials.

The IPO price was slightly above the midpoint of the company’s target range, suggesting lukewarm investor interest. But it still translated to a decent price-to-earnings (P/E) ratio of more than 18, based on the company’s 2021 net profit. That was well ahead of other beaten-down China fintechs whose ratios are mostly below 5, but below the ratio of 27 for insuretech star ZhongAn Online P & C Insurance (6060.HK).

But that was just the beginning of a wild ride for AMTD Digital, as investors sensed a good opportunity. They stormed in during the stock’s first two trading days to send the shares to more than triple their IPO price. The stock gave back some of those gains on Tuesday, but were still well ahead of their IPO price with their close of $24.88 and latest lofty P/E ratio of 138.

Created in 2019, AMTD Digital is ultimately controlled by AMTD Group, which was founded by Hong Kong billionaire Li Ka-shing’s CK Hutchinson Group (0001.HK) and Commonwealth Bank of Australia (CBA.AX) in 2003. The company, which promotes itself as an operator of a one-stop digital “solutions” platform, seems a bit like a jack-of-all-trades in digital financial services, which at first may leave those trying to figure out what it does scratching their heads.

The best way to understand its main business is to think of it as an “accelerator” that helps young fintech companies to grow. Through its “SpiderNet” ecosystem, the company provides capital, technologies and other resources for a network of digital financial startups, and also helps to connect them with other businesses that can help them develop.

AMTD Digital receives fees from members of its community, functioning as a sort of incubator for the group. With its mission “to be a fusion reactor for the best entrepreneurs and ideas,” the company identifies promising new businesses through various means, including referrals or industry events it sponsors. It then acquires majority stakes in some of those ventures through equity swaps.

Its network-based business model has enabled AMTD Digital to expand across various areas of digital financial services. Its parent was a joint book runner for Xiaomi’s (1810.HK) IPO in 2018. It later teamed up with the smartphone maker to create digital lender Airstar Bank in Hong Kong, for which AMTD Digital provides fee-earning services. In 2019, a consortium including an AMTD Digital subsidiary and Xiaomi agreed to found another virtual bank, Singa Bank, which is now awaiting approval for a digital wholesale banking license in Singapore.

Non-financial investments

In addition to incubating other companies, AMTD Digital has its own brokerage business in Hong Kong, which it complemented with the acquisition of a similar venture in Singapore named PolicyPal in 2020.

That same year, the company started a new business to invest in digital media and marketing companies. Since then, AMTD Digital has invested in Forkast.News, a crypto news site set up by former Bloomberg Television anchor Angie Lau, and bought DigFin, a fintech-focused content company.

AMTD Digital also invests in technology startups that aren’t necessarily related to financial services, but can still benefit from inclusion in its SpiderNet ecosystem.

For a young technology-driven company, AMTD Digital’s revenue growth looks underwhelming. In the 12 months through April 2020, its second year of operation, the company’s revenue surged more than tenfold year-on-year to HK$168 million ($21.4 million), which isn’t too surprising for a business just starting out. But annual revenue growth slowed sharply to 17% in the next fiscal year and ground to an anemic rate of less than 4% in the 10 months through February this year from the same period in 2021, its prospectus shows.

But AMTD Digital, whose revenue comes mainly from fees for its SpiderNet services, has a strong selling point in its high margins. Its net profit margin was 88% in its latest fiscal year. To be sure, that figure was inflated by gains in the values of its equity investments. But even excluding those and other extra income, the company’s net margin would have been more than 60%. By comparison, the operating profit and net profit margins at FinVolution Group FINV, one of China’s better-performing online lenders, were far lower at a little more than 21% and 27%, respectively, last year.

Such a highly profitable business model is something investors can appreciate about AMTD Digital, particularly when most other fintech companies in China are struggling. Also, AMTD Digital is based in Hong Kong, which has separate regulation from the Chinese mainland, and focuses on Southeast Asia. That shields it from huge risks that technology companies in China in general face due to a regulatory environment that is less transparent and also subject to sudden change without warning.

At the same time, prospects are bright for digital financial services in Southeast Asia, where populations are young and tech-savvy. Many young adults in the region aren’t heavy users of traditional banks, creating abundant opportunities for a new generation of businesses providing digital financial services.

All this may explain why AMTD Digital’s stock soared following its IPO. But the huge gains may also partly reflect inexperience by the company’s underwriters, Maxim Group and Livermore Holdings, which aren’t exactly big-name investment banks and may have undersold the company when marketing it to investors. Still, the valuation that AMTD Digital fetched in its IPO was by no means bad, though far less than its latest P/E ratio.     

Of course, AMTD Digital is not without its risks. For one, a lot of its investments in young startups can go wrong, and fintech everywhere is becoming increasingly competitive. But the company seems to offer a lot to like for investors, especially those who want to diversify away from the crowded and high-risk fintech sector in China.