N2N Connect Bhd
(March 7, 91.5 sen)
Maintain buy with an unchanged fair value of RM1.18: N2N Connect (N2N) has signed a memorandum of understanding with SBI Holdings Inc (SBI) to collaborate on a blockchain-enabled trading platform. SBI currently holds 20.36% of shares in N2N.

 
The blockchain-enabled trading platform works by digitalising the trading of multiple financial instrument in one venue, including equities, derivatives, currencies etc. We believe this would potentially revolutionise the current trading practices.

Under this initiative, the blockchain-enabled trading platform will allow for instantaneous tracing of asset ownership rather than the T+3 settlement method under the current system, and fractional share trading whereby a fraction of share can be bought or sold which will increase affordability of higher priced securities.

In terms of expertise, N2N will tap SBI’s experience in successfully launching Japan’s first bank-backed cryptocurrency exchange, VCTRADE. With some modification, this technology can be adopted by N2N to roll out its own version. For now, N2N’s role is to seek the necessary approval from the respective regulators for deployment.

This initiative is aimed at expanding N2N’s regional footprint and expediting the setting-up of an “Asia trading hub” which allows cross-border trades. N2N currently is working on the first phase to connect Malaysia, Singapore and Hong Kong which is targeted to be completed by the end of 1QFY19. The second phase will involve the Philippines, Thailand and Indonesia. Vietnam and Taiwan will be connected in the final phase.

In the near term, we expect earnings to be driven by an industry-wide replacement of back office systems (BOS). The increasing complexity of trading procedures, such as the recent introduction of short-selling, requires a more advanced BOS, thereby necessitating a system upgrade. There are currently 28 brokers in Malaysia, and a traditional BOS typically costs RM8 million to RM12 million.

We continue to like N2N due to its leading position in the online trading solution space, the acquisition of AFE, which offers tremendous earnings accretion, and the affordability of TCPro Global, which could help the group win market share from global competitors such as Bloomberg and Thomson Reuters. — AmInvestment Bank, March 7