Friday, April 06, 2007
Timing Is Everything
(additional catalysts updated)
It is very easy to spot winners from Mesdaq. Readers of this blog will be aware that I have been careful in highlighting good companies. It is pretty easy to write about good companies, but as an investing and trading blog, it is also crucial to get timing pretty right. Its quite pointless to me to write about something now when it only moves in 4Q, better for me to write in 3Q than now. Some will say that we all don't know the timing, true, but there are things called probable catalysts and you can surmise by looking at a whole load of other factors to get close to timing. Its a daily blog for heaven's sake, not a half yearly blog, so gotta spot them better.
Been reluctant to highlight specific stocks as index has been moving higher and looking to gather steam for a charge at 1,350 soon, but the aggregation of fundmentals and convergence of catalysts make it impossible to neglect N2N Connect.
Paid up: 284m shares Market Cap: RM596m
Biz: Leader in online broking services on a multi platform that allows mobile trading in overseas markets
Turnover/Pretax: 2004 RM4.11m/RM1.34m; 2005 RM7.74m/RM3.27m; 2006 RM16.9m/RM10.073m
Quiet market leader, grabbing market share and now makes it almost impregnable by competition. Smartest thing is they did not try and be a standalone broker themselves, rather they help brokers operate online. There is enormous power in aggregation of clients, and their platform does not make them a competitor to brokers. Now they have 8 brokers as clients: Apex Securities, PM Securities, SJ Securities, CIMB Securities, KL City Securities, Kenanga, Credit Suisse, AmSecurities and Hwang-DBS.
Quietly profitable already, meaning they have gone past sufficient critical mass already. Gains in revenue from here is largely supernormal profits. They now have a 40% market share. This transaction-based-payment platform works, and has attracted a number of suitors/investors. I would not be surprised if Legg Mason/GSachs or the like were to gobble up a substantial stake soon.
Its platform is a few rungs above many others in that it can be accessed via mobile, PCs or PDAs. Plus they have the flexibility to allow clients to buy overseas shares as well. One can argue that internet trading has not taken strong roots in KLSE yet, it takes time and there is only one way to go, up. If we were to compare with the same evolutionary process in the US, Australia, Japan, Singapore or even HK, the outlook is quite brilliant. The other brilliant thing is that even at such a nascent acceptance stage, N2N Connect is already profitable, what else can I say?
The delivery channels is not just one-way (buying/selling stocks) but also informational advantage (transmission and relay of live prices). Current internet trading in KLSE adds up to about 8% of overall market share daily, can go much higher.
Management is credible, not some twenty year olds who have no appreciation for trading stocks and are just tech geeks, but rather savvy long time operators. Izlan Izhab, the the independent non-executive chairman has 35 years of experience in Legal & Compliance at Bursa. The MD, Tiang Boon Hew is a 17 year techie and have done stints at Computer Associates Pte Ltd, Citibank (South Asia) and i2 Technologies Pte Ltd.
A bonus is in one of its subsidiary, 3GWiFi, where it holds its IM application EMO. A surge in IM applications via mobile and hand held devices could launch a seperate but exciting prospect on its own.
The Saudis are coming. Very prominent Saudi investor/partners have joined forces in a jv with N2N holding 51%, the rest are held by Majed Al Ibrahim, Thamer Al Muhana, Selman Alfares and Hassan Ajam. The company named N2N Arabia is said to have 2 Saudi banks and 2 Saudi brokers coming onboard. The Saudi Stock Exchange or Tadawul has only 84 companies while Bursa has more than 1,000 but the market cap and DAILY TRADING VALUE are even bigger than Bursa. Its daily value traded averages between RM5bn-RM7bn. Market cap wise, Bursa is at about RM670bn while Tadawul hovers at RM1 trillion.So, the prospects are excellent considering internet broking is still in its infancy in Saudi Arabia.
Mesdaq companies going great guns are easy to spot after they have climbed over a certain threshold because their business models are highly scalable. Just look at Green Packet and the likes.
Catalysts: banks and brokers signing up for N2N Arabia; 700,000 shares crossed on wednesday (4 April) at RM1.74; plus average daily volume picking up nicely for the past few days; judging from private equity flows and funds movement, would not surprise if there is a takeover or privatisation bid in the works ... I personally won't be selling till it goes past RM3.00.
Additional catalysts: while harping on Saudi Arabia, it seems an earlier agreement may have been signed with Dubai Financial Exchange as well; the first 3 months of 2007 have seen a stupendous surge in trading volumes, esp internet trading... just how good?? ... well, there are hints that the 1Q profits could match the whole of 2006, now that would be a brilliant catalyst ... as internet trading players tend to move in and out at a quicker rate, the level of activity and selldown/buyback in 1Q2007 would not surprise me.