Speculative BUY Nicholas Brownbill 16 th October 2015

Transcription

1 Speculative BUY Nicholas Brownbill 16 th October 2015 SMARTTRANS HOLDINGS (SMA.ASX) EXPOSURE TO THE BOOMING CHINESE MOBILE PAYMENTS MARKET Share Price $0.039 Valuation $146 million Price Target (FY 2016) $0.066 Brief Business Description INVESTMENT HIGHLIGHTS Business leveraged to booming Chinese mobile payments market via their mobile and online billing and payment platform for the Chinese Market Business model leveraged to a prosperous Chinese Mobile Payment and Online Billing Market SmartPay platform: Monetises as business grows, Company s Direct Carrier Subscription Billing with China Mobile and China Telecom are now generating revenue across multiple provinces Subscription feature of the Direct Carrier billing service means large proportion of revenue is passive and recurring- with customer retention rates running at an average of over 85% month on month Strong month on month, recurring and passive revenue growth, creating solid platform for revenue growth in FY 2016 Key milestones achieved in 2014/2015 Proven management team including Bryan Carr, Geoff Raby the Former Australian Ambassador to China and Yui (Ian) Tang PROVINCES IN CHINA COVERED BY SMARTPAY SmartTrans holdings Limited is a leading Australian technology and software provider that has developed a Mobile and online billing and payment platform for the China Market. Corporate Structure Shares on Issue Unlisted Options Market Cap 2206 million 166 million $86 million (AUD) 52 Week HIGH 3.9 cents 52 Week LOW 0.9 cents Board Bryan Carr Dr Geoff Raby Yui (Ian) Tang Ian Hawkins Andrew Forsyth Greg Simpson CEO/Managing Director Non-Executive Chairman Non-Executive Director Executive Director Non-Executive Director Non-Executive Director Earnings Summary Year Ending June Revenue ($M) EBITDA ($M) Reported NPAT ($M) Adjusted NPAT ($M) Adjusted EPS (cents FD) Adjusted P/E (x) Share Price Graph Table showing population & number of mobile phone users by province Province *Population **Cell phone Users # 1 Guangdong 107,240, ,350,000 2 Hubei 57,260,000 43,519,000 3 Gansu 25,849,800 18,917,000 4 Sichuan 81,070,000 59,322,000 5 Shandong 95,800,000 78,252,000 6 Jiangsu 79,394,900 77,614,000 7 Liaoning 42,030,000 43,040,000 TOTAL 488,644, ,014, Source: 2. Source: Page 1 of 11

2 THE COMPANY SmartTrans Limited is an Australian publically listed company providing innovative software solutions to companies all around Australia and China who are delivering either goods or services. SmartTrans provides mobile applications contents and online billing systems for smartphone users with all three Chinese telcos: Telco billing partners include China Mobile, China Telecom and China Unicom; SmartTrans has access to a vast library of mobile apps and content through it partnerships providing billing services to App and Content Providers in China; Having secured 5,000,000 paying customers in 12 months in China, SmartTrans is well-positioned to expand its reach into other markets; SmartTrans has proven payment technology and popular and proven mobile games and content; Trusted ASX-listed service provider. SmartTrans hold a diverse portfolio of revenue generating activities within the technology sector aimed at providing shareholders with improved prospects of a high return along with significantly lower risk. THE INDUSTRY The arrival of mobile payments and billing- effectively the ability to use your phone as a wallet- is having an enormous impact on many sectors, offering significant investment opportunities for investors that are looking for leverage to the booming mobile payments market. For developed markets, in particular China, the benefits based around convenience, with customers able to make faster transactions, together with reduced transaction costs for retailers- mobile payments are generally cheaper than existing chip-and-pin transactions. In a developed market like China, adopting mobile payments can leapfrog older technologies. Due to limitations and statutory obligations around foreign companies establishing a business and operating in China, businesses and individuals seeking to sell their products in China cannot simply sell their products online. As a testament to the future direction of the industry, Mobile 3 rd party payments are now the preferred online payment method for Chinese customers. The company of interest in this report has developed a market leading mobile and online billing and payment platform for the Chinese market - SmartPay. BOARD OF DIRECTORS Bryan Carr Dr Geoff Raby Yui (Ian) Tang Ian Hawkins Andrew Forsyth Greg Simpson CEO/Managing Director Non-Exec Chairman Non-Exec Director Exec Director Non - Exec Director Non-Exec Director Page 2 of 11

3 BUSINESS MODEL LEVERAGED TO A BOOMING CHINESE MOBILE PAYMENT AND ONLINE BILLING MARKET The key drivers behind the rapid growth in the Chinese mobile payment and online billing market are also key themes leveraged by the SmartTrans business model. These include: Largest mobile user base in the world with estimated 1.29B users and exceptionally high mobile penetration rates, with 3G rolled out to 70% of the population. Roll out of the mobile networks central to China s 12th 5 year plan enabling the government to deploy communication, financial services and products to the masses, in particular 3G/4G to rural China. Smart phone usage growing at a torrid rate, though still behind developed world, with an estimated 780m smart phones in China, growing at a rate of 100m units per quarter and adoption rates twice as high as the developed world. Largest number of mobile internet users in the world, with an estimated to be ~600m. The shift of commerce from traditional to mobile. China's online and mobile payment transactions have been growing at pace forecast to overtake the United States as the world's largest online retail economy short term. Ecommerce has averaged 120% compound growth for the last 10 years in China. China s online retail transactions in 2013 reached US$251 billion representing 9% of total retail spend. Independent reports indicate that m-commerce in China will represent over 50% of e-tailing within 5 years. SMARTPAY A smartphone payment platform servicing the China market Direct Carrier Billing- ability to direct user s mobile phone accounts - Subscription billing (recurring monthly billing) - In-App Billing (integrated by third party app developers) SmartTrans receives royalty revenue by operating the billing platform Mobile Payments preferred payment method for Chinese Consumers China Mobile, China Telecom, China Unicom, Unionpay, AliPay billing functionality. Page 3 of 11

4 SmartPay Platform: How SmartTrans earns Revenue SmartPay system is their embedded in-app billing platform used by Chinese Smartphone Game developers SMA earns revenue from in-app content purchase and subscription billing The customer is billed by the Telco and payment is deducted from the user s telephone account SmartPay has now earned revenue over $4.48 million from the payment transaction of smartphone game and content providers with growth expected to continue Growth Drivers: SmartPay Mobile Payments New content providers being added to SmartPay platform in China Customers include smartphone games developers, mobile content providers, media and travel Subscription billing by Chinese consumers generating recurring revenue- focused on expansion Monthly consumer retention running at 80%+ month to month for subscription billing Sufficient cash holdings to drive growth. 1. SmartPay system is the embedded in-app billing platform used by Chinese smartphone game developers 2. SMA earns revenue from in-app content purchase and subscription billing 3. The customer is billed in partnership with the telco and payment is deducted from the user's telephone account 4. SmartPay has now earned revenue from more than eight million billing transactions of smartphone game and content providers with growth continuing. Mobile & Logistics Software Provider in Australia Logistics software to optimise goods delivery Blue chip customer base Recurring revenue from long term contracts typically 3 to 5 years Tender pipeline of new contracts to give the business greater scale Pursuing growth opportunities in China Growth Drivers Mobile and Online Logistics Business Mature online and mobile software products Pursuing new long term contracts in Australia & expansion opportunities in China New tenders being considered with large Australian Businesses Assessing opportunities to enter the Chinese market Logistics sector presents growth opportunities China need to urbanise the equivalent of the Australian population each year (20 Million +) Page 4 of 11

5 SmartTrans Australia This entity is engaged in meeting the challenges faced by the local environment within the context of conducting business in a large landmass with low population density. Building on proven emerging technology, SmartTrans Australia engages with businesses to provide them the with the technical tools to drastically increase the ability to better manage field works, thus improving control, customer service, safety, compliance and efficiency. SMARTPAY PARTNERS TESTIMONIALS SmartTrans is highly scalable business with the upfront costs in developing and establishing platforms already absorbed, resulting in a significant proportion of future revenues dropping straight to earnings before interest and tax. The company has a degree of resilience, benefiting from recurring income and non-discretionary spending such as bill payments. SmartTrans has been building a mobile and online payment business in China that is starting to kick some real goals as it gradually spreads to various provinces - John Beveridge Herald Sun - Trevor Hoey Financial Review 2014/2015 SMA REVENUE: STRONG MONTH ON MONTH GROWTH The below figures represent the revenue growth for SmartTrans China growth over the 2014/2015 financial year: Revenue of $4.277 million for FY 2015 represents increase of 82% on FY 2014 ($2.344 million) China revenue of $2.737 million for FY 2015 driven by ongoing growth and uptake of SmartPay platform Cash flow positive quarter in Q4 FY 2015 with record revenue of $1.397 million Further Developments in revenue New Content Providers constantly being added to SmartPay platform in China Fifteen consecutive months of revenue growth from mobile billing business (July 2014 to September 2015) Customers include smartphone games developers, mobile content providers, media and travel Recurring and passive revenue still solid and expected to grow. This is being driven by subscription billing Transformational year for SMA has created solid platform for revenue growth in FY 2016 Rich portfolio of content from Chinese developers and content providers seeking new markets Subscription billing by Chinese consumers generating recurring revenue focussed on expansion Monthly customer retention running at 80%+ month-tomonth for subscription billing Strong cash position to drive growth Page 5 of 11

6 Continuing diversification of its product with multiple revenue streams 23 rd September 2015: SmartTrans announces continuing diversification of its product revenue base with its Love Finance News service, now generating growing monthly sales revenue in addition to established monthly subscription revenue for auto and movie products. Having now developed and refined Love Finance, which was initially launched in Hubei, SmartTrans is now in advanced discussions with China Telecom to strategically roll the service out into additional provinces and so promote the product to the telco s broader subscriber base of 191 million customers Like revenue derived from other subscription services that the company promotes and sell under its SmartPay banner, the revenue earned by SmartTrans from monthly subscriptions to the Love Finance service is passive and recurring in nature and ads to revenue earned from numerous games and Apps. KEY MILESTONES OF 2015 Implementing a subscription billing model for the Smart Pay platform, whereby customers pay a monthly fee for content, which has led to excellent retention rates and growing, recurring revenue streams Securing billing agreements with China Unicom and China Telecom (in addition to that with China Mobile), giving SMA reach to a combined 1.23 billion subscribers of all three major telcos in China Executing a contract with Entellect Ltd (now KNeoMedia Ltd) for exclusive distribution rights for this company s popular edutainment games in China Securing in-app billing arrangements with a growing number of popular smartphone game developers in China, allowing consumers easy access and repeat purchases/upgrades Strengthening the Company s balance sheet through a $3 million strategic placement and more recently with a $5.5 million capital raising through the successful completion of a heavily over-subscribed Non-Renounceable Rights Issue Entered into agreement with and commenced revenue generation with Ta Kung Pao, China s oldest established and first online newspaper3 Establishing close working relationships with respected state-owned enterprises (SOEs) in China, including China International Travel Service (CITS) Launching an integrated Direct Carrier billing service with China Mobile, allowing subscribers to easily purchase games and content on their mobiles, initially in Guangdong and then rolled out into additional major provinces Adding Direct Carrier billing service with China Telecom (in addition to above), successfully launched in Hubei province and planned to soon expand into more provinces Expanding the Company s logistics business into China (contract executed July 2015) by securing an agreement with the subsidiary of China s largest car manufacturer for the provision of software and service. Page 6 of 11

7 TIMELINE OF SIGNIFICANT ACHIEVEMENTS: JANUARY SEPTEMBER 2015 January 2015 February 2015 March 2015 April 2015 May 2015 June 2015 July 2015 August 2015 September 2015 China Revenue $226k China Revenue $260k up 15% from previous month China Revenue $300k up 15% from previous month 1 millionth customer billed Mobile billing with China Mobile in Jiangsu province(pop.79million*) added Mobile billing with China Mobile in Sichuan province (Pop.81million*)added Mobile billing with China Mobile in Guangdong province added (Pop.106 million*) China revenue $357k up 19% from previous month Mobile Finance News product with China Telecome and Ta Kung Pao agreed China Revenue $406k - up 13% from previous month Launch of billing with China Telecom in Hubei province(pop. 58 million*) New App providers added to China Mobile SmartPay billing Successful Rights Issue raising $5.5m (Applications totalling $9.1m received) China Revenue $450k up 12% from previous month Launch of Mobile Love Finance News product with China Telecom Enter china logistics market with contract with Yanfeng Visteon Automotive- a major subsidiary of China s largest auto manufacturer Break through milestone of 4.3 million customers using SmartPay platform in China with 1.2 million customers billed in July alone Expand subscription billing products with China Mobile and China Telecom into Shandong Province (Pop.97 million*) China Revenue $1,063k - up 60% from previous month Q China revenue of $2.27 million 83% of full year revenue from China in FY2015 achieved in Q More than 8 million billing transactions achieved in 15 months since July 2015 Page 7 of 11

8 THIRD PARTY DISTRIBUTION AGREEMENTS As part of SmartTrans overriding strategy, the company seeks to partner with key distribution partners in China to expand the reach of the SmartPay online platform. In November 2014, SmartTrans signed an agreement with China s oldest existing and first online newspaper, Ta Kung Pao ( to work together on distributing and promoting news and content across China, in Australia and globally through the SmartTrans online platform to reach a wider audience. The Ta Kung Pao group chose to work with SmartTrans for the distribution of its content to consumers in China providing access to all three major telecommunications operators there- China Mobile, China Unicom and China Telecom- providing reach to the 1.26 billion subscribers that these companies collectively have. The decision by Ta Kung Pao to partner with SmartTrans to distribute its content online is a sign of trust in their credibility and technology, as well as the position in the market place which they have worked very hard to establish. An agreement of this calibre leaves SmartTrans well placed in negotiating additional agreements and ventures with third parties who wish to use their unrivalled access in China to access the dynamic and growing market. SmartTrans have stated that they are continually pursuing a number of new contracts and agreements and look forward to communicating the progress to shareholders in the months to come. Triple C /Six Degrees site visit: On set at Ta Kung Pao studio GROWING THIRD PARTY MOBILE PAYMENTS The continued growth and uptake of online and mobile payments presents SmartTrans and SmartPay opportunities for expansion and growth. SmartTrans to expand SmartPay utilization and product range SmartPay to expand utilization geographically across China across six difference provinces: Guangdong, Shandong, Hubei, Sichuan, Hunan and Gansu LONG STANDING AGREEMENTS WITH KEY CHINA PAYMENT GATEWAYS Long-term relationships and agreements in place with China s Telco and billing providers High Barriers to Entry: SMA has the agreements, licences and registrations-assembled over many years China Mobile Direct-to-phone billing and In Application billing with China Mobile China Mobile has 816 million customers Agreement with China Mobile- retains 30% as a fee China Telecom Direct-to-phone billing and In Application billing with China Telecom China Telecom has 188 million customers Agreement with China Telecom retains 30% as a fee China Unicom Direct-to-phone billing and In Application billing with China Unicom China Unicom has 285 million customers Agreement with China Unicom retains 30% as a fee Alipay Annually auto renewing agreement in place with Alipay Circa 600 million subscribers AliPay charges SMA 1% of transaction fee to access its platform Union Pay Over 1 billion UnionPay account holders in China Annually auto renewing agreement to utilise UnionPay in its platform UnionPay charges SMA 0.65% of transaction fee to access its platform. Page 8 of 11

9 RISKS There are, however, risks to the massive rise in adoption of mobile payments and the market in which SMA operate. Push back from customers or merchants, is most likely to come from a lack of convenience. Mobile payments need to be quicker than other methods and cheaper for merchants Any perception that it is not safe due to fraudulent transactions or theft of personal details will limit greater adoption. However, risk is limited in this case due to SMA relationship with existing Chinese companies. Chinese government risk WHY TO BUY After a busy and transitional year in FY 2015, SmartTrans have entered the new financial year well placed to capitalise on the platform it has now created with its two distinct business divisions of the SmartPay platform in China and the logistics business that it has now expanded into China. In 12 months, SmartPay has secured 5,000,000 paying customers in China SmartTrans has trusted relationships with Content and App Providers in China with vast libraries of high-quality, Asian centric content SmartTrans is able to deliver Apps and Content from China to the world SmartTrans provides in-app billing and monthly subscription billing People subscribing to mobile news content are customers of SmartTrans China and pay a monthly fee for: - Auto news - Movie news - Finance news Users making purchases within games and Apps become customers of SmartTrans SmartTrans has trusted relationships with Content and App Providers in China with vast libraries of high-quality content SmartTrans has a growing and active customer base searching for additional mobile and internet products. VALUATION As a result of the continued growth rate in revenue from mobile billing payment transactions in FY15 we are projecting our full year FY16 revenue to $22.7m. Triple C initiate coverage with a SPECULATIVE BUY recommendation with 12-month price target of A$0.066/sh. Page 9 of 11

10 DISCLAIMER This Research report, accurately expresses the personal view of the Author. This report was prepared by Triple C Consulting Pty Ltd ABN: , Australian Financial Services Licence No This Research Report was not commissioned by the Company, the Company did however provide assistance in verifying the factual content of the report. No inducements have been offered or accepted by the company for the publication of this report. Triple C Consulting initiated this research of its own initiative based on its own due diligence of the company and its opinion that it represents value to existing and potential shareholders. Disclosure Triple C Consulting Pty Ltd, including the authors of this report, its directors and employees advise that they have an interest in and earn brokerage and other benefits or advantages, either directly or indirectly from client transactions in securities the subject of this report. Interest in Securities 1,500,000 options exercisable at 2 cents, 8,500,000 options exercisable at 3.5 cents and 22,127,503 shares. Fees Triple C Consulting received a fee of 6% ($14,931.16) and 2 million 2 year 3.5c exercisable options for the Underwriting of the Small Shareholding sale facility which was announced to the market on 6 October The 2 million options are included in the interest disclosed above. Triple C Consulting is engaged by the Company to provide corporate services and is paid $10, per month as a retainer. Triple C has received corporate consulting fees and professional services related expenses from the company of $424, (including GST). Warning In accordance with Section 949A of the Corporations Act 2001 Triple C Consulting advise this report contains general financial advice only. In preparing this document Triple C Consulting did not take into account the investment objectives, financial situation and particular needs ( financial circumstances ) of any particular person. Accordingly, before acting on any advice contained in this document, you should assess whether the advice is appropriate in light of your own financial circumstances or contact your Triple C Consulting adviser. Disclaimer Triple C Consulting believe that the advice herein is accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained in this publication and no responsibility for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence), is accepted by Triple C Consulting or any officer, agent or employee of Triple C Consulting. No part of this report may be reproduced or distributed in any manner without permission of Triple C Consulting Pty Ltd. Page 10 of 11

11 Prepared by Nicholas Brownbill Investment Adviser / Analyst nic@tripleccc.com.au Triple C Consulting Pty Ltd 5 Lindsay Street, Perth WA Peter Sheppeard Managing Director peter@tripleccc.com.au Scott Williams Director scott@tripleccc.com.au Bradley Hill Investment Adviser brad@tripleccc.com.au Natasha Nikoleaff Administration tash@tripleccc.com.au Page 11 of 11