Equity Analysis /
Global

AMTD Digital: The mother of all shorts

  • AMTD Digital is a meme stock that is set to collapse

  • The company is a startup without a viable business model

  • We initiate with a Sell, with our target price of US$10.9 implying 94% downside

AMTD Digital: The mother of all shorts
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
15 August 2022
Published byTellimer Research

We initiate coverage on AMTD Digital Inc. with a Sell recommendation. Our DCF-derived target price of US$10.9 implies 94% downside. The NYSE ticker is HKD US.

AMTD Digital Inc is a subsidiary of Hong Kong-based investment group AMTD IDEA Group. AMTD IDEA has an 89% stake in AMTD Digital.

AMTD Digital is an Asian tech company, with its website stating that it provides "one-stop, cross-market digital financial services for retail and corporate clients.” Its four business segments include insurance, portfolio management, digital media marketing and a platform connecting clients. It claims that its SpiderNet ecosystem is the string that binds its businesses.

AMTD Digital saw its market cap reach US$310.6bn on 2 August, more than 100 times the level at its initial public offering on 15 July. AMTD Digital overtook Alibaba, whose market cap came to US$237.3bn, as the No. 1 Chinese company listed in the US.

It also rose to 25th in the global ranking, leapfrogging such multinationals as Toyota Motors, Coca-Cola and Pfizer. It has since fallen sharply.

AMTD: Price Performance

We see severe vulnerabilities with the stock:

  1. AMTD Digital has the hallmarks of meme stock. It has appreciated 21,000% since its listing on 15 July 2022. A meme stock is one that rises extravagantly on the back of a social media frenzy. It is a continuation of the hysteria that drove Gamestop and AMC to unsustainable heights in 2021.

  2. AMTD Digital is overvalued on every conceivable metric. It is trading at 1,023x FY23f PE and 2,067x FY23f EV/EBITDA. This is 100 times the prevailing multiples in the EM tech space. The frenzy had taken AMTD Digital to one of the top 10 financial firms in the world.

  3. There is little substance to AMTD Digital's business model. Some of its areas of business are pre-operational. For instance, its digital financial services segment has applied for a digital banking license in Singapore. This has not been granted by the Monetary Authority of Singapore (MAS). Similarly, AMTD Digital has not got its direct insurer (composite) license.

  4. In FY21, changes in fair value on financial assets represented one-third of the US$22mn net profit in FY21. In FY20, the ratio was one-fourth. The changes in fair value on financial assets are non-cash. It is not a recurring earnings item.

  5. The SpiderNet Ecosystem has a limited operating history. It has negligible traction with the client base. The extravagant multiple that the market is paying for this stock is hard to justify.

  6. AMTD Digital's low free float has amplified its volatility. Only 19mn of outs 185mn outstanding shares were offered in the IPO. This suggests that the stock is open to manipulation. The meme stock frenzy was dominated by stocks with a low free float.

  7. AMTD Digital has claimed that it is an investee company of the CK Group, the flagship company of the Hong Kong tycoon Li Ka-Shing. This may not be accurate. The CK Group issued a statement last week disassociating itself from the AMTD Digital. CK Group has said that it has sold a majority of its shares in AMTD Group, which was the parent company of AMTD Digital a decade ago. CK Group now only has a small stake.

Company Dynamics

AMTD Digital has projected itself as a one-stop digital solutions platform operator. There are four business segments:

  1. It acts as a digital financial services provider. AMTD Digital provides digital solutions for insurance providers in Hong Kong. It also operates a digital insurance technology platform for consumers and SME clients in Singapore. This platform is called PolicyPal. AMTD Digital has applied for a digital wholesale banking license in Singapore.

  2. It operates the SpiderNet Ecosystem Solutions. This platform connects Asian entrepreneurs to capital and technologies. The platform operates a membership fee scheme. We have not been able to independently verify the depth of this platform.

  3. There is a digital media, content and marketing division. This segment provides seed funding for video and podcast providers. AMTD Digital has sponsored the Singapore FinTech festival as a means of promoting this segment.

  4. Digital Investments are made through the final segment. The investment portfolio includes companies in artificial intelligence, financial innovation and fintech.

Segmental revenue

We note that fair value gains have played a vital part in AMTD Digital's net income in the past three years. The company made equity investments in private companies and the changes in the fair value of the assets are recognised on the P&L.

Fair value gains as a % of net income

Management

Dr Timothy W. Tong – Chairman of the Board of Directors

Dr Timothy Tong was appointed as the chairman of the board of directors in February of 2020. Prior to joining AMTD Digital, Dr Tong spent a decade as the president of Hong Kong Polytechnic University. His extensive experience with education goes further back than that, though, as he served as the Dean of the School of Engineering at George Washington University in Washington DC. Dr Tong is also an independent, non-executive director at a number of companies, including Airstar Bank, Xiaomi Corporation, and Gold-Peak Industries.

Dr Frederic Lau – Director and President

Dr Frederic Lau is currently the director and president of AMTD Digital. His background is extremely extensive in regulations and monetary authority, serving in both the Hong Kong Monetary Authority and the United States Treasury Department, where he served as a senior bank examiner at the office of Thrift Supervision. At the HKMA, he was the division head of the banking supervision division. In between these two jobs, he also spent time working as executive director for the Dah Sing Banking Group, and the managing director of Promontory Financial Group.

Corporate structure

AMTD Digital has a complex ownership structure. AMTD Group is AMTD Digital's parent company. AMTD Group holds 50.6% of AMTD Idea Group, a Cayman Islands incorporated investment bank, which holds 97% of AMTD Digital.

Calvin Choi, a former UBS banker, is the sole shareholder in an entity that controls 33% of AMTD Group. According to Bloomberg, Choi is facing an industry ban in Hong Kong for failing to disclose conflicts of interest.

Valuation

We have valued AMTD Digital using a DCF methodology. We arrive at a valuation of US$10.9, implying a 94% downside.

AMTD: FCFF valuation (HK$ '000)

We assume a WACC of 8.2%.

AMTD: WACC assumptions

AMTD: P/E ratio

Comparables: Price to Earning

Financial Statements

AMTD: Income Statement (HK$ 000)

AMTD: Balance Sheet (HK$ 000)

AMTD: Cash Flow Statement (HK$ 000)