AGBA — Forecasts lowered but momentum maintained

AGBA (NASDAQ: AGBA)

Last close As at 23/05/2024

USD2.17

0.06 (2.84%)

Market capitalisation

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Research: Financials

AGBA — Forecasts lowered but momentum maintained

AGBA generated sales of US$28.4m in H123, 361% higher than in H122, as it continued to onboard agents and COVID-19 restrictions were relaxed. Compared to Q123, revenue increased by 54% as AGBA continued to benefit from the reopening of the Hong Kong-China border in February and the Chinese economy. Despite the positive momentum, AGBA has reduced its forecasts for each consecutive year to 2026 because of the slower-than-expected revival of the Chinese and Hong Kong economies so far in 2023. It still projects double-digit growth in subsequent years and expects to capitalise on increasing travel to Hong Kong from Mainland Chinese looking for high-quality health and wealth products.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

AGBA Holding

Financials

AGBA Group Holding

Forecasts lowered but momentum maintained

Financial services

Spotlight Update

18 September 2023

Price

$0.75

Market cap

$51m

HK$7.84/US$

Share price graph

Share details

Code

AGBA

Listing

Nasdaq

Shares in issue

67.5m

Cash at 30 June 2023

US$3.8m

Business description

AGBA Group Holding is a diversified financial services company operating out of Hong Kong. AGBA distributes health and wealth products to over 400,000 retail and corporate clients through its extensive independent financial advisor network, which is the largest in Hong Kong. It holds several investments in fintech start-ups, notably selling its holding in Nutmeg to JP Morgan in June 2021.

Bull

Core technology platform has been built out, allowing for implementation of selective cost-saving strategy.

Superior product quality and diversity in Hong Kong continues to drive demand from Mainland China.

Strong investor base. Richard Tsai of Fubon Financial Holdings is a majority shareholder. AGBA recently entered into a US$50m equity purchase agreement over a 36-month period.

Bear

Low free float of 16.5%.

China’s GDP growth not as prominent as first expected.

Sales from Mainland China rely on customers travelling to Hong Kong and are limited to the amount of cash they can bring through the border.

Analysts

Rob Murphy

+44(0)20 3077 5700

Armando Hoxha

+44(0)20 3077 5700

AGBA Group Holding is a research client of Edison Investment Research Limited

AGBA generated sales of US$28.4m in H123, 361% higher than in H122, as it continued to onboard agents and COVID-19 restrictions were relaxed. Compared to Q123, revenue increased by 54% as AGBA continued to benefit from the reopening of the Hong Kong-China border in February and the Chinese economy. Despite the positive momentum, AGBA has reduced its forecasts for each consecutive year to 2026 because of the slower-than-expected revival of the Chinese and Hong Kong economies so far in 2023. It still projects double-digit growth in subsequent years and expects to capitalise on increasing travel to Hong Kong from Mainland Chinese looking for high-quality health and wealth products.

Historical financials

Year
end

Revenue
(US$m)

PBT
(US$m)

EPS*
(US$)

DPS
(US$)

P/E
(x)

Yield
(%)

12/19

N/A

N/A

N/A

N/A

N/A

N/A

12/20

N/A

N/A

N/A

N/A

N/A

N/A

12/21

11.5

120.0

1.74

N/A

0.43

N/A

12/22

31.1

(44.4)

(0.79)

N/A

N/A

N/A

Source: AGBA. Note: *EPS is diluted.

US$50m equity purchase agreement to fuel growth

On 8 September, AGBA entered into a US$50m equity purchase agreement with Williamsburg Venture Holdings, a New York-based private investment fund. The agreement is over a 36-month period and will allow the fund to purchase up to US$50m in AGBA ordinary shares. The investment will provide further headroom to fund cash requirements until projected profitability in 2025. In addition, this year AGBA also expanded its footprint into Singapore, partnering with HSBC Life to distribute one of its life insurance products, and has been included as a constituent stock on the MSCI Global Micro-Cap Index (see ‘Positive newsflow year to date’ on page 4).

Profitability delayed to 2025

The rebound in the Chinese economy after reopening after COVID has not been as rapid as expected and GDP growth forecasts have been lowered. Despite this, China’s GDP growth remains robust with the International Monetary Fund forecasting 5.2% growth. AGBA has lowered its sales estimates for 2023 from US$160m to US$103m and has further decreased its sales estimates for each subsequent year to 2026. It has delayed positive PBT expectations (US$37m) to 2025 and now projects a small US$10m loss in 2024.

Valuation: Internal valuation suggests upside

AGBA has no direct peers due to the diversity of its business. In conducting its own peer valuation, AGBA has aggregated a list of business that operate in similar industries, from insurance brokers to companies classified as Chinese fintech firms. The mean EV/sales ratio of these businesses is 4.8x, far higher than AGBA’s 0.4x.

H123 summary: Costs outweigh sales growth

AGBA grew its H123 sales by 361% to US$28.4m, which it attributes to the substantial increase in commissions earned as it benefited from onboarding agents and the reopening of China’s and Hong Kong’s economy and borders (see Exhibit 1). Sales increased by 57% on a quarter-on-quarter basis, suggesting strong momentum for AGBA during H123.

Commission expenses increased by 64% quarter-on-quarter. However, as a percentage of commissions earned, commission expenses marginally increased by 0.6pp to 73.4%. In H123, commission expenses as a percentage of commissions earned was 73.2%, a significant drop from 84.5% in H122, suggesting that AGBA can negotiate fees more competitively as it scales.

Personnel and benefit costs rose as the group increased headcount to support growth in the Platform and Distribution businesses. During H123, AGBA reversed the annual bonus of US$3.8m, which had already accrued at the end of FY22.

Additionally, AGBA incurred US$2m in technology costs (H122: US$0.3m) as it hired more staff to facilitate the expansion of OnePlatform, its proprietary technology platform, which manages the wealth and health products AGBA distributes.

Other general and administrative costs increased substantially to US$14.5m, or 597% y-o-y. The costs relate to the depreciation of property and equipment, legal and professional fees and management fee expenses. Since listing, AGBA has incurred more expenses, mainly through US legal counsel fees and costs related to office and administrative expenses that are paid to the holding company for the use of offices in Trust Tower and Hopewell Centre. This includes building management fees, government rates and rent, office rent, lease-related interest and depreciation incurred by the holding company. The costs also incorporate US$3.3m in share-based compensation awarded to a third-party marketing consultancy for services rendered at a price of US$1.578 per share.

Other income was positive at US$2.3m in H123, compared to a negative US$5.8m in H122, as AGBA primarily benefited from positive foreign exchange movements and investment income.

Despite a strong sales performance, costs increased at a faster pace and hence AGBA suffered a loss of US$22.7m in H123 – double the US$11.3m loss incurred in H122. Subsequently, net loss per ordinary share increased by 77% to US$0.36 versus H122.

Exhibit 1: Profit and loss – selected numbers

US$m (unless otherwise stated)

Q123

Q223

H123

H122

Q223 vs Q123

H123 vs H122

Commissions

10.0

16.3

26.3

3.8

63%

600%

Recurring service fees

1.0

1.0

2.0

2.3

(1%)

(12%)

Loans

0.0

0.0

0.0

0.1

0%

(23%)

Total revenue

11.1

17.4

28.4

6.2

57%

361%

Interest expense

(0.2)

(0.3)

(0.4)

0.0

50%

N/A!

Commission expense

(7.3)

(12.0)

(19.3)

(3.2)

64%

506%

Sales and marketing expense

(1.9)

(0.5)

(2.4)

(0.6)

(72%)

276%

Technology expense

(0.9)

(1.1)

(2.0)

(0.3)

20%

584%

Personnel and benefit expense

(9.6)

(5.3)

(15.0)

(5.4)

(45%)

176%

Other general and administrative

(5.9)

(8.7)

(14.5)

(2.1)

48%

597%

Loss from operations

(14.6)

(10.4)

(25.0)

(5.4)

(29%)

361%

Other income/(expenses)

(2.5)

(0.2)

2.3

(5.8)

(107%)

(140%)

Loss before tax

(12.1)

(10.6)

(22.7)

(11.2)

(13%)

102%

Taxes

0.0

(0.0)

0.0

(0.1)

(199%)

(100%)

Net loss

(12.1)

(10.6)

(22.7)

(11.3)

(12%)

100%

Weighted average shares (m)*

60.7

65.0

62.8

55.5

Net loss per ordinary share (US$)

(0.20)

(0.16)

(0.36)

(0.20)

(18%)

77%

Source: AGBA, Edison Investment Research. Note: *Includes basic and diluted.

AGBA lowers forecasts through to 2026

On 14 April, AGBA released its financial projections for 2023–27 (see Exhibit 2). At the time of release, AGBA forecast sales of US$160m in 2023 and US$298m in 2024, and expected to achieve positive PBT of US$6m in 2024.

However, following China’s underwhelming economic performance and less tourism into Hong Kong (from Mainland China), AGBA has downgraded its forecasts for 2023–26 (see Exhibit 3). It has reduced its revenue expectations for 2023 to c US$103m, with positive PBT now delayed until 2025 as the group adjusts its expectations in accordance with the performance of the wider economy.

A key factor in understanding the business model is the large variable cost base, which is dominated by commissions paid to agents, which in turn are based on sales. This means that the drop in projected PBT in 2023 and 2024 is relatively small compared to the shortfall in revenue expectations.

Additionally, with the build-out of its OnePlatform now complete, AGBA is focused on initialising its cost saving strategies and increasing revenues from new products. It expects to reduce costs incurred from recurring expenses by more than 30%, which should help narrow losses.

Positively, AGBA states that Chinese nationals continue to maintain high savings rates and high-net-worth individuals in the Greater Bay Area are keen to invest abroad and diversify away from cash. In the short run, the appetite to diversify away from cash could benefit AGBA. China continues to reduce its interest rate benchmark as it battles weaker consumer spending and a real estate slump. Wealth and savings products bought in Hong Kong could offer a more attractive financial return with enhanced product features.

Exhibit 2: AGBA projections released 14 April 2023

Source: AGBA

Exhibit 3: AGBA revised projections released 30 August 2023

Source: AGBA

Positive newsflow year to date

Exports fell by 9% y-o-y in Mainland China (August) and Hong Kong (July). Despite slowing growth, AGBA has demonstrated sales momentum and significantly improved its year-on-year performance during H123. Below we have highlighted some recent newsflow that should serve as tailwinds to AGBA.

In April, AGBA entered into an agreement to acquire 100% of Sony Life Financial Advisers for c US$1.9m. It is a licensed financial adviser and insurance broker in Singapore, and a subsidiary of Sony Life Insurance (an affiliate of the Sony Group Corporation). The acquisition will help AGBA enhance its branding and commercial footprint, as well as benefit from the geographical positioning of the island and its reputation as a major financial hub in South-East Asia.

In July, AGBA’s OnePlatform partnered with HSBC Life, which ranks first in market share in Hong Kong for individual life new business premiums and annualised new premiums (2022), to distribute HSBC’s Wealth Select Protection Linked Plan. AGBA was also selected to be a constituent stock of the MSCI Global Micro-Cap Index with effect from 31 August 2023.

In other news, during the year AGBA was able to expand its product offering by launching eight Securities and Futures Commission-authorised funds as well as OneGI, a digital sales platform for general insurance products. AGBA also announced that it plans to launch a direct-to-consumer savings and investment platform, called AGBA Money, at some point in the future.

Although the recovery in China has been pushed back, AGBA’s sales momentum remains very strong, with double-digit growth rates expected. The medium-term outlook remains positive as AGBA continues to strengthen its partnerships, improve its product offering and attract new investors. If demand from Mainland China continues to be strong and its cost-saving initiatives bear fruit, AGBA should be able to navigate a less favourable macroeconomic climate successfully.

General disclaimer and copyright

This report has been commissioned by AGBA Group Holding and prepared and issued by Edison, in consideration of a fee payable by AGBA Group Holding. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by AGBA Group Holding and prepared and issued by Edison, in consideration of a fee payable by AGBA Group Holding. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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