AMTD Digital is a quality company going public at the wrong time (NYSE:HKD)

Matteo Colombo

Hong Kong financial services platform, AMTD Digital Inc. (NYSE: HKD) closed 108% above its initial offering price of $7.80 during its IPO in the United States, making it the largest listing of its size. The company has raised nearly $125 million and won a valuation of $3 billion.

What AMTD Digital does

The company has a very interesting mission statement. According to its F-1/A filing, AMTD aspires to be a “fusion reactor for the best entrepreneurs and innovative ideas”, by digitally bringing together all the elements of its ecosystem and leveraging this power to produce “social impact, technological and economic. ”

The Company’s digital solutions platform, AMTD SpiderNet, operates in four business segments: Digital Financial Services, SpiderNet Ecosystem Solutions, Digital Media, Content and Marketing, and Digital Investments.

The Company’s revenue is derived from fees and commissions collected from its digital financial services business and SpiderNet Ecosystem Solutions segment.

The company is on a digital transformation path, which has accelerated during the pandemic. It is already the most integrated digital solutions platform in Asia and in this regard, its value is expected to grow given the network economies. Asia is a large market that is in many ways ahead of the United States in terms of product development. Asia also has a young and growing population that is getting richer. This presents the company with a huge market opportunity. The fact that many Asian economies are not highly developed is a plus for AMTD Digital as it meets the need, and also enables AMTD Digital to help these economies leapfrog levels of development by going straight to digital.

Financial performance

The company increased its revenue from HK$14.55 million on April 30, 2019 to HK$195.8 million (US$25.2 million) on April 30, 2021, and from HK$162.4 million Hong Kong dollars in the ten months ended February 28, 2021 at 168.0 million Hong Kong dollars (USD). $21.5 million) in the ten months ended February 28, 2022. This represents a compound annual growth rate (CAGR) of nearly 140%. According to the Credit Suisse Base Rate Book, only 2.5% of companies are able to achieve this type of growth.

Exceptional growth has been accompanied by profitability. Net profit increased from HK$21.5 million as of April 30, 2019 to HK$171.6 million (US$22.1 million) as of April 30, 2021, and HK$113.0 million during for the ten months ended February 28, 2021 at HK$186.8 million (US$23.9 million). in the ten months ended February 28, 2022. This represents a 3-year CAGR of nearly 100%.

During this period, the company’s free cash flow (FCF) increased from HK$24.56 million to HK$213.76 million. Once again, we see incredible growth in a key metric, with FCF growing by a 3-year CAGR of 105.7%.

The company’s ability to combine growth and profitability testifies to its solid competitive advantages.

The Chinese threat

Although both China and Hong Kong have a “one country, two systems” philosophy, in recent years Hong Kong has been increasingly integrated into the same system as mainland China. Normally that wouldn’t be a problem from an investment perspective, but it is in a post-Ukrainian world. Under President Donald Trump, relations with China soured, and it continued under President Joe Biden. The Chinese signaled that they were ready to go to war with the United States. The risk of war between the two powers has steadily increased, with Taiwan being the most likely source of conflict.

We have already entered a period of de-globalization, with the world breaking up into Western, Chinese and non-aligned spheres. In this world, geopolitical considerations will trump economic considerations. Investors should therefore consider the likelihood of war, which Admiral Philip Davidson predicts could occur within the next six years, and ask themselves what this means for any investment in China and Hong Kong.

With Hong Kong increasingly part of the same system as mainland China, the type of sanctions regime imposed on Russia will likely affect Hong Kong as well. This means that investors run a huge risk of being kicked out of Hong Kong and suffering massive losses. Russia should warn investors that in this new moment in which we find ourselves, investing in countries with which the United States is in conflict, or with which the United States is likely to be in conflict, will lead to losses economic.

Evaluation

AMTD Digital is too expensive. With an FCF of HK$213.76 million ($27.23 million) and a market capitalization of $4.63 billion, AMTD Digital has a free cash flow yield of just 0.27%. This is an unattractive rate at a time when Treasury yields are rising.

Conclusion

Despite very exciting, very high quality fundamentals, the risk of conflict with China makes this a very risky proposition. Given that both sides anticipate conflict, and what we’ve seen with Russia, any investment in Hong Kong could be subject to short-term sanctions. This risk is too high for any sensible investor.

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