Equity Research | Tech, Media & Telecom Econtext Asia (1390 HK) Solid online payment platform in Japan We recently met Econtext Asia (ECTA) management. Here is the background information and quick takeaway. Online payment solution for credit card & convenient stores in Japan: Econtext Asia has 2 major operating entities, Econtext and VeriTrans. In 2000, Econtext introduced convenience store payment option for online transactions in Japan. VeriTrans focused in credit card transaction since 1997. Overall, ECTA payment services allow online merchants to accept payments via credit card, debit card, ATM, internet banking transfer, eMoney,3rd party payment intermediaries, payment at convenience store and payment through mobile phone bill. ECTA gets an average fee equivalent to 1-2% of the transaction value. Strategy for Japan lower-tier market to expand overall market share: Out of 12,284 active merchant websites, ECTA top 5 customers were DMM.com, Rakuten Edy, BitCash, Sony Computer and SBILife Living, which together made up 57.7% online retail market in Japan. ECTA had an overall market share of 10.9% as of 2012 behind the leader at 21.4%. In addition to market growth at 11.7%-14.4% a year 2012A - 2017E, ECTA is partnering with brand names to launch low-cost devices to penetrate lower-tier market dominated by GMOPayment Gateway (3769 JP), which may make up 20%-30% ECTA income in 3 years. Strong company background and Asian diversification strategy: ECTA controlling shareholder is Digital Garage (DG) (4819 JP), which co- founded the platform with Lawson (2651 JP), Mitsubishi (6503 JP) and TISInc. ECTA is the online payment arm of DG, which also operates incubation IT arm and marketing arm. ECTAChairman is also DG President and CEO. In fact, ECTA aims to set foot on other Asian countries such as China and India, which in total contribute up to 20% income in 5 years. For instance, in 2009, ECTA partnered with Sumitomo Mitsui Card to introduce China UnionPay cards as a settlement option for cross-border e-commerce transactions between Japanese merchants and Chinese consumers. Waiting for a better entry point despite solid business: As of prospectus profit forecast, ECTA is to earn at least HK$68.1m for FY2014. We believe it is conservative, as it represents 5% YoY growth vs 11.7%-14.4% market growth in Japan. For reference purpose, if we take 12.5% YoY growth of existing business,20% new sub-market contribution and 10% overseas contribution in 3 years, ECTA income is to double in 3 years. We suggest investor to wait for better entry as FY2013AP/E was 58.8x. ECTA was listed Dec 2013 at HK$3.59 a share. Kevin Mak, CFA Analyst +85235191299 email@example.com Meeting takeaway Share price: HK$7.36 Bloomberg Ticker: 1390 HK Reuters: 1390.HK 27 Jan 2014 Illustration 1. Flow of funds for a typical transaction using ECTA online payment services Source: ECTA Table 1. Profit and loss summary Year-end Jun (HK$m) FY11AFY12AFY13A Revenue 278.7 492.4 1,166.5 Cost of revenue (195.9) (352.9) (853.3) Gross profit 82.8 139.5 313.2 SG&A (40.8) (65.2) (182.3) Other operating income 0.6 0.0 1.5 Other operating expenses (0.4) (0.3) (11.6) EBIT 42.2 74.0 120.9 Finance income 0.3 0.2 0.5 Finance costs (0.1) (0.1) (1.0) Share of after-tax loss of an associate - (0.0) (1.0) EBT 42.4 74.0 119.4 Income tax (18.0) (31.5) (56.0) Total profit 24.5 42.5 63.4 Net profit 24.5 43.0 64.9 MI - (0.5) (1.5) Total number of shares (fully diluted) 518.8 518.8 518.8 Diluted EPS (HK$) 0.047 0.083 0.125 Source: Orient Securities Table 2. Balance sheet summary Year-end Jun (HK$m) FY11AFY12AFY13A Non-current assets 35.0 1,411.3 1,195.4 Goodwill - 495.3 410.4 Other intangible assets 19.8 865.1 695.3 Financial investments - 5.8 21.4 Property, plant and equipment 6.2 19.4 46.6 Deferred tax assets 5.7 13.0 10.9 Investment in an associate - 4.6 3.3 Restricted cash 1.0 1.1 0.9 Security deposits 0.0 5.4 5.4 Other non-current assets 2.3 1.6 1.1 Current assets 832.8 1,946.2 1,775.0 Cash and cash equivalents 441.6 1,087.1 1,090.2 Payment processing receivables 347.0 662.0 628.8 Account receivables 2.1 30.2 25.4 Due from the ultimate holding co 28.9 146.8 Other current assets 13.3 20.1 30.5 Non-current liabilities 0.5 280.2 221.7 Finance lesase payables - - 0.9 Other non-current liabilities 0.5 0.8 1.9 Provisions - 1.2 1.0 Deferred tax liabilities - 278.2 217.9 Current liabilities 580.2 1,452.6 1,449.3 Payment processing payables 523.1 1,378.0 1,363.0 Account and other payables, accruals 35.3 63.2 61.4 Finance lease payables - - 0.2 Interest-bearing bank borrowings 19.3 - 0.2 Income tax payable - 7.6 19.7 Other current liabilities 2.5 3.7 4.8 Total equity 287.1 1,624.7 1,299.4 Issued capital - - 1,623.2 Other reserves 204.2 1,455.5 (153.7) Retained earnings 61.5 104.5 53.9 Foreign currency translation reserve 21.4 55.9 (229.5) Non-controlling interests - 8.7 5.5 Source: Orient Securities Table 3. Selected operating statistics Year-end Jun (HK$m) 2011A 2012A 2013A Customer concentration Number of active merchants 6,704 10,213 12,284 Top 5 customers 28.0% 20.5% 18.3% Others 72.0% 79.5% 81.7% Revenue breakdown Initial setup and monthly fees 5.6 14.2 46.6 Settlement data transaction fees 4.6 18.5 66.9 Agency payment fees 244.6 420.8 949.0 Advertising related services 12.4 58.3 Information security services 4.7 19.6 Others 23.8 21.8 26.1 Total revenue 278.7 492.4 1,166.5 Table 4. Shareholders shareholding Digital Garage 58.2% Sumitomo Mitsui Card 7.2% Credit Saison 5.4% JCB 1.4% Public 27.8% Total 100.0% Source: Orient Securities Analyst Certification I, Kevin Mak (Mak Tsz Hang), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that: (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFCCode of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report. 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