AMTD International (HKIB) is a young investment bank currently reporting substantial fees growth. It is a name to be followed carefully after the IPO. With that, there are several risks to be kept in mind. Firstly, it operates in Hong Kong, where there is a political crisis right now. Besides, the company is a controlled entity and may not have an independent Board of Directors. Given these risks, the share price appears to be too expensive. The company sells ADSs at 28x earnings. Most investment banks report a P/E ratio below 17x.

Source: Prospectus

Source: Prospectus

Business And Risks

Hong Kong-headquartered and incorporated in Cayman, AMTD International Inc. offers investment banking, asset management, and strategic investment services.

Source: Company’s Website

The company appears to be experienced in the IPO market. CIC Report noted that AMTD International is the first investment banking firm in Asia in terms of aggregate offering size of Hong Kong and U.S. IPOs executed in 2018 and Q1 2019.

The company’s business is solid in China and Hong Kong. As shown in the lines below, AMTD International is an expert in connecting clients in Hong Kong and China:

“This genuine “Hong Kong-owned” identity positions us to play an instrumental role in connecting local clients from Hong Kong and China with global capital markets. Compared to other global and Chinese market players in Hong Kong, we believe that we benefit from greater execution efficiency, supreme local market and industry know-how, and unparalleled access to the sizeable capital of Asia’s tycoon families.” Source: Prospectus

In our opinion, the company has not chosen the best time to execute its IPO. The political relations between Hong Kong and China are not excellent right now. As a result, investors will most likely not expect many IPOs of Chinese companies in Hong Kong or vice versa. With this in mind, the business of AMTD International in 2019 may not be as good as in 2018. The lines below offer further information on the political crisis going on right now in Hong Kong:

Source: CNN

As shown in the image below, AMTD International expects the number of IPOs in HK to decrease in 2019, 2020, and 2021. Given these projected figures, investors may wonder whether it is better to invest in 2022 or 2023.

Source: Prospectus

The table below offers information on the fees generated by AMTD International. In 2018, 78.5% of the total fee and commission income was generated from underwriting of IPOs, bong offering, and M&A. It appears clear that the political crisis in Hong Kong will damage the future financial performance of AMTD.

Source: Prospectus

Income Statement

In 2018 and 2019, the increase in the amount of fees obtained is very impressive. In 2018, the total amount of fees and commission income increased by 31%. Besides, in the three months ended March 31, 2019, fees increased by 696% as compared to fees in the same quarter in 2018. The image below offers further information on the matter.Source: Prospectus

With that, the company reported declining comprehensive income. Notice that the fair value changes in financial assets increased less in 2018 than that in 2017. In 2018, the company reacted by reducing operating expenses, staff costs, and finance costs. Notice that the number of employees did not decline in 2019. It increased in 2017, 2018, and 2019. The image below offers further information on the bottom of the income statement:

Source: Prospectus

Balance Sheet

With an asset/liability ratio of 1.81x, AMTD International appears to have a very stable financial situation. Having said that, there are several assets that investors need to understand well. Due from fellow subsidiaries represents 36% of the total amount of assets, which is not ideal. As shown in the lines below, AMTD International provided services to fellow subsidiaries and its immediate holding company:

“As at December 31, 2018 and March 31, 2019, the Group’s receivable from investment banking services of HK$70,875,980 and HK$26,420,072, respectively, were due from fellow subsidiaries and its immediate holding company, which were repayable on similar credit terms to those offered to the major customers of the Group.” Source: Prospectus

A stock loan represents 21% of the total amount of assets. The lines below offer further information on the matter:

“Our stock loan represents certain listed equity securities that we lent to a shareholder of our Controlling Shareholder, in September 2017 in connection with a stock borrowing and lending arrangement.” Source: Prospectus

See more on the company’s assets in the image below:

Source: Prospectus

Debt due to an immediate holding company also represents 54% of the total amount of liabilities. The image below offers further information on the matter:

Source: Prospectus

The balance sheet includes many assets and liabilities generated from relationships with controlling shareholders and fellow subsidiaries. Investors may not appreciate these items.

Use Of Proceeds

As shown in the lines below, the company expects to use the proceeds from the IPO to finance business, expand infrastructure and perhaps acquire another competitor. The lines below offer further details on the matter:

Source: Prospectus

Dual-Class Shares

The company expects to have two types of shares; class A and class B shares. Investors in the IPO will acquire class A shares, which give the right to one vote. Notice that owners of class B shares have the right to twenty votes per share. It is not ideal. If there is an acquisition attempt, class B owners may block it.

Besides, there is one shareholder who controls more than 99% of the total aggregate voting power. It means that the company will be a controlled entity. The image below offers further information on the matter:

Source: Prospectus

Also, investors will dislike that the company does not expect to have an independent Board Of Directors. As a result, the rights of minority shareholders may not be that protected. The lines below offer further information on the matter:

Source: Prospectus

The company was incorporated in Cayman and has assets in Hong Kong. Securities law of Cayman does not protect shareholders as much as that in the United States. Besides, judges in the United States may have issues if they decide to take action against the company. See below for more details on the matter:

“Substantially all of our directors and executive officers and the experts named in this prospectus reside outside the United States, and most of their assets are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against them in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands, Hong Kong, or other relevant jurisdiction may render you unable to enforce a judgment against our assets or the assets of our directors and officers.” Source: Prospectus

Risks: Short Operating History And Investments In Technology

There is another clear risk on this name. AMTD International has a relatively very short history. The company commenced operating in the investment banking business in 2015. The company hired many great professionals who brought a lot of business connections. With that, the company is creating a new brand and will need to manage future growth, which is not an easy task.

Net fair value changes in financial assets represent 35.5% of the total amount of revenue. It is necessary to understand the equity portfolio of AMTD International. As shown in the lines below, the company has invested in the technology sector, which is subject to substantial valuation changes.

Source: Prospectus

Publicly listed Bank of Qingdao accounted for 89.9% of the total investment portfolio. Besides, the company’s Chairman of the Board of Directors and the Chief Executive Officer also serves as a Director of Bank of Qingdao. It means that the CEO could make decisions in the Bank of Qingdao, which may also modify the AMTD’s net fair value changes in financial assets.

Valuation: The Shares Are Expensive At 28x Earnings.

After the offering, there will be 20.75 million ADSs and 230.663 million shares. Each ADS represents one Class A ordinary share. With each ADS at $8.29, the expected market capitalization will be equal to $1.912 billion. In 2018, the company reported net income of 525.125 million Hong Kong dollars or approximately $67 million. It means that the company intends to sell shares at 28x earnings.

The P/E ratio of international investment banks and banks in Asia is 5x-70x. However, the median is between 9x and 17x. Given the current political risks and the expected decline in the amount of IPOs, the shares are too expensive at 28x earnings. The image below offers further information on the matter:

Source: Ycharts

AMTD International presents many risks. Investors need to have them in mind while deciding at which price they will be willing to acquire shares. In our opinion, most investors may be willing to pay 15x earnings or $4.35 per ADS for the company. Let’s see whether the price hits that mark after the IPO.

Conclusion

With impressive fees growth in 2017 and 2018, AMTD International’s financial performance will be appreciated by the market. With that, future fees growth may not be as brilliant. The fact that there are political issues between China and Hong Kong may negatively affect AMTD’s business. Besides, the fact that the company will be a controlled entity is worrying. Additionally, the company is selling shares at 28x earnings, which seems expensive. In our view, the buying opportunity may commence at 15x earnings.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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