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Credit Intelligence Limited (ASX:CI1) – Banking on Bankruptcy

Article written by Pitt Street Research. For the full report click here

Unique proposition in the lucrative bankruptcy services

Credit Intelligence (ASX:CI1) is a Hong Kong-based debt restructuring and personal insolvency management service provider. CI1 has been a trusted partner for global banks for over 16 years. Considering the significant number of personal insolvency cases every year as well as the lack of experienced debt restructuring consultants and bankruptcy service administrators, we believe CI1 has substantial growth opportunities.

Highly scalable platform for bankruptcy management

CI1 is a market leader in a business that requires minimal capital. The operations are highly profitable, with net margins of ~40% and a dividend yield >10%. The fully functional IT platform and an experienced team make CI1 valuable for both regulators and financial institutions. It has recently set up joint operations with Cor Cordis and Arrow Business Consultants, to expand into Australia and Singapore respectively, both new markets for CI1. The extended network in these new markets and recurring revenues from the Hong Kong market are expected to drive a re-rating of CI1.

Valuation range of A$0.048–0.071 per share

We value CI1 at A$ 0.048 per share base case and A$ 0.071 per share in a more optimistic scenario in which CI1 expands into additional geographies in the next few years. Our valuation is based on a blend of DCF and relative valuation methods, with conservative assumptions on the commercial expansion of the new Australian and Singapore businesses.

Introducing Credit Intelligence

Credit Intelligence (CI1), a Hong Kong-based and ASX-listed entity, is a diversified debt restructuring and personal insolvency management service provider. Founded in 2002, CI1 was one of the first entrants in Hong Kong’s insolvency market. Working with ~30 banks and financial institutions, it structures and customizes cost-efficient debt management solutions for banks and individuals. CI1 is one of the largest players in Hong Kong’s bankruptcy administration market, supported by its highly experienced staff including lawyers, accountants, and bankers.

Insolvency services – vital and in great demand

CI1 operates through two segments – Bankruptcy Administration Services and Individual Voluntary Arrangement Services. The company serves as an outside trustee (OT) in bankruptcy proceedings to ensure impartial administration of assets in accordance with the law. CI1 also provides customized debt restructuring solutions to help avoid personal bankruptcies and help creditors recover dues. Under the Bankruptcy Ordinance of Hong Kong, a person can lose all his/her personal wealth if declared bankrupt. By experience, government employees, such as school teachers and policemen, will lose their jobs if declared bankrupt, and hence there is personal interest in avoiding bankruptcies and paying off debts.  Thus, there is a need for professional administrators who can act on behalf of financial institutions to ensure that processes are smooth, and consultants who can help individuals manage regular payments. CI1 fulfils this critical need.

Business operations – long-term and steady

Currently, CI1 is one of the two players in Hong Kong that provide insolvency services for bankruptcies where individuals have assets valued at A$36k (HK$200k) or higher. Together, the two players control ~90% of the market. Over the years, CI1 has handled ~10,000 cases as an OT. It gets ~100 new cases each month, each with a bankruptcy periods of 4–8 years, providing the company with a steady and recurring fee income. The management’s extensive experience, industry knowledge, and in-depth understanding of market conditons enable the company to assess new trends, client needs, and evolving service requirements.

Expansion across new geographies with improved efficiencies

As Hong Kong is a relatively mature market and slowly stagnating, CI1 has decided to enter a new market: Australia. Through its collaboration with Cor Cordis, one of Australia’s leading insolvency advisors, CI1 has forayed into the country’s debt restructuring market. In addition, the company has commenced the development of an app that is expected to bring in operational efficiency while handling increased volumes of cases.

Business still highly undervalued

CI1 is valued at only A$11.5m. We think that the main reasons for the apparent undervaluation of CI1 are concerns related to the saturation of its Hong Kong operations and reluctance of investors to look at a bankruptcy consulting business. We look for a re-rating based on a consistent volume of cases in the home market, new market outreach, and operational efficiencies from the app, leading to steady profitability.

Ten reasons to look at Credit Intelligence

1) CI1 is one of the first companies to have ventured into the business of bankruptcy administration and personal insolvency filing across Hong Kong. It holds ~18% market share in total bankruptcy cases and >50% share in cases involving assets worth >A$36k (HK$200k).

2) CI1 has an experienced team that has been at the forefront of executing administration services for the past 16 years. The founder, Jimmie Wong, was the first to venture into bankruptcy services across Hong Kong, gathering significant knowledge about the industry.

3) The company is highly profitable, with an average adjusted net margin of >40% (past two years). With both RoE and RoA being close to 100% for the past two years (on adjusted net profit), the service business requires minimal capital investment for higher returns.

4) As Hong Kong has an increasingly high ratio (>60%) of household debt to GDP, the requirement of advisory and solutions for debt restructuring is high. Rising interest rates and expected economic downturn could lead to an increase in bankruptcy filings.

5) To expand beyond Hong Kong, CI1 has partnered with Cor Cordis and Arrow Consultants to extend its distribution network and utilize their reach to establish operations in Australia and Singapore, respectively.

6) The business is highly scalable. Having been in the business for 16 years, the company has developed well-documented processes. CI1’s processes are transparent, easy, and provide enough checkpoints to raise a red flag, if needed. These organizational practices grants CI1 a unique position in an otherwise unorganized industry.

7) Relationships with regulators and financial institutions are critical in the bankruptcy administration services segment. CI1 has been able to establish trust and respect for itself among all stakeholders – creditors, regulators, and clients. Its long-standing associations with global financial institutions in Hong Kong are expected to prove highly beneficial in the long run.

8) CI1 has deployed a sophisticated IT platform to run its processes. Faster maneuvering of cases allows for the management of high volumes with minimal staff, thus expanding efficiency. The system also records case data and notifies of any variation to the repayment plan.

9) The company is developing an enhanced fintech solution in the form of a smartphone app for improving customer experience and scalability of operations. The added features of discreet booking and ability to fill out information remotely are expected to further boost operational efficiencies.

10) We believe CI1 is currently undervalued. We value the company at A$0.048 per share in our base case scenario, using a blended valuation approach of DCF and relative valuation. We have applied realistic estimates on case volumes, tech app platform launch, and establishment of the Australian franchise network.

Potential for re-rating: share price catalysts

CI1’s stock is currently trading below our base case valuation. We have outlined several factors that may result in a rerating of CI1 going forward:

– A unique service offering and long-standing market presence driving a steady volume of cases despite maturation of the home market.
– The asset-light model, the multichannel revenue stream, and the inverse relation with economic developments of the various revenue components provide a natural hedge to the business.
– The sophisticated IT systems and the new smartphone app are expected to help develop professional, transparent, and smooth processes to scale up operations with enhanced user experiences.
– Successful entry into the Australian market as well as other Commonwealth-like markets.

Furthermore, we believe CI1 has a management team (Figure 34) capable of taking the company through the next growth stage. Jimmie Wong, CI1’s founder, CEO, and MD, has practiced law in Hong Kong for over 20 years. He has been instrumental in the corporate evolution of CI1 and is a pioneer in the bankruptcy administration services domain. Executive Director King Wong brings operational experience in handling insolvency matters. In our view, CI1’s board has the kind of expertise required to build an Enterprise-level service organization. Sydney-based Non-Executive Chairman Tony Ho brings >20 years of leadership experience across various industries.

Risks

We see four main risks related to CI1’s investment thesis.

1) Saturation of the Hong Kong market: Over the years, the number of total bankruptcies in CI1’s home market of Hong Kong has been declining gradually. This is partially due to individuals’ reluctance to file for bankruptcy and overall consistency in the economic conditions of the territory. Going forward, this can potentially reduce the number of new cases.

2) Execution Risk: As CI1 invests more in improving its IT systems and marketing activities after expanding in Australia and Singapore, uncontrolled cost escalation would negatively impact valuation.

3) Regulatory risk: Every country has its own bankruptcy laws. CI1 has experience only in the home market of Hong Kong. Understanding new and distinct market regulations may prove tricky and may entail a long gestation period to breakeven.

4) Collaboration risk: As CI1 expands into new geographies, the countryspecific partner it chooses will be highly critical. Any slippage or error of judgment may result in delays in geographic expansion and potentially a decline in the company’s valuation.

Conclusion

CI1 has well-established business operations, has an experienced team and a superior technological platform. It has also initiated a process to expand into the similar but untapped geographies of Australia and Singapore. Sustained expansion into new geographies, consistently increasing market share in the mature market of Hong Kong, and better operational efficiency as a result of transition to the app platform are expected to contribute to a potential re-rating of the stock.

Based on a peer group valuation and a Discounted Cash Flow calculation, we have set a valuation range of A$0.048 to A$0.071

SWOT Analysis

Strengths:
– A well-established business with consistently expanding market share in a niche segment.
– An experienced team of bankruptcy administration service providers.
– Strong business links with global banks.
– Potentially low operating costs following deployment of the new case management platform app.

Weaknesses:

– Bankruptcy saturation in main geography of operation – Hong Kong.
– High competition in Australia from established law firms and collection agents.

Opportunities:

– Expansion in Australia through collaboration with Cor Cordis, which has a comprehensive network.
– Transferring cases onto the newly developed app to manage increased volumes with better efficiency.

Threats:

– Limited experience with respect to working in geographies other than Hong Kong.
– Potentially rising interest rates may dampen property prices, affecting payback capabilities of the people under bankruptcy administration as this limits property selling prices in CI1’s custody.
– Negative investor perception of administration service providers as being
nothing more than collection agents.

Credit+Intelligence+Initiating+Coverage+20+12+18

Please note, the usual disclaimers apply – click here

Pitt Street Research work is commissioned by the listed companies it covers, and Pitt Street Research has received or will receive payment for the preparation of such work. Please refer to the bottom of the research notes as published on Pitt Street Research’s web site for risks related to the companies being covered, as well our General Advice Warning, disclaimer and full disclosures. Also, please be aware that the investment opinion in this report is current as at the date of publication but that the circumstances of the company may change over time, which may in turn affect our investment opinion.



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