AMTD Digital(US:HKD)2022-08-29 16:00PART I Key Information The company faces significant risks from its China/Hong Kong operations, business model, controlling shareholder, and ADS volatility Risk Factors Key risks stem from China/HK regulations, a nascent business model, reliance on the AMTD ecosystem, and extreme ADS price volatility - The company identifies significant risks related to PRC government intervention and potential U.S. delisting under the HFCAA due to PCAOB inspection issues161727 - Business operations are concentrated in the emerging digital financial services industry with a limited operating history, particularly in its main revenue source, the SpiderNet ecosystem2959 - As a "controlled company", potential conflicts of interest arise from its parent, AMTD Group, and a dual-class share structure limits public ADS holder voting power176177191 - The ADS trading price has shown extreme volatility, ranging from US$12.05 to US$2,555.30 since its July 2022 IPO182 Information on the Company The company operates a digital solutions platform in Asia across four business lines, acting as the core of the AMTD SpiderNet ecosystem History and Development of the Company Incorporated in 2019, the company consolidated businesses from AMTD Group, became majority-owned by AMTD IDEA, and listed on the NYSE in July 2022 - The company was formed via a 2019 restructuring, carving out businesses from its Controlling Shareholder, AMTD Group233 - AMTD IDEA Group acquired a majority stake in February 2022, now owning 87.6% of issued shares and 99.3% of total voting power235 - The company's ADSs began trading on the NYSE on July 15, 2022, under the ticker symbol "HKD"236 Business Overview The business comprises four core segments, with the SpiderNet ecosystem being a key revenue driver and strategy under extensive regulation - The business is built on four pillars: Digital Financial Services, SpiderNet Ecosystem Solutions, Digital Media, Content, and Marketing, and Digital Investments238 - The company is connected to Airstar Bank, a Hong Kong virtual bank, and plans a digital wholesale bank in Singapore242245 - A controlling interest in PolicyPal, a Singapore digital insurance platform, was acquired in August 2020253255 - The SpiderNet Ecosystem Solutions business is a primary revenue driver, providing exclusive network access for a membership fee261262 - The company operates under stringent regulatory frameworks in Singapore (MAS) and Hong Kong (HKIA) for its various activities288376 Corporate Structure The company is a holding company controlled by AMTD IDEA Group through a layered structure governed by several inter-company agreements - AMTD Digital is controlled by AMTD IDEA Group, which is 50.6% owned by AMTD Group Company Limited, creating a layered control structure396397 - A Master Transaction Agreement governs liability allocation and investment referrals with the Controlling Shareholder399404 - A Transitional Services Agreement ensures the provision of corporate support services from the Controlling Shareholder post-IPO407411 - A Non-Competition Agreement prevents business competition between the company and its Controlling Shareholder412413 Property, Plants and Equipment The company's principal executive offices in Hong Kong are leased and shared by its Controlling Shareholder - The company's main offices are leased by its Controlling Shareholder, not directly by the company itself417 Operating and Financial Review and Prospects FY2022 saw flat revenue but higher profit due to fair value gains, with liquidity sourced from operations and its controlling shareholder Operating Results FY2022 profit rose to HK$201.4 million on flat revenue, driven by fair value gains, while expenses increased due to growth and IPO costs Consolidated Results of Operations (Fiscal Years 2020-2022) | | 2020 (HK$ in thousands) | 2021 (HK$ in thousands) | 2022 (HK$ in thousands) | 2022 (US$ in thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenue | 167,547 | 195,816 | 196,958 | 25,101 | | Changes in fair value on financial assets at FVTPL | 43,592 | 70,291 | 132,032 | 16,827 | | Employee benefits expense | (15,168) | (48,026) | (72,426) | (9,230) | | Legal and professional fee | (1,952) | (6,850) | (23,456) | (2,989) | | Profit before tax | 182,047 | 196,252 | 225,010 | 28,676 | | Income tax expense | (23,715) | (24,611) | (23,614) | (3,009) | | Profit for the year | 158,332 | 171,641 | 201,396 | 25,667 | Revenue by Business Segment (Fiscal Years 2020-2022) | Segment | 2020 (HK$ in thousands) | 2021 (HK$ in thousands) | 2022 (HK$ in thousands) | % of Total 2022 Revenue | | :--- | :--- | :--- | :--- | :--- | | Digital financial services | 9,869 | 11,721 | 11,798 | 6.0% | | SpiderNet ecosystem solutions | 157,678 | 184,095 | 184,627 | 93.7% | | Corporate | — | — | 533 | 0.3% | | Total | 167,547 | 195,816 | 196,958 | 100.0% | - The increase in profit for FY2022 was largely driven by a realized gain of HK$130.6 million from the disposal of 'Investment I'452456 - A significant portion of income is derived from a limited number of clients, with the top five clients accounting for 43.6% of total revenue in FY202289 Liquidity and Capital Resources The company maintains liquidity through operations and its parent, with no debt and sufficient cash despite large intra-group transfers Summary of Cash Flows (Fiscal Years 2021-2022) | | 2021 (HK$ in thousands) | 2022 (HK$ in thousands) | 2022 (US$ in thousands) | | :--- | :--- | :--- | :--- | | Net cash generated from operating activities | 82,901 | 79,891 | 10,182 | | Net cash (used in)/from investing activities | 128,167 | (382,986) | (48,810) | | Net cash from financing activities | 7,894 | — | — | | Cash and cash equivalents at end of the year | 416,420 | 112,516 | 14,340 | - As of April 30, 2022, the company held HK$112.5 million (US$14.3 million) in cash and had no total indebtedness490 - A significant use of cash was a net outflow of HK$372.5 million to AMTD Group, reflecting a centralized treasury function499569 Critical Accounting Estimates Critical accounting estimates involve significant judgment in the fair value measurement of Level 3 assets and impairment of goodwill - Fair value measurement of unquoted equity instruments and movie income rights are key estimation uncertainties as Level 3 assets515818 - Determining potential impairment of goodwill (HK$58.7 million) and intangible assets (HK$36.4 million) requires significant estimation817 Directors, Senior Management and Employees The company's leadership includes a six-member board, key executives, and 50 employees, with established governance committees - The board comprises six directors, with several holding concurrent positions within the broader AMTD Group519526527 - For FY2022, aggregate cash compensation for directors and executive officers was HK$7.2 million (US$0.9 million)530 - Governance committees have been established, but the audit, compensation, and nominating committees each consist of only a single member541543544 - As of April 30, 2022, the company had 50 employees, with 70% being frontline staff553554 Major Shareholders and Related Party Transactions AMTD IDEA Group controls the company through super-voting shares, leading to significant related-party transactions and fund transfers - AMTD IDEA Group is the principal shareholder, holding 87.6% of beneficial ownership and 99.3% of the aggregate voting power559560 - The company has a dual-class share structure where Class B shares, held by AMTD IDEA Group, have 20 votes per share559 - In FY2022, the company had significant related-party transactions, including receiving HK$7.1 million in cost recharges and earning HK$12.8 million from services to an affiliate566567 - Significant intra-group fund transfers occur, with HK$2,522.7 million (US$321.5 million) due from group companies as of April 30, 2022569 Financial Information The company reports no material legal proceedings or significant post-balance sheet events and has no fixed dividend policy - The company is not a party to any material litigation, arbitration, or administrative proceedings573 - No dividends have been paid, and future distributions are at the board's discretion without a fixed policy575 Additional Information This section covers the dual-class share structure, anti-takeover provisions, tax implications, and potential PFIC status - The company's dual-class share structure gives Class B shares 20 votes per share versus one for Class A shares586587 - The articles of association contain anti-takeover provisions, such as the board's authority to issue preferred shares606 - The company does not expect to be classified as a Passive Foreign Investment Company (PFIC) but notes the risk depends on annual factual determination226637 - There are no foreign exchange control restrictions in Hong Kong affecting the company's ability to remit profits or pay dividends612 Quantitative and Qualitative Disclosures about Market Risk Primary market risks include equity price risk from unquoted securities and credit risk from related-party receivables - The company is exposed to equity price risk from its unquoted securities; a 3% price change would impact pre-tax profit by HK$2.6 million657919 - Foreign exchange risk is considered limited due to the HKD-USD peg654 - Credit risk is concentrated in receivables and amounts due from AMTD Group, which are monitored closely659920 PART II Material Modifications to the Rights of Security Holders and Use of Proceeds The company reports no modifications to security holder rights and details the intended use of its US$130.4 million in IPO proceeds - The company raised US$130.4 million in net proceeds from its July 2022 IPO668 - As of the report date, none of the IPO proceeds have been used, with funds earmarked for licenses, acquisitions, and IT669 Controls and Procedures A material weakness in internal control over financial reporting was identified due to the lack of an internal audit function - A material weakness in internal control was identified as of April 30, 2022, due to the lack of an internal audit function155674 - Remediation steps include establishing an internal audit department and hiring experienced personnel674 - As an emerging growth company, it is exempt from the auditor attestation requirement on internal control over financial reporting675 Principal Accountant Fees and Services For FY2022, the company paid its principal accountant, Deloitte, HK$6.75 million in audit fees and HK$28,000 in tax fees Accountant Fees (Fiscal Years 2021-2022) | Fee Type | 2021 (HK$ in thousands) | 2022 (HK$ in thousands) | 2022 (US$ in thousands) | | :--- | :--- | :--- | :--- | | Audit Fees | 5,285 | 6,748 | 860 | | Tax Fees | 28 | 28 | 4 | PART III Financial Statements This section presents the audited IFRS consolidated financial statements for fiscal years 2020-2022 Consolidated Statement of Financial Position Highlights (as of April 30) | | 2021 (HK$ in thousands) | 2022 (HK$ in thousands) | | :--- | :--- | :--- | | Total Assets | 3,067,071 | 3,221,646 | | Non-current assets | 408,811 | 245,353 | | Current assets | 2,658,260 | 2,976,293 | | Total Liabilities | 173,849 | 118,194 | | Current liabilities | 135,787 | 107,106 | | Non-current liabilities | 38,062 | 11,088 | | Total Equity | 2,893,222 | 3,103,452 | Consolidated Statement of Profit or Loss Highlights (for the year ended April 30) | | 2020 (HK$ in thousands) | 2021 (HK$ in thousands) | 2022 (HK$ in thousands) | | :--- | :--- | :--- | :--- | | Revenue | 167,547 | 195,816 | 196,958 | | Profit before tax | 182,047 | 196,252 | 225,010 | | Profit for the year | 158,332 | 171,641 | 201,396 | - The financial statements were audited by Deloitte Touche Tohmatsu, which confirmed they conform with IFRS697700