Due Diligence Report. Market Data i

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1 Due Diligence Report Arrowhead code: Company: Credit Intelligence Limited Coverage initiated: Ticker: ASX:CI1 This document: Listing Date: Share Price on Date: AUD Headquarters: Hong Kong Outstanding Shares: M Managing Director: Jimmie Wong Analyst Team Aditya Ahluwalia aditya.ahluwalia@arrowheadbid.com Priyanshi Jain priyanshi.jain@arrowheadbid.com Market Data i 52-Week Range: AUD Average Daily Volume: 950,753 ii Market Cap. on date: AUD 16.41M Fiscal Year (FY) July 1 June 30 Credit Intelligence Limited ( Credit Intelligence or the Company ) is a Hong Kong-based bankruptcy administration and Individual Voluntary Arrangement ( IVA ) proposal consultancy and implementation business. The Company serves as an outside trustee ( OT ) in bankruptcy to ensure equitable administration of the assets in accordance with the Bankruptcy Ordinance. The Company claims to be the largest player in the Hong Kong individual insolvency market, and one of only two major players in the key segment of insolvency cases where the value of the bankruptee s assets is >AUD 35,000 (HK$ 200,000). Credit Intelligence also develops customized debt restructuring plans to help people avoid default and bankruptcy and help creditors recover their dues without expensive litigations. The Company develops these plans using its proprietary case management platform that brings a factory production line like automation to the case management process. The Company entered the Australian market in early 2018 and expects to replicate its success here, given the country s high household debt levels, low wage growth, rising interest rates and the absence of a dominant player in the individual insolvency space. To support its growth plans, the Company is looking to tie up with key banks and insolvency management businesses in the region. The Company is also looking to strike strategic partnerships with local technology businesses that complement its offerings and open additional diversification opportunities. In the medium term, Credit Intelligence plans to deepen its market penetration through a string of acquisitions and minority investments in businesses of strategic interest. It plans to focus on businesses with a strong technology backbone and businesses with a wide branch network. The Company s leadership has a proven track record of building a successful debt restructuring business in Hong Kong. In addition, its innovative technology allows the Company to generate strong margins with high operational efficiency and competitive pricing. The Company s management believes that these factors place the business favorably to emerge as an industry leader in Australia if the environment continues to remain amicable. Credit Intelligence Limited Arrowhead BID ASX: CI1

2 Table of Contents Company Presentation... 3 Growth Strategy... 6 News... 7 Listing Information... 8 Management and Governance... 9 Industry Analysis Analyst Certifications Glossary Notes and References Credit Intelligence Limited Arrowhead BID 2 ASX: CI1

3 Company Presentation Credit Intelligence Limited ( Credit Intelligence or the Company ) is a Hong Kong-based bankruptcy administration and Individual Voluntary Arrangement ( IVA ) proposal consultancy and implementation business. The Company serves as an outside trustee ( OT ) in bankruptcy to ensure equitable administration of the assets in accordance with the Bankruptcy Ordinance. The Company also develops customized debt restructuring plans to help people avoid default and bankruptcy and help creditors recover their dues without expensive litigation. The Company develops these plans using its proprietary case management platform that brings cost-efficiency and a factory production line like automation to the case management process. The Company is an established player in the Hong Kong insolvency market with relationships with most major banks and financial institutions. It is currently engaged in more than 10,000 cases in Hong Kong and has 800 properties in its possession as an OT. It has already sold 800 properties and expects to sell the existing 800 in the coming years. It has recently entered the Australian market to capitalize on the opportunities presented by the country s high levels of household debt and personal insolvency, increasing interest rates and the absence of a dominant player in the individual insolvency space. Credit Intelligence listed through a reverse take-over of a listed shell named APAC Coal Limited, which was formerly involved in the coal production business, with assets in Indonesia. APAC was listed on the ASX since 2007 under the ticker AAL. Credit Intelligence subsequently transitioned the organization into the debt restructuring and bankruptcy administration business with a focus on Hong Kong. The Company has been among the market leaders in Hong Kong for over a decade. At present, Credit Intelligence is one of only two major players in Hong Kong that operate in the key segment of insolvency cases involving bankruptees with >AUD 35,000 (HK$ 200,000) in assets. Listed on the ASX through a reverse merger and raised AUD 3.56 million through a public offer in May 2018 Credit Intelligence (formerly APAC Coal) acquired Credit Intelligence Holding Limited ( CIH ) in the context of a reverse merger process, in an all-stock transaction in May The Company also raised AUD 3.56 million through a public offer where it offered 178,275,000 shares of common stock at an issue price of AUD 0.02 per share. The Company intends to use the proceeds of the public offer to set up its Australian operations and invest in marketing and advertising initiatives to build a strong brand name in Australia. Credit Intelligence s shares began trading on the ASX on 22 May Two-pronged business model Credit Intelligence s business model includes two revenue-generating service lines Bankruptcy Administration ( BA ) and Individual Voluntary Arrangement ( IVA ) Proposal Consultancy and implementation. These service lines are organized under two separate subsidiaries Hong Kong Debt Management Services Ltd. ( HKDMS ) and Hong Kong IVA Consultants Limited ( HKIVA ). Both these subsidiaries are 100% owned by Hong Kong Debt Management Ltd. ( HKDM ), which, in turn, is a 100% owned subsidiary of Credit Intelligence through Credit Intelligence Holding Ltd. ( CIH ) The Company s group structure is illustrated below. Credit Intelligence Limited Arrowhead BID 3 ASX: CI1

4 No. of Cases Handled Market Share Credit Intelligence Limited Credit Intelligence Holding Limited Hong Kong Debt Management Limited Hong Kong Debt Management Services Limited Hong Kong IVA Consultants Limited Bankruptcy Administration: Credit Intelligence s bankruptcy administration subsidiary, HKDMS, appoints its employees as OT to administer a bankruptee s assets in cases where the value of the assets is expected to be >AUD 35,000. The OTs ensure equitable administration of the property in accordance with the Bankruptcy Ordinance. Compensation. HKDMS s compensation is generally based on a fixed percentage of the contributions from the bankruptee and proceeds from the realization of assets. This has averaged 16% since HKDMS also receives a fixed percentage of the bankruptcy distributions, which has averaged 1% since The Company s minimum compensation is AUD 5,200 (HK$ 30,000) per case, subject to the funds available in the estate account. Market Position. Credit Intelligence s share of Hong Kong s bankruptcy administration market has consistently increased since its incorporation. The Company handled 1,136 out of 9,750 bankruptcy cases in Hong Kong in 2015, translating to 11.65% market share. Its market share rose to 17.32% in 2017 (till August), as it was engaged in 908 of the 5,243 cases in Hong Kong during this period. The Company claims that it held the largest share of the Hong Kong bankruptcy administration market in Consistent Increase in CI1 s Market Share 1, % 19% 1,300 16% 1,136 1,089 1, % 13% 12.21% % * No. of Cases Handled Market Share Source: Credit Intelligence Limited - Prospectus 21 December 2017 (issued as APAC Coal Limited) IVA Proposal Consultancy: Credit Intelligence s IVA subsidiary, HKIVA, provides credit restructuring and proposal implementation services to help borrowers avoid bankruptcy and help creditors evade expensive enforcement proceedings. Credit Intelligence Limited Arrowhead BID 4 ASX: CI1

5 The Company has experienced insolvency practitioners that assess a debtor s financial position using the Company s proprietary technology platform and design a convenient repayment plan for them. Once the debtor agrees to proceed and the creditor accepts the plan, HKIVA assists with initiating the legal procedure. This includes drafting the IVA proposal, liaising with the relevant creditors and processing the court application. Once the proposal has been approved and a nominee has been appointed, HKIVA supports the nominee throughout the implementation period. Its functions during this period include providing administrative support and liaison support when communicating with the creditors. Compensation. HKIVA s compensation is in the form of a one-time fee for drafting the proposal and a monthly administrative fee for the support it renders to the nominee. The Company receives an average proposal fee of AUD 2,100 (HK$ 12,000) per IVA case and charges an average monthly administrative fee of AUD 35 (HK$ 200) per IVA case. The average duration of a case is 60 months, implying that the Company receives an average administrative fee of AUD 2,100 per case. Market Position. Credit Intelligence claims to have consistently commanded a 2% to 3% share of Hong Kong s IVA proposal consultancy and implementation market. Scalable business model due to proprietary case management platform Credit Intelligence s proprietary platform for bankruptcy administration and IVA services brings a factoryproduction-line-like automation to case management and the dividend distribution process. The system creates significant operational and cost-related efficiencies that give Credit Intelligence great scalability and customer traction. The Company developed the platform in-house over a period of eight years and is constantly working on improving it. The system can automatically create 100 credit reports in a single click, with minimal staff intervention. This saves considerable time and human effort. The system also handles large volumes of case data and monitors any departures from the repayment plan with instant notification alerts. The data is readily accessible for creditors, which improves transparency and planning. The system also provides features like overdue payments, repayment progress, dividend distribution and half-yearly / annual review. The Company has plans to AI power the platform, for which it is actively looking for technology partnerships. It is also planning to acquire and make minority investments in strategically relevant businesses that can bring in more sophisticated technology. Credit Intelligence Limited Arrowhead BID 5 ASX: CI1

6 Growth Strategy The addressable market for insolvency solutions in Australia is much large than in Hong Kong. The market has low entry barriers that make it relatively convenient to enter for new businesses. For this reason, it is fragmented, with few large players. To get a strong foothold in this market, Credit Intelligence would need to rapidly create a regional branch network and a establish a strong brand name. The Company intended to invest 70% of the funds raised in the May 2018 public offer for these two ends. To achieve these ends, the Company has developed a growth strategy that rests on four pillars: Entering strategic alliances with Australia-based businesses: The Company is working on striking alliances with banks and insolvency businesses with a strong presence in Australia. It expects to combine its technological capabilities with its partners distribution network to expand the reach of its services. Acquiring businesses with a strong regional branch network: In addition to partnerships, Credit Intelligence is considering setting up its own branch network in Australia. For this, it plans to acquire multiple local businesses and roll them up into one network. Developing technology partnerships: Introducing Artificial Intelligence to its platform is one of the future developments that Credit Intelligence is exploring. It is looking at developing partnerships and making strategic minority investments in Australia-based technology businesses that can jointly develop AI capabilities for the Company s platform. Investing aggressively in brand building: The Company intends to invest 15% of the proceeds from its May 2018 public offer for marketing and advertising initiatives. It plans to target the large market in Australia s East Coast to start with. The Company has also hired a PR firm in Australia that is working on enhancing its public profile. Credit Intelligence Limited Arrowhead BID 6 ASX: CI1

7 News Initial Director s Interest Notice and Director Appointment: June 14, 2018 Credit Intelligence notified ASX of the appointment of Mr. Anthony Ho as Director of the Company, with a holding of 2,000,000 ordinary shares. The Company also announced Mr. Ho s appointment as nonexecutive director and the chair of the Finance and Audit Committee of the Company. Change in Company details and ASX Code change: May 25, 2018 The Company announced that it has resolved the issue around the ownership of the name Credit Intelligence Limited and the change of name is now effective. The Company also announced that its ASX code will change to CI1 with effect from May 28, Full terms of Performance Shares: May 18, 2018 Credit Intelligence announced the full terms of the Performance Shares to be issued to the proposed Directors of the Company. As per a previous disclosure by the Company, it will restructure the board and replace the existing directors. The 18,500,000 Class A Performance Shares can be converted to ordinary shares on the Company s 30-day average share price reaching at least AUD 0.025, subject to a 2-year expiry period from the date of commencement of trading. Similarly, 21,500,000 Class B Performance Shares can be converted to ordinary shares on the Company s 30-day average share price reaching at least AUD 0.030, subject to a 3-year expiry period from the date of commencement of trading. Credit Intelligence Limited Arrowhead BID 7 ASX: CI1

8 Listing Information Credit Intelligence Limited, headquartered in Hong Kong, is listed on the Australian Stock Exchange (ASX: CI1). The Company made a back-door listing through a reverse merger with the Credit Intelligence Holdings. Contacts Registered office Suite 2, 11 Ventnor Avenue, West Perth, Western Australia, Australia, 6005 Telephone Fax jimmiewong@hkdm.com.hk Shareholding as on 18 May 2018 Equity Holder No. of ordinary shares held % shareholding Wong Ka Sek 458,253, % Lam Kwok Ho 49,500, % Magnus Energy Group Limited 40,165, % Wong Ka Lam King 26,642, % Chen Guorong 26,642, % Yus International Holdings Limited 25,000, % Others 194,283, % Total 820,487, % Credit Intelligence Limited Arrowhead BID 8 ASX: CI1

9 Management and Governance Jimmie Wong (Founder & Managing Director) Mr. Jimmie Wong is the founder of Credit Intelligence. Mr. Wong obtained a Bachelor of Law degree from the University of Hong Kong. He has over 20 years of experience as a leading insolvency lawyer. He has served as legal advisor to numerous financial institutions and has also provided legal advice with respect to cross-border mergers and takeovers, corporate finance, and IPOs. Mel Ashton (Non-executive Chairman) Mr. Ashton has over 37 years experience as a chartered accountant and 25 years experience as an insolvency practitioner. Mr. Ashton is also a director of Hawaiian Group and the non-executive chairman of ASX listed company, Venture Minerals Ltd. Mr. Ashton is also the former President of Chartered Accountants Australia and New Zealand. King Wong (Head of Operations) Mr. King Wong joined Credit Intelligence in 2002 and is the Head of Operations at the Company. He holds a Bachelor of Laws degree (Honors) from the City University of Hong Kong and is a practicing solicitor. Vincent Lai (Non-executive Director) Mr. Lai has 30 years experience in international banking and corporate finance. He was formerly the senior executive at the PRC Office of Bank of America and the Chairman of a Hong Kong-listed company. Krista Bates (Non-executive Director) Ms. Bates has over 15 years of experience as a legal practitioner. She has worked extensively in multiple jurisdictions, with experience in advising corporate matters such as acquisitions, joint ventures, takeovers etc. Ms. Bates has also acted a legal counsel and director of Fastjet Plc, a company listed on the London Stock Exchange. Credit Intelligence Limited Arrowhead BID 9 ASX: CI1

10 Anthony (Tony) Peng Ho (Non-executive Director) Mr. Ho is a Chartered Accountant and a Bachelor of Commerce degree holder from the University of New South Wales, Sydney. He is a fellow member of the Australian Institute of Company Directors and the Governance Institute of Australia. Mr. Ho is also the Non-executive Chairman of two other ASX-listed companies Greenland Minerals Limited and Bioxyne Limited. Credit Intelligence Limited Arrowhead BID 10 ASX: CI1

11 Industry Analysis Hong Kong Economic growth in Hong Kong has been weaker in the past few years An unstable global economy and relatively weaker domestic demand in China has led to Hong Kong experiencing a period of stagnancy in its economy in the last few years. While there has been a steady growth in household income in Hong Kong, the growth has been outdone by the inflation, particularly housing expenses. As a result of continuously rising inflation, the household debt in Hong Kong has soared. Primarily, there are three types of household debt in Hong Kong: Mortgage loans (67~70%) Personal loans (23~25%) Credit Card loans (7~8%) Hong Kong housing affordability has been ranked as the most expensive in the world. Subsequently, the ratio of mortgage repayment to household income is on a rise. Inflation of household expenses, particularly food and transportation, is also driving a reliance on personal loans and credit cards. This uptick in personal debt and in turn personal solvency has resulted in increasing demand for debt management services in Hong Kong. Two types of services in Debt management services are common in Hong Kong: Bankruptcy Administration Services: When an individual is unable to pay their debts, they or their creditors may petition a court for a bankruptcy order against them. Upon making the bankruptcy order, a trustee is appointed to administer the bankruptcy estate. This duty is known as bankruptcy administration service. The bankruptcy administration service comprises of two sectors, one is the Official Receivers Office of the Hong Kong Government (ORO) and other is the service providers in the market. In cases where assets are not likely to exceed AUD 35,000 (HK$ 200,000), ORO will generally administer the cases themselves. For cases where assets are likely to exceed this amount, the creditors can appoint service providers to act as OTs. Individual Voluntary Arrangement Services: IVA is an alternative to bankruptcy. An individual may enter an IVA with their creditors by making a proposal to repay their debts (generally in installments). The proposal is first approved by the court and then by a special majority of creditors (75%). After the approval, a nominee is appointed to implement the proposal. IVA services include preliminary debt restructuring consultancy to implementation services once the IVA proposal has been considered and approved. Credit Intelligence Limited Arrowhead BID 11 ASX: CI1

12 Australia Household debt is on a rise in Australia The household debt in Australia touched an all-time high in June It was 194% of the annual disposable income, which included more than A$1 trillion of mortgage debt. The growth in Australian workers wages is at a historically low level. This combined with an increase in global interest rates is placing further pressure on household debt affordability in Australia. As a result, Australia is witnessing an increase in the number of personal insolvency cases. Total personal insolvency appointments in Australia rose 4.4% from 28,288 during the 2015 financial year to 29,527 for the 2016 financial year, with a total of 17,202 bankruptcies in the 2016 financial year, a rise of 0.2%, the first annual rise in bankruptcies seen since the 2009 financial year. Number of personal insolvencies is growing There are primarily three types of personal insolvency agreements in Australia: Bankruptcy- voluntary & compulsory Personal Insolvency Agreements Debt Agreements As of October 2017, there were 219 registered bankruptcy trustees and 38 registered practicing debt agreement administrators in Australia. For the quarter ended June 2017, Australian Financial Security Authority (AFSA) stated that debt agreements in the June 2017 quarter are the highest on record, both by numbers and proportion of total personal insolvencies (48.2%). AFSA further states that this is the fourth consecutive quarter in which the personal insolvency agreements have increased in year-on-year terms. Credit Intelligence Limited Arrowhead BID 12 ASX: CI1

13 Analyst Certifications I, Aditya Ahluwalia, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security and the subject company. I, Priyanshi Jain, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security and the subject company. Important disclosures Arrowhead Business and Investment Decisions, LLC received fees in 2018 and will receive fees in 2018 from Credit Intelligence Limited for researching and drafting this report and for a series of other services to Credit Intelligence Limited, including distribution of this report, investor relations and networking services. Neither Arrowhead BID nor any of its principals or employees own any long or short positions in Credit Intelligence Limited. Arrowhead BID's principals have a mandate for investment banking services from Credit Intelligence Limited and expect to receive compensation for investment banking activities from Credit Intelligence Limited in Aside from certain reports published on a periodic basis, the large majority of reports are published by Arrowhead BID at irregular intervals as appropriate in the analyst s judgment. Any opinions expressed in this report are statements of our judgment to this date and are subject to change without notice. This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, any of the financial or other moneymanagement instruments linked to the company and company valuation described in this report, hereafter referred to as the securities, may not be suitable for all investors. Investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors are advised to gather and consult multiple information sources before making investment decisions. Recipients of this report are strongly advised to read the information on Arrowhead Methodology section of this report to understand if and how the Arrowhead Due Diligence and Arrowhead Fair Value Bracket integrate alongside the rest of their stream of information and within their decision taking process. Past performance of securities described directly or indirectly in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from any of the financial securities described in this report may rise as well as fall and may be affected by simple and complex changes in economic, financial and political factors. Should a security described in this report be denominated in a currency other than the investor s home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the security. This report is published solely for information purposes and is not to be considered as an offer to buy any security, in any state. Other than disclosures relating to Arrowhead Business and Investment Decisions, LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data. Arrowhead Business and Investment Decisions, LLC is not responsible for any loss, financial or other, directly or indirectly linked to any price movement or absence of price movement of the securities described in this report. Credit Intelligence Limited Arrowhead BID 13 ASX: CI1

14 Glossary CI1 AUD USD PSA LOI JV Credit Intelligence Limited Australian Dollar US Dollar Purchase & Sale Agreement Letter of Intent Joint Venture Credit Intelligence Limited Arrowhead BID 14 ASX: CI1

15 Notes and References i ASX as on 17-August-2018 ii 30 Day Avg Volume calculated using ASX as on 17-August-2018 Credit Intelligence Limited Arrowhead BID 15 ASX: CI1