Waton plays up fintech transformation, though without much evidence

The online stockbroker prominently highlights its focus on fintech services as it seeks a New York IPO, but its financial results don’t quite back that up
Key Takeaways:
- Waton is looking to raise as much as $30 million from a New York IPO, a significant sum relative to its revenue and profit
- The online stockbroker appears to be positioning itself as a fintech specialist, but its financial results show progress in those efforts has been spotty
By Warren Yang
In this era of all things digital, the buzzword “fintech” certainly has a nice ring to it.
Online stockbroker Waton Financial Ltd. is banking on the charms of that association as it gears up for a New York IPO. But without much to show for its big fintech aspirations, the company’s ability to lure investors to its listing could be a big question mark.
Waton, which was founded in 1989 and whose main business is in Hong Kong, is looking to raise as much as $30 million through the IPO, according to a prospectus filed with the U.S. Securities and Exchange Commission (SEC) last Thursday. The company is offering 5 million shares at $4 to $6 apiece.
The midpoint of the range would translate to a market capitalization of about $240 million – quite a large amount for Waton, considering its financials. The company’s revenue totaled just $10 million in the 12 months to March 2024, even after doubling from the prior year, with a net profit of $2.5 million.
Based on these performance metrics, a $240 million market capitalization would translate to lofty price-to-earnings (P/E) and price-to-sales (P/S) ratios of 96 and 24, respectively. By comparison, the P/E ratio for far larger competitor Futu Holdings (FUTU.US) is about 21, and the P/S ratio is about 8. Among other Asia-oriented online stockbrokers, UP Fintech Holding (TIGR.US) trades a bit higher with a P/E ratio of 50 and P/S of 3, though both are still well behind what Waton is seeking.
Such a lofty valuation could be justifiable for Waton if it can grow quickly. But where exactly it plans to find such growth is a question that may leave many scratching their heads. For starters, its revenue base is quite small for a company that has been around for more than three decades. If it took this long for Waton to achieve this level of revenue generation, one can only wonder why the company expects its growth to suddenly accelerate going forward.
The company does have a little bit of star power on its board, with celebrity investor Jim Rogers set to become a director and senior advisor “effective upon the SEC’s declaration of effectiveness of our registration statement,” according to the prospectus.
Fintech aspiration
It’s pretty clear from the prospectus that Waton wants to position itself as a fintech specialist as it seeks to boost revenue from software licensing. The first of the company’s competitive strengths highlighted in its prospectus is that it is a “major fintech service provider” that serves small and medium-sized brokers. Fintech is a word the company wishes to emphasize to investors, appearing more than 100 times across the prospectus.
But Waton’s self-description is at odds with its financial results, which themselves are a bit perplexing due to wild swings in its revenue mix over time. Its revenue surge in its latest fiscal year was primarily driven by income from its traditional brokerage services, which accounted for more than 80% of the total. That proportion is up sharply from about 36% in the year to March 2023.
Waton attributes the jump in its brokerage revenue mainly to its commencement of earning commissions from new bond distribution services, which accounted for more than half of its total revenue for the fiscal year through March 2024.
By comparison, income from software licensing and related support services, which Waton calls fintech services, shrank substantially during its latest fiscal year through March last year. Income from that business, called fintech services provided for third-party customers, dropped more than 70% from the prior 12-month period. Even such sales to a related company more than halved year-on-year.
Such a setback for Waton’s fintech business doesn’t look too encouraging, as that segment only started to bring in money in the year ended March 2023. Typically, revenue from such a new product line would grow exponentially from a low base in its early years.
The situation becomes even more confusing when Waton reports its revenue from fintech offerings for third-party customers increased more than sevenfold year-on-year to $546,000 in the six months to September 2024. But its income from brokerage services during the six-month period for a related party — a New Zealand brokerage named Wealth Guardian Investment, or WGI, where two Waton shareholders are senior managers — fell nearly 30% to $893,000.
Shifting revenue mix
Such wild changes mean the composition of Waton’s revenue has shifted drastically from one period to another. For example, the share of all brokerage income in Waton’s total revenue shrank to less than 50% during the six months to last September from nearly 65% a year earlier, following the massive jump for the figure in the fiscal year to March 2024.
Waton’s erratic financial performance owes to the fact that it relies on a handful of customers, including WGI, for most of its revenue. In the year to March 2023, the company’s top five customers accounted for 98% of its revenue. And in the following six months to September that year, it generated nearly all of its revenue from them. Fast forward to the six months to September 2024, where the proportion decreased to about 80%. While that’s an improvement, it still represents a significant level of customer concentration.
Such a small pool of customers means that if any of them reduces the use of Waton’s services, the company can take a big hit to its revenue, as seen in the wide gyrations across different components of its revenue.
Waton also has a less-than-stellar track record of regulatory compliance, as Hong Kong regulators found the company violated rules regarding the management of customer funds and inter-company equity share transactions in 2022 and the following year. The company has taken steps to rectify the breaches, but the fact that they occurred at all is a red flag, given that it operates in a highly sensitive, regulated industry.
Fintech in general may hold a lot of potential. But that doesn’t mean Waton is set to capitalize on it, at least not based on the information it has given in its prospectus. As things stand now, the company seems to think quite highly of itself – though investors may not necessarily agree if and when it completes its IPO.
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