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99 Loyalty (ASX: 99L): Interview with Chairman Ross Benson

November 12, 2021


99 Loyalty (ASX: 99L): We spoke with Chairman Ross Benson about the strength of his B2B customer base in China for loyalty and customer enagement solutions, including the company’s strong relationships with leading banks and insurance companies. 99 Loyalty has been growing strongly in recent years and Ross Benson is optimistic for another good year.

See full transcription below.


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Stuart: Hello, and welcome to “Stocks Down Under.” My name is Stuart Roberts and I’m one of the cofounders of our publication. And joining me today from Sydney is Mr. Ross Benson, who’s the chairman of 99 Loyalty ASX 99l. Ross, good morning. And thank you for a beautiful view of the Opera House in the background.

Ross: My pleasure, Stuart. And lovely to talk to you today.

Stuart: Yes. Now, Ross, I was looking in the dictionary the other day. And I looked under the word, perseverance and there was a photograph of you there. You listed 99 Loyalty on the ASX back in 2013 as a great way for investors down here to get positioned in the massive growth of the digital economy in China. Here we are eight years later, and the company is a heck of a lot bigger in size, and really got its growth Mojo going it’s fair to say.

Ross: Absolutely. Stuart, I mean, I suppose the words that come to mind were given by Lee Iacocca in a speech that he gave to all the staff at Chrysler, and particularly when we embarked on this journey in China, back in 2007. And those words are, never give in. You know, what we believe is that the Australian market is obviously highly dependent from an economy, highly dependent on China. And we just saw that we would like to build that bridge by getting some of these exciting, high-growth tech stories to the Australian market and allow Australian investors to participate. I think against that, and the never give in attitude has been required because the sentiment, predominantly towards Chinese is either listings and understandably because some of them have not displayed what I would call good corporate governance over the years. So, understandably, there’s concern there. But in 99’s case, you know, as you mentioned, we’ve been listed here since 2013. We have an extraordinary portfolio of blue-chip giant clients in China. This is the segment when you can bond insurance companies, the regulators are particularly aggressive in terms of making sure that you’re complying with not only the local regulations, but your technology must be best practice. So, we consider the fact that we have an existing pool of clients, a very big tick. And the business in our view is poised now with a strong foundation of a run rate of about 50 million poised for some significant growth over the coming years. Having said that, the alignment we have in China is B2B with financial services. And as a segment, they have been slower to adopt some of the technology and the utilization of some of the data, the power of data that they have within their client base to really drive engagement with their customers.

So we are really arming both banks and insurance companies with technology that enables them to not only engage and enhance their relationship with their customers to protect against the big B2C participants but allows them to increase their customer base and we just see that momentum increasing as the Chinese market continues its digitization of financial services. We’ve got very good structural headwinds behind us with the impetus that the Chinese government is now effectively putting the clamps on some of the big B2C participants in the market. And they really arming the banks and insurance companies with tools to fight back that loss of customers they’ve seen to the big B2C participants. So we see 99 is well-positioned to benefit from them.

Stuart: Certainly. And the most recent half, if you look at the presentation that you put out on the ASX recently, the growth profile has been fairly steady from year to year. And in the most recent Alpha about 99 million renminbi, which will translate to roughly $20 million Aussie at the revenue line growing quite smartly year on year. It says to me that you’ve got some pretty loyal customers yourself in those banks that are now realizing the need for those engagement tools.

Ross: Oh, absolutely. I mean, I think, you know, these sorts of customers in China, you cannot just simply walk in the front door. The days of acquiring a customer in China through what we call one sheet or relationship are gone, sure you can have relationships to open the door. But if you can’t prove capability, you will leave that door faster than you in. These are long-term customers. They’re customers that really and sometimes often have a tail of three to five years to acquire them but once you have them, provide you maintain that integrity in your service offering a new capability, then you’ll have them for a very long period of time. The banks and insurance companies are absolutely paranoid as they are in every jurisdiction about letting third-party service providers touch their clients. And here we are sitting literally in between the banks and their customers providing value-added services. It’s quite a unique ecosystem. It would be extraordinary to see that occur in the Australian market because, you know, the bigger trading banks here just won’t let third-party operators have access to their client data. So, we have that in China. The next big leg of this is helping the banks understand how with the use of technology, they can use that data to improve their engagement with their customers and build their customer bases. So, that’s a very exciting bridge that we’re going over now. And, you know, the digitization of these segments in China is obviously gonna accelerate that.

Stuart: Yeah. What I’m impressed by the Chinese market compared to Western markets, many of our viewers will better understand is the importance of virtual goods. As in the willingness of people to buy and sell virtual goods is a whole lot higher in the Chinese market than it is elsewhere. That’s great for insurance companies like Ping On, for example. In a sense, it’s a different world. You’re operating into what we’re used to here.

Ross: Absolutely. And I think, you know, the comfort that the new Chinese and the evolving Chinese consumer, number one, the comfort they have with the engagement via a mobile device because you’ve got approximately 1.1 billion mobile internet users in China are targeted by 2025.

Stuart: And smartphones here, not dumb phones, right?

Ross: No. Smartphones. That’s right. Seventy-one percent of bank customers in China use a mobile bank app for all their banking services. So, when you talk about virtual products, this is a very interesting one in China because it’s nonphysical, their comfort level with virtual product delivery and as a value-added service provider, our comfort level with virtual products is very high because we don’t get stuck in supply chain and logistics issues. Because any physical product delivery that represents the problem in any country, and particularly now, post-COVID. There’s a real problem with supply chain. But virtual products can happen instantaneously. When you look at segments like insurance, these are huge growth opportunities in China. The participation rate in insurance, as a product is growing. The penetration rate of insurance as a product is growing. So, businesses like ours, which sit between big customer bases, owned by these financial organizations and technology, with the ability to live up, those virtual products have great growth profiles. And insurance, I think for 99 would be one of the most exciting growth segments for us because of their very fact it’s virtual. It’s accepted that that’s the place to buy it. It’s just that it all happens via the mobile device.

Stuart: Right. Now, you’ve had the benefit of some great founders, that this company was started in about 2011 used to be called 99 Wúxiàn. So I’m presuming that the founders were based in Wuxi originally?

Ross: Well, it’s a very good guess, Stuart. But Wúxiàn actually in Chinese means with no limits. And the whole meaning behind it is wireless. In other words, the mobile device is limitless. Wúxiàn in Chinese also, interestingly enough, means something along the lines of long life together. And so the concept of…The reason we rebranded and changed the name to 99 Loyalty was that that is at the very heart of our positioning. Our sole focus is to help big financial services organizations with loyalty of their customers. We changed it to Loyalty because we feel like the Australian market and Australian investors really understand this term loyalty. Around the world now it’s broadly accepted. Loyalty programs per se in China, a reasonably new business compared to say Australia, but the history is that yeah, Wuxian was just the Chinese literal meaning of wireless, no limits, so 99 mobile.

Stuart: Right. Revealing my ignorance of Chinese geography and language at the same time.

Ross: Yes. It was a good guess. It was a good guess.

Stuart: Yes. Now, I remember reading years ago, if you lay out a list of the world’s most valuable brands, you know, Apple’s up near the top, Coca-Cola, Nike, the usual suspects, but Ping On, and the big four banks in China are also up there as well as being important brands. And yet, we’re at a relatively early stage of the loyalty programs, as you were saying for some of these really powerful brands. What opportunities can you see your company being able to leverage as this whole sector matures?

Ross: Look, I think for businesses in China and 99 is obviously one of those that has that existing relationship with these big company brands, be it a big bank brand or be it a big insurance company, there’s obviously a very significant opportunity to work with these big brands, as they utilize the tools and technology to drive that loyalty into their customer base. So, you know, there’s no bank or insurance company that doesn’t understand the value of your existing customer is harder than acquiring a new one. But the real exciting part about this in China is that providing you’ve got that historical relationship with these banks, once you get them and insurance companies, once you get them to the point where they trust you, it’s the utilization of the data, and the depth of data they have, and the data mining that can be done to create targeted and pinpoint our marketing programs for their customers, which means that the success rate on what you’ll see from these big banks and insurance companies for loyalty programs as we go forward, is only gonna increase because if anything, they’ve been slow to adopt using the data. But they’ve got massive amounts of big data. They’ve got more data on the Chinese consumer market than any online player, including Alibaba. Because as a consumer, your online activity holistically might be 25%, 30% but you’ve still got a big chunk…You don’t buy a house online. You generally don’t buy a car online. But these behaviors, the bank see all of them. And a lot of them are also for the big-spending that happens in China, you’ve still got a lot of credit cards out there. And so all that data the bank’s been accumulating and now they’re starting to work out that if they’re smart technology service providers, we can use this data to enhance the engagement of the customer and increase their activation with them as a product or service provider.

Stuart: Yes. You know, talking before I press the record button here, it’s fair to say if 99 Loyalty was trained in Shanghai on the Shanghai Exchange, if that were possible, it would probably be capitalized a little bit higher than the 60 or 70 million you currently capitalized on ASX. And some of that 60 or 70 million is cash. Right? You’re carrying no debt. So, this is a very derisk story?

Ross: Yeah, we are carrying debt, Stuart, but our net tangible assets, as we sit here today, cloud acquired for approximately 80% of our paid-up capital. So our paid-up capital is 65 million Ozzie. We have around about 45 to 48 million Australian dollars in net tangible assets, which is receivables, predominantly banks and insurance companies, less our domestic financing facilities. So yeah.

Stuart: And usually for a technology company, we can buy this thing for only a modest premium to NTA.

Ross: That drives to the whole question of valuation. I mean, obviously, it’s extraordinary to see a tech company, particularly after 18 years of operation with the scale of clients we have with an existing run rate of 50 million Australian dollars per annum with this amount of NTA sitting on its balance sheet, but that is the business model. B2B drives lower cost of engagement. So your risk-return is quite attractive with a B2B tech company. And 99 is a great example of this. But we would probably say that at, you know, 6 cents bid on the market, we appear to be very undervalued. We’re either trading at a nominal premium to our NTA, But you mentioned in Shanghai, if we look at mobile technology companies around the world, you’re seeing multiples of anywhere from eight times revenue up to, you know, 20 and 30 and silly numbers time revenue. We’re currently looking at 99 and it’s trading at, you know, about 1.3 times revenue here. If it was listed in Shanghai, you’d have to assume that it would align itself with global comps. And so, if we extrapolate that to, you know, multiple even eight times revenue, we should be a $300 to $400 million market cap as a very base case.

Stuart: Right. Now, let me ask the dumbest of dumb questions here. Now, obviously, we all know about some of the challenges that Australia and China have had in terms of the different labor relations. So, leave that to one side. Some of this is probably saying, well, does 99 Loyalty have issues with repatriating capital earned in China back to investors here? Are there any issues that one has to negotiate if you’re your company in that regard?

Ross: Well, it’s actually a very good question, Stuart. And I think it’s a very valid question. First and foremost, as a tech company, our focus is on growth. So, I don’t wanna say that we don’t have a current objective to pay dividends short-term. However, in the long-term, let’s assume that as a tech company, and if the rationale of we’re not burning a lot of capital, and we can continue to grow the revenue and create profits, we wanted to pay a dividend. Number one, there is very good now precedents for a Chinese tech company listed on the Australian market that has actually gone through that process and paid a dividend. And I think you may be familiar with that one. But more importantly, there is a very defined process that allows you to do this. And it’s not so much that can’t be done. It’s just that for an Australian company, for argument’s sake, once the company’s declared the dividend, and it’s payable, the payments are processed, and it goes into the shareholders’ bank account. Whereas, in China, from that point there, you’ve got a time lag of probably three to four months of requisite process and regulatory approval. So the only difference is you have…you’ve got about five more boxes, you’ve got to take about 100% you can get through the process. And the good thing is we now have very good precedents for that exact thing. Identical structure for 99 was sitting in an Australian-listed Chinese tech company with our structure, declare and pay a dividend to domestic holdings.

Stuart: Right. But to your point, there is just so much growth opportunity in the B2B market China, now that you’re well placed. Let’s just play with much of the capital going back into the business and grow it quite strongly?

Ross: Absolutely. I mean, you know, as a tech company, I suppose, we would love to see a lot stronger headline growth. You know, if our target internally is 20% to 25% headline growth, that’s a nice growth profile. But it’s also I think, you know, the senior management of the business and the board have taken the view that China is a market where you can manage risk, you can’t manage return. And so our view has been, let’s ensure we have a strong growth profile. And we guarantee the business stays alive and grows in China because, you know, the problem in Australia, sometimes we take it to shorter-term view. We always took a 10-year view, with going into a business in China. And, you know, coming up 2 years away from 10 years in this business, at 10 years, the business should start and accelerate towards the point where it becomes too big to fail but where we’re a number of years away from that at the moment. But, you know, China, to a large extent is about managing risk. The growth in the China consumer market and the flow of the river will take care of your growth, provided that you can manage the risk of doing business in China.

Stuart: Yeah. Now, for investors who don’t know you very well, are you sharing with me that you’ve gone back and forth to China, possibly 200 times in the course of your career. What attracted you to the Chinese market as a way of hitting your stars to their growth trajectory?

Ross: Well, I suppose in the first instance, surely, going back to 2006, you know, the rhetoric and the discussion and, you know, all the political discussions, we thought, you know, China has become such an important trading partner to Australia, with almost 20% of our two-way trade. I don’t think the average investor and the average Australian realizes how important the economic trade with China is to our standard of living here in Australia, the lucky country. And so, when we first went to China, we thought, let’s try and identify opportunities where we give Australian investors participation in some of these exciting growth segments that we could see happening over the next 10 years. So yes, look, I’ve been to China from 2006 to today, I’ve been to China over 200 times. It started as an exploratory mission, but very soon we were fortunate to meet people and discuss growth segments that really opened our eyes. And, you know, from our point of view, it was as much about wanting to understand China and invest there directly ourselves, as bring some of these opportunities via some listings to Australia. You know, the Chinese listed technology companies that we’ve introduced to the Australian market, first and foremost, we think that you’ve gotta adhere to best practice corporate governance, and protocol, and providing you do that, and you have good close relationships with your executive and your board in China, then you de-risk. And so number one, you make sure that you comply with all the regulations, best practice corporate governance, and the growth and excitement of China long-term will build these businesses.

Stuart: Well, Ross Benson, here’s for a big payoff for 99 Loyalty. Thank you for your perseverance on behalf of the shareholders to build this company.

Ross: Thank you very much. Sure delighted to talk to you.