MTC - MMTec: An All-Round Look

2023-11-11 04:49:29 ET

Summary

• MMTec is a financial technology company that provides data analytics and trading services for financial markets.
• The company caters to the growing demand for foreign securities investment among Chinese investors.
• MMTec has a high current ratio and cash reserve, but concerns about profitability and asset utilization raise red flags for potential investors.

Company Overview

MMTec, Inc. (MTC) is a financial technology company that provides data analytics and trading services for financial markets, offering software solutions and data services to help traders and investors make data-driven decisions in the stock, futures, and options markets. MMTec is a holding company that operates several subsidiaries. Its subsidiaries are MM Future, Gujia Technology, MMBD Trading, MM Capital, MM Global, MM Fund, HC Securities, MM SPC, MMBD Advisory, and Fundex. MMTec, the holding company, doesn't conduct substantive operations but instead indirectly holds equity interest in its operating subsidiaries in China and other countries and regions. MM Future and HC Securities are Hong Kong-incorporated limited companies. Guija is incorporated in China. MM Fund, MM Capital, and Fundex are Cayman Islands companies. MMBD Advisory is incorporated in the state of New York.

Each of these subsidiaries delivers various types of investment services to Chinese investors interested in both foreign and local securities markets. Additionally, MMTec offers technical products and data analysis services to Chinese financial institutions, enabling these institutions to offer investment services related to the foreign (especially the U.S.) securities markets to their clients.

Market Overview and Opportunity

There is a burgeoning demand for foreign securities investment and assets among Chinese investors, and Chinese outflows have grown this year. MMTec aligns its services with this demand for foreign investments. The company stands out for its diverse range of products and services, catering to both institutional clients and individual investors. Through subsidiaries, MMTec has developed and launched various platforms, forming a comprehensive fintech business chain. These platforms include the ETN Counter Business System, PTN Private Fund Investment Management System, Personal Mobile Transaction Client System, PC Transaction Client System, Individual and Institutional Integrated Account Management System, and Quantitative Investment Transaction Platform. Together, these platforms provide a seamless business process, allowing China-based entities, such as hedge funds, mutual funds, registered investment advisors, proprietary trading groups, and brokerage firms, to actively participate in global securities market transactions and settlements. With the PC Transaction Client System, for example, users can gain real-time access to a wealth of market information - from bid/ask prices to breaking news. MMTec utilizes dedicated cross-border lines, ensuring high-speed and stable market data delivery.

MMTec has expanded its financial technology presence through acquisitions. In May this year, it entered into an equity acquisition agreement in which it acquired an 85% stake in Alpha Mind Technology for $99.7 million. Alpha Mind is a China-based insurance technology company that develops and operates next-gen insurance products.

MMTec has also diversified its business by offering consulting and advisory services. In 2019, the company added a financial advisory and investment banking business line that offers guidance for high-value, fast-growing Chinese enterprises seeking to be listed on U.S. stock markets.

MMTec Financials and Valuation

MMTec releases its financial results every half-year, therefore I would do this analysis based on its annual values. FY22 revenue of $1.1 million is a 68% YoY increase. Revenue growth has exhibited a three-year CAGR of 76.24%.

On the balance sheet , total current assets for FY22 is $9 million, while total current liabilities is $1.2 million. This gives us a very high current ratio of 7.5, indicating a strong ability to cover short-term obligations and suggests good liquidity. A high current ratio of 7.5 may also imply that MMTec is not efficiently utilizing its assets to generate profits. The bottom line recorded a loss of $5.6 million for the last fiscal year; hence, Return on Assets (ROA) is also negative. Cash and equivalents for FY2022 was $3.8 million, and total receivables was $5 million. Receivables make up about 55% of the $9 million current assets, signaling that a significant amount of cash is tied up in unpaid invoices. For this reason, though MMTec has a high current ratio, it could still face the issue of delayed cash conversion which can strain the working capital. Cash and equivalents make up 42% of the current assets. Having such a substantial cash reserve is generally favorable for meeting immediate financial obligations; however, it raises questions about asset utilization efficiency. The net loss and negative ROA align with concerns about the company's profitability and effective use of its assets to generate returns. While a high current ratio may indicate strong short-term financial health, it doesn't guarantee optimal asset utilization for long-term profitability.

MMTec burned $7.4 last fiscal year as shown in its net change in cash recorded in the cash flow statement. The monthly burn rate for the company would be $617,000. With cash of $3.8 million available as of the last financial report, and assuming the company burns cash at the same rate as last fiscal year, MMTec's cash runway would be just 6 months. This is a relatively short runway.

MTC currently has an EV / Sales ((TTM)) multiple of 207.65x; this is way higher than the sector EV / Sales of 2.5x. This shows a very high overvaluation this stock might currently have. MTC stock price has shown stronger price momentum in the 3 and 6-month time frame, compared to the average momentum seen for stocks in its sector. The stock experienced price surges last month. MTC saw a double-digit percentage gain over the previous day's close on October 19, reaching a $2.06 daily high. There are no known catalysts for these price surges. The stock price has since declined by about 48% to a current value of $1.07. This stock currently exhibits a high beta.

Risks

Government and Regulation

As a China-based company, doing business in China presents inherent risks for MMTec. Adverse changes in the political, economic, and regulatory landscape. The government's substantial influence, capable of enforcing and changing rules swiftly, may increase compliance costs and reshape the industry.

Currency Fluctuation

As MMTec operates globally and deals with various currencies, fluctuations in exchange rates could impact its financial results. Currency depreciation or appreciation may affect the company's revenue and expenses.

Dependency on Subsidiaries

MMTec's reliance on its subsidiaries for substantive operations introduces risks associated with the performance and activities of these entities. Any issues, legal challenges, or operational disruptions within the subsidiaries could impact MMTec's overall business.

Takeaway

MMTec faces a combination of concerning factors that raise significant red flags for potential investors. It's very high market valuation metrics, paints a grim picture. The overvaluation, as indicated by an extremely high EV/Sales multiple compared to the sector median, suggests potential market correction risks. The lack of catalysts for recent price surges and the subsequent 48% decline in stock value raise doubts about MTC's sustainable growth. Combined with inherent risks related to operating in China, these factors collectively point to a Strong Sell recommendation for MMTec stock.

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