Could this be Australia's answer to the Nasdaq?

Ann Bowering is the CEO of the National Stock Exchange. It's an interesting business that's listed on the ASX. It's a stock exchange and challenger stock exchange with the ambition of becoming Australia's version of the Nasdaq.

It started off as the Newcastle Stock Exchange in 1937 and subsequently changed to the NSX. It has been through lots of ideas and strategies over the years.

Ann Bowering has been there for a few years and is trying to turn it into Australia's Nasdaq, but that obviously has got a long way to go.

They're losing money and burning cash. They recently raised some cash from a few interesting shareholders including the Thorney Opportunities fund (Alex Waislitz), David Paradice and a few others. They've got some backing and have also got Gowing Brothers on board as shareholders, so it's an interesting play.

I think they need to tie up with some other international exchange; the Nasdaq would be great or possibly the Toronto Stock Exchange or something like that. But there's no sign of that happening yet, although I think that's what they're trying to achieve.

There's a couple of other things coming up that Ann discuses in the interview such as getting onto the online broking platforms such as CommSec and Bell Direct, which they're not on currently.

They have also been having trouble with their biggest listing, which is a Maltese listed investor in Irish property which is about five times bigger than anything else listed on the exchange. They've had to suspend it because it's up to no good (of sorts), so that has been a bit awkward.

Look, it's an interesting play, it's quite cheap and the market cap is not very much. The average market cap of their listings of which there are 80, is 50 million.

Here's Ann Bowering, the CEO of the National Stock Exchange.

Listen to the podcast or read the full transcript below:

Ann, the N in NSX stands for National but it used to stand for Newcastle Stock Exchange.  Tell us how it changed from that to the National Stock Exchange and just a bit of a potted history of what occurred.

Sure.  That’s one of the great things about the Australian equity market space, we trace our roots right back to, as you say, the early 1900s in terms of markets forming in Australia to fund innovation across our economy even back in those days.  Fast forward to the late 1990s and early 2000s and a group of advisors in Newcastle saw an opportunity off the back of the success, and growing success, of the A market in the UK and the venture market out of Vancouver at that point in time.  We saw an opportunity to build a platform, a market place to fund innovation, fund investment in innovation, facilitate investment in innovation in Newcastle.

They set about reactivating the licence and bringing together a framework for liquidity and transparency and governance, and they formed the Newcastle Stock Exchange.  Pretty quickly others cottoned on to what a good idea this was and what an opportunity there was.  I guess some of those people could remember the small cap market that ASX put together for a period of time and really believed in the opportunity and the demand for a microcap market in Australia to facilitate investment into growth companies. 

After the Newcastle Stock Exchange started getting some traction it gathered interest from Sydney-siders and people from Melbourne who thought that this was a pretty good idea.  They listed it on ASX and raised some capital to pursue the growth of the exchange and pretty quickly realised that the opportunity was a national opportunity, not just simply a Newcastle opportunity so the name change occurred at about the same time that the NSX merged with the Bendigo Stock Exchange to become the one market, the National Stock Exchange.

How many stocks are listed on the NSX now?

There are around 80 securities listed on NSX, they range from debt and equity securities.  We have some great little listed investment companies that have been quite successful in terms of East 72 and [0:05:04.8] Holdings.  We have a great track record in agri, rice growers or Sun Rice is probably one of our largest brands in the market place at the moment and they listed on us at around $70 million market cap and now have a market capitalisation of around $350 million.  [0:05:24.6] Poultry is another great little agri business that we have on our market.

What’s the average market cap?

Our average market cap is around $50 million at the moment, so really represents what our target market is in terms of where we see ourselves as providing a better alternative in that $10 to $50 million market cap at IPO.  Typically we see the companies listing at around market cap of $30 million and they’re raising between $1 and $3 million on average at IPO.

I note that your largest listed company by far is a Malta based company that invests in Irish property called Moralltach Global and you’ve suspended them, what’s going on there?

I guess that’s part of the governance of the market place, isn’t it.  Stocks that are listed on NSX are required to adhere to the same standards that they are when they’re listed on ASX.  We have continuous disclosure requirements that we require our companies to adhere to to ensure that the market is informed and we have periodic disclosure requirements which are the same as those on ASX.  When our companies fall behind or fail to meet those requirements then those companies will be suspended until they can meet their obligation to ensure that the market is informed.  We work with our companies to help them get to that level but it’s really important to us the integrity and quality of the information in the market place.

They’re a $1.8 billion company, what did they do to get suspended, has this been a big deal for you?

It is, we would love for all of our companies to be freely trading and up to date with their disclosures but in this instance Moralltach has had some changes at a board level which we’re processing those and ensuring that the directors have sufficient experience and are of appropriate standard to be directors of a publicly listed company and making sure that the information that they are reporting to the market is all that it needs to be.  We do that by doing our own investigations into the companies and triangulating what information we can find from social media and through traditional media and making inquiries and if we feel the market isn’t properly informed then we’ll be talking to the company and asking them to make that information available to the public.

In this instance we’re working with Moralltach and their company secretary to make sure that that’s the case.

They probably don’t entirely fit with your mission of listing micro-cap technology stocks and so on, do they?

Correct, absolutely, and we have found as we have focussed the exchange on the Australian market place and growth companies, micro-cap companies, that naturally you find the companies that aren’t a great fit, tend to find themselves looking towards other markets.  We’ve de-listed a number of companies over the last 18 months and we have sort of knocked back a number of companies who come to us seeking a listing, 10 in the last financial year, because we really want to make sure that we’re focussing on bringing the right companies to NSX who are coming to list here as part of the Australian financial market to really engage with Australian investors.

How do your listing requirements differ from those of the ASX?

They are principally around the admissions criteria, so the admission chapter one on ASX is the one that you’d be looking to there.  We have a spread requirement, a minimum spread of 50 shareholders compared to ASX which is 300 shareholders.  What that really means is that companies can consider accessing a listing sooner by listing on NSX.  We operate a two year track record test which looks at the suitability for companies for listing.  We look at the management experience, the board experience, we look at the historical financials of the company and their business model and who the customer base is and really understand what their business model is and whether they’re ready to be listed as a public company.  They’re required to have all the accounts, they’re required to have…

But the main thing is the number of shareholders, is that right?

That’s the key objective threshold, is the shareholder spread.

Yeah, is it fair to say that your long term plan would be to become Australia’s Nasdaq?  Obviously you’re a long way off that now but is that where your head is at?

Absolutely, it’s the standout model in terms of challenger markets, alternate listing venues in the world absolutely is Nasdaq, they were an overnight success story in 40 years.  They commenced trading, opened up a market place for companies to list and get access to liquidity and get access to capital where those companies couldn’t get access to the NYSE.  It was so big, it was so cumbersome and so built, or one type of company, that Nasdaq came along and thought we can do this better and provided a market place.  They differentiated in their instance through technology, also through their listing rules and the way their market model worked. 

It allowed a group of companies to get access to being a public company, to the liquidity and to the capital, and to attract the management and enabled those companies to grow and it created the diversification investment and those companies became Apple, became Cisco, became Oracle.  A fantastic success story for a challenger market.  There are other examples, the Venture Exchange in Vancouver is another really good example.  They were so successful that they were acquired by incumbent market, the TSX purchased the Venture Exchange so that’s another great example.

Obviously, the success of AIM as an international market attracting listings from all over the world to access capital for growth.

I guess your main problem, it seems to me anyway, is that the ASX is intent on becoming its own Nasdaq.  They are actively recruiting small cap technology companies in particular from all over the world and doing it quite successfully.  Your strategy seems to be sub-$50 million and they are definitely looking for companies above $50 million.  Is that really where it’s at, that you’re looking for micro caps below $50 million whereas they’re going for companies above $50 million?

Yes.  In terms of replicating Nasdaq where we’re looking to replicate their success in terms of creating an alternate venue in what has otherwise been a monopoly market place you’re absolutely right, ASX has repeatedly stated that their target audience, target market, target customers, are international $100 million plus market cap listings which in a way is pivoting from the Australian market place and its traditional heartland of listings in Australia which the backbone has been built off.  Sub-$50 million market cap a lot of it being resources but equally in terms of traditional technology or finance or property, we see there as an opening and opportunity because of ASX’s strategy for us to come in and do it better in that sector of the market.

It seems to me another problem you’ve got is that there’s hardly any trading going on on your market.  It just doesn’t seem to be very liquid.  I look at today, what is it now, it hasn’t opened yet but most of the stocks, it seems to me, don’t trade from one day to the next.  Is that fair enough, what sort of daily volume or trading do you get?

The liquidity is a function of two things, liquidity is a function of access to the market or distribution and the other quality element is product.  If you look at access to the market first NSX has transformed from what was a very rudimentary order interface model so for our brokers and of which we have a fantastic broker space, the likes of Patersons, [[0:14:36.9] Bell Potter, Morgans.  For those guys to enter trades into our market place it was a single point of contact entering the orders into a bespoke interface.  Meanwhile the rest of the market, the hundreds of advisors were trading ASX stocks using a platform called Iris. 

Over the last 18 months we’ve worked with Iris on a very large project to build NSX into the Iris model and the outcome of that is now NSX stocks are traded the same way as ASX stocks are, by not one person at that broking firm but hundreds of people at that broking firm.  That transformation in terms of accessing NSX has only happened in recent months so the actual benefit for that will take a little time to come to fruition but that will happen hand in hand with us lifting some good quality traditional Australian companies to come on board and engage with the investors in the market place to tell a good story and to give investors aa good experience.

It’s two parts to the equation but what’s quite interesting is when we did some analysis recently as we were looking to access service from ASX and that analysis showed that 13% of ASX listed securities had a trading volume or were less liquid than NSX’s most traded stock.  Despite us having disintermediated access model and despite us having nine out of the brokers the 30 brokers that ASX has.  Despite those impediments our stocks are still punching above their weight for liquidity.  What it also says is that it comes down to the stocks.  Even with that access that the ASX listed stocks have there’s 200 who have very poor liquidity and despite having access to the same liquidity model.

A lot of it comes down to the company once the exchange has got the distribution model right which we now have.              

Can people trade your stocks on one of the online trading platforms like CommSec or Bell Direct?

Currently wee have Open Markets which is an online retail trading broker, they are the first on board and they have been a broker of ours for quite some time now.  We are now working with CommSec, NAB Trade, CMC and Bell Direct to work with one of those guys to get them on board as the first of the big four electronic retail brokers to come on board.  We have had a little bit of a challenge in that in order to facilitate that access for those brokers we have had to approach ASX clear and access their clearing house.  After 18 months of discussion with ASX we have just now been granted access to the clearing settlement service that wee need in order to bring those guys onboard. 

That’s what we’re looking forward to for the next six months, is getting one of those guys onboard and going live with that retail distribution model.   

Right, I presume that will make a bit of a difference.

Absolutely.  At that point in time it really becomes about trading the company and not about what exchange it’s listed on so today for those in the market you might know that you order directly either through Chi-X or ASX for all intents and purposes you don’t know which of those routes the order takes and you don’t care because at the end of the day you want to trade a stock.  Similarly in two years’ time you’ll be wanting to trade a stock and you won’t care and may not even know which exchange it’s listed on, whether it’s listed on NSX or ASX, you’ll be going to your CommSec account, your NAB Trade Account, you’ll be ringing up your broker at Paterson and saying hey I need to buy 10% of this stock or 1% of this stock, it becomes about the company and not about what exchange it’s listed on.

If it’s telecommunications, rewind 15 to 20 years and we all had Telecom Telstra phones and the concept of Optus coming into the market place was a bit ridiculous and we couldn’t see why on earth would we need competition in telecommunications.  Today you pick up your mobile phone and you call somebody and you don’t know whether it’s Optus, Telstra or Vodafone or any of the other new market entrants now.  It’s about connecting to the person on the other end of the telephone and it’d be the same with investing, you don’t care what market it is on you just care that the investor is there to take the other side of the trade.

I suppose the other question is whether any of the brokers that you’re connected with are researching your stocks.  Part of the thing that the investors need is some research and to know what the stocks are, is that going on at all with any of your stocks?

NSX sponsors a research scheme for our company because we know how important research is particularly for smaller companies to get some profile and visibility.  We have an independent research firm called Research as a Service who perform one page independent pieces of research on all new companies coming onto NSX and some of our existing companies as they start to make changes and deliver on their business models.  We know that’s really important and that’s sort of the building block there in terms of research and coverage for all of our stocks.

One of the reasons that we had Canaccord come on as a new broker in September this year which was really a fantastic step for us, they’ve got quite a strong research house and they’re quite interested in the opportunities that the smaller microcap end of the market presents, they obviously are very experienced in the NSX and the name, and so yes we’re looking to cover NSX stocks and they are in fact covering NSX Ltd. 

Can I just look at your financial results now for the latest financial year.  Your revenue fell by $1 million and from I think $3.2 to $2.2 and as a result your loss blew out in that year because your costs were roughly the same.  The decline of $1 million was entirely in application fees, your annual listing fees went up and your application fee fell from $1.3 million to $300,000 which was actually even below the financial year 2015 number of $500,000.  What’s going on with that?  Application fees, does that refer to new companies coming on because if so that is pretty disturbing, isn’t it?

No, not at all.  Just stepping back I guess the recent history of NSX – I came into this role two years ago in June 2016 where NSX was really in quite a hole, it had some serious regulatory issues, it had no visibility or engagement in the market place, it had zero participation from its brokers and really was quite lost in terms of what its strategy was.  We had the opportunity to turn that around, in the last two years we have made outstanding progress on all fronts in terms of the credibility, the integrity, the standards of the exchange, our relationships with our key stakeholders who are regulated institutional investors, retail investors, investor groups – to say it’s the new NSX doesn’t even go to what the changes are that have taken place here.

Those changes take time, we’re an infrastructure business.  The last two years have been about making those changes and embedding those standards, that change in culture, remarketing, rebranding, all of those things are essential elements for us to build a viable challenger market to ASX and we’ve done that but that investment, that takes time.  Our business IPOs have quite a long lead time, 18 months you’d say typically from a first conversation to a listing.  On top of having lifted the listing standards and you’re naturally going to get less listings meeting the bar, as I said earlier we knocked back ten companies so we listed eight last year and knocked back ten, so 18 in total might have been listed under a previous framework compared to 14 the year before.

We could have knocked our numbers out of the park but we didn’t, we focussed on attracting quality companies, back to that point about the product, getting quality product onto the exchange that investors want to engage with that actually build the engagement and participation with the exchange.  Whilst the annual listing fees are down that’s driven by two things.  One, fewer listings which I am very comfortable with, I’d much rather have good quality companies coming on who are there for the right reasons and therefore for a long time growing with us as an exchange as opposed to letting listings on who then either you need too de-list because they don’t meet expectations or they de-list because they can’t meet expectations.

We’re focussed on quality, as a result eight versus 14 listings which is still reasonable on global scale.  The other point is that we had a non-recurring item, a large invoice that went through for the large company, which is Moralltach, it’s quite a large company and they listed in the prior year and that had a significant but non-recurring impact on the P&L.

I see, so Moralltach, the one that you’ve suspended, was a big lump in the FY17 year.  I see.

Yes.

Right, and now you probably wish they hadn’t come on.

Yes, which goes to the point of our quality, you really need to make sure the quality is there, that they’re there for the right reasons, that your investor base is going to want to engage with them and that they have the experience and expertise to meet the standards.

Can I just ask you now about your shareholders.  There’s a bunch of shareholders there that I never heard of and I’m just wondering if you can explain to us who they are.  There’s SHKL Group with 16.4%, Suntec Investment International 14% and Cross-Strait Common Development Fund, WorldPoint Inc, Sino Australia.  Four or five of them add up to more than 50% of the business.  A few of them seem to be Chinese or Hong Kong businesses, is that right, and who are they?  Are they connected with each other at all?

When you look back through recent times in equity markets, back five years ago or thereabouts, there was a big trend globally to engage with china and the opportunities with China and the increasing middle class and Chinese investment offshore presented to companies and countries.  We signed a free trade agreement with China which included the financial services, so a real push to build the ties between the countries and China responded by looking externally for opportunities to engage in financial markets and markets generally offshore. 

At that point in time in 2015 one of our major shareholders decided to sell down their holding and they did so which is sort of beyond the control of the company itself, it’s a transaction between the shareholders.  On market we are ASX listed, that block was sold to four parties that you read out there, the names Suntec, WorldPoint, Australian Sino and SHKL.  Thosee guys came on board, their reasoning for wanting to invest in an exchange aside from the opportunity in infrastructure was around the model of bringing listings to Australia which was all very commendable at the time.

What’s since happened is we’ve better understood some of those emerging market challenges, some of the emerging market issues have in being listed in foreign markets, in particular Western markets like Australia, Canada and the US and the UK.  Where they really struggle to understand and to meet the expectations around suitability for listing and continuous disclosure and periodic disclosure and engagement with the market place in general.  Between that period of time wee have seen a cracking down from ASIC on emerging market issuers listing in Australia.  They have really been quite clear in terms of what their view is, they have released and updated a guidance note and they have included some specific suitability criteria in their RG172. 

That’s all it aims at, really helping intermediaries and gatekeepers be they exchanges or lawyers or accountants or brokers, really understand what the expectations are of the Australian financial market places for emerging market issuers coming to Australia.  That was I guess the chronology of the strategy and intentions from those investors, why they were interested in NSX or why they’re interested in the Australian market place, it hasn’t unfolded.

Those four shareholders that came aboard in 2015, have they been bringing potential Chinese listings to the ASX which you have been knocking back, is that what’s been happening?

They are an advocate for NSX on the ground and they would like to see Chinese listings come and be listed in Australia but in terms of the standard and the bar that’s expected some of those companies are needing to go away and further develop their connection with Australia and rational for being listed in Australia.

Does that mean that these four shareholders are disappointed, is this an overhang, are they interested in getting out now do you think?

My conversations with them they absolutely see the value and the opportunity in the infrastructure of NSX.  I think they’re probably disappointed that it hasn’t quite panned out as they hoped it might but I think they absolutely see the value in a tier one stock exchange and the opportunity and the strategy that we have here.  What’s also interesting to note is that we did a capital raise subsequent to the annual report which you’re looking at based on those numbers that you’re quoting.  We did a placement in September this year for new shareholders, for Australian shareholders,, including the likes of Thorney group, David Paradice, the Gowling Brothers and a gentleman Rod Roberts from Tasmania also came on board.

With those new shareholders comes a doubling down in terms of what our strategy is, they are obviously quite deep in the small cap and micro-cap space here in Australia and very committed to seeing innovation happen in our market.  It was great to bring them on board, we also did a rights issue and our Australian investors participated in that.  There’s been a bit of a shift in the register since then and I guess an alignment with our strategy.

Just to sum up this little section of it would it be fair to say that before you came on board there was an actual plan for the NSX to be aligned with China but since you’ve come aboard that’s changed.  You’re now interested in a much more Nasdaq focussed type of strategy.

Yes. 

Okay.  You mentioned you’ve raised some money, that was great, I think it was $5.3 million.  How much cash have you got in the bank now?

A little under that.  We have some creditors that we’ve topped up so we’re sitting just over $4 I guess and we also have obviously some cash that’s held in reserve for regulatory compliance reasons as well.

What’s your current cash burn rate?

Cash burn rate, in terms of opex we’re projecting for probably a similar result to last year where the ICO activity we’re sort of expecting to be in line with last year and our cost base is pretty fixed.  We can pencil forward based on that.  We have some investment that we’re looking to make in the first quarter and second quarter of next year around distribution and connectivity as we’re connecting to the trade acceptance service with ASX and as we’re connecting to the electronic retail brokers.  There’ll be some capex that comes through in the first half of next year but on an opex line base we would expect revenue to be pretty similar to the prior year and our cost base is pretty similar.

Right, do you expect you’ll need to raise some more money or you’ll be right?

I think we’ll take a look, we were projecting break even in the next two to three years so we’ll see where the business goes in terms of milestones to be achieved and the valuations that we can create for our shareholders and make an assessment off the back of that.

Okay, great.  Ann, thanks very much.

Absolute pleasure talking to you, thank you very much.

That was Ann Bowering, the CEO of NSX.