This article first appeared in The Edge Malaysia Weekly on September 2, 2024 - September 8, 2024

MyEG Services Bhd’s (KL:MyEG) net profit has grown an average 24% in the last two years but its share price has not kept up with positive analyst calls despite heightened trading volume recently.

Over the last two years, the group has spent more than RM1 billion, and counting, on its blockchain platform Zetrix, whose use case is currently concentrated on ZTrade, its relatively new trade document digitisation service.

“One billion ringgit might seem a lot for a Malaysian company [to invest in blockchain],” MyEG co-founder and group managing director Wong Thean Soon, also known as TS Wong, tells The Edge in an interview. “But in the global context, of course, it’s actually a drop in the ocean.

“The nature of Web3 architecture is that tokens are required to carry the data [across transactions] ... Even in China where cryptocurrencies are banned, a user requires cryptos or tokens to use China’s national public blockchain.

“Most global tech companies invest tens of billions of US dollars in building a platform that has global reach. That’s what we’re trying to do.” says Wong, the largest shareholder of MyEG with a 12.8% direct and 16.18% indirect stake in the company.

Interestingly, MyEG’s earnings growth in the last year has been attributed to the sale of Zetrix’s digital tokens, rather than “gas fees” from the use of the ZTrade application or the Zetrix platform.

Accounting for crypto assets is fairly new in Malaysia. Currently, there is not one accounting standard globally that can be applied to the asset class. Companies rely on their best judgement in analysing the characteristics of the crypto asset to determine its classification and the resulting accounting method to apply.

It is no wonder then that many investors are perplexed trying to interpret MyEG’s recent financial statements.

Minutes from the company’s 23rd annual general meeting (AGM), held in June, reveal that there were many questions about the company’s digital assets and the amortisation of the development cost associated with the Zetrix platform.

In MyEG’s 2023 annual report, there is a new line item presented under current assets in its balance sheet — digital assets amounting to RM301.76 million. The notes accompanying the financials explain that these consist of cryptocurrencies.

The AGM minutes also show that the management explained that the digital assets comprised proceeds arising from the sale of Zetrix tokens as well as the purchase of other digital assets that included a stablecoin, measured at fair value.

So far, MyEG has said it has already minted one billion Zetrix tokens that are not recognised in the financial statements until they are sold.

There are several ways to amortise the development cost of intangible assets. The most common way is the straight-line method, which involves distributing the development cost over the asset’s estimated useful life. But MyEG has adopted a different method — via the percentage of tokens sold out of the total minted.

MyEG rationalised that the development cost represents cost incurred to develop the blockchain, which allows the tokens to be minted, and hence the revenue from the sale of the tokens will be offset by the corresponding cost of developing the Zetrix blockchain platform.

Accountants The Edge spoke to say MyEG’s method of amortisation is acceptable and similar to the method used by some companies to amortise  software development costs, also an intangible asset— that is, based on the number of transactions, number of units produced or the hours operated.

So, how did MyEG venture into China’s blockchain ecosystem? Wong says it was the result of an investment made nine years ago in Bubi (Beijing) Network Technology Co Ltd.

From a blockchain start-up in 2015, Bubi emerged as one of Forbes China 50 Most Innovative Companies in 2019 and was more recently featured in KPMG’s 2023 China Fintech 50 Report.

Bubi’s protocol, Wong says, was selected by the Chinese government to build its national public blockchain infrastructure Xinghuo BIF.

Bubi is also the contractor that developed the Zetrix Layer 1 blockchain, which is compatible with Xinghuo.

Other applications can then ride the Zetrix blockchain. ZTrade is one such application that provides blockchain verifiable credentials exclusively for Malaysian and Philippines exports to China.

As an analogy, Xinghuo is like a mobile network; Zetrix is the mobile operating system and ZTrade (which was also developed by Zetrix) is the mobile application.

Since its launch in June, ZTrade has recorded “a few thousand” transactions (one transaction per document, and each shipment has several documents). Wong says this could speed up the document credential process by 50% compared with the conventional method using physical documentation.

Upon payment, ZTrade shares the revenue with Zetrix, as is typical of the revenue-sharing mechanism between app developers and operating systems.

The intellectual property for Zetrix is owned by Zetrix Sdn Bhd, of which MyEG owns 56% and Bubi Network Technology owns 30% via Bubi Technologies Co Ltd. Another Chinese partner, Star Jewel Capital Inc (British Virgin Islands-registered), owns the remaining 14%.

MyEG still owns “almost 10%” of Bubi Network Technology, Wong says. “We wouldn’t have been able to [build the platform] otherwise [without Bubi’s input].”

In July, MyEG, Bubi and Star Jewel extended their exclusive collaboration agreement for Zetrix by another five years.

Still, the mass adoption of Zetrix is a long way ahead. Instead, it is the token sales that have churned out MyEG’s profit growth, says Wong.

The sales represented RM127.65 million or 17% of group revenue in MyEG’s financial year ended Dec 31, 2023 (FY2023).

The other 76% came from services rendered, followed by sales of goods (4%) and concession-based services (3%). MyEG did not provide a segmental breakdown of its operating profit.

According to the minutes of the recent AGM, the Zetrix blockchain business generated revenue exceeding 20% in 1QFY2024.

Nonetheless, some have questioned whether the revenue from the token sales is sustainable going forward.

A rise in token prices means higher costs to those keen to digitalise their trade documents. This raises another question: apart from cryptocurrency traders, who else buys the tokens?

Wong says MyEG does not know who buys its tokens but argues that they are “critical” to the ecosystem. For example, it is automatically distributed as payment to those who put in the computing power to help validate transactions.

About 15 million tokens had been sold by Zetrix at the time of the interview in mid-August. They are sold at the prevailing market price; at the time of writing, they were being traded at US$15.51 apiece.

While ZTrade accepts Zetrix tokens, it also accepts renminbi and will help manage the conversion to tokens for those paying with the fiat currency, for a fee. Wong did not provide a timeline as to when Zetrix tokens will be used exclusively.

The digitalisation of one document is priced at RMB200, on top of one-off registration and platform fees of RMB1,400 in total.

But Zetrix is not the only one aiming to be a first mover in China’s blockchain policy.

Paperless exports from China were piloted in October 2023, involving the Singapore government-linked blockchain framework TradeTrust. Separately, HSBC has completed a blockchain-based letter of credit transaction that processes the required trade documents within a day compared with at least five days through the normal process.

“I think I will leverage the fact that our platform is in partnership with Chinese Customs,” Wong says.

“Since China is the biggest trading partner for practically most countries in the world, we think that gives us enough leverage to be able to push our platform as the standard,” he adds.

Back home, Zetrix has “the largest blockchain network” among the less than 10 Malaysian blockchain companies, with over 300 nodes across 20 countries, according to a spokesperson of government agency Mimos Bhd.

Zetrix is partnering with Mimos, an agency under the Ministry of Science, Technology and Innovation (Mosti), to develop Malaysia’s national blockchain infrastructure — much like China’s Xinghuo.

These ventures have seen MyEG’s debt rise more than seven times in the last two years to RM1.13 billion at the end of June, from RM160.55 million at the start of 2022, although gearing remained low at 0.19 times.

The group is expected to spend more on Zetrix — RM500 million each year for several years, according to analysts.

Wong says MyEG is “pledging that our capex (capital expenditure) will be within our operating cash flow”.

“Our objective is to ensure we are cash flow-positive. If we are, we wouldn’t be increasing the borrowings.”

Part of that capital would still come from its e-government services, which in FY2023 still contributed more than 70% to group revenue. At home, two service contracts were extended last year (two years with the immigration department and three years with the road transport department).

On potential cash calls or recapitalisation, Wong says, “We are generating cash flow right now from the [Zetrix] system. So we think we are okay.”

The group raised RM430.2 million via the placement of 330 million shares in 2020-2021.

More importantly, what will happen if Zetrix’s platform loses out in the race for the top spot in China?

There is also speculation that MyEG plans to propose Zetrix’s adoption in Malaysia. Apart from its collaboration with Mimos, MyEG separately bought into Heitech Padu Bhd (KL:HTPADU), which reportedly lost out in its bid for the National Integrated Immigration System (NIISe) project.

“That’s a valid question,” Wong concedes. “My point is, we believe all government services will run on national blockchain infrastructure, which will enable all documents to be digitised in a manner that is forgery-proof.

“We would like to believe that in five years’ time, we will be able to provide e-services to other governments.

“Where shipping companies use us rather than Singapore’s TradeNet and financial institutions issue their letters of credit on ZTrade instead of HSBC or other platforms… that’s our mission.”

In 1HFY2024, MyEG’s net profit rose 47.76% to RM321.37 million from the previous corresponding period, representing 65% of the full-year profit in FY2023. Revenue also grew, climbing 32.7% to RM475.24 million in 1HFY2024 compared with a year ago.

MyEG attributed the growth in profit and revenue to the contribution from services from its blockchain platform and from the sale of Zetrix tokens but did not provide a breakdown of the numbers.

With so much invested in Zetrix, MyEG has its work cut out to ensure its adoption. In the meantime, those who believe in the blockchain journey will be delighted to see MyEG continue to rake in the profits from token sales. 

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