I was pleased to read earlier today that Eugene Fama et al received the Nobel Prize for Economics. Given that Fama's work form the foundation of modern corporate finance and corporate finance research, this is a great result! My favourite papers must be on the topic of random walks and efficient market hypothesis from the 60s and 70s. The Nobel award however are recognising their work on market price movements.
In other news, I'm currently reading 'Superfreakonomics' - the sequel to 'Freakonomics'- which is as mad as the title suggests. It is worthy of an analysis in a future post!
Monday 14 October 2013
Tuesday 1 October 2013
Discounters go big
THE US budget situation is big news, but I am actually finding something else far more interesting at the moment.
Poundland, the UK's best known 'pound shop' chain, is possibly heading for an IPO and definitely heading for growth. Strong sales (£880 million at the March 2013 year end) has driven the firm to open 1000 stores in the UK and Ireland in the coming years; currently there are 458 stores in both countries.
Likewise, the situation is much the same for Aldi, the German discount supermarket chain. Next month, it will open its 500th Aldi store (and more subsequently), based on strong performance in the past year (pre-tax profit of £157.9 million in 2012, an increase of 124% from 2011). Some of these stores will be based in more affluent areas in the UK to reflect changing demographics of the store's customers. It will also create premium lines for Christmas and other products to draw in sales. In fact, Aldi is the UK's fastest growing supermarket, challenging the likes of Tesco and Asda. For now however, Aldi only has 3.7% of the market share whereas Tesco holds 30%.
There are a few factors driving the growth of large discount retailers. Aldi, for example, partially appeals to customers due to their sourcing of local produce from meat to fruit & veg. More generally, the discount retail sector is becoming more mainstream and more 'integrated' into the industry. The fact that the mindset for many consumers at present is to spend less where possible also contributes to this somewhat 'boom'.
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| Will you be shopping here? |
We've seen a string of high street casualties but Aldi and Poundland - which stocks the goods we depend on for daily living - certainly won't be added to that list.
JH
Friday 20 September 2013
Breaking BlackBerry news
There is quite exciting BlackBerry news going on at the moment. The company has taken a dramatic turn for maybe the worst...their shares are suspended for trading in New York and Toronto and a 40% global workforce cut will result. The driving factor is a huge projected and somewhat unexpected Q2 loss...follow it now, if you're interested!
Thursday 19 September 2013
A busy summer for TMT
OF ALL sectors this summer, many of the largest and many of the high profile deals have originated from the TMT sector. Most recently, there was the Verizon $130 billion buyout of Vodafone's stake in Verizon Wireless. Total TMT buyouts of this past quarter amounted to $240 billion worldwide. Total M&A deals in this period reached $520 billion worldwide, surpassing many previous quarters. One recent notable M&A transaction is Microsoft's acquisition of Nokia phone business for 5.4 billion euros.
So after a few uncertain years, it is suffice to say that the era of 'big deals' and corporate confidence are making a return. However, it is worth noting that TMT is a far more innovative and fast paced an industry than say, consumer retail. Given the speed of innovation (think how often the likes of Samsung or HTC or Blackberry release a new product/version of an existing product), strategic moves of M&A or buyouts are the easiest and quickest way to hedge against competition. Innovating organically could be too slow and ergo, useless. Further, I believe that such deals were not snap strategic decisions; in fact, they probably have been contemplated for a while. The time to execute them now is attractive because of a potential rise in interest rates, raising the cost of capital and - related to the previous point - due to the increased pace of innovation and the associated competition.
After these strategic moves, I believe there could be more coming along. In the Vodafone and Verizon case, this deal could put pressure on competitors such as AT&T to make strategic moves, such as speeding up their plan to tap into the European market. This transaction has also granted Vodafone with a considerable amount of cash. With this cash, it makes sense for them to enter into acquisitions. Conversely, Vodafone could be targeted themselves.
Lenovo is looking to acquire in the area of smartphones and tablets. Blackberry is considering their sale. I don't think this would be an unlikely match as their is much synergy between the two. Much of their products are created for business but Blackberry's breakthrough to consumers in recent years coupled with Lenovo as a tech power could send more challenge to Apple/iOS or Android phones than Blackberry or Lenovo doing it alone. On a related note, Lenovo ended their interest for HTC over a year ago, blaming HTC's poor quality products. Nevertheless, Chinese firms, ZTE and Huawei, who are more equipment makers at the moment, could make a bid for HTC especially when HTC's shares are trading exceptionally low compared to two years ago. The question is when? I would say not this year. The HTC One - their flagship model - has been doing well and the company's outlook is not too weak.
There has also been talk of Microsoft to sell its Xbox business - now that Ballmer is leaving - as a stand alone one for around $17 billion. Xbox, despite its widespread popularity, actually produces one of the lowest margins and does not help to sell the company's core products. I think Xbox could be a successful entity by itself and there is plenty of room for growth, but only if it can access enough investment for R&D to survive competition. Microsoft's cash pot will no longer be accessible!
Meanwhile in Japan, Yahoo! Japan is also seeking out acquisitions to expand their mobile products for smartphones within Japan. I believe we can expect announcements here shortly; their hiring of former Goldman Sachs M&A VP, Ryu Hirayama, shows Yahoo! is serious.
I think that one of the most interesting things about the current TMT sector is that it creates opportunities for other sectors. For example, apps have made digital advertising huge and we saw the $35 billion merger of Omnicom and Publicis to form one giant advertising house.
So after a few uncertain years, it is suffice to say that the era of 'big deals' and corporate confidence are making a return. However, it is worth noting that TMT is a far more innovative and fast paced an industry than say, consumer retail. Given the speed of innovation (think how often the likes of Samsung or HTC or Blackberry release a new product/version of an existing product), strategic moves of M&A or buyouts are the easiest and quickest way to hedge against competition. Innovating organically could be too slow and ergo, useless. Further, I believe that such deals were not snap strategic decisions; in fact, they probably have been contemplated for a while. The time to execute them now is attractive because of a potential rise in interest rates, raising the cost of capital and - related to the previous point - due to the increased pace of innovation and the associated competition.
After these strategic moves, I believe there could be more coming along. In the Vodafone and Verizon case, this deal could put pressure on competitors such as AT&T to make strategic moves, such as speeding up their plan to tap into the European market. This transaction has also granted Vodafone with a considerable amount of cash. With this cash, it makes sense for them to enter into acquisitions. Conversely, Vodafone could be targeted themselves.
Lenovo is looking to acquire in the area of smartphones and tablets. Blackberry is considering their sale. I don't think this would be an unlikely match as their is much synergy between the two. Much of their products are created for business but Blackberry's breakthrough to consumers in recent years coupled with Lenovo as a tech power could send more challenge to Apple/iOS or Android phones than Blackberry or Lenovo doing it alone. On a related note, Lenovo ended their interest for HTC over a year ago, blaming HTC's poor quality products. Nevertheless, Chinese firms, ZTE and Huawei, who are more equipment makers at the moment, could make a bid for HTC especially when HTC's shares are trading exceptionally low compared to two years ago. The question is when? I would say not this year. The HTC One - their flagship model - has been doing well and the company's outlook is not too weak.
There has also been talk of Microsoft to sell its Xbox business - now that Ballmer is leaving - as a stand alone one for around $17 billion. Xbox, despite its widespread popularity, actually produces one of the lowest margins and does not help to sell the company's core products. I think Xbox could be a successful entity by itself and there is plenty of room for growth, but only if it can access enough investment for R&D to survive competition. Microsoft's cash pot will no longer be accessible!
Meanwhile in Japan, Yahoo! Japan is also seeking out acquisitions to expand their mobile products for smartphones within Japan. I believe we can expect announcements here shortly; their hiring of former Goldman Sachs M&A VP, Ryu Hirayama, shows Yahoo! is serious.
I think that one of the most interesting things about the current TMT sector is that it creates opportunities for other sectors. For example, apps have made digital advertising huge and we saw the $35 billion merger of Omnicom and Publicis to form one giant advertising house.
JH
Sunday 15 September 2013
Tokyo 2020: An all-over confidence boost
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| And its congratulations to Toyko; commiserations to Madrid and Istanbul |
IN CASE you haven't heard the news, earlier this week, Tokyo was selected by a majority vote to become the host city of the 2020 Olympic Games. Sure, its seven years away but the Games have already had a positive effect right from the moment of announcement. The Topix Index rose 2.2% and unsurprisingly, winners were construction, tourism and real estate companies. The biggest performers included Taisei Corp, a building firm expected to play a role in the Games' infrastructure, who rose by 14% on the day of the announcement. This rally is of course short-lived, but the shares of companies in real estate, infrastructure, construction, transport, tourism and retail related to the Games are valuable equity to hold overall - I see growth in these. Coupled with 'Abenomics' (read about it here), the Olympics is something that will boost consumer confidence and their mood, the optimism of investors and output. It is a force that will help halt Japan's two decades of deflation. You could say that Tokyo 2020 is the fourth arrow of Abenomics. It has been predicted by Japan's bid team that the Games will create 150,000 jobs in Japan and generate $30 billion. The government estimated that an additional 0.3% of GDP will be generated. This is quite a modest amount and I believe it will be more similar to that of the UK's, at 0.6%-0.7%.
The Olympic Village will be in close proximity to Tokyo Bay, which has seen its share of problems over the past 20 years such as abandonment and deflation of property prices. With the Games, I see property price in this area rising a considerable amount due to rejuvenation - influx of people, businesses, shops, transport, parks, stadiums - into the area, just as Tokyo 1964 turned the wasteland of Komazawa into an Olympic Village and then into a trendy neighborhood in central Tokyo. An example closer to home would be Stratford. The development of Tokyo Bay will benefit landowners - prominent corporate owners include Mitsubishi Estate and Daiwa House Industry who have already seen their stocks rally. From the property developers and real estate side, I suppose they are also eager to make Tokyo become a hot property market in Asia again.
In the next post: I will discuss some recent M&A deals that have interested me
JH
Tuesday 10 September 2013
Move over, Moshi Monsters
I HAVE a much younger sibling and about two years ago, from her, I learnt of something called Moshi Monsters. You may have heard of Moshi Monsters and you have probably 'seen' it around from their copious and varied range of merchandise that is widely available So, what is Moshi Monsters? Well, Moshi Monsters is an online virtual game that allows the user to choose from one of six pets to care for. It is also a social environment where users can add friends, send messages or virtual gifts.The aim of the game is for the user to create a 'home' for the pet; items are bought with 'rox' (Moshi Monster currency) earned from playing games or completing tasks. Users can purchase premium membership to access the underground disco and such like things... From seeing the game myself, the interface is relatively simple and I would say that it is aimed at the ages of 7-10. But realistically, because the interface is simple, children will bored playing the game beyond the age of 8-9, a point I will return to later.
Moshi Monsters was developed and released by Mind Candy (a UK company) in 2008 and interest in it was slow at first. But by the end of 2009, it had 10 million users. Now, there are over 80 million users globally. I believe that this success can be attributed towards Mind Candy's first mover advantage into a market that did not really cater for young children, who are ever so comfortable with technology, games and the web. It is also built on the idea of 'nurturing' which kids love. 90s kids like me may not have played Moshi Monsters but we will fondly remember caring for the 'aliens' in eggs, Furby, Tamagotchi or even caring for our Neopets (another virtual pet game for slightly older users still up and running today). The communication and social media features of Moshi Monsters also helped it to take off.
In terms of revenues, Moshi Monsters makes half from premium memberships which of course, all the kids want their parents to pay for. The other half comes from merchandise where Mind Candy receives around 15-20% in royalties. Currently, there are 130 licensing deals including one with McDonald's Happy Meals. In March 2013, Mind Candy announced "£250 million of total gross retail", so approximately £37.5-£50 million could be Mind Candy revenue. The last set of results filed were in 2011, where it made £28.7 million in revenues and £7.4 million in profits.
There was talk of a Mind Candy IPO last year aimed at in a few years time. But for now, Moshi Monsters is facing considerable challenges so I believe that until Moshi Monsters can tackle its challenges head on, it shouldn't even consider an IPO.
So if reading about Moshi Monsters makes you slightly confused, then now try to consider Bin Wheevils - Moshi Monsters' arch enemy. Without going into much detail (because I don't really understand the game myself having not played it!), Bin Wheevils, founded in 2008 under Nickelodeon is also a virtual gaming environment allowing kids to create a character (a wheevil-like creature that lives in a bin) and take it around in a virtual city on all kinds of adventures. It has a grimy and slimy undertone to it all, which is why I suppose kids love it. Currently, there are around 20 million users worldwide and 30,000 users are signing up daily. Like Moshi Monsters also, there is a premium membership option and its merchandise are fast filling up in the many aisles of major retailers globally. While it is behind Moshi Monsters in terms of user count, it will prove be far more popular with youngsters in the long term because Bin Wheevils provides a far more entertaining, fun and an interactive and social environment which makes it difficult for users to log off. I have been told by my sister that every time she visits Moshi Monsters, the virtual streets are empty but on Bin Wheevils, the streets are so crowded that she can barely see her character. This tells a story: the truth is that Moshi Monsters has become boring with its limited features and games. Kids are instead turning to Bin Wheevils. It also seems that the Bin Wheevils themselves have more persona and character than the Moshi Monsters. Mind Candy Entertainment is no longer so entertaining.
Moshi Monster's plan is to go more global - break into the US more and into the Far East as well enter into tablet gaming for children (which will be a challenging venture in itself). It is also hiring game developers for their San Francisco office to launch new games. However, no one at Mind Candy has quite realised that many of their features and the monster characters have become just dull. And dullness in the gaming market is detrimental.
JH
Moshi Monsters was developed and released by Mind Candy (a UK company) in 2008 and interest in it was slow at first. But by the end of 2009, it had 10 million users. Now, there are over 80 million users globally. I believe that this success can be attributed towards Mind Candy's first mover advantage into a market that did not really cater for young children, who are ever so comfortable with technology, games and the web. It is also built on the idea of 'nurturing' which kids love. 90s kids like me may not have played Moshi Monsters but we will fondly remember caring for the 'aliens' in eggs, Furby, Tamagotchi or even caring for our Neopets (another virtual pet game for slightly older users still up and running today). The communication and social media features of Moshi Monsters also helped it to take off.
In terms of revenues, Moshi Monsters makes half from premium memberships which of course, all the kids want their parents to pay for. The other half comes from merchandise where Mind Candy receives around 15-20% in royalties. Currently, there are 130 licensing deals including one with McDonald's Happy Meals. In March 2013, Mind Candy announced "£250 million of total gross retail", so approximately £37.5-£50 million could be Mind Candy revenue. The last set of results filed were in 2011, where it made £28.7 million in revenues and £7.4 million in profits.
There was talk of a Mind Candy IPO last year aimed at in a few years time. But for now, Moshi Monsters is facing considerable challenges so I believe that until Moshi Monsters can tackle its challenges head on, it shouldn't even consider an IPO.
So if reading about Moshi Monsters makes you slightly confused, then now try to consider Bin Wheevils - Moshi Monsters' arch enemy. Without going into much detail (because I don't really understand the game myself having not played it!), Bin Wheevils, founded in 2008 under Nickelodeon is also a virtual gaming environment allowing kids to create a character (a wheevil-like creature that lives in a bin) and take it around in a virtual city on all kinds of adventures. It has a grimy and slimy undertone to it all, which is why I suppose kids love it. Currently, there are around 20 million users worldwide and 30,000 users are signing up daily. Like Moshi Monsters also, there is a premium membership option and its merchandise are fast filling up in the many aisles of major retailers globally. While it is behind Moshi Monsters in terms of user count, it will prove be far more popular with youngsters in the long term because Bin Wheevils provides a far more entertaining, fun and an interactive and social environment which makes it difficult for users to log off. I have been told by my sister that every time she visits Moshi Monsters, the virtual streets are empty but on Bin Wheevils, the streets are so crowded that she can barely see her character. This tells a story: the truth is that Moshi Monsters has become boring with its limited features and games. Kids are instead turning to Bin Wheevils. It also seems that the Bin Wheevils themselves have more persona and character than the Moshi Monsters. Mind Candy Entertainment is no longer so entertaining.
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| Bin Wheevils: Here to conquer a piece of the market |
Moshi Monster's plan is to go more global - break into the US more and into the Far East as well enter into tablet gaming for children (which will be a challenging venture in itself). It is also hiring game developers for their San Francisco office to launch new games. However, no one at Mind Candy has quite realised that many of their features and the monster characters have become just dull. And dullness in the gaming market is detrimental.
In the next post: I will discuss how Tokyo 2020 will give Japan a much needed economic (and confidence) boost
JH
Saturday 31 August 2013
The next IPOs and M&As
THERE ARE a few companies out there I believe should/could debut on stock exchanges in 2014 or the year after. This post is a short analysis of two of them:
Dropbox (online file storage and sharing; mainly targeted for personal use)
Dropbox works by storing users' data with cloud storage and synchronising files, eradicating the need to carry portable storage devices or storing to your computer. There are now over 200 million users of Dropbox who are mostly individuals rather than enterprises, unlike Dropbox's main competitor, Box. Dropbox nevertheless in the past year has been pushing a version of its storage service for enterprise use, charging a considerable fee. In terms of other monetised/premium services, individual users can buy more space although not many users have opted for this at the moment. Still, Dropbox have enjoyed strong revenue streams (the figure is a Dropbox secret) and also secured $250m of venture capital recently. Their valuation is around $4 billion (to grow substantially) and I believe an IPO could help raise a huge amount, most likely to be used for expanding via further acquisition of technologies (also not to mention the acquisition of talent in this process) that are compatible with smartphones and also the technology to store music, sound. The storage of map and app data can be a further area to venture into; either to develop organically or through acquisition.
So from this latter point, I think such opportunity is also Dropbox's number one challenge affecting valuation and stock performance after an IPO: it is really the ability to innovate storage technology so it copes as new devices, apps and platforms are changed and introduced. Another is the changing scene of cloud storage. When I started using Dropbox a few years ago, there weren't really that many 'well-known' competitors around. Now, there are several: Google, Microsoft and Amazon being the three I can think of at the top of my head. With these places giving space away for free, they could very easily snatch away Dropbox's users and eat into their profit margin. However, there is a lot of scope for growth at Dropbox which hasn't even started. Its clean-cut piece of stand alone technology giving users secure storage, a simple interface and fast software earns everyone's trust. Google and Microsoft for example, have been implicated in privacy breaching.
Box, valued at $1.2 billion is also poised for an IPO in 2014.
Twitter (microblogging/social media tool, for those unfamiliar with Twitter)
There has been a lot of talk and hype about Twitter's IPO especially in recent days. It has been reported in the financial press that initial talks between Twitter with several investment banks have started. J.P.Morgan, Goldman Sachs, Morgan Stanley, BAML, Credit Suisse and others are vying for a lead role in this prestigious IPO. The social media platform also advertised for a 'Form S-1 preparer with other financial reporting duties' for "when we go public" on Linkedin, although it was later taken down. Reasons for Twitter going public are fairly simple. Twitter is valued at $10 million with its shares valued at around $20 on the private market and increasing in an IPO. Twitter's financial performance ($350 million in revenues in 2012; estimated $500 million in revenues this year; estimated $1 billion next year) and strong user and advertising interest makes it a good time to go public. Future prospects for social media companies like Twitter are good. They can capitalise on digital advertising through its huge user base & user data and channel more links with app developers. I believe that part of the financing raised from the IPO will be spent on a further string of acquisitions, given Twitter's recent track of them. Seeing what happened to Facebook's shares after their IPO, it is no surprise that Twitter is cautious about an IPO. Indeed, there will be a lot of comparisons between the IPOs of these two social media giants. There are a few lessons from the Facebook experience that Twitter can learn from, and hopefully avoid: overvaluation, using a dutch auction and not delaying the IPO too long so that there is no inflation of the market value - ergo a bubble waiting to pop.
From the M&A side, I think there are currently a few potential M&As which has the synergy to work well together.
I previously talked about Blackberry's case for a joint venture with Tactus Technology to develop a microfludic keyboard for a touchscreen phone/tablet. (See here). Tactus has the technology while Blackberry already has the credentials to bring such a product to market. Such a radical innovation before anyone else on the mainstream market launches it could just be Blackberry's final life saver before it considers going private.
TMT aside, in the food sector, I believe Krispy Kreme is a good target for acquisition by a supermarket. The doughnut chain/franchise business had been suffering from a volatile bottom line in a recent years for a number of reasons such as accounting irregularities and aggressive but often unprofitable growth in its USA franchises. Revenues have grown but this has attracted more tax, eating away at profit. Yesterday, Krispy Kreme released their financial results, missing their revenue target and causing their share price to drop 13.3%.
Krispy Kreme doughnuts are stocked in selected Tesco stores in the UK as well as in Target and Walmart in the USA, but I believe Krispy Kreme could fare better in a supermarket for the increased consumer exposure because at the end of the day, Krispy Kreme is a highly desirable, unique and special brand. One way it has done this is through its designs of doughnuts, the packaging and the fact the chain has managed to keep itself relatively exclusive by having few stores compared to other 'occasion' confectionery and bakery retailers such as Thornton's and Millie's Cookies.
An acquisition by an international supermarket such as Tesco, Safeway or Kroger could give Krispy Kreme far more consumer exposure through Krispy Kreme doughnuts being sold in more supermarket stores. The theme of making junk food 'healthy' is also an important thing Krispy Kreme cannot ignore. It could be useful to use the cash of a parent company (Safeway for example has considerably more cash than Krispy Kreme) for product development and marketing in this area.
JH
Dropbox works by storing users' data with cloud storage and synchronising files, eradicating the need to carry portable storage devices or storing to your computer. There are now over 200 million users of Dropbox who are mostly individuals rather than enterprises, unlike Dropbox's main competitor, Box. Dropbox nevertheless in the past year has been pushing a version of its storage service for enterprise use, charging a considerable fee. In terms of other monetised/premium services, individual users can buy more space although not many users have opted for this at the moment. Still, Dropbox have enjoyed strong revenue streams (the figure is a Dropbox secret) and also secured $250m of venture capital recently. Their valuation is around $4 billion (to grow substantially) and I believe an IPO could help raise a huge amount, most likely to be used for expanding via further acquisition of technologies (also not to mention the acquisition of talent in this process) that are compatible with smartphones and also the technology to store music, sound. The storage of map and app data can be a further area to venture into; either to develop organically or through acquisition.
So from this latter point, I think such opportunity is also Dropbox's number one challenge affecting valuation and stock performance after an IPO: it is really the ability to innovate storage technology so it copes as new devices, apps and platforms are changed and introduced. Another is the changing scene of cloud storage. When I started using Dropbox a few years ago, there weren't really that many 'well-known' competitors around. Now, there are several: Google, Microsoft and Amazon being the three I can think of at the top of my head. With these places giving space away for free, they could very easily snatch away Dropbox's users and eat into their profit margin. However, there is a lot of scope for growth at Dropbox which hasn't even started. Its clean-cut piece of stand alone technology giving users secure storage, a simple interface and fast software earns everyone's trust. Google and Microsoft for example, have been implicated in privacy breaching.
Box, valued at $1.2 billion is also poised for an IPO in 2014.
*****
Twitter (microblogging/social media tool, for those unfamiliar with Twitter)
There has been a lot of talk and hype about Twitter's IPO especially in recent days. It has been reported in the financial press that initial talks between Twitter with several investment banks have started. J.P.Morgan, Goldman Sachs, Morgan Stanley, BAML, Credit Suisse and others are vying for a lead role in this prestigious IPO. The social media platform also advertised for a 'Form S-1 preparer with other financial reporting duties' for "when we go public" on Linkedin, although it was later taken down. Reasons for Twitter going public are fairly simple. Twitter is valued at $10 million with its shares valued at around $20 on the private market and increasing in an IPO. Twitter's financial performance ($350 million in revenues in 2012; estimated $500 million in revenues this year; estimated $1 billion next year) and strong user and advertising interest makes it a good time to go public. Future prospects for social media companies like Twitter are good. They can capitalise on digital advertising through its huge user base & user data and channel more links with app developers. I believe that part of the financing raised from the IPO will be spent on a further string of acquisitions, given Twitter's recent track of them. Seeing what happened to Facebook's shares after their IPO, it is no surprise that Twitter is cautious about an IPO. Indeed, there will be a lot of comparisons between the IPOs of these two social media giants. There are a few lessons from the Facebook experience that Twitter can learn from, and hopefully avoid: overvaluation, using a dutch auction and not delaying the IPO too long so that there is no inflation of the market value - ergo a bubble waiting to pop.
*****
I previously talked about Blackberry's case for a joint venture with Tactus Technology to develop a microfludic keyboard for a touchscreen phone/tablet. (See here). Tactus has the technology while Blackberry already has the credentials to bring such a product to market. Such a radical innovation before anyone else on the mainstream market launches it could just be Blackberry's final life saver before it considers going private.
TMT aside, in the food sector, I believe Krispy Kreme is a good target for acquisition by a supermarket. The doughnut chain/franchise business had been suffering from a volatile bottom line in a recent years for a number of reasons such as accounting irregularities and aggressive but often unprofitable growth in its USA franchises. Revenues have grown but this has attracted more tax, eating away at profit. Yesterday, Krispy Kreme released their financial results, missing their revenue target and causing their share price to drop 13.3%.
Krispy Kreme doughnuts are stocked in selected Tesco stores in the UK as well as in Target and Walmart in the USA, but I believe Krispy Kreme could fare better in a supermarket for the increased consumer exposure because at the end of the day, Krispy Kreme is a highly desirable, unique and special brand. One way it has done this is through its designs of doughnuts, the packaging and the fact the chain has managed to keep itself relatively exclusive by having few stores compared to other 'occasion' confectionery and bakery retailers such as Thornton's and Millie's Cookies.
An acquisition by an international supermarket such as Tesco, Safeway or Kroger could give Krispy Kreme far more consumer exposure through Krispy Kreme doughnuts being sold in more supermarket stores. The theme of making junk food 'healthy' is also an important thing Krispy Kreme cannot ignore. It could be useful to use the cash of a parent company (Safeway for example has considerably more cash than Krispy Kreme) for product development and marketing in this area.
JH
In the next post: I will be discussing the future of 'Moshi Monsters' and 'Bin Wheevils'
Wednesday 28 August 2013
Afghanistan, Iraq and Syria?
WELL THE escalation of the Syria crisis is pretty disconcerting. Last week, I was in a hotel room watching the coverage of victims of the chemical attack. This week, now back at home, I am watching coverage of potential military action by the US, UK and other European nations. Tomorrow, MPs will debate the plausibility of a military strike after being recalled to parliament by Cameron (still without any concrete evidence of who the perpetrators really are).
I and most British electorates are not the only ones worried about our involvement in another bloody war. It seems that there is strong agitation in the markets yesterday and today. As expected, oil prices rose to a two year high while energy companies including Exxon Mobil and Chevron enjoyed a rally in their share prices. Oil consuming companies (several European airlines, for example) suffered a loss. S&P 500 have also dropped to an eight week low while markets in Abu Dhabi, Saudi Arabia and Kuwait dropped by 3%. Other agitation signs point to the fact that global funds have withdrawn $44 billion from stock and bond funds of emerging markets in this tense and uncertain time. Meanwhile, the Turkish Lira has dropped to a record low and the Israeli Shekel weakened by 1.1%.
In general, a military strike on Syria is highly likely to affect their oil production and supply, driving up global oil prices. Secondly, a mess in Syria could spill into its neighbours, impacting on their economy (namely oil/other energy production and supply). Such aggressive foreign policy by the UK, US and Europe could also spur on a risk of terrorism affecting global markets and economic stability.
I don't like hearing Cameron et al speak but tomorrow I feel is an important day for us all.
JH
I and most British electorates are not the only ones worried about our involvement in another bloody war. It seems that there is strong agitation in the markets yesterday and today. As expected, oil prices rose to a two year high while energy companies including Exxon Mobil and Chevron enjoyed a rally in their share prices. Oil consuming companies (several European airlines, for example) suffered a loss. S&P 500 have also dropped to an eight week low while markets in Abu Dhabi, Saudi Arabia and Kuwait dropped by 3%. Other agitation signs point to the fact that global funds have withdrawn $44 billion from stock and bond funds of emerging markets in this tense and uncertain time. Meanwhile, the Turkish Lira has dropped to a record low and the Israeli Shekel weakened by 1.1%.
In general, a military strike on Syria is highly likely to affect their oil production and supply, driving up global oil prices. Secondly, a mess in Syria could spill into its neighbours, impacting on their economy (namely oil/other energy production and supply). Such aggressive foreign policy by the UK, US and Europe could also spur on a risk of terrorism affecting global markets and economic stability.
I don't like hearing Cameron et al speak but tomorrow I feel is an important day for us all.
JH
In the next post: I will be discussing big IPOs to come and M&A targets.
Tuesday 27 August 2013
Earnings, earnings, earnings
SO EARNINGS reporting season has just gone by and I am sharing some thoughts on the financial results of a few companies I follow, particularly on companies I haven't blogged about already. Ideally I would have liked to blog about this sooner but travelling and holidays got in the way!
Yahoo! announced their Q2 2013 results on 16th July. Revenue dropped by 1% to $1.07 billion while profit was $331m, up 46% compared to Q2 2012. This profit growth was mostly attributed to Yahoo's investment in Alibaba. While on the topic of Alibaba, I want to note that how Alibaba's impending IPO will affect Yahoo!'s fortunes is uncertain; Yahoo! has already promised to sell half its shares but of course it is Alibaba who holds the cards in this IPO and not Yahoo!. I imagine there could be some conflict on interest between Yahoo! and Alibaba as Alibaba will be less concerned about the initial offering price but more about strong stock performance after. (Just think of what happened to Facebook's shares soon after their IPO). A favourable situation for Yahoo! could be to sell its stake in Alibaba but share some future share price gains. On the other hand, Yahoo! could prefer an outright exit. Whatever they choose and given its promise to sell half its stake, the investment of Alibaba won't be propping up Yahoo!'s profit so strongly after Alibaba's IPO.
Another cause for concern is Yahoo!'s falling revenue in advertising and for search, decreasing 13% and 9% respectively. Melissa Mayer however is choosing to concentrate on the offering of new mobile applications and services where Yahoo! is basically offering a new product or service every week - notable mobile apps include Yahoo Mail, weather, sports, news and Flickr. Share price under Mayer has risen by 70% (over the past year) and since Mayer took office, admittedly, Yahoo! has undergone a cultural and structural turnaround. Employee turnover has decreased by 59% and 17 acquisitions including Tumblr have been made to not only acquire the technology but also the talent. Despite this, Mayer's strategy to ignore revenue is not particularly unimpressive in this competitive environment. The lackluster revenue reflects the fact that Yahoo! is failing to make the effort to attract online advertisers who are far more appealed to Google and Facebook instead. It is predicted by eMarketer that Yahoo's share of digital ad spending is to decline from 3.37% to 3.1% of total spending while Google and Facebook will bite more into Yahoo's online ads stake.
There is also indication that Tumblr won't generate big profits this year and there will be no more big acquisitions like Tumblr either. As a result, Yahoo! really needs to capitalise on making money by appealing to digital advertisers to advertise on what seems like their endless array of apps and mobile services as well as on the jewels of Flickr and Tumblr. The challenge (for all internet companies) however is that it is difficult to display ads on the smaller mobile screen for the ever increasing smartphone app users. Further, Yahoo! is not as attractive to advertisers as Facebook since it does not have as large a user base and user data for targeted/location ads. I think another lucrative but more difficult route to go down is mobile gaming which has a huge opportunity to build in buy-able add-ons and advertising. Designing from scratch and building this area organically is costly and tough in an already filled market. Yahoo! could enter into joint venture with a games developer (the likes of Beeline, King and among others) to build-in such games into its online apps, email and IM.
Whatever Yahoo! decides to do next, it still will be in a turnaround process into the next 2-3 years. If Mayer is successful in reversing Yahoo!'s fortunes, it will be reflected in the company's fundamentals then.
Facebook delivered their Q2 2013 results on 25th July which surpassed expectations. Profits reached $333 million, as boosted by mobile ads, sending shares to a 25.6% gain - the highest since May 2012. In fact, Facebook's revenue from smartphones and tablets constituted almost half of their total advertising revenue to the June quarter; this was $655.6m (or 41%) of the total $1.6 billion advertising revenue. It was only 30% last quarter. Facebook's smartphone users has increased by 51% to 819 million, compared to this time last year.
It seems that Facebook has finally capitalised on its 1.6 billion users (who spent 20 billion minutes on Facebook in June 2012) to generate business since one year ago, the social media giant had no mobile advertising. Unlike Yahoo!, Facebook is making smart moves to capitalise and focus on advertising. For example, in Q4 this year, Facebook will launch mobile video advertising with 15 second video ads. This could be the next billion dollar revenue generator as Facebook's massive user base, user data, smartphone users are highly desirable to advertisers.
Compared to Google and certainly to Yahoo! among other internet companies, I would say that Facebook is in the lead with digital advertising. At their conference call, Zuckerberg indicated that mobile revenue will continue to grow and set to overtake its desktop counterpart. I think this is a definite accurate statement since I talked about what is happening in Q4. Also, Facebook will be opening the popular photo sharing platform Instagram to advertisements and possibly adding video ads on Instagram given video sharing is a new feature there. It is predicted that Facebook will generate more than $2 billion in mobile advertising revenue in 2013 and its market share of the digital ad market will increase from 4.11% (in 2012) to 5.04% this year. In essence, Facebook's weapon is simple. Facebook's competitive advantage is its user base and user data; highly attractive to advertisers since there is a huge opportunity to create targeted and location based ads.
Not many people outside of China are familiar with Tencent but many are familiar with social media platform and instant messenger QQ. QQ is actually run and owned by Tencent who also designs and owns a whole host of other social media platforms such as WeChat and gaming products.
China's biggest internet company announced their results for the April to June quarter about two weeks ago. Results this time aren't has golden compared to previous quarters, missing targets by around 3.9 billion Yuan and causing shares to drop ~5%. While Tencent have made a profit (3.7 billion Yuan; $605 million) which is up 18.4% compared to this time last year, profit declined by 9.5% compared to the previous quarter.
This decline in profit is largely attributed to a more competitive gaming environment, marketing costs for e-commerce and marketing costs for WeChat. On the topic of WeChat, high marketing costs seems to have paid off as WeChat now has 300 million active users, up 176% from a year ago (the more established Whatsapp has 250 million). For example, Tencent used Messi among other celebrities to promote the app to appeal to users outside of China. However, I do not think Tencent's slowing profit is a long term concern at all. Their marketing costs has been offset by the huge surge of users internationally, not just within China. Chinese internet companies have had trouble with breaking out of China (see why in this previous post) but WeChat is proving previous experiences wrong. Further, with a huge user base and user data on smartphones, Tencent can set to monetize the app with targeted and location ads or services. In fact, I updated my WeChat app this month and found that the new version combines online games, stickers and payments for add-ons. I don't buy these things but many people do! It is good to see Tencent moving away from desktop products and into mobile, especially attempting to break borders.
Tencent's main challenge I would say is the cut-throat competition in China's internet scene right now (which is nothing new, of course). Alibaba recently bought an 18% stake in the well-known Sina Weibo and also suspended sellers’ access to WeChat applications this month. The good news is that IM is highly popular in China with 84% of Chinese internet users regularly using IM. By the end of the year, WeChat is projected to have 400 million users globally, with the biggest foreign market being India and in South East Asia. This provides a golden opportunity to invest and push on with gaming and digital advertising services within WeChat. If Tencent could achieve this, it is predicted that 2.2 billion Yuan will be generated from WeChat.
Consumer Goods Sector (Retail)
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Inditex is the owner of the brands as shown above; most well known brands are Zara and Zara Home. Zara in recent years has won appraise from both the fashion side and the investor side for its huge uninterrupted growth due to its "fast-fashion model" where it replicates designs from the catwalk forthe high street in a short lead time of just two weeks. Inditex released their first quarter figures in June which proved that Inditex is actually not invincible. Lower demand due to cold weather in Europe and a volatile currency market - particularly in the Yen, Bolivar, Real and Rouble - has made Inditex's Q1 the weakest set of results in four years. It did make a profit nevertheless where Inditex reported a net profit of 438m Euros, a 1.4% increase compared to this time last year but missed analyst predictions by 2m. After all, it was always going to be difficult to beat last year's bumper results. However, Inditex has experienced slowdowns before and this quarter's results (still strong profit margins and a profit) won't make Inditex unfavorable with investors.
Inditex's net sales grew by 5.2% to 3.6 billion Euros, mostly attributed to the opening of new stores. In the coming years, the group plans to open 80-100 new stores each year globally but not in Spain due to the difficulties there... Some of the Inditex brands deserve more exposure to our shopping streets, particularly Pull and Bear and Bershka. Their chic fashion pieces and low prices can draw in sales.
JH
TMT Sector
Yahoo! announced their Q2 2013 results on 16th July. Revenue dropped by 1% to $1.07 billion while profit was $331m, up 46% compared to Q2 2012. This profit growth was mostly attributed to Yahoo's investment in Alibaba. While on the topic of Alibaba, I want to note that how Alibaba's impending IPO will affect Yahoo!'s fortunes is uncertain; Yahoo! has already promised to sell half its shares but of course it is Alibaba who holds the cards in this IPO and not Yahoo!. I imagine there could be some conflict on interest between Yahoo! and Alibaba as Alibaba will be less concerned about the initial offering price but more about strong stock performance after. (Just think of what happened to Facebook's shares soon after their IPO). A favourable situation for Yahoo! could be to sell its stake in Alibaba but share some future share price gains. On the other hand, Yahoo! could prefer an outright exit. Whatever they choose and given its promise to sell half its stake, the investment of Alibaba won't be propping up Yahoo!'s profit so strongly after Alibaba's IPO.
Another cause for concern is Yahoo!'s falling revenue in advertising and for search, decreasing 13% and 9% respectively. Melissa Mayer however is choosing to concentrate on the offering of new mobile applications and services where Yahoo! is basically offering a new product or service every week - notable mobile apps include Yahoo Mail, weather, sports, news and Flickr. Share price under Mayer has risen by 70% (over the past year) and since Mayer took office, admittedly, Yahoo! has undergone a cultural and structural turnaround. Employee turnover has decreased by 59% and 17 acquisitions including Tumblr have been made to not only acquire the technology but also the talent. Despite this, Mayer's strategy to ignore revenue is not particularly unimpressive in this competitive environment. The lackluster revenue reflects the fact that Yahoo! is failing to make the effort to attract online advertisers who are far more appealed to Google and Facebook instead. It is predicted by eMarketer that Yahoo's share of digital ad spending is to decline from 3.37% to 3.1% of total spending while Google and Facebook will bite more into Yahoo's online ads stake.
There is also indication that Tumblr won't generate big profits this year and there will be no more big acquisitions like Tumblr either. As a result, Yahoo! really needs to capitalise on making money by appealing to digital advertisers to advertise on what seems like their endless array of apps and mobile services as well as on the jewels of Flickr and Tumblr. The challenge (for all internet companies) however is that it is difficult to display ads on the smaller mobile screen for the ever increasing smartphone app users. Further, Yahoo! is not as attractive to advertisers as Facebook since it does not have as large a user base and user data for targeted/location ads. I think another lucrative but more difficult route to go down is mobile gaming which has a huge opportunity to build in buy-able add-ons and advertising. Designing from scratch and building this area organically is costly and tough in an already filled market. Yahoo! could enter into joint venture with a games developer (the likes of Beeline, King and among others) to build-in such games into its online apps, email and IM.
Whatever Yahoo! decides to do next, it still will be in a turnaround process into the next 2-3 years. If Mayer is successful in reversing Yahoo!'s fortunes, it will be reflected in the company's fundamentals then.
Facebook delivered their Q2 2013 results on 25th July which surpassed expectations. Profits reached $333 million, as boosted by mobile ads, sending shares to a 25.6% gain - the highest since May 2012. In fact, Facebook's revenue from smartphones and tablets constituted almost half of their total advertising revenue to the June quarter; this was $655.6m (or 41%) of the total $1.6 billion advertising revenue. It was only 30% last quarter. Facebook's smartphone users has increased by 51% to 819 million, compared to this time last year.
It seems that Facebook has finally capitalised on its 1.6 billion users (who spent 20 billion minutes on Facebook in June 2012) to generate business since one year ago, the social media giant had no mobile advertising. Unlike Yahoo!, Facebook is making smart moves to capitalise and focus on advertising. For example, in Q4 this year, Facebook will launch mobile video advertising with 15 second video ads. This could be the next billion dollar revenue generator as Facebook's massive user base, user data, smartphone users are highly desirable to advertisers.
Compared to Google and certainly to Yahoo! among other internet companies, I would say that Facebook is in the lead with digital advertising. At their conference call, Zuckerberg indicated that mobile revenue will continue to grow and set to overtake its desktop counterpart. I think this is a definite accurate statement since I talked about what is happening in Q4. Also, Facebook will be opening the popular photo sharing platform Instagram to advertisements and possibly adding video ads on Instagram given video sharing is a new feature there. It is predicted that Facebook will generate more than $2 billion in mobile advertising revenue in 2013 and its market share of the digital ad market will increase from 4.11% (in 2012) to 5.04% this year. In essence, Facebook's weapon is simple. Facebook's competitive advantage is its user base and user data; highly attractive to advertisers since there is a huge opportunity to create targeted and location based ads.
Not many people outside of China are familiar with Tencent but many are familiar with social media platform and instant messenger QQ. QQ is actually run and owned by Tencent who also designs and owns a whole host of other social media platforms such as WeChat and gaming products.
China's biggest internet company announced their results for the April to June quarter about two weeks ago. Results this time aren't has golden compared to previous quarters, missing targets by around 3.9 billion Yuan and causing shares to drop ~5%. While Tencent have made a profit (3.7 billion Yuan; $605 million) which is up 18.4% compared to this time last year, profit declined by 9.5% compared to the previous quarter.
This decline in profit is largely attributed to a more competitive gaming environment, marketing costs for e-commerce and marketing costs for WeChat. On the topic of WeChat, high marketing costs seems to have paid off as WeChat now has 300 million active users, up 176% from a year ago (the more established Whatsapp has 250 million). For example, Tencent used Messi among other celebrities to promote the app to appeal to users outside of China. However, I do not think Tencent's slowing profit is a long term concern at all. Their marketing costs has been offset by the huge surge of users internationally, not just within China. Chinese internet companies have had trouble with breaking out of China (see why in this previous post) but WeChat is proving previous experiences wrong. Further, with a huge user base and user data on smartphones, Tencent can set to monetize the app with targeted and location ads or services. In fact, I updated my WeChat app this month and found that the new version combines online games, stickers and payments for add-ons. I don't buy these things but many people do! It is good to see Tencent moving away from desktop products and into mobile, especially attempting to break borders.
Tencent's main challenge I would say is the cut-throat competition in China's internet scene right now (which is nothing new, of course). Alibaba recently bought an 18% stake in the well-known Sina Weibo and also suspended sellers’ access to WeChat applications this month. The good news is that IM is highly popular in China with 84% of Chinese internet users regularly using IM. By the end of the year, WeChat is projected to have 400 million users globally, with the biggest foreign market being India and in South East Asia. This provides a golden opportunity to invest and push on with gaming and digital advertising services within WeChat. If Tencent could achieve this, it is predicted that 2.2 billion Yuan will be generated from WeChat.
.jpg)
Inditex's net sales grew by 5.2% to 3.6 billion Euros, mostly attributed to the opening of new stores. In the coming years, the group plans to open 80-100 new stores each year globally but not in Spain due to the difficulties there... Some of the Inditex brands deserve more exposure to our shopping streets, particularly Pull and Bear and Bershka. Their chic fashion pieces and low prices can draw in sales.
JH
Monday 26 August 2013
On Holiday
Dear readers,
I have been travelling around a fair bit this month which is why I have been quiet! I will blog very soon upon my return.
I have been travelling around a fair bit this month which is why I have been quiet! I will blog very soon upon my return.
Thursday 15 August 2013
What's next for LVMH?
Louis Vuitton Moet Hennessy (LVMH) has the greatest number of jewels in its treasure chest in that it holds more majority stakes in prestigious luxury brands - from Marc Jacobs to Givenchy to TAG Heuer and of course Louis Vuitton - than any of its competitors.
Its strategy in recent years has been one of rampant acquisition and global expansion where the group has spent more than $10 billion in 27 transactions since the beginning of 2010. Notably, Bulgari, Fendi and Pucci have all joined the LVMH family in the last two years. The group's availability of cash and cash equivalents has certainly come in handy. Its latest 'big brand' acquisition occurred in early July where LVMH acquired a 80% stake in Loro Piana, an Italian cashmere clothing house for 2 billion Euros. For a small relatively unknown family owned business, this price is high. However, LVMH can benefit a lot from Loro Piana. Why? Loro Piana is a fairly unique business focussing only on cashmere clothing - there are not many similar players in the industry. It is also a company in its early stages and thus can accommodate much growth and expansion into the future. For example, Loro Piana achieved a growth in sales revenues of 13.1% in 2012 to 630 million Euros and no doubt can they repeat a growth rate of around 10% into the next year. Loro Piana can also go more global and expand its leather+cashmere goods products. The fact that 30% of its sales come from Asia and the region's strong demand for the brand no doubt contributed to the attraction of acquisition. Perhaps this analysis is reflected by LVMH's share increase of around 2% at the time the deal was announced. In essence, there is much synergy between LVMH and Lora Piana.
However, we can expect to see less fashion acquisitions by LVMH in the coming year or so as the business wishes to focus on organic growth, at least in some segments. For example, the group wishes to restructure and revamp its watch and jewellery business and the plan to achieve this by giving Bulgari a make over into the long term. Watches and jewellery are LVMH's lowest revenue and profit generating area, as seen on their half-year report.
Having said this however, acquisitions and investments by LVMH are likely to increase in the luxury hospitality sector as Arnault seeks to move into high-end hotels and restaurants. Indeed, LVMH has realised that 'luxury goods' isn't just about what the consumer is wearing or possessing but more about an overall luxury experience to suit a lifestyle; from food to place of stay on holiday. It is not so much about a product anymore, but about a produce + service. Last week, LVMH bought the 5* Hotel Saint-Barth Isle de France in the Caribbean for an undisclosed sum, to be operated by LVMH's hotel business area. There are also similar opulent resort/hotel developments in Oman, the Maldives and the French riviera In 2016, La Samaritaine in Paris, owned by the group since 2001 will be opened as a 5* hotel. At the end of June, the luxury group purchased a majority stake in Pasticceria Confetteria Cova, a 200 year old high-end storied cafe of Milan. This was the LVMH's first acquisition of a luxury food business and Arnault wishes to replicate Cova's popularity globally, using its heritage as leverage. Again, they have been helped by their deep pool of cash resources in this area.
LVMH isn't the only nor the first to expand into the full luxury spectrum. For example, Robert Cavalli is buying high-end cafes while Armani and Versace is designing hotels. Such brands' ability to shift into a new business area is what keeps them interesting in the eyes of their wealthy (and frequent) customers (as well as analysts at their desks!).
The success of the hospitality acquisitions remains to be seen but I think given the brands Arnault has chosen above are fairly unique and niche, along with having the recognisable LVMH as a parent with an already established reputation for the customers, profit margins will be high.
Acquisitions aside, LVMH's quarter end results to June which were released on July 26th have been mixed. China is a big market for luxury brands but sales in the country have been underperforming whereby Chinese consumers are now buying overseas -in Macau, Hong Kong, Taiwan, Dubai and Europe - rather than in the mainland as attributed to tourism and weak European currencies. This, along with slowing European sales, however is being offset by demand from South-East Asia in the countries of Malaysia, Vietnam and Indonesia. Asia is the group's biggest revenue generating region - 28% of total revenues came from Asia while the US followed in second place with 23%.
The good news is that profit margins for Louis Vuttion - its most prized brand has increased slightly in the first half year. In recent years, profit margins for LV has fallen and operating margin has declined from 44% to 42% between 2011-2012. In line with LVMH, Louis Vuitton sales in China declined although this was compensated by optimistic sales in Japan, US and Europe suggesting that the luxury goods sector is not so down hill anymore in the West. The strategy for Louis Vuitton for the past 10-15 years has been to expand quickly and rapidly across the globe. Consequently, growth increased by 10% but the real danger of this is that such strategy for a luxury brand is not sustainable. Continued rapid expansion makes Louis Vuitton somewhat of an expensive high street retailer rather than unique, boutique and luxurious and special. Everyday, in the city where I live, I see many many Louis Vuitton monogram and canvas bags - some fake and some real. Indeed, Louis Vuttion is rather ubiquitous but regardless of the origins of the bag, this risk has been reflected by Arnault himself who is putting a halt on the opening of new Louis Vuitton stores to maintain the exclusively.
There are signs of a rebound in the global luxury sector but China, an enormous market for luxury goods and services will certainly have retailers in the country experience a decline in sales as Xi cracks down on luxury gift-giving to battle against corruption and misuse of public funds. For example, Swiss watch imports fell by 24% in Q1 2013 although Burberry still experience soaring sales there. Any decline within in China could be offset by Chinese tourists visiting regions outside of the country as well as by the stronger sales in Europe and the US. For the former, Chinese tourists are attracted to buy luxury goods in Europe due to the weak currency and Chinese nationals are now account for the biggest global luxury buyer market at 25% (only 0.5% in 1995) with European nationals close behind at 24%. Major luxury retailers in the West have been equipped for this for several years now with the employment of Mandarin speakers and the likes of UnionPay but there is still scope for smaller, more boutique luxury players to follow suit.
I believe despite the recent slowdown in Asia's luxury market, the raising middle and wealthy class with their demand for status goods - not just in China but especially in South Asia (India, Bangladesh) and South East Asia (Indonesia, Philippines, Vietnam, Thailand) - makes Asia the most important region for luxury brands to capitalise on, for now and in the next 5 years or so. At the same time however, ongoing challenges that affect revenues aside from growth and the crackdown in China are the volatile currency market affecting exchange rates/local pricing, rising real estate prices and high import duties/taxes increasing prices by 30%-60%. This latter point nevertheless can be partially offset by tourism/spending in the West. Finally, European high street retailers of Zara and H&M have become hugely popular in Asia over the past 2-3 years. Such brands offer far more affordable fashion pieces which imitate the styles seen on catwalks.
JH
Its strategy in recent years has been one of rampant acquisition and global expansion where the group has spent more than $10 billion in 27 transactions since the beginning of 2010. Notably, Bulgari, Fendi and Pucci have all joined the LVMH family in the last two years. The group's availability of cash and cash equivalents has certainly come in handy. Its latest 'big brand' acquisition occurred in early July where LVMH acquired a 80% stake in Loro Piana, an Italian cashmere clothing house for 2 billion Euros. For a small relatively unknown family owned business, this price is high. However, LVMH can benefit a lot from Loro Piana. Why? Loro Piana is a fairly unique business focussing only on cashmere clothing - there are not many similar players in the industry. It is also a company in its early stages and thus can accommodate much growth and expansion into the future. For example, Loro Piana achieved a growth in sales revenues of 13.1% in 2012 to 630 million Euros and no doubt can they repeat a growth rate of around 10% into the next year. Loro Piana can also go more global and expand its leather+cashmere goods products. The fact that 30% of its sales come from Asia and the region's strong demand for the brand no doubt contributed to the attraction of acquisition. Perhaps this analysis is reflected by LVMH's share increase of around 2% at the time the deal was announced. In essence, there is much synergy between LVMH and Lora Piana.
However, we can expect to see less fashion acquisitions by LVMH in the coming year or so as the business wishes to focus on organic growth, at least in some segments. For example, the group wishes to restructure and revamp its watch and jewellery business and the plan to achieve this by giving Bulgari a make over into the long term. Watches and jewellery are LVMH's lowest revenue and profit generating area, as seen on their half-year report.
Having said this however, acquisitions and investments by LVMH are likely to increase in the luxury hospitality sector as Arnault seeks to move into high-end hotels and restaurants. Indeed, LVMH has realised that 'luxury goods' isn't just about what the consumer is wearing or possessing but more about an overall luxury experience to suit a lifestyle; from food to place of stay on holiday. It is not so much about a product anymore, but about a produce + service. Last week, LVMH bought the 5* Hotel Saint-Barth Isle de France in the Caribbean for an undisclosed sum, to be operated by LVMH's hotel business area. There are also similar opulent resort/hotel developments in Oman, the Maldives and the French riviera In 2016, La Samaritaine in Paris, owned by the group since 2001 will be opened as a 5* hotel. At the end of June, the luxury group purchased a majority stake in Pasticceria Confetteria Cova, a 200 year old high-end storied cafe of Milan. This was the LVMH's first acquisition of a luxury food business and Arnault wishes to replicate Cova's popularity globally, using its heritage as leverage. Again, they have been helped by their deep pool of cash resources in this area.
LVMH isn't the only nor the first to expand into the full luxury spectrum. For example, Robert Cavalli is buying high-end cafes while Armani and Versace is designing hotels. Such brands' ability to shift into a new business area is what keeps them interesting in the eyes of their wealthy (and frequent) customers (as well as analysts at their desks!).
The success of the hospitality acquisitions remains to be seen but I think given the brands Arnault has chosen above are fairly unique and niche, along with having the recognisable LVMH as a parent with an already established reputation for the customers, profit margins will be high.
Acquisitions aside, LVMH's quarter end results to June which were released on July 26th have been mixed. China is a big market for luxury brands but sales in the country have been underperforming whereby Chinese consumers are now buying overseas -in Macau, Hong Kong, Taiwan, Dubai and Europe - rather than in the mainland as attributed to tourism and weak European currencies. This, along with slowing European sales, however is being offset by demand from South-East Asia in the countries of Malaysia, Vietnam and Indonesia. Asia is the group's biggest revenue generating region - 28% of total revenues came from Asia while the US followed in second place with 23%.
The good news is that profit margins for Louis Vuttion - its most prized brand has increased slightly in the first half year. In recent years, profit margins for LV has fallen and operating margin has declined from 44% to 42% between 2011-2012. In line with LVMH, Louis Vuitton sales in China declined although this was compensated by optimistic sales in Japan, US and Europe suggesting that the luxury goods sector is not so down hill anymore in the West. The strategy for Louis Vuitton for the past 10-15 years has been to expand quickly and rapidly across the globe. Consequently, growth increased by 10% but the real danger of this is that such strategy for a luxury brand is not sustainable. Continued rapid expansion makes Louis Vuitton somewhat of an expensive high street retailer rather than unique, boutique and luxurious and special. Everyday, in the city where I live, I see many many Louis Vuitton monogram and canvas bags - some fake and some real. Indeed, Louis Vuttion is rather ubiquitous but regardless of the origins of the bag, this risk has been reflected by Arnault himself who is putting a halt on the opening of new Louis Vuitton stores to maintain the exclusively.
There are signs of a rebound in the global luxury sector but China, an enormous market for luxury goods and services will certainly have retailers in the country experience a decline in sales as Xi cracks down on luxury gift-giving to battle against corruption and misuse of public funds. For example, Swiss watch imports fell by 24% in Q1 2013 although Burberry still experience soaring sales there. Any decline within in China could be offset by Chinese tourists visiting regions outside of the country as well as by the stronger sales in Europe and the US. For the former, Chinese tourists are attracted to buy luxury goods in Europe due to the weak currency and Chinese nationals are now account for the biggest global luxury buyer market at 25% (only 0.5% in 1995) with European nationals close behind at 24%. Major luxury retailers in the West have been equipped for this for several years now with the employment of Mandarin speakers and the likes of UnionPay but there is still scope for smaller, more boutique luxury players to follow suit.
I believe despite the recent slowdown in Asia's luxury market, the raising middle and wealthy class with their demand for status goods - not just in China but especially in South Asia (India, Bangladesh) and South East Asia (Indonesia, Philippines, Vietnam, Thailand) - makes Asia the most important region for luxury brands to capitalise on, for now and in the next 5 years or so. At the same time however, ongoing challenges that affect revenues aside from growth and the crackdown in China are the volatile currency market affecting exchange rates/local pricing, rising real estate prices and high import duties/taxes increasing prices by 30%-60%. This latter point nevertheless can be partially offset by tourism/spending in the West. Finally, European high street retailers of Zara and H&M have become hugely popular in Asia over the past 2-3 years. Such brands offer far more affordable fashion pieces which imitate the styles seen on catwalks.
 |
| In Indonesia (and rest of emerging Asia) where it is happening for LVMH, Hermes, Richemont , Kering and others |
JH
Wednesday 7 August 2013
Wofo = Offer
THE PICTURE below is Wofo temple just outside Beijing. I was rather amused to read today on BBC that many university and graduate students come here to pray so that the Buddha can grant them good fortune when job seeking in China's tough tough market. And why this temple in particular? Because although 'wo - fo' means kneeling Buddha (due to the sculpture of the Buddha in a lying down position at the temple), 'wo - fo' also mirrors the all important English word when seeking a job - 'offer'!
Read the full story/watch video reporting here.
P.S. I will be back to blogging 'properly' when I am home! Looking forward to seeing what this year's Fringe will bring too, before going away again!
JH
 |
| Offer? |
P.S. I will be back to blogging 'properly' when I am home! Looking forward to seeing what this year's Fringe will bring too, before going away again!
JH
Sunday 28 July 2013
Why I ditched Blackberry for Samsung and not Apple
WHEN I was 11, I got my first mobile - a Nokia 3410. Compared to the modern smartphone, there wasn't a lot you could do with it. I guess it was good for playing Snake II, Space Impact and Bantumi. Other than that, the phone's functions like reminders and the calculator weren't that exciting to an 11 year old. The good thing however about phones back then was that because they were all simple in design and functions, it was easy to choose a new phone when you needed one. This is exactly what I miss about the phones of the early 2000s.
My 2 year old contract Blackberry Bold is due up for renew and I spent/wasted a lot of time this week (re)searching for a new phone. I really do like Blackberry. Their indicator light, acceptable size, physical QWERTY keyboard and its ability to receive emails extremely easily has made me value this brand over the unnecessarily large touchscreen smartphones that grace the phone market. But as a follower of business news and tech companies, I knew deep inside that choosing Blackberry again - even their new models of Q10 and Z10 would be a mistake.
Blackberry, who changed its name from Research In Motion at the beginning of 2013 (to put the emphasis on the company's main product) is really a dying brand and a maker of phones in many ways. I don't think it is the 'design' of Blackberry phones that have caused their continued poor performance but it is the Blackberry software itself. The phone market is populated by touchscreens and for 3+ years, Blackberry have adopted touchscreen technology into various models, such as the Bold Touch range and the Torch range. Therefore, the physical design is not likely to be a shortfall. I believe the real shortfall lies with the software. iOS and Android are more technologically advanced than Blackberry's software. Without going into the tech. specifications, I think its fair to say that the former 2 operating systems can just 'do more' than Blackberry. This is exactly what makes iPhones and other phones that run Android more exciting and fresh. For example, many applications today are developed for Android and iOS, leaving Blackberry out. One of the reasons for this is that Android and iOS are technically superior, allowing apps with more functions and graphics to be coded. I do use apps and as a Blackberry user, I have often been frustrated when I cannot download app x for a Blackberry platform. Blackberry's newest software - Blackberry 10 - allows for Android apps to run although the developer will have to tailor some code to suit a Blackberry phone. Despite not being a fan of the huge touchscreen only smartphones, the general superiority of iOS and Android (that you can 'do more') is the main reason why I could no longer consider Blackberry.
So now the choice was down to iPhones (by Apple) versus Android phones (by HTC, Sony and Samsung).
For me, iPhones and iOS are still the most aesthetically pleasing phones and operating systems on the market. However, between the iPhone 4, iPhone 4S and the current iPhone 5, there have not been that many variations in design or internal software at all. This argument holds for the iPad and iMac ranges. Whether Apple is guilty of patent thickening is debatable, but the truth is that iPhones have become boring, unexciting and still overpriced because the brand is 'Apple'. I am wondering if Apple still has the same innovative foresight as it did under Steve Jobs. Probably not is the answer. Because of this (lack of innovation and variation in their products), I am not convinced that I can be fulfilled with an iPhone.
So next, my search turned to the Android phones.
Sony was easy to ditch as the design of the Xperia range didn't quite appeal to me. It is too rectangular and 'sharp'.
HTC's latest phone - HTC One and Samsung's Galaxy S3 and S4 became the serious contenders. First thoughts? Well, the HTC One's serious silver slick design and its frontal 'Beats' speaker attracted me to the phone immediately. One the other hand, the S3 and S4 are both technologically powerful, yet they are not as aesthetically pleasing and definitely the least premium feeling phone (with a plastic casing) in their category. After much pondering, watching various Youtube phone reviews and copious visits to various phone shops, I decided to settle with Samsung for their technology and all their extra functions over the HTC (and also Apple). The S4 is lighter, has a bigger screen, a faster processor, an improvement of 5MP in its camera to 13MP and a better resolution. But the S3, only one year older then its successor, it not that inferior. Therefore, (unlike most people), I didn't think it would be worth paying an extra £12+ per month to upgrade to the S4 and settled for the S3 in the end.
Perhaps my thoughts have been reflected in the companies' recent financial results. Blackberry's results coincidentally were released today. Their Q1 results for June 2013 ended (fiscal year 2014), revealed that although revenues reached $3.1 billion (up 15% from previous quarter) and global shipments of smartphones were up by 13% to 6.8 million, they still made a huge operating loss of $84 million. Even with the roll out of new products and services over the next year and the global roll out of Blackberry 10, I am not convinced in this competitive environment that Blackberry can turn fortunes around so easily. I would anticipate another loss in Q2. However, perhaps they can be helped by the adoption of BBM on to iPhones and Android. BBM is more user friendly and established compared to other instant messengers like WhatsApp or PingChat. It wouldn't be a bad idea either for Blackberry to 'combine' their traditional QWERTY keyboard with a full touchscreen using microfluidics technology (by a joint venture) as seen below. However, like Dell, I think Blackberry would really benefit from a buyout and going private for a few years. It has little prospects of competing with Apple, Samsung, HTC among others even with the launch of Blackberry 10 and its future successor operating systems. It would be a good time for Blackberry shift its focus out of smartphones and into business services.
This quarter has really belonged to Samsung, who has become the most profitable mobile company in the world, (finally) beating Apple. In Q2 2013, to June month end, Samsung's phones made an operating profit of $5.2 billion ($7 billion for the entire company). This has mostly been driven by strong demand for Android devices from Asia and LATAM as well as its new S4. Samsung has also succeeded with rigorous cost controls, high volume of production and high wholesale prices.
Apple's iPhone profit was $4.2 billion ($6.9 billion overall for company). This figure has marked the iPhone range as 'underperforming', reflecting poor sales of the iPhone 5 globally including China, and strong competition from the likes of Samsung. Samsung now accounts for the biggest share of the global smartphone market at 27.7%. Nokia is in 2nd with 15.8% while Apple is in 3rd, accounting for 8% of the global smartphone market, their smallest market share in 3 years. (Blackberry does not rank in the top 5). This, coupled with a lack of innovation and unsuccessful attempts to gain significant market share in emerging markets due to their high price of phones, has made Apple less and less of a darling company. In Sept. 2012, Apple's share price hit a record $700 odd but now it is trading at 40% less. Until a brand new innovation - that is not an adaptation of its existing products - the story for Apple is likely to remain the same. According to Tim Cook, this is likely to happen in autumn 2014. The 'Apple watch' is likely to be one of these, but I will be curious to see what else there is...
JH
My 2 year old contract Blackberry Bold is due up for renew and I spent/wasted a lot of time this week (re)searching for a new phone. I really do like Blackberry. Their indicator light, acceptable size, physical QWERTY keyboard and its ability to receive emails extremely easily has made me value this brand over the unnecessarily large touchscreen smartphones that grace the phone market. But as a follower of business news and tech companies, I knew deep inside that choosing Blackberry again - even their new models of Q10 and Z10 would be a mistake.
Blackberry, who changed its name from Research In Motion at the beginning of 2013 (to put the emphasis on the company's main product) is really a dying brand and a maker of phones in many ways. I don't think it is the 'design' of Blackberry phones that have caused their continued poor performance but it is the Blackberry software itself. The phone market is populated by touchscreens and for 3+ years, Blackberry have adopted touchscreen technology into various models, such as the Bold Touch range and the Torch range. Therefore, the physical design is not likely to be a shortfall. I believe the real shortfall lies with the software. iOS and Android are more technologically advanced than Blackberry's software. Without going into the tech. specifications, I think its fair to say that the former 2 operating systems can just 'do more' than Blackberry. This is exactly what makes iPhones and other phones that run Android more exciting and fresh. For example, many applications today are developed for Android and iOS, leaving Blackberry out. One of the reasons for this is that Android and iOS are technically superior, allowing apps with more functions and graphics to be coded. I do use apps and as a Blackberry user, I have often been frustrated when I cannot download app x for a Blackberry platform. Blackberry's newest software - Blackberry 10 - allows for Android apps to run although the developer will have to tailor some code to suit a Blackberry phone. Despite not being a fan of the huge touchscreen only smartphones, the general superiority of iOS and Android (that you can 'do more') is the main reason why I could no longer consider Blackberry.
So now the choice was down to iPhones (by Apple) versus Android phones (by HTC, Sony and Samsung).
For me, iPhones and iOS are still the most aesthetically pleasing phones and operating systems on the market. However, between the iPhone 4, iPhone 4S and the current iPhone 5, there have not been that many variations in design or internal software at all. This argument holds for the iPad and iMac ranges. Whether Apple is guilty of patent thickening is debatable, but the truth is that iPhones have become boring, unexciting and still overpriced because the brand is 'Apple'. I am wondering if Apple still has the same innovative foresight as it did under Steve Jobs. Probably not is the answer. Because of this (lack of innovation and variation in their products), I am not convinced that I can be fulfilled with an iPhone.
So next, my search turned to the Android phones.
Sony was easy to ditch as the design of the Xperia range didn't quite appeal to me. It is too rectangular and 'sharp'.
HTC's latest phone - HTC One and Samsung's Galaxy S3 and S4 became the serious contenders. First thoughts? Well, the HTC One's serious silver slick design and its frontal 'Beats' speaker attracted me to the phone immediately. One the other hand, the S3 and S4 are both technologically powerful, yet they are not as aesthetically pleasing and definitely the least premium feeling phone (with a plastic casing) in their category. After much pondering, watching various Youtube phone reviews and copious visits to various phone shops, I decided to settle with Samsung for their technology and all their extra functions over the HTC (and also Apple). The S4 is lighter, has a bigger screen, a faster processor, an improvement of 5MP in its camera to 13MP and a better resolution. But the S3, only one year older then its successor, it not that inferior. Therefore, (unlike most people), I didn't think it would be worth paying an extra £12+ per month to upgrade to the S4 and settled for the S3 in the end.
Perhaps my thoughts have been reflected in the companies' recent financial results. Blackberry's results coincidentally were released today. Their Q1 results for June 2013 ended (fiscal year 2014), revealed that although revenues reached $3.1 billion (up 15% from previous quarter) and global shipments of smartphones were up by 13% to 6.8 million, they still made a huge operating loss of $84 million. Even with the roll out of new products and services over the next year and the global roll out of Blackberry 10, I am not convinced in this competitive environment that Blackberry can turn fortunes around so easily. I would anticipate another loss in Q2. However, perhaps they can be helped by the adoption of BBM on to iPhones and Android. BBM is more user friendly and established compared to other instant messengers like WhatsApp or PingChat. It wouldn't be a bad idea either for Blackberry to 'combine' their traditional QWERTY keyboard with a full touchscreen using microfluidics technology (by a joint venture) as seen below. However, like Dell, I think Blackberry would really benefit from a buyout and going private for a few years. It has little prospects of competing with Apple, Samsung, HTC among others even with the launch of Blackberry 10 and its future successor operating systems. It would be a good time for Blackberry shift its focus out of smartphones and into business services.
This quarter has really belonged to Samsung, who has become the most profitable mobile company in the world, (finally) beating Apple. In Q2 2013, to June month end, Samsung's phones made an operating profit of $5.2 billion ($7 billion for the entire company). This has mostly been driven by strong demand for Android devices from Asia and LATAM as well as its new S4. Samsung has also succeeded with rigorous cost controls, high volume of production and high wholesale prices.
Apple's iPhone profit was $4.2 billion ($6.9 billion overall for company). This figure has marked the iPhone range as 'underperforming', reflecting poor sales of the iPhone 5 globally including China, and strong competition from the likes of Samsung. Samsung now accounts for the biggest share of the global smartphone market at 27.7%. Nokia is in 2nd with 15.8% while Apple is in 3rd, accounting for 8% of the global smartphone market, their smallest market share in 3 years. (Blackberry does not rank in the top 5). This, coupled with a lack of innovation and unsuccessful attempts to gain significant market share in emerging markets due to their high price of phones, has made Apple less and less of a darling company. In Sept. 2012, Apple's share price hit a record $700 odd but now it is trading at 40% less. Until a brand new innovation - that is not an adaptation of its existing products - the story for Apple is likely to remain the same. According to Tim Cook, this is likely to happen in autumn 2014. The 'Apple watch' is likely to be one of these, but I will be curious to see what else there is...
JH
Sunday 21 July 2013
What's the 'deal' with Chinese internet companies?
THE AMOUNT of M&A activity and the increasing value of deals - fuelled by the money making potential in mobile platforms - in the Chinese internet scene makes the sector a very exciting place at the moment. Analysys International, an internet research firm recently reported that the value of China's mobile internet market will rise to 300 billion Yuan (£30 billion) in 2014. It was only worth 150 billion Yuan in 2012. China's internet users stands at 591 million in June 2013, an increase of 41% compared to three years ago.
M&A wise, I believe there will be continued activity here and especially in the mobile internet sector since mobile internet and applications fields are not fully developed in China. There is much scope for growth, organically or by M&A.
I have chosen a few momentous (planned) deals to blog about.
*****
In the past day, Qihoo, the second most popular search engine by traffic in China (after the almighty Baidu) has announced it is in early talks with Sohu to buy its search engine Sogou (meaning literally 'search dog'). I believe that the acquisition of Sogou, the third most popular search engine by traffic is a well thought out strategic decision for catching up with Baidu who is and still will be (if the acquisition goes ahead), miles ahead in terms of traffic and revenue. Internet research firms CNZZ and Alexa show that Baidu command roughly 69% of search traffic while Qihoo and Sogou only have 15% and 9% respectively. However, Qihoo has still been a serious competitor to Baidu. Their simple interface is more attractive to inexperienced users and at the same time, delivers a better smartphone/tablet experience. Further, Qihoo have an advantage over Baidu in that it is also a software company. This has enabled Qihoo to incorporate search engine bars into their software to boost traffic.
Market share is important in the internet sector and the fastest way for Qihoo to increase market share is through M&A. With the Sogou buy, Qihoo will reach more than 20% of market share for search engines and can scale it up. This acquisition will also give the company access to the search technologies of music/MP3, videos, maps, shopping, photos, Sogou's online radio station among other features which are popular among younger internet users (who form the bulk of internet users), directly challenging Baidu's products. Further, Qihoo will reap the technology of Sogou's smart input search method which currently has 195 million users. In general, both brands have similar business models and I think there are strong synergies between Sogou and Qihoo search. Not only will they be a dominant challenger to Baidu from a second position, but they will also be dominant in the browser, internet security, software and Chinese language input markets.
The valuation of Sogou is questionable since it was only worth $237 million one year ago. A valuation of over $1 billion only makes sense if Sogou has dramatically optimised and innovated new products in its search and other software in the past year which admittedly it it has done some of...see here and here. Still, a more prudent estimate should be around $800 million maximum.
*****
The IPO of Alibaba in possibly this year or early next, will be one of the biggest IPOs globally. Alibaba is currently valued at up to $120 billion and could raise $15-$20 billion in this IPO. Alibaba is the biggest e-commerce firm in China and its platforms are the equivalent of eBay, Amazon, Groupon and PayPal.
I think this IPO is likely to happen sooner than later. Alibaba achieved a profit margin of 48.4% in Q1 2013 - double than that of Apple's in the same period - boosted by the demand for e-commerce services to link businesses and consumers in China. If Alibaba can demonstrate such strong earnings growth again in Q2 2013, an IPO could be ready by the end of 2013. Other financials are also very attractive. Compared to its US counterpart, Amazon, who is the world's largest online retailer, Amazon only achieved a profit margin of 0.51% in the March quarter while it was 18.1% for eBay. Alibaba's net income in Q1 2013 was $669 million compared to only $220 million in Q1 2012. Further, Alibaba constituted 70% of parcel deliveries in China last year and sales alone on its two main platforms reached 1 trillion Yuan in 2012.
Alibaba is also an attractive company to hold on any investor's portfolio due to the large growth market it operates in. Alibaba is still in its early days also, who has a more vertical growth curve rather than a flatter one.
Other details of the IPO remain sketchy. But Credit Suisse is expected to take a leading role given its history of working with Alibaba on past transactions. Goldman Sachs and Morgan Stanley are also expected to play a leading role in this prestigious and highly lucrative deal.
I believe that one problem Alibaba has however, and which could be reflected in valuations, is that Alibaba does not have a strong position in China's social media/mobile market. It is has been unable to monetise on mobile users thus far unlike other Chinese internet giants of Tencent and Baidu among others who all operate rather strong e-commerce platforms or capabilities. The other challenge is choosing which stock market to float on. With many foreign backers, Alibaba may have to float outside of Hong Kong.
Overall, internet companies are inherently volatile, as are their valuations. I believe any valuation up to $100-120 billion of Alibaba is fair. High performers in this sector are attractive to fierce competitors and creative destruction (in the Schumperterian spirit) is not uncommon, whereby new technologies uproot even the most established ones. It therefore makes sense for Alibaba to take imminent action for an IPO.
*****
A few days ago, Baidu, China's Google, has announced it will acquire 91 wireless from NetDragon Websoft for $1.9 billion to further penetrate the mobile applications market. 91 wireless is a platform that distributes Android applications and connects over 90,000 application developers. Baidu is behind the other giant internet companies, namely Tencent and Sina, in terms of targeting mobile internet. So strategically, this acquisition is the correct one for Baidu. Baidu, as a search engine, is really for desktops but since consumers are devoting more time to mobiles/tablets, Baidu cannot continue to rely on online search for revenues. Baidu really needs this acquisition as location based and real-time applications (for maps, business nearby, SatNav for traffic data) are growing popular and consumers no longer need search to find what they're looking for. Using Baidu on smartphones is not particularity user friendly either.
This acquisition will allow Baidu to generate more traffic from mobile users. Tencent's WeChat has 400 million mobile users and Alibaba is also starting to make headway in mobile applications by investing in Sina Weibo, AutoNavi among others. It is safe to say that Baidu is falling behind in traffic from smartphones. Unlike Google, it also has few applications for smartphones but this acquisition can help Baidu to boost usage experience in mobile apps and help the company to build a mobile ecosystem faster than developing organically. As well as catching up with Alibaba among others, the 91 Wireless acquisition can also shrug off competition from Qihoo who is the market leader in mobile application distribution.
Although Tencent is a big player in developing, operating and marketing mobile gaming applications, I believe that Baidu and also Alibaba could look into targeting gaming apps in the near future as these are hugely popular with younger Chinese users, who are willing to pay for add-ons within games.
*****
- A large internet/mobile internet market (due to China's population) has been an underlying factor to all Chinese internet companies' success.
- The rise, growth and later dominance of the main Chinese companies we know today can be attributed to first mover advantage. The companies were founded in circa 1999, a period of mass internet adoption within China. This not only provided the opportunity to enter the internet content market but internet companies also capitalised by emerging as the first movers. Later entrants fail to be as successful since the first movers capture the benefits of dynamic increasing returns, which cause rise and growth. This is true for Baidu for example, as later entrants, whether indigenous firms or foreign firms who enter the search engine market hold significantly less market share.
- Joseph Schumpeter argued that innovation drives economic growth and an organisation forward. Innovation allowed Chinese internet companies to emerge and achieve first mover status but importantly, innovation facilitated their development of new combinations, leading to rise and growth. Baidu contributed little to the general search engine technology having modelled/imitated itself after Google, but the company innovated China’s first Chinese language search engine. Similarly, Tencent QQ is imitated after Mirabilis’ ICQ but Tencent innovated the first Chinese language instant messenger and also technology to send offline messages and store chat history, rapidly increasing QQ’s popularity. Sina’s main innovation lies in being the first to provide comprehensive news and entertainment and lifestyle portals, allowing Sina to diminish its direct competitor Sohu’s market share. Innovating Chinese language platforms in particular, immediately improves ease of use for Chinese users, leading to customer loyalty, brand recognition, other dynamic increasing returns and in turn, rise and growth. Weak IP laws within China have allowed internet firms to do so without much consequence and then reap the benefits of imitating an already successful model. Just compare:
Or:
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Spot the similarity: Facebook v RenRen; Baidu v Google v Qihoo |
- Chinese internet companies' success within China can also be attributed to possessing an excellent understanding of the Chinese market. Chinese search engines' MP3 downloads and games searches are of interest to young Chinese users and Tencent’s QQ and games allow users to purchase items for customising virtual characters, meeting their entertainment needs. Sina provides region-focussed news, relevant adverts and infotainment channels such as automobile information and luxury goods which appeal to China’s ever-growing middle class. The companies also brand themselves strongly as indigenous Chinese firms, further appealing to users.
- Cooperation with the Chinese government’s censorship regulations enabled the companies to emerge and rise. Cooperation is key; Google’s refusal to censor instigated its exits from China in 2010 and several Google services became blocked, allowing Baidu’s market share to increase from 60% to 75.9%. Following Wikipedia’s block in 2005, Baidu also capitalised by developing a Chinese version of Wikipedia, Baiduknows. Sina used the opportunity to launch Weibo in 2009, after the closure of micro-blog Fanfou due to censorship disputes. Thus, censorship regulations and blocks on the main foreign internet companies from Facebook to Youtube to Google reduces competition, grants indigenous companies who comply opportunities to replicate such foreign websites and space to thrive in the Chinese market.
- Chinese internet companies have been and will be unable to compete globally, I believe. Chinese internet companies cater only to the Chinese market and their niche models cannot succeed abroad. . Mastering an understanding of international markets can also be difficult if management have little experience of the target country. Further, competing abroad is unlikely as well-established or indigenous firms may already operate in the market; Google, Yahoo!, eBay and Amazon serve many regions outside of China. For example, Baidu, who entered the Japanese market in 2008 holds only 0.2% of the market share; the market is divided between first-movers Google and Yahoo!. Moreover, as Chinese internet companies generally will offer no markedly new products, entering foreign markets will generate little success. Similarly for these same reasons, foreign internet brands cannot be successful in China so easily. However, Baidu and Tencent currently operate small-scale foreign ventures - includes multi-language products and establishing partnerships with foreign counterparts - in emerging markets such as Brazil, India and Vietnam. Expanding into developing markets offers Chinese firms an increased chance of success as they benefit from first mover advantage and will experience little competition . Such companies will continue to expand into emerging markets, as their management have expressed a desire to invest in, or acquire foreign firms. For example, Tencent have invested substantially in FAB and KakaoTalk and Qihoo 360 have partnered with Line.
JH
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