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'.

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

Tokyo 2020: An all-over confidence boost

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

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. 

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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. 

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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

In the next post: I will be discussing the future of 'Moshi Monsters' and 'Bin Wheevils'

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!

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. 

Consumer Goods Sector (Retail)

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