Blog – Page 28 – shiqiv.com

History Is Not A Straight Line Forward: Cannabis, Bitcoin, 3D Printing

History is not a straight line forward.

Setbacks are usual on the road. Plus, it takes time for new ideas to evolve into a better version of itself. As long as it represents a future that’s needed, it will come back from “disillusion”.

Instead of chasing the very new idea, investors looks back and brings past “bubbles” back to life – when they can show some real progress/changes.

Cannabis, Bitcoin and 3D printing are just three examples. It’s interesting to see the cycles forming, although 2-3 years might not be long enough to be called “big cycles”. That’s how the future arrives.

Future ways of living, of production and of how to organize the society are always the areas to invest – but be careful with bumps on the road.

1/ Cannabis

Cannabis stocks had a great performance in the second half of 2018 before they crashed. In the past few month, they are back to life with some 100-200%+ returns.

What has changed? People are expecting the US market to open up as legalization on the federal & states levels is under way. Price stabilizes, oversupply concerns are going away, more consolidation in the industry, and companies post strong growth and healthier gross margin in Q3.

Jan 1, 2017 – Jan 8, 2021 | ~2 years from the previous peak

2/ Bitcoin

Bitcoin was called a “bubble” and is still called a “bubble” today. Bitcoin price hit $20k 3 years ago. Now it’s doubling the previous high to $40k.

What has changed? More people are seeing it as a hedge against USD depreciation as bitcoin’s supply is limited – it’s younger generation’s gold.

Jan 1, 2017 – Jan 8, 2021 | ~3 years from the previous peak

3/ 3D printing

3D printing was in a “hype” mode back in 2014 and quickly lost most of its “market cap” afterwards – just like cannabis and bitcoin.

What has changed? During COVID-19, when global supply chain was disrupted, people realized the value of flexibility of 3D printing, especially in medial equipment solutions. The 3D printing companies are also developing more “recurring” business model. With auto and other manufacturing sectors are expected to recover in 2021 and beyond, people are betting on a more “agile” future of the industrial world, with more customization and more flexible capex.

Jan 1, 2012 – Jan 8, 2021 | ~7 years from the previous peak

Charts are created by author, soured from WSJ

How Tech Companies Flex Their Muscle

Tech companies are wielding their influence. People are seeing things that normally they won’t see – things that tech companies are always technically able to do.

Social Medias

Facebook on Thursday (Jan 7): “extending the block we have placed on his Facebook and Instagram accounts indefinitely and for at least the next two weeks.”
Twitter on Friday (Jan 8): “permanently suspended the account”

App Store

Google on Friday (Jan 8) suspended Parler from its app store
Apple on Saturday (Jan 9) removed Parler from its the iPhone App Store

Server

Amazon told Parler on Saturday (Jan 9) it intends to cut ties with the company in the next 24 hours – suspend Parler’s (AWS) account effective Sunday, January 10th, at 11:59PM PST. AWS “will ensure that all of your data is preserved for you to migrate to your own servers, and will work with you as best as we can to help your migration”.

Other actions

Payment (Shopify, Stripe, Paypal)
Other social medias (Youtube/Alphabet, Snapchat, TikTok, Pinterest, Discord, Reddit, Twitch/Amazon), per Axios
Airbnb on Monday (Jan 11) announced that it banned certain users from its platform and cancelled certain reservations in the Washington, D.C. metropolitan area

Pinduoduo Tragedies & Involution

The first 10 days of 2021 is not usual for Pinduoduo (NASDAQ: PDD): a female employee’s sudden death on her way back to home midnight, widely reported in China + a suicide by jumping from an employee’s home on the 27th floor + firing of a Shanghai-based employee due to posting unwanted messages on Maimai. (see details below)

Pinduoduo is not alone. The three cases, although all about Pinduoduo (NASDAQ: PDD), are the latest extreme illustration of “involution” (内卷), a very popular word in China right now.

To explain it in one sentence, involution = excessive competition with no real growth. It’s mostly used with China’s urban working class and popular in the case of internet companies.

How did involution happen? For internet companies in China:

1/ no more demographic dividend. No easy growth from new handset shipment, MAUs. Growth from lower-tier cities has been explored for the past 2-3 years.

2/ major business models are occupied by established companies. It’s the same across US and China. Rarely a new thing could pop up and sustain (Pinduoduo and ByteDance are years old and becoming “established”). Established companies are disproportionately more powerful. And internet companies are usually more innovative than others.

3/ too big to grow domestically and hard to grow overseas. When those $200bn+ companies want to grow fast, they require more energy and space. China has a big market, but US big techs not only have a large domestic market but can easily participate other markets globally. Southeast Asia is important for China’s tech/internet sector but cannot provide enough TAM.

On a side note, investors globally should start to focus on ESG measures in China.

Leading investors in China should take a lead, be more responsible on values (not just value), and care more about all stakeholders (not just as shareholders).

Three Pinduoduo cases attached:

1. The girl’s death on her way home after working until midnight

The tragedy is well reported in medias (Bloomberg, Reuters, etc.). The girl, born in 1998 (22 years old) and joined Pinduoduo (NASDAQ: PDD) in July 2019, collapsed while walking home with colleagues at 1:30 am. She died in the early hours of Dec 29, 2020 in local time – didn’t make it through the new year.

In China, the death quickly get massive public attention and criticism over the internet, as well as the regulator’s probe according to the news.

2. The suicide on Jan 9 by jumping from the 27th floor

The male developer joined Pinduoduo (NASDAQ: PDD) in July 2020. His suicide on Jan 9 (Jan 8, Friday in local time) in Changsha has been confirmed by Pinduoduo and is well-reported in China. It hasn’t been reported much in english so far but here is one from EqualOcean. The details are still unclear.

3. An employee in Shanghai fired on Jan 9 for posting photo

The story is still developing. The fired employee posted a video detailing his experience on social medias, including Bilibili, Weibo and Zhihu. The video is only in Chinese, but here are the major facts he provided:

The fired employee joined Pinduoduo (NASDAQ: PDD) as a front-end developer in July 2019, right after graduating from college.
On Jan 7 (local time) morning, when he entered the Pinduoduo office building, he saw a male being put on an ambulance in front of the building. He then posted a photo of the ambulance on Maimai, a career social platform in China known for anonymous forum.
Somehow, Pinduoduo found out it was him to post the photo anonymously and asked for a “talk” on Jan 8 (local time) afternoon.
He was told that he was making Pinduoduo look bad and was asked to sign an agreement that says he will voluntarily quit, confirm that he made certain comments, and not to talk about it after quitting.
He refused to sign the agreement and was fired immediately afterwards.

He also confirms some “rumors” about how Pinduoduo treats its employees and the unpleasant working environment, e.g.

Employees in Shanghai are implicitly asked to work 300 hours per month; some departments are asked to work up to 380 hours per month
- It’s much more than the so-called “996” culture; employees mostly get off work around 11pm/12am
For any legal holiday that is longer than 3 days, employees are required to get back to work early
Employees are asked to move into newly renovated buildings/offices when there is unpleasant/unusual smell in the air

An Update On Jumia: A New Business

Continuing on the last post, I said although some earnings number are not pretty, Jumia has become a different firm in two year.

It was relying heavily on first-party sales (“resell” model like JD.com) which accounted for over 70% of its revenue in 2018Q1. That number decreased overtime to 34% in 2020Q1 (halved), partially due to the coronavirus disruption from Jumia’s own suppliers.

Another way to look at this is on the GMV level. 1st party revenue as % of GMV decreases overtime as well – what is more, the take-rate on the rest of the GMV, where marketplace revenues come from, is improving.

I do believe marketplace revenues (like Alibaba) are more valuable. Thus, Jumia’s has grown its higher-quality revenue overtime. The third-party business has shaped Jumia into a different company (with more valuable revenues).

As JumiaPay keeps growing, it will deliver value just like Alipay.

Another important matrix that is improving significantly is gross profit after fulfillment expense. This value could be used as “gross profit” or even “revenue” to better track the long-term profitability.

Fulfillment expense is not trivial and grows with the GMV as both 1st-party and 3rd-party sales uses Jumia’s delivery network.

And as mentioned in the previous post, African nations are now more willing to use mobile payments due to coronavirus. The improvement in adoption will give Jumia a boost in monetization overtime.

To sum up, three reasons that I believe Jumia is a different company:

1. higher-quality marketplace revenues are now driving the growth
2. gross profitability after fulfillment improves meaningfully
3. pandemic-shaped population will adopt mobile payments & fintech solutions much more easily – trust is forced to build.

An Update On Jumia: In Coronavirus

Jumia is the probably most famous Africa startup in the past few years and went IPO last year.

I wrote about the potential e-commerce giant in a few blogs before.

On May 13, Jumia reported its 2020 Q1 earnings, which also provides a glimpse into African cities under coronavirus.

The market didn’t react positively after the earnings, but some opportunistic expectations had been built in before.

Although some numbers are not ideal and growth seems lackluster, I would argue in the next blog that Jumia has become a very different company than two years ago.

This post summarizes things that appear to be positive for Jumia, from its Q1 earnings and the shareholder letter in April, among other communications:

Partnership with Reckitt Benckiser, a global health products manufacturer selling through Jumia, is financing free shipping nationwide (8 markets that Jumia operates) on all listed products; Jumia takes 0% commission. -> free marketing / user acquisition that ensures a good first online shopping experience; keep logistics team operate
Focusing on contactless delivery options & online payments. -> accelerating JumiaPay adoption when cash is still considered important; building trust, also encouraged by governments
Providing affordable basic foods and sanitary essentials. -> shaping perception on online shopping to everyday purchases
In South Africa, it launched Jumia platform with an assortment of essential products (Reckitt Benckiser and P&G) that can be delivered despite the lockdown (was selling fashions via Zando which is shut down).
Jumia Food pivots to grocery delivery
Increased demand from sellers to join the Jumia platform as offline distribution channels are largely disrupted – high-profile brands on Jumia Mall, including Coca-Cola and Nigerian Breweries in Nigeria, PepsiCo and Nivea (Beiersdorf) in Egypt.
Launched JumiaPay in Tunisia
Consumers can purchase game subscriptions or credit for in-app purchases on the JumiaPay app for popular games
Advertising services were available across 9 out of 11 countries, compared with 5 at the end of 2019 – in Q1 run campaigns for high-profile brands including Adidas, L’Oreal, Microsoft, Sensodyne and Mondelez
Volumes surged in some markets, such as Morocco and Tunisia, while limited in countries such as South Africa and Nigeria
The countries that have been the most severely affected by confinement measures have experienced a gradual volume recovery since mid-April, while the countries that saw a surge in volumes continued to experience robust momentum throughout April. Overall, in terms of items sold, we ended the month of April c.3% above the first week of March levels.
The United Nations Development Programme (UNDP) in partnership with Jumia Uganda, have launched an online platform – to enable small and medium enterprises to connect with consumers
- Jumia will use its infrastructure which includes riders trained to provide safe and contactless deliveries, to provide a platform for the vendors to reach customers who are currently under lockdown.
- Consumers will have the option of giving feedback on the level of satisfaction of both the product and the service through the Jumia Vendor App.
Jumia and Mastercard announced a partnership to incentivize the use of cashless payments platforms – consumers who purchase essential products using their Mastercard on the Jumia platform will receive up to a 10 per cent discount on their order

Things that are implying negative developments:

The early signs of the COVID-19 disruption were felt in our cross-border operations as a result of manufacturing facility shutdowns in China. Supply chain disruption in China also impacted our local sellers, many of whom source their goods from China.
Different forms of confinement measures have been affecting operations to varying degrees, food delivery business, brief closures of warehouse, sellers’ inability to deliver, etc.
Currently expect continued GMV weakness over at least the first half of 2020, with better Order and Annual Active Consumers growth, on a year-over-year basis.

to be continued…

「What’s News In China」

HK’s Hang Seng Index will incorporate Chinese internet giants Alibaba, Xiaomi and Meituan Dianping – companies with dual-class or equivalent structures, starting from August, with a weighting cap of 5%. The tech trio are also eligible to join the Hang Seng China Enterprises Index. The Hang Seng is tracked by $20 billion of exchange-listed products globally and $8 billion of local retirement plans, the index provider said in a consultation paper in January. // FT | Hang Seng Indexes

On May 18, HeyTea 喜茶 announced the roll-out of its first artificial meat product, partnering with Starfield 星期零. The 未来肉芝士堡 is priced at ¥25. // 36kr | WeChat

Before HeyTea, its competitor Naixue’s Tea also partnered with Starfield on artificial meat burger last November. Last month, Starbucks and KFC in China launched their artificial / plant-based meat products. // Sina | 36kr

ByteDance is marching into automobile sector with plans to integrate Douyin and Toutiao into cars. The research and development (R&D) team for the Internet of Vehicles (IoV) team are former employees of smartphone maker Smartisan 锤子手机, who joined the company after ByteDance acquired Smartisan (team & patents) in early 2019. // 36kr | kr-asia

Chinese black-box doll retailer Pop Mart 泡泡玛特 has raised more than $100 million in funding from China Renaissance and Loyal Valley Capital in what is expected to be its last round before an IPO. // avcj | 36kr

Airbnb’s IPO Plan & Capital Allocation

Airbnb did well in the past quarters before 2020 and doesn’t have much concerns for cash. It was one of the most financially healthy startup.

Actually, its full year earnings turned positive as early as 2017, when it generated earnings of about $100m while bookings grew around 150%. It became profitable in the second half of 2016.

In 2018, it made $93 million in profit on $2.6 billion in revenue.

More recently, it took in more than $1 billion in revenue in 2019Q2.

However, Airbnb racked up a $322 million net loss for the nine months through September, down from a $200 million profit a year earlier.

In 2019Q3 alone, Airbnb increased its revenue to $1.65 billion in the third quarter, up almost $400 million from a year earlier, one of the people said. But costs rose faster. Net profit for the quarter was $266 million – less than the $337 million profit for the same period in 2018

All sorts of reports said Airbnb is preparing to go IPO in 2020… until coronavirus hit.

When WSJ reported in Feb, it says Airbnb’s business in China is currently down about 80% compared with last year.

Now as travel industry worldwide is hit, Aribnb total revenue could decline 70-90% and might have cash flow problem.

It now has raised debt and cancelled summer internships.

In early April, Airbnb raised $1 billion in debt and equity from private equity firms Silver Lake and Sixth Street Partners.

Last week, Airbnb raised another $1 billion in debt. Fidelity, T Rowe Price and Blackrock are participating along with Apollo and Oaktree.

While Airbnb should be fine and solvent, how its revenue gonna recover & how to show its growth rate will be an IPO headache.

「What’s News In China」

On April 17, China 2020 Q1 GDP data is released. China’s economy shrank 6.8% in the first three months of 2020 compared with a year earlier, the first such contraction since Beijing began reporting quarterly gross domestic product in 1992. // WSJ

On April 15, China cut the benchmark interest rate for the second time this year, lowering the medium-term lending facility (MLF) for financial institutions to 2.95%. The one-year loan prime rate (LPR), based on banks quotations, was lowered by 20 basis points (bps) from 4.05% to 3.85%. // Reuters | PBOC

China’s central bank has introduced a homegrown digital currency across four cities as part of a pilot program. Internal tests of the digital currency are being conducted in four large cities around China—Shenzhen, Suzhou, Chengdu and Xiong’an, a satellite city of Beijing. // WSJ

As China is reopening its economy, getting consumers to spend is one of the key initiatives. Many cities collaborate with Alipay to give residents discount coupons for various needs. Wuhan, which reopened on April 8, on April 17 announced that it is going to offer coupons worth of 2.3 billion RMB for restaurant, shopping malls, grocery stores and other cultural/sports spendings. // cnbeta