Blog

「News of the Week」New York State Curve Flattening, Stock Market Up

On Tuesday (April 7), Gov. Andrew Cuomo projected that the state is reaching a plateau in coronavirus hospitalizations due to strict social distancing measures.

“To the extent that we see a flattening or a possible plateau, that’s because of what we’re doing and we have to keep doing it,” Mr. Cuomo said. (WSJ)

three day hospitalizations
Source: Cuomo press conference, Axios

The S&P 500 on Thursday (April 9) closed out its best four-day streak since 1974, up 11.9% (Dow up 12%). (CNBC)

CH 20200409_dow_best_weeks_close.png

Occidental Petroleum (1): Permian, Chevron Bid For Anadarko Petroleum

Occidental Petroleum (OXY) has been one of the most watched stock since 2019. Its stock lost ~80% compared with the start of 2018 and lagged behind Chevron and the industry later on.

OXY vs. XLE & CVX Jan 2018 – Apr 2020 | Source: Yahoo Finance, author

[XLE is State Street’s Energy Select Sector ETF fund; see its top holdings here]

Permian Oil Production

The Permian, the biggest shale basin in the US, has been one of the biggest drivers of a shale oil boom that helped make US the biggest oil producer in the world, ahead of Saudi Arabia and Russia.

Source: EIA

According to the March 2020 productivity report, output from the Permian basin of Texas and New Mexico, is expected to rise 38,000 bpd to a record 4.79 million barrels per day (bpd) in April 2020.

Texas continues to produce more crude oil than any other state or region of the United States, accounting for 41% of the US total in 2019.

Source: EIA
Source: EIA

As mentioned in Occidental’s 2019 annual report, Permian accounts for more than 30% of the total United States oil production; Occidental has a leading position in the Permian Basin, producing approximately 10% of the total oil in the basin.

Chevron Bids For Anadarko Petroleum (APC)

As the competition in Permian intensifies, with Occidental and Chevron two leading operators, companies are looking for M&A opportunities.

Anadarko Petroleum is the 11th largest operator in Permian Basin; its Permian production (127 mboe/d) accounted for ~18% of its 2018Q4 production of 701 mboe/d. [Occidental Acquisition Proposal Presentation April 2019]

A graphic with no description

Chevron, another major player in Permian, announced its acquisition agreement with Anadarko on April 12, 2019.

Chevron was the No.1 in 2018 whole year production in Permian, but lost that seat to Occidental in 2018Q4 as shown above. Growth by acquisition seems to be the way to go for Chevron.

Occidental Wins Battle for Anadarko as Chevron Exits Bidding - WSJ
Source: WSJ

The total enterprise value of the transaction is $50 billion. Anadarko’s equity is valued at $33 billion, or $65 per share. Based on Chevron’s closing price on April 11th, 2019 and under the terms of the agreement, Anadarko shareholders will receive 0.3869 shares of Chevron and $16.25 in cash for each Anadarko share. (75% stock and 25% cash)

[Read more on Chevron’s acquisition presentation]

Jumia And Africa E-commerce (5): Delivery In Africa, Jumia Prime

In Jumia’s 2019 20-F, filed on April 03, it mentions that

The logistics landscape in Africa is characterized by a high degree of fragmentation, often with no clear leading player in a particular country or region, a high degree of variability between regions and players, a general lack of automation of logistic centers and an overall challenging infrastructure. While some of Africa’s major cities are reasonably well-served by third-party logistics vendors, such vendors often do not operate with the standards required to ensure a good seller and consumer experience in the context of e-commerce. In addition, many Africans live in settings which lack clear addresses and are often far from the nearest warehouse or distribution center. As a result, logistics and delivery services are not readily available in such areas or may be prohibitively expensive. Furthermore, many local logistics companies operate without the technology required to provide consumers with high quality service (e.g., tracking of their order, timely delivery).

Jumia Logistics could be a competitive advantage, just like how Amazon becomes a delivery giant discussed in another post. But it is still at a very early stage. Read more about Jumia’s delivery challenges and solutions here, e.g. last-mile delivery with no street address.

As of December 31, 2019, Jumia Logistics platform consisted of almost 200 logistics partners, a proprietary delivery fleet to fulfill express deliveries in select areas, more than 40 thousand sqm of warehousing space, more than 70 drop-off stations for sellers and almost 600 pick-up stations for consumers. All of the warehouse space is leased from third parties.

Take a look at Jumia’s delivery time in Nigeria, Egypt, Kenya.

Source: Jumia Nigiria, Medium

Jumia Express is a program where sellers store goods in Jumia’s warehouses. In 2019, Jumia Express accounted for more than 30% of the items sold via our platform.

Jumia also rolled out Jumia Prime for unlimited free deliveries in certain markets. For exmaple, it’s around $60/yr in Nigiria, ~$64/yr in Nairobi in Kenya.

Source: jumia.com.ng

Another difficulty is the trust in cash (or maybe the unavailability of banking).

The ability for consumers to pay cash on delivery is an important feature of our platform, in particular for new consumers who are transacting online for the first time. In case of cash on delivery, the consumer needs to be present at the time of the delivery to pay for the order. While we are constantly improving our operations to make delivery schedules more convenient and predictable, some consumers are not present at the time of the delivery attempt, which means that cash on delivery results in a significantly higher portion of returns than other delivery options. These returns are driving higher fulfillment costs, higher costs of operations for our sellers and lower monetization for us as we are not able to collect commissions for such returns. In comparison, orders that are “pre-paid” electronically tend to drive much lower returns than cash on delivery, driving better monetization for us and, ultimately, lower fulfillment costs and less operational complexities.

Jumia 2019 20-F

As discussed in the filing as well, JumiaPay is trying to solve this issue, which could follow Alipay’s success in China (not a guarantee).

On-platform penetration of JumiaPay Transactions as a percentage of orders reached 28.7% in 2019 compared to 14.0% in 2018.

Jumia And Africa E-commerce (4): Citron, Net Merchandize Value

About one month after Jumia’s IPO, the famous short research Citron published a short report.

Their first major short thesis is based on a Confidential Investor Presentation for investors in October 2018, which presents a discrepancy between Jumia’s IPO filing.

    • The active customers & merchants as of 2017 are 2.1 million and 43 thousand in the Confidential Investor Presentation while in the IPO filing are 2.7 million and 53 thousand.
      • no difference in 2018 numbers
      • they might used different definition for “active”
      • another possibility is consolidation calculation – if a user used multiple Jumia services (online shopping, travel, food, etc.), they could have been double counted. In the October 2018 presentation, they might deduct the duplicated accounts

Cirton also emphasized on omitting a metric in IPO – net merchandize value (NMV).  Since GMV doesn’t take into account returns/cancellations, which is ~41% of the GMV in 2017, this could be material in evaluating the business.

Another lever is failed delivery. Taking all these into account, GMV probably is not a very good indicator at this stage of Africa’s e-commerce. This also explains the hight fulfillment expenses. As the infrastructure in Africa improves over time, it could be better.

In Jumia’s IPO documents, it only mentions “in 2018, orders accounting for 14.4% of our GMV were either failed deliveries or returned by our consumers. ”

In the 2019 20-F, it says “we have also experienced a decrease in the rate of cancellations, failed deliveries and returns as a percentage of our GMV from approximately 35% in 2018 to 32% in 2019.”

So around 20.6% of Jumia’s 2018 GMV is cancelled.

Actually, in Jumia’s 2019 Q2 call with analysts, it says “it has identified instances where orders were placed and then subsequently canceled“.

However, when NMV provides an important information about Jumia’s operation, after all its revenue and expenses won’t change.

「What’s News In China」

Yuanfudao 猿辅导 raised $1 billion led by Tencent and Hillhouse in a round valued at $7.8 billion. Offering online courses and homework plans to students, Yuanfudao ranked first in China in-app purchases in the education category between January and mid-March, according to mobile app performance tracker App Annie. // Reuters | 36kr

Tencent controlled Huya (NASDAQ: HUYA) by exercising its option, purchasing 16.5 million of Huya’s Class B ordinary shares from JOYY Inc. (NASDAQ: YY) for approximately $262.6 million. Tencent has became the largest shareholder of Huya, increasing its voting power in Huya to 50.1% on a fully-diluted basis, or 50.9% calculated based on the total issued and outstanding shares of Huya, and will consolidate financial statements of Huya. Tencent has already been the top shareholder of Douyu (NASDAQ: DOYU). With its investments in Kuaishou and Bilibili, Tencent has gained a near monopoly in game streaming. // Huya | 36kr

On April 6, Wolfpack, on its short selling research website, issued a report on iQiyi (NASDAQ: IQ) and estimates that “IQ inflated its 2019 revenue by approximately RMB 8-13 billion, or 27%-44%… by overstating its user numbers by approximately 42%-60%.” // Wolfpack

「Video of the Week」Queen Elizabeth Coronavirus Speech

Transcript:

I am speaking to you at what I know is an increasingly challenging time. A time of disruption in the life of our country: a disruption that has brought grief to some, financial difficulties to many, and enormous changes to the daily lives of us all.

I want to thank everyone on the NHS front line, as well as care workers and those carrying out essential roles, who selflessly continue their day-to-day duties outside the home in support of us all. I am sure the nation will join me in assuring you that what you do is appreciated and every hour of your hard work brings us closer to a return to more normal times.

I also want to thank those of you who are staying at home, thereby helping to protect the vulnerable and sparing many families the pain already felt by those who have lost loved ones. Together we are tackling this disease, and I want to reassure you that if we remain united and resolute, then we will overcome it.

I hope in the years to come everyone will be able to take pride in how they responded to this challenge. And those who come after us will say the Britons of this generation were as strong as any. That the attributes of self-discipline, of quiet good-humoured resolve and of fellow-feeling still characterise this country. The pride in who we are is not a part of our past, it defines our present and our future.

The moments when the United Kingdom has come together to applaud its care and essential workers will be remembered as an expression of our national spirit; and its symbol will be the rainbows drawn by children.

Across the Commonwealth and around the world, we have seen heart-warming stories of people coming together to help others, be it through delivering food parcels and medicines, checking on neighbours, or converting businesses to help the relief effort.

And though self-isolating may at times be hard, many people of all faiths, and of none, are discovering that it presents an opportunity to slow down, pause and reflect, in prayer or meditation.

It reminds me of the very first broadcast I made, in 1940, helped by my sister. We, as children, spoke from here at Windsor to children who had been evacuated from their homes and sent away for their own safety. Today, once again, many will feel a painful sense of separation from their loved ones. But now, as then, we know, deep down, that it is the right thing to do.

While we have faced challenges before, this one is different. This time we join with all nations across the globe in a common endeavour, using the great advances of science and our instinctive compassion to heal. We will succeed – and that success will belong to every one of us.

We should take comfort that while we may have more still to endure, better days will return: we will be with our friends again; we will be with our families again; we will meet again.

But for now, I send my thanks and warmest good wishes to you all.

Source: telegraph.co.uk

「News of the Week」Luckin Coffee Fraud

On April 2, the company’s board announced that a preliminary investigation indicates that the “aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2 billion ($314 million).” Luckin’s stock price crashed.

Luckin Coffee Press Release

WSJ – Luckin, Rival to Starbucks in China, Says Employees Fabricated 2019 Sales; Stock Plummets

FT – Luckin Coffee apologises for alleged fraud

TechCrunch – Luckin Coffee’s board initiates investigation into $300M potential fraud

WSJ – Ernst & Young Says It First Found Accounting Issues at Luckin

Dots to connect: more scrutiny for US-listed Chinese companies, investigations into underwriters / lawyers / equity research analysts / auditors, trust issues, the need for Citron & short-sellers, fundamental value of this coffee chain business, internal governance for corporates in China, etc.

Buffet’s Shareholder Letter In Feb 2020

While the market is volatile and uncertainty is ahead, I went back to read Buffet’s 2019 annual shareholder letter, issued in February 2020.

[More letter could be found here]

Some ket takeaways:

  • Berkshire’s earnings has 3 components (operating earnings, realized capital gains, unrealized capital gains) and indeed becomes more volatile under the new accounting rule
  • The 3 criteria for purchases/investments:
    1. First, they must earn good returns on the net tangible capital required in their operation.
    2. Second, they must be run by able and honest managers.
    3. Finally, they must be available at a sensible price.
  • Per the accounting rules, earnings from controlled companies fully flow into “operating earnings”; but for noncontrolled companies, only the dividend portion of their earnings is reflected in Berkshire’s operating earnings.
  • There is a large part of companies’ value that is embedded in their retained earnings
    • some may argue the changes in stock prices (thus the unrealized gains) capture it; but it’s a poor reflection I think.
    • “Overall, the retained earnings of our investees are certain to be of major importance in the growth of Berkshire’s value.”
  • “What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses. These companies, also, earn their profits without employing excessive levels of debt.”
  • “In all, I estimate that it will take 12 to 15 years for the entirety of the Berkshire shares I hold at my death to move into the market.”
  • “It would be an interesting exercise for a company to hire two “expert” acquisition advisors, one pro and one con, to deliver his or her views on a proposed deal to the board – with the winning advisor to receive, say, ten times a token sum paid to the loser. Don’t hold your breath awaiting this reform: The current system, whatever its shortcomings for shareholders, works magnificently for CEOs and the many advisors and other professionals who feast on deals. A venerable caution will forever be true when advice from Wall Street is contemplated: Don’t ask the barber whether you need a haircut.”
  • Board independence is unlikely to be real for many companies.
  • Berkshire is going to repurchase shares when price-to-value discount is meaningful and Berkshire is left with ample cash; but, value is somewhat subjective.

Live stream for the annual meeting on May 2nd: https://finance.yahoo.com/brklivestream