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Increasing Yield & Multiples

US stock market is in a tough week as 10-year yield rises.

It’s interesting to review the CAPM formula and its relation with multiple.

Assumptions:

    • Market risk premium (MRP) = 6%
    • Before covid, risk-free rate = 10-year yield = ~2%
    • 10-year yield basically goes to 0.5% in 2020 and approaches now to 1.5%
    • Discount = Risk-free rate + MRP, assuming beta is 1
    • Earnings terminal growth rate = 3%
    • Earnings multiple = 1/(Discount – Terminal growth rate)
Risk-free rate Discount Multiple
2% 8% 20.0x
0.5% 6.5% 28.6x
1% 7% 25.0x
1.5% 7.5% 22.2x

When market was performing like it’s 1% but realized that it’s actually 1.5%, the correction is ~9%.

When market was performing like it’s 0.5% but realized that it’s actually 1.5%, the correction is ~22.5%.

Proposed Law in Japan For FinTech

Found this proposed law in Japan very interesting – for Financial Services Intermediary Business operator (FSIBO).

It’s basically a single registration system that allows 4 types of major fintech services​: Banking / Lending / Securities / Insurance​, as long as it’s an intermediary business.

It’s like a law for Ant Group…

Or for PayPay (backed by SoftBank).

To list a few details here:

FSIBO is not required to be sponsored by a principal institution​

A FSIBO is required to make a security deposit at a public deposit office before commencing its services to secure the payment of potential damages to its clients.

FSIBO can offer only those conventional products or services that do not need a sophisticated explanation to the clients​

The FSIBO must disclose fees or remuneration to be received from financial institutions or other matters upon clients’ request. The FSIBO is generally prohibited from receiving deposit from clients in relation to its intermediation service with financial institutions.​

FSIBO is subject to further requirements depending on the financial sector where the FSIBO provides its services

Bitcoin’s Downside (?)

So Bitcoin price traded at over $50k today, surpassing $1 trillion market cap.

People are seeing the future where Bitcoin are welcomed or adopted in certain ways by major institutions.

– Tesla bought $1.5 billion Bitcoin recently.

– Twitter considers “how we might pay employees should they ask to be paid in bitcoin, how we might pay a vendor if they asked to be paid in bitcoin and whether we need to have bitcoin on our balance sheet”

– Banks like BNY Mellon are going to offer Bitcoin-based service.

While I share a similar view that it is becoming more mainstream, I think it also faces risks – people should remember that it’s not rare that governments “hated” gold occasionally in the past.

“One of his first moves as President was to declare a four-day bank holiday and suspend gold exports. Within days, the Emergency Banking Act was enforced that prohibited banks to pay out gold coins or bullion or gold certificates except under a government-issued license.

Just two weeks prior to abandoning the gold standard, he issued an executive order prohibiting hoarding of gold coins, bullion or gold certificates.” – Investopidia “When FDR Abandoned the Gold Standard”

As people talk about how Bitcoin can replace gold, the risk transfers to Bitcoin as well.

Fed’ or others’ ability to effectively print money will be reduced if goods and services are priced in Bitcoin and wages are paid in Bitcoin.

Facebook – Not An Easy Business

Facebook blocked all news content in a Australia on Thursday – users cannot share news links and Facebook Pages of media account are taken down.

This is in response to Australian government’s proposed law, which requires payment deals between media outlets and tech companies over content.

This is also one day after Google stroke a deal with News Corp, the media giant. Under the proposed law, Google will need to pay for news content if they appear in search results.

1/ Why Google and Facebook chose different routes (at least for now)?

I think their ad business are fundamentally different.

Facebook ads is seen on Facebook platforms, but Google ads is seen on both Google products and third-party websites.

Google is enabling third-party advertisers (think about the ads on newspaper’ website) to make money, e.g. AdSense. They are partners, and this network of advertisers is valuable to Google.

Facebook’s ads is sold by getting to know users better and letting users stay on its platforms longer. Traffic is important to Facebook, so news is important as a form of content that users want to see. However, Facebook also thinks it is giving media outlets traffic in return. More important, ads sold by Facebook is not relying on those media outlet.

2/ What content should be on social media?

Instagram is in a purer form of social media, so does Twitter. They are usually gravitating towards certain types of contents. On the other hand, products such as Facebook’ main app are aggregating all kinds of “feeds” as long as they can drive traffic.

I think the two types are both here to stay.

Another related issue is how to regulate contents, which has been an increasingly important issue in the US and globally.

“Regulate more” or “regulate less”?

I think either way more regulatory interventions (government) is most likely inevitable.

If platforms regulate less, regulators may think Section 230 is providing to much protection and platforms are not doing enough for their social responsibility.

If platforms regulate more, regulators might think they have too much power, which is also risky. And as they moderate more, it costs more and they may be challenged more often on their decisions.

“Public square” is not easy. “Digital living room” is where Facebook may find more flexibility in contents.

Paying for news might be one of the solutions to navigate some content risk, e.g. fake news, misinformation. However, fake news or misinformation might be the traffic driver that Facebook values.

Unit Economics For Streaming on Kuaishou

As of Feb 2021,

For independent individuals – 40% of gross value of virtual gifts, when tax withheld is 20%

Streamers = 40%

Streamer’s tax withheld by Kuaishou = 10%

Kuaishou = 50%

For streamers under a “family/union” – varies.

Unions can set the sharing ratio to between 35% and 50%.

For example, if the ratio is set at 40%, and tax withheld is 0 (to simplify)

Streamers = 40% (certain tax should be withheld)

Union = 10%

Kuaishou = 50%

In addition, Kuaishou gives back additional revenue-sharing (“bonus”) as incentive if certain growth/active targets are achieved, up to 12% of gross value (after-tax I assume).

The larger the union, the higher basic bonus (up to 2%) it can get. Active bonus (1%) requirement is a bit higher for larger union. Growth target is lower for large unions. Growth bonus is tiered and every union can potentially get the full 9% growth bonus.

Therefore, if a union get say 5% bonus, following the previous example, then

Streamers = 40%

Union = 15%

Kuaishou = 45%

Unions can set certain bonus internally for streamers, and often provide a base pay + % commission model for streamers.

We could see from Kuaishou’s reported financials that after deducting “revenue sharing to streamers and related taxes”, Kuaishou retains a bit over 40% of its live-streaming revenue.

Two Steps For Video Platforms To Stand Out

There are two strategic offerings that drive the organic growth of Kuaishou, Douyin and Bilibili, which also differentiate them from the others:

1/ an easy-to-use video editing tool that is actually empowering users

2/ a marketplace (e.g. ads, e-commerce) for users/MCNs to monetize. One key difference is that: it is not for platforms to sell ads. Platforms are just operating the marketplace.

Video editing tools

– Kuaishou introduced Kuaiying (Kmovie) in 2017

– ByteDance/Douyin introduced Jianying (CapCut) in Jun 2019

– Bilibili introduced Bijian (bcut) in July 2020

Marketplaces

– Kuaishou upgraded the exchange as 磁力聚星 Magnetic Star, part of the 磁力引擎 Magnetic Engine

– ByteDance upgraded the website to 巨量星图2.0 in 2020

– Bilibili launched 花火 Huahuo in July 2020

Those are all similar – marketplaces for brands/agencies + influencers/MCNs

Tesla Bought $1.5 Billion Bitcoin

On Monday, Feb 8, Tesla announced it bough $1.5 billion bitcoin and would accept it as a payment method soon.

A few takeaways:

1/ There will be more companies using bitcoin to manage their cash, adding to the demand for it.

2/ Bitcoin as a payment method will be more mainstream. Now people not only can rely on selling it to the market, but maybe can buy a Model Y. The future question would be – what will the “economy” look like on Mars? I bet Bitcoin will be important.

Questions remain –

How Tesla is gonna price its cars? in fixed Bitcoin? that will cause a collision with USD, etc. as Bitcoin is volatile on a daily basis.

JOYY After Sale of YY

JOYY (NASDAQ: YY) just announced on Feb 8 that “The sale by JOYY Inc. (“JOYY” or the “Company”) of its YY Live business to Baidu, Inc. is substantially completed”.

Without the China business, YY = BIGO, which has BIGO Live and Likee.

More importantly, investors are only valuing the BIGO Live business, while Likee is like a “bonus”.

To be more specific,

1/ BIGO is undervalued

JOYY has ~81 million ADS -> $9.7 billion market cap at $120 per ADS.
It also has some $3.5 billion cash/short investment and $1 billion convertible bond (conversion price 95.5 and capped at 127.87).

The sale price of YY China business is $3.6 billion.

JOYY still has 68.4 million Huya shares, which is worth ~$1.6 billion at $24 per share.

Therefore the enterprise value for BIGO is around $2.4 billion.

BIGO Live is a live streaming business with RMB 3.4 billion revenue in Q3 2020, so around $2.1 billion annually.

That is 1.1x sales multiple! Usually live streaming virtual gifts could be valued at 2-3x revenue.

Room to double!

2/ Market is not even valuing Likee, which is a legit business with 104 million MAUs in Q3.

Likee is popular. Some may even compare it with TikTok. The recent decrease is due to the ban in India but the rest of the growth will be fine.

3/ JOYY will become an true international company, and is poised to operate in a more flexible global manner, which should benefit its ex-China strategy.

Kuaishou Valuation

So the competitor of Douyin (TikTok) in China, Kuaishou (HKEX: 1024) just went IPO this week, now valued at ~$160 billion.

It’s a well-known app in China – with the current market sentiment, hypes around video-based social platforms, I should say I am not surprised about the valuation.

Here I provide one way to look at Kuaishou’s valuation:

Q3 revenue is ~$2.4 billion:

1/ ~50% comes from live-streaming (virtual gifts).

2/ The rest is from ads and e-commerce. I categorize them as “good” revenues that are fast growing (+200% yoy for ads) and stable.

For the first part, virtual gifts, we can use Huya (most revenue is from live-streaming) as a comp – about 3x annualized revenue.

For the second part, we can compare it with Snap, which trades at 25x annualized revenue. Kuaishou’s ads business (~$900 million in Q3) is at the same scale as Snap and grows faster – so some can argue to use 30x.

Therefore,

Kuaishou = virtual gifts business x 3 + ads & other business x 30

As virtual gifts is 50% now, we are talk about 16.5x revenue as a whole.

Annualize it: $2.4 billion x 4 x 16.5 = $158.4 billion

Virtual gifts business is debatable – while it’s 50% of revenue, it accounts for less than 20% of Kuaishou’s value if we use the above framework. So change it from 3x to 2x or 1x won’t affect much actually.

Deloitte and McKinsey

Institutions need some extra efforts to win trust…

  • McKinsey has agreed to pay $573 million to settle over its role helping to market and boost sales of high-risk opioids including OxyContin.
  • Deloitte China is now dealing with scandals exposed by a young employee, over illegal/unethical auditing practices by other employees between 2016-2017. You may find this organized presentation (in Chineses) here 德勤举报PPT.

Big corporations or respectful big names are never the “guarantee” of high standard.

They need to be more self-aware before any “systematic failure” might emerge.