lenS & thoughtS – Page 12

PBOC’s Draft On Payment Regualtion

The most important clause is the definition of “dominant position” in the national e-payment market – over 50%, or over 2/3 for two companies, or over 3/4 for three companies.

The new regulation is only for nonbank payment service providers, like AliPay, WeChat Pay, etc.

The the most obvious outcome?

1/ In offline markets, it’s time for Meituan payment to grow.

2/ Meanwhile other internet companies will first grow their payment services within their ecosystem online. To name a few: JD payment, Pinduoduo payment, ByteDance’s payment, Kuaishou’s payment, Baidu’s Duxiaoman, Bilibili’s payment, etc.

3/ Traditional banks will be benefited. They can partner with internet companies and grow users. Related services can be provided via those internet companies, such as credit card, small loans, etc.

DoorDash Can Grow – But By How Much More Above $60 Billion

I did buy some DoorDash (NASDAQ: DASH) from the $140-150 level, but feel that potentials are priced in now.

To put some rough numbers –

DoorDash in 2020 Q3:

Active customers: 18 million
Total number of orders: 236 million
That’s around 1 order per week for each customer.
GOV: 7,252 billion
So $ per order = $30.7
Revenue: 879 billion
Take rate = 12.1%
Contribution Margin = 24.5%
Adj. EBITDA Margin = 9.8%

That’s a nice profit thanks to growing orders during covid (no marketing needed).

The question is how much of the growth will continue post-pandemic.

My guess is that GOV will continue to grow, due to

Food delivery offers greater convenience & more selections – benefits that are not only tied to the pandemic (DashPass can become a food explorer’s subscription)
DoorDash is inner-city-delivery-as-a-service and can expand to groceries & pickups from brick-and-mortar stores. It’s a way to revive every kind of physical retail.

Plus, it’s legit to argue that as delivery network density grows, the efficiency grows, and unit cost will drop.

That being said, let’s assume (post-pandemic, by 2022) total order number goes to 450 million/qtr so 1,800 million/yr (e.g. 30 million customer x 60 orders/yr)

$ per order goes up to $35.

GOV = $63 billion

With unchanged 12% take-rate, revenue = $7,560 billion

Adj. EBITDA = $1,512 billion (margin improved to 20%)

Then 40x adj. ebitda will give us a valuation of ~$60 billion. (which is DoorDash’s current valuation)

Clearly, multiples will depend on the market sentiment.

Some of the assumptions are not conservative I have to say, so I won’t expect some solid 50% return ($90bn valuation) from the current level in near term.

Fundings Versus $800 Billion Tesla & Top 5 US Tech All Have An EV Play

Following up on my post almost 2 years ago – fresh fundings are going to EV makers and autonomous driving.

The check sizes are big – you need billions of dollars to compete with the $800 billion Tesla.

1/ Microsoft + Cruise, $2+ billion

A new investor in the EV space – Microsoft (NASDAQ: MSFT) led the $2+ billion round for GM’s (NYSE: GM) Cruise, with valuation up to $30 billion. Microsoft’s Azure is getting the new customers: GM and Cruise.

Cruise, as a self-driving unit, spent $0.8 billion in operating cash flow in 2019.

At December 31, 2019, external investors held 17.3% of the fully diluted equity in Cruise Holdings. After this funding, GM should still have 77%+ of Cruise.

2/ Rivian, $2.65 billion

The financing is led by T. Rowe Price and the firm is valued at $27.6 billion. This is in addition to the $2.5 billion raised in July 2020.

3/ Lucid Motor, $2 billion (?)

It was reported (rumored) that Lucid Motor will go public via a SPAC deal with Churchill Capital Corp IV (NASDAQ: CCIV), which raised $2.07 billion last year.

The transaction could be valued at up to $15 billion.

CCIV share closed at $17.9 today, or 79% above its blank check ipo price of $10.

If pre-money Lucid is worth $13 billion, then buying CCIV at $17.9 is buying Lucid at over $23 billion.

There were a lot more others, with SPACs. To name a few others – Lordstown Motors (NASDAQ: RIDE) raised $1.175 billion; Luminar (NASDAQ: LAZR) raised $570 million; Fisker (NYSE: FSR) raised $1 billion, etc.

Plus, Apple will make EVs, Alphabet has Waymo, Amazon has Zoox and invested in Rivian. With Microsoft’s deal today and Tesla surpassing Facebook in market cap: now top 5 big tech in the US all have an EV play.

Takeaways:

1/ Cash might be abundant today – cash will be a competitive edge tomorrow.

2/ Covid-19 delayed most EV companies’ production for 1 year – that’s a gift for those who can produce – namely Tesla. The valuation jump includes the unexpected another year ahead.

3/ Top 5 big tech in the US all have an EV play.

Tech Companies Want A Podcast

Spotify (NYSE: SPOT) launched podcast service in 2015. It appears to be the leading podcast provider in 2020.

Podcast listeners are projected to surpass 100 million in 2020 in the US alone, and podcast ads revenue to surpass $1 billion in 2021, according to emarketer.

US Podcast Ad Spending, 2018-2022 (millions and % change)

Spotify launched Spotify Podcast Ads in January 2020.

In November last year, Spotify announced to acquire Megaphone for $235 million. Megaphone offers technology for podcast publishers and advertisers seeking targeted slots on podcasts.

Amazon Music came a bit late – it adds podcasts in September last year.

Apple, an already big player in podcast, seems to plan another route to monetize – a paid subscription service, according The Information today.

On the same day, Tencent Music (NYSE: TME) announced its acquisition of Lazy Audio, which provides audiobooks, and other forms of “podcast-like” audio services.

ByteDance, Kwai and LiZhi (NASDAQ: LIZI) have their own apps for podcast as well.

It’s another round of competition in long-form audio – PGC & UPGC contents will be hot.

Yep, tech companies always want to connect with users longer.

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

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.

Occidental Petroleum (2): Topping Chevron’s Bid For Anadarko, Buffett’s Preferred Investment

Occidental Bids Anadarko Petroleum (APC)

Having grown into the No.1 operator in Permian in 2018Q4, Occidental definitely don’t want give that title back to Chevron.

While acquiring Anadarko is an add-on for Chevron, it’s much more financially challenging for Occidental.

Occidental produces at a similar scale as Anadarko. So it’s presumably an acquisition that would double its size.

But Occidental moved decisively. It offered $76.00 per share for Anadarko on April 24, 12 days after Chevron’s announcement, with ~17% premium over the $65 per share agreement. Taking into account the stock price movement, Occidental’s deal presents a ~20% premium.

Occidental’s offer also has more cash component (50/50) – $38.00 in cash and 0.6094 shares of Occidental common stock per Anadarko share, valuing Anadarko at $57 billion.

Occidental also argues a $3.5 billion free cash flow improvements through synergies and capital reduction, compared with Chevron’s $2 billion / year synergies.

Occidental actually tried to acquire Anadarko earlier in April, according to the press release later on.

It is unfortunate that Anadarko agreed to pay a break up fee of $1 billion, representing approximately $2 per share, without even picking up the phone to speak to us after we made two proposals during the week of April 8 that were at a significantly higher value to the transaction you were apparently negotiating with Chevron.

We noted to you on April 8 that our due diligence is complete. As you are aware, our financial advisors are BofA Merrill Lynch and Citi, and our legal advisors are Cravath, Swaine & Moore LLP, and we and they are available to discuss any aspect of our proposal. We and our advisors have reviewed your merger agreement with Chevron. We are separately sending to you and your legal advisors a form of merger agreement on that basis which we would be prepared to enter into, subject to our agreeing to the disclosure schedules to be attached, together with a copy of our financing commitment letter.

Financing The Acquisition

Acquisition of this size is difficult for Occidental, especially as it offers much more cash than stocks.

In 2018, Occidental generated $7,669 million operating cash flows with $(4,975) million CapEx. It also paid $(2,374) million in cash dividend and bought back $(1,248) million stocks.

On its balance sheet as of the end of 2018, it had $3,033 million cash, and $10,317 million long-term debt.

On April 30, $10 billion financing was secured as Buffett came on board.

Berkshire Hathaway, Inc. has committed to invest a total of $10 billion in Occidental. The investment is contingent upon Occidental entering into and completing its proposed acquisition of Anadarko. Berkshire Hathaway will receive 100,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share, together with a warrant to purchase up to 80.0 million shares of Occidental common stock at an exercise price of $62.50 per share.

The preferred shares also have a dividend rate of 8% per year.

As WSJ describes, the investment “is straight out of Warren Buffett’s playbook“. During and after the financial crisis, Berkshire acted as a lender of last resort for blue-chip companies including Goldman Sachs, General Electric and Bank of America.

Occidental marks Berkshire’s largest purchase of preferred shares; the 2013 Heinz deal has $8 billion preferred stocks and other securities.

Mr. Buffett and Occidental have some shared history.

Mr. Buffett’s first stock purchase was three shares of Cities Service preferred stock when he was 11 years old. Occidental’s chief executive, Vicki Hollub, started her career at Cities Service, which was later acquired by Occidental. Cities Service is now called CITGO Petroleum Corp. and owned by Venezuela’s Petróleos de Venezuela SA.

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.

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.

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)

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.

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.

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.