Category: lenS & thoughtS

Part II … [see the previous post for Part I]

Acquisitions of Supply

To keep up the revenue growth, global partners and their distributions networks are important while expanding supplies is as essential.

Building their own facilities is a must (especially for GMP capacities medical uses) but slow. Acquisitions are needed and done frequently.

These acquisitions are also helping with global distributions and footprints/presence (entry by acquisition). If they produce/manufacture/supply, they must also have sales channels.

• • February 20, 2019: TLRY to acquire Manitoba Harvest for up to C$419 million; completed in February; the world’s largest hemp food company; a broad-based portfolio of hemp-based consumer products, sold in over 16,000 stores across the U.S. and Canada; has two high quality BRC AA+ certified manufacturing facilities, and access to relationships with farmers who plant more than 30,000 acres of hemp
  • January 22, 2019: TLRY to acquire Natura for up to C$70 million; completed in February; capable of producing plants in a 662,000 square feet greenhouse facility, of which 155,000 is currently licensed
  • January 4, 2019: ACB to acquire Whistler Medical for up to $175 million; completed in March; Whistler, providing premium brand/products, has two facilities, with a combined expected production capacity of over 5,000 kg per year; the second facility is being built for compliance with EU GMP standards
  • December 10, 2018: ACB to acquire Farmacias, Mexico’s first and only federally licensed importer of raw materials containing THC; providing 80,000 retail points for CBD products + 500 pharmacies and hospitals for the distribution of THC products; owns and operates a high-quality 12,000 square feet facility
  • October 9, 2018: TLRY to acquire Alef Biotechnology for C$5 million; licensed by the Chilean government to commercially produce medical cannabis; to create a hub to distribute TLRY products throughout Latin America
  • September 10, 2018: ACB to acquire ICC Labs for $290 million; regulatory approval received in November; ICC is expanding rapidly to bring an estimated annual production capacity to over 450,000 kg; two greenhouse facilities currently operational, approximately 92,000 square feet

ACB:

acquisition of ICC Labs, a leading cannabis company with over 70% market share in Uruguay and medical cannabis licenses in Colombia.

Other supply agreements are also crucial to expand capacity. For example, TLRY and LiveWell Canada entered into a supply agreement in December 2018 (finalized in March 2019) that LiveWell will supply TLRY with a monthly quantity of up to 300 kilograms of hemp-derived CBD isolate, or an equivalent amount of full-spectrum CBD extract, with an option to increase to 500 kilograms per month.

Already, these companies find assets are rising in price, making their acquisitions’ returns lower.

TLRY:

We will not purchase or invest in what we believe to be overpriced supply assets in Canada, which we believe will erode in value in the medium to long term, as the market normalizes.

Global Market Choices & Comments

TLRY:

…while Canada will continue to be an important market for us, we expect to focus the majority of future investments on the U.S. and Europe.

In the next year, we anticipate distributing medical cannabis to at least a half a dozen more countries globally through this partnership with Sandoz.

Our seven production facilities around the world are significantly increasing our global production output compared to 2018.

So, the UK, Australia, New Zealand, we continue to see growth there. Really Chile, Argentina, Peru, Brazil are really early on in their growth curve. And then, in Europe, Czech Republic, Croatia, Cyprus are all countries that we already ship to.

CGC:

So Europe as a region we have a strategy of investment that covers four countries, South America, four countries, Australia and each of those will have a yield that goes out over anywhere from 1.5 to 3 years.

We expect to see Denmark beginning to supply European markets this coming September and also to contribute to the margin.

ACB:

Our ability to execute on this objective is strengthened by our substantial hemp assets gained through our ownership of Agropro, Europe’s largest organic hemp producer as well through Hempco in Canada and ICC in South America.

Aurora’s presence now spans 22 countries on five continents. A look into two regions Europe and Latin America with a combined population in excess of a billion people. In Europe, we continue to capitalize on the strong central presence we established in Germany. In early October, we became the first private company to be granted an import permit for medical cannabis into Poland.

There are total of 8 EU GMP certified production facilities in the world and we have two of them, plus we have our EU GMP certified distributor Aurora Deutschland.

 

[Update 3/26] CRON:

Cronos Israel, with the Israeli agricultural collective Kibbutz Gan Shmuel. Cronos Israel is focused on the production, manufacturing and distribution of medical cannabis and is in full construction. We anticipate the construction of the 45,000 square-foot greenhouse will be complete in the first half of 2019, and construction of the manufacturing facility will be complete in the second half of 2019. Cronos holds an effective 90% economic equity ownership across the entities Cronos Israel.

In 2018, we also brought our production model to Latin America. Cronos announced a JV with a leading Colombian agricultural services provider with over 30 years of research and expertise, managing industrial scale horticultural operations. This partnership establishes a newly formed entity, NatuEra in Colombia that will develop, cultivate, manufacture and export cannabis-based medical and consumer products for the Latin American and global markets. NatuEra was granted a license to cultivate non-psychoactive cannabis plants to produce seeds for planting and the manufacture of derivative products.

We see Europe and Asia Pacific to be extremely important markets for the future, but in the near term, it is our belief that the development of pharmaceutical form factors and delivery systems for medical cannabis will play a crucial role in growing the prescription and patient base in these markets.

The Company owns a 50% equity interest in Cronos Australia and believes that Cronos Australia will serve as its hub for Australia, New Zealand and South East Asia, bolstering the Company’s supply capabilities and distribution network in the Australasia region.

Three companies’ earnings calls are included: Tilray, Inc. (TLRY), Canopy Growth Corporation (CGC), Aurora Cannabis Inc. (ACB).

Cronos Group Inc. (CRON) is expected to release 18Q4 earnings next week.

It is a newly opened (legalized) industry that has already attracted some big names’ attention. Its recreational uses, plus its potentials in medical settings and beverages, are supporting some huge market estimates and (partially) their sky-high valuations.

Net Revenue and yoy growth for the quarter ended on December 31, 2018

CGC – $83 million / 282%

ACB – $54 million / 363%

TLRY – $15.5 million / 204% (revenue includes excise tax of ~$2 million, so $13.5 million net)

[Update 3/26] CRON – $5.6 million / 248%

As the revenue multiple is incredibly high, companies need to ramp up its revenue very fast (to catch up with capital market’s expectations). As the actual cannabis markets usually need more time to educate/develop/open up, it is extremely important to rely on top-tier partners (and their distribution networks) to expand globally to keep the 200%+ growth.

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So starting with a roundup of…

Industry Collaborations (where/how to sell)

January 15, 2019: TLRY + Authentic Brands Group – $350 million payments to ABG and revenue sharing of 49%

• • TLRY as a supplier and sharing revenue from its white-labeled products; ABG as a brand manager and distributer
  • the parties will leverage ABG’s portfolio of brands to develop, market and distribute consumer cannabis products across the world, with an immediate focus on [CBD] opportunities in Canada and US
  • TLRY will initially pay to ABG US$100 million and up to US$250 million in cash and stock, subject to the achievement of certain commercial and/or regulatory milestones
  • TLRY will have the right to receive up to 49% of the net revenue from cannabis products bearing ABG brands, with a guaranteed minimum payment of up to US$10 million annually for 10 years, subject to certain commercial and/or regulatory milestones.
  • TLRY will be the preferred supplier of active cannabinoid ingredients for such products
  • ABG has a global retail footprint of over 100,000 points of sale and more than 4,500 branded freestanding stores and shop-in-shops

December 19, 2018: TLRY + AB InBev – up to $100 million JV in non-alcohol cannabis beverages

• • the partnership is limited to Canada for now;
  • AB InBev’s participation will be through its subsidiary Labatt Breweries of Canada (up to $50 million);
  • Tilray’s participation will be through its Canadian adult-use cannabis subsidiary High Park Company (up to $50 million)

December 18, 2018: TLRY + Novartis (Sandoz) – medical cannabis

• • this is a global version of a previously signed agreement focused in Canada;
  • the merit of the agreement is about supply (TLRY) & distribute (Sandoz) in the healthcare industry;
  • don’t think the margin would be high for TLRY; but if they develop new co-branded cannabis products, could be interesting

December 7, 2018: CRON + Altria – USD $1.8 Billion (CAD $2.4 Billion) investment

• • the deal gives Altria a 45% equity stake in CRON and an additional 10% ownership interest through warrants if exercised in full;
  • shares are purchased @C$16.25/shr;
  • warrants are issued at an exercise price of C$19.00/shr, exercisable over four years from the closing date
  • Altria will have the right to nominate 4 directors, including 1 independent director, expanding CRON’s Board of Directors from 5 to 7

August 15, 2018: CGC + Constellation Brands – $5 billion CAD ($4 billion USD) investment and beverages

• • the agreement is the largest deal in this space and is a significant equity investment, after which Constellation Brands will increase its ownership in CGC to ~38%, including existing ownership (9.9% in October 2017) and warrants
  • shares are purchased @ C$48.60/shr, a 51.2% premium to the previous closing price
  • new warrants are issued @ C$50.40/shr; if all exercised (existing and new), its ownership would exceed 50 percent

  • 

  • Constellation will nominate 4 directors to Canopy Growth’s 7-member Board of Directors
  • A detailed presentation

September 17, 2018: Rumor but no agreement: ACB + Coca-Cola

• • Sep-18: Aurora said there is no agreement: “The Company does confirm that it engages in exploratory discussions with industry participants from time to time,” Aurora said in a press release.”
  • Sep-18, Coke’s statement following the report: “We have no interest in marijuana or cannabis. Along with many others in the beverage industry, we are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world. The space is evolving quickly. No decisions have been made at this time.”

March 13, 2019: ACB got a strategic advisor Nelson Peltz

• • he could bring some industry collaborations/investments that others had done, while granted options to purchase ~20 million ACB shares
  • Mr. Peltz (through Trian) held large positions or had board seats on many companies such as PepsiCo, Dr Pepper Snapple, Procter & Gamble, Kraft Foods, Heinz, Mondelez

Tencent and others have tried to challenge Alibaba’s dominance in e-commerce for years. From its investment in JD.com to Meilishuo and Pinduoduo, Tencent has helped an array of companies, giving them “special entrances” on its most powerful app WeChat, while blocking links from Alibaba (e.g. Taobao links).

Tencent’s series of efforts also represents shifts or new forms for e-commerce, at least in China.

Core/Basic Form: Alibaba (Taobao, Tmall), JD – trying to be the everything’s store, the go-to place for shopping

Although they have different business models (record commissions as revenues, record products as inventories and therefore net prices as revenues), they all trying to be the first website that consumers will think of when they want to buy something.

Tencent investments in and supports to JD.com is the direct competition with Alibaba, with some differentiating factors such as specialization in appliances (more quality control, logistics, procurement focus, not just a marketplace to connect buyers and sellers)

When these existing platform is good enough, where are the new opportunities?

Efforts I: To Sell Experiences/Appearances (Influencers)

The idea behind Tencent’s backing for Meilishuo. Mogujie and Meilishuo joined forces together in early 2016, giving them a bigger presence. Mogujie went IPO in December 2018, raising $66.5 million.

But that was only the idea. Selling & buying products is still the main format of user interactions. The difference with the Core/Basic Form is that they list products with prettier models & pics, and with videos/live streaming.

Meanwhile, Xiaohongshu is better at letting users generate authentic experiences and become influencers.

After all, Mogu is where consumers could buy fashion & skincare products with fancy demonstration (my understanding). And Xiaohongshu’s position is where users could share their life/day.

Alibaba led the $300m Series D in Xiaohongshu last May, at ~$3 billion valuation.

With Xiaohongshu’s emphasis on user’s journal/blog (e.g. travel and others, not directly relevant to selling products), it is also more like a social app, for users to build their reputation/followers (and social is where Alibaba is trying to compete with Tencent).

You can’t find an “influencer” on Mogu that is not trying to sell a thing; but many users on Xiaohongshu are not selling anything, while writing their stories, commenting and interacting with other bloggers/influencers.

Effort II: Buying Together, Leveraging Existing Social Network

Tencent’s WeChat has tried to push for the use cases of its Mini-program within WeChat. Pinduoduo might be the most successful one.

By incentivizing users to share with their friends and buy together (at extremely low product prices), Pinduoduo has grown its sales rapidly, currently having a $30+ billion market cap.

Making users as their marketing tools sounds a brilliant idea and is indeed very unique to Tencent. No one else could help to build such a big enterprise within a short period of time. (Alibaba has similarly powerful app such as Alipay but not social – can’t make users part of its marketing)

Plus, through this social marketing strategy, plus the low pricing, Pinduoduo could reach out to the rest of Chinese consumers who use smartphones but not served by existing platforms.

It might be the first time that Tencent could generate revenue on many of its WeChat users.

Effort III: Ads

This is more like what Facebook is doing. Tencent is adding new features and more ads to the Moment feature in WeChat, and also in the Public Accounts’ Feed feature.

While WeChat not directly doing e-commerce, it is leveraging the time users spend on the app to be part of the overall e-commerce economy.

In the time of rising consumer acquisition costs (see a previous post/podcast by a16z on consumer goods), it is becoming a vital part of the overall e-commerce.

Taobao is powerful but probably should not be the first word to describe Chinese retailing and consumers’ choices.

T-mall and JD might be considered as the second generation e-commerce in China, where branded goods are sold.

With the rise of Chinese middle class and their disposable incomes, retailers found that they are willing to pay a little extra to get a sense of some kinds of “premium”.

So there arises a wave of e-commerce efforts that are selective about their offerings, in terms of quality and design. Meanwhile, some marketplace will emphasize on their own brand (website/marketplace), instead of the brands of the products – somewhat similar to “AmazonBasics” but more correctly “AmazonPremium”.

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Yanxuan (网易严选), by NetEase (NASDAQ: NTES), might be the most successful one.

It started with products made by original manufacturers who supply to top international brands, hitting consumers’ sweet spot in price and quality.

Xiaomi has a similar strategy but featuring more of its own products or affiliated products. on Xiaomi Youpin (小米有品), independent of its core Mi Store (小米商城).

Alibaba has its response under Taobao’s name called Taobao Xinxuan (淘宝心选), making Xinxuan its own brand.

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Updated

• From NetEase 2018 Q4 earnings report, we could see its E-commerce net revenues were RMB6,678.7 million (US$971.4 million), an increase of 43.5%
  compared with the fourth quarter of 2017. (Its e-commerce revenue includes Yanxuan and Kaola)
• 2018 full year net revenues from e-commerce were RMB19,235.5 million (US$2,797.7 million), an increase of 64.8% compared to RMB11,670.4 million for fiscal year 2017.
• And Amazon is in talks to merge its China business with NetEase‘s e-commerce site Kaola, ranked as the No.1 cross-border import retail e-commerce platform in China.
• The new e-commerce unit will be as important as gaming to NetEase, with 3 sub-teams: Yanxuan, Kaola and Amazon China. The latter two might combine into one team.
• And Yanxuan has opened it first offline store in Hangzhou last December