personal_noteS – Page 8

China’s housing market (1) [WIP]

Urbanization and population

According to the World Bank, China’s urban population percentage increased from 36% in 2000 to 60% in 2019, or around 843 million[1]. Two largest cities in China, Shanghai and Beijing, have 24.3 million and 21.5 million residents respectively in 2019 (Exhibit 1).

in millions	2000	2005	2010	2015	2019
Beijing	13.64	15.38	19.62	21.71	21.54
Shanghai	16.09	18.90	23.03	24.15	24.28

Exhibit 1. Beijing and Shanghai residents growth over the past two decades

While the definition for a “resident” is to live for more than 6 month of a given year, two other metrics are “Hukou” and “actual population served / managed” – Hukou, the most conservative one, is a concept dated back to ancient China while the latter is newly disclosed. In 2019, measured by actual population served / managed, Guangzhou has over 22 million, Shenzhen has over 22 million[2], Chengdu has over 21 million[3]. Meanwhile, their official residents in 2019 are 15.3, 13.4 and 16.6 million respectively.

While Hukou population for Shenzhen is only around 5 million, the actual population is 4 times more. The gap seems to be a good proof for Shenzhen’s fast growth over the past few decades, and also implies an outsized demand for future home buying. As further discussed below, Hukou (or certain years of social security tax) has become the prerequisite to buy homes in certain large cities such as Shenzhen. Therefore, fundamentally, the long-term increase in buying pressure is from 1) among the actual population, those who would like to stay in Shenzhen, obtain Shenzhen Hukou and buy homes, 2) the constant increase in actual population managed / served, as Shenzhen continues to attract businesses and provides high-quality jobs.

[1] https://data.worldbank.org/indicator/SP.URB.TOTL?end=2019&locations=CN&start=2000

[2] https://www.thepaper.cn/newsDetail_forward_7843440 (Chinese)

[3] https://m.bjnews.com.cn/detail/159193229415528.html (Chinese)

Current State of Covid

I found this graph a good illustration of what has been happening in the past year – “Zoom” vs. “Vaccine” on Google Trends.

Meanwhile, trend only illustrates new changes – “zoom” has permanently entered people’s life although the number of searches for it lowers overtime.

Rule of 40 & Valuation

For SaaS companies, rule of 40 is a quick back-of-the-envelope calculation, to measure the healthiness of the business.

Score = top-line growth + bottom-line margin

Score of 40 or above is good – e.g. a business grows at 40% with 0% adj. ebitda margin.

The valuation for those businesses, which usually starts at 10x revenue, is assuming a maturity stage of 0% growth and 40% profitability.

10x revenue @40% profit margin = 25x P/E

8x revenue @40% profit margin = 20x P/E

DoorDash Beyond Pandemic

Back in January, I wrote about how DoorDash could be valued at $60bn, with solid earnings (in the future).

While I question the near-term growth beyond $60bn, today’s earnings obviously doesn’t help.

Its stock drops more than 10% after-market.

Two things that the market seems to be too optimistic about:

1/ GOV and revenue growth – won’t be amazing

While it’s amazing that DoorDash GOV grew more than 200% in 2020, its forecast for 2021 is conservative: $30bn to $33bn, or 28% growth at the middle point.

Given Q4 GOV is ~$8.2bn, it’s basically forecasting minimal sequential growth. (lower in Q3/Q3 and higher in Q1/Q4, considering seasonality)

Our outlook anticipates the successful rollout of COVID-19 vaccines, among other things. Though we cannot predict the short or long-term effects this will have on consumer behavior, our guidance assumes it creates headwinds to growth in total orders and average order values. We caution investors that the outlook for 2021 remains highly uncertain, and consumer behavior could deviate from the expectations included in our guidance. Our guidance also assumes that the timing of scaled vaccinations will coincide with our seasonally softer Q2 and Q3 periods. Consequently, our forecast assumes increasing consumer churn, reduced order frequency at the cohort level, and slightly smaller average order values beginning in Q2. Because of this, our full year 2021 guidance assumes Marketplace GOV in Q2 and Q3 will be below the levels we expect in Q1.

2/ Profits – won’t be amazing

While DoorDash posted ~10% adj. EBITDA margin for the past three quarters, it may not be able to do so in 2021.

Considering $86 million adj. EBITDA in 2020 Q3, the forecast of $0-200 million for FY2021 seems lower than what investors were expecting.

That being said, to maintain a healthy ecosystem and to withstand the normalization of life, DoorDash needs to put extra efforts in retaining users and Dashers, and business partners. And it can and will invest more in acquiring talents.

Even 2021 GOV is $30-33bn, it will diversify (more heathy/stable demand), growing outside of the food delivery business. In 2023, this number can still go to $50 billion (say 2 billion orders x $25 per order), growing at over 25%.

And on the subscription front,

While DashPass orders carry a below-average Take Rate, the average DashPass subscriber orders more frequently and stays on the platform longer than the average non-subscriber.

DoorDash is playing the long game and the business is here to stay.

Be patient.

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

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.

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.

Clubhouse Revenue (?)

Clubhouse is a $1 billion business with 2 million weekly active users (as of Jan 2021).

Despite the exploding user count, it appears to have zero revenue now.

Clubhouse mentioned three business model: tipping, tickets and subscriptions (therefore, no ads – good!).

1/ tipping – it’s an established model in Asia but don’t think it will work well in the US. If rolled out, it will be on a smaller scale and shouldn’t be the main source of revenue, unless it incorporates cryptocurrencies like Dogecoin!

2/ tickets – I think this can work but it’s not sexy. It makes the app more “administrative” and ordinary. Also, eventbrite works well with some 2.5%+ fees.

3/ subscriptions – this sounds interesting and may leapfrog podcast subscription model. Another layer of curation can be added, which Clubhouse might have been working on).

Clubhouse may also think about adding features to be more relevant on a daily basis, than monetizing the app right now.

Spotify management should be worried.

Social medias should be worried too.