Tag: Business

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.

---

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”.

---

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.

---

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

The European aerospace group said it had made the “painful” decision to stop making A380 after Emirates, the biggest customer, reduced an outstanding order for 53 planes to only 14. [The Guardian]

Airbus announcement on February 14 – capital market liked it.

A History

A380 is the world’s largest passenger airliner, a wide-body aircraft manufactured by Airbus. The project was announced in 1990 to challenge the dominance of the Boeing 747.

Boeing’s 747 project had its origin in a US Air Force requirement for a large heavy-lift transport carrying up to 750 troops over long distances. Losing that contract, however, made Boeing to pursue it in high-capacity commercial jet transportation. [Air Force One, the presidential aircraft version of the 747 will be modified based on 747-8; Boeing received the contract in July 2018 – a $3.9 billion contract to build two, due to be delivered by December 2024]

Boeing’s board of directors decided to launch the 747 in March 1966, making its decision public in April, along with an announcement that Pan Am had placed its first order for 25 at $20 million each. First flown commercially in 1970 with Pan American Airways, the 747 held the passenger capacity record for 37 years.

Conceived as a response to the Boeing 747, the Airbus A380 development program was officially launched in June 1994. It is the largest jet airliner ever built and is the world’s first double-deck passenger aircraft. First flight took place from Toulouse, France on 27 April 2005, A380 completed its first commercial with Singapore Airlines on October 25th 2007 with 471 passengers on board (breaking 747’s record).

Commercial Success?

A380 took the realm and record in terms of manufacturing and engineering, but is often considered an unsuccessful commercial product. As of January, Airbus had received 313 firm orders for the passenger version of the plane, of which 234 had been delivered.

But its target was to sell 700 in total. The whole programme is thought to have cost $25bn (£19.4bn). [BBC]

Consumers like A380 but not airlines do not

The average price of Boeing’s 747-8 as of January 2018 is at $402.9 million and $403.6 million for the passenger and freighter version respectively. The current list price is up 4% at $418-419 million.

The average list price of the Airbus A380 is 10% more expansive, based on its 2018 average list price of $445.6 million.

Common concerns and considerations…

• too large, hard to fill and thus inefficient
• high fuel prices, high operating cost and environmental concerns
• airlines looking at Boeing’s new family of 777s

Now, the world’s largest passenger airliner will not be produced after 2021.

The Economics

The rising global demand in the 21st century is the underlying theme, especially the rapidly rising number of air travelers in the Asia and Middle East market.

The center of Airbus’ pitch for the A380 in the early 2000s was the notion that the core of the long haul business model would be so-called hub-to-hub flights. [AirwaysMag]

On the other hand, Boeing is pursing the point-to-point (more accurately hub-to-spoke) thesis.

Boeing’s 777X, specifically the larger 777-9X variant, offers similar performance (the A380 can fly slightly further) to the A380. And pretty much every other carrier with a hub network large enough to support an A380 has ordered either the Boeing 777X or the Airbus A350. [AirwaysMag]

The airline industry is planned and started as fragmented. Then comes bankruptcy and consolidation.

And airlines are also sharing world hubs or exploring second/third tier cities. (it’s not common for a single airline to secure the majority share of an international traffic hub – which would make A380 a wise choice/investment)

Airbus may have bet that countries like China and India will have large demand centered around one or two cities. But the reality is the opposite. They have planned ahead to spread out and made several international hubs.

First tier airports/cities in terms of size will add new members to its list. That’s how the predicted increase in demand mostly absorbed.