Tag: Business

Aphria: Latest Numbers (Good!) Describe The Current State Of Cannabis

Aphria (NASDAQ: APHA), the company to be merged into Tilray (NASDAQ: TLRY),  with 62% post-merger ownership, just released its earnings for the quarter ended on Nov 30, 2020.

And the numbers are good – net cannabis revenue doubled yoy; adj. EBITDA margin continues to improve.

The stocks in the cannabis industry are cheering it up. In the past 3 month, those stocks are up more than 100%.

More legalization and Cannabis 2.0 products helped the sales.

More impressively, cannabis companies are growing their revenue while controlling the costs.

In the latest quarter (FY21Q2), Aphria grew net revenue by 33% yoy while G&A+sales+marketing+R&D grew by only 17%. Its LTM net revenue grew by 34% yoy (amid covid-19, at least two quarters’ sales impacted) while LTM costs (G&A+sales+marketing+R&D) grew only by 26%.

Canopy Growth (NASDAQ: CGC) is more aggressive in cutting costs. Its costs (G&A+sales+marketing+R&D) in decreased by 24% in 2020 Q3, while the revenue increased by 77% yoy.

Tilray (NASDAQ: TLRY) also cut 40% in those costs in 2020 Q3.

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.

An Update On Jumia: In Coronavirus

Jumia is the probably most famous Africa startup in the past few years and went IPO last year.

I wrote about the potential e-commerce giant in a few blogs before.

On May 13, Jumia reported its 2020 Q1 earnings, which also provides a glimpse into African cities under coronavirus.

Source: Google

The market didn’t react positively after the earnings, but some opportunistic expectations had been built in before.

Although some numbers are not ideal and growth seems lackluster, I would argue in the next blog that Jumia has become a very different company than two years ago.

This post summarizes things that appear to be positive for Jumia, from its Q1 earnings and the shareholder letter in April, among other communications:

  • Partnership with Reckitt Benckiser, a global health products manufacturer selling through Jumia,  is financing free shipping nationwide (8 markets that Jumia operates) on all listed products; Jumia takes 0% commission. -> free marketing / user acquisition that ensures a good first online shopping experience; keep logistics team operate
  • Focusing on contactless delivery options & online payments. -> accelerating JumiaPay adoption when cash is still considered important; building trust, also encouraged by governments
  • Providing affordable basic foods and sanitary essentials. -> shaping perception on online shopping to everyday purchases
  • In South Africa, it launched Jumia platform with an assortment of essential products (Reckitt Benckiser and P&G) that can be delivered despite the lockdown (was selling fashions via Zando which is shut down).
  • Jumia Food pivots to grocery delivery
  • Increased demand from sellers to join the Jumia platform as offline distribution channels are largely disrupted – high-profile brands on Jumia Mall, including Coca-Cola and Nigerian Breweries in Nigeria, PepsiCo and Nivea (Beiersdorf) in Egypt.
  • Launched JumiaPay in Tunisia
  • Consumers can purchase game subscriptions or credit for in-app purchases on the JumiaPay app for popular games
  • Advertising services were available across 9 out of 11 countries, compared with 5 at the end of 2019 – in Q1 run campaigns for high-profile brands including Adidas, L’Oreal, Microsoft, Sensodyne and Mondelez
  • Volumes surged in some markets, such as Morocco and Tunisia, while limited in countries such as South Africa and Nigeria
  • The countries that have been the most severely affected by confinement measures have experienced a gradual volume recovery since mid-April, while the countries that saw a surge in volumes continued to experience robust momentum throughout April. Overall, in terms of items sold, we ended the month of April c.3% above the first week of March levels.
  • The United Nations Development Programme (UNDP) in partnership with Jumia Uganda, have launched an online platform – to enable small and medium enterprises to connect with consumers
    • Jumia will use its infrastructure which includes riders trained to provide safe and contactless deliveries, to provide a platform for the vendors to reach customers who are currently under lockdown.
    • Consumers will have the option of giving feedback on the level of satisfaction of both the product and the service through the Jumia Vendor App.
  • Jumia and Mastercard announced a partnership to incentivize the use of cashless payments platforms – consumers who purchase essential products using their Mastercard on the Jumia platform will receive up to a 10 per cent discount on their order

Things that are implying negative developments:

  • The early signs of the COVID-19 disruption were felt in our cross-border operations as a result of manufacturing facility shutdowns in China. Supply chain disruption in China also impacted our local sellers, many of whom source their goods from China.
  • Different forms of confinement measures have been affecting operations to varying degrees, food delivery business, brief closures of warehouse, sellers’ inability to deliver, etc.
  • Currently expect continued GMV weakness over at least the first half of 2020, with better Order and Annual Active Consumers growth, on a year-over-year basis.

 

to be continued…

Airbnb’s IPO Plan & Capital Allocation

Airbnb did well in the past quarters before 2020 and doesn’t have much concerns for cash. It was one of the most financially healthy startup.

Actually, its full year earnings turned positive as early as 2017, when it generated earnings of about $100m while bookings grew around 150%. It became profitable in the second half of 2016.

In 2018, it made $93 million in profit on $2.6 billion in revenue.

More recently, it took in more than $1 billion in revenue in 2019Q2.

However, Airbnb racked up a $322 million net loss for the nine months through September, down from a $200 million profit a year earlier.

In 2019Q3 alone, Airbnb increased its revenue to $1.65 billion in the third quarter, up almost $400 million from a year earlier, one of the people said. But costs rose faster. Net profit for the quarter was $266 million – less than the $337 million profit for the same period in 2018

All sorts of reports said Airbnb is preparing to go IPO in 2020… until coronavirus hit.

When WSJ reported in Feb, it says Airbnb’s business in China is currently down about 80% compared with last year.

Now as travel industry worldwide is hit, Aribnb total revenue could decline 70-90% and might have cash flow problem.

It now has raised debt and cancelled summer internships.

In early April, Airbnb raised $1 billion in debt and equity from private equity firms Silver Lake and Sixth Street Partners.

Last week, Airbnb raised another $1 billion in debt. Fidelity, T Rowe Price and Blackrock are participating along with Apollo and Oaktree.

While Airbnb should be fine and solvent, how its revenue gonna recover & how to show its growth rate will be an IPO headache.

Occidental Petroleum (3): Sweetened Bid, Carl Icahn

The Sweetened Winning Bid

On May 5, 2019, as part of the financing plan, Occidental entered into an agreement with Total to sell Anadarko’s African assets for for $8.8 billion , contingent on successfully completing the acquisition of Anadarko.

The assets to be sold to Total represent approximately 6% of the expected net production and approximately 7% of the cash flow after capital expenditures of Occidental in 2020 pro forma for the acquisition of Anadarko.

At the same time, Occidental increased the cash portion of its $76-per-share offer to a level that would allow it to make a bid that does not require the approval of its shareholders. Under the new terms, the offer comprises $59 in cash and 0.2934 shares of Occidental common stock per share of Anadarko. (78% Cash and 22% Stock)

This modification (of not requiring a shareholder vote) would become one of the major arguments brought by Carl Icahn later on.

Vicki Hollub, CEO of Occidental, also explains in her letter to Anadarko’s Board,

Our revised proposal does not require an Occidental shareholder vote, which has been repeatedly cited as the explanation for why you previously chose Chevron’s $65 offer over our $76 offer

Plus, the $1 billion breakup fee would be borne by Occidental after the acquisition.

The bidding war didn’t escalate.

On May 9, 2019, Occidental won the battle for Anadarko as Chevron exited bidding.

“Costs and capital discipline always matter,” Mr. Wirth said. “An increased offer would have eroded value to our shareholders.” Shares in Chevron rose 3.1% on Thursday. Occidental’s stock fell 6.4%, while Anadarko’s shares declined 3.2%.

Shareholders’ Discontent & Carl Icahn Coming

Along the bidding process, on the day (April 30) that Occidental secured Berkshire’s money, T. Rowe Price Group, one of the largest shareholders of Occidental Petroleum, says it opposes the energy company’s proposed merger with Anadarko Petroleum.

We think there is significant execution risk with the Anadarko deal and it would increase Occidental’s financial leverage significantly as well.

– John Linehan, manager at T Rowe Price Equity Income fund

On May 3, Bloomberg reported that Carl Icahn had built a small stake in Occidental Petroleum Corp.

Some investors expressed their intention to vote against approving Occidental’s Board.

At Occidental’s annual meeting in Houston on Friday (May 10), a proposal cutting the percentage of shareholders required to call a special meeting (from 25% to 15%) was backed by investors speaking for 60% of the shares voted, in defiance of opposition from Occidental’s board.

On May 30, Carl Icahn sued Occidenta over its acquisition of Anadarko, calling its $38 billion deal to buy Anadarko Petroleum Corp. “fundamentally misguided”.

Icahn argus that the Purchase is a Levered Bet on the Price of Oil, as Occidental’s debt (and debt-like preferred stock) increases from approximately $10 billion to over $45 billion.

The Icahn parties estimate that if the price of oil declines to approximately $45 per barrel or below for an extended period of time, Occidental might be forced to cut the common dividend. The warrants given to Berkshire alone were worth approximately $1.2 billion on the day the preferred deal was announced. And the singular focus to win the Anadarko bid at any cost prevented Occidental from
maximizing value in its sale of Anadarko’s African assets. [Court Document]

However, the complaint was to seek certain books and records relating to the Anadarko acquisition, etc. And eventually, in September 2019, the court ruled in favor of Occidental.

On June 26, in a preliminary copy, Icahn called for a special shareholder meeting where he plans to oust and replace four Occidental directors and change the company’s charter through a stockholder consent solicitation to prevent it from ever engineering a similar takeover again. [Icahn Solicitation Statement – Preliminary] [Icahn Solicitation Statement – Definitive]

On July 22, Icahn published an open letter to Occidental shareholders, four days after the definitive proxy statement was filed.

On August 8, Occidental announced that it has completed the acquisition of Anadarko.

[Icahn’s second and third open letters on August 13 and August 28]

In the third letter, Icahn opposed the two new board members (not in Icahn’s slate) proposed by Occidental.

On November 8, in his fourth open letter,

Earlier this year we owned over 33 million shares of OXY, but recently we reduced the size of our investment.  I still own almost 23 million shares, valued at almost $900 million, but this has become a very risky investment and without changing the incumbent Board and potentially the CEO, and in the absence of accountability for the OxyDarko Disaster, I am very concerned.

We fully intend to run a proxy fight, and if elected, work to right this teetering ship.

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.

Source: Chevron

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.

Berkshire’s Preferreds | Source: WSJ

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.

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.

Source: Jumia Nigiria, Medium

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.

Source: jumia.com.ng

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.

Jumia And Africa E-commerce (4): Citron, Net Merchandize Value

About one month after Jumia’s IPO, the famous short research Citron published a short report.

Their first major short thesis is based on a Confidential Investor Presentation for investors in October 2018, which presents a discrepancy between Jumia’s IPO filing.

    • The active customers & merchants as of 2017 are 2.1 million and 43 thousand in the Confidential Investor Presentation while in the IPO filing are 2.7 million and 53 thousand.
      • no difference in 2018 numbers
      • they might used different definition for “active”
      • another possibility is consolidation calculation – if a user used multiple Jumia services (online shopping, travel, food, etc.), they could have been double counted. In the October 2018 presentation, they might deduct the duplicated accounts

Cirton also emphasized on omitting a metric in IPO – net merchandize value (NMV).  Since GMV doesn’t take into account returns/cancellations, which is ~41% of the GMV in 2017, this could be material in evaluating the business.

Another lever is failed delivery. Taking all these into account, GMV probably is not a very good indicator at this stage of Africa’s e-commerce. This also explains the hight fulfillment expenses. As the infrastructure in Africa improves over time, it could be better.

In Jumia’s IPO documents, it only mentions “in 2018, orders accounting for 14.4% of our GMV were either failed deliveries or returned by our consumers. ”

In the 2019 20-F, it says “we have also experienced a decrease in the rate of cancellations, failed deliveries and returns as a percentage of our GMV from approximately 35% in 2018 to 32% in 2019.”

So around 20.6% of Jumia’s 2018 GMV is cancelled.

Actually, in Jumia’s 2019 Q2 call with analysts, it says “it has identified instances where orders were placed and then subsequently canceled“.

However, when NMV provides an important information about Jumia’s operation, after all its revenue and expenses won’t change.

「News of the Week」Luckin Coffee Fraud

On April 2, the company’s board announced that a preliminary investigation indicates that the “aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2 billion ($314 million).” Luckin’s stock price crashed.

Luckin Coffee Press Release

WSJ – Luckin, Rival to Starbucks in China, Says Employees Fabricated 2019 Sales; Stock Plummets

FT – Luckin Coffee apologises for alleged fraud

TechCrunch – Luckin Coffee’s board initiates investigation into $300M potential fraud

WSJ – Ernst & Young Says It First Found Accounting Issues at Luckin

Dots to connect: more scrutiny for US-listed Chinese companies, investigations into underwriters / lawyers / equity research analysts / auditors, trust issues, the need for Citron & short-sellers, fundamental value of this coffee chain business, internal governance for corporates in China, etc.