Thursday 20 January 2022

Central Banks tightening means the Tech Industry now has to fight for survival

The tech sell off worldwide is something worth observing. With higher interest rates in the immediate future and central banks balance sheet run offs, investors will now demand that tech companies be profitable, becoming like other traditional companies.

The past decade of cheap money and venture capital success has allowed entrepreneurs to incubate loss-making businesses for probably the longest period ever. However all these are about to change.

Either companies become profitable or they die off

Like all boom and bust cycles, the inefficient and unprofitable ones will be weeded out. This is similar to the dot com boom era where "Mickey Mouse" companies sprang up, had unviable business models, raised capital with alluring stories, CEOs became a poster child and then kaput. We have seen this in the 2000s before and I didn't like the ending 

Of course, there will be survivors who turn out to be dominant forces in the next decade. However, they had a sustainable business model that was scalable to start with. And it seems the likely few are Tesla and Airbnb. (their share prices will follow similar to what Microsoft went through in 2000s)

How to be profitable?

Its simple- either increase your revenue or cut your cost. Netflix is now attempting to increase its revenue by raising its monthly subscription fees in its mature markets. Gone will be the days where there are free shipping for small value purchases, cyber vouchers given out daily and deep discounts (I am referring to what Sea Group and Grab have been doing).

Of course, the other way is to cut cost. Taking Palantir as an example: In its latest quarter, it earned about USD$392 million, however employee expenses made up approximately US$190 million (about 48%). This is a lot higher than the traditional companies where employee costs form less than 20% of revenue. Palantir definitely has to cap its employee expense as it grows; otherwise, Palantir will go bankrupt or have to issue an expensive round of share dilution. Sea Group and Grab too are in this category.

Cost cutting measures will involve to stagnate your tech worker's salaries or trim them. Everyone now knows the best industry to work at is Tech - chief reason the remuneration is good. However, the good times aren't going to last and I expect the Tech workforce to experience trying times soon. 

The era of accommodative monetary policy is gone. Tech companies have to tighten their belts and be profitable, otherwise they will be joining the tech graveyard of the 2000s.

Who are the winners?

Truthfully I want to say it is the China Tech companies. They have built up a profitable model, are sustainable and using their free cash to generate new products and segments. However, they have been hampered by their own government making them less competitive and unable to spread their influence of "Chinese Tech and Innovation" when fighting with regional competitors.

In the era of monetary tightening, they are in my '"winner list" with their profitable business model. Just look at the difference between Tencent Music and Spotify current financial results. Both are leaders in their respective markets and are serving about the same population market size. However Tencent Music is at least 4 times more profitable than Spotify.

Furthermore with China now going the other way of having monetary accommodative policies, they are in a better standing to fight global tech companies. 

If tech workers want to keep their job, working in a Chinese Tech Company is the safest bet.

And the Losers?

I feel the ride hailing and food delivery industries are in a serious problem. Ride hailing is a low margin business and worldwide all ride hailing companies are loss making. It will be difficult for them to be profitable unless they undergo retrenchment and price hikes (the latter  will make them less attractive options to consumers when compared to the cab business).

Food delivery too has the issue of being too cheap to the expense it is negative in profits. The plastic/ Styrofoam used in the Asian markets is very worrying environmentally. However, governments are reluctant to regulate/tax business on this either due to worries of causing loss of jobs or simply angering their voters.

I don't expect many food delivery and ride hailing entities to survive this current cycle of monetary tightening unless central banks turn tail on their current interest rate trajectory.

Saturday 15 January 2022

How Much is Sea Group Worth?

Sea Group is definitely the most talked about (and largest market value) company Singapore has now. It holds valuable brands in Garena, Shopee and SeaMoney (which is fronted by Shopeepay). The growth prospects of this company has been talked a lot with South East Asia and Latin America being its stronghold (amounting to a population size of 1.2 billion)

Currently, the market has valued Sea at USD$97 million. I will be evaluating based on a sum of the parts valuation to determine if it is a worthwhile investment with probability scenarios. 

SeaMoney (Digital Payment)

This is probably the most valuable component of Sea Group. The company is poised to dominate South East Asia (a region with population of about 670 million, growing in numbers and affluence). In my view South East Asia is an upcoming market with better managed governments as opposed to South America and affluence will rise. 

However Sea Group faces a rival in Grab Holdings. Both are now engaged in a cash burning war, with Sea Group having a larger war chest. Sea Group has also been better in execution as compared to Grab with its transaction volume growing faster. It shows its superiority. 

I believe in the end state, the winner of the Fintech will morph to be as valuable as DBS bank (market cap of USD$65 billion). Using probability scenarios, I think there is a 30% probability Sea Group will dominate South East Asia; a 60% probability, it will seek truce with Grab but take a lion share of the digital payment segment here (Market value then will be about USD$30 billion) and 10% chance it will lose to Grab (Residual Value of USD $100 million for brand). The expected probability E(X) will be about USD $40.5 billion value.

E Commerce

Shopee is currently the leader in South East Asia. While it is no doubt leading, I am slightly biased and of the view that Lazada, Alibaba's subsidiary, is gaining grounds in the battlefield. Alibaba is backing Lazada and is using its superior logistics network to help it. To me, it is a 50-50 chance that either Lazada or Shopee will dominate. I will use a probability scenario. But if a tie results, the 2 will be of equal standing.

This is because while Sea Group has a war chest to support Shopee, Alibaba has sustainable cash generating subsidiaries to support Lazada in its bid to become a South East Asia e- commerce giant with 100 billion GMV. 

The battle for e commerce is much tougher than Digital Payments, hence Sea Group will not win easily. I am pricing a win scenario of 10%, draw scenario of 80% and loss scenario of 10%. Lazada wont back down that easily because Alibaba is now desperate to find a new segment given China has turned its back on them. A win scenario will mean Shopee carries a value of USD $12 billion (assuming a PE of 20 times (no visible standalone comparable in the stock market) on a NPM of 3% (based on Amazon commerce results) of USD$200 billion in gross merchandise value/ $20 billion revenue. In a draw game, it will be worth USD$6 billion and $100 million in a loss scenario.

The expected probability E(X) will be about USD$6 billion value.

Digital Entertainment/Games

Its subsidiary, Garena has cemented its position in SEA and South America. It is earning about USD$1 billion profits annually and will likely to double as time passes. Ascribing a 20 times PE because I think there will be some room for further growth, this segment is worth USD$20 billion.

Sea Group's Financial Strength

Sea's financial strength lies in two areas: firstly it has a huge War chest of USD$12.5 billion to fight in its Digital Payment and E commerce battlefronts. Secondly, it has Garena's profits to subsidize its losses. In current situation, despite Garena's immense profitability, Sea Group has been reporting billion in losses each year and burning that much in cash. They are fighting Grab and Lazada on both fronts and hoping their competitors eventually run out of cash. Unfortunately, this is going to be a tough fight as the other 2 are also well funded.

Valuation Of Sea

All in all, I think Sea has an eventual value of USD$66 billion. However, this value will fluctuate as the developments in each of its 3 segments progresses. Should it become clear that Sea is losing out either in the Digital Payment or E commerce segment, its US$66 billion valuation will fall a lot. Personally, I would prefer a 20% discount on the final value for uncertainties, that will put it at about US$55 billion.

Until we see Sea Group dominating in one of the above segments, an upside re rating is unlikely. I expect Sea Group to move lower to the $110 mark until it becomes a winner. Any hint of it being a loser in one of the segments will see the share price dropping below $100.

Sunday 9 January 2022

How Much is Grab Holding Worth?

Initially, I had planned to wait for Grab to report it's full year financial results. However my prediction is that the narrative then will be similar to now - "Yes we are now loss making and cash burning in all segments, but we will turn around soon."

Investing in Grab involves a lot of prediction that with (i) scale and (ii) it defeats its competitors, it will become profitable.

Can We Trust the Narrative?

Judging from the need to scale, I don't think Grab can be massively profitable just by growing revenue. It is difficult to achieve this feat with only South East Asia as your base. Venturing into China and India, you will fight the incumbents who are well entrenched and some have profitable, cash generating subsidiaries.

Alternatively, if Grab wants to be profitable with just only SEA, it could turn to cost cutting measures such as reducing the commission/incentives paid to freelance workers or cut corporate cost. Not a palatable option but it will right the ship.

To find the value of Grab, it is important to evaluate the future of the main segments it has business in.

Peering into the Crystal Ball

Let's look at these main segments.

Digital banking/Fintech:

This is the most promising segment. Relying on the draw of users from it's food delivery and mobility segment, Grab hopes it can build a Super app where users will use it's lucrative financial services. Essentially the other 2 segments work as customer acquisition units to draw users to eventually use its high margin financial services.

It's a good strategy and revolves around a Winner-takes-all strategy in South East Asia; however Sea group is its competitor in this segment. Personally I feel Sea Group is better funded because it has a profitable arm in Garena to subsidize losses (its game unit is earning USD $530 million per year) and Shopee to acquire the customers. Unless Garena turns out to be a fraud, I don't think Sea Group will lose this battle and will become the no 1 in South East Asia. Secondly, Sea Group has a US$12.5 billion cash chest while Grab only has US$8 billion (post Grab IPO).

Using probability scenarios, I assume a 10% probability Grab wins against Sea in the digital bank segment (putting Grab's segment at DBS's value of USD$65 billion), 60% probability both will agree to harmony and Grab will be the smaller player earning only about US$100 million of annual profits (Grab's market value of USD $3 billion then). I doubt as the smaller player it will be able to earn even UOB's level of profits because South East Asia is too small. It will be around Hong Leong's Finance level of USD$50 million. Lastly, there is a 30% chance that Sea Group will win (Grab's market value of USD $100 million for residual). The expected probability E(X) will be about USD $8.4 billion value.

Food Delivery:

Delivery Hero (Food Panda) is a tough competitor in South East Asia's space and has been fighting on the same strategy of burning cash and making losses. I expect Grab to use the same strategy as well, continuously burning cash to fight competitors. Leaving this market segment is a good option, however if Grab does it, a significant amount of users will be lost and it loses its ability to build a Superapp (the product). In a sense, the food delivery arm is like the marketing arm, a cost center to burn cash but to acquire users to use its product. Delivery hero is a weaker competitor than Sea due to balance sheet weakness. Hence, it is likely grab can eke out a USD 200 million annual profit long term. This puts Grab business at a 20x P/E of USD $4 billion.


I doubt it will ever be profitable. It is a loss making segment to draw users and will likely only break even on accounting basis with positive numbers only reported at EBITDA level. Uber uses the same strategy- low margin ride hailing to attract users to use other product offerings. Secondly, if grab prices its mobility offerings too high, it runs into Comfortdelgro pricing and CDG has cash cow businesses and will be able to keep to its current prices. I have compared CDG ride hailing app prices vs Grab and notice Grab tends to be cheaper by $2-$3 at most times.

Hence I will ascribe this segment as an accounting profit segment of zero with no value.

Valuation of Grab

Based on the above, Grab's value should be USD$12.4 billion.

To be honest, Grab is too hard to value because it has been loss making (accumulated more than US$11 billion in losses in its 9 years history) and doesn't show any signs of profitability in its quarterly results yet unlike Tencent Music, Palantir, Spotify or Netflix.

It is still based on a winner-takes-all strategy but it has a final boss level in Sea Group and a first boss to fight in Delivery Hero. Mobility is difficult to earn because if it raises prices too high, it infringes into the profitable taxi companies of South East Asia and will lose market share to them.

Stock analysts tend to value such companies on a Price to Sales ratio which I find is a bull shit metric. If your sales continue to bring negative margin, there isn't a P/S ratio to value, except zero.

Based on the latest SEC filing, post Temasek and its band of investors investing, Grab will have close to US$8 billion in cash and equity of US$9.1 billion to outmaneuver its rivals. To me this is not impressive because Sea Group has a larger cash warchest and only in 2025, will its convertible bonds be due. Its important to watch in 2022, who burns their cash faster.

Sea Group in its Way and Motivation for SEA Domination

In terms of the war for South East Asia dominance, Sea Group has more "troops" and it knows when 2025 comes, it will be at a stage where convertible bond holders will either redeem their bonds in cash or at a share price of US$90 or US$477. It has to justify its current sky high valuation by dominating South East Asia as promised. Otherwise, it will run into cash calls and have to dilute existing Sea shareholders. (An interesting fact is Forrest Li owns a larger proportion of Sea Group shares (25%) than all of Grab's executives and Directors combined have in Grab; indicating he has more skin in the game). Given how Sea executives' wealth are tied to the rise and fall of Sea's share price, they are likely more motivated for domination here.

Sea Group does have some urgency to kill off Grab, hence why I had priced in a much higher probability that Sea will be the winner in digital banking. Grab's advantage is that it has Temasek Holdings backing it but I am unsure how much more cash will Temasek inject into it (my estimate is USD $5 billion at best as Temasek is unable to concentrate its holdings too much).

Sea Group could venture beyond South East Asia to continue its growth story while living with Grab as two leading giants In SEA but it is an unbelievable story as the surrounding Asian countries have incumbents who have bigger cash balances and are well funded. Its easier to be the leader in this region here than going for Asia conquest.

Grab's Fair Value

At worse, Grab is worth its current book value (USD $9.1 billion). Alternatively, we can estimate its value post 2025 after the war; probability wise, it puts Grab at USD$12.4 billion. Share price wise it will be at the range of $2.25 to $3.10 currently. However, should Grab successfully defeat Sea Group in South East Asia, Grab will be worth a fortune and can fetch a USD $70 billion value ($17.50 per share). This is a giant killing act.

Saturday 8 January 2022

What I am looking to invest in 2022

First up, an update on my current portfolio. In 2021, I have added Alibaba, Tencent Music. Chinese Banks etc. I have increased the proportion of my portfolio for China State Banks. My view is that the market has overestimated the extent of the bad debt these banks are not declaring or that they may be none at all. As a result, they are sporting a high dividend yield which is also a consistent dividend amount they have been giving out. Others include the China Oil majors. 

In Growth stocks, there is one in Palantir that I believe will start to be profitable starting from this year. My view is that it will eventually become a 2 billion profit generator company and at a valuation of 40 billion, it will be a fair price. 

In terms of China weightage, I am at about 70% but spread across many industries of banking, e-commerce, music streaming, oil & refining, utilities and food produce (in the form of Willmar). The entire portfolio has a dividend yield of 2.3%, but this is skewed as the top 3 of my portfolio do not give dividends

Singapore Reopening Theme

As Singapore starts to reopen, there are 3 sectors I am looking at- tourism, transport and property/construction. "Tourism", I am looking at SATS but I am unsure if the upside is worth the risk because it seems the market has priced it at reopening levels, assuming returns to normalcy with a yield of 17 cents annual dividend; at $3.90, the dividend yield is already below 5%

Among the "Transport", it is a choice between ComfortDelgro (CDG) and Grab. Both look set to benefit with Singapore opening to tourism and foreigners which translates to more rides demanded especially from airport to other locations. I chose CDG as it has other profitable arms in Vicom, SBS Transit, driving schools. 

The change in CDG Taxi CEO in my view is a positive because the previous CEO had performed badly in the face of competition from Grab and Gojek. The pricing of CDG's ride hailing app has been dismal where it is priced higher than Grab, despite CDG taxi model already profiting from drivers renting their taxis. If CDG could tweak its pricing correctly for its ride hailing app and given that its meter fares for street hailing is presently priced cheaper than ride hailing fares, CDG has the potential to take back a significant market share from these tech unicorns. CDG's other subsidiaries will also grow their profits back under the reopening theme. With the conglomerate still profitable and has a good dividend policy, I see it as a good stock to buy for now. I presume CDG will return to its 9-10 cents dividends dished out, which indicates a future yield of 6.6% at current prices.

"Property/Construction"- Public sector projects are being dished out and more foreigners are now able to enter for work with freedom to travel for short trips on VTL This leads to increased housing demand. Enough said. Companies I am looking at are KSH, Hock Lian Seng and Oxley. Boustead Singapore is another I am looking at having divested from it recently. Yongnam, while it is one of Singapore's largest steel strutting/construction company, is a no-go to me. They are bidding for projects below cost and are in a real danger of folding as evident by their balance sheet and cash burning ways.

Beyond Singapore

I am still looking at Chinese bank stocks mainly the big 4 of ICBC, CCB, ABC and BOC. However, further investments in them is not guaranteed. Yangzijiang and Tianjin Pharmaceutical are other companies that have attracted my interest due to its high dividends and strong business profits. The 3 china oil majors are also candidates

I don't see much value in many companies outside of these 2 countries.

Saturday 1 January 2022

Best World Management Unfriendly Actions to take Advantage of Minority Shareholders

This post is to highlight the shareholder unfriendliness of Best World (BW) Management to its public shareholders. It bears no form of accusations or slander to its management. 

On 31 December 2021, Best World has offered $1.36 as an equal access scheme where it will buy 10% of its share base. It is built off its equal access scheme which I note has a clause:

2. The purchase price to be paid for the Shares pursuant to
the purchases or acquisitions of the Shares must not exceed:
(a) in the case of a Market Purchase, one hundred and five per cent. (105%) of the Average Closing Price (as
defined hereinafter); and
(b) in the case of an Off-Market Purchase pursuant to an equal access scheme, one hundred and twenty per cent (120%) of the Average Closing Price (as defined hereinafter). (i) “Average Closing Price” means the average of the closing market prices of the Shares over the last five (5) Market Days on which transactions in the Shares were recorded immediately preceding the date of the Market Purchase by the Company or, as the case may be, the date of the making of the offer

Singapore Business Environment is unfriendly to Public Shareholders 

What got me interested was the wording of "must not exceed" and "last five (5) Market Days". The average closing price of BW over its last 5 market days was $1.712.

The company opted to low ball its minority shareholders with an offer at $1.36 which is lowest closing price. This is 80% of the average closing price for 5 days. Do note in the clause which was passed, it mentioned it must not exceed 120% but did not mention how low the price could go. In this episode, the management of BW took advantage of minority shareholders who are unable to realize the value of their shares because the company is suspended under the laws of Singapore regulators which the management has failed to meet.

As investors in Singapore listed companies, it is important for us to read the clauses in share buybacks and other schemes that are tabled in motions of AGM, it seems that a few Singapore companies are taking advantage of the public shareholders via many forms of actions in recent years. 

As the shareholders had passed the motion which has a cap on the high side, but not the downside, the management took advantage of this and tried to offer a very low price. The company could have in fact offered to buy back the shares at $0.01 per share and it would not run afoul of technicalities. However, the independent directors of BW would have been in for severe questioning.

Were the Independent Directors (ID) of BW truly acting for minority shareholders in this episode?

In my opinion, the IDs of BW were doing very little for minority shareholders if they were consulted of the management actions on 31 December 2021. BW is a company which has cash balance of $380 million with little liabilities and generated $160 million in operating activities for a year. The company could well afford to offer $1.712 or even 120% (at $2.054) to its existing shareholders.

The fact that the company had the financial capabilities to do a buyback from its existing shareholders but didn't want to share the cash balance with them (and likely had the IDs blessings) shows the unfriendliness of the management and the IDs' actions.

BW will continue to remain suspended as it encounters difficulty to be lifted from suspension because it has run foul of SGX regulatory monitoring. In the meantime, shareholders are stuck with a low ball offer and no dividends while the majority shareholders, who are the executives of the company, will earn mutli-million dollar salaries (in the excess of $10 million) for its strong profits; these are all approved by the board of directors comprising of the IDs. It is likely until Singapore regulators step in to intervene with the two Doras (co-chairwomen), the public minority shareholders will be on the short end of the stick.