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Indian IT Services: Picks and Pans

By | Smartkarma Webinars

In this week’s Smartkarma Webinar, we welcome Insight Provider Wium Malan, CFA to discuss the state of Indian IT Services firms, the impact of COVID-19, and how key companies in the sector have performed since the March 2020 lows.

The webinar will be hosted on Wednesday, 19/August/2020, 5.00pm SGT/HKT.

Wium Malan is a Global Equity Analyst with 13+ years of experience on the Buy-side covering companies in Emerging and Developed markets. He specialises in Fundamental and Quantitative analysis on companies in the Internet, Telecommunication, Media, Technology, IT Services, Healthcare, Pharmaceutical, and other Industrial sectors.

Related Smartkarma Insights

Indian IT Services: COVID-19 Revenue Impact Troughed, Recovery Already Priced In?

Wipro: Net Cash Equal to 24% of Its Market Cap, Deep Value or a Value Trap?

Tata Consultancy Services: Premium at Excessive Levels, Pricing in Overly Optimistic Relative Growth

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Indian E-Commerce Logistics – Shipping Into The Limelight

By | Smartkarma Originals

This is a joint insight with Nitin Mangal

The Indian logistics industry was one of the ‘hot topics’ just a couple of years back pursuant to the revolutionary GST reforms along with the introduction of the E-way bill. It was expected that the entire dynamics of the industry would change due to extinction of various taxes especially octroi, however in reality it was found out that this was just another hype and that the industry still functions more or less the same owing to poor GST implementation per se.

Fast forward to 2019-20, opportunities galore for logistics, but this time it is attributed to the triumph of e-commerce in India. E-commerce in India has already taken-off,  however, it is set to champion the rally in the coming years; with a significant share owing to the emergence of JioMart. Jio’s vision of digitalisation augurs well for the industry, probably being a game-changer. On the back of leading global investors, it is expected that JioMart will turn the tide in the logistics market, quite similar to what witnessed in the telecom market. The market share dynamics would also change, as Amazon and Flipkart which combine to form 90% of the e commerce market, will see their market shares decline. Additionally, the pandemic and new social distancing norms can also turn out to be the icing on the cake.

The primary crux of this insight is to study the Indian logistics sector and to determine the reaction towards expected boom in e-commerce. Currently, the logistics industry has a good mix of established listed players like Blue Dart, private/startups like Delhivery and captive players like ATS, offering a wide range of services across surface, 3PL and e-commerce.

As per our channel checks, we realised that the upcoming e-commerce traction would act as a ‘Santa’ to all the players; since there is no particular player who is a leader across all the services. The pie will be shared by those engaging in surface and 3PL as well, apart from the e-commerce oriented entities. However, the key is that e-commerce services of all the players will take the hot seat, and would represent close to one-third of revenues.

In the battle of public players vs the startups, we presume that the startups have a leading edge, especially due to their already-high specialisation in e-commerce and the ability to get funded regularly. Lastly, our preferred pick among all the players would be E-kart, Delhivery and to some extent, ‘Grab’ in the private space. Among the listed entities, we assume Blue Dart Express (BDE IN) , Mahindra Logistics (MAHLOG IN) and TCI Express to gain a relatively higher advantage.

 

ASA Capital Management • Indian Consumer Analyst • (Opens in a new window) ⧉

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Asian SaaS Stars: Opportunities, Market Outperformance, & Key Challenges

By | Smartkarma Originals

The Asian Software-as-a-Service (SaaS) is a highly fragmented sector filled with numerous innovative companies. Thousands of companies compete in the Asian SaaS sector. In this insight, we have included 105 companies, including 56 public companies and 49 private companies in Asia.

The 56 public companies have a total market cap of $367.2 billion won. The top 10 companies in this list have a total market cap of $298.1 billion won. Among the top-ranked companies, those from India and Australia stand out. India and Australian companies accounted for 8 out of 10 top-ranked companies in this list. We have provided the rankings of these companies on their market cap basis. We have included 6 major countries/regions in Asia including Japan, China, Australia, India, Korea, and Southeast Asia (Singapore, Malaysia, and Thailand).

Keep in mind that although these 56 public companies all provide some sorts of SaaS related products and services, not all of them have a 100% SaaS business model. Rather, for most of these software-related companies, SaaS is becoming a greater portion of their incoming revenues. Among all the public companies, Atlassian Corp (TEAM US) (Australia) is probably the biggest pure-play SaaS company right now with a market cap of US$42.7 billion. The 49 private companies that we have included in this insight tend to be smaller companies but they tend to be more pure-play SaaS providers.

SaaS is becoming more important in companies, our homes, and in our lives due to the accelerating evolution of technology in terms of greater adoption of cloud-based services, smartphones, AI, Big Data, IoT, and increasing programming sophistication that reduces the need for human, manual labor. Adam Smith would be very proud of SaaS today, as massive amounts of global venture capital and start-up funding have tried to accelerate promising SaaS companies as the global competition has forced the very best companies to sprout in this highly competitive market.

In Asia, some of the best companies in the SaaS segment include Atlassian (Australia), After Pay (Australia), Xero (Australia), One Connect (China), Kingdee (China), Kingsoft (China), Douzone Bizon (Korea), Freee KK (Japan), and Rakus (Japan).

The main purpose of this report is as follows:

  • Identify the major players (both public & private) in the highly fragmented SaaS sector in Asia
  • Specify the key trends driving the Asian SaaS industry
  • Provide an initial overview of the key companies in the Asian SaaS industry
  • Highlight the main risks of this industry

 

• Korea, Tech, IPOs, Event-Driven, Small-Caps • (Opens in a new window) ⧉

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Entities 28901-29000

By | Entity Directory
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Chinese Expressways: A Step In The REIT Direction

By | Smartkarma Originals

2020 has been a bumpy journey for Chinese toll roads. China’s State Council first increased the toll-free period over the Chinese New Year to 16 days, up from seven days in a normal year. This was followed by a directive from the Ministry of Transport such that charges for using the toll roads would be waived for users from the 17 February until a later date – an exemption which was finally lifted on the 6 May.

The sector was already being scrutinized after an ETC (E-Toll discount) policy was introduced in July of last year; and a truck toll charge implemented on the 1 January of this year, with respect to toll-by-weight compared to toll-by-vehicle.

Collectively, yield-starved investors have questioned the defensiveness of the sector. Shares are off 22% on average YTD, versus 12% for the HSI.

The New News

On the 30 April, the China Securities Regulatory Commission and the National Development and Reform Commission jointly announced (Chinese-only) a new pilot for Chinese infrastructure real estate investment trusts (or C-REITs), which are ostensibly a mechanism to fund infrastructure projects such highways and airports; and only for such infrastructure which has been operational for three years.  

Details are still to be fully fleshed out, not least how China’s complex tax regime will be addressed. But it is worth exploring which toll road companies may be best suited to being taken private and repackaged as a REIT.


What’s Original?

The CSRC and NDRC’s announcement of a pilot program for public infrastructure REITs opens the door for the potential restructuring of listed toll road companies.

This in-depth insight canvasses the key Chinese toll road operators listed in Hong Kong, and assesses which companies may be targeted for acquisition, from both a financial and regulatory perspective, to spearhead this new policy.

Quiddity Advisors • Pan-Asia Catalysts/Events • (Opens in a new window) ⧉

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Entities 28801-28900

By | Entity Directory
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Short-Sell Strategies – How to Get Teflon Coated?

By | Smartkarma Originals

This insight has been produced jointly by Shifara Samsudeen, ACMA, CGMA ​and Supun Walpola ​at LightStream Research ​

  • In this Smartkarma Original, we provide a guide on short-sell strategies employed by short-sellers to identify, analyse, and subsequently target companies. We also provide our recommendations to companies to prevent, detect, and combat short-sell attacks.
  • We believe companies whose share prices have increased significantly within a short period of time and whose valuations are at significant premiums to their peers become vulnerable for short-sell attacks. The share price of the short-sell targets in our sample increased by 89.2% on average from its 52-week low to the date of release of the short-sell report. The EV/Revenue, EV/OP, P/E, and P/B multiples of the short-sell targets in our sample were at premiums of 241.2%, 37.6%, 42.5%, and 118.7% on average over their peers, respectively.
  • Short sellers also seem to target companies that significantly outperform their peers on operating matrices. Short-sellers imply that such outperformance is due to fabricated results. The OP margin of the short-sell targets in our sample were around 4.5x higher than their peers.
  • It is conventional wisdom that insiders cash-out when they are no longer confident about the prospects of the company. Short sellers try to exploit this idea and are often on the lookout for instances where insiders are continuously cashing out, either by way of selling their stake in the company, or through back door transactions like share pledges, collar transactions, and high levels of compensation.
  • Short-sellers show no mercy when it comes to questionable or complex corporate structures like VIE arrangements either. Short-sellers are of the view that such dubious corporate structures enable companies to round trip revenue and assets to fabricate financial results. Short-sellers are also on the lookout for suspicious M&A transactions with related parties, particularly overvalued asset sales to and undervalued asset purchases from insiders.     
  • When a company fakes revenue or profit at the income statement level, it leads to a fake cash problem, i.e. the company then has to forge significant cash balances to match its inflated profit. Short sellers believe that inflated capex or R&D expenses are helpful tools to burn fake cash as these expenses often do not raise any suspicion if they do not generate instant returns.
  • Short-sellers also seem to target companies and insiders that historically have a bad reputation. We also came across several instances where short-sellers have questioned the track record of auditors, underwriters, and appraisers that were employed by the target companies. Short-sellers also consider frequent auditor changes and audit fees that are either too-high or too-low as red-flags.
  • Short-sellers regularly keep an eye out for companies with weaker corporate governance practices. However, some of the cases that we came across in our research suggest that traditional corporate governance matrices have limited relevance in exposing fraudsters in this day and age. Short-sellers now seem to question the true “independence” of independent directors and are sceptical about companies with high board turnover.
  • A short-seller can identify a plethora of red-flags for a company, but a short-sell attack is seldom successful without any smoking-gun evidence. Therefore, short-sellers often thrive on finding that one key piece of evidence that would make their thesis irrefutable. In most of the cases we looked at, this smoking gun evidence has come in the form of alternative filings, which include the likes of filings with the local regulators, credit reports, and tax filings. Short sellers have often used these alternative filings to reconcile reported financials and in some cases to trace the “true” ownership of assets.
  • We believe recent short-sell reports on Luckin Coffee (LK US) and GSX Techedu (GSX US) raise the bar for modern-day short-sellers. The anonymous short-sell report on Luckin was backed by 11,000+ hours of store traffic video and 25,000+ customer receipts while Grizzly’s short-sell report on GSX Techedu used a variety of alternative data sources such as customer reviews, web traffic, keyword search results and app rankings as smoking-gun evidence.
  • Short-seller attacks have become part of today’s investment world and companies should learn to co-exist with them and more importantly, to defend these attacks, companies should have a plan in place while strengthening their fundamentals and improving corporate disclosures.  
  • In order to prevent short-seller attacks we recommend companies to 1) be honest about any errors and make due restatements to reported financials, 2) adopt conservative accounting practices, 3) avoid providing aggressive earnings guidance, 4) provide detailed disclosures when deviating from accepted accounting standards, 5) avoid withholding or delaying bad news such as product failures, litigation, profit warnings, layoffs, etc. from the market, 6) improve corporate governance measures, 7) and improve company disclosures particularly regarding company acquisitions, divestitures, and capital investments.
  • If a company has always been committed to providing complete disclosures and its shareholders are kept informed about both good and bad news regarding a company, the best way to approach the shorts may be to completely ignore them. However, a company should respond to a short sell attack if the allegations laid out by the shorts were unreasonable or misleading or if it is impacting the company’s valuation.

LightStream Research • Equity Analyst • (Opens in a new window) ⧉

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China Internet Healthcare: Massive Potential Awaits for Further Policy Tailwinds

By | Smartkarma Originals

We are positive on the long term prospects of China internet healthcare industry and expect robust growth outlook, driven by large & fast growing users base, increasing adoption and penetration rate, supported by government favorable policies. However, in the near term, only pharma e-commerce business has a valid monetization model & is proven to have reliable revenue stream for leading players, such as Alibaba Health Information Technology (241 HK) ; While online consultation player Ping An Healthcare and Technology Company Limited (1833 HK) and internet hospital provider WeDoctor are still struggling to find sustainable profit model, due to certain policies limitation & lower paying client conversion, the massive growth potentials are likely unlocked by further policy tailwinds such as online prescription drug sales, insurance reimbursement of online medical services, in our view. 

In the order of stock preference, we prefer Alibaba Health Information Technology (241 HK) with its dominate position in the pharma e-commerce market, distinctive edges in users acquisition from synergies from Alibaba Group (9988 HK); 3) best positioned to benefit robust growth upon the opening of online prescription drugs sales with its integrated business model. With >70% 3-year sales CAGR forecast, our DCF valuation suggests margin of safety of 22%.

With its leading position on online consultation, we believe Ping An Healthcare and Technology Company Limited (1833 HK) will continue to enjoy fast users growth thanks to its supported from Ping An group. Yet, the lower paying client conversation rate & large revenue reliance from Ping An group concerned us. At current level, we believe the street has over priced in the potential policy benefits & growth potential. With ~38% sales CAGR estimates, our DCF valuation reveal potential downside of 30%. 

Our proprietary scorecard rating system also suggests Ali Health stands ahead of peers, with larger MOAT, more comprehensive product & services offerings, higher sales CAGR, better profitability, more efficiency (higher customer acquisition growth, lower acquisition cost), higher productivity. 

• Asia-ex Japan, Senior Healthcare Analyst • (Opens in a new window) ⧉

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China Environment Sector Deep Dive: Solid Waste Treatment

By | Smartkarma Originals

We are positive towards the outlook of China’s solid waste treatment industry and believe the current share price level is a very good entry point, especially after the approval of the revisions in “Solid Waste Pollution Environmental Prevention and Treatment Law of the People’s Republic of China” by National People’s Congress in May which will become effective on 1 Sep. In addition to the Law which will lead to an improved operating landscape of the industry, the increase in waste volume stimulated by urbanisation and e-commerce, growth in waste treatment capability, potential for industry consolidation and favourable financial infrastructure are the factors that presented the industry with tremendous opportunities.

There are still risks including heightened competition due to fragmented industry structure, potential change in on-grid tariff and subsidies and weak power demand due to economic slowdown. However, the depressed valuations of the sector after sustained underperformance offer good value with long-term structural change in the industry, in our view. We rank the five major Hong Kong listed and A-share companies in the sector in the following order: Canvest Environmental Protection Group (1381 HK), China Conch Venture Holdings (586 HK), China Everbright Intl (257 HK), Zhejiang Weiming Environment (603568 CH), and China Everbright Greentech (1257 HK).

What’s Original?

This Smartkarma Original takes a detailed look on the revised “Solid Waste Pollution Environmental Prevention and Treatment Law” and reads on the implications to the major listed waste treatment companies.  In addition to discussions on the revenue and profit drivers of the individual companies, we will also assess the outlook for improvement in returns, and compared the relative valuations of individual companies within the sector based on their P/B vs. ROE and PEG ratios.

Since the waste treatment industry is highly fragmented, we analyse the possibility of consolidation as a potential way to improve sector return levels. Lastly, we will take this opportunity to introduce a leading A-share waste treatment company – Zhejiang Weiming Environment (603568 CH), which has recorded a marvelous share price performance – up 95% over the last three years and 28% YTD.

• China Analyst – Onshore Credit, Equity Long-Short • (Opens in a new window) ⧉

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How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

By | General

Anyone watching financial technology evolve knows it takes two to innovate. Plenty of fintech startups are developing bold, game-changing solutions but distribution and scale remains a problem. That’s where big players come in. 

Digital payments and e-wallets are on the rise in Southeast Asia, with a number of players coming out with their own products, including international and local tech firms as well as established financial institutions.

According to a comprehensive report on Southeast Asia’s digital ecosystem by Google, Temasek, and Bain & Company, digital payments and e-wallets are a fast-growing segment, the market having reached an “inflection point”. 

Digital payments are expected to reach US$1 trillion in gross transaction value (GTV) in 2025, up from US$600 billion in 2019. 

E-wallets are projected to reach US$114 billion that same year, up from US$22 billion in 2019.

“Adoption and usage levels are surging, in line with other Internet economy sectors such as [ride-hailing] and [ecommerce],” the report says.

How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

Source: e-Conomy SEA 2019 report

Several companies have moved to capture this opportunity. Google Asia-Pacific has been active in the region, bringing its Google Pay service of mobile and online payments. The multi-national has been working with local and regional banks such as DBS to integrate its services to existing frameworks. 

It has also developed new solutions from the bottom up to serve specific local needs, like the Tez payment app (now Google Pay) in India.

Collaboration with banks like DBS brings each party’s strengths to the table according to Aman Narain, Google’s Global New Payments Ecosystems Lead. Speaking as part of a fireside chat at Smartkarma’s INSIGHT 2020 digital conference, Aman notes that Google is strong at building ecosystems and developing solutions, while banks are more business-driven, understanding customers and risk. “It helps to have people who have worked in both areas,” Aman adds, himself a “banker-turned-Googler”.

Participating in the same fireside chat, DBS Managing Director & Head of Payments & Platforms, Anthony Seow, concurs. He adds that there needs to be “strategic alignment” between the players, which can help avoid conflicts and serve customers better in the long run.

“When we digitise payments, there’s a lot of opportunities to change the customer journey,” he says. Value-added services like ordering and paying at a food court through a phone create the kind of seamless customer journey the bank envisions. “We’re trying to go after the Uber kind of experience,” he adds.

Money Talks

DBS has its own digital payments app and e-wallet, called PayLah, but it’s also exploring so-called “conversational payments”: integrating payment systems into popular messaging apps, which enables users to send money to their friends or merchants who use the system.

The bank unveiled such a system on Facebook Messenger in 2018, through which users could order and pay through the app in participating restaurants and coffee shops in Singapore. “The point is to be where consumers are, so they can do what they want to do,” Anthony says.

Google Pay in India helps users make peer-to-peer (P2P) payments as well as pay bills and in stores, and has a conversational element built in – which the company is now working to bring to Singapore as well.

How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

Source: Google

“Can payments continue to happen without a conversational [element]? Absolutely,” Aman says. But that element “humanises” payments, he thinks. “Whether interacting with a small business or splitting a bill with friends, it makes everything much more human.

And they’re not the only ones jumping on the opportunity. Facebook is making its own inroads into Asia-Pacific regions. In India, the company just announced it is compliant with national regulations for its WhatsApp Pay product. In Indonesia, along with PayPal, the social networking giant bought a stake in GoJek, the country’s “super-app”, whose most prominent feature outside its ride-hailing service is its GoPay e-wallet.

The region is particularly well-placed for growth in this sector thanks to the confluence of a few different factors, notes Insight Provider Valerie Law in a Smartkarma Original Insight. 

“Credit and debit card penetration rates are low across parts of developing Asia,” she writes. “It is precisely the lack of cashless options that created the opportunity for these new players to provide their e-wallet.”

Read Valerie Law’s full Smartkarma Original Insight: Asian E-Wallets Plant Their Flags: An In-Depth Analysis of the Top-10 Players

The region also has very high smartphone penetration (close to 97 million smartphones were purchased across Southeast Asia in 2019, according to a study by GfK). Many of these companies are focusing on leveraging that volume to grow their market share and build a user base for now rather than making a profit through payments, Valerie notes.

How Big Tech and Banks Work Together to Grow Digital Payments in Southeast Asia

Source: Valerie Law

Cross-border Payments Remain a Challenge

With many payment players trying to go regional, establishing cross-border systems is one of the biggest challenges that both banks and tech firms face. The first step is to establish local solutions, suggests Aman. “I don’t think it’s impossible, but it’s harder to get to cross-border if you don’t have local payments down,” he says.

DBS is expanding its PayLah app out of Singapore but the challenge “is not trivial,” Anthony says. The app is compatible with Singapore’s PayNow online payments protocol, so the bank is exploring similar protocols in other markets to enable cross-border P2P payments. And then there’s the regulatory challenges, such as know-your-customer (KYC) requirements, payment settlement, and so on.

As more financial services are integrated into a digital framework, the COVID-19 crisis will also determine where the needs of consumers and merchants go. 

“Boring” things like being able to open an account and generally reduce friction for consumers are going to be some of the things to keep an eye on, Aman says. Anthony adds that supporting small- and medium-sized businesses in the current climate will be important as the pandemic has impacted transaction volume among other things.

Aman sums up his company’s approach quite nicely: “I think the main thing is to continuously experiment, and that’s something Google is really good at.”

Watch the full INSIGHT 2020 fireside chat with Aman Narain and Anthony Seow, moderated by Smartkarma’s Raghav Kapoor:

Lead image by Mika Baumeister on Unsplash

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