Smartkarma Originals

• Korea/Asia, New Economy, IPOs, Events • (Opens in a new window) ⧉

What’s Original?

In this original, we have discussed some of the key aspects highlighted in Kishida’s policy statements along with the current status of these policies and companies that are likely to benefit.

LightStream Research • Japan/Asia Long-Short • (Opens in a new window) ⧉

NFTs, or Non-Fungible Tokens, first leapt into our collective consciousness in March 2021 when Mike Winkelmann, also known as Beeple, sold a digital work of art for USD69.346 million. NFTs are “one-of-a-kind” assets in the digital world that can be bought and sold like any other piece of property, but do not take any tangible form. NFTs are (ostensibly) non-fungible – that is, it cannot be replaced with something else – and are verified and stored using blockchain protocols. 

The most expensive piece of art ever sold by Christie’s was the Salvator Mundi by Leonardo Da Vinci sold for USD450 million in 2017.  Whilst not topping that list, Beeple laid claim to being the third most valuable living artist as measured by auction prices.

In parallel, popular NFT games like the Axie Infinity, Sandbox and Decentraland are increasingly being used to describe what the Metaverse could be like when it reaches a state of maturity.  These “Play to earn” NFT-based games are said to provide an early type of Metaverse like experience where digital scarcity, strategy and gameplay come together to create a game where people enter a shared digital realm and create unique in-game experiences. 

In this SK Original, we provide a primer on the evolving NFT digital market and its possible future iterations within the much hyped Metaverse.  We organise this as follows: 

1. NFT Origins
2. an overview of the major NFT platforms, stakeholders and projects 
3. drawing similarities between NFT and Mobile Gaming Adoption 
4. regulatory landscape 
5. future applications – NFTs across the Metaverse

• Forensic Analyst • (Opens in a new window) ⧉

China’s cybersecurity market growth is set to reaccelerate given increased digitisation of the economy, emphasis on data security, and increase in cybersecurity spending.  While pandemic disruptions had led to an inevitable slowdown in 2020, recent cybersecurity spending trends by corporates and government bodies suggest a cyclical rebound. 

In the First of this Three part SK Originals series, we discuss how China’s Company Accounting Standard No. 14 – Revenue (“CAS No. 14“)’s application and consequent changes in accounting policy could result in material changes to the revenue recognition policy of Venustech Group Inc A (002439 CH), such as changing the timing of revenue recognition and the amount being recognised across the company’s various revenue segments.  

Most Chinese software companies started adopting CAS No. 14 in 2020.  Broadly, the net impact of CAS No. 14 is that recognition of software product revenue shifts from from multiple milestones based on a percentage of delivery completion to the transfer of actual control of the software products to customers, subject to specific terms of contract and management judgement. 

We also discuss the materiality threshold used to identify the listed software companies that have made changes in lieu of CAS No. 14, the key implications, and what this all means for Venustech with reference to industry dynamics, relative valuation, and company fundamentals.

We are constructive on Venustech’s prospects given its market leading position in software products, security operation centers and related services.  At forward P/E of 21.9x and market leading ROE and operating margin relative to peer average, we believe that Venustech is attractively valued. 

• Forensic Analyst • (Opens in a new window) ⧉

SPACs have been around for a long time but the market exploded in 2H20 and 1Q21.  This Original seeks to provide a lot of information surrounding US SPACs, including a SPAC’s lifecycle, various entry points to invest, differences when compared to a traditional IPO, what areas of the market are attracting the most SPAC activity, and emerging structures and changes in the SPAC market.  While these equities are helping a lot of companies get public and lining the pockets of sponsors, SPACs have not historically been good investments.  Lots of investors claimed this time was different, but the last quarter or so may have begun to reveal the same cracks.

Vision Research • President • (Opens in a new window) ⧉

EdTech in Asia has been booming with increase in investor interests over the last two years. While China has seen a faster adoption and development in this space, other countries in Asia are also advancing very rapidly on the back of the pandemic-driven demand. Fueled further by significant investments, particularly from venture capital, the Asia (ex-China) EdTech market has been rapidly expanding. We think there are a lot of positive drivers, including demographic, socio-economic, political, cultural and governmental factors, behind the high growth rate of Asian EdTech and support its encouraging prospects. However, there are also many challenges need to be overcome by the EdTech enterprises so that they can thrive in the long-term.

Outside of China, there are already two unicorns in Asia and both are from India – BYJU’S (1391510D IN) and Unacademy (1434617D IN) and there are some potential newcomers from Southeast Asia striving to make themselves into the list. We believe with further growth in EdTech adoption and the influx of EdTech investments in Asia, there are numerous opportunities for the sector to advance. Besides the two Indian names, we also look into interesting names including Zenius Education (1783734D IJ), XSEED Education (1256190D SP), Cialfo (1432512D SP), Topica Edtech Group (1679740D VN) and Ruangguru (1522782D IJ). We think many of them are poised to become more meaningful players going forward, and serve as important role models for future development of EdTech in the region.

What’s Original?

This Smartkarma Original addresses the latest developments of EdTech industry in Asia (ex-China) and will take experience from China as reference. In particular, its focus will be mostly on South and Southeast Asian countries. We highlight comprehensively the positive trends and driving factors behind the rapid growth of EdTech in Asia and discuss the key challenges. With EdTech development still in a comparatively early stage in the region, the company section of this Original focuses primarily on unlisted names. We look at their background, business model, management team, moats and challenges, financing arrangements and latest developments. We will finish up by looking at the emerging trends which will shape the industry in the medium-term. It is our intention that this Original will be an important reference Insight for the sector with unique coverage of key unlisted EdTech plays in Asia (ex-China).

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

This Original aims to showcase the leading Insurtech companies in the three insurance markets with the highest growth potential in Asia – China, India, and Southeast Asia.

Insurtech companies can be broadly divided into three categories – full-stack Inustech, Insurtech marketplace, and Insurtech enablers. As such, the Original also presents the Insurtech companies based on these categories by showing their company overview, how they leverage tech to do things differently, their product offerings, and financial information (capital raise and valuation in case of no financial information).

The Insurtech companies presented are:

• Full-stack Insurtech: ZhongAn Online (China), Acko (India), SingLife (Singapore)
• Insurtech marketplace: Waterdrop (China), Huize (China), Policybazaar (India), Coverfox (India), Turtlemint (India), PasarPolis (Indonesia), PolicyStreet (Malaysia)
• Insurtech enablers: eBaoTech (China), Turtlemint (India), CXA Group (Singapore)  

By analyzing the key Insurtech companies and their development in these countries/regions, we have further identified the following key trends/themes in the sector:

• In the near future, Insurtech is unlikely a threat to traditional (re)insurers who have also been actively investing in Insurtech themselves.
• Insurtech marketplace is expanding offline and will likely embrace a hybrid model, especially in less developed insurance markets.
• L&H full-stack Insurtech companies are yet to be common in less developed insurance markets.
• Insurtech is going to promote differentiated growth in insurance markets of different maturity.
• “ReInsurtech” is currently still a blind spot.

What is Original?

A deep dive into 12 (mostly private) leading Insurtech companies, under each Insurtech category from China, India, and Southeast Asia, is presented in this Original. Key investment thesis and risks are also developed for each company.  

Based on the company analysis and the broader insurance and Insurtech development in these countries/regions, five key Insurtech trends and themes are further identified. 

• Fintech & EM-focused Analyst • (Opens in a new window) ⧉

The Ethereum Blockchain: First Mover That Transformed the Blockchain

The Ethereum blockchain was launched in 2015 and is built on the decentralised and distributed architecture present in Bitcoin. Ethereum uses smart contracts which can be interconnected to interact with each other and hence create an operational platform.

The significance of the Ethereum platform is that it allows users to build applications running on the blockchain, similar to software running on a computer. Through running smart contracts on Ethereum Virtual Machine (EVM), mass consumption of decentralised apps is made possible.

Given that Ethereum is a decentralised network, clients will have the benefit of control over their data, with no central governing authority. Ethereum is a permission-free, public blockchain platform whereby all transactions recorded on it are visible and accessible by everyone. The blockchain uses a Proof of Work (PoW) consensus mechanism according to which all nodes need to agree on a ledger to access the entries recorded in the network.

The key benefit of Ethereum when compared with other blockchains is that it has a large network which has been tested through years of operation and billions of trading value. For instance, in the early part of 2020, the total value of cryptocurrencies invested in Ethereum smart contracts exceeded US$ 10bn.

However, on the other hand, due to this growing popularity, Ethereum transaction (gas) fees reached a record US$ 23 per transaction in February 2021. Previously, for most of 2020, gas fees were around US$ 2. Although gas fees hit a high of US$ 61.74 in May 2021, transaction fees had declined to reasonable levels in the subsequent month of June 2021 at an average of around US$ 2.15. However, the decline in gas prices is indicative of the decline in demand for Ethereum (the cryptocurrency).

Another key issue is that the growing demand has caused slower processing times whereby processing times are much slower than those of newer blockchains.

Ethereum’s open-ended and open-source nature has led to the creation of numerous dApps on the blockchain. In this report, we will be discussing some dApps which run on the Ethereum blockchain and how each of these have responded to the issues of high transaction fees and slow processing times on the blockchain.

These dApps and the sidechains that have evolved to support greater functionality for them create interesting new possibilities which we believe are currently underappreciated. In particular, we believe investor attention is too focused on what blockchains can currently enable rather than the overall direction in which blockchain technology is evolving. This is because despite the massive media attention on crypto and blockchain, the technology itself remains at the early stages of its development and deployment and thus many of the critical limitations it faces could be solved in time. It is thus more pertinent, we feel, to examine what some of these early dApps are trying to accomplish and some of the future possibilities that they hint at.

LightStream Research • Japan/Asia Long-Short • (Opens in a new window) ⧉

Historically, tea dominated the Asian beverages market, but over the last few years we are seeing a renewed interest in coffee and coffee-based beverages among Asians. Meanwhile, the tea industry is focusing on new products/trends such as bubble tea and fruit-infused tea to counter the threat posed by coffee as well as to provide a growth driver to counteract stagnant demand.

The younger generation favors the bubble tea and fruit tea trends, meaning that teahouses have been a tremendous success over the last four to five years. However, we think bubble tea and fruit tea lack the ability to encourage consumers to make regular purchases, affecting the long-term foot traffic of teahouses. Meanwhile, tea is generally less profitable than coffee. On the other hand, the coffee trend is more long-lasting. It also has the potential to generate superior returns/profitability over the medium/long term.

Nevertheless, there are both good apples and bad apples in both camps (coffee and tea). In this insight, we take a look at a few coffee and tea chains in China, Japan, and South Korea, assessing the long-term investment and business cases for our top picks in those markets.

What’s Original?

In this original, we discuss the value chain, costs of production and global demand and supply conditions in the tea and coffee markets. Additionally, we look at the emerging trends and the unit cost dynamics within tea/coffee chains in Asia, focusing on the three biggest tea/coffee markets in the region (China, Japan and South Korea). Furthermore, we briefly talk about popular tea/coffee chains and highlight the long-term investment and business cases for our top picks in the above markets.

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

This Original aims to identify the key investment opportunities among the listed brokers in the three major East Asian countries – China, Japan, and Korea. 

By looking at the development of the brokerage sectors in these three countries, we observe a general trend where upstart online brokers first compete against the more established brokers based on their cost and technological advantages. This then pushes the more established brokers to either focus on more lucrative wholesale businesses or adopt and invest in tech initiatives in order to stay competitive in the retail market.

After further establishing themselves in the retail market, these upstart online brokers then also diversify and expand into the more lucrative wealth/asset management or even wholesale businesses.  By gauging at which phase the broker is in this cycle, investors can have a good understanding of its future outlook.

In our opinion, Korean brokers currently offer the best value, while the Chinese pure-play online brokers offer the highest growth potential. As such, our pecking order, in terms of investment attractiveness, is Kiwoom Securities (039490 KS), East Money Information Co A (300059 CH), Futu Holdings Ltd (FUTU US), Monex Group Inc (8698 JP) / Huatai Securities Co Ltd (H) (6886 HK).  

What is Original?

In this Original, we look into the competitive landscape of the brokerage sectors in China, Japan, and Korea. 55 listed brokers from these three countries are included in this Original as the company universe for regression analysis. 

Among them, a total of 8 brokers are chosen, with their company profiles separately presented, to further showcase and contrast the impact of competition and technological disruption. Based on this, a pecking order is then developed, both on a country and a company basis.

• EM focused Principal Investments Partner • (Opens in a new window) ⧉