Smartkarma Originals

A joint report by LightStream Research & Henry Kwon

Ride hailers pitch themselves to investors and regulators as disruptive P2P technology platforms which serve to link passengers with both commercially licensed and unlicensed vehicles using mobile apps.  These services closely resemble services offered by dispatchers in the taxi dispatch service segment.  However, because ride hailers are free from fixed fare and fleet size limitations imposed on the taxi industry in virtually all jurisdictions around the world, they have been able to utilise surge pricing to dramatically reduce the response time to customers at peak hours.  During non-peak times, ride hailers tend to undercut traditional taxi pricing and, in our view, these two factors have provided greatest growth drivers for ride hailers over the past several years.

In our report conducted jointly by Henry Kwon and Lightstream Research for Smartkarma, we have analysed a large variety of markets in North America, Latin America, Europe, Asia (East, SouthEast and South), the Middle East and Africa to attempt to discern the characteristics which will determine the long-term winners in this industry and understand their true nature as businesses. As part of this process, we interviewed the dominant ride-hailing application in Sri Lanka (where many of the LSR team are based). The company, known as PickMe is unusual in that it is profitable at the EBITDA margin despite being constrained to an extremely small market with very low ASPs. By conducting this detailed research, we identified the following broad patterns in the ride-hailing markets around the world:

1. Ride hailers display all the characteristics of traditional taxi dispatch services with added scalability at peak times through surge pricing, which dramatically reduces response time to get to customers. Traditional taxi operators are legally prevented from increasing fleet size and their fares are strictly regulated.  This is what taxi operators around the world have been complaining about as the “unlevel playing field” against ride hailers.
2. Technological entry barriers are low. This is attested to by the sheer number of successful local ride-hailing apps in operation in virtually all nations and certainly in all regions that we have examined.
3. Regulations are evolving to place ride hailers under closer scrutiny by all jurisdictions based on concerns over public safety and congestion, given early indications in the U.S. municipalities highly suggest that ride hailers add to, rather than take away from, urban traffic congestion.
4. While the question of drivers’ employment status has been addressed in only a few jurisdictions, some key ride-hailing markets such as NY, London, and California are moving towards either wage or status definition.
5. Finally, empirical evidence based on academic studies in the U.S. suggest that 91% of ride-hailing users have not switched their vehicle ownership practices so the argument put forth by ride hailers about car ownership being a thing of the past should be seen as long term mission statement at best, not realisable guidance over the next several years.

The question of whether ride hailers are taxis, private hire vehicles or P2P technology platforms, are in the process of being worked out by each jurisdiction that we have analysed, each with its own set of priorities (traffic congestion, public safety and/or service quality).  In the end, we believe that ride hailers will come to be regulated one way or another just as the taxi industry was placed under regulation in the early part of the 20^th century in the U.S. that closely resembles the current moves to regulate ride hailers. This means that ride hailers will have to pay taxes, answer to any pricing/licensing/fleet size regulations that authorities may impose based on their perception of ride hailers’ role in public welfare, and as NYC and London are imposing, certain wage and quasi-employee status requirements will have to be met.  This is likely to result in long term cost pressures for ride hailers that may not be reflected in current consensus analyst forecasts, despite disclaimers from both Uber and Lyft that increased regulations will likely lead to higher cost pressures and/or the need to increase their prices.

Current equity market valuations have likely priced in these factors based on the post-IPO price performances of Uber (UBER US) and Lyft Inc (LYFT US), but the notion that ride hailers are taxi companies may not have sunk in completely, and it is this risk that we believe investors should keep in mind.  Based on our observations, we further believe that localized EM ride hailers are better positioned competitively against developed market players based on business model sustainability.

We favour the emerging markets partly because we believe local knowledge is a key competitive advantage that has been demonstrated repeatedly, mostly through instances of local players beating out global major Uber and forcing its exit. Consumer customs are key to attracting riders and examples of their importance include Didi offering e-cashback rewards whereas Uber offered its standard discounts for fees, early offerings of three and two-wheeled options by local operators around South and South East Asia whereas Uber was slow to offer these same services, and Ola offering the booking of rides and information updates through SMS for India where smartphone penetration is lower than many other regions.

This need for localisation allows emerging market players to more than offset potential scale advantages generated by players like Uber on the cost side, particularly on server fees due to volume purchasing. Emerging markets also typically have an under-developed public transport system and taxi operators. As such, the overall competitive situation is less intense even if market sizes can be much smaller and penetration rates could be difficult to raise quickly with lower-income customers. In addition to reduced competition, the situation also typically makes regulators more welcoming of these services in order to address transport infrastructure deficiencies. The national loyalty and pride in a locally sourced “tech” company should also not be underestimated.

This situation potentially can allow these operators, not to displace incumbents, because they barely exist, but instead to focus on developing their ecosystem and build out the services already available in developed markets with lower up-front costs while also creating moderately well-paying jobs. The extension into other services such as food delivery may be similar to developed markets but financial services are an area where there is again often no incumbent to replace due to low levels of banking and loan penetration. Taxi operators in these regions typically do not have a real empire to protect and are more likely to be enticed by the potential to grow the pie than by the idea of defending their share of it.

For all these reasons we believe this industry is likely to generate the most value in emerging markets rather than in developed ones. In a nutshell, we believe the true change in economics that these models bring are not so much in running costs but in up-front costs (no need to invest in a massive taxi fleet, safety can be complemented with tracking rather than just background checks and driver screening and professionalism can be maintained through ratings rather than expensive training and reinforcement). As such we view them as poor versions of disruptive tech companies but as potentially very attractive tech companies if their role is to accelerate development (although valuations may or may not be justified).

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

Since its emergence as the technology underpinning Bitcoin over a decade ago, blockchain has captured the imagination of technologists, investors and charlatans in roughly equal measure. Blockchain has been portrayed by its advocates as the solution to some of the most fundamental challenges facing modern-day society including free and fair elections, the protection of identity records and title deeds, supply chain integrity and, of course, enabling all manner of exotic cryptocurrencies. Little wonder then that we experienced a wave of blockchain mania which coincided with a similar level of cryptocurrency mania in late 2017. During that time, companies were adding “Blockchain” to their names and seeing their share prices soar by many multiples within weeks. Just as the crypto bubble burst in early 2018, so too did the blockchain bubble. Share prices of so-called blockchain companies collapsed just as quickly as they had risen. Testifying before a US senate committee in October 2018, professor of economics Nouriel Roubini was scathing in his criticism of blockchain referring to it as  “The most over-hyped technology ever, no better than a spreadsheet/database”.

 Now, as the dust settles and the mania fades, we witness the emergence of a new class of enterprise-grade blockchain implementations led by the likes Hyperledger, Corda and various customisations of Ethereum. While the blockchain technologies supporting the likes of Bitcoin and Ethereum are public in so far as the data they contain is accessible by anybody who wishes to view it, these enterprise blockchain implementations are private, a necessary prerequisite for their potential deployment at major corporations and financial institutions. This distinction, along with a number of other important differences, means that enterprise blockchain represents a significant departure from the original public blockchain concept.

Today, enterprise blockchain is being deployed to tackle challenges across a swathe of verticals thanks to the likes of the Big Four consulting firms striving to position it at the heart of their business process reengineering practices. From Maersk to Walmart, they are convincing some of the world’s biggest conglomerates to tackle age-old issues relating to outdated, inefficient, labor intensive business practices, all in the name of  blockchain.

It’s not just the Big Four that are cashing in on enterprise blockchain. Professional services firm Accenture is investing heavily in its blockchain consulting practice. Blockchain as a Service (BaaS) solutions are available from enterprise software giants Intl Business Machines, Oracle,  SAP and Microsoft and more recently from China’s Alibaba and Baidu. Intel wants to ensure that enterprise blockchains runs best on its servers while Microsoft and Amazon want to host them on their clouds. It’s little surprise then that enterprise and government spending on blockchain is expected to reach $2.9 billion in 2019, an increase of 89% over the previous year according to IDC. Furthermore, they predict that spending on enterprise blockchain will reach $$ja12.4 billion by 2022.

In common with Roubini, our belief has long been that blockchain as a technology offers little that was not already available elsewhere and before. Enterprise blockchains bear little resemblance to the technical ingenuity that gave us Bitcoin, but which is otherwise largely useless. The populist mantra that enterprise blockchain has the ability to transform the business processes of major corporations, key industry verticals and governments is a largely a delusion in our opinion. This recent report from McKinsey further supports our perspective, noting that blockchain has yet to become the game-changer some expected and recommending that it should only be considered when it is the simplest solution available.

Paradoxically, if the allure of blockchain can be leveraged as the motivating factor to undertake the much-needed digital transformation and business process re-engineering required to modernize outdated, legacy practices and procedures, then it may indeed have some inherent, albeit unintended, value. Furthermore, our interviews with the CEOs of two small, privately held startups clearly indicated that they are actually finding important, albeit niche, use cases for blockchain technologies in their solution stacks.  In this context, it makes sense to view blockchain as an emerging technology actively seeking real-world use cases and likely to be strongly promoted by its proponents in the coming years.

Against this backdrop, how should investors think about the investment opportunities for blockchain? For starters, venture capital interest grew significantly in 2018 with some $5.4 billion invested in blockchain related startups, up from $1.5 billion the previous year according to Autonomous Research. Nonetheless, our analysis of multiple categories of companies with blockchain exposure reveals a harsh reality. Neither their blockchain related revenues nor any cost savings directly attributable to the technology are significant enough to have any meaningful impact on their valuations from a fundamentals perspective, a situation we do not expect to change any time soon. The same holds true for the blockchain-related ETFs and hedge funds we examined.

On a more positive note, there are some excellent companies doing exciting things with blockchain and related technologies. Privately held GuardTime and Digital Assets should be on investors watch lists for funding rounds and IPOs. We expect publicly listed Digital Garage and Broadridge Financial Solutions to continue to perform well and feel that they should be considered as part of a broader fintech portfolio. By the same token, we are positive on the growth opportunities of blockchain-associated multinationals such as Microsoft, IBM, Visa, Mastercard etc, albeit for reasons that have little to do with blockchain.

Ingenuity • Semiconductor & Technology Specialist • (Opens in a new window) ⧉

Outline of A Bear Investment Case of Samsung Electronics report

• Samsung Electronics (Main Business Background)
• Major Competitive Threats & Industry Analysis of Global Smartphone Market 
  • Global market share analysis of global smartphone sector
  • Major Competitors/Threats to Samsung in the Smartphone Business
  • What do people actually use their smartphones for?
  • 5G Availability Around the World & The Pareto Principle
  • Launch of the 5G Services in Korea
• Major Competitive Threats & Industry Analysis of Global Semiconductor Market
  • Key Chinese semiconductor memory players (Yangtze Memory & Innotron Memory)
  • China, the Balance of Power in Asia Pacific, & the Semiconductor Sector
  • SK Hynix’s plan to invest 120 trillion won on the semiconductor sector
  • Aggressive expansion of the System LSI/Foundry Business
• Consumer Electronics, Display, & Harman Business Units
• What Would Cause to Change Our Minds? (Top Seven Events)
  • Timeline of rolling out “fully” autonomous vehicles
  • Korea National Assembly election
  • Apple’s launch of 5G smartphones
  • Emergence of “Netflix” of cloud gaming
  • AR glasses go mainstream
  • Transition to 5nm and 3nm chips
  • US and China finally agree to settle the trade war 
• “The Art of Investing” & The Fragile Transition Stage to the Fourth Industrial Revolution
• Moon Jae-In Administration’s Socialist Experiment is Dangerous for Samsung & Korea Inc. 
  • 52-hours workweek restriction 
  • Higher corporate tax rate 
  • Ruling party’s vocal “Anti-Samsung” stance 
  • Unstable industrial electricity/energy policy
  • Drastic increase in minimum wages
  • Drastic revision of the Industrial Safety & Health Act 
• History of Bear Markets for Samsung Electronics
• Samsung Electronics (share ownership, dividends & share buybacks)
• Samsung Electronics – Financial Analysis
  • Profit Margin Trend
  • Our Earnings Estimates vs. Consensus Estimates of Samsung Electronics
  • Geographical Sales Breakdown & The Billion Dollar Question of the Chinese Consumers
• Samsung Electronics Valuation

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

How long can the high last?

On the 1st January 2019, the South China Post^[1]published a story on Vitasoy International Holdings (Vitasoy 0345.HK) entitled “Cooler than Marijuana”.^[2] Whilst this related to the huge internet memes^[3] following of Vitasoy’s lemon tea in China, it could also be applied to the stock price performance, and high valuation multiple:

• Since June 2013 Vitasoy’s stock price was up more than 327% and has, with dividends provided a total return of 344%, which compares to the Hang Seng index return of 29% over this period.
• Consensus calls for a historical price earnings multiple of circa 74 times and 1 year forward of circa 53 times, relative to peer multiples of 24x times and 18 times. The stock trades on a fiscal 2019 forecast of 54.9x and presents with consensus EPS growth of 31%, which by anyone’s standards is expensive.

With Vitasoy’s lack of research coverage by mainstream houses, the fact that they are due to report their fiscal 2019 March year-end earnings on 20th June 2019, and an expectation of slower growth ahead, our initial bias is one of negativity. In this report, we examine whether the stock warrants the multiple awarded to it by the market.

However, with Vitasoy entering the Hong Kong MSCI Index in May, we ask – when is the right time to purchase a stock, with a solid fundamental case and earnings influenced by China’s burgeoning consumer base.

SR Services DMCC • Global Special Situations – Small-Mid Cap bias • (Opens in a new window) ⧉

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The final Industrial Estate developer that we will cover in this series is Puradelta Lestari (DMAS IJ), which has a single industrial estate and integrated township called Kota Deltamas, with a total planned area of 3,181 ha and located in the industrial heartland of  Cikarang, East of Jakarta.

The company still has 500ha of this, which can be developed, with 70% of this area sellable. It continues to acquire land and has another 300-400 ha of adjacent land close to its existing estate earmarked for acquisition.

Kota Delta Mas has already built a critical mass of Japanese auto companies including Suzuki, Mitsubishi and Honda and more recently Chinese auto-maker Wuling. It is in the midst of negotiating with Hyundai Motor for a large plot within the estate. 

With the prospect of auto exports increasing, as companies utilise excess capacity for this purpose, Kota Delta Mas stands to benefit as the supply chain expands. It is also well located when the new Patimban Port is completed. This new port in central Java is being developed as an auto export hub.

The estate is also a beneficiary of the government mandated policy of moving manufacturing companies from Central Jakarta to Industrial Estates. Kalbe Farma (KLBF IJ) has already moved its manufacturing facility to the Kota Delta Mas.

After a delay caused by a shift in location, the AEON Mall in Kota Delta Mas will start construction in August this year., with completion two years down the line. This will draw in large numbers of customers and provide a great utility for existing residents. 

The completion of a new toll road to the south and a nearby station on the Bandung High-Speed Railway nearby will further improve connectivity for Kota Delta Mas over the long term. 

Puradelta Lestari (DMAS IJ) remains a high-quality proxy for the industrial estate sector, with a strong balance sheet and strong exposure to the auto segment. The share price has run up over the last few months on the expectation of stronger marketing sales this year. As a result, the company is now approaching fair value trading at 1 std above the historical mean on a PBV basis and 2 std on a PER basis. From a NAV perspective, Puradelta Lestari (DMAS IJ) currently trades at a 45% discount to our NAV of IDR431 per share. Our target price of IDR254, which is a blend of PBV and PER, assumes that the stock can take at 2 std deviations above the historical mean, leaves upside from the current price of 7.8%. If we factor in the dividend yield of 3.5%, then the return increases to just over 10%. 

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The eighth company that we explore is Bekasi Fajar Industrial Estate (BEST IJ), an industrial estate operator in the Cikarang, East of Greater Jakarta with an overall estate portfolio of 2,300ha. About 1,250ha is fully developed, leaving BEST with 1,051ha gross landbank (716ha net). BEST’s estate is located 30km from Central Jakarta, the closest one to the city center among other integrated industrial estates in the Cikarang Area. The company is also expanding to a new area in West Java, further East of the current estate where the minimum wage is cheaper.

BEST commanded a premium pricing versus its neighbors due to its well-established infrastructure and closer proximity to the city, port, and airport. The company continues to outperform peers in terms of margin as it stays on its core industrial estate business. Despite rising land acquisition cost, BEST benefits from a stronger USD as its land ASPs are pegged to the Dollar. Over 40% IDR depreciation since 2013 has helped BEST to maintain its gross margin at above 70%.

Indonesia is one of the key ASEAN countries that is set to benefit from the US-China trade tension. Import tariffs imposed by the US may not be enough to push the current factories to move outside of China, but the multinational companies may think to relocate their future expansion elsewhere. Our channel checks confirm that inquiries on the industrial estates have also doubled compared to the previous year.

The increased inquiry volume, driven by the domestic investment cycle and US-China trade tension is the next leg for growth in the short term. Over the medium term, growth from the new industrial estate expansion and infrastructure roll out should kick in. BEST is currently trading at 0.6x PBV and 5.5x forward PE, about 1-std below its mean. Our estimated fair value for BEST, using a mean reversion method for the PE and PB valuation, is at IDR398 per share. The fair value is equivalent to about 55% discount to NAV.

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

Tencent Holdings (700 HK) is a consensus buy with none of the 46 analysts covering it having an underperform or sell recommendation. Analysts’ optimism is supported by the share price which is up 23% YTD. While Tencent is undoubtedly a blue-chip tech company, it does not mean the shares are a slam-dunk buy. 

Global Equity Research Ltd • IPOs, M&A and TMT analyst • (Opens in a new window) ⧉

In part one of our extensive bear-case analysis on Tencent Holdings (700 HK) , we analyze a number of elements related to Tencent’s overall growth dynamics. In part two of our bear-case, written by my colleague Arun George, we specifically dig into the matters related to Tencent’s gaming division. Our key points for part one are below. 

Preamble – Where is the cash?

The transaction economy – how Tencent earns income off investees irrespective of profitability

Valuation and financials – implausible estimates and 37% downside in our alternative DCF

Bull-case rebuttal

Global Equity Research Ltd • IPO and L/S equity, 2015 Starmine top stock picker • (Opens in a new window) ⧉

• Asset Quality recognition is something of a black art with varied definitions for non-performing loans (“NPLs”).
• Firstly, we analyse what a NPL is.
• We then evaluate provisioning changes across Asia. We rank countries.
• We further analyse specific underlying NPL recognition issues in China.
• We then rank a sample of regional banks and countries by NPL recognition.
• Later, we take a look at how different systems come under NPL stress and how they cope often in a crisis environment.
• Finally, we wrap things up with some concluding insights about the cultural backdrop which defines systemic asset quality.

Creative Portfolios • Global Quantamental Bank Specialist • (Opens in a new window) ⧉

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

In the seventh company in ongoing Smartkarma Originals series on the property space in Indonesia, we now look at Indonesia’s oldest Industrial Estate developer and operator Kawasan Industri Jababeka (KIJA IJ). The company’s largest and the original estate is in Cikarang to the East of Jakarta and comprises 1,239 hectares of industrial land bank and a masterplan of 5,600 ha. 

It has a blue chip customer base both local and foreign at Cikarang including Unilever Indonesia (UNVR IJ), Samsung Electronics (005930 KS), as well as a number of Japanese automakers and their related suppliers.

The company has also expanded its presence to Kendal, close to Semarang in Central Java, where it has a joint venture with Singapore listed company Sembcorp Industries (SCI SP). This estate covers a total area of 2,700 ha to be developed in three phases over a period of 25 years and is focused on manufacturing in industries.

The company also has successfully installed a 140 MW gas-fired power station at its Cikarang, providing a recurrent stream utility-type earnings, which cushion against the volatility in its industrial estate and property earnings. After some issues with one of its boilers (non-recurrent) and issues early last year with PLN, this asset now looks set to provide a stable earnings stream for the company.

KIJA has also built a dry-port at Cikarang estate which has been increasing throughput by around +25% every year, providing its customers with the facility for customs clearance at a faster pace of that at the Tanjong Priok port, as well as logistics support. 

After two difficult years where the company has been hit by a combination of problems at its power plant, foreign exchange write-downs, and slower demand for industrial plots, the company now looks set to see a strong recovery in earnings in 2019 and beyond.

The company has seen coverage from equity analysts dwindle, which means there are no consensus estimates but it looks attractive from both a PBV and an NAV basis trading on 0.85x FY19E PBV and at a 73% discount to NAV. If the company were to trade back to its historical mean from a PBV and PER point of view, this would imply an upside of 33% to IDR325, using a blend of the two measures. An absence of one-off charges in 2019 and a pick up in industrial sales should mean a significant recovery in earnings, putting the company on an FY19E PER multiple of 9.7x, which is by no means expensive given its strategic positioning and given that this is a recovery story. 

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉