Thursday, April 19, 2018

A Brilliant Deal For Axiata, Celcom and PUC - Malaysia's Largest Listed Internet Commerce Entity

Next week on 26th April, PUC will be holding its EGM to approve the acquisition of a 33% stake in Pictureworks, which comes with guaranteed profits for two years. PUC sprang a surprise just prior to the important EGM by disclosing the deal with 11th Street. In one fell swoop, we basically have the largest listed internet commerce entity in Malaysia. 

Can anybody say that internet commerce will not grow even more significantly in Malaysia over the next 2, 5, 10 years? Well, how can anyone "participate" in that growth in a listed vehicle? Now you have it.

Ask yourself, can you buy a stake in Lazada or Shopee or even Zalora??? Yes, maybe when they actually list. Plus when they do, you can be sure the valuations will be astronomical (in the billions of USD).

Lazada, is backed by Ant Financial and Alibaba. Enough said.

Shopee is backed by Garena Group. Garena is backed by Tencent.

Celcom Planet Sdn Bhd is a joint venture between ADS and SKP, which owns and operates an e-commerce platform known as 11Street Malaysia, and is one of the largest e-commerce companies established in Malaysia. 11Street Malaysia was originally a leading e-commerce company in South Korea, operating under the management of SK Planet Co., Ltd. which expanded its operations to Malaysia to grow and expand the e-commerce industry in the country. From 2015 to 2017, 11Street Malaysia reported an achievement of more than 300% growth in gross merchandising value (“GMV”), 160% growth to over 13 million product listings, and 200% increase to 40,000 sellers registered on its platform. As of 31 December 2017, 11Street Malaysia recorded a GMV of approximately RM427million for financial ended 31 December 2017, and total monthly unique visitors (“UV”) of 13.5million for the month of December 2017. 

The Investment Amount translates to an implied valuation of 100% equity interest in CPSB ranging from MYR333.33 million to MYR375.00 million (the “Implied Valuation”).

How expensive was the deal? If you were to take the historical Gross Merchandising Value of RM450m, it means PUC is coming in at a staggeringly cheap P/GMV of 0.6x. How cheap is that? Well, similar deals in the same tech sector have been in the 1.5-2.0x.

Why would Axiata/Celcom do such a deal? One, that the management of PUC has the ability and vision to take 11th Street to the next level. If you look at the new ownership structure, the original shareholders will still hold much hight stakes than PUC in 11th Street, so nobody's cashing out.

I believe some of the RM90m will be used to pay down debt at 11th Street. The burn rate at 11th Street has passed the initial setup stage. They are recording good growth and good revenues, hence any synergies and cost savings will go swiftly to the bottom line. 

PUC shall be appointed as a preferred partner of 11Street Malaysia provided that it shall offer competitive terms to 11Street Malaysia for the following (“Synergistic Collaboration”):- a. 11Street Malaysia’s marketing needs, especially in digital marketing; b. 11Street Malaysia’s payment gateway requirements for all its eCommerce services with PUC’s flagship digital services platform (“Presto”) being nominated and implemented as the Company’s preferred payment platform on all of its eCommerce services; and c. 11Street Malaysia’s technology needs for its eCommerce infrastructure and platform.

This is key to the transaction, elevation of PUC as the management and preferred partner. Obvious immediate synergies in e-marketing and e-advertising, the usual rice bowls for PUC. The management of PUC will be directing and putting in place the future direction of 11th Street, which is critical in being part of a listed entity. 

PUC wishes to announce that the Company had on 12 April 2018 incorporated a wholly-owned subsidiary in Malaysia, namely PUC Ventures Sdn Bhd (“PVSB”), under the Malaysian Companies Act 2016 (“Incorporation”). PVSB is incorporated as an investment holding with an initial issued share capital of RM1.00 comprising one (1) ordinary share. It is intended that PVSB identifies opportunities to invest or acquire equity interests in and/or enter into strategic alliances / joint-ventures with companies which are principally involved in electronic commerce (“e-Commerce”) businesses, electronic payment services, financial services, technological services, and related businesses including but not limited to media services, airline and accommodation services related (“Target Segments”), which are synergistic and complementary to the existing businesses of PUC and its subsidiaries.

This announcement which came last week would actually be quite significant. The establishment of PUC Ventures would indicate that Pictureworks and 11th Street and e-Wallet and Presto etc... would not be just a mish mash of investments by PUC. It speaks of a bigger cohesive agenda by PUC going forward. I believe PUC is mapping itself as a smaller Meituan or Tencent.


a) Valuation wise - PUC looks particularly compelling - just taking into account the impending absorption of the proposed stake in Pictureworks, which is very undemanding. Added to the guaranteed profit for two years, Pictureworks has a very good chance to be listed in HKSE Gem, which will translate to a substantive "potential value unlocking" if/when Pictureworks lists. Just follow the steady roster of clientele of Pictureworks: Malaysia, HK, China, Singapore... but largely in China, which bodes well for a China/HK listing (comfort level based on source/location of revenues).

b) Valuation wise - As indicated above, the P/GMV for the 11th Street deal makes a lot of sense for PUC. Should they be able to bring up the revenues of 11th Street from 2017's RM427m to a billion ringgit within 2-4 years, that would certainly make it highly attractive to list or be sold to even bigger whales at a valuation closer to 2.0x P/GMV. As always, 11th Street is a highly sought after asset platform, hence the permutations for a sale or joint venture or seperate listing are always on the table. Another potential kicker in PUC's inherent value, which they bought at a very reasonable valuation.

c) A COUP - If you were to believe the media, and Alibaba were also trying hard to buy 11th Street. Of course both have bigger firepower and money, but then it would immediately lose its Malaysian roots. I think thats part of the broader strategy by Axiata/Celcom, to bring in a local champion and bring about much higher valuation, maybe a Malaysian "unicorn" in the making.

d) Institutional Funds - Fund managers now can no longer ignore PUC. It is a "must have" being the biggest listed internet commerce entity. That should see an upsurge in institutional holders. 

e) Data Science & A.I. - The bigger picture going forward. I think PUC is one of the very very few tech based companies that understand the whole ecosystem of the new world and the new future. PUC Ventures would be the vehicle to jumpstart alliances and investments. Just gauging its corporate moves for the past years and a half would paint a company and leadership that understands the really "big picture".

Wednesday, April 04, 2018

Trade Wars - Sense & Sensibilities

My view: I like it that China has retaliated tit for tat, because there is no way a trade war will be good for either country. The fact that China did that will actually hasten the "end" to the trade wars quickly. Trump will now have to sit down and negotiate a kinda truce. 

The emerging markets selldown has been way overdone, a kneejerk reaction which has lowered average PE valuations of emerging markets to a 2 year low. I agree with strategists who called this a great opportunity for "all-in" into emerging markets, buying on this dip.


Some of the talking heads on the same issue (as reported by Bloomberg):
Simon Smiles, chief investment officer at UBS Wealth Management for ultra-high net worth clients, said the potential market overreaction gives further reason for money managers to buy into weakness.
“We’re all-in, in terms of the growth impulse, in terms of the relative valuations and that’s against a backdrop of being constructive on risk assets more broadly," he said on Bloomberg TV, adding that UBS is overweight emerging-market equities and hard-currency debt.
Gene Frieda, global strategist at Pacific Investment Management Co.:
  • "The market reaction is confused, reflecting the fact that it has no historical narrative on which to fall back. Today’s Chinese actions were not surprising, but the market response shows how confidence has been diminishing"
  • "You cannot separate tweets against tech firms from tariff actions against China. This is a material change relative to the first quarter, when the market was bulletproof to bad news"
  • Frieda said most probable scenario is a negotiated settlement before the first round of tariffs kick in on both sides. Yet second-most probable is that round one happens with the goods that have now been put on the table
  • China has a strong desire to deescalate the situation
  • Argentina and Brazil could be "unintended beneficiaries" from soybean tariffs
Anders Faergemann, senior fund manager at PineBridge Investments in London:
  • Increased tensions may actually benefit emerging-market assets as markets could dial down their optimistic view of global synchronized growth and ultimately global yields will come down. That would add to the return outlook for spread products such as EM, he said
  • "Valuations have already adjusted sufficiently to compensate for the increased equity volatility and EM spreads are better value now"
  • "As long as China’s retaliation to the U.S. provocation remains within reason, which is our base case, fixed income should benefit and the appeal of EM remains strong and it stands to benefit from investors returning to a 2017 frame of mind"
  • Faergemann favors the Mexican and Colombian pesos in this scenario as markets seem to be overestimating political risk associated with their upcoming elections
Anastasia Levashova, a fund manager at Blackfriars Asset Management in London:
  • A trade war will have a mixed impact on EM countries as China buying less soy, avocados and wine from the U.S. means they’ll buy more from developing nations. On the other hand, no one knows where it will escalate, she said.
  • More important indicator of direct competition between the U.S. and China was the launch of renminbi crude oil futures, a clear trend of strengthening their own currency and trade balance
Kathy Jones, chief fixed-income strategist at Charles Schwab:
  • "It looks like a mixed bag for EM. On the one hand, it could benefit agricultural producers like Brazil and Argentina, but I doubt that is enough to offset the concerns about slowing global growth and protectionism"
Sebastien Barbe, head of emerging-market research and strategy at Credit Agricole CIB
  • "It fuels the risk of a trade war, but we are not there yet. China has intensified its rhetoric, but I think we are still in a hard negotiation”
  • If risks continue to intensify, Asian currencies would probably be most affected as some countries would be hit given supply chains and considering economies are more open to trade than other developing regions
Sean Newman, an Atlanta-based money manager at Invesco Advisers:
  • Although trade war fears should be taken seriously, it isn’t a factor in his long-term outlook for emerging-market assets
  • "We like buying here but are conscious that trade tweets may present some downside risk," noting Trump’s tweets on Monday, where he "hated Nafta in the morning and wanted a deal by the afternoon"
Greg Saichin, chief investment officer for emerging-market bonds at Allianz Global Investors
  • "I still believe this is a negotiating stance for the U.S. -- somewhat justified, somewhat politically driven by the mid-term elections in November. The Chinese understand this"
  • "Up to this point, Mexico was getting all the collateral damage given the negative NAFTA rhetoric. Now I’m not so sure. If this escalates into a full blown trade war then global growth will decrease with negative repercussions for oil and metals"
  • Marginal producers for oil and metals, or competitive producers with high fiscal break-evens will be negatively impacted, he said. Frontier markets such as Ghana, Angola, Mozambique, Zambia and Ecuador, which rely on these commodities as a primary source of foreign-exchange generation, could be particularly hurt.
Alejandro Cuadrado, global head of FX at BBVA in New York:
  • Cuadrado says he doesn’t share investor fears yet and hasn’t altered his long-term outlook for emerging-market currencies.
  • He favors the Colombian and Argentine pesos for their carry

Countries Stock market's Capitalisation As A % Of GDP

 Why is the figure important ... if you can strip out foreign listings and non related listings (inclusive of SPACs) and maybe some REITs th...