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Malayan United Industries (MUI Group): An Asset Rich, Undervalued Opportunity?

Bar chart showing domestic holidays in Great Britain during 2008-2017 (in millions of trips). In 2017, there were a total of 59.149 million recorded domestic holiday trips made in Great Britain, the highest since 2008.

Wielding a collection of renowned brands such as Laura Ashley and Metrojaya in the retail sector, Corus Hotels in the hospitality sector, Kandos and Tudor in the food sector, and Bandar Springhill in the property development sector, could asset-rich Malaysian conglomerate Malayan United Industries prove to be a diamond in the rough?

Malayan United Industries (KLSE:MUIIND) once a corporate powerhouse has under-performed over the past several years and has consequently lost its charm among investors. However, with MUI founder Tan Sri Khoo Kay Peng relinquishing his role as Chief Executive Officer in December last year, and paving the way for his son Andew Khoo Boo Yeow to take over the reins, changes are already underway with the new CEO spearheading a restructuring exercise aimed at building a sustainable business in the long run. Key restructuring initiatives include corporate restructuring, business transformation (which involves transforming MUI’s key brands such as Laura Ashley into a lifestyle brand) and deleveraging (which will see the company’s debt burden being reduced through divestitures among other options). With such measures to unlock shareholder value being implemented, can the asset-rich long-time laggard turn its fortunes around, and regain its former glory?

Laura Ashley (LON:ALY)

Plans are underway to transform Britain’s iconic Laura Ashley brand (and one of MUI’s crown jewels) into a lifestyle concept by expanding from the current fashion, accessories and home furnishings business into other areas such as hotels (currently the company owns two hotels – Laura Ashley The Manor, and Laura Ashley The Belsfield – both located in the UK) and cafés (the company’s opened its first café – Laura Ashley The Tea Room – in June 2017). Future plans will see the brand expand into the spa business as well. The idea of transforming a brand into a lifestyle concept is nothing new and while some brands such as Missoni and Moschino have fallen off the runway (the fashion houses checked out of the hotel business a few years ago) a number of others, such as Bulgari, Mercedes Benz, Armani, Fendi, and Versace are still continuing the show. Buglari extended their famous jewelry brand into the now famous Bulgari Hotels and Resorts; Mercedes Benz steered their automobile brand into perfumes; Armani elevated the fashion brand towards luxury hotels and luxury furnishings; Versace strutted their fashion brand into fashion hotels; Jaguar took the auto brand up a notch with its lifestyle products ranging from clothing to accessories; Godiva sweetened their chocolate brand with its chain of lifestyle chocolatier cafés; and Fendi took the fashion brand to new heights with their hotel venture.

So can ailing Laura Ashley, which is struggling financially (profits have been falling over the past few years) as well on the stock market (its languishing share price has been a long time under-performer and is currently trading at a fraction of its value during its heyday decades ago in the mid-1990s), get back in vogue with a similar push?

While much would depend on strategy and execution, fundamentally, the idea holds potential. And if history is any guide, Laura Ashley appears to have had a reasonably fair track record in extending the brand beyond its core products. Starting out as a clothing brand, famous for its floral, billowy dresses typical of English fashion in the 1970s, which were in vogue up until the 1990s, Laura Ashley subsequently stumbled due to a combination of factors such as an ill-executed overseas expansion and a failure to adapt appropriately to changing fashions. The failed expansion dented the company’s finances while the failure to evolve meant the brand’s classic style gradually became more and more classic, which later on ended up looking completely outdated altogether. And although years later Laura Ashley made an effort to update its chintzy image, customer perceptions are hard to change, contributing to flagging financials.

Despite these setbacks, it is noteworthy that the company successfully made great strides in transforming the brand’s product offering from one limited to just clothing to one spanning furniture, decorating items and home accessories. A few years ago clothing accounted for 50% of sales, but now it accounts for just 15% and is the smallest revenue generator of all of Laura Ashley’s four business segments according to its latest annual report. The biggest revenue earner, Home Accessories (which includes products such as lighting, gifts, bed linen, rugs, cushions, and children’s accessories), accounts for 33% of sales followed by the Furniture segment (cabinets, beds, and mirrors) which accounts for 30%. The balance 22% comes from the Decorating segment (fabric, curtains, wallpaper, paint and decorative accessories).

So could the new hotel venture be the key to unlock the brand’s value and reverse the company’s sagging financials?

Laura Ashley is an upscale brand synonymous with British heritage and the company’s new hotel and café brands are clearly positioned in similar fashion with all three Laura Ashley hotels (Laura Ashley The Manor Elstree, Laura Ashley Belsfield Hotel, and the upcoming Laura Ashley Burnham Beeches) and its two cafés (Laura Ashley The Tea Room in Solihull and Buckinghamshire) offering quintessentially British experiences to their well-heeled guests.

Britain has no shortage of hotels offering “quintessentially British” experiences such as as The Savoy and The Langham London. However, Laura Ashley hotels differentiated themselves by offering their upscale iconic British-style getaways in some of England’s endeared countryside locations. Laura Ashley Hotel The Belsfield for instance, is located along Lake Windermere in Lake District which is a World Heritage Site in North West England. Although plenty of travellers visit to enjoy the lake’s shimmering water and picturesque surroundings, there is little traveller spend in the area. Sensing an opportunity, in 2014 Laura Ashley acquired a Victorian-era mansion (it was built in 1845) overlooking Lake Windermere, and spent millions of pounds on refurbishment (with décor and furnishings from Laura Ashley of course) to offer a classic English-style countryside retreat, ideal for corporate events and weddings (in fact winter weddings bookings were reportedly up 75% during 2017). The strategy seems to be working with revenues and operating profits at the hotel reportedly increasing three-fold since being converted to a Laura Ashley hotel.

Yet, with Laura Ashley’s hotel segment accounting for just a fraction of group revenue (revenues from Laura Ashley’s hotel segment made up about 1% of total group sales according to Laura Ashley’s latest annual report), the rosy numbers may not be enough to move the needle at Laura Ashley in the near term.

The long view seems more promising. With Laura Ashley hotels being located in England’s countryside which tend to draw local travellers (as opposed to locations such as London, Manchester and Birmingham which are among UK’s most popular tourist destinations), the company is positioned to tap the UK’s domestic travel market which accounted for 80% of the UK visitor economy according to data from VisitBritain’s 2016/2017 annual review. In 2017, Brits took 59 million domestic holidays in Great Britain, a 6% increase from the previous year, spending £14.1billion on domestic holidays in Great Britain, also a 6% increase over the previous year according to VisitEngland’s Trip-Tracker Survey.

Bar chart showing domestic holidays in Great Britain during 2008-2017 (in millions of trips). In 2017, there were a total of 59.149 million recorded domestic holiday trips made in Great Britain, the highest since 2008.

Furthermore, there is considerable potential for the Laura Ashley hotel brand to expand internationally, and the management seems keen to exploit this opportunity having announced plans to increase the number of domestic and international hotels to 100 over the next five years through licensing agreements.

There exists clear demand for British heritage brands outside the UK, particularly in countries such as Japan, South Korea, Hong Kong, South Asia and Southeast Asia with British-style brands Burberry, Church’s and Harrod’s cashing in on enthusiastic customers in these regions. This market could be an opportunity for Laura Ashley and with the brand’s planned hotels serving as a showcase for Laura Ashley products, they could potentially draw shoppers to Laura Ashley’s product offering.

Towards this end, Laura Ashley is taking steps to export the brand worldwide; Laura Ashley derives much of its sales from the UK and with international sales making up just 7.4% of group revenue according to the company’s latest annual report, the Laura Ashley brand is strongest among UK customers and appears to have relatively little recognition outside the UK. Laura Ashley has expanded into India with a signing of a licensing deal with India’s leading fashion retailer, Future Group. The company has also tied up with a partner in Thailand to tackle the Southeast Asian market.

Growing its international customer base could help the brand reduce reliance on sales from the UK, its primary market, insulating its financials from geographical shocks and thereby smoothening out revenues over the longer term. According to the company’s latest financial data, all business segments except Fashion suffered revenue declines, partly due to the impact of Brexit which saw UK consumers reigning in on big-ticket purchases. And with UK consumer spending not expected to recover as the uncertainty of Brexit’s impact on jobs and income hit hard on consumer confidence, British brands with a heavy reliance on the UK market such as Laura Ashley may find themselves in challenging conditions in the coming years. Keeping a long term view in mind, an international expansion could Laura Ashley minimize such geographical risks.

Since Laura Ashley was thrown a lifeline by MUI about two decades ago, MUI has yet to see a return on its investment, with Laura Ashley trading at just a fraction of its market value in the mid-1990s when it was looking its prettiest. Will this time be different? Only time will tell, but the company could be worth watching.

 

Part 2 of this series (Corus Hotels) will be coming soon. Sign up for the newsletter to get the article delivered to your inbox.

 

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These Are The Companies Profiting From China’s Belt And Road Initiative

"One Belt, One Road" map showing the Silk Road Economic Belt and the Maritime Silk Road under China's One Belt, One Road (aka Belt and Road) Initiative.

China’s Belt and Road Initiative (BRI) also known as the One Belt and One Road Initiative (OBOR), is an ambitious, trillion-dollar infrastructure project that aims to connect countries along two primary trade routes known as the “Silk Road Economic Belt” and the “Maritime Silk Road” in an effort to enhance connectivity, investment, international trade, and economic development.

The “Silk Road Economic Belt” represents the land-based route, and is named after the ancient trading route known as “Silk Road” which went through China, Central Asia, West Asia, the Middle East and Europe. The “Maritime Silk Road” represents the sea route which, like the original maritime trade route, linked Chinese ports with ports located in Southeast Asia, the Indian subcontinent, the Mediterranean, Europe and Africa.

"One Belt, One Road" map showing the Silk Road Economic Belt and the Maritime Silk Road under China's One Belt, One Road (aka Belt and Road) Initiative.

By various measures, BRI is one of the largest infrastructure and investment projects in history. About 70 countries representing about two-thirds of the world’s population and accounting for about one-third of the global economy are participating in Belt and Road projects. Under the initiative, some US$ 900 billion worth of projects are currently either under way or in detailed planning stages according to data from China Development Bank.

While some projects have encountered roadblocks and delays, numerous others are ongoing. Ongoing projects under the initiative include the Eurasian Railway Program (an 81,000 km railway linking China with Europe), the Colombo Port City (CPC) development project in Sri Lanka, the Khorgos Gateway project in Kazakhstan (a railway linking China with Kazakhstan), the Hungary-Serbia high speed railway (a 350km railway line from Budapest to Belgrade), the Gwadar deep sea port project in Pakistan, the China-Laos Railway (a 414km railway linking Laos with China), the Karot Hydropwer project in Pakistan, the Sino-Oman Industrial City in Oman’s port of Duqm, the Malaysia-China Kuantan Industrial Park in Malaysia, the Kohala hydropower project in Pakistan, the Melaka Gateway in Malaysia, the Yanbu Refinery in Saudi Arabia, and the Kunming-Singapore High Speed Railway (a 3,000 km railway line connecting China to Southeast Asia) to name a few.

Projects under the BRI initiative fall into one of six economic corridors, namely:

  1. The China-Indochina Peninsula Economic Corridor (CICPEC)
  2. The China-Mongolia-Russia Economic Corridor (CMREC)
  3. The New Eurasian Land Bridge (NELB)
  4. The China-Central Asia-West Asia Economic Corridor (CCWAEC)
  5. The China-Pakistan Economic Corridor (CPEC)
  6. The Bangladesh-China-India-Myanmar Economic Corridor (BCIM)

BRI projects that have been successfully completed include the Ethiopia-Djibouti High Speed Rail Link (a 752km railway linking Ethiopia’s capital to the Port of Djibouti), the Amsterdam-Yiwu railway (an 11,000km railway linking  Amsterdam in Netherlands with  Yiwu in China’s Zhejiang province), the Baku-Tbilisi-Kars Railway (an 846km railway linking Baku in Azerbaijan, Tbilisi in Georgia and Kars in Turkey), the Nairobi-Mombasa railway (a US$ 3 billion railway project linking Kenya’s capital Nairobi,  with Kenya’s port city of Mombasa), and the Rudbar Lorestan hydropower station in Iran to name a few.

The initiative is expected to unlock substantial commercial opportunities in the decades to come. With the initiative already having a positive impact on the bottom lines of some companies, many other companies around the world are keen to participate and are positioning themselves for a share of the pie.

Caterpillar (NYSE:CAT)

American heavy-machinery manufacturer Caterpillar which has been investing heavily in China the world’s largest construction and mining equipment market in the world, expects strong sales growth in 2018 boosted by robust business from China’s Belt and Road Initiative. The company said Asia-Pacific sales grew 22% in the fourth quarter of 2017, with half of the increase coming from China alone where contractors buy much of the machinery for BRI projects to take advantage of the initiative’s tax rebates and export them to the relevant countries where the BRI project is being carried out.

The company has also been flexing its finance arm to boost sales, lending to Chinese companies including state-owned enterprises.

Caterpillar is involved in BRI projects in 20 countries such as Kazakhstan, Sri Lanka, and Pakistan supplying heavy machinery such as drills, excavators, and hydraulic mining shovels for BRI projects such as roads, ports, mines, and oil fields.

Although Chinese rivals such as Sany Heavy Industries (SHA:600031) and Zoomlion Heavy Industry Sci & Tch Co Ltd (SHE:000157) dominate the local market and are expanding their international presence, Caterpillar’s advanced technology, superior reputation for quality and reliability, and extensive global dealer network in over 180 countries, (compared with Caterpillar’s key rival Sany Heavy Industries which has dealers in 100 countries) are solid competitive advantages that have put the company in a better position to capture orders for BRI-related projects. Caterpillar’s wider international dealership network is particularly advantageous considering the fact that while both companies maintain active dealerships in developed markets such as the United States and Europe, Caterpillar has a relatively wider footprint in developing markets where much of the Belt and Road projects are being carried out.

For instance, thanks to Caterpillar’s strong brand name and its active, experienced dealer network in Sri Lanka (unlike Sany Heavy Industries which is relatively unknown and has a relatively limited presence in the country), Caterpillar captured a number of equipment orders for the Colombo Port development project in Sri Lanka which required machinery such as hydraulic excavators.

COSCO Group (SHA:601919) (HKG:1919)

 Chinese shipping giant COSCO has been riding on China’s Belt and Road Initiative to aggressively expand and strengthen its global presence helped by a supportive government and access to low-interest loans which enable the company to make more aggressive bids for port assets compared to competitors; loans from Chinese state banks to fund BRI-related initiatives are as low as 2.5%.

In 2017, COSCO acquired APM Terminals Zeebrugge in Belgium, and acquired a 51% equity interest in Spanish port company Noatum Port Holdings which operates terminals at ports such as the Valencia port and railroad terminals in Madrid.

In 2016, the company acquired a 51% stake in Piraeus Port, which is the largest port in Greece, and has launched of a number of projects to upgrade the port to help make it a transshipment hub for expanding trade between Asia and Eastern Europe.

COSCO has signed a 35-year concession agreement with Abu Dhabi Ports (which operates Khalifa Port) that sees COSCO building and operating a new container terminal at Khalifa Port in Abu Dhabi, in an ambitious plan that aims to almost double the container handling capacity at Khalifa Port over the next several years by adding 2.4 million TEUs to  the existing 2.5 million TEUs.

COSCO acquired a stake in the Khorgos Gateway in Kazakhstan, an ambitious BRI project that aims to develop the biggest dry port in the world. The project, which Chinese president Xi Jinping called “the project of the century” connects Kazakhstan to China by rail.

Kazakhstan, the world’s largest landlocked country, sits right in the middle of China’s Silk Road Economic Belt. The country’s strategic location makes it a key link in transport routes between markets in Asia and Europe. Overland freight routes pass through Kazakhstan from all directions and with trade expected to grow along the Belt and Road, freight volumes are expected to accelerate in the decades to come making the China-led transportation projects significantly important to landlocked Kazakhstan and other countries in Central Asia such as Azerbaijan.

Volumes of rail freight moving between China and Europe are on the rise; during 2013 and 2016, rail freight volumes grew more than three-fold in just two years to over 300,000 tons in 2016 according to data from aviation consulting firm Seabury Consulting (owned by Accenture).

Bar chart showing China-Europe rail freight volumes ('000 tons) in 2013 and 2016. - LD Investments

China-Europe rail freight volumes registered a CAGR of 65% between 2013 and 2016, far surpassing growth rates in other trade types.

Bar chart showing CAGR of ocean trade, air trade, international express, parcels by mail and the China-Europe rail pre financial crisis and post crisis - LD Investments

Yet, much of China-Europe cargo is still carried by sea and to a lesser extent by air; more than 90% of trade between China and Europe occurs via ocean, while rail accounts for less than 5% of goods moved between China and Europe (most of which is carried through the Trans-Siberian railway).  However, rail is considerably cheaper than air and faster than sea and rail is particularly competitive to transport goods between points located deep inland.

Thus, there is a case for rail freight transport as Chinese manufacturing bases relocate from coastal areas where wages and realty prices are rising, to areas further inland where wages and property prices are more competitive.

China-EU transit volumes transported via Kazakhstan amounted to just about 32,000 TEU in 2015, which is just about 1% of total China-EU container traffic according to data from The Brookings Institution. However, driven by the relocation of manufacturing bases in Western China, and greater trade among Belt and Road countries, there is potential for Kazakhstan to increase the volume of transit container traffic to 240,000 TEU by 2030.

Thus, COSCO is well positioned to profit from expanding trade among Belt and Road countries. According to its 2017 annual results, 62% of the company’s total container shipping capacity was deployed along Belt and Road routes, comprising 180 container vessels with a total capacity of 1.15 million TEU.

China Merchants Port Holdings (HKG:0144)

China’s leading port operator China Merchants Port Holdings (CMPort) is actively involved in China’s Belt and Road initiative which has helped the state-owned conglomerate expand its international presence.

At the end of 2017, the company owns 31 ports in across 16 countries and five continents and the number is likely to grow in the coming years as the company aggressively snaps up terminals worldwide, helped by an encouraging regulatory environment for BRI-related projects and easy access to cheap BRI-financing from state banks (typically funding comes as a loan from the state-owned Export Import Bank of China, which usually have long maturity periods of about 20 years, and low interest rates of about 2%).

The company built and owns a stake in the new Doraleh Multipurpose Port, a US$ 600 million “flagship” project in Djibouti which recently began operations.

The company participated in upgrading the port facilities and the planning and construction of the Djibouti Free Trade Zone.

CMPort owns and operates the Colombo International Container Terminal (CICT) which saw an 18.5% YoY increase in container throughput to 2.39 million TEUs last year, making it one of CMPort’s top performing overseas port facilities in terms of volume growth last year. The boost helped CMPort handle a total container throughput of 102.9 million TEU in 2017 surpassing the 100 million TEU container throughput milestone for the first time.

As of 2017, Colombo was ranked among the top 30 busiest ports in the world in terms of container traffic. Colombo sits at the heart of China’s 21st Century Maritime Silk Road making it a strategically important location on the East-West shipping route.  As trade grows between China and other BRI countries, Colombo is poised to capture some of the increase in container traffic.

CMPort has also acquired an 85% stake in Sri Lanka’s Hambantota International Port Group Ltd which is involved in the Hambantota port development project in Sri Lanka.

Hambantota, located about 200km south of Colombo, holds immense potential to develop into a top container port in its own right. Hambantota’s strategic location coupled with its owner China Merchants Port Holdings’ global clout and commercial relationships with its network of Chinese shippers could help Hambantota emerge as a major port.

In the longer term, CMPort is poised to profit as container throughput grows along with growing trade among Belt and Road countries. The total value of China’s imports and exports to Belt and Road countries reached 7.37 trillion yuan (about US$ 1.14 trillion), a 17.8% increase YoY in 2017 according to Huang Songping, spokesperson for the General Administration of Customs. The value of imports and exports to Belt and Road countries accounted for 26.5% of China’s total imports and exports in 2017.

Alibaba (NYSE:BABA)

China’s new Silk Road is going digital and China’s largest e-commerce platform, Alibaba, is positioning itself to profit from the anticipated increase in trade among Belt and Road countries in the decades to come.

Alibaba’s finance affiliate Ant Financial which owns China’s most popular mobile payment app, Alipay, has been expanding its global reach by rolling out the payment app in countries along the Belt and Road such as Malaysia, Indonesia, Pakistan, Cambodia, Laos, Myanmar, and Vietnam. Ant Financial has also signed a partnership with London-based Standard Chartered Bank to collaborate on enhancing financial inclusion in Belt and Road countries.

Alibaba is also positioning itself as the platform of choice for SMEs in Belt and Road countries looking to capitalize on cross-border trade opportunities as a result of greater trade connectivity the BRI initiative is expected to bring.

Alibaba is leading the charge, together with the Malaysia Digital Economy Cooperation (MDEC) to develop a ‘Digital Free Trade Zone’ in Malaysia, a BRI-project expected to facilitate trade between Chinese and Southeast Asian SMEs. The effort includes a regional e-commerce and logistics “hub” near the Kuala Lumpur International Airport and an electronic World Trade Platform (eWTP) which offers Malaysian SMEs the necessary infrastructure for cross border ecommerce such as order fulfillment, logistics, and centralized customs clearance services. Already more than 1,900 Malaysian businesses have signed up to use the eWTP hub. The e-commerce and logistics “hub”, which is expected to be developed by the end of 2019, will be jointly developed by Malaysia Airports Holdings Berhad (KLSE:AIRPORT) and Cainiao Network (Alibaba’s logistics arm).

Siemens (ETR:SIE)

German industrial giant Siemens has been actively positioning itself to capitalize on business opportunities in China’s Belt and Road projects. The company has set up a Belt and Road office in Beijing and has signed ten cooperation agreements with Chinese companies such as China National Chemical Engineering Group Corp, China Railway Construction Corp (International) Ltd and China Civil Engineering Construction Corp. The agreement covers a wide range of business sectors such as power generation, energy management, building technology and intelligent manufacturing among others for BRI projects in countries such as Indonesia, the Philippines, Nigeria, Mozambique and South America.

 

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China’s Geely: A Formidable Global Automaker In The Making?

Bar chart showing the world's top 10 fastest growing car brands in 2017 (by YoY sales volume growth %).

Chinese automaker Geely (HKG: 0175) (OTCMKTS: GELYF) is on a hot streak. The company reported record sales in 2017 selling 1.24 million units, a 63% year-on-year increase, emerging as the world’s second-fastest growing automaker by sales volume in 2017.

Bar chart showing the world's top 10 fastest growing car brands in 2017 (by YoY sales volume growth %).

Much of Geely’s sales were concentrated in its home country China, the world’s largest passenger car market, which accounted for over 99% of the brand’s sales volume in 2017 according to data from its annual report. Geely’s strong sales performance in China helped boost its market share to 5.06% of China’s passenger car market in 2017, an increase of 1/75% from the previous year.

Outside China, Geely’s subsidiary Volvo Cars which Zhejiang Geely Holding Group acquired in 2010 is also on a run, reporting its fourth straight year of record sales; revenues grew 17% in 2017 to 210.9 billion Swedish crowns while operating profit rose jumped 28% to 14.1 billion ($1.76 billion) from 11.0 billion in 2016. Volvo sold 571,577 Volvo cars globally last year, up 7% thanks to strong sales in China its biggest market, which accounted for 20% of Volvo’s sales in 2017.

After years of lackluster performance under the Ford Motor Co umbrella, the upscale Sweden-based Volvo Cars is now a success story, enjoying a remarkable turnaround under Geely’s ownership.

Global expansion

For Geely, already a major automaker in China, Volvo’s success could be a sign of bigger things to come as Geely sets its sights on going global. The company has been aggressively amassing a formidable portfolio of international car brands thereby expanding its geographical reach and broadening it technical expertise; the company gained an avenue into Europe through its acquisition of Volvo Cars while its 49.9% stake in Malaysia’s Proton Holdings Bhd gives it an inroad into Southeast Asia.

Geely’s 51% stake in British sports car maker Lotus Cars will give the company a presence in the sports car segment while its acquisition of American flying-car startup Terrafugia gives it access to the nascent flying car industry. The investments may also play a part in uplifting the brand’s image going forward; having started life as a cheap, low-cost, no-frills car brand, Geely has already come a long way since its inception boasting four design studios around the world (specifically in Los Angeles, Barcelona, Gothenburg and Shanghai) employing over 500 designers (headed by Geely’s chief designer Peter Horbury who formerly worked at Volvo and Ford), and four R&D centers (in Hangzhou Bay, Ningbo, Coventry and Gothenburg) employing nearly 7,000 full-time engineers.

With average e-x-factory selling prices of its vehicles steadily climbing from RMB 47,872 per unit in 2012 to RMB 73,550 per unit in 2017 according to its latest annual report, the company is now making inroads into the midscale auto segment with its new car brand Lynk & Co which is being developed with technology from Gothenburg-based Volvo.

“Born global and connected”, the millennial-aimed Lynk & Co car brand which made headlines as the “most connected car ever” (a ‘smartphone on wheels’) is unique in several aspects; the company’s cars can be purchased outright, or they could be leased, or they could be subscribed to via the company’s subscription model, or they could just be borrowed via the car’s unique ‘sharing’ feature. The company’s focus on mobility rather than car ownership means it fills a niche that taxi companies, ride-sharing solutions such as Uber, and traditional auto companies such as Honda do not fulfill. Lynk & Co is also differentiating itself by building a direct-to-consumer sales model, allowing customers to purchase a car online thereby bypassing traditional dealer networks.

Geely’s new marque holds promise; in November last year, Lynk & Co held a three-day sales campaign in China for the brand’s ‘01’ SUV model. In just over two minutes, the stock of 6,000 vehicles was sold out.

However, while the Geely brand is expected to continue its goal of being a leading automotive brand in China, Lynk & Co which is European designed and engineered, aspires to be a global auto brand, competing against global car giants such as Volkswagen and Ford. Lynk & Co plans to launch sales of its cars in Europe in 2019 and in the United States in 2020. The brand is aiming to sell 500,000 cars globally by 2021.

Over in Southeast Asia, Geely has been busy trying to turn-around struggling Malaysian car company Proton, which it acquired last year. Established in 1983, Proton reached its zenith in 1996 when the company accounted for 64% of Malaysia’s car sales, and exported its cars to over 50 countries including Australia, Ireland, New Zealand, Sri Lanka and Brunei. That was also the year Proton acquired sports car brand Lotus Cars.

Fast forward to today, Proton’s market share has dwindled to less than 15% with sales dropping to 70,991 last year from 72,291 units in 2016. Meanwhile local rival Perodua, and Japanese car company Honda are flying high in the country with market leader Perodua’s sales exceeding 200,000 units and Honda notching record-breaking sales of 109,511 last year.

Bar chart showing Malaysia passenger car sales (number of units) by car brand, 2016 and 2017.

Determined to regain lost ground, Proton is now on an aggressive transformation path with CEO Dr Li Chunrong introducing multiple changes for Proton dealerships and service centers in the country aimed at strengthening the brand and improving customer experience, as well as tapping into Geely’s technical know-how and expertise to help Proton expand its current model lineup to include SUVs (Proton is reportedly developing its first SUV model from Geely’s best selling SUV model the “Boyue”), and move up from producing fossil fuel vehicles to plug-in hybrid and electric vehicles. Malaysia is Southeast Asia’s third largest automotive market after Thailand and Indonesia, and if Geely could repeat its Volvo turnaround success story with the currently loss-making Proton, Geely could be sitting on a potentially profitable investment as well as a platform to develop a beachhead in Southeast Asia.

Under its former owner Proton, iconic British sports car brand Lotus Cars struggled due to lack of funds and currently offers a handful of models dating back several years. However under its new deep-pocketed owner, Geely, it could be light at the end of the tunnel for Lotus Cars as Geely could do for Lotus Cars what it did for Volvo; offer much-needed financial support along with a relatively hands-off management to allow Lotus Cars to unlock its full potential.

The partnership could also result in a cross-pollination of technology, know-how and possibly other resources as well such as suppliers and distribution networks among Geely’s portfolio of automotive marques similar to the way the Geely-Volvo tie-up gave birth to Lynk & Co which uses technology jointly developed by the two companies. Volvo and Lotus Cars are reportedly exploring options on sharing their technologies (Lotus Cars is renowned for lightweight engineering while Volvo is known for safety features and hybrid drivetrains).  The resulting partnerships could generate significant cost savings such as through shared development costs and procurement costs.

Eye on costs 

While Geely’s global aspirations could boost top-line growth, such international expansion plans are expensive and hence if unchecked could negatively impact bottom-line performance resulting in poor investment returns. However, Geely seems to have its eye on costs as well. Geely’s new marque Lynk & Co is reportedly aiming for success by being “brutally simple” by limiting model variations that rotate seasonally and offering limited options which the management believes is not only cost effective since production costs are lower but also offers a better, less-complex customer experience since Lynk & Co cars will be sold at a flat rate throughout Europe so buyers won’t have the trouble of haggling for a discount.

Although the car companies under Geely’s umbrella operate independently and maintain their own unique identity, they are forging close ties to cut costs. Volvo is deepening links with Geely and Lynk & Co to cut electric car development costs for instance by sharing knowledge and thereby cutting costs on developing expensive new technologies.

Volvo is also exploring ways to share technology with Lotus Cars for mutual benefit while Proton is depending on know-how from Geely to develop its first SUV.

Lynk & Co meanwhile has tapped into Volvo and Geely’s jointly developed CMA platform (Compact Modular Architecture platform), a cost-effective move, particularly since the new CMA platform was developed to be highly scalable, allowing multiple models to be developed using the same platform.

Geely’s global ambitions are clear and how far the company gets remains to be seen, however the company is worth watching.

 

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Reliance Industries: India’s Answer To Amazon, Alibaba?

Amazon, Alibaba and Reliance Industries have wide business ecosystems - LD Investments

Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA) are two of the world’s biggest e-commerce companies, each boasting a market value of about half a trillion dollars (specifically speaking, Amazon is more than half a trillion dollars while Alibaba is slightly less).

Both companies boast top-line figures that surpass the Gross Domestic Product of entire countries – Amazon raked in US$ 178 billion in revenues in 2017 while Alibaba earned CNY 250.3 billion or about US$ 40 billion for the year ended March 2018, higher than the 2017 GDP figures of countries such as Estonia (US$ 26 billion), Iceland (US$ 24 billion), Cyprus (US$ 21.6 billion), Afghanistan (US$ 20.8 billion), Jamaica (US$ 14 billion), Brunei (US$ 12.1 billion), Fiji (US$ 5 billion), and Maldives (US$ 4.5 billion) according to data from the World Bank.

Both companies also serve sizeable user bases the number of which is larger than the population of entire countries; Alibaba’s over 600 million monthly active users would make it the third most populous country in the world after China and India, while Amazon’s over 300 million monthly active users would make it the fourth most populous country in the world after China, India and the United States.

Both companies owe much of their initial success to the rapid growth of e-commerce in their respective home countries which make up the world’s two biggest e-commerce markets; Alibaba in China (the world’s biggest e-commerce market) and Amazon in the United States (the world’s second biggest e-commerce market).

Both companies continue to dominate their respective home markets, with Amazon holding a market share of nearly 40% in 2017 while Alibaba commanded a market share of about 55%.

With India emerging as e-commerce’s next major opportunity (Morgan Stanley estimates India’s e-commerce market will grow from US$ 15 billion in 2016 to US$ 200 billion in 2026, representing at a CAGR of nearly 30% between 2017 and 2026), could the South Asian nation join China and the United States in producing its own e-commerce juggernaut?

India’s crowded e-commerce landscape boasts its own share of homegrown online retailers notable examples include Flipkart, Snapdeal, Alibaba-backed Paytm Mall (the e-commerce arm of India’s top digital payment firm Paytm) and ShopClues. With Reliance Industries (RIL) (NSE:RELIANCE) (BOM:500325) and Future Group planning on entering India’s e-commerce sector, competition is set to intensify in an already hyper-competitive market where the majority of players are yet to show profits.

For instance, India’s second-biggest online retailer and e-commerce veteran Amazon’s loss from its international business jumped nearly 30% to US$ 3 billion in 2017 from US$ 1.28 billion in 2016, with much of it due to massive investments in India. Meanwhile India’s leading homegrown e-commerce player, Flipkart saw its losses balloon by 68% during the fiscal year ended March 2018.

With e-commerce making up just 3%-4% of India’s US$ 670 billion retail sector, it is still early days for India’s e-commerce market which is undergoing rapid change. Founded in 2010, local competitor Snapdeal, at one time was India’s number two e-commerce platform after Flipkart, while Amazon India stood at number three. By mid-2016, Snapdeal found itself dislodged from its second-placed position by deep pocketed Amazon India, which began life a couple of years after Snapdeal. With current market leader Flipkart holding retaining its crown (with a market share of 39.5%, ahead of Amazon’s 31% share) the market has so far evolved to be a two-horse race with Flipkart (which was bought up by Walmart this year) and Amazon fighting tooth and nail for gold while ShopClues, Snapdeal and Alibaba-backed PayTM Mall battle for bronze.

Although late to the party, oil-to-telecom conglomerate Reliance Industries possesses several competitive advantages from an extensive brick-and-mortar network to a wide eco-system of businesses which could help it emerge as a formidable player in India’s e-commerce war.

Deep Pockets

Amid stiffening competition, e-commerce platforms are investing substantial sums and burning money heavily as they vie for a slice of India’s promising e-commerce market. Aiming for dominance, Amazon, the world’s largest e-taiiler, has a massive US$ 5 billion war chest while local rival and current market leader Flipkart managed to add nearly US$ 4 billion to its kitty thanks to a funding round from investors such as Softbank, Tencent, Microsoft and eBay last year. The company reduced its burn to just US$ 17-18 million a month while arch rival Amazon continues to burn twice that amount estimated at over US$ 40 million. Against this backdrop, it is likely that smaller, cash-strapped rivals will gradually find themselves edged out by deep-pocketed players. Reliance Industries Ltd being a Fortune 500 company and India’s biggest private sector corporation could have the financial wherewithal to compete against the incumbents similar to the manner in which its telecom arm, Reliance Jio disrupted India’s telecom sector in less than two years of operation to emerge as India’s fourth largest telco after Bharti Airtel, Vodafone and Idea Cellular.

Extensive brick-and-mortar store network

Omnichannel retail experiences (offering customers a seamless online and offline shopping experience) are increasingly becoming commonplace in mature retail markets such as China and the United States. India is expected to follow suit and retailers such as Pepperfry, Adidas, Urban Ladder, FirstCry and Nykaa are among the few in India to have already incorporated click-and-mortar shopping experiences.

Unsurprisingly, Amazon and Flipkart have also been busy plotting their own omnichannel retail strategies; last year, Amazon made its first investment in an offline retailer in India when it picked up a 5% stake in Shoppers Stop, a Mumbai-based department store chain for INR 179.24 crore (about US$ 28 million).

Under the partnership, the duo will conduct “joint marketing” initiatives which will see Amazon open Amazon Experience Centres showcasing Amazon’s products across all 80 Shoppers Stop outlets located in 38 cities in India.

Not wanting to be outdone, Flipkart is reportedly in talks to acquire a 8%-10& stake in Future Lifestyle Fashions Ltd (NSE:FLFL), the listed fashion company owned by Future Group, one of India’s largest retail companies with a presence in grocery, electronics, home furnishings and furniture with over 17 million square feet of retail space in more than 240 cities.

Future Lifestyle is one of India’s largest branded apparel retailers in India with a total retail space of over 5 million sq ft across 400 stores in 90 cities.

Flipkart claims to have a 70% market share in India’s online fashion retail space. A deal with Future Lifestyle Fashions could open an avenue for Flipkart to establish an offline presence in India’s fashion retail sector thereby helping it solidify its market leading position as India’s leading online fashion retailer.

While the e-commerce giants have bolstering their offline presence, Reliance Retail already has an extensive brick and mortar store network throughout India which the company can leverage as part of an omnichannel retail strategy. Similar to Future Group which was founded in 1997, Reliance Retail which was founded nearly a decade later in 2006 is one of India’s largest retail enterprises with a presence in grocery, electronics, furniture and fashion. The company boasts a store network of over 3,700 stores across 750 cities with an area of over 14.5 million square feet of retail space according to the company’s December 2017 quarterly report.

Reliance Jio

There has been a noticeable trend in developed markets where media companies such as Google, Amazon and Alibaba which deliver copious amounts of video and other content are increasingly morphing into telecom companies and telecom companies such as AT&T and Verizon are morphing into media companies.

In other words, the “pipe” owners i.e., the telecom companies are increasingly taking control of the content that flows through their “pipes” while the content owners i.e., the media companies, are increasingly evolving into pipe owners.

Google offers high-speed internet service through its subsidiary Google Fiber, Amazon has reportedly been considering the prospect of becoming an ISP in Europe, and Alibaba is reportedly looking at expanding into the telecom sector.

AT&T, America’s second-largest wireless carrier merged with Time Warner while Verizon, America’s largest wireless carrier, scooped up AOL in 2015 and Yahoo last year, and then clubbed the two companies together to launch its digital content subsidiary Oath Inc with the goal building a media business that could compete with the likes Google and Facebook.

Over in India, a similar trend has been unfolding and Reliance Industries has made its moves. Reliance Industries owns the “pipes” via its telecom arm Reliance Jio and the company also offers its own unique content via its plethora of content apps such as JioCinema, JioMusic etc.

In response to rising net neutrality concerns, the Telecom Regulatory Authority of India (TRAI) last year proposed guidelines in favor of net neutrality; however, Content Delivery Networks (CDNs) or “content “edge” providers (a network of computer servers set up inside an ISP which can deliver digital content faster to end users) do not fall under the proposed regulations and thus integrated operators such as Reliance Jio and Bharti Airtel are poised to benefit as they could leverage this CDN exemption and offer their content at lower prices to their subscribers.

Content Delivery Networks are often built and owned by third-party companies such as Akamai Technologies Inc and Cloudflare, however, some deep-pocketed content providers such as Google, Facebook, Netflix, Amazon, Microsoft and Alibaba have built their own private CDNs. The net neutrality debate focuses on ISPs (Internet Service Providers) and not CDNs.

Wide ecosystem of businesses

Amazon, Alibaba and Reliance Industries have wide business ecosystems - LD Investments

With businesses spanning cloud computing to video streaming Amazon and Alibaba are much more than just e-commerce companies. Interestingly, Indian stalwart Reliance Industries also boasts a highly diversified ecosystem of businesses which combined could prove to be a powerful force.

In brick-and-mortar retailing, Amazon owns the Whole Foods grocery chain, Alibaba owns Hema Supermarkets (盒马) while Reliance has Reliance Retail.

All three companies have logistics arms – Amazon with Amazon Logistics, Alibaba with its Cainiao and Reliance Industries with Reliance Logistics.

In video streaming, Amazon has Amazon Video while Alibaba has video hosting platform Youku Tudou. Relince has JioCinema.

In music streaming, Aamzon has Amazon Music, Alibaba has Ali Music and Reliance Industries has JioMusic.

All three companies have ventured into production of digital video content; Amazon through Amazon Studios, Alibaba through Alibaba Pictures and Reliance Industries via its partnership with Roy Kapur Films (RKF) which will produce original digital video content as “Jio Originals”.

In the mobile wallet space, Amazon has Amazon Pay, Alibaba has Alipay and Reliance has Jio Money.

In messaging apps, Amazon has Amazon Chime, Alibaba has DingTalk and Reliance Industries has JioChat,

All three companies have their feet in the cloud business as well with Amazon offering cloud services through AWS, Alibaba through Alibaba Cloud and Reliance through JioCloud.

All three companies have a direct or indirect involvement in media as well, with Amazon founder Jeff Bezos owning the Washington Post, Alibaba founder Jack Ma owning the South China Morning Post and Reliance Industries holding Network 18.

Such a wide eco-system has several advantages; the businesses will reinforce each other as existing consumers and companies become more likely to use their platforms which not only generate diverse sources of revenue but vast quantities of consumer and business data as well, which ultimately could be used towards further business expansion.

RIL Chairman Mukesh Ambani famously said, “Data is the new oil and India does not need to import it”.

While Reliance Industries is a latecomer to India’s e-commerce arena and the company’s success depends on several factors such as execution, Reliance’s entry into e-commerce cannot be taken lightly; the Indian giant could be a formidable competitor, disrupting the current status quo similar to the manner in which it reshaped the Indian telecom sector within a few years of operation.