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The Technology Trends Powering China’s Agrifood Sector

Column chart showing crop yields in China vs United States for selected crops during crop year 2018/19. During crop year 2018/19, coarse grain yields in the United States stood at 10.44 metric tons per hectare compared with 5.95 metric tons per hectare in China. Wheat yields were 3.2 metric tons per hectare in the United States and 5.42 metric tons per hectare in China. Corn yields were 6.11 metric tons per hectare in China and 11.07 metric tons per hectare in the United States. Barley yields were 3.64 metric tons per hectare in China and 4.17 metric tons per hectare in the United States. Oats yields were 1.15 metric tons per hectare in China and 2.33 metric tons per hectare in the United States. Sorghum yields were 4.79 metric tons per hectare in China and 4.53 metric tons per hectare in the United States. Rice yields were 7.03 metric tons per hectare in China and 8.62 metric tons per hectare in the United States. Soybean yields were 1.9 metric tons per hectare in China and 3.4 metric tons per hectare in the United States. Cottonseed yields were 3.11 metric tons per hectare in China and 1.26 metric tons per hectare in the United States. Peanut yields were 3.75 metric tons per hectare in China and 4.48 metric tons per hectare in the United States. Sunflower seed yields were 2.71 metric tons per hectare in China and 1.94 metric tons per hectare in the United States. Rapeseed yields were 2.03 metric tons per hectare in China and 2.09 metric tons per hectare in the United States.

China is one of the world’s largest food producers. With the country’s middle class expanding along with growing incomes, food demand in China has been on a steady growth path. China is the world’s largest wheat consumer, largest fruit consumer, largest egg consumer, and largest meat consumer. China is the world’s biggest importer of soybeans, is the world’s largest tea market, and is the world’s largest market for alternative meat. China is expected to be the world’s largest dairy market by 2022, and the country is expected to overtake the United States to become the world’s largest grocery market as well.

With Chinese per capita incomes standing at less than one-third of the United States, there is tremendous potential for growth in China’s agrifood sector as per capita food consumption grows along with rising prosperity opening interesting opportunities. While China has attracted much attention due to some high profile outbound agri-food acquisitions such as ChemChina’s of Swiss seed giant Syngenta, and China Mengniu Dairy’s (HKG:2319) acquisition of Australian dairy company Bellamy’s Australia, business optimism is strong on the domestic front as well. Listed agrifood companies such as New Hope Liuhe Co Ltd (SHE:00876), and Muyuan Foods Co Ltd (SHE:002714) have seen share prices jump over the past five years; Muyuan Foods Co Ltd saw its share price jump more than ten-fold during the five years until August 2020 while New Hope Liuhe’s share price quintupled during the same period. Hong Kong-listed China Mengniu Dairy’s share price also quintupled during the same period. On the startup front, China remains the world’s second largest market for agrifood tech startup investing by total deal number and amount invested after the US according to AgFunder.

Much of investor attention is currently on China’s booming eGrocery market, which raked in 60% of agrifood startup investment in 2019 according to data from Agfunder. However, there are numerous other sectors worth watching particularly in agri-tech which has strong government support. This year, the Chinese government released the “Digital Agriculture and Rural Area Development Plan 2019-2025” which aims to have digital agriculture account for 15% of China’s agricultural value-add.

Precision farming

Precision farming is a growth industry and the opportunity is no different in China, one of the world’s largest agricultural producers. China is upgrading is agriculture infrastructure to precision farming. The vast majority of China’s farms are small scale farms with basic machinery. Agriculture 4.0 technologies such as precision and smart farming accounts for just 1% of the nation’s total agricultural production. For instance according to a 2018 article by a Chinese economist HE Fan, agricultural drone penetration is about 65% in the U.S. but just 2% in China. Innovation and advancement in areas such as AI, IoT, remote sensing, and 5G will spur greater adoption.

The regulatory environment is favorable too, with the Chinese government stepping up efforts to boost domestic agricultural yields and production in an effort to reduce reliance on food imports from the U.S.

Column chart showing crop yields in China vs United States for selected crops during crop year 2018/19. During crop year 2018/19, coarse grain yields in the United States stood at 10.44 metric tons per hectare compared with 5.95 metric tons per hectare in China. Wheat yields were 3.2 metric tons per hectare in the United States and 5.42 metric tons per hectare in China. Corn yields were 6.11 metric tons per hectare in China and 11.07 metric tons per hectare in the United States. Barley yields were 3.64 metric tons per hectare in China and 4.17 metric tons per hectare in the United States. Oats yields were 1.15 metric tons per hectare in China and 2.33 metric tons per hectare in the United States. Sorghum yields were 4.79 metric tons per hectare in China and 4.53 metric tons per hectare in the United States. Rice yields were 7.03 metric tons per hectare in China and 8.62 metric tons per hectare in the United States. Soybean yields were 1.9 metric tons per hectare in China and 3.4 metric tons per hectare in the United States. Cottonseed yields were 3.11 metric tons per hectare in China and 1.26 metric tons per hectare in the United States. Peanut yields were 3.75 metric tons per hectare in China and 4.48 metric tons per hectare in the United States. Sunflower seed yields were 2.71 metric tons per hectare in China and 1.94 metric tons per hectare in the United States. Rapeseed yields were 2.03 metric tons per hectare in China and 2.09 metric tons per hectare in the United States.

One such area where precision farming holds tremendous potential in China is pesticide use. China feeds about 19% of the world’s population with just 7% of the world’s arable land. While this is commendable, the country also uses about 47% of the world’s pesticides, making it the world’s largest user of agricultural chemicals. China’s heavy pesticide use despite the country’s relatively minute cropland share, is a national concern. In an effort to improve food safety, and minimize environmental damage caused by pesticide overuse and thereby improve the sustainability of Chinese agriculture, the Chinese government has been phasing out highly toxic pesticides from use over the past few years.

Chinese agritech drone startups such as XAG, and McFly are well placed to emerge as solution providers to tackle China’s pesticide issue. XAG is a leader in China’s smart agriculture field, with more than 40,000 of its agricultural drones operating in China. Baidu-backed McFly, which raised US$ 14 million in 2019 is a relatively new player. Both develop AI-powered remote sensing agriculture-focused aviation equipment to help farmers reduce farm pesticide use. For instance McFly’s precision pesticide spray is able to detect with 97% accuracy the presence of pests on specific areas of a farm land and spray pesticide accordingly.

This precise use of pesticides eliminates the need for the current practice of completely spraying an entire farmland with pesticide since more often than not, pest distribution occurs in parts of the farm, not throughout the farm. The benefits are clear; consumers have safer food while farmers benefit from reduced farm input costs.

The growth story is just beginning. Farmers need large sized farms to justify the investment in expensive agricultural drones. In McFly’s case for instance, farmers need reportedly a little more than 13 hectares to justify the investment in McFly’s commercial services. However, unlike in the United States, very few Chinese farmers have farmland of that size. McFly worked around this limitation by offering a group-buying model to make the services more affordable, which has been successful. However, McFly’s bottom margins may be better off dealing with large-scale individual customers as opposed to millions of small scale users. This will likely materialize in the years ahead. 

For centuries, millions of small-scale farms have been dominating China’s rural areas, and these are often managed by farming families themselves. Apart from the cost disadvantage of small scale farming due to their inability to benefit from of economies of scale, it has also been found that agricultural chemicals are often used inefficiently on small farms according to a research study conducted a team of researchers from the Universities of Melbourne, Zhejiang, Fudan, Wuhan and Stanford.

The inefficiencies of small-scale farming along with China’s growing problem of ageing farmers has prompted the Chinese government to clear the path for private investment in large-scale commercial farming, through rural land reform which will allow family farmland owners to collectively rent out their land to large-scale farmers to cultivate the land on a large scale.  Much like the gradual disappearance of America’s small family farms in the in the mid 20th century, China too appears to be on the path towards farm consolidation where small family farms will gradually give way to modernized, large scale commercial farms which suggests good for McFly.

Agricultural e-commerce

According to government data, e-commerce sales of agricultural produce reached CNY 554.2 billion in 2018, representing 9.8% of total agricultural sales. There is still ample room for growth. Under China’s “Digital Agriculture and Rural Area Development Plan 2019-2025” the Chinese government is aiming to boost the proportion of agricultural products sold online to reach 15% by 2025 which suggests bright prospects for agri-marketplaces in China. The competitor landscape however is crowded with players. Pinduoduo (NASDAQ:PDD) is perhaps one of the biggest names in the game having shot up to becoming China’s third largest marketplace after Alibaba and JD.com, by capitalizing on the growth of rural e-commerce. Their strategy was largely based on agriculture e-commerce and their popularity as a platform for rural farmers to sell their wares to city folk hungry to buy fresh agricultural produce straight from farmers continues to this day. Pinduoduo’s group-buying model enabled shoppers to team up with other interested buyers to collectively make a purchase of farm produce. Shoppers earn discounts for the relatively large purchase while farmers get to sell their produce at higher prices (since there is no middleman involved) and in relatively large order sizes thus saving them the hassle of fulfilling a large number of small orders.

Valued at US$ 7 billion,  agri-marketplace unicorn Meicai took a different route, connecting farmers with restaurants and hotel chains instead who also make relatively large purchases (for instance, the minimum order quantity is 5kilograms for vegetables). Meicai started off as an online retailer, directly sourcing and selling the fresh produce themselves. Starting 2017 however, the platform was opened to third party merchants as well.

The company in-house cold chain logistics network which was built with an investment of more than RMB 2 billion. This supply chain advantage is a significant competitive strength, with the company boasting more than 74 cold storage centers scattered in 52 cities with a warehouse area of approximately 800,000 square meters. Meicai has a fleet of more than 17,000 delivery vehicles and the company has a daily parcel handling capacity of more than 5.2 million. Meicai’s sales are expected to exceed RMB 14 billion in 2019 and although the company is currently loss-making, it is cash flow positive and is expected to turn in a profit by 2020.

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China’s Centuries-Old Plant Based Meat Industry Set For Growth

Bar chart showing the top five vegetarian markets in the world by vegetarian population. India was the biggest with a vegetarian population of 390 million followed by Indonesia with 66.9 million vegetarians, Nigeria with 58.1 million vegetarians, China with 51.9 million vegetarians, and Pakistan with 33.2 million vegetarians.

According to Euromonitor China’s “free from meat” market which includes plant-based meat products has grown 33.5% since 2014 to reach US$ 9.7 billion in 2019. The industry is forecast to reach US$ 11.9 billion by 2023. Already the world’s largest market for alternative meats, the Covid pandemic could serve as a catalyst to encourage greater numbers of non-vegetarian Chinese to adopt alternative meats as consumers, wary of potential sickness from animal protein increasingly turn to plant-based proteins such as plant-based meat and plant-based eggs. For instance, Just Egg, a plant-based egg alternative reportedly saw sales jump 30% on e-commerce platforms JD.com (HKG:9618) (NASDAQ:JD) and Alibaba’s Tmall since the Covid outbreak.

The potential is enormous; protein demand in China is on a structural uptrend, driven by a growing middle class, rising incomes, and living standards. China is the world’s largest meat consumer, the world’s largest meat importer, the world’s largest meat producer, and the world’s largest soybean importer (demand for which is largely driven by its livestock industry which uses soybean meal as animal food). China’s soybean imports by value are more than 10 times bigger than second-placed European Union.

Bar chart showing top five soybean imports by volume, 2018. China was the world’s largest soybean importer having imported 85.47 million metric tonnes in 2018, followed by the EU-27 + UK with imports of 17.29 million metric tonnes, Argentina with 6.78 million metric tonnes, Mexico with 5.15 million metric tonnes, and Egypt with 3.51 million metric tonnes. Data from UN Trade Data.

Yet, there is still room for growth. Although China has caught up with Asian neighbors such as South Korea in terms of average protein supply, China still falls short when compared with Western countries such as the United States and Germany.

Column chart showing average protein supply (in grams per capita per day) (three year average) in China, South Korea, United States, and Germany. In 2008-2010, average protein supply was 91.7 in South Korea, 92.4 in China, 101.3 in Germany, 110.7 in the United States. In 2009-2011, average protein supply was 93 in South Korea, 93.7 in China, 102 in Germany, 109.3 in the United States. In 2010-2012, average protein supply was 94.3 in South Korea, 95.3 in China, 101.7 in Germany, 109 in the United States. In 2011-2013, average protein supply was 96 in South Korea, 96.7 in China, 101.7 in Germany, 108.7 in the United States. Data from the Food and Agriculture Organization of the United Nations.

However, satisfying this expected protein demand may prove an uphill challenge due to scarce resources; home to 19% of the world’s population but owning just 7% of the world’s arable land, China has very limited arable land. At just 0.086 hectares per person, China’s arable land per capita is lower than India, the United States, the European Union, and Russia.

Bar chart showing arable land per capita for selected countries as a 2016. In 2016, arable land per capita reached 1.904 hectares per person in Australia, 0.853 hectares per person in Russia, 0.471 hectares per person in the United States, 0.2 to 3 hectares per person in the European Union, 0.118 hectares per person in India, and 0.086 hectares per person in China. Data from the World Bank.

And with the livestock industry producing just 18% of the world’s calories and 37% of total protein despite occupying 77% of the world’s agricultural land according to figures from Our World in Data, it is clear that animal protein is far more resource intensive than plant-based protein, and so China, already the world’s largest meat producer, likely has very little room for further land expansion for livestock which makes the case for plant-based meats in China is very compelling.

Furthermore, the industry is bound to benefit from support from the Chinese government which reportedly aims to cut down meat consumption by 50% to reduce greenhouse gas emissions. Plant-based meats are an answer to this and the climate-friendly narrative of plant-based meats is a major draw factor, particularly among China’s sustainability-conscious millennial generation. China has about 400 million millenials, compared with about 80 million in the United States.

The opportunity has not gone unnoticed. Global alternative protein players such as Beyond Meat (NASDAQ:BYND), and Impossible Foods have stepped up marketing efforts in China while food and beverage players such as Starbucks, and Yum! Brands’ (NYSE:YUM) KFC, Pizza Hut and Taco Bell have launched plant-based menus. KFC’s plant-based chicken will be supplied by agri-business giant Cargill, while Stabucks’ plant-based menu will see faux meats supplied by Beyond Meat.

Beyond Meat also partnered with Alibaba’s (HKG:9988) (NYSE:BABA) grocery retailer Hema to bring its plant-based packaged meat to supermarket shelves in China.

Competitive landscape: China’s mock meat industry is centuries old, and the country’s has well established players offering a wide variety of plant-based meat products

Imitation meat originated in China, and restaurants in Buddhist temples throughout the country have been serving fake meat as far back as the Song dynasty which lasted until the 13th century. A key pillar of Buddhist principles is respect for all life i.e., all living creatures and hence vegetarianism is commonly practiced among Buddhists. To accommodate the diets of patrons and guests, these temple kitchens mastered the art of preparing mock meats, a tradition which continues to this day in numerous Chinese Buddhist temples not only throughout China but also around the world from Malaysia, to the United States. Over the centuries, restaurants sprung up throughout the Middle Kingdom offering faux meat menus to cater to vegetarian Buddhists. According to China Daily there are more than 300 restaurants offering fake meat in Beijing alone.

Chinese entrepreneurs and merchants brought their expertise with them during their overseas travels and hence countries with a significant ethnic Chinese population such as Malaysia, also have their share of mock meat restaurants and mock meat manufacturers. Notable Malaysian players such as Ahimsa (which literally means “non-violence” in Sanskrit) for instance have been in the business for decades. X% of Malaysian vegetarian meat companies in the LD Investments database are more than 10 years old.

Thus, China has a very long history of manufacturing plant-based protein and the country has several players producing mock meat products out of a variety of plant-based foods such as tofu skin (known as yuba), soybeans, wheat gluten (sometimes called seitan), mushrooms, peanuts, and vegetables such as potatoes and carrots.

These well established players offer much more than just burghers and sausages, with their product range covering a wide breadth of faux meat and seafood products from ordinary staples such as beef, pork, lamb, chicken, crab meat, roast duck, and cuttlefish, to exotic meats such as eels, puffer fish, shark’s fin, and abalone.

It has been noted however that a number of these companies’ products are targeted at China’s vegetarian population, and the products often do not mimic the taste, texture, and color of authentic meat very well. Hence, while they satisfactorily serve the needs of China’s vegetarian population, the products may need some tinkering before China’s mammoth non-vegetarian population will be sufficiently persuaded to make the switch and consume plant-based meats on a regular basis. Impossible Foods’ burgher for instance uses a patent-protected lab-grown heme which makes its vegetarian burgher look, taste, and “bleed” like the real thing, and thereby differentiates itself from competing burghers.

This probably explains why despite having a centuries-old and well-established mock meat industry, Chinese still favor animal meat over plant-based options and animal meat’s popularity has only grown along with the country’s affluence-driven protein demand. China’s vegetarian population is just about 3.8% of the total population.

Bar chart showing vegetarians as a percentage of the population for selected countries. With vegetarians accounting for 29.8% of the country’s population, India’s vegetarian population had the highest percentage, followed by Indonesia where vegetarians accounted for 25.4% of the country’s population, and Pakistan at 16.8%. China’s vegetarian population made up just 3.8% of the country’ s total population.

And in absolute terms, China’s vegetarian population is dwarfed by Asian neighbors India, and Indonesia.

Bar chart showing the top five vegetarian markets in the world by vegetarian population. India was the biggest with a vegetarian population of 390 million followed by Indonesia with 66.9 million vegetarians, Nigeria with 58.1 million vegetarians, China with 51.9 million vegetarians, and Pakistan with 33.2 million vegetarians.

Nevertheless, these established players will seek to expand beyond their traditional target market of vegetarian Buddhists, which suggests competition will be fierce.

Overseas players will be up against local upstarts and established domestic players

Overseas companies Beyond Meat, JUST, and Impossible Foods will be up against local upstarts such as Zhenmeat (often touted as China’s answer to Beyond Meat), and OmniPork who are also beefing up their businesses to carve out their slice of the market.

While Beyond Meat and Impossible Foods’ product offering is heavily skewed towards the western palate with products such as burghers and sausages, China’s domestic players are heavily focused on Chinese taste buds with a focus on pork rather than beef (given that pork is China’s most popular meat) and with a product range covering local delicacies such as dumplings, mooncakes, and meatballs.

Zhenmeat for instance offers local delicacies such as plant-based meat mooncakes, and konjac-based crayfish. Hong Kong-based OmniPork offers a line of pork products tailored to Chinese taste buds such as pork buns and pork strips. Pork makes up 80% of China’s meat market, and China is the world’s largest pork consumer accounting for nearly half of global pork consumption.

Pie chart showing pork consumption by country in 2018. Accounting for 49.3% of global pork consumption, China was the world’s biggest pork consumer followed by the European Union with 19%, and the United States at 8.7%. Other countries accounted for the balance 23.1%. Data from the United States Department of Agriculture, Foreign Agricultural Service, and LD Investments analysis.

With domestic demand outstripping domestic supply, China has also held the position as the world’s largest pork importer for a few years, before being overtaken by Japan in 2018 but expected to regain the leading position in 2019 according to data from the United States Department of Agriculture (USDA) as the African Swine Fever (ASF) disease reduced China’s domestic pig herd by at least 40%, leading to a spike in imported pork from all China; China’s pork imports by dollar value jumped 117.4% in 2019.

The ASSF outbreak has also pushed up meat prices such as pork helping further push interest towards plant-based pork. The current conditions prevailing in China’s pork market suggest apt timing for OmniPork to capture its share of China’s alternative protein market.

Established domestic mock meat players to watch include Whole Perfect Food and Godly. Founded in 1993, Whole Perfect Food has been in the industry for decades selling faux meat to Chinese consumers shunning meat for religious reasons. Now they are looking to expand that market and the company could emerge as a strong contender armed with a product range of more than 300 vegetarian/plant-based meat and meat product alternatives including vegetarian versions of oyster sauce, tailored to the Chinese palate.

Founded in 1922, Godly 功德林is considered to be one of the pioneers of plant-based meats. And like Whole Perfect Food offers a plethora of faux meat products from mock meat chicken, duck, ham and traditional meats such as vegetarian dried intestines, to local delicacies such as mock meat buns, dumplings, traditional Chinese cakes, and mooncakes. Their official store on JD.com has over 200 reviews, most of which are positive.

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Singapore Economy: Current State, And Prospects

Pie chart showing Singapore's nominal GDP by industry in 2019. Singapore's manufacturing sector was the largest contributor to GDP was a 20.9% share followed by wholesale and retail trade with a 17.3% share, business services with a 14.8% share, finance and insurance with a 13.9% share, other services Industries 11.3% share, transportation and storage with a 6.7% share, information and Communications with a 4.3% share, ownership and dwellings with a 3.8% share, construction with a 3.7% share, accommodation and Food Services with a 2.1% share, and utilities with a 1.2%. Data from the department of Statistics Singapore.

Like many other countries that have been economically affected by the COVID crisis, Singapore, Southeast Asia’s fifth largest economy, has officially entered into a technical recession with the economy contracting 13.2% year on year during the second quarter of 2020 and The Straits Times Index entering bear territory as well with a decline of nearly 20% this year.

By industry, 70% of Singapore’s nominal GDP is from the services sector and about 26% from the goods-producing sector (Manufacturing, Construction, Utilities).

Pie chart showing Singapore's nominal GDP by industry in 2019. Singapore's manufacturing sector was the largest contributor to GDP was a 20.9% share followed by wholesale and retail trade with a 17.3% share, business services with a 14.8% share, finance and insurance with a 13.9% share, other services Industries 11.3% share,  transportation and storage with a 6.7% share, information and Communications with a 4.3% share, ownership and dwellings with a 3.8% share, construction with a 3.7% share, accommodation and Food Services with a 2.1% share, and utilities with a 1.2%. Data from the department of Statistics Singapore.

Of the services sector, the largest sub-sector is the Wholesale & Retail Trade sector which accounts for 17.3% of Singapore’s GDP, followed by Business Services accounting for 14.8% and Finance and Insurance accounting for 13.9% of Singapore’s GDP in 2019. The largest services subsector – Wholesale and Retail Trade – was heavily hit by the COVID pandemic when Singapore, like many other countries around the world, went into lockdown with retail sales declining 52% year on year on May 2020 and 27.8% year on year in June 2020.

However, as business activities resumed in June 2020 (in phases), retail sales jumped 51% in June 2020, with almost all subsectors in Singapore’s Wholesale and Retail Trade sector enjoying gains, reflecting an unleashing of pent up consumer demand. In fact, sales in the Watches & Jewellery industry jumped a whopping 1,236.9% month on month, a spectacular gain for an industry considered to be non-essential, and the demand for which is highly elastic which suggests Singapore’s consumer spending power and consumer confidence have been little affected by the Covid pandemic so far.

Bar chart showing the percentage change in retail sales by industry in Singapore for the month of June 2020. Department store sales increased 319.3% month on month but declined 69.5% year-on-year. Supermarket and hypermarket sales declined 3.3% month-on-month but grew 43.4% year on year. Mini Mart and convenience store sales declined 0.1% month-on-month but increased 8.7% year on year. Food and alcohol sales increased 34.3% month on month but declined 45.7% year on year. Motor vehicle sales grew 212.4% month on month but declined 47.8% year on year. Petrol service stations sales grew 51.9% month on month but declined 33.6% year on year. Cosmetics, toiletries and medical goods sales increased 34.2% month-on-month but declined 33.1% year on year. Wearing apparel and footwear sales increased 251.1% month-on-month but declined 63.4%. Furniture and household equipment sales increased 125.1% month on month but declined 19.9% year-on-year. Recreational goods sales increased 126.3% month on month but declined 40.7% year on year. Watches and jewellery sale increased 1236.9% month-on-month but declined 53.5% year-on-year. Computer and telecommunications equipment sales increase 49.7% month on month and also increased 20.9% year on year. Optical goods and book sales increased 228.3 percent month on month but declined 39.4% year on year. Sale in the other categories grew 90.5% month-on-month but declined 42.5% year on year. Data the department of Statistics Singapore.

Domestic wholesale sales dropped 9.6% year on year in the first quarter of 2020 while foreign wholesale sales dropped 12.2% year on year in the first quarter of 2020 as all domestic and foreign trade except essential industries such as food decelerated sharply during the Covid lockdown. Consequently, wholesale sales declines were registered in all sub-sectors in the domestic Wholesale Trade sector except Food, Beverages & Tobacco which grew 3.5% year on year during the first quarter of 2020, and General Wholesale Trade which rose by 1.4% year on year during the same period.

Bar chart showing the percentage change in domestic wholesale trade sales by industry in Singapore for the month of June 2020. Food, beverages and tobacco sales increased 4.6% quarter-on-quarter and increased 3.5% year on year. Household equipment and furniture sales fell 9% quarter-on-quarter and fell 16.4% year on year. Petroleum and Petroleum products sales dropped 1% quarter-on-quarter, and 10.4% year on year. Chemicals and chemical products sales increased 5.9% quarter-on-quarter and fell 7.7% year on year. Electronic components sales dropped 2.8% quarter-on-quarter and dropped 17.5% year-on-year. Industrial and construction machinery sales declined 6.3% quarter on quarter and dropped 15.2% year on year. Telecommunications and computer sales dropped 4.3% quarter-on-quarter, and fell 9.9% year on year. Metals, timber and construction sales fell 1.6% quarter on quarter and dropped 15.3% year on year. General wholesale trade dropped 3% quarter on quarter and increased 1.4% year on year. Ship chandlers and bunkering sales dropped 0.7% quarter on quarter and dropped 10% year on year. Transport equipment sales dropped 9.5% quarter-on-quarter and dropped 10.5% year-on-year. Other wholesale trade sales dropped 0.9% quarter-on-quarter and dropped 3.6% year-on-year. Data from the department of Statistics Singapore.

As global trade slowed and global supply chains nearly ground to a halt, all sub-sectors within Singapore’s Foreign Wholesale Trade sector saw year on year declines in the first quarter of 2020 and all except Other Wholesale Trade saw quarter-on-quarter sales declines.

Bar chart showing the percentage change in foreign wholesale trade sales in Singapore during the month of June 2020. Food, beverages tobacco wholesale sales dropped 4% quarter-on-quarter and 2% year on year. Household equipment and furniture wholesale sales dropped 0.5% quarter-on-quarter and 6% year on year. Petroleum and Petroleum products wholesale sales dropped 14.1% quarter-on-quarter and 18.6% year on year. Chemical and chemical products wholesale sales dropped 9.9% quarter-on-quarter and 10.9% year-on-year. Electronic components wholesale sales dropped 0.5% quarter-on-quarter 3.4% year-on-year. Industrial & Construction machinery wholesale sales dropped 7.9% quarter-on-quarter and 18% year on year. Telcommunications and computers wholesale sales dropped 4.1% quarter-on-quarter and 6.6% year-on-year. Metals, timber and Construction wholesale sales dropped 7% quarter on quarter and 4% year on year. General wholesale trade dropped 14% quarter on quarter and 12.7% year on year. Ship chandlers and bunkering dropped 9.7% quarter on quarter 0.6% year-on-year. Transport equipment wholesale sales dropped 9.2% quarter-on-quarter and 22.2% year-on-year. Other wholesale trade was unchanged quarter-on-quarter and dropped 0.5% year-on-year. Data from the department of Statistics Singapore.

Singapore’s Manufacturing sector, the single largest GDP contributing sector, accounting for 20.9% of Singapore’s nominal GDP in 2019, was also affected by the COVID crisis with manufacturing output declining 8.1% in May 2020 and 6.7% in June 2020. Excluding biomedical manufacturing, manufacturing output grew 2.1% in June 2020 clearly benefiting from the gradual lifting of lockdown measures.

Line chart showing Singapore's manufacturing output on your growth during the month of April May and June 2020. Singapore total manufacturing output increased 12% in April 2020, dropped 8.1% in May 2020 and dropped  6.7 percent in June 2020. Excluding biomedical manufacturing Singapore's manufacturing output dropped 2.7% in April 2020, dropped 10.3% in May 2020, and increased 2.1% in June 2020. Data from Singapore economic development board.

With SMEs accounting for 99% of Singapore’s 273,100 business establishments and 72% of Singapore’s 3.52 million employees, the economic slowdown caused by the nationwide lockdown has dented SME finances causing Singapore’s unemployment rate to rise to 2.9% in the second quarter of 2020, the highest in more than a decade, and up from 2.4% in the previous quarter. The number of bankruptcy applications also reached an all-time high in March this year, though the number rapidly declined in the months after as the Singaporean government swiftly put relief measures in place through the Covid-19 (Temporary Measures) Act.

On the bright side, at less than 3%, Singapore’s unemployment rate is still on the lower end of the unemployment scale compared to the rest of the world; Singapore’s neighbor in the north, Malaysia, registered an unemployment rate of 5.3% in May 2020, up from 5% in April 2020. Additionally, Singaporean households are relatively financially stable with household debt being well covered by financial assets which suggests the general population is reasonably well placed to weather an economic storm.

Line chart showing Singapore household debt as a percentage of household financial assets. Singapore's household debt as a percentage of household financial assets at 23.81% in the first quarter of 2020, 24.07% in the fourth quarter of 2019, 24.64% in the third quarter of 2019, 25.05% in the second quarter of 2019, 25.72% in first quarter of 2019, 26.65% in the fourth quarter of 2018, 26.78% in the third quarter of 2018, 27.03% in the second quarter of 2018, 27.19% in the first quarter of 2018, 27.39% in the fourth quarter of 2017, 27.62% in the third quarter of 2017, 27.67% in the second quarter of 2017, and 27.94% in the first quarter of 2017. Data from the department of Statistics analysis from LD investments.

Singapore’s strong fiscal position also helped it maintain its AAA sovereign debt rating despite the government rolling out large stimulus measures (as much as 12% of GDP) to support the economy from the Covid impact. By comparison, Australia saw its credit rating outlook revised to negative by S&P Ratings.

The bigger potential risk to Singapore’s recovery is a downturn in the global economy and international trade, as well as economic downturns among key trading partners such as China, the United States, and Malaysia which will have a knock-on effect on Singapore’s economy as well.

China is Singapore’s biggest merchandise trade partner as of 2019.

Bar chart showing Singapore's top five merchandise trade partners in 2019. With a total  merchandise trade value of S$ 137.3 billion, Mainland China was Singapore's top merchandise trading partner in 2019, followed by Malaysia with S$ 113 billion, the United States with S$ 105 billion, The EU with S$ 93 billion, and Taiwan with S$ 66.5 billion.

And the United States is Singapore’s biggest services trade partner as of 2018, according to official data.

Bar chart showing Singapore's top five service trade partners in 2018. With a total service trade value of S$ 75.3 billion, the United States was Singapore's top services trading partner in 2018, followed by Japan with S$ 37.4 billion, Mainland China with S$ 35.3 billion, Australia with S$ 27.3 billion, and Ireland with S$ 23.3 billion.
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Bright Prospects For China’s Cold Chain Logistics Sector

Column chart showing China's fresh food e-commerce market size, growth, and proportion of total fresh food market size. China's fresh food market was valued at RMB 43.6 trillion in 2015, RMB 47.3 billion in 2016, RMB 47.4 billion in 2017, RMB 49.5 billion in 2018, and RMB 51 billion in 2019. China's fresh food ecommerce market was valued at RMB 828 million 2015, RMB 1.324 billion in 2016, RMB 1.752 billion in 2017 RMB 2.424 billion in 2018, and RMB 2.888 billion in 2019. China's fresh food ecommerce market's sure of the country's overall fresh food market stood at 1.9% in 2015, 2.8% in 2016, 3.7% in 2017, 4.9% in 2018, and 5.66% in 2019. China's fresh food ecommerce market growth rate was 80.7% in 2015, 59.9% in 2016, 32.3% in 2017, 38.4% in 2018, and 19.1% in 2019. Data from Cushman and Wakefield.

China’s cold chain logistics market has been growing steadily over the past several years. According to management consulting firm L.E.K. Consulting, China’s cold chain market grew from RMB 81 billion in 2011 to RMB 181 billion in 2015 representing a growth rate of over 20% annually.

Column chart showing China's cold chain logistics market size (in RMB billions). China's cold chain logistics market was valued at RMB 81 billion in 2011, RMB 109 billion in 2013, RMB 181 billion in 2015, RMB 236 billion in 2017 (forecast), RMB 368 billion in 2019 (forecast), RMB 470 billion in 2020 (forecast).

Yet, there is still ample potential for growth. China’s cold chain logistics network currently represents a relatively small part of the overall logistics industry, with just about 19% of the Chinese market having access to cold chain technologies, compared to 85% in Europe and Japan. This explains why the cargo damage to fresh product (such as fruits and vegetables which accounts for the greatest demand for cold chain logistics services) within China’s cold chain is reportedly as high as 20% to 30% – which is considerably higher than the average 5% to 10% in developed countries.

Furthermore, the market for cold chain logistics is expected to be driven by consumption upgrades (for instance with regards to consumer expectations on product freshness and quality), and growing demand for agricultural commodities such as fresh fruits and vegetables, as a result of rising incomes and living standards.

Considering these growth drivers, market research firm Reportlinker, projects China’s cold chain logistics market to reach RMB 522.5 billion in 2025 from RMB 295.6 billion in 2018 representing a CAGR of 8.5% between 2018 and 2025.

Fundamental growth drivers: rising fresh produce demand along with increasing quality and freshness expectations as living standards rise, and an expanding fresh food e-commerce sector

Demand for cold chain logistics stems largely from five agricultural products including meat, aquatic products, quick-frozen foods, fruits and vegetables, and dairy products, among which cold chain for fruits and vegetables accounts for the greatest demand. With incomes growing and its middle class expanding, demand for such agricultural products are enjoying robust demand in China.

According to data from the China Chamber of Commerce for Import and Export of Foodstuffs, Native Produce, and Animal By Products, in 2019 China imported approximately 6.83 million tons of fruit with a total value of US$ 9.5 billion, representing a year-on-year increase of 24% 25% respectively.
With China’s fruit exports amounting to 3.61 million tons at a value of US$ 5.5 billion in 2019, up just 4% and 14% year on year respectively, China is a net fruit importer and is likely to remain so, as per capita fruit consumption grows while economic policy focuses on high-tech industries and high-value manufacturing sectors.
Data released by the National Bureau of Statistics show that per capita consumption of fresh fruits among urban residents was 56.423 kilograms in 2018, up from 47.6 kilograms 2013. With per capita fruit consumption growing steadily, the Chinese Academy of Agricultural Sciences projects China’s fruit market will reach US$ 460 billion in 2024.

China’s growing interest in milk and dairy products is also poised to contribute to demand for cold chain logistics. China today is the second largest dairy market behind the United States, the third largest milk producer in the world, with about 13 million dairy cows up from just 120,000 cows in 1949.  The average dairy product consumption per capita has increased from almost just 6 kilograms in 1999 to 36 kilograms in 2019. Yet, there is plenty of potential with China’s per capita consumption of dairy products being half of the rest of Asia and less than one third of the world average according to Milk Quotient report published by the China Dairy Industry Association and Dutch dairy producer Royal Friesland Campina last month in Beijing.

China’s burgeoning fresh food e-commerce sector is expected to drive some of the demand for these products. China fresh food e-commerce industry has been growing steadily over the past few years; according to Euromonitor and Qianzhan Industry Research Institute, in 2019, China’s fresh food e-commerce market was valued at around RMB 288.8 billion up 19.1% 2018 when the market was valued at RMB 242.4 billion in 2018. Yet, with fresh food e-commerce accounting for just 5.6% of the total fresh food industry market in China in 2019, there is tremendous potential for growth.

Column chart showing China's fresh food e-commerce market size, growth, and proportion of total fresh food market size. China's fresh food market was valued at RMB 43.6 trillion in 2015, RMB 47.3 billion in 2016, RMB 47.4 billion in 2017, RMB 49.5 billion in 2018, and RMB 51 billion in 2019. China's fresh food ecommerce market was valued at RMB 828 million 2015, RMB 1.324 billion in 2016, RMB 1.752 billion in 2017 RMB 2.424 billion in 2018, and RMB 2.888 billion in 2019. China's fresh food ecommerce market's sure of the country's overall fresh food market stood at 1.9% in 2015, 2.8% in 2016, 3.7% in 2017, 4.9% in 2018, and 5.66% in 2019. China's fresh food ecommerce market growth rate was 80.7% in 2015, 59.9% in 2016, 32.3% in 2017, 38.4% in 2018, and 19.1% in 2019. Data from Cushman and Wakefield.

However, the bigger growth driver is from fresh food e-commerce’s need for cold storage warehouses closer to the consumer to enable cheap and fast delivery as opposed to the conventional notion that warehouses and distribution centers should be near ports and airports. Much of China’s cold storage warehouse stock is located in provinces with some of the world’s busiest ports. For instance, Liaoning which has the biggest warehouse stock by area in China is home to the Port of Dalian (the world’s 16th busiest port), Guangdong which has the 5th largest logistics warehouse stock is home to the Port of Guangzhou (the world’s 5th busiest port), and Shanghai which has the 11th biggest logistics warehouse stock in China is home to the Port of Shanghai (the world’s busiest port).

Bar chart showing China's cold storage logistics warehouse distribution by storage area (in square metres). The Province with the highest cold storage logistics warehouse by storage space area is Liaoning with 1.065 million square metres, followed by Henan with 1.059 million square metres, Sichuan with 684.9 thousand square metres, Jiangsu with 567.5 thousand square metres, Guangdong with 399.2 thousand square metres, Shandong with 387.3 thousand square metres, Shaanxi with 373 thousand square metres, Tianjin with 363.5 thousand square metres, Beijing with 282.9 thousand square metres, Hubei with 258.5 thousand square metres, Shanghai with 235 thousand square metres, Heilongjiang with 150 thousand square metres, Hebei with 132 thousand square metres, Hainan with 81.7 thousand square metres, Zhejiang with 80 thousand square metres, Hunan with 75 thousand square metres, Chongqing with 72,600 square metres, Fujian with 58,680 square metres, Guangxi with 49,850 square metres, Anhui with 49,218 square metres, Jiangxi with 40,000 square metres, Yunan with 36,000 square metres, Shanxi with 25,300 square metres, Guizhou with 12,000 square metres.

Opportunities in China’s fragmented cold storage warehouse market

Cold storage is a major part of the cold chain logistics industry; according to projections from L.E.K. Consulting, transportation, cold storage, and other services are expected to make up 40%, 30%, and 30% of China’s cold chain logistics market, respectively in 2020.

Currently cold chain storage represents a small part of China’s logistics warehouse stock; according to Warehouse In Cloud (WIC), China’s total cold storage logistics warehouse stock was about 6.65 million square meters in 2019, accounting for just 2.15% of the total logistics warehouse market. Along with the development of China’s cold chain industry, the market for refrigerated warehousing is poised to experienced solid growth.

China’s cold storage market is fragmented with the top 10 cold storage operators commanding a market share of around 21%. One of the country’s largest property developers China Vanke (HKG:2202), is a notable player in China’s cold storage space. The company purchased Swire Cold Chain Logistics from Swire Pacific (HKG:0019) in 2018, propelling Vanke into the ranks of China’s 10 largest temperature controlled-storage providers.

Under its logistics and warehousing Service Platform ” VX Logistic Properties”, has been aggressively acquiring and building its portfolio of high-standard warehouses, cold storage warehouses, as well as cold storage integrated logistics parks. In 2019, China Vanke served more than 850 customers, covering e-commerce, manufacturing, catering, retailing, etc. According to their 2019 financial results, the annual utilization rate of their cold storage warehouses stood at around 82% in 2019. China Vanke is also one of the consortium of investors that participated in the buyout of GLP, cheap the world’s leading logistics solution provider.

Another player worth watching is Alibaba (NYSE:BABA) whose logistics subsidiary Cainiao has been actively building distribution centers equipped with cold storage and delivery facilities to offer B2C cold chain logistics services, which are expected to grow along with the country’s growing fresh food e-commerce sector.
Alibaba’s cross-border ecommerce platform TMall Global offers end-to-end cold chain logistics services including warehousing, processing, packaging, and transportation enabling merchants from around the world sell fresh foods to Chinese buyers. Once in China, the goods are stored in TMall Global’s warehouses and are delivered to consumers within 24 hours.
Alibaba’s marketplace TMall Global has introduced a cold storage logistics option to enable foreign merchants to sell fresh food to Chinese buyers. The service supports refrigeration across warehousing, processing, packaging, and transportation. It also offers customs clearance online. Once the goods have reached China they can be delivered within 24 hours. Cainiao Logistics offers the full chain of services, from cargo storage in bonded warehouses, to packaging and last mile delivery.

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China’s Software-As-A-Service (SaaS) Market Offers Tremendous Growth Potential

A column chart showing China's cloud computing market size in billions of yuan. China's cloud computing market was valued at RMB 9.7 billion in 2015, RMB 17 billion in 2016, RMB 26 billion in 2017, RMB 41.3 billion in 2018 (forecast), RMB 60.8 billion in 2019 (forecast), RMB 84.3 billion in 2020 (forecast), and RMB 110.9 billion in 2021 (forecast).

The public cloud market is growing at a rapid clip around the world. The worldwide public cloud services market is projected to grow from US$ 182.4 billion in 2018 to US$ 331.2 billion by 2022 representing a CAGR of 16.08% according to research from Gartner. The fastest growing market segment is expected to be cloud system infrastructure services, also known as Infrastructure as a Service (IaaS) which is expected to grow from US$ 30.5 billion in 2018 to US$ 76.6 billion by 2022, representing a CAGR of 25.89%. The second fastest growing market segment is expected to be Cloud application infrastructure services, also known as Platform as a Service (PaaS), which is expected to grow from US$ 15.6 billion in 2018 to US$ 31.8 million by 2022 representing a CAGR of 19.49%. Meanwhile the market for cloud application services, also known as Software-as-a-Service (SaaS) is expected to grow from US$ 80 billion in 2018 to US$ 143.7 billion by 2022 representing a CAGR of 15.77%.

The story is the same in China where, much like the rest of the world, China’s cloud market has also been on an uptrend.

A column chart showing China's cloud computing market size in billions of yuan. China's cloud computing market was valued at RMB 9.7 billion in 2015, RMB 17 billion in 2016, RMB 26 billion in 2017, RMB 41.3 billion in 2018 (forecast), RMB 60.8 billion in 2019 (forecast), RMB 84.3 billion in 2020 (forecast), and RMB 110.9 billion in 2021 (forecast).

China’s IaaS market is the fastest growing cloud computing segment and is dominated by homegrown tech giants Alibaba (NYSE:BABA) and Tencent (HKG:0700). And although the country’s SaaS market has received relatively little attention compared to the IaaS segment, it is a significant part of China’s overall cloud computing market, being estimated to reach a market value of RMB 47.3 billion in 2020 which accounts for about 56.1% of China’s cloud market which is estimated to reach market value of RMB 84.3 billion the same year.

China’s SaaS market has been growing steadily over the past several years.

A column chart showing China software-as-a-service market size (in RMB billions). China's software-as-a-service market was valued at RMB 3.49 billion In 2013, RMB 5.98 billion in 2014, RMB 9.89 billion in 2015, RMB 12.75 billion in 2016, RMB 16.87 in 2017, RMB 23.21 billion in 2018 (forecast), RMB 33.7 billion) in 2019 (forecast), and RMB 47.34 billion in 2020 (forecast).

Yet, there is still ample potential for growth. China’s SaaS market is expected to reach approximately RMB 47 billion (US$ 6.7 billion) in 2020 according to Statista while the global SaaS market is expected to reach US$157 billion by 2020. This means China would account for just about 4% of the global SaaS market while accounting for about 16% of global GDP indicating ample potential for growth.
Furthermore, according to a 2019 report issued by Alibaba Cloud Research Center, while the number of Chinese companies is 3 times that of the United States, China’s SaaS output is just 24% of the U.S.

There are several growth drivers to support China’s SaaS market. Unlike in the west, a growing number of Chinese firms are not tied to legacy IT infrastructure and they are increasingly moving directly to the cloud, leapfrogging the traditional enterprise software generation in much the same way Chinese citizens leapfrogged the desktop/laptop phase and went straight to mobile. In the medium term, the COVID pandemic may prompt SMEs to accelerate cloud adoption to control costs, facilitate remote working, and online sales. Over the longer run, the industry is likely to enjoy tailwinds thanks to China’s made in China 2025 initiative which aims to upgrade China manufacturing base by developing high-tech Industries including electric cars, robotics, artificial intelligence, agricultural technology engineering new synthetic materials. Cloud computing is among the many technologies expected to drive this development (others include big data and IoT).

Opportunities for local and international SaaS companies

China’s higher end SaaS segment is largely dominated by foreign SaaS behemoths such as Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and SAP (ETR:SAP) whose product offering often comes with a hefty price tag. Homegrown SaaS companies such as Kingdee (HKG:0268), Digiwin, and Yonyou (SHA:600588) on the other hand are not as powerful in terms of functionality compared their foreign counterparts, however their product offering has been improving in terms of sophistication and capabilities, and they are usually significantly cheaper which makes them a very compelling option to fulfill the needs of China’s Small and Medium Enterprises (which make up almost 99% of business establishments in China) as well as state enterprises. This has helped local SaaS providers carve out a niche for themselves in China’s nascent SaaS market while competing against foreign, well-established players.

The country’s SaaS market is highly fragmented the top 10 vendors accounting for only about 30% that the market as of 2018 according to research from PR Underground. Local rising star Kingdee dominated the market with a market share of just 5%, followed by Microsoft, SAP, Salesforce (NYSE:CRM), Oracle, Veeva Systems (NYSE:VEEV), Zoho, Beisen, Yonyou, and Newdo which collectively made up the top 10.

Pie chart showing the market share of China's SaaS vendors during the first half of 2018. Kingdee was the market leader with a 5.1% market share followed by Microsoft (5%), SAP (4.3%), Salesforce (4%), Oracle (3.8%), Veeva Systems (2.6%), Zoho (2.6%), Beisen (2.2%), Yonyou (2%), Newdo (1.8%), and others accounted for the balance 64.5%,

Many of China’s SaaS market verticals are also dominated by homegrown companies. Kingdee for instance, leads in HR, ERP, and accounting. Beijing-based Forceclouds, and Shanghai-based MacroWing lead in document and data management tools for the clinical research, pharmaceutical, and medical device industries. Beisen and DOIT provide CRM solutions in partnership with Tencent.

America boasts a number of SaaS behemoths; in one category America has born-in-the-cloud SaaS companies such as Salesforce, Workday (NASDAQY:WDAY), ServiceNow (NYSE:NOW), Splunk (NASDAQ:SPLK), and Atlassian (NASDAQ:TEAM); in another category there are established software giants with a growing cloud business such as IBM (NYSE:IBM), Oracle, Microsoft, SAP, and Adobe (NASDAQ:ADBE); and finally there are IT vendors with a growing SaaS cloud offering such as Google (NASDAQ:GOOGL) and Cisco. The world’s top three SaaS companies are American; Microsoft, Salesforce, Adobe with market shares 17%, 12%, and 10% respectively of in 2019 when the SaaS market reached US$ 101 billion according to analysis by Synergy Research.

Chinese SaaS companies on the other hand are still at a relatively early stage of growth. However, in much the same way America’s SaaS market growth spawned a number of homegrown SaaS giants, there is potential for Chinese SaaS companies to blossom along with the growth of China’s SaaS market. A notable example is Kingdee.

Kingdee

Kingdee is one of China’s largest providers of ERP software with a focus on SMEs, and is one of China’s leading SaaS players with a market share of 5%. Kingdee first started out as an ERP software company building a large user base of enterprise customers. This user base helped Kingdee’s cloud transformation, enabling it to introduce its own cloud products to its existing user bas

In FY 2019, Kingdee’s cloud services revenue grew 54.7% year-on-year accounting for 39.5% of revenue during the year up from 30.2% in 2018 according to their 2019 annual report. Cloud revenue’s share of total revenue is likely to increase going forward as traditional ERP customers migrate to the cloud. Traditional ERP systems are gradually being replaced by SaaS which is generally more cost-efficient and easier to use and manage compared to traditional ERP systems. Notable enterprises upgrading to Kingdee’s “Kingdee Cloud Cosmic” (a cloud platform for large enterprises) include one of China’s largest courier companies SF Express (SHE:002352), Chinese edtech unicorn VIPKid, and Chinese state-owned defense corporation Norinco. The company is targeting cloud revenue to contribute 60% to total revenue by 2020.

While it may seem that cloud can cannibalize Kingdee’s traditional software business, according to figures from its annual report, it is evident that this is not the case with much of Kingdee’s cloud growth being driven by new customers During FY2019, of Kingdee’s “Kingdee Cloud Galaxy” (a digital cloud service platform for medium and large enterprises, and fast-growing enterprises) customer base, 77% of clients were new to ERP, 13% were from competitors, and just 10% were existing clients.

Armed with a wide product range of cloud software spanning e-commerce, supply chain and intelligent manufacturing, a healthy balance sheet (the company’s borrowings stands at RMB 199 million while it has a cash pile of RMB 3.18 billion), a strong brand name among local SaaS companies, and an impressive user base of SMEs as well as large enterprises suggest Kingdee is well placed to capitalize on China’s growing SaaS market.

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Chinese EdTech Startups With Tremendous Growth Potential

Bar chart showing leading edtech unicorns worldwide in 2020, by valuation, (in US$ billions). The startups are ByJu’s (from India) valued at US$ 10 billion, Yuanfudao (from China), valued at US$ 7.8 billion, Zuoyebang (from China) valued at US$ 6.5 billion, VIPKid (from China) valued at US$ 4.5 billion, Udemy (from the United States) valued at US$ 2 billion, Coursera (from the United States) valued at US$ 1.7 billion, Duolingo (from the United States) valued at US$1.5 billion, ApplyBoard (from Canada) valued at US$ 1.4 billion, Course Hero (from the United States) valued at US$ 1.1 billion, Udacity (from the United States) valued at US$ 1.1 billion, and Quizlet (from the United States), Guild Education (from the United States), Knowbox (from China), iTutorGroup (fromm China), Zhangmen (from China), Huike (from China), 17zuoye (from China), Age of Learning (from the United States), and HuJiang (from China), valued at US$ 1 billion each. Data from HolonIQ.

Chinese edtech startups accounted for 50% of all global VC investment in edtech, during the period 2016-2018 according to market research firm HolonIQ.

Chinese have traditionally placed tremendous importance on education. The gaokao, China’s notoriously tough entrance examination, is known as one of the toughest exams in the world, and gaokao scores are now being increasingly accepted in universities worldwide for admissions purposes. The sheer competition for top schools, and jobs, is driving demand for tutoring Chinese parents spare no expense so it is not surprising that education is big business in China.

However, the distribution of quality educational resources to match demand for such resources is inconsistent; urban students generally have greater access to top-notch educational resources while their rural peers often do not.
Experienced, highly qualified teachers also tend to teach in urban schools while schools in lower tier cities generally grapple with lesser-experienced teachers, and some schools suffer shortages. But the problem is not just limited to urban vs rural educational resource distribution. Even within urban cities, the distribution of English teachers for instance is inconsistent, with some cities and schools being able to hire native English teachers while others struggle.

Online education is a feasible solution to these problems. Online education offers numerous other benefits as well. Lesson schedules can be made flexible, lessons can be customized to suit the student’s learning pace and existing knowledge, artificial intelligence and other technologies can be utilized to make the learning experience more fun,
and parents can be given updates on the child’s progress, and areas that need to be improved. VIPKid for instance, a leading platform connecting Chinese children with English tutors from North America provides progress data to parents such as what the child has learnt, and what needs to be improved.

With, more and more Chinese students having access to the internet, mostly through smartphones, and some others through desktop devices such as laptops and PCs, long-sighted edtech startups have been quick to capitalize on the opportunity of using the internet to bring forth a more even and equitable distribution of online resources to match demand which has been growing along with rising disposable incomes which enable a growing number of China’s ambitious tiger parents to shell out top dollar for online after-school supplemental education resources.
China’s after-school tutoring revenue has grown from RMB 2 billion in 2011, to RMB 3.9 billion in 2017, representing a CAGR of 11.6% according to figures from research firm Frost & Sullivan. The market is expected to reach RMB 5.6 billion by 2021, representing a CAGR of about 9% during 2017-2021.

This has helped spawn a vibrant edtech market, which has emerged to be one of the biggest in the world. Of the 19 leading global edtech unicorns, 9 are from China (eight from the United States, one from India, and one from Canada).

Bar chart showing leading edtech unicorns worldwide in 2020, by valuation, (in US$ billions). The startups are ByJu’s (from India) valued at US$ 10 billion, Yuanfudao (from China), valued at US$ 7.8 billion, Zuoyebang (from China) valued at US$ 6.5 billion, VIPKid (from China) valued at US$ 4.5 billion, Udemy (from the United States) valued at US$ 2 billion, Coursera (from the United States) valued at US$ 1.7 billion, Duolingo (from the United States) valued at US$1.5 billion, ApplyBoard (from Canada) valued at US$ 1.4 billion, Course Hero (from the United States) valued at US$ 1.1 billion, Udacity (from the United States) valued at US$ 1.1 billion, and Quizlet (from the United States), Guild Education (from the United States), Knowbox (form the China), iTutorGroup (form China), Zhangmen (from China), Huike (from China), 17zuoye (from China), Age of Learning (from the United States), and HuJiang (from China), valued at US$ 1 billion each. Data from HolonIQ.

Online education accounts for just about 10% of China’s overall education market according to Deloitte. However, as online learning gains acceptance, this share is expected to climb in the years ahead. The number of online education users in China is expected to climb to 263 million by 2022, up from 42 million in 2012 according to research from iResearch.

Column chart and line graph showing the number of online education users in China, 2012-2022 (estimate), (in millions of people). The number of online education users in China is expected to reach 263.7 million people in 2022, up from 42 million in 2012. Data from iResearch.

Here are some notable startups poised to grow along with China’s online learning opportunity.

VIPKid

Backed by tech giant Tencent (HKG:0700), VIPKid connects Chinese students (aged 4-15) and English teachers from around the world (predominantly North America). VIPKid has been a notable beneficiary of China’s demand for English language training for children; in 2018 the market was valued at RMB 21.3 billion (approximately US$ 3 billion), registering a 104% growth year-on-year. The number of users jumped a whopping 168% from 5.7 million in 2017 to US$ 15.3 million in 2018 according to a 2019 report from data monitoring firm Trustdata.

Founded in 2013, and launched in 2014, the startup was one of the first to capitalize on the shortage of native English speakers in China at the time. While taking advantage of what seems to be very strategic timing, VIPKid also established a strong brand for itself by building a reputation for maintaining high quality standards with all tutors undergoing a rigorous assessment before being accepted as VIPKid teachers (the startup reportedly receives about 20,000-30,000 teacher applications per month, and 90% of them are rejected).

This focus on quality, as well as its first-mover advantage, among other reasons helped VIPKid’s meteoric rise to unicorn status in less than five years. VIPKid boasts 700,000 students, 100,000 teachers, a student retention rate of 95%, and according to data in a 2018 Chinese Online Youth English Education white paper published by the Chinese Academy of Sciences, VIPKid has been noted as a market leader with a market share of 67.2%. According to a report by Trustdata, VIPKid held a market share of 68.4%, followed by 51Talk (11.6%), Da Da English (7.8%), and vipJr (5.7%) as of 2018.

Pie chart showing leading online English education platforms in China by market share (%) in 2018. VIPKid led the market with a market share of 68.4%, followed by 51Talk (11.6%), DaDa English (7.8%), vipJr (5.7%) and others (6.5%) according to figures from market research firm Trustdata.

English language training (ELT) is still very much in demand by parents of school-aged children in China; the ELT market is expected to grow from US$ 41.51 billion in 2017 to US$ US$ 75 billion in 2022, representing a CAGR of 12.56% according to Statista with much of that being driven by the online English education segment as noted in a research report by research firm Global Information Inc.

While demand is growing, the supply side on the other hand is not expected to keep pace. China has tightened regulations on teachers’ backgrounds and qualifications which may have the effect of smaller language schools struggling to recruit qualified foreign teachers.

This suggests plenty of runway left for VIPKid’s growth story. However, competition is increasing, particularly with online learning giants such as TAL Education and New Oriental Education rolling out their own online English education courses. Furthermore, VIPKid’s one-on-one classes are generally not as profitable as group classes so VIPKid, which has so far yet to turn a profit, may find itself struggling with greater losses as it fights for market share.

However, VIPKid has made efforts to differentiate itself, for instance all of VIPKid’s teachers are from North America ; by comparison, 69% of 51talk’s teachers are from Southeast Asia. Additionally, VIPKid is working to increase the efficacy of its teaching materials (such as syntax, vocabulary, accents etc) by utilizing its vast trove of data from the more than 2 million English classes it offers monthly. VIPKid has also taken its global model a step further by aiming to bring quality native speaking Chinese teachers to students overseas where demand for Chinese language education is growing in leaps and bounds. VIPKid has already gained some ground as an education platform in North America so the startup may find it easier to enroll overseas students compared to most of its rivals who have a very limited presence beyond China’s boundaries.

Makeblock

STEM education and robotics startup Makeblock develops hardware, software, and robotics hardware targeted at schools, educational institutions, hobbyists, children, and families. With a userbase of more than 10 million, Makeblock are sold in more than 140 countries, and its products are used in more than 25,000 schools around the world. The robotics education market is expected to witness tremendous growth in the coming years driven in part by schools’ continuing emphasis on STEM (Science, Technology, Engineering, and Mathematics) education. Market research firm HolonIQ foresees the global robotics education market to nearly triple to US$ 3.1 billion by 2025, from US$ 1.3 billion in 2019.

The market is riding on the back of a large and fast-growing robotics market in the Middle Kindgom; Chinese companies installed 154,000 industrial robots in 2018, more than double that of Japan’s 55,200 and more than triple that of the United States’s 40,400 according to the International Federation of Robotics. This strong performance helped China maintain its position as the world’s largest industrial robot maker for the sixth consecutive year, accounting for 36% of global robot installations. By value, China’s robot installations grew 21% year-on-year to reach US$ 5.4 billion in 2018. China’s robot density (the number of robots per 10,000 persons used in the manufacturing industry) has also been on an uptrend, growing from 68 in 2016, 97 in 2017, and 140 in 2018.

Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry in 2016, by leading countries. At 631 industrial robot installations per 10,000 manufacturing sector employees, the Republic of Korea had the highest robot density in the world, followed by Singapore 488, Germany 309, Japan 303, Sweden 223, Denmark 211, United States 189, Italy 185, Belgium 184, Chinese Taipei 177, Spain 160, Netherlands 153, Canada 145, Austria 144, Finland 138, Slovenia 137, Slovakia 135, France 132, Switzerland 128, Czech Republic 101, Australia 83, United Kingdom 71, China 68, Portugal 58, Hungary 57. Data from the International Federation of Robotics.
Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry, 2017. At 710 installed industrial robots per 10,000 manufacturing sector employees, the Republic of Korea had the highest robot density in the world in 2017, followed by Singapore (658), Germany (322), Japan (308), Sweden (240), Denmark (230), United States (200), Chinese Taipei (197), Belgium (192), Italy (190), Netherlands (172), Austria (167), Canada (161), Spain (157), Slovakia (151), Slovenia (144), Finland (139), France (137), Switzerland (129), Czech Republic (119), China (97). Data from the International Federation of Robotics.
Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry, 2018. At 831 installed industrial robots per 10,000 manufacturing sector employees, Singapore had the highest robot density in the world in 2017, followed by the Republic of Korea (774), Germany (338), Japan (327), Sweden (247), Denmark (240), Chinese Taipei (221), United States (217), Italy (200). Belgium (188), Netherlands (182), Austria (175), Slovenia (174), Canada (172), Spain (168), Slovakia (165), France (154), Switzerland (146), China (140), Finland (140),Czech Republic (135). Data from the International Federation of Robotics.

Since 2017, China’s robot density has exceeded the world average.

Column chart showing China’s robot density (number of industrial robots per 10,000 employees in the manufacturing sector) vs world average. In 2016,2017, and 2018, China’s robot density was 68, 97 and 140, respectively while the world average was 74, 85, and 99 respectively. Data from the International Federation of Robotics.

China’s robot density is expected to continue its upward march in the years to come. With China’s robotics industry growing at a rapid clip, the need for skilled robotics professionals and talent will no doubt increase in the future, suggesting bright prospects for Makeblock.

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Malaysia’s Growing Digital Economy: Opportunities And Sectors To Watch

Bar chart showing usage of ICT tools and systems among Malaysian SMEs. 86.5% of Malaysian SMEs used desktop / laptops, 90.1% used internet connections, 91.4% used smartphones, 43.8% used e-commerce, 70.5% used social media, 50.2% used Finance & Accounting systems, , 28.8% used HR systems, 18.8% used POS systems, 14.5% used inventory systems, 12.5% used Customer Relationship Management (CRM) systems, 12.3% used supply chain management systems, 11.5% used order fulfillment systems and 10.5% used Enterprise Resource Planning (ERP) systems.

Malaysia’s digital economy, as defined by its government registered an average growth of 9% annually between 2010 and 2016 in value-added terms, exceeding Malaysia’s overall GDP growth rate during the period. In 2018, Malaysia’s digital economy grew 6.9% year-on-year to reach RM 267.7 billion, contributing 18.5% to the national economy (up from 18.3% in 2017) according to the Department of Statistics. Although the 2018 growth rate of 6.9% is lower than in 2017 when it grew 9.8%, it is still higher than the country’s overall GDP growth rate of 4.7% recorded for the year according to data from Bank Negara.

This growth momentum is likely to continue thanks to a combination of government support, a youthful, tech-savvy population, and increasing digitization of SMEs among other factors.

On the consumer front, Malaysia boasts favorable demographics to support its growing digital economy. Of Malaysia’s approximately 31 million population, about 42% are aged 24 years and below according to the CIA and the median age of the country’s population is 29.2. This compares with neighboring countries such as Thailand where the median age is 39, Singapore (35.6), and Vietnam (31.9). A relatively young population as well as high incomes have helped push Malaysia’s internet penetration rate to 85.7% as of 2018, which is higher than the approximately 60% penetration rate in the region.

On the enterprise front, large enterprises currently dominate Malaysia’s digital economy as they adopt digital technologies such as e-commerce at higher rates than SMEs, partly due to larger enterprises having greater access to funding and technical expertise. For instance less than 44% of Malaysian SMEs use e-commerce for their business according to data from a 2018 report by SME Corp.

Bar chart showing usage of ICT tools and systems among Malaysian SMEs. 86.5% of Malaysian SMEs used desktop / laptops, 90.1% used internet connections, 91.4% used smartphones, 43.8% used e-commerce, 70.5% used social media, 50.2% used Finance & Accounting systems, , 28.8% used HR systems, 18.8% used POS systems, 14.5% used inventory systems, 12.5% used Customer Relationship Management (CRM) systems, 12.3% used supply chain management systems, 11.5% used order fulfillment systems and 10.5% used Enterprise Resource Planning (ERP) systems.

However, government support (such as the government’s PeDAS program which is aimed at assisting rural SMEs reach a larger consumer base through e-commerce platforms) and a growing breadth of affordable digital enterprise solutions could spur Malaysian SMEs to shift towards digital applications in the future. With SMEs accounting for nearly 99% of Malaysia business establishments, their digital transformation could contribute significantly to the growth of Malaysia’s digital economy.

To add further impetus to Malaysia’s digital economy which is already riding high on strong fundamentals, the Malaysian government has put in place several incentives to encourage greater market expansion and is aiming for the digital economy to contribute 20% to the national economy by 2020, up from 17.8% in 2015.

Some of the incentives include:

  • A RM 210 million allocation under Budget 2020 for the purposes of accelerating the development of digital infrastructure such as industrial parks, and in public buildings such as schools.
  • RM 21.6 billion allocated under Budget 2020 for the five-year National Fiberization and Connectivity Plan (NFCP) which will ensure high-speed connectivity throughout the country along with an additional RM 250 million to increase broadband connectivity in rural and remote areas such as Sabah and Sarawak with technologies such as satellite technology.
  • Under the Malaysia National Industry 4.0 framework, the Industry4WRD Readiness Assessment Intervention Program or in short known as ‘Industry4WRD Intervention Fund’ was launched by the government in Budget 2019. It is a financial support facility for Malaysian SMEs in the manufacturing and related services sectors to adopt Industry 4.0 applications and technologies such as the Internet of Things (IoT), sensor technology, artificial intelligence, robotics, 3D printing and others.

With many tailwinds to support market expansion, the International Data Corporation (IDC) predicts that by 2022, 21% of Malaysia’s GDP will be digitized, up from about 18% currently.

Sectors and industries to watch within this burgeoning market include:

E-Commerce

E-commerce is one of the few verticals in Malaysia that is relatively ahead of the digitization race with the e-commerce sector alone contributing 8% to Malaysia’s GDP in 2018. Already one of the fastest growing e-commerce markets in Southeast Asia, there is still ample growth ahead with the sector expected to expand to nearly US$ 6 billion by 2024.

Column chart showing Malaysia’s e-commerce revenue, 2017-2024. Malaysia’s e-commerce revenue was 2,651 million in 2017, 3,030 million in 2018, 3,680 million in 2019, 4,337 million in 2020, 4,974 million in 2021 (estimated), 5,433 million in 2022 (estimated), 5,750 million in 2023 (estimated), and 5,995 million in 2024 (estimated.

B2C e-commerce has garnered the most attention contributing to the top-lines of online retails such as Lazada (owned by Alibaba (NYSE:BABA)), Shopee (owned by SEA Group (NYSE: SE), and Zalora (owned by Global Fashion Group (ETR:GFG)).

However B2B e-commerce is poised to catch up as SMEs jump into the e-commerce bandwagon. Alibaba looks set to capitalize on this growth opportunity having emerged as one of the most aggressive players in encouraging and facilitating Malaysian SMEs to adopt e-commerce to reach a global customer base. Under its eWTP (e World Trade Platform), Alibaba collaborated with the Malaysian government to launch the world’s first Digital Free Trade Zone (DFTZ) at Kuala Lumpur International Airport (KLIA) Aeropolis in 2017 to assist local businesses sell their products in overseas markets through online e-commerce, and position Malaysia as a regional e-commerce hub. And in April this year, Alibaba’s logistics arm Cainiao Smart Logistics Network celebrated the inaugural flight of a new dedicated cargo route between Hangzhou and Kuala Lumpur.

Electrical and electronics

Malaysia is a global electrical & electronics (E&E) hub, with major players such as Intel, Hewlett Packard, Osram, Broadcom, Western Digital, and Samsung having manufacturing and distribution operations in the country notably Penang. Malaysia’s E&E industry (which can be categorized into 4 sub-sectors namely electronic components, consumer electronics, industrial electronics, and electrical products) is the biggest segment in the country’s manufacturing sector. Malaysia is the world’s 7th largest E&E exporter and the E&E sector accounts for 38% of Malaysia’s exports.

As Malaysia’s digital economy grows, spurring greater demand for mobile devices, semiconductors, storage devices, and other hardware, Malaysia strong E&E industry is well-placed to satisfy demand and profit. Only 62% of businesses in Malaysia are connected to the internet, 46% have fixed broadband, and about 28% have a web presence of some kind according to the World Bank. This is lower than the EU average where 96% businesses are connected to the internet, 95% have fixed broadband, and 75% have a website.

In an effort to incentivize Malaysian SMEs to adopt digitalisation measures for their business operations including electronic point of sale systems (e-POS), Enterprise Resource Planning (ERP), and electronic payroll systems, the Malaysian government will provide a 50% matching grant of up to RM 5000 per company for subscription to such digital services under Budget 2020. The government will also allocate RM 550 million to provide smart automation matching grants to 1,000 manufacturing and 1,000 services companies automate their business processes.

Furthermore, the imminent launch of 5G technology in the country (expected by the third quarter of 2020) should add a further boost to the E7E sector thanks to the offering of 5G-compatible smartphones, tablets and other devices. Satisfying this growing demand for electrical and electronic components suggests revenue growth opportunity for local E&E players such as Inari Amertron Bhd (KLSE:INARI).

Although the country’s E&E sector has been hit by production shocks as a result of Covid-19, these blips are likely to be temporary and should recover in the long term as market fundamentals remain supportive.

Cloud services    

IDC projects Malaysia’s overall IT spending to be approximately US$ 11 billion in 2020, with much of that shifting to managed and cloud services.

Research firm GlobalData foresees Malaysia’s digital spending to reach US$ 25.2 billion by 2023 from US$ 16.5 billion in 2018 (representing a CAGR of 8.9% during the period). Much of that spending will be on client computing and cloud solutions.

Bar chart showing Malaysia's ICT market growth rate (CAGR) a leading 5 IT solution areas, 2018 2023. Mobility is expected to grow at a CAGR of 20.9%, cloud computing 19.1%, data and analytics 17.6%, storage 14.3%, outsourcing 10.1% during the forecast period.

By vertical, the manufacturing sector is expected to account for the lion’s share of ICT spend in 2023.

By vertical, the manufacturing sector is expected to account for the lion’s share of ICT spend in 2023.

Cloud adoption is largely concentrated among Malaysia’s larger enterprises while adoption among SMEs, (which accounting for 98.5% of Malaysian business establishments make up the backbone of Malaysia’s economy) is relatively low. However this is poised to change with the Malaysian government encouraging SMEs to adopt digital technologies such as cloud computing, thanks to favorable provisions in Budget 2020.

Yet again, Alibaba has made its moves in Malaysia with its cloud computing arm Alibaba Cloud partnering with local domain registrar WebNIC to tap into this relatively underserved market.

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As Bangladesh’s Startup Scene Blooms, These Startups Are Poised To Thrive

Bar chart showing the top 10 countries with highest increase in Ultra High Net Worth (UHNW) population during the five year period between 2012 and 2017 according to data from Wealth-X. Bangladesh’s UHNW population grew 17.3% making the country with the fastest growing UHNW population during the five year period. Bangladesh was followed by China (13.4%), Vietnam (12.7%), Kenya (11.7%), India (10.7%), Hong Kong SAR, China (9.3%), Ireland (9.1%), Israel (8.6%), Pakistan (8.4%), United States of America (8.1%).

Bangladesh rarely comes to mind when thinking about startups but with a population of some 160 million (which makes it the world’s eighth most populous country) over 46% of which belong to the entrepreneurial and tech-savvy “Gen Z” generation of youngsters aged 24 and below (over 50% of the country’s citizens have internet access and 90% of them use the internet through their smartphones), and a stellar economic growth which has propelled Bangladesh to number one position in a number of indicators (such as the five year growth of UHNW people and per capita economic growth), could this rising South Asian nation emerge as a dark horse in the startup landscape?

Unlike its giant neighbor India, which is one of the most attractive countries for startup entrepreneurs and investors, Bangladesh doesn’t stand out as a startup nation and its startup ecosystem is at a relatively infant stage of development. However, with the frontier market having a number of ingredients that could potentially cook up a potentially vibrant startup economy, Bangladesh has potential to quietly emerge as an unexpected startup success story in the coming years.

Once one of the poorest countries in Asia, Bangladesh’s economy has been booming over the past few years so much that the South Asian nation has shot up to be the world’s fastest growing Ultra High Net Worth (UHNW) country according to studies by New York-based global UHNW market intelligence and research firm Wealth-X which measured the compound annual growth rate of UHNW populations across countries worldwide since 2012.

Bar chart showing the top 10 countries with highest increase in Ultra High Net Worth (UHNW) population during the five year period between 2012 and 2017 according to data from Wealth-X. Bangladesh’s UHNW population grew 17.3% making the country with the fastest growing UHNW population during the five year period. Bangladesh was followed by China (13.4%), Vietnam (12.7%), Kenya (11.7%), India (10.7%), Hong Kong SAR, China (9.3%), Ireland (9.1%), Israel (8.6%), Pakistan (8.4%), United States of America (8.1%).

Bangladesh’s HNW population is projected to grow at a CAGR of 11.4% between 2018 and 2023, the world’s third fastest growing HNW population behind Nigeria (16.3%) and Egypt (12.5%) but ahead of China (9.8%) and India (9.7%).

Bar chart showing the fastest growing HNW countries between 2018-2023 (CAGR %). Nigeria is expected to see the world's fastest growing HNW population with its HNW population growing at a CAGR of 16.3% between 2018 and 2023. Nigeria is followed by Egypt (12.5%), Bangladesh (11.4%), Vietnam (10.1%), Poland (10%), Kenya (9.8%), China (9.8%), India (9.7%), Philippines (9.4%) and Ukraine (9.2%). Data from Wealth-X.

Meanwhile studies from British weekly magazine revealed that Bangladesh registered a 45% increase in per capita income in terms of Purchasing Power Parity over the last five years, propelling the country to number one position along with China and India to emerge as the countries with the highest per capita economic growth globally during the period.

Bangladesh’s economic transformation has been helped in part by a thriving industrial sector (notably its garment sector which accounts for about 80% of the country’s export revenue and about 20% of GDP) as well as overseas remittances from Bangladeshis working overseas. The country’s economy grew 7.86% during FY 2018, up from 7.28% in 2017. The momentum is likely to continue with the country forecast to be the third fastest growing economy in the world in 2019 with a projected GDP growth rate of 7.4%, according to a report by the United Nations titled World Economic Situation and Prospects. Meanwhile, the country’s middle and affluent class (MAC) is growing at a rate of around 10%-11% per annum and if this pace of expansion continues, the MAC population is expected to nearly triple to about 34 million by 2025 (equal to about 12% of the population) from about 12 million 2015 (equal to about 7% of the population) according to Boston Consulting Group.

Apart from an exciting economic growth story, Bangladesh also boasts attractive demographics with a population of some 160 million (making it the eighth most populous nation in the world) over 46% of which are aged 24 years and younger. The median age is 27.1, making it the fourth youngest population in South Asia behind Afghanistan (which has a median age of 19), Pakistan (24.1), and Nepal (24.5) according to figures from the CIA. The total number of internet users in Bangladesh reached 91 million at the end of December 2018 over 93% of which are mobile internet users according to figures from the Bangladesh Telecommunication Regulatory Commission. Yet, with internet penetration at less than 60%, there is still ample potential for growth in internet users. This tech-savvy, youthful generation presents a potentially major driving force for the country’s digital economy and as they climb up the income ladder and their buying power grows, they could potentially drive Bangladesh’s consumer market as well opening tremendous opportunities. This suggests Bangladesh, which has so far been off the radar of international startup entrepreneurs and investors, could become an increasingly important market going forward.

Flight Expert

Founded by a company that has been an active player in Bangladesh’s travel industry for over two decades, homegrown Online Travel Agency (OTA) startup Flight Expert which helps travelers find, compare and book flights and accommodation, leveraged its advantage of being backed by a company with years of experience and knowledge about the local travel industry, as well as an established reputation in the country’s travel agency industry to successfully position itself as one of the most popular OTAs in Bangladesh.

Like most other emerging and frontier markets, Bangladesh’s travel market is on the rise and with Bangladeshis becoming increasingly digitized, the country’s nascent online travel market is taking off as well, propelled by a growing appetite for travel thanks to rising incomes and rising internet penetration among its young and increasingly tech-savvy workforce.

There is reason to be optimistic about the sector’s prospects going forward. With a direct contribution of just 2.2% to the country’s GDP as of 2017 (lower than neighboring South Asian countries such as Nepal (4%), Sri Lanka (5.3%), Pakistan (2.9%), India (3.7%), and Maldives (39.6%)), Bangladesh’s travel and tourism sector was valued at BDT 427.5 billion in 2017 (about US$ 5.3 billion) according to data from the World Travel and Tourism Council (WTTC) – suggesting ample potential for growth in the long run. The WTTC forecasts Bangladesh’s travel & tourism sector to expand by 6.2% between 2018 and 2028 to reach a value of BDT 824 billion (about US$ 10.2 billion), making it the fifth fastest growing travel and tourism market in the world during the 2018-2028 period, and the second fastest in South Asia behind India.

Bar chart showing the market value (in US$ billions) of the travel and tourism sector in 2017 and 2028e in selected South Asian countries. India’s travel and tourism market was the biggest with a value of US$ 91.3 billion in 2017. India was followed by Pakistan (US$ 8.8 billion), Bangladesh (US$ 5.3 billion), Sri Lanka (US$ 4.5 billion), Maldives (US$ 1.5 billion) and Nepal (US$ 0.9 billion). By 2028, it is estimated that India’s travel and tourism market will be valued at US$ 194.7 billion, Pakistan (US$ 16,4 billion), Bangladesh (US$ 10.2 billion), Sri Lanka (US$ 8.2 billion), Maldives (US$ 2.7 billion), and Nepal (US$ 1.5 billion).

This bodes well for OTAs and Flight Expert, as one of the pioneering OTAs in Bangladesh is poised to benefit. A report by ResearchAndMarkets expects Bangladesh’s mobile travel booking industry (which includes offline and online bookings) to witness a CAGR of 21.4% to reach US$ 9.65 billion by 2025. Meanwhile Flight Expert CEO Salman Bin Rashid estimates OTAs will account for about 45% of Bangladesh’s travel market by 2025, up from an estimated 3%-4% currently.

ShopUp

Bangladeshi social commerce platform ShopUp helps small businesses with online stores on social media (notably Facebook) automate their businesses by providing solutions to business processes such as automating inventory and order management, invoice generation, accounts, etc.

The startup’s automation services are provided free of charge, a godsend for the thousands of Bangladeshis who struggle to find a job and aspire to earn a living selling products online but are hampered by limited capital. ShopUp has helped jumpstart tens of thousands of social commerce entrepreneurs who used the platform’s services to automate the backend processes in online store management, enabling them to focus on other aspects of the business such as product development etc.

The company’s chief revenue stream comes from fees charged for marketing and delivery and there is ample scope for growth in this area as Bangladesh’s social commerce scene continues its upward march. Like many other countries in Asia such as Indonesia and Vietnam, social commerce, particularly F-commerce is a sunrise industry in Bangladesh and over the past few years, the country’s growing social commerce sector has given birth to thousands of social commerce businesses (estimated at over 150,000 compared to just about 2,5000 formal e-commerce businesses according to data from the E-Commerce Association of Bangladesh).

And the growth story is just beginning. Hootsuite’s Digital 2019 report revealed that despite having an internet penetration rate of about 55% (with an internet userbase of about 91 million), just 37% of these internet users (equal to just about 34 million) are active social media users, representing a social media penetration rate of just 20%.

Bar chart showing the active social media user penetration rate (%) as at January 2019 in selected Asian countries. Brunei has one of the highest active social media user penetration rates with 94% of its population actively using social media. Other Asian countries and their respective active user penetration rates are: South Korea (85%), Singapore (79%), Philippines (71%), China (71%), Vietnam (64%), Japan (61%), Indonesia (56%), Bhutan (51%), Myanmar (39%), Laos (39%), Nepal (33%), Sri Lanka (30%), India (23%), Bangladesh (20%), Pakistan (18%) and Afghanistan (10%). Data from Hootsuite and We Are Social.

And the number of internet users making online purchases is even smaller. According to a 2018 report by IDLC Finance Ltd, online sales account for less than 1% of Bangladesh’s retail sales, compared with 5%-6% for India. Meanwhile on the seller side, less than 30% of Bangladesh’s workforce is female according to the International Labour Organization which represents a tremendous untapped market of potential social commerce entrepreneurs for ShopUp.

However, the more exciting part of ShopUp’s growth story is not in Bangladesh’s social commerce landscape but in the country’s nascent fintech sector, which has tremendous potential to grow thanks to a huge unbanked population (estimated at 70% of the total population), increasing smartphone penetration and a relatively undeveloped financial system. Having started out by providing solutions for the automation of business operation processes such inventory control and order management, over the past few years ShopUp has successfully transformed its product offering to include automation services in the areas of credit assessment for small business owners who are generally left out of the formal credit system. Using algorithms and big data, ShopUp’s automated credit appraisal platform aims to solve this challenge for the majority of Bangladesh’s 10 million Micro, Small and Medium Enterprises (MSME) who lack access to much needed working capital.

REPTO Education Center

The global educational technology market is on an upswing (Frost & Sullivan foresees the global education technology market growing from US$ 17.7 billion in 2017 to US$ 40.9 billion by 2022, representing a CAGR of 18.3%) and in Bangladesh which suffers from low educational attainment, edtech could well be a key solution to address the country’s imminent skills shortage as the country transforms into middle-income country.

Bangladesh’s own homegrown online education platform REPTO Education Center, which is a graduate of Bangladeshi startup accelerator GP Accelerator, offers online courses, classes and training, focused on tertiary level students, and working adults, somewhat similar to Udemy and the startup appears well placed to capitalize on what promises to be a potentially substantial opportunity.

In Bangladesh, education demand is on the rise and there is a greater need for education opportunities, particularly higher education and skills-based education. According to education sector market intelligence company ICEF Monitor, tertiary enrollment in Bangladesh tripled between 2000 and 2012 and surpassed two million students in 2012. Yet, as of 2012, just 13.39% of Bangladesh’s college-age students were enrolled in tertiary education, compared with 27.18% in China, 24.37% in India, 30.66% in Indonesia, 37.21% in Malaysia and 61.46% in Japan the same year according to data from the World Bank indicating ample potential for increase in the years ahead as Bangladesh’s education system matures along with a growing economy.

Bar chart showing gross enrollment ratio in tertiary education (% of college-age population) in selected Asian countries, in year 2000 and 2012. The percentage of college-age students enrolled in tertiary education increased from 48.74% in 2000 to 61.46% in 2012 in Japan, from 25.74% in 2000 to 37.21% in 2012 in Malaysia, from 14.88% in 2000 to 30.66% in 2012 in Indonesia, from 9.55% in 2000 to 24.37% in 2012 in India, from 7.72% in 2000 to 27.18% in 2012 in China, and from 5.45% in 2000 to 13.39% in 2012 in Bangladesh. Data from the World Bank.

Of Bangladesh’s 160 million plus people, 46% are aged 24 years and younger according to data from the CIA and they are becoming increasingly digital. For most of these young adults, skills development institutes are out of reach, either due to cost constraints (most of the courses are unaffordable for the majority of working adults in Bangladesh which ranked 176th in the world out of 228 countries in 2017 in terms of per capita income according to data from the CIA), or geographical constraints (most of these institutes are located in Bangladesh’s capital city Dhaka), or language constraints (foreign courses offered by online education platforms such as Coursera or Udemy are primarily conducted in English, a language most Bangladeshi’s are not proficient at; Bangladesh ranks 63rd out of 88 countries in education company EF Education First’s English Proficiency Index).

REPTO Education addresses all these problems for Bangladesh’s burgeoning workforce; the online courses can be accessed online anywhere, are generally more affordable than courses offered by traditional brick-and-mortar educational institutions, and most of the platform’s courses are offered in Bangladesh’s official language, Bengali.

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Southeast Asia E-Commerce: Opportunity and Optimism Abound

Southeast Asia digital spend by category, 2016 (US$ billions)

Rising internet penetration, a young population, and rising incomes are pushing Southeast Asian shoppers online, thereby opening exciting opportunities for business and investment.

Southeast Asia’s 655 million plus population is increasingly migrating towards a digital-centric lifestyle, going online to conduct day-to-day activities such as shopping, entertainment, payments, and transport. Driven by an expanding middle class and a youthful, tech savvy population (about 43% of Southeast Asia’s inhabitants are aged 24 years and below according to data from the CIA), this evolution of consumer culture is expected to drive the region’s internet economy in the years ahead and e-commerce has emerged as one of the top categories for digital spending according to Bain & Company; of the region’s estimated US$ 50 billion internet economy in 2016, e-commerce accounted for US$ 15 billion or 30%, second only to travel and tourism which accounted for US$ 22 billion (equal to about 44%) of digital spending.

Southeast Asia digital spend by category, 2016 (US$ billions)

The dynamism is reflected in the growth numbers with Southeast Asia’s e-commerce sales of first-hand goods reaching US$ 10.9 billion in 2017, up from US$ 5.5 billion in 2015, representing a CAGR of 41% according to data from Google and Temasek’s “e-Conomy SEA Spotlight 2017” report.

Yet, there is still plenty of growth potential. With just about 390 million people in Southeast Asia connected to the internet, (making it the world’s third biggest internet population), internet penetration in the region stands at about 59%, thereby offering an untapped market of over 200 million people.

Bar chart showing the population of internet users and non-internet users in Southeast Asia by country as at December 2017. Indonesia had the highest number of internet users (143.26 million people) as well as the highest number of non-internet users (123.53 million people). After Indonesia, countries with the highest number of internet users are as follows: Philippines (67 million), Vietnam (64 million), Thailand (57 million), Malaysia (25.08 million), Myanmar (18 million), Cambodia (8.01 million), Singapore (4.84 million), Laos (2.44 million), Brunei (0.41 million) and Timor Leste (0.41 million).

And among this army of internet users, just a handful of them are active online shoppers and e-commerce accounts for just about 1% of total retail sales for most countries in Southeast Asia according to a report by ResearchAndMarkets. In Singapore, one of the region’s most mature e-commerce markets, online sales made up just 2.1% of total retail sales in 2015 – the highest proportion among Southeast Asian countries according to a report by Google and Temasek. This compared with China where e-commerce accounted for about 12.1% of total retail sales in 2015, according to the National Bureau of Statistics.

Unsurprisingly, there is an air of optimism about Southeast Asia’s e-commerce growth prospects and the region is expected to be the next rising star of e-commerce in Asia. Asia-Pacific e-commerce sales grew 31.1% in 2017, according to data from eMarketer, however nearly 83% of those sales came from China alone, the world’s biggest e-commerce market. Japan, South Korea and India make up the top four e-commerce markets in Asia-Pacific, which leaves Southeast Asia as the next frontier for e-commerce growth thereby opening opportunities for business and investment in the region. BMI Research projects Southeast Asia’s e-commerce sales to explode from US$ 37.7 billion in 2017 to US$ 64.8 billion by 2021, representing a CAGR of 14.5%.

Indonesia

Boasting the fourth largest population in the world, the largest population of internet users and the largest economy in Southeast Asia, Indonesia is often touted as one of the most promising e-commerce markets in the region.

Indonesia’s e-commerce market was valued at US$ 8 billion in 2017 according to McKinsey and the market is forecast to grow eight-fold to US$ 55-65 billion by 2022, representing a grand CAGR of over 45% driven by increasing internet penetration and a growing consumer class; just about 53% of the country’s 260 million plus population is connected to the internet, leaving an unconnected population of over 120 million, and the country’s consumer class is projected to grow from 45 million in 2010 to 135 million by 2030 according to analysis by McKinsey Global Institute which represents huge potential for internet retailers.

With e-commerce accounting for 1.6% of Indonesia’s total retail sales as of 2016 (compared with 13% in China the same year) according to a report by AusTrade, and with just 15% (equal to about 30 million) of Indonesia’s adult population of 195 million being active online shoppers as of 2017, Indonesia’s e-commerce market, already the largest in Southeast Asia, is still at an infant stage of development and these driving forces are expected to propel the number of Indonesian online shoppers to 43.9 million people by 2022 and Indonesia’s online sales are expected to make up about 20% of total retail sales by 2020 according to estimates by Indonesia’s Trade Ministry. ResearchAndMarkets released a year 2018 report which foresees Indonesia to have the highest e-commerce growth rate in the region through 2025, and the potential has lured the likes of e-commerce giants Amazon, Alibaba who are aiming to capture a slice of this ever-growing pie which is currently dominated by homegrown head honcho Tokopedia with a 14% market share according to data from CLSA. Tokopedia is followed by Singapore-rebased Shopee with a market share of 11%, Bukalapak and Alibaba-backed Lazada with 6% each. 28% is taken up by other e-commerce platforms (such as Zalora, Blibli, MatahariMall and China’s JD.com-owned JD.id) while 36% of Indonesian online sales is generated by social media platforms, (notably Facebook and Instagram) and messaging apps (such as Whatsapp).

Part of the reason for the rise of social commerce in Indonesia could be attributed to a few factors; Indonesians are avid social media users (according to Hootsuite, Indonesia has the world’s fourth biggest population of Facebook users, and the world’s fourth biggest population of Instagram users, and according to Twitter, Indonesia has the world’s fifth biggest population of Twitter users), and Indonesian online shoppers seem to have a preference for interacting one-on-one with the seller prior to making a purchase. Banking on this consumer culture, a number of Indonesian SMEs began selling their wares online using available online channels such as social media, way before e-commerce platforms became ubiquitous. As a result, social commerce developed before e-commerce websites became mainstream with social commerce accounting for as much as 50% of online sales in Indonesia before dropping to 36% in 2017 as e-commerce websites gained traction.

While e-commerce is gathering momentum among Indonesian online shoppers, quite the opposite is taking place in China, the world’s biggest e-commerce market, where social commerce is gradually taking root and finding its place alongside well-entrenched e-tailing websites. Barely three years old, Pinduoduo, a Chinese social commerce platform launched in 2015, filed for an IPO this year, raising US$ 1.6 billion in what was the second-biggest Chinese IPO in the United States.

Hence, if the ongoing evolution of the relatively more mature Chinese e-commerce is anything to by, social commerce is likely to remain a formidable channel in Indonesia’s e-commerce sector going forward. However, the growth opportunity for dedicated e-commerce platforms could be more exciting as they potentially continue taking up market share from social media platforms. According to McKinsey, Indonesian online sales through e-commerce websites is forecast to grow eight-fold from US$ 5 billion in 2017 to US$ 40 billion by 2022 while online sales from social media is expected to rise about five-fold or so from US$ 3 billion in 2017 to US$ 15-25 billion by 2022.

Bar chart showing Gross Merchandise Volume (GMV) in Indonesia’s e-commerce market in 2017 and 2022 (forecast) (US$ billions). In 2017, Indonesia’s total GMV was estimated at over US$ 8 billion with about US$ 5 billion being generated by e-tailing websites and over US$ 3 billion being generated by social commerce channels. By 2022, Indonesia’s GMV is forecast to grow to US$ 55065 billion with US$ 40 billion being generated by e-tailing websites and US$ 15-25 billion being generated by social commerce channels.

So far, certain categories have been high flyers in Indonesia’s e-commerce growth wave. Much like in other Asian e-commerce markets such as India, Indonesian online shopping baskets tend to contain products in Fashion (the leading product category as per one market survey); Electronics & Media; Furniture & Appliances; Food & Personal Care; and Toys, Hobby & DIY product categories.

Although integrated e-commerce platforms such as Tokopedia, Lazada, and Blibli have been taking the limelight, specialist e-commerce websites that cater to these popular product niches are also showing promise. Seven-year old Islamic fashion e-tailing startup Hijup for instance, was ranked 20th in the number of visits to e-commerce sites in Indonesia in the second quarter of 2018 with a monthly average of 930,000 visits and has topped the list as the most followed e-commerce business on Instagram.

Much like the ongoing evolution of mature e-commerce markets such as China and India, where a proliferation of specialist e-tailing websites such as China’s Gome and Vipshop (which specialize in home ware and fashion respectively), and India’s Pepperfry and Ajio.com (which specialize in furniture and fashion respectively) take market share from integrated e-commerce bigwigs such as Alibaba in China and Flipkart in India, there is tremendous long term growth opportunity for such specialist sites in Indonesia as the country’s e-commerce market matures.

Indonesia’s largest luxury retailer, Masari Group appears to have spotted one such gap; luxury fashion. Although Indonesia isn’t particularly noted for its affluent class (unlike India or China for instance where swelling high income consumers has given birth to a burgeoning luxury fashion e-commerce market), the country is seeing a steady growth in its population of affluent consumers. And yet, there is no clear e-commerce platform for luxury fashion and unlike in India or China where existing e-commerce players are adding a luxury fashion component to their respective websites (Indian e-commerce giant Flipkart’s fashion arm Jabong for instance is piloting a ‘Jabong Luxe Store’ while Chinese e-commerce behemoth Alibaba launched ‘Luxury Pavilion’, an invite-only platform for premium and luxury brands to strut their stuff) so far there has yet to be such a move towards a dedicated platform for luxury brands by Indonesian e-commerce websites. Sensing an opportunity to offer an avenue for the country’s affluent demographic to shop online for high-end fashion wear, accessories, and shoes, Masari Group launched an e-commerce website showcasing products from brands such as Les Petits Joueurs, Rodo, Dorateymur to name a few.

Malaysia

A young, tech-savvy population with relatively high incomes, and a strong infrastructure make Malaysia a potentially lucrative e-commerce market.

As Malaysians increasingly turn to online channels for their shopping needs, e-commerce has been steadily growing its share of Malaysia’s GDP; e-commerce’s share of Malaysia’s GDP stood at 6.1% or RM 74.6 billion in 2016 according to Malaysia’s Statistics Department, up from 5.9% or RM 68.3 billion of in 2015. Online sales made up about 2.5% of Malaysia’s total retail sales in 2015 and the figure is expected to reach 4%-5% this year according to online deal website 11street. A 2016 report by yStats foresees Malaysia’s e-commerce sales jumping five-fold by 2025.

Several factors suggest that Malaysia, Southeast Asia’s fourth-largest economy according to data from the IMF is at an inflection point of e-commerce growth; internet penetration stands at about 78% as at December 2017, according to data from Internet World Stats, the country’s middle class is expanding (Malaysia, ranked third among Southeast Asian nations in terms of GDP per capita by PPP as of 2017 according to figures from the CIA, and incomes are rising among Malaysia’s youthful population (the median age of the country’s population is 28.5 as of 2017 according to the CIA, making it the country with the sixth-youngest population in Southeast Asia, younger than Thailand (median age: 37.7), Singapore (34.6), Indonesia (30.2), Vietnam (30.5), and Brunei (30.2). And with about 45% of the country’s population aged 24 and below according to data from the CIA, the long term outlook for Malaysia’s online sales growth is bright as these tech-savvy youngsters rise up the income ladder.

Although pundits point out that Malaysia’s logistic infrastructure may pose a bottleneck to the country’s burgeoning e-commerce sector, it is still worth noting that regionally Malaysia’s infrastructure is second only to Singapore according to the World Economic Forum’s Global Competitiveness Index 2017-2018. This could make delivery quality, speed and costs relatively more competitive in Malaysia compared to regional peers, which could better enable Malaysian e-tailers to profitably offer free shipping (an important advantage in an era where free shipping is increasingly becoming a competitive necessity) which incentivizes buyers to spend more money shopping online and thereby propel the domestic e-commerce market forward.

Bar chart showing the World Economic Forum's Global Competitiveness Index, 2017-2018 Infrastructure score for selected Southeast Asian nations. Singapore ranks highest with a score of 6.5, followed by Malaysia (5.5), Thailand (4.7), Indonesia (4.5), Brunei (4.3), Vietnam (3.9), Philippines (3.4), Laos (3.3) and Cambodia (3.1)

With the e-commerce space in Malaysia seemingly ripe for the taking, competition is heating up among e-tailers both foreign and local for a share of the pie. The horizontal e-commerce space is crowded with well-established players dominating the arena such as Alibaba-backed Lazada, Singapore-based Shopee, and homegrown e-commerce pioneer Lelong. Competition could get stiffer in the years ahead with deep-pocketed e-commerce heavyweights such as Amazon (which has already established operations in neighboring Singapore) and Chinese e-tailer JD.com (which has tied up with retail giant Walmart to tackle the Southeast Asian market) potentially setting up shop in Malaysia.

Vertical e-commerce however offers ample opportunity. Similar to most e-commerce markets, Fashion is the leading online shopping category in Malaysia, and there has been a blossoming of a number of local and international fashion and fashion-related platforms, the success of which minted a fair number of millionaire founders. Homegrown online beauty store Hermo was acquired by Japanese beauty portal iStyle, netting Gobi Partners (Hermo’s ex-investors) a 91% Internal Rate of Return (IRR) in just one and a half years. Meanwhile Fashion Valet, another homegrown fashion e-commerce platform successfully closed its Series C round this year with an investment from Malaysia’s main sovereign fund Khazanah.

Apart from Fashion, other popular categories include Electronics; and Sports & Hobbies. Opportunities exist in other verticals which are tremendously popular offline but have yet to established online. Furniture is one example; Malaysia’s furniture market has grown in along with the growth of the country’s middle class and the country’s has a vibrant furniture industry, currently ranked as the world’s eighth largest furniture exporter as of 2017 and has a target of being among the world’s top five furniture exporters by 2022.

While horizontal e-marketplaces such as Lazada and Rakuten sell furniture online, specialist online furniture marketplaces are a relatively new concept in Malaysia and there is so far no dominant specialist furniture e-commerce site in Malaysia as is found in other countries such as Pepperfy and Urban Ladder in India, and Wayfair(NYSE:W) in the United States. Malaysian furniture online stores iHias and Apver could be poised to ride this potential.

Vietnam

With its relatively high internet penetration rate, youthful, tech-savvy workforce, and rising status as a low-cost manufacturing hotspot, Vietnam’s e-commerce sector could be one of the hottest growth stories in the region propelled by domestic as well as cross-border e-commerce.

With about 64 million of its approximately 96 million population connected to the internet (reflecting an internet penetration of about 67% according to data from Internet World Stats) and about 40% of the population aged 24 and below (the median age is 30.5) according to the CIA, Vietnam’s e-commerce market, which accounts for a meager 1% of the country’s total retail sales is a growth opportunity. Online sales grew 25% in 2017 to US$ 1.75 billion up from US$ 1.4 billion in 2016 according to data from Statista, driven by its young, tech-savvy workforce who happen to be among the most frequent online shoppers in Southeast Asia. According to the Visa Consumer Payment Attitudes Study 2017, Vietnamese were the second most frequent online shoppers with 84% of the 517 Vietnamese respondents saying they shopped online at least once a month, behind only the Thai respondents, 85% of which shopped online at least once a month.

And although challenges such as a relatively weak logistics weak infrastructure network (Vietnam ranks sixth out of nine selected Southeast Asian countries in terms of infrastructure according to the world Economic Forum’s Global Competitiveness Index, and logistics costs account for about 21% of Vietnam’s GDP as of 2016 according to figures from the World Bank) and low online payments penetration continue to dog Vietnam’s e-commerce sector, they have not deterred e-commerce behemoths such as Lazada, Amazon, JD.com and Shopee who, clearly playing the long game, continue to invest heavily as they race to capture market share in the Vietnam’s burgeoning online retail market. Euromonitor projects Vietnam’s e-commerce market to expand from US$ 1 billion in 2016 to US$ 2.3 billion by 2020, representing a CAGR of over 23%.

Like most other e-commerce markets around the world, fashion is the leading product category, with Vietnam’s working class women who have money to spend but little time to stop by every store, instead peruse a variety of online stores at the convenience of their internet-enabled devices to hunt for clothes, handbags, shoes and fashion accessories. Fashion is the most product popular category not just on e-commerce portals but also on social commerce channels such as Facebook.

Bar chart showing the most popular categories among online shoppers in e-commerce platforms and social commerce platforms according to a 2017 survey by Q&Me Vietnam Market Research. Fashion was the most popular category with 73% of e-commerce shoppers and 68% of social commerce shoppers spending the most on fashion products over the past 12 months. Fashion was followed by IT / Mobile phones, Food and beverage, Cosmetics, Kitchen appliances, Books / Stationery, Sports goods, Ticketing, Supplements / Functional foods, Consumer electronics, SPA / Beauty services, Flowers and plants, Music / Video.

After fashion, IT products, cosmetics, food and beverages, and books and stationery according to a 2017 survey conducted by Vietnamese market research firm Q&Me. While there is clearly tremendous potential for Vietnam’s domestic e-commerce market going forward, the more exciting part of the story however is Vietnam’s rising status as a manufacturing hotspot and the implications this status has on e-commerce. As manufacturing costs rise in China as result of rising costs of labor and land among others, a number of China-based manufacturers are shifting some or all of their manufacturing facilities away to other countries, a strategy known as the “China+1” production model. Thanks to its geographical advantage of being located close to China, Vietnam (particularly northern Vietnamese provinces such as Hai Phong) has been a major beneficiary of this trend, which has had the effect of widening the country’s manufacturing base, and boosting the area’s GDP and real estate demand. Vietnam’s ascent has a manufacturing hotspot gives the country’s local businesses an advantage in selling to the global market, which suggests bright prospects for Vietnam’s cross-border e-commerce sector.

Global e-tailing giant Amazon has clearly noticed Vietnam’s potential in this space. This year, Amazon announced a partnership with the Vietnam E-Commerce Association (VECOM) to allow local and small and medium-sized enterprises to sell and export Vietnamese-made goods through the platform. Alibaba-backed Lazada has also jumped into the ring with the company revealing that it was developing tools to help sellers peddle their wares to Southeast Asian countries in which Lazada has operations such as Malaysia. Tiki.vn, backed by Chinese e-tailer JD.com has launched a cross-border e-commerce channel, “Tiki Global”, to enable consumers to purchase foreign products directly from foreign manufacturers.

Philippines

In a country where logistics infrastructure is lacking and shopping malls function as “destinations” whereby they represent more than just places to shop, dine and entertain friends, but also serve as places of worship, workout classes and more, e-commerce may not necessarily displace Philippines’s plethora of shopping malls in the near term. The long term outlook however for online retailing in Southeast Asia’s second most populous country is a lot more exciting.

Retailing is big business in the Philippines with the country being home to three of the top 10 largest malls in the world in terms of Gross Leasable Area according to a ranking compiled by WorldAtlas. For Filippinos however, shopping malls are not just places to shop, dine, watch movies and hang out with friends; shopping malls also function as places to pay bills, worship, workout (such as Zumba classes), conduct government transactions (such as applying for driver’s licenses and business permits) and more.

With shopping malls performing an ever-growing list of functions to cater to a shopping lifestyle somewhat unique to the Philippines, the rise of e-commerce may not necessarily spell the demise of the country’s shopping malls (at least in the near term) as has been the case in the west. Furthermore with Philippines being a notable infrastructure laggard (the country’s logistics infrastructure network that is among the weakest among Southeast Asian nations), the resulting relatively uncompetitive delivery charges could be a turn off to the country’s price conscious shoppers (at about US$ 8,300 per person Philippines’ income per capita is also among the lowest in the ASEAN region according to data from the CIA) which means online retailers may be compelled to absorb bulk of the delivery cost at the expense of their bottom lines. This challenge may impede Philippines’ e-commerce sector from achieving its fullest potential going forward.

Bar chart showing the 2017 GDP per capita (Purchasing Power Parity) among Southeast Asian nations according to data from the Central Intelligence Agency. At US$ 93,900 per person, Singapore had the highest GDP per capita. Singapore was followed by Brunei (US$ 78,200), Malaysia (US$ 29,000), Thailand (US$ 17,900), Indonesia (US$ 12,400), Philippines (US$ 8,300), Laos (US$ 7,400), Vietnam (US$ 6,900), Myanmar (US$ 6,200), Timor Leste (US$ 5,400) and Cambodia (US$ 4,000).

Although the near term view for Philippines’s online retail market may not appear to be as potentially lucrative compared to regional peers such as Indonesia or Vietnam, that however does not necessarily reflect a lack of long term potential. With just about 1% of Philippines’s total retail sales coming from e-commerce in 2017 according to The Philippine Retailers Association, and with the country expected to overcome its infrastructure inadequacies over the next decade through development programs such as the ‘Build, Build, Build’ program, Philippines’ e-commerce businesses could be set to ride a wave of growth in the long term in a market that could prove to be one of the biggest in Southeast Asia; among Southeast Asian nations, Philippines has the second largest population (estimated at over 100 million in 2017 according to data from the CIA), the second largest population of internet users (estimated at 67 million in 2017 according to Internet World Stats), and the second-youngest population with a median age of 23.5 (behind Timor Leste where the median age is 18.9 according to data from the CIA).

Like many other e-commerce markets in Southeast Asia, Philippines’ online retail sector is driven by its youth and as this tech-savvy generation climbs up the income ladder in the years ahead, there is tremendous growth potential for online consumption growth. Unsurprisingly, a report by Google and Temasek projects Philippines’ e-commerce sector to be worth US$ 19 billion by 2025, overtaking Malaysia and Singapore.

 

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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 17% 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 34% of UK sales followed by the Furniture segment (cabinets, beds, and mirrors) which accounts for 29%. The balance 20% 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 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.

Banking on the success of this approach, plans are underway to convert Corus Hotels’ Burnham Beeches hotel which is located in the rolling Buckinghamshire countryside, into a Laura Ashley Hotel, which could potentially emerge as a promising top-line contributor going forward.

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.

Corus Hotels

MUI Group’s hotel subsidiary Corus Hotels which operates a portfolio of hotels across the UK and Malaysia and is also the owner and operator of Laura Ashley Hotels has returned to profitability in its latest financial year with pre-tax profit of £1.7m on a turnover of £27.8m in the year to 30 June 2017 which is a 5.7% increase from the £26.3 million turnover recorded the previous year.

Having disposed of two “non-core” hotels in the UK (namely The Old Golfhouse Hotel in Huddersfield, and The Imperial Crown hotel in Halifax), Corus Hotels’ UK portfolio comprises Corus Hyde Park in London, Burnham Beeches in Buckinghamshire, The Chace Hotel in Coventry, The Hillcrest Hotel in Widnes, Grimsby’s The St James Hotel and The Regency Hotel in Solihull. Corus Hotels also operates two Laura Ashley Hotels namely The Belsfield and The Manor Elstree, while a third hotel will be added to the Laura Ashley Hotel portfolio soon with the rebranding of Corus Hotels’ Burnham Beeches in Buckinghamshire.

Corus Hotels’ flagship hotel Corus Hotel Hyde Park (in London) which generated revenue of £11.9 million (accounting for over 40% of Corus Hotels’ revenue) recorded an average room occupancy of 75.8% for the year ended 30 June 2017. Although this is lower than the 2017 average room occupancy rate of 81.7% in London according to data from Colliers International, it is reportedly an improvement over the hotel’s average room occupancy rate last year according to its latest annual report.

Bar chart showing the top 5 cities with the highest hotel occupancy rates in the UK, 2017 (%). At 83.7%, Edinburgh had the highest hotel occupancy rate in the UK in 2017, followed by Oxford (82.6%), Glasgow (82.1%), London (81.7%) and Belfast (81.6%)

Over in Malaysia, for the year ended 30 June 2017, Corus Hotels Kuala Lumpur, which is strategically located within walking distance to Malaysia’s major tourist attraction KLCC, recorded an average room occupancy rate of 61% (lower than the 66.1% hotel occupancy rate recorded for Kuala Lumpur in 2017 according to data from CEIC) while Corus Hotels Port Dickson recorded an average room occupancy of 64.1% (considerably higher than the 55.7% hotel occupancy rate recorded for Negeri Sembilan in 2017 according to data from CEIC).

It is not clear how well the other hotels in Corus Hotels’ portfolio performed, however, what is known is that business has reportedly improved since two hotels, The Belsfield and The Manor Elstree were converted into Laura Ashley-themed hotels. The conversion of Burnham Beeches into a Laura Ashley Hotel is a continuation of this strategy and with more hotels under the Corus Hotels umbrella likely to follow the same path, Corus Hotels’ bottom line could get a much needed lift, benefiting MUI Group as well; Laura Ashley hotels target upper middle class travelers and are positioned as boutique hotels with fewer rooms (often less than 100, compared to Corus Hotel Hyde Park which has over 300 rooms) and higher room rates (for instance room rates at Laura Ashley The Belsfield is almost double that of Corus Hotel Hyde Park), which makes Laura Ashley Hotels a higher-margin and less capital-intensive business.

While this potentially profitable strategy gives reason to be optimistic about Corus Hotels’ future valuation, there is reason to be optimistic on its present valuation as well; many of Corus Hotels’ properties have been valued decades ago and their current market values could be considerably higher than their current net book values (NBV). For instance, Corus Hotel Kuala Lumpur, which occupies prime freehold land in Jalan Ampang less than half a kilometer away from KLCC, was last valued in 1982, and its current NBV is just Malaysian Ringgit (RM) 54.5 million according to MUI Group’s latest annual report. That values the property at about RM 843 per square foot. By comparison, an empty development land also along Jalan Ampang, about 2 kilometers away from KLCC and less than 2 kilometers away from Corus Hotels is currently seeking a buyer at about RM 2,300 per square foot, nearly three times the current NBV of Corus Hotels’ Kuala Lumpur. That would suggest Corus Hotels Kuala Lumpur could command a value of at least RM 200 million (some reports have put the figure as high as RM 300 million), and this property alone would thereby make up about 40% of MUI Group’s entire market capitalization of about RM 500 million currently.

Corus Hotels’ other Malaysian property, Corus Paradise Resort in Port Dickson, currently carries a NBV of RM 24.5 million according to MUI Group’s latest annual report, equivalent to about RM 41 per square foot. By comparison, a plot of land for sale along the same road as Corus Paradise Resort, was listed at a sale price of RM 45 per square foot. Meanwhile, hotel operator Avillion Berhad’s (KLSE:AVI) Avillion Port Dickson hotel which occupies a mix of freehold and leasehold land about two kilometers away from Corus Paradise Resort, is valued at RM 236 per square foot according to the company’s latest annual report.

Metrojaya

Metrojaya, at one time a high flying department store brand in Malaysia, is no longer doing business as briskly as it used to, and although the management is striving to revitalize the retail subsidiary through initiatives such as upgrading its string of department stores and participating in e-commerce, how well these plans bear fruit remain to be seen. Malaysia has no shortage of department stores (Parkson (KLSE:PARKSON), and Isetan (SGX: I15) are notable examples), and e-commerce is increasingly gaining momentum in Malaysia, the rise of which is likely to put downward pressure on brick and mortar retailers going forward as has been the case worldwide. Department store stalwarts such as JC Penny (NYSE:JCP), Sears (OTCMKTS: SHLDQ) and Macy’s (NYSE:M), and specialty stores such as Gap (NYSE:GPS), and Toys R Us for instance have seen their store counts and market values shrink over the past decade as shoppers flocked to e-tailers such as Amazon (NASDAQ:AMZN), lured by an unrivalled product variety, competitive prices and the convenience of shopping anytime, anywhere. According to figures by consulting firm A.T. Kearney, department store sales in the United States as a percentage of total retail sales in America dropped from 10% in the mid-1980s to just 2.4% by 2011.

As shoppers increasingly click to shop, brick and mortar stores are crumbling under the onslaught of online retailers; by the end of 2018, more than 146 million square feet of retail space will be announced for closure in the United States alone, which is a nearly 40% increase from the roughly 105 million square feet that was announced for closure in 2017, according to figures from real estate information company CoStar Group.

The wave of store closures hitting the United States has so far not hit Malaysia and in fact, Malaysia’s retail floor space has been on an upward trend over the past few years. In Klang Valley for instance, which is Malaysia’s most prosperous region, about 6 million square feet of mall space is scheduled for completion by the end of 2018, a 11% YoY increase, according to data from Savills, bringing Klang Valley’s total retail stock to an estimated 69 million square feet in 2018, from 62 million in 2017.

Bar chart showing total retail supply space in Greater Kuala Lumpur, 2008-2018 (E) (in millions of square feet). Total retail supply in Greater Kuala Lumpur is expected to reach 69 million square feet by 2018, up from 62 million square feet in 2017.

With retail space per capita in Klang Valley estimated at 8.1 square feet per person (one of the highest in Malaysia) according to a 2017 report by Nawawi Tie Leung Property Consultants Sdn Bhd (NTL), this influx of retail space could exert downward pressure on retail occupancy rates going forward. At slightly above 85%, occupancy rates in malls in Greater KL are already at a five year low (occupancy rates in Greater KL were over 90% in 2013) according to figures from Savills.

While Malaysia is unlikely to suffer the “retail apocalypse” currently affecting the United States where retail space per capita far exceeds that of any other country (according to a 2016 Morningstar Credit Ratings report, retail space per capita in the United States was estimated at about 23.5 square feet per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia) the country’s increasing retail stock combined with rising e-commerce (Malaysia’s e-commerce penetration is estimated at about 2.5% as of 2015 and is expected to grow to 4%-5% in 2018 according to online deal website 11street could suggest challenging business conditions for physical retailers going forward. This is particularly the case for department stores such as Metrojaya which are heavily exposed to popular online shopping product categories such as apparel and cosmetics.

The impact is already being felt with Parkson’s department stores Sungei Wang Plaza (where it had operated for over three decades) and Maju Junction abruptly closing early this year, while American retailer Gap is shutting down all their stores in Malaysia, sparking concerns over the health of Malaysia’s retail industry. However, “A” grade malls located in prime shopping centres such as Pavilion and and Suria KLCC in Kuala Lumpur, and Mid Valley Megamall (where Metrojaya is an anchor tenant), Sunway Pyramid and The Gardens Mall outside Kuala Lumpur, which have occupancy rates of over 90% are not expected to be badly affected. For these prime shopping malls and their tenants, e-commerce is unlikely to pose a major threat as they offer experiential shopping experiences that online shopping simply cannot offer. Parkson in fact still maintains its flagship store at Suria KLCC which is one of its best performing stores according to its annual report.

Keeping this in mind, while much would depend on execution, the Metrojaya management’s effort to reinvigorate the retailer through store upgrades could prove fruitful in the face of a growing e-commerce industry; the in-store shopping experience is still very much in demand, (which explains why online retailers such as Amazon, Alibaba (NYSE:BABA), JD.com (NASDAQ:JD) and Bonobos have been building physical stores) and if done right, Metrojaya’s store upgrades could help retain foot traffic as Malaysia ushers in an e-commerce era; the physical stores could function as showcases for customers (giving them a tactile, sensory experience and access to expertise which is difficult to replicate online), and with Metrojaya planning to dive into e-commerce, these physical stores could also double as distribution centers for e-commerce sales, a retail strategy known as “omni channel retailing”.

Omni-channel retail success stories include century-old Hong Kong luxury department store chain Lane Crawford (having implemented a seamless customer experience across offline and online channels, the department store’s omni-channel customers reportedly spend seven times more than single-channel customers) and Nordstrom (NYSE:JWN) (the American luxury department store chain found that its omni-channel customers spend five times more than single-channel customers).

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