Author: Yolandi

Tencent is the largest video game company in the world and operates some of the largest online social platforms in China. Prosus owns 31 percent of Tencent. Valued at $660 billion (R11.4 trillion), Tencent is the second-largest Chinese company after Alibaba. The company derives its revenue from online and mobile games, internet services, social network and music platforms, online commerce, and payment services.  Its social media app WeChat has over 1.2 billion users; close to 86 percent of China’s population. Tencent has also become one of the largest venture capital and investment firms globally. Management has a remarkable ability to identify and partner with entrepreneurs outside of its own circle of competence. To date, Tencent has invested in more than 800 companies, 160 of which are valued at more than $1 billion. Of the 800, 70 are listed on stock exchanges. Tencent owns 5 percent of Tesla and 9 percent of Spotify, for example.

Tencent cruised through the pandemic as more people stayed home and played games during lockdowns. It reported a healthy set of quarterly results, underpinned by smartphone gaming revenues growing 62 percent over the past year. All of its core business units were structurally resistant to the health crisis and generated double-digit revenue growth. Total revenue rose 26 percent on an annual basis. Early in August Tencent’s share price dipped after the Trump administration issued an executive order banning WeChat in the United States from 20 September 2020. Trump alleges that WeChat poses a threat to United States national security because the Chinese Communist Party may gain access to the vast amounts of personal information gathered by the app. The order prohibits any transaction that is related to WeChat by any person subject to United States jurisdiction. The order has caused interpretative uncertainty, but is primarily allegorical as American users of WeChat represent less than two percent of the total number of users. So, from a revenue point of view the impact is immaterial for Tencent. Although the administration could potentially increase its efforts to restrict Tencent and WeChat, this would be detrimental to American companies. For example, iPhone sales in China account for 16 percent of Apple’s revenue. If Apple is forced to drop WeChat from its Chinese App Store, this would effectively halt iPhone sales in China. Senior administration officials have, however, apparently been reaching out to some US companies, seeking to reassure them that they can still do business with Tencent’s WeChat app.

Tencent benefits from a dominant position in the Chinese internet and social media industries. It continues to prudently manage the growth and monetisation of its enormous user base. Tencent generates stable cash flows and is investing heavily in its gaming business, as well as payments and cloud computing. It maintains the relevance of its ecosystem through innovative upgrades and features. Tencent is a high-quality company with various growth drivers and multiple competitive advantages. Tencent is an attractive long-term investment and its share price has increased nearly 60 percent over the past year. It is not a bargain at nearly 40 times forward earnings, but its sustainable earnings growth arguably justifies the premium.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria. Tencent shares are held on behalf of clients.

Paris-based L’Oréal is the world’s most valuable cosmetics company. It manufactures 7 billion beauty products annually. At a market value of R3.2 trillion it is larger than Estée Lauder, Colgate-Palmolive and Beiersdorf combined. The company has over 497 registered patents and 36 global brands with thousands of products in fields focusing on hair colour and care, make-up, skincare, sun protection, and perfume. Brands include Garnier, Maybelline, Kérastase, The Body Shop and beauty products of Yves Saint Laurent, Lancôme and Giorgio Armani. Nestlé owns 23 percent of L’Oréal.

Since its inception 111 years ago, research and development have played a crucial rule in L’Oréal’s success. It has had many industry firsts, including soap-free shampoo and foam bath. The company has 21 research and development centres and 42 manufacturing plants across the globe. L’Oréal has been against testing products on animals and has spent at least R18 billion on research to find an alternative. They developed Episkin, which is reconstructed skin that acts as an alternative for testing on animals. L’Oréal does not test products or ingredients on animals. However, it sells cosmetics in China that are required by Chinese law to be tested on animals.

L’Oréal reported resilient bi-annual results last week. The consumption of beauty products over the period was strongly impacted by the closure of millions of points of sale as a result of the COVID-19 pandemic. This caused a crisis of supply, rather than demand, since consumers were temporarily unable to purchase products. As part of its solidarity programme, L’Oréal used its facilities to make and donate over 15 million units of hand sanitiser gel and moisturising cream for medical officials in need. Although L’Oréal’s revenue in the first half declined 12 percent, its sales in China increased by 17.5 percent and online sales grew 65 percent – a further sign that the pandemic is accelerating a digital shift among retailers worldwide. Online sales now comprise a quarter of its total revenue. CEO Jean-Paul Agon announced that L’Oréal will embark on an aggressive plan of new product launches and advertising campaigns to remain competitive in a market that has been reshaped by the pandemic.

The global cosmetics market has grown steadily at approximately 4 percent per annum. It is a market driven by the development of social media, increasing urbanisation and rising growth in online beauty spending due to the expected growth of the high-income class over the next decade. L’Oréal’s strong and diversified brand portfolio enables it to lead the industry in terms of margins and organic growth. It is also the market leader in research and development capabilities in the cosmetics industry. Increasing demand for cosmetic products in China offers significant opportunity, but also intensifies competition. The country’s animal testing policies remain a contentious issue. L’Oréal shares offer investors a defensive profile, but are currently trading at record highs and at a premium to peers and itself.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.

For over 4,000 years silver has been regarded as a form of money and store of value.

It is widely used in the production of coins, jewellery, silverware, chemical reactors, catalytic converters, photographic film, computers, solar panels and electrical conductors. It exhibits the highest electrical and thermal conductivity of any metal. Silver is more cyclical than gold due to its primarily industrial applications. Although silver is much cheaper than gold, the prices of the two metals often move in tandem. Gold and silver have historically been hedges against uncertainty, holding value well in economically challenging times. Given their popularity as safe haven assets, investor sentiment plays a substantial role in their price movements.

One of the most impressive rallies of 2020 has been the increase in the price of gold and silver. Gold is trading at price levels not seen since late 2011 and silver is trading around five-year highs. The recent silver rally follows a period in which gold significantly outperformed silver. The gold-to-silver ratio, which shows how much silver it takes to buy gold, best illustrates this. The ratio’s 30-year average is about 65, but spiked at 120 in April; the highest on record. This suggests that silver was extremely undervalued relative to gold, so the silver rally may not be entirely unexpected. The ratio is currently 80.

Anaemic global bond yields should support investment demand for gold and silver into the foreseeable future. Amazingly, $17 trillion in global debt bear negative yields. In addition, many positive yields are so low that it does not outpace inflation. Investors are increasingly turning to silver and gold as inflation hedges as opposed to bonds and cash. Bond yields will likely remain low, since the US Federal Reserve anticipates that it will leave its interest rate at rock-bottom until at least 2022. Simultaneously, many countries are drastically expanding money supply to promote inflation, which generally translates to higher precious metal prices. The COVID-19 pandemic has also led to various mine closures throughout the world, reducing the supply of metals, including silver. This is a positive shorter-term catalyst for silver prices.

The recent shift in the silver supply-demand curve has led to it becoming a popular asset choice for cautious investors. Its ability to hedge against inflation and currency swings, as well as its low historical correlation with shares and bonds offer investors portfolio diversification benefits. Local investors can consider the NewWave Silver exchange-traded note (ETN). It provides investors with cost-effective exposure to the spot price of silver in a listed instrument trading in rand. Alternatively, investors can invest indirectly in silver by buying shares in listed silver mining companies. This allows for possible dividends, the added advantage of experienced management teams and leveraged balance sheets. In this regard, the Global X Silver Miners exchange-traded fund (ETF) provides such exposure for offshore portfolios.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria. NewWave Silver ETN shares and Global X Silver Miners ETF shares are held on behalf of clients.

https://www.iol.co.za/business-report/opinion/opinion-silver-trades-at-five-year-highs-78a8ad44-3b10-4810-82ac-4cc501f17134

Alibaba is the largest online commerce company on earth, reaching 960 million consumers globally, with 780 million of those in China. China’s online retail market is larger than the next ten markets combined. A staggering 80 percent of all online purchases in China are executed through Alibaba. Its platforms like Taobao and Alibaba.com facilitate transactions in exchange for a small commission. They do not hold or sell any merchandise themselves. Alibaba’s businesses extend into advertising, cloud computing and logistics. Its stock price has nearly tripled since its initial public offering (IPO) in 2014. However, the trade war, COVID-19 and a potential delisting of Chinese companies listed in the United States have strained the share price in recent months, presenting a good buying opportunity.

By the turn of the 21^st century, a commerce-anaemic China was ripe for the picking. With hundreds of millions of cash-flush consumers, Alibaba opened for business at an auspicious time. A significant tailwind came from Chinese government regulations. Suspicious of foreign businesses, it imposed strict national internet control, locking foreign competitors like Amazon out of the Chinese market. China’s online retail has enormous growth potential as it represents only a quarter of total retail sales in the country. Alibaba benefits from the rise in per-capita income among the Chinese middle class that should enhance consumption appetite.

Alibaba delivered strong numbers in its latest results despite widespread lockdowns in February and March. Total revenue rose 35 percent and gross merchandise value surpassed $1 trillion for the first time. The core commerce business is Alibaba’s only profitable business and accounts for 86 percent of revenue. These profits subsidise the growth of the other businesses. The cloud business rose 58 percent on heightened digitisation demand. Alibaba also sought to ensure investors that it had no plans to delist after the US Senate passed a bill targeting Chinese stocks. There is a three-year compliance period after the enactment of the Act, allowing ample time for the regulators to negotiate and resolve differences. Alibaba is confident that it can comply with any new regulations. Furthermore, it is likely that influential major US Alibaba shareholders would advise the policymakers against moves prejudicial to their interests.

Alibaba dominates the largest online market in the world. It benefits from economies of scale and the ability to leverage its user base of nearly a billion. Its diverse revenue streams include commission, fee subscription and selling advertisement space. The company is building an ecosystem that can enhance user experience and create synergies among different business segments. Improvements in efficiency could significantly boost profitability. Its valuation is currently attractive, given its promising growth prospects and its relative undervaluation compared to peers such as Amazon, Pinduoduo, Tencent and Meituan Dianping.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria. Alibaba shares are held on behalf of clients.

https://www.iol.co.za/business-report/opinion/good-buying-opportunity-presented-for-alibaba-shares-49094629

Starbucks purchases and roasts high-quality whole coffee beans, which it sells along with cold beverages and complementary food. The company was founded in 1971 by two teachers and a writer. It is the largest coffee chain in the world by far and the second-most valuable convenience food brand, surpassed only by McDonald’s. The company has a footprint of 30,000 stores in over 77 countries, with the average customer going to Starbucks six times a month. Their well-known logo is a siren, which is a mythological mermaid seductress. It is supposed to symbolise the seductive power of coffee. Indeed, while coffee is not quite essential, many people have a hard time getting through the day without their caffeine boost.

Starbucks’ shares were among the first to be hit by the coronavirus pandemic. The company was forced to close the majority of its stores in China, then across the world. Yet it faced the challenges head-on, implementing tight measures to control costs to protect its bottom line. It suspended share repurchases, cut discretionary spending and deferred certain capital expenditures. The locations that remained open became hubs for takeaway and delivery orders. As a result, the company’s second-quarter results were better than many investors feared. They were able to generate a profit, even in the face of a significant global disruption. Having faced the brunt of the COVID-19 closures, the third quarter results will likely be worse than the second.

Starbucks is among the faster-growing companies in the consumer segment. It invests relentlessly in digital development, social media, mobile payment and loyalty programmes. Seventy percent of sales are derived from the United States where it commands a 40 percent market share. Starbucks’ global growth prospects recently improved after its biggest competitor in China, Luckin Coffee was embroiled in vast-scale accounting fraud. Legal implications and funding concerns will likely render Luckin Coffee unable to compete with Starbucks in China. This leaves the door wide open for Starbucks to gain even more market share in an increasingly affluent country where growth in coffee demand is underpinned by the brew being regarded as an exhibition of social status and cosmopolitanism.

In times of economic uncertainty, going with industry leaders can help mitigate downside investment risk. Significant scale advantage offers Starbucks unmatched flexibility in supply negotiations and product pricing, which leads to durability. Simply put, they can afford to make less money per cup than individual coffee shops that have lower sales volume. While the cost to switch product is minimal, Starbucks has a strong brand name and loyal customer base. As lockdown restrictions are eased, people will return to their daily routine, which will no doubt include a stop at their nearest Starbucks outlet. However, this recovery seems to be priced into the current valuation, with the share price already 35 percent up from its low in March.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.

Johnson & Johnson began as a small company that created surgical dressings in 1886. It has grown to become the largest, most resourceful healthcare company on earth. The company manufactures healthcare products for the pharmaceutical, consumer and medical devices markets. Johnson & Johnson has over 250 subsidiary companies that sell products in over 175 countries. It has increased its annual dividend for 58 consecutive years and is one of only two companies with a higher credit rating than the United States government. Shareholders have benefited from stable and consistent returns over the years.

A quarter of its sales come from products launched in the past five years; testament to Johnson & Johnson’s ability to innovate. It was the first company to release prescription contraceptives and invented the coronary stent. Will it be able to add yet another first to the list? Johnson & Johnson has committed over $1 billion to develop a COVID-19 vaccine and it is scheduled to advance to clinical trials by September. If all goes well, it could be available for emergency use early next year. The company is also revving up production capacity for such a vaccine, irrespective of whether they are the first to develop it.

Unfortunately, it is the company’s legal battles that have been making recent headlines. It has faced lawsuits relating to its role in the opioid crisis and talc baby powder products. The cost of litigation cut into about 6 percent of revenue during 2019 and 3 percent in 2018. Although not currently consequential, the risk is that these lawsuits get larger and materially impact its financials. The company has lost quite a number of lawsuits, although it has had many of the verdicts reduced or nullified on appeal. A potential agreement in principle to settle opioid litigation could likely remove an overhang on the share price.

Johnson & Johnson’s pharmaceutical segment represents half of its revenue. It is also its most profitable business and largest sales growth driver. The medicines focus on the therapeutic areas of immunology, neuroscience, cardiology and oncology. Its medical device segment sells a wide range of products including contact lenses, hip and knee replacement devices and surgical equipment. Well-known brands such as Listerine, Neutrogena, Savlon, Band-Aid and Clean & Clear are included in its consumer segment stable.

Johnson & Johnson will almost certainly remain a global force for years to come. It has a diverse business mix, with leading positions in various health markets. The company has the massive research and development infrastructure required to remain relevant over the long run. Its solid balance sheet and cash flow generation allow for further dividend growth, share repurchases and acquisitions. For these reasons Johnson & Johnson is a quality, defensive core holding in many investment portfolios.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.