Decisive is an international fund for Australian investors.
As consumers the majority of products and technology we use are foreign owned but as investors we typically only invest in Australia. We invest in global companies especially the US to give you exposure to these growth opportunities while diversifying your portfolio.
Facebook's (FB) mission is to make the world more open and connected whether its on PC's or mobile phones. But the question is what communication platform will be next? FB has bet $2 billion that Oculus rift the virtual reality leader will be a new communications platform. The majority of time spent on mobile phones is gaming 40% and communications 40% with FB having half the market share in communications. Virtual reality should be able to combine these two activities.
The matrix is here just plug in
Virtual reality is about tricking your brain. You are no longer looking at a screen instead you get a 110 degree view which gives you a feel that you are in the environment. Just like other platforms virtual reality needs software or apps to showcase what it can do. Oculus has focused first on gaming but down the track they plan to extend into other fields like training and travel. See the reaction of first time users below, it really tricks your body into thinking that you are actually there.
A holiday in your room
But its not only FB even Marriott is making a bet on the future. Marriott's hotels are a great place to stay on vacation. But if you can't afford a trip to Hawaii Marriott have produced a holiday experience. Users are transported to the destination for 100 seconds. This experience took 3 months to create. Pumps in the floor create the sensation of sand under your feet. Marriott is also adding other elements such as mist, heat and wind. The technology called the Teleporter (see below) will help guests to virtually explore locations such as Hawaii and London.
The transporters will be available for a couple of days at 8 key MAR hotel sites in the US. The software development comes from the same company that produced Ascend the Wall for the recent Game of Thrones tour that came to Sydney. Marriott hopes that consumers can use the Teleporter to experience different locations before booking a trip and of course a Marriott hotel. Oculus is still tinkering with a development kit that will cost you $350. Its been rumoured that a product will be available for the general public next year. The matrix has finally arrived.
Disclosure: Decisive has a long position in Facebook (FB) stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
Walking in crowds is difficult in the best of times. The rise of smart phones has added extra difficulty. We have all probably experienced the mobile dance. When you have to correct course as someone is paying more attention to their phone than where they are going. That's why I was interested to see this week that China was trialing a smartphone only lane, hopefully so smartphone users can only crash into other smartphone users!
Life is truly in the 'text lane' in Chongqing, China where city authorities have designated a 100 foot cellphone lane for texting while walking. I'm looking forward to when this takes off around the world. So far residents seem to be stopping and taking photos of the below sign then properly using the lanes!
As an investor I am always interested in new consumer trends or habits. So what are our thumbs doing on these phones? In the US users are either on Facebook, Twitter or playing games (see below). According to the Comscore US Mobile app report a staggering 42% of all time spent occurs on the individual's most used app. The app field is dominated by Facebook, Google, Apple, Yahoo, Amazon and eBay. They account for 9 of the top 10 most used apps, 16 of the top 25, and 24 of the top 50.
Source: Comscore the US Mobile App Report
However these are just US numbers what about China? The data is similar but the companies are different. The top app list is dominated by Tencent, Alibaba and Qihoo. The most used app is Tencent's Wechat a Chinese messaging service similar to Facebook. Alibaba's Taobao, UC Mobile browser and Alipay are also top apps. Alibaba is dominant in e-commerce with 80% marketshare it is even more dominant on mobile with 86% share. Alibaba has learnt from Facebook's mistake they have already proven that they can monetise mobile increasing mobile rates in December 2013 though they are still half that of desktop (see below).
Source: Alibaba roadshow
According to iResearch only 22% of China's population have shopped online this compares to 37% of the population using their mobiles to access the internet. We expect both these numbers to increase. Tencent and Alibaba should be the biggest beneficiaries especially if more text lanes are created.
Disclosure: Decisive has no position in Alibaba (BABA) or Tencent (700) stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
Dreamworks
Animation (DWA) is a computer generated film studio best known for its characters such as Shrek, Madagascar, Kung Fu Panda and
How To Train Your Dragon. These characters have entertained millions around the world but investors have had to read from a different script. Being a studio that is reliant on releasing two successful films a year has made it difficult for the company to grow. It also makes it hard for investors to analyse as a hit or a miss film can have a major impact on the company. It is not a great long term business model when you only make money twice a year when a film is released resulting in a stock that is down 34% year to date. Transforming from a studio into a global branded family entertainment company
However like all good animated films DWA is planning on having a happy ending. DWA feels it finally has enough characters to move aggressively just from film into television, consumer products,
digital content and location based entertainment. A similar model to Disney that relies on multiple revenue streams. Instead of watching
DWA twice a year at the movies fans can watch 365 days a year on
Netflix and TV keeping their characters front of mind. Their recent initiatives include:
·Launching their own television production unit in
partnership with Netflix and with Super RTL and Planeta Junior in Europe
·Finalised arrangements for their Chinese joint
venture known as Oriental Dreamworks including an indoor theme park
·Acquired Awesomeness TV a popular channel among
young teens with more than 100 million subscribers on Youtube
·Bought Classic media the owner of some of the
great kids content in the world see below
·Building a consumer product business to unlock
their library of content.
·DWA changed distributor to FOX and received more
attractive distribution economics.
Netflix a no risk deal
The DWA TV deal with Netflix is one of the great media
deals. DWA will provide Netflix with 300 hours of original programming. Amazingly
DWA will own the rights to the content after an exclusive period. Over a 3-4 year period of time DWA will
accumulate over a $1 billion worth of programming that will be extremely valuable if
they ever want to launch their own channel similar to say a Disney Junior. It is a godfather deal in the movie business its a deal with no downside.
There are no performance requirements DWA just has to
produce the shows to get paid. DWA effectively gets paid to build a content
library that they can monetise once their exclusivity period expires. It’s a
smart move to forgo cable television in favour of Netflix which is the
future of TV viewing. It keeps DWA characters front of mind with Netflix being a compelling pitch to parents as the shows are
commercial free. DWA has guided to $250m in TV sales by 2015 up from $106
million in 2013 in context DWA total sales in 2013 were $724m. Turbo is a good
example of the change even though the film fell short of expectations, the Turbo
series launched in December on Netflix is on track to become one of the most
popular kid’s series ever on their platform.
Not that sort of library
Media companies are valuable for their library of content. These older shows have already been expensed and tend to be high margin cash generative businesses. Digital distribution has
opened up the value of film libraries with Netflix and iTunes etc creating a larger market
for on demand titles versus just linear TV scheduling which is limited by range
and choice that it can show viewers. Producing 2 films a year is not a great way for DWA to build up a library so they have been actively acquiring content recently paying for Classic Media. Classic
Media owns 3,600 hours of programming including Casper, Where’s Wally, Lassie,
Rocky & Bullwinkle (see above). Much like Disney with the Avengers and Lucasarts DWA will
reintroduce these characters to a new generation reducing the risk of trying to
create new franchises from scratch. Parents tend to gravitate towards
characters they are familiar with as children when buying gifts for
their own. Hidden within this
acquisition are also the rights to the Golden Books library whose titles have
sold more than 2 billion copies but have yet to be exploited digitally.
China friendly characters (Pandas & Dragons)
Disney had a 50 year headstart on DWA in the US but in China
the playing field is level. DWA had a little luck with the release of Kung Fu
Panda in 2008 as the story set in ancient China resonated with the China
market. 6 out of the top 10 animated films in China were produced by DWA. DWA
has a JV in China that will make animated and live action films including the
upcoming Kung Fu Panda 3. DWA has long term plans to eventually IPO the China
business. China is expected to be the largest box office market by 2020. The How to Train your Dragon 2 opening weekend in China grossed $25.9 million nearly 8x higher than the original.
Balance sheet mess
With writedowns on three of its last four movies Turbo, Rise of the Guardians and Peabody DWA's balance sheet is looking stretched. There is also a contingent payment estimated to be $91.8m that will be be paid to Awesomeness TV based on certain earnings and performance targets in 2014 and 2015. However DWA will receive cash from Netflix on delivery on the TV shows and How to train your dragon 2 (which has now grossed $609 million after a soft start). Fortunately going forward DWA is releasing a number of other sequels including Penguins of Madagascar (see trailer above) and Kung Fu Panda 3. Its unlikely that DWA will lose money on these films. DWA also announced news of an SEC investigation into the timing of the write down of Turbo. Since the announcement DWA has put in place a new CFO. In our opinion it is hard to see much more bad news.
How to train your dragon happy meals
DWA is leveraging consumer
products for future movies signing toy deals with Hasbro for two upcoming films
Trolls in 2016 (remember that crazy hair?) and BOO Bureau of Otherworldly
Operations in 2015. In the past year DWA opened up an office in Arkansas just for the
merchandising team at Walmart. DWA's 2013 hit The Croods had little or no consumer programs at retail compared to How to train your dragon 2. This branding
also extends to licensing with Royal Caribbean themed cruises, 3 theme parks in
Russia and hotel deals with Sands China and similar deals to the Dreamworks
experience on the Gold Coast. Licensing is a substantial opportunity currently DWA is ranked 16th in the top global licensors behind Westinghouse with Disney being number 1.
Having more licensing revenue including recurring
and more predictable television fees is a welcome sight for investors. These
initiatives have impacted earnings on the cost side yet looking
forward DWA should provide investors with growth, diversification and more stable earnings an ending investors should be happy with.
Disclosure: Decisive has a long position in Dreamworks (DWA) stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
The Walt Disney Company (DIS) is the King and Queen of entertainment. It dominates the movie, TV, toys and theme parks business by owning 6 of the top 10 franchises in the world. Favorites such as Disney Princess, Star Wars, Winnie the Pooh, Cars, Mickey and Toy Story. DIS owns the licensing entertainment category with 80% market share. DIS also entertains sports fans around the world with its ownership of ESPN. DIS is a monopoly in entertainment helping to keep both adults and kids glued to its screens and products.
Add another hit Frozen
If you have a young daughter like I do you will know all about Frozen. It has grossed $1.3 billion worldwide at a production cost of $150 million. It is the fifth highest grossing movie and highest grossing animated film of all time. Frozen is now officially a key franchise for Disney and is so popular they are running out of merchandise, 9 out of the 10 highest selling items at Disney stores in the 2Q were Frozen products. To cap it all off Frozen is now headed to broadway.
Investors can party like Ewoks
DIS has successfully integrated its acquisitions of Pixar and Marvel and they appear to be doing the same with Lucasfilm. Like the Marvel acquisition Lucasfilm and Star Wars provides a literally rich universe that DIS can develop and monetise. DIS has announced that they will launch a new Star Wars film every year starting in 2015. Alternating between three new episode films with standalones based on characters rumoured to be Yoda, Boba Fett and Han Solo. Marvel's relatively unknown Guardians of the Galaxy movie has already grossed nearly $600 million, the upcoming Star Wars films should be able to do much more. With DIS's recent track record investors should be preparing to party like the Star Wars Ewoks (little furry creatures in the original series).
Theme park MyMagic+++
DIS also provides families with the ultimate theme park vacations which are always fun but hectic. MyMagic+ is an electronic wrist band introduced into the parks earlier this year to help manage and plan trips. The MyMagic+ band will let you better control your vacation allowing you to enter the park, your room, pay for food and allow characters to recognise who you are just with the device. It will also store all your information including reservations and help schedule the best times so you can spend more time with what you enjoy best. See the Incredibles explanation video below.
Technology is so important to DIS that they added Jack Dorsey the Chairman of Twitter and CEO of Square to the board alongside Sheryl Sandberg of Facebook.
2015 a big year
The main problem with DIS is that they are doing so well. Shanghai Disney (43% owned by DIS) will open at the end of 2015 it will be nearly 3x the size of Hong Kong Disneyland. DIS will also release two blockbuster movies the first of three new Star Wars films (episode VII) and a followup to Avengers. Its a good problem to have though releasing these two films and the opening of Shanghai Disney will make next year tough to beat.
In any other industry DIS will be deemed a monopoly they have a strangle hold on the best characters and entertainment. They are also accelerating growth and are just beginning to monetise the Lucasfilm (Star Wars) and Marvel acquisitions. DIS is great at keeping its customers both adults and kids constantly engaged. Their parks are the vacation drawcard while their Disney Channels beamed into 428 million home keeps the dream alive in-between. DIS is a company that its customers can't live without.
Disclosure: Decisive has long a position in Disney (DIS) stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
Chocolate lovers around the world know all about Hershey (HSY). HSY manufacturers some of the most classic and craved for American treats such as its Chocolate Kisses, Reese's peanut butter cups and Jolly Rancher candy. HSY's stood out from the crowd with its unique chocolate shapes and wraps. HSY plans to stay ahead of competitors by co-developing a 3D printer that can deliver printed edibles ie a chocolate printer (see below).
Earlier this year HSY announced a partnership with 3D systems to co-develop a printer to make your own chocolate. HSY believes that the printer could act as a new distribution/delivery system for its products. While 3D systems sees it as a way to help 3D printing go mainstream. It will be a multi-year joint development and though the machine can take any chocolate HSY will provide guidelines for achieving HSY like chocolate quality. It will be like having your own personal chocolate vending machine. It will be a very dangerous product to have in the office, if you get hungry just press print! It will be customisable so you can create your own shapes or even your own Willy Wonka landscape. Unfortunately there is still no word on when the chocolate printer will be available or the price. For me I think I'll stick with the original my favourite is the largest Kisses (see below) which weighs 1.27 kg filled with normal sized kisses.
Spreading Kisses around the world
Large consumer product companies tend to be slow growers because they are distributed everywhere and consumers already purchase the product. This is true of HSY in the US where they are dominant but they are just beginning to grow overseas. Only 16.6% of HSY's sales are to customers outside of the US with 5% or a 1/3 of overseas sales going to Canada. HSY is pushing hard into emerging markets especially China making its largest acquisition ever of Shanghai Golden Monkey China's 6th largest chocolate company. HSY plans to increase China sales by a factor of seven over the next five years by introducing other products like Jolly Rancher and Reese. Its HSY kisses candy was its first product in China to reach $100m in annual sales outside of the US and has grown 20 fold over the past 5 years.
This international growth potential has helped HSY to be recently ranked as the fastest growing large consumer
products company with sales over $5 billion by Boston Consulting Group and IRI.
The US confectionery market is tough its made up of over 1,200 brands and approximately 1,000
companies. However only 15-20 of the 1,000 companies have national distribution. HSY has a monopoly like position with 44.5% market share of the US chocolate market. HSY can use this strong position to grow overseas. As an example Mondelez the owner of Oreo's receives 80% of its sales outside North America while HSY is the exact opposite with 16% of sales overseas. HSY's also has a decent 2.3% dividend yield which is above the S&P500 yet as seen above it is also one of the fastest growing consumer packaged goods companies. HSY's strong US market share combined with its emerging market growth and 3D printer opportunities makes for an appetizing stock just like its products.
Disclosure: Decisive does not have a position in Hershey (HSY) stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
Valeant Pharmaceuticals (VRX) is a developer and marketer of a range of generic pharmaceuticals and medical devices like contact lenses. You may not have heard of VRX but its major division is Bausch & Lomb the eye care company. Instead of focusing on blockbuster drugs that might cure cancer VRX has focused on dermatology (skin care such as curing acne) and ophthalmology (diseases of the eye). While not as exciting as curing cancer VRX's focus on health care products means it competes in less competitive but growing markets.
Pharmacy is hard consumer brands are better
Pharmacy is tough companies spend millions of dollars to develop drugs that have protection for around 20 years before low cost generic competitors enter the market and eliminate profits. This risk is known as the patent cliff where revenues from protected products can drop dramatically when protection runs out. Research and development spend to produce these drugs tends to be high risk but low reward with only 4% of compounds becoming approved medications, it has been estimated that R&D investments produce around 4.8% ROI.
Source: Valeant Pharmaceuticals
Make or buy decision
Instead VRX conducts targeted research and development. The CEO believes that R&D is generally a waste of money. It is better to make small bolt on acquisitions with successful medications that can benefit from VRX's distribution and sales team. VRX chooses to buy products instead of investing in creating them. VRX assigns no value to the acquisition pipeline and tends to pay cash. VRX is not a roll up story that is reliant on issuing expensive acquisitions reliant on an expensive share price. The Allergan acquisition below is an exception due to the size.
One big injection (botox)
Bausch + Lomb was a major acquisition in 2013 this year producing organic growth of 12%, 8 of VRX's top 20 products are Bausch + Lomb products. This acquisition is serving as a model for what VRX hopes to achieve with Allergan. VRX has decided to bid for Allergan the maker of Botox. VRX is offering US$58 per share and 0.83 VRX shares for Allergan. Its a big bite for VRX but they believe they can drastically cut costs at Allergan. They also share similar consumer type products which are out of pocket expenses not reliant on government reimbursements Botox is also more of a consumer durable than a pharma product. Once again the opportunity for VRX is to reduce costs as the average pharma spends 19% on research and develop versus VRX 3% below.
Source: Valeant Pharmaceuticals
Cash is fact profit is an opinion
VRX financials are messy. It is a company that has done 100 acquisitions over the past 5 years. There are a lot of restructuring charges, acquisition accounting and amortization of intangible patents but importantly free cash flow has been strong. As anyone with a business knows cash is king. You can actually do things with cash in the bank but accounting profits are just a number on a page.
Source: Valeant Pharmaceuticals
VRX has become a battleground stock with those who love the cost cutting model and those that hate the low research and development spend. The stock trades at a 12x multiple with the opportunity to take on another great consumer brand like Botox alongside with Bausch and Lomb. Its a stock that eventually could trade on a more durable consumer product multiple than that of a pharmaceutical stock. With Bausch and Lomb eye drops it is a company to keep an eye on.
Disclosure: Decisive does not have a position in Valeant (VRX) stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
Vipshop (VIPS) is China's leading online discount retailer providing deep discounts on branded products. VIPS does not compete directly with the Chinese internet giant Alibaba but sits inbetween two of their websites. Alibaba's Taobao specialises in cheap but generic to lower end brands while TMall offers products direct from retail brands. VIPS takes the middle road offering high quality brands at discounted prices to its 9.3 million active customers.
Chinese ecommerce market the largest in the world
Chinese ecommerce is one of the fastest growing markets in the world. It has grown so fast that China is now the largest ecommerce market in the world (see chart above). This is amazing given that China only has 45% internet penetration versus the US at 80%. China's online market is growing rapidly with discount and flash sales growing faster. At 10am every day VIPS launches events across its four regional websites each event lasts for 3-5 days with several hundred products.
Buy now or cry later
Their business model of discounted limited time sales is addictive to mobile users who can check products on the go. Customers have to buy then or cry later they won't get a second chance purchase. In July mobile accounted for 52% of total sales. According to JP Morgan VIPS accounted for 8% of the Chinese discount market. In comparison TJ Maxx and Ross Stores have over 38% discount market share. China's retail market is still underdeveloped it does not have the offline discount retail stores like TJ Maxx or DFO here in Australia. VIPS benefits from this growing but competitive market by providing an online inventory clearance channel for brands.
VIPS is a growth stock constrained by warehouse capacity. They currently have total warehouse capacity of 540,000 square meters and are on track to meet their goal of reaching 700,000 square meters by the end of 2016. VIPS has recently made an acquisition in the cosmetics space with ambitions to move into other categories not just apparel. With all the excitement around the upcoming Alibaba IPO investors would do well to consider its discount rival VIPS.
Disclosure: Decisive does not have a position in Vipshop (VIPS) stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
