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YY.com – Full Analysis

General Intro

This is a follow-up on my previous post where I initiated a position in YY.com. I have already directed you (Here is the link again) to an excellent article on the whole live-streaming phenomena in China. As I stated before, I believe in this going forward both as a phenomena and YY’s revenue model of virtual gifts. I think this works especially well in China where the people aged 15-35 spend more and more of their time in front of computers/video-games/mobile phones. A lot of people are getting seriously dysfunctional in normal social interaction and feel loneliness. The need to interact is still there and these platforms become the ultimate way to relieve that frustration. On top of that we have a lot of old people, who also feel lonely, especially in China where the one child policy has created a lot of elderly which don’t have a big group of youngsters to interact with. In the case of YY, it’s also a city tier story, the people living in Tier 3 cities are very curious of the lives of people living in Tier 1 cities. Digging in to the figures the best future prospects for revenue growth comes from online-dating and educational platforms. But let’s not get ahead of ourselves, let’s move over to the company Intro.

Company introduction

The founder David Li has a long history in China Internet Tech. In 2003 David worked for Sohu as the IT head editor, later he join NetEase. In 2005 David start his own business duowan.com, the homepage quickly became China’s largest game information website, with over 100 million page views per day. Mr. Lei Jun, an angel investor in YY is was the CEO of Kingsoft Corporation later he founded XIAOMI technology-a smart phone company, Lei Jun is considered among China’s 10 wealthiest. David Li and Lei Jun owns both about 17.5% of the company each. In July 2008, the company launched the YY Client, a PC-based software that allows users to create individual channels for any live social gatherings. YY Client quickly gained a vast user base and emerged as one of the most popular voice communication tools. In 2010 a mobile app Mobile YY was introduced and in 2012 a web version. YY was listed on the NASDAQ in November 2012.

It should also be mentioned that David Li and Lei Jun quite recently tried to take the company private: “YY received a non-binding “going private” proposal from its Chairman Mr. Jun Lei and its CEO Mr. David Xueling Li, proposing to acquire all of the outstanding shares of YY for US$68.50 in cash per American depository share (ADS).”

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YY.com in Ctrip out

To not increase my China exposure, which is at somewhat uncomfortable high, I decided that for every China exposure holding going in, another one has to go out. This means to make space for my new holding YY.com which I’m very excited about, I have to throw out one. The Chinese holding I have not yet done a full due dilligence on is Ctrip, and for no other reason than that, it is the weakest card in my portfolio. So out goes Ctrip in in comes YY.com at the same dollar values (approx 5% weight), as of today’s close.

From Vlogs to Live streaming

I have been very fascinated about the whole Vlog (Video log) scene, and how big it has grown in just a few years in western countries. I find myself watching more and more quality content on YouTube, but also spending more time on “crap”. With crap I mean following some person through their daily life or just someone doing silly things online. China has managed to take this to the next level through online streaming, where hosts interact with their audience. YY.com and their competitors have implemented a very clever system in terms of how viewers pay. I’m very sure people get hooked on it, and I’m sure we are just at an initial stage of growth. What I’m less sure of is if YY.com is the right horse to bet on, but as far as I have been able to gather, they are. As I said I’m excited about this holding and I hope to find the time to write a full report on the stock this weekend.

Until then, this is a very excellent piece on the topic and I will base a lot of my post about YY on this article: Livestreaming Trend in China

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Chinese shoes – XTEP

If you have been following my posts on portfolio changes you know that I have been running a fairly high cash position lately. I have been struggling to find new good investments. With a few days off during Chinese New Year I have tried to search for new investment cases. I wanted to find something in Europe or the US but again it is a China exposure.  I guess I keep coming back to this market because it’s here I still can find companies at reasonable valuations. American stocks for example just feel so expensive. Entering at a 5% weight in my portfolio – XTEP International Holdings a sportswear and mainly sports shoe maker listed in Hong Kong with almost all of it sales in mainland China.

Introduction XTEP

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The company you can say is a copy-cat on the way Nike sell their products. A strong offering of running shoes and other type of sport shoes and then offering a whole set of other sporting apparel in the same shop. The company was listed in 2008 and share-price wise not much has happened since, although the company has delivered solid dividend over the years and increased revenue significantly in the early years. The company had a rough patch in 2013 and has now recovered closer to peak revenue levels.

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Pros/cons

+ Dividend payout ratio around 50% – 5% Div Yield.

+ Attractive valuation multiple – Trailing P/E at 9.5

+ Sportswear and the “healthy trend” has also reached China, projected to have continued good growth for many years.

+  Working with popular celebrity Nicholas Tse who promotes their brand (my girlfriend who is Chinese thought this was an important point).

+ Looks wise, shoes improved significantly over the last few years. Now selling a shoe that looks as good as Nike but sells and half the price.

+ Seem to be ahead of competition in terms of e-commerce sales through Tmall and other online channels (including their own homepage).

+ Competitors share price has been rallying lately, XTEP is the lagger, a positive in my view since I see it as unjustified. But perhaps also a worry, what does the market know that I don’t know?

– History of trading at low multiples and high dividend yield in the past. Value trap? At least receiving a nice dividend is good, but why is the market so hesitant to multiple expansion?

– Just a few years ago fierce competition among local players, leading to weakest hands being shaken out. XTEP being a semi-small player also struggled, somewhat worrisome. The largest rival Anta held up much better during those years.

– Hard to judge what brands the Chinese would prefer among the local brands, some sell side analyst argue Li Ning has a better product offering and better brand image.

– Lately sales have been dropping in apparel (more on that later).

The competition

Chinese-Sportswear-Market-Share-2015-Pie-Chart

The market is lead by the international brands Nike and Adidas, likely one would expect more competition in the future from international players like New Balance, Asics etc. On the other hand there is probably room for consolidation of the “Others” piece of the pie, where probably Anta, Li Ning, XTEP, Peak Sports and 361 Degrees will be able to grow their market share.

So basically the local competition to XTEP is four other Chinese players, where Anta, Li Ning and 361 Degrees are all listed. Peak Sports was also listed but was recently acquired.

Market Value P/E Yield CFO/Sales
Anta 62bn HKD 25 2.56% 16.7%
Li Ning 10bn HKD N/A N/A 8.6%
361 Degrees 7bn HKD 12 3.64% 5%
XTEP 7bn HKD 10 5.34% 16.5%

XTEP has been a clearly been lagging stock price wise and that’s the main reason why the stock look so cheap on metrics compared to the competition.

6 month return 12 month return
Anta +49% +35%
Li Ning +18% +36%
361 Degrees +45% +39%
XTEP -19% -4%

 

Sales and Revenue

The main reason for the weak performance lately (as far as I have been able to gather) is explained by this graph (Sorry for the first graph being reversed, 2016 to the left):

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We can see the tough competition mentioned earlier, in 2013, where all players were witnessing pressure on sales. What has happened since is that apparel has not recovered, rather hovering sideways, whereas footwear sales has shown very nice sales growth. The last reported figures are a bit of a mystery and explains the share price weakness, apparel sales drops a lot, whereas if looking closely at the footwear data, H1 is normally weaker than H2, but the footwear sales comes in very strong. So what is happening with apparel? Well I don’t have a full answer, going in on their homepage I can see they are having heavy discounts on the clothes (80-85% discount on some items). The company has also stated a strategy on harder focus on footwear, becoming a leader in this field, expanding sales of soccer shoes etc.

Otherwise we can see that the business is operating profitably and generating cash (which is 50% paid out in dividend).

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Risk reward looks attractive

I’m willing to take a bet here that apparel will recover to its previous trend of revenues around 900m and the H2 figures for footwear should come in strong. Even if it sales comes in at current levels, the stock is trading cheap and there is much more room for upside surprise compared to downside, which the market seems to already have priced in. I don’t really see why XTEP should be trading at such a steep discount to its competition, being a small cap stock I’m betting that the market has miss-priced the stock rather than that they know something I have overlooked.

If anyone has further input (on the ground testing of products etc) please do comment. I plan to visit Shanghai this month and will follow this up with a small field trip of checking out sportswear stores.

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