To market to market to buy a fat pig. There was green on our screens again yesterday, with all three major US indexes up around 0.1%. The main flavour for the day was the Fed minutes with a bit of Trump spice to round things off. The Fed minutes indicated that they would unwind their $4.5 trillion balance sheet incrementally, with more definitive plans coming out of their September meeting. There is the concern though that US inflation is not picking up and that interest rate hikes will hamper things further. The result is that interest rate hikes might be slower than the market is expecting which meant Dollar weakness.
Locally the All Share was up a nice round 1%, to 55 535 points. A positive 3% move from Naspers, thanks to strong Tencent numbers and 12-month highs for Discovery and Firstrand kept the market ticking. Unfortunately, Famous Brands finished down 8% after a weak trading statement, more on them a bit later.
After reading about the amount of time that the average person spends on social media and watching TV, I have been thinking about how that is possible. My conclusion is that it comes down to global wealth creation and technological advances resulting in people needing to work less. Rewind 100 years, around half of the global population were employed in agriculture as a full-time job. You would be working the land when the sun came up until it went down, seven days a week. Unless you were 'noble' or part of the global elite. Even if you weren't on a farm, your job kept you busy six and a half days a week. The half day off was so that you could go to church.
Today, the average person works 35 hours a week, leaving many hours free to consume social media and entertainment content. Coupled with that, more people globally now live in cities than those who live in rural areas. City living normally comes with fewer square meters to live in. Imagine coming home from work to a 25 square meter apartment. Going out all the time is expensive, Netflix at $10 a month is a great cost effective way to take up your time. Social media is free and a night of gaming is cheaper than a round of beers. As the hours of leisure time increase, entertainment creators and providers will become more valuable.
Company corner
Michael's Musings
The Tencent 2Q numbers didn't disappoint when they were released after market close in Hong Kong yesterday. This was in the middle of our trading day, the Naspers share price immediately shot 4% higher. Tencent is up 3.5% today. The numbers beat on top and bottom line, with revenues up 59% YoY and EPS up 44% YoY. What is amazing is the QoQ growth, where revenue is 14% higher than 3 months ago and profits are 17% higher. Most companies would be happy with that level of growth over twelve months instead of just three.
The biggest chunk of the business is still gaming, where revenues increase 39% YoY, taking the division's contribution to group revenues from 72% to 65%. From a diversification point of view, having their other divisions play a more significant role in the company is a good thing. Gaming is addictive but barriers to entry are rather low.
Their other two divisions are online advertising which saw revenues up 55%, accounting for 18% of group revenues and then their 'Other' division saw revenues up 177% to account for 17% of group revenues. Their other division includes some exciting projects, namely digital payments, cloud computing and then Artificial Intelligence (AI). Remember under the payments segment, WeChat and Starbucks China have teamed up to allow people to pay for their coffee using the app
WeChat is the platform that ties all their divisions together because when people are on the app, Tencent is able to direct the users to other services in the group. The number of Monthly Active Users (MAU) is up 19.5% YoY to 963 million. Joining the 1 billion club is just around the corner now.
Having a look at the above metrics you can see why Naspers's purchase of Tencent was the deal of the century. Unlike Amazon which has razor thin margins, Tencent has operating margins above 30%. Coupled with revenue growth in the region of 40% to 50%, the amount of fresh cash that they produce each quarter is a huge advantage. They can afford to take punts in next generation businesses, where many will fail but the few that survive will be major players in a Chinese economy growing at 6% off an already massive base. Buy Naspers, buy Tencent.
Byron's Beats
Yesterday we received a performance update from Famous Brands which certainly disappointed the market. The share closed down 7.9%. System wide sales grew 7% in South Africa for the six month period. If you exclude new stores, sales only increased 1.8%. 52 restaurants were opened in South Africa for the period.
GBK, the recently acquired UK based burger joint had sales increase by 12.1%. If you strip out the 6 new stores they have opened, like for like sales actually declined 2.6%.
You can see why the market is concerned. The company suspend their dividend to make the big GBK purchase. Post Brexit, the UK economy has been stagnant. Locally, we are also under pressure. Famous Brands have been very resilient in a tough economy but are now seeing the pressures reflecting in the numbers. The share price was expecting more, hence the rerating.
When you buy into a consumer facing company like this, you need to realise there will be good and bad cycles. The company is extremely well managed in a sector that will grow throughout the cycles over the coming decades. They should come out of this stronger and more efficient. We continue to hold the stock and ride the wave. Expect more details when the results come out.
Linkfest, lap it up
One thing, from Paul
This was my best read on the web yesterday. Financial Times US Bureau Chief Sam Fleming has a deep chat over lunch with Federal Reserve Deputy Chair Stanley Fischer. Fischer basically invented the idea that monetary authorities like the Fed can intervene heavily to counteract the effects of an economic crisis (like the one that we saw in 2008-09). Before becoming a central banker in Israel and the USA he was an academic. He supervised Ben Bernanke's thesis. Also interesting, he grew up in Zambia - Stanley Fischer, Fed vice-chair, on the risky business of bank reform
Michael's Musings
Nokia are back with the launch of a new smart phone, this is on the back of the release of an updated Nokia 3310 around 6-months ago - Nokia 8 hopes to beat Apple and Samsung with 'bothie', a new version of the selfie.
Who knew that we have been getting the Star Wars line, "Luke, I'm your father" wrong for all this time - 18 famous movie quotes everyone gets wrong. Some fun for a Thursday.
I can't imagine myself paying an entrance fee to go for a coffee. The argument though is that you are paying for the experience and access to common space, where you get to meet new people or sit in a comfortable environment finishing off your latest read - Grocery stores and coffee shops are starting to charge admission - and it could become more common.
Home again, home again, jiggety-jog. There are UK retail sales figures out later today, which is significant for the likes of Steinhoff and Brait. Then later today there are CPI numbers out of the EU and initial unemployment numbers out of the US. Alibaba and Walmart are reporting later, so we will get a good idea of how the global consumer is doing.
Sent to you by Team Vestact.
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