Monthly Archives: December 2010

The case for bricks (and motar)

December 10, 2010

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Apple has overtaken Microsoft as the largest technology company by market capitalization, amounting to 293 billion compared to MSFT’s 231 billion (Google is at a distant 189 billion).

As a software behemoth from the eighties, Microsoft gained dominance through its Windows operating systems and Office suite of productivity applications, which were all within the realm of software. Their position continued unchallenged for more than twenty years, and even though Apple was a serious competitor with both the Mac desktops and Apple OS, Microsoft was never really challenged until now.

With the emergence of the Internet in the late nineties, several online only outfits such as Google, Amazon, Yahoo and lately Facebook have claimed a huge stake of capital. Back in the early 2000′s, there was a popular notion that ‘brick and motar’ companies like your neighborhood bookstore were going the way of the dinosaur as online alternatives became the only form of commerce. Now ten years later, it seems as if ‘bricks’ are back in business.

Before Apple launched the iPhone, which was in January 2007, APPL’s share price was about $85 that January. In the 4 years since then, the share has rocketed to about $320 today (10 Dec 2010). Now this is an incredibly lucrative piece of ‘brick’! (or maybe more like a piece of tile since Motorola was the first to produce phones that looked like bricks and Apple’s iPhone is way too slick to be degraded like that). While other technology companies are churning away at codes and software products, Apple has developed a piece of hardware that is highly coveted by the generations of past, present and future. Apple is also a software player with their Mac OS and iTunes, but a single piece of hardware like the iPhone has truly integrated their product lines and provided huge synergies. Revenues stream in not only from each iPhone sold but also from Apple’s cut of sales of iPhone Applications on App Store, music, TV shows and movies from iTunes and books from iBooks. By providing a desirable platform and conduit through which it takes a cut of every content that passes through, Apple has found the golden goose in the form of a ‘brick’. Google tried too late to mimic this strategy by creating first the Android mobile OS and then the Nexus phone, but their only success was Android OS, which, like their search engine service, is still being provided for free to other handset manufacturers like Samsung and HTC. The Nexus phone continues to languish and Android does not generate revenues nor provide any synergies besides providing a marketing platform for other free Google services. On the other hand, with each iteration of the iPhone and additions like the iPad, Apple has gone from strength to strength by producing both hardware and software, the hardware being at the heart of the revenue generating machine.

Market capitalizations of selected tech industry giants:

Apple – 293 Billion
Microsoft -231 B
Google – 189 B
Oracle -147 B
Intel – 122 B
Facebook – about 50 B (estimated at 1/4 of GOOG)

(data as of 10 Dec 2010)

Chinese IPOs on NYSE

December 9, 2010

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It would seem like the dot.com bubble is descending on us again after a decade. The 2 Chinese IPOs that went for listing on NYSE today skyrocketed on opening, with one ending more than 100% above their initial price. The two companies are youku.com and dangdang.com.

How well do investors in the US know these 2 companies, especially when they are from China, where regulatory and accounting standards are different and numbers cannot be verified? For one, Youku has not even been profitable in the 3 years prior. Once again we are going back to the era where eye-balls and page impressions were worth as much, maybe even more, than actual profit dollars.

What I found most amusing was how the hosts on CNBC glorified these companies. Or maybe it was not their intention to do, but the publicity stunts of those companies who gave them these sound-bytes. Youku.com was called the “Youtube of China” and Dang Dang termed the “Amazon of China”. These two phrases gave these companies more clout and familiarity with US investors. And who would not be excited by a Youtube or Amazon, especially if they are tapping on the Chinese market, the world’s most populous market?

While I am not familiar with Dang Dang, I have been on Youku.com to watch Chinese TV-dramas and movies. They have excellent connection speeds and a very broad range of content, which is excellent service for the many students and individuals who were looking for free entertainment online. However, I have often wondered if these were legally posted. In those early days (about 4 years ago), it probably did not matter that these videos were posted without permission of the owners. After all, it might be difficult for enforcement. We do not see entire movies on Youtube precisely because these were copyrighted and there is strict regulation in the US on distribution of these works. When I checked the site for this article, I found that they now have American movies! So are we to next see a Chinese company that duplicates DVDs (piracy?) seek funds from American investors?

The business model of Youku is similar to Youtube – they rely on advertisements on the clips for revenue, but it makes one wonder whether this is really sustainable, given that they are still in the red. One thing going for Youku is that Youtube is still banned in China, so it has a greater chance to monopolize that niche. I once read that Google acknowledges that Youtube was not worth its 1.65 billion acquisition. I wonder if investors will feel the same way about Youku in the coming months.

Youku ended 161.25% above it’s offer price to end at $33.44 on 8 Dec 2010
Dang Dang ended 86.94% above to end at $29.91

To read more about these IPOs, follow on to CNBC here

Creative alternative investments

December 9, 2010

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There is growing popularity in an area of alternative investment, if one can even call it that, which is the funding of divorce proceedings, or “divorce funding”. The idea is straightforward. Find someone who is going through a divorce and who is too poor to pay for protracted legal fees to get a good settlement, and “invest” in them by supplying them with the necessary funds. When the case is settled, the investors get a cut of the settlement.

Divorce funding is quite simply another form in which capital can be raised, invested and grown, much like the capital markets of the world where companies go to borrow funds for their expansion or acquisition plans. And it is not only in divorce cases that are seeing this funding phenomena, there are various funds focused on all types of litigations. Capitalism, at it’s best, can find it’s way into various vehicles. Venture Capital (VC), Private equity (PE), Angel investing are but some ways in which funds are channeled to startup/private companies in return for some stake in the future payouts. In these ‘traditional’ scenarios, funds are backing a technology, or a group of people and their ideas. Like divorce funding, there are potentially many other avenues where capital would be put to use for a sizeable return in a non-traditional manner. For example, funds could be used to invest in people.

Before I set off for business school, I was searching for a student loan to cover school fees and the idea of a “dax fund” came to mind. This is true. I solicited the investment from several acquaintances but they were not too sure that this “investment” would produce a good return. And I had not had the good sense to provide them with a prospectus and valuation report! In truth, this form of “education funding” would probably not make much sense because the investment horizon is very long, and it can be very difficult to “valuate” a person. However, consider that this investment helps to improve the live of a person and one can see how this can be a worthy investment, no matter if the returns to the investor is meager. The intangible benefit to the ‘investee’ is potentially large because it can be life-changing. Instead of donating money to a school to build a new wing or for new research, could one not put the money in a few deserving students? Of course, unless the investor has tons of goodwill to spare, i don’t think any sensible business person will commit to this. As for me, I would seriously consider doing this if I do have the capital to spare.

NY Times article about divorce funding:

http://www.nytimes.com/2010/12/05/business/05divorce.html

Investing in Mongolia?

December 8, 2010

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Wild horses galloping on grassland expanding into the horizon. Nomads herding cattle as they head towards their ‘gers’ (round Mongolian tents). That’s the image that most people will have of Mongolia where Genghis Khan once ruled and conquered lands as far west as Turkey. This is the real Mongolia, the independent country. There is an Inner Mongolia, which is part of China. Mongolia is truly a beautiful country of majestic landscapes and rich culture. After graduation, I had the privilege of working in Mongolia and it was an eye-opening experience for a city-dweller accustomed to the luxury of hot water, Macdonalds and Starbucks.

As Mongolia continues to open it’s economy to global investments, it’s rate of growth has accelerated in recent years as capital from developed nations seek out ever risky and high-return opportunities. “Emerging markets” were used to categorize the BRICs (Brazil, Russia, India, China) but that is so early millenium. Mongolia, sitting with another obscure country – Kazakhstan, is in a newly defined category of “frontier markets”. These are countries that have low market capitalization and liquidity but have potential for high growth over the long-term. Of course, in the near term, a lot of investment is required in order to exploit those opportunities. Mongolia for one is supposedly a diamond in the rough. Land-locked by Russia to the north and China to the south, the country has vast amounts of land and underneath the soil lies huge deposits of natural resources, minerals, and coal. The potential for discovery, extraction and export of these resources is huge and a few global mining companies have already started making in-roads into the remote mountains and distant lands such as the Gobi desert. The buzz in the expat community when I was there was that the mining industry was set to explode, which meant that miners, engineers, personnel, i.e. the whole ecosystem for the mining community would be descending on Mongolia – mainly in Ulaanbaatar, the capital. Real estate prices were skyrocketing as developers raced to build accomodations for these people. Imagine being in the middle of nowhere and having to pay $3000 USD rental per month for an apartment about 100 sq meters. Surprisingly, Ulaanbaatar is quite modern with numerous restaurants serving international cuisines from American burgers and shakes to Singaporean Bak Kut Teh and Mexican burritos.

There was tremendous hype on the ground and overseas, and hype it was. That’s my personal opinion, having lived there for awhile and experienced on the ground what the place, the systems and the people are like. I was involved with bringing investors into the country and showing them the various investment opportunities in real-estate, mining, and capital markets and I personally was not convinced that Mongolia offers a great investment opportunity. There was too much risk from unstable political system to government regulations which could change overnight, wrecking any well-established plans. Like any other country coming to terms with its new-found popularity and its treasure troves of untapped resource deposits, there is a lot of governmental control and hoarding and only those who have connections to the upper echelons of the administration would be able to have a piece of the investment opportunity. Regulations and accounting policies are in a constant state of flux and often cannot be relied upon for accountability and comparability. Infrastructure is a major concern as the city appears to be buckling under the stress of a population that is expanding in tandem with capital inflows. People are coming in from everywhere around the world and also from the country-side. Young Mongolians are giving up their nomadic lifestyles for the comforts of the modern world. While new condominiums, commercial buildings and global luxury brand retail stores continue to sprout in the tiny city, nothing seems to be done to the roads and horrendous traffic conditions. The small two-lane main roads connecting most parts of the city will no longer be able to support the affluent population accustomed to travelling by cars, trucks and SUVs. I hope more will be done to improve these conditions, but there currently appears to be no proper plans to space out the developments or make way for transportation, as everyone continues to scramble for the scarce land that is still available for the next condominium. In short, there are many inhibitors in the near term and even the promise of the availability of rich resources and potential requires even closer scrutiny as current reports may be more hype than substance.

Caveat emptor!

Hello world!

December 7, 2010

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After 10 years of hibernation, daxchow.com is finally live online. Since I registered this domain 10 years ago, I have never thought of putting up a personal website as I had been busy with my other commercially-driven websites. Now that the other assets have been retired, I decided to put up some writings of my own to spur discussions and interactions with friends, colleagues, clients and those-I’ve-yet-to-be acquainted.

The growth of social networks in the past 10 years has been tremendous, and I can possibly say that I was there before the beginning – before Friendster, Myspace, Facebook. Those were times of web-forums and discussion boards, which are still popular now but pale in comparison to the social networking sites. The sites that I developed were “communties-of-practice” forums that was more niche and brought together people of common interests to share knowledge – in this case, it was how to build, manage and grow websites. One other site I created was for people to create their personal websites for free. I was able to reach 11,000 members in a thriving community through Google Adwords advertising, word-of-mouth advertising, and article marketing. But this number is peanuts compared to what Facebook was able to achieve in a short time.

Now, I realize that these 2 concepts were possibly the very foundation of Facebook – a personal profile page where others can see what you are doing, what you have been saying, and who you are friends with, and a platform for that exchange to take place. Facebook pools together status updates from your friends and puts it together, leveraging on the network effect. Facebook gave those connections immediacy and a place for personal expression. It seems I was almost there – if only I had connected the dots and merged the concept of forum with personal websites! Of course that would not have been possible because I was using tools that were built by others – a forum software and a hosting software. Even though I had a computing degree and was capable of customizing some of the code in those software, I was nowhere near the creation of an application from the ground-up, which was essentially what was needed. I suppose I was also not thinking of conquering the world, although the reach of my sites did reach all corners of the globe. Sometimes we can be at the brink of a new concept that would change the world and it just brushes by because we constrain ourselves!

This site, although it uses a blog platform, is aimed at a more professional level; I do not intend to post what I had for lunch or where I am at the moment (we have Facebook for that). Instead, expect to find observations, analysis and insights of yours humbly.

Please feel free to send me an email or IM. I would love to hear your thoughts on anything on this website, or to simply chat.

Thanks for reading.

Dax

daxchow.com

Monthly Archives: December 2010

The case for bricks (and motar)

Chinese IPOs on NYSE

Creative alternative investments

Investing in Mongolia?

Hello world!

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