Disruption seems to be the buzz word nowadays. In last year’s National Day Rally, PM Lee Hsien Loong spoke at length about disruption and how it is the “defining challenge of the economy”. He stressed that Singapore has to embrace changes, raise the level of technology adoption among companies, and train workers to upskill. In essence, disruption should be seen not as a threat, but an opportunity to transform industries to remain relevant and competitive.
According to the online Cambridge Dictionary, to disrupt means ‘to prevent something, especially a system, process, or event, continuing as usual or as expected’. There is even a specialised definition in the business context: to change the traditional way that an industry operates, especially in a new and effective way.
Right now, we are seeing the full impact of disruption being played out in Singapore particularly in 3 sectors: taxi, telecommunication, print media.
Let us first look at taxi segment. The emergence of Grab and Uber have single-handedly revolutionalised the way we consume taxi services and pulling us away from the traditional taxi operators. They started by offering a new channel of taxi booking applications, then moved on to carve out a new avenue of private taxis. Then came throngs of new drivers offering transport services using their private cars, competing directly with taxi drivers. Now we are seeing Grab implementing a new electronic payment system which could pay for daily purchases. Essentially they are creating a whole new commercial ecosystem anchored by taxi services with a complementary offering in e payment that brings about consumer stickiness.
ComfortDelgro Corporation Limited (SGX:C52) has been adversely affected by Grab and Uber. In the most recent quarter, its revenue and operating profit dropped 3.4% and 9% respectively. The taxi segment saw its revenue dropped 11%. The market has responded by pushing its share price down to around $2.2 which is at a multi-year low.
Telecommunication is another sector that is facing disruption. However, it is not caused by a new business model offering alternative services, but instead the entrance of a new player into an oligopolistic industry that has remained status quo for a long time. TPG Telecom, an Australia fixed network company, has successfully bidded to be the fourth mobile telecommunication company in Singapore, muscling its way into the field occupied by Singapore Telecommunications Ltd (SGX:Z74), Starhub Ltd (SGX:CC3) and M1 Ltd (SGX:B2F). Under regulations, it is required to roll out nationwide 4G services by Oct 2018.
When there is a new player entering an industry with matured players and stable dynamics, chances are the new player will resort to aggressive price tactics to wrestle customers away and gain market share. It is highly probable for Singapore with a small market and a mobile penetration of 150%. Existing telcos, to defend their market share, would need to up their offerings with innovative products and attractive pricing to retain customers. A case in point: the return of unlimited-data mobile plans recently.
Arguably, M1 as the smallest telco would be the worst affected. It is heavily dependent on Singapore’s mobile market, with less diversified operations and smallest customer base. Expenses will rise in marketing, recruitment, handsets subsidies to retain customers. In its latest quarterly results, its handset cost of sales rose by 17%, while its EBITDA margin for service revenue shrank from 40.3% Q2 last year to 35.9% this year.
It’s share price? Currently trading at around $1.80, also a multi-year low unseen since the Global Financial Crisis.
The newspaper and print media industry in Singapore is tightly regulated by the government, as media is a powerful yet dangerous tool that can be abused to spread negative sentiments on sensitive topics such as race and religion. The government needs to keep a tight lid on the media industry to preserve our social harmony. Hence there is only 1 company monopolising the print media industry: Singapore Press Holdings Ltd (SGX:T39).
However, SPH has not been immune from the changing landscape of media industry. Technological advancement has, again, disrupted the way people consume news, articles and information. The proliferation of internet, smart phones and social media means more people are receiving news online, and reading articles using their mobile devices on-the-go. These channels are more competitive in nature with a much lower cost of advertising compared to print media. Circulation of printed materials such as newspaper and magazines have been declining, forcing industry players to move existing hard copy content online, and generate more creative content to retain consumers. However, the advertisement deal is less lucrative in online space and digital advertising than the print materials. This is a case of lower Return on Investment even with higher capital expenditure.
The impact has been felt clearly by SPH. It’s media revenue has been declining since 2012, and the latest 9-month results showed 8.4% decrease in revenue and 31.9% fall in profit.
How Can We Finetune Our Investment
It is clear that disruption is usually brought about by technological advancements. Think about the algorithm and e-payment solutions behind Grab’s suite of services. Hence, investors need to be keenly aware of the latest technological advancements and government’s broad direction and efforts in industry transformation. These are factors that determine the strength of headwind that companies are up against, and their performance in the long-term.
Secondly, disruption can be broad-based. No companies can escape the wave of disruption and those which react slowly will suffer. Hence we need to monitor our investments closely to identify the sign of business deterioration caused by structural changes in the industry. Should one deduce that the worsening business is long term in nature, be decisive to liquidate your investment and leave the sector.
Disruption is here to stay and its impact will be widespread. While we are familiar with the old saying that ‘change is the only constant’, disruption is in fact changes that are more frequent and sweeping in nature. Corporations have survived previous industry changes and will need to survive future ‘disruptions’ too. Investors would also need to do the same: be nimble, observant and always stay informed to stay afloat in their investments.
To learn more about how you can start managing your own wealth, subscribe to our monthly Asia-In-Focus Report. Subscribe today to get a free E-Book from us as well, Our Stock Guide 2017: The top 10 stocks on our watch list today.
You can unsubscribe at any time. Your contact details will be safeguarded
The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in CS Chong’s personal capacity. It does not in any way represent those of his employer and other related entities. CS Chong owns M1 Ltd.