We chat with Tan Chun How, an investor in a family office based out of Sydney, Australia. Chun How talked about one of his favourite investment ideas at the moment: Jianpu Technology Inc (NYSE:JT).

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S1: 00:01 This is investing ideas by valueinvestasia.com.
S2: 00:05 This week, we talked to Mr. Tan Chun How, an investor from Skyfield Capital based out of Sydney, Australia. Jun Hao has been investing in the stock market for a long time. But I will say that he has quite a unique style of investment. He almost approached the stock market like a venture capitalist looking at high growth, high potential company that is still undiscovered by the public. This week, he shared with us one of his key ideas, a FinTech company based out of China, where the growth potential is still far from over. Without further ado, let’s get started.
S1: 00:37 [music] From valueinvestasia.com, this is investing ideas where we talk to investors from all walks of life, learn from them and find out some of their favorite investment ideas.
S2: 00:53 Today, we have a very special guest tonight, Chun How, from Skyfield Capital. Hello, Chun How, how are you?
S3: 01:00 Hey, I’m good. Thanks for having me here, Stanley.
S2: 01:03 So Chun How, I think you have been a longtime investor, and we have known each other for a while. And you have always shared with me great investment ideas. Why don’t you just give a brief background on your investment journey and what do you do now at Skyfield Capital?
S3: 01:23 Yeah, so, I’m an engineer by training, but I have some financial experience as well. I’ve always enjoyed investing. So typically looking at Benjamin Graham as a value investor, that’s a starting point. But over the course of my career and then life, I have taken different nuances and different approaches to investing. So in Skyfield capital, it’s a family office. So we do primarily private investments. And we are often the bridge or the financing solution between the cash flow need of business and the revenue that they generate. So we are, in essence, the funding gap. So that means we have quite [inaudible] on how we can structure our financing solution. So that’s what we do [inaudible] let’s say. We do public investors when the opportunities arise. So we are quite long-term by nature and very patient. So what it means is we will only sell when we realized we have to and that’s the only reason we sell together with the founders. And when I say patient, meaning, we’re not incentivized by, by commission or transaction fee. So meaning we can be sitting along and not doing a deal in two years, but we can also do three deals in a quarter. So that’s how flexible we are.
S2: 02:53 Okay. Cool. Yeah, I guess, giving you the flexibility as a family office, definitely, you can be much more diverse in your investment. And also, you don’t have to have a quarterly target to reach, similar to hedge funds. But on your personal note, how would you describe your own investment style when I asked you, what’s your main strategy of investment? How would you describe that?
S3: 03:23 Yeah, good question. I don’t think I covered that in my description of Skyfield Capital. So I tend to hold quite a concentrated portfolio. And that’s the reason being I have– if something is not simple enough for me to understand, I will stay away. So, hedge fund, I don’t have that trading mentality. So it’s a buy and hold type of mentality. And because it’s very concentrated, I need to have high conviction, so that sometimes it might take even years for me to believe a include that in my portfolio. And I typically like very long-term circular trends, like the rising middle class in China. That’s a theme that is not going to change. It has a lot of tailwind. And when you have that kind of long-term thinking, but you have the privilege of waiting and being patient. And when you see great companies buying quality companies, they’re typically not cheap. So, meaning you’re not getting a cigar butt but you’re not– value opportunity. But rather, for the lack of a better word, I think you’re looking at compounders. And then, figuring out what a fair price to pay, and the reason why you get it. So that’s my style in the public sector that I manage my own portfolio on behalf of my family members.
S2: 04:49 Ah, cool. Cool. Okay. And definitely, I think the idea that you’re going to present today also kind of fit into this investment philosophy. Why don’t you tell us a little bit about this company? Quite a unique company which, to be honest, I haven’t really come across. And I find it fascinating. But why don’t you explain a little bit what does this company do.
S3: 05:14 Yeah. So, the target company that I’m going to talk about is Jianpu Technology. The ticker is JT.
S2: 05:23 Okay. So listed in the US. Right?
S3: 05:26 On Nasdaq Stock Exchange, late 2017. They are essentially a marketplace by birth. Founded in 2012 by four founders with experience in PayPal, Amex, Baidu. So, it’s a combination of consumer online marketing as well as financial experience among the background of the founders. So, they generated around, I would say, close to $300 million US revenue in 2018. And they made their losses of say, 20 million, in the same year. But they have a hundred and twenty registered users in China online. And that’s quite massive. So, what they do is, if you are a user in China and you have a credit need. Meaning, you need a credit card or you need to apply for a loan.
S3: 06:20 So they don’t have traditional brick and mortar branches, so you go online and you search on Baidu or you search on some other search engines in China. You hopefully come across their brand RONG360. So, that’s the brand that they– the products are wrapped around. And it’s a marketplace. Meaning, you key in your need and then, you have a list of traditional credit card companies, or car loan companies, or even mortgage companies. And then, you fill in your criteria and they will send you, based on your needs, to the right provider. And then, collect a fee. So, that’s what they do. They collect fees per credit card success or per loan success.
S3: 07:03 And on top of that, I think there is a third component of the revenue stream which is a sales and marketing fee that they managed to monetize from the banking and financial institutions. In the sense that, with the data that they have through the hundred and twenty users, where there is– you’re based in Shang Hai. You’re looking for a loan in Tianjin, or you’re looking to purchase a car loan. Or whether it’s secure, unsecure, your disposable income, how long you intend to pay. And have you had a history of owning credit cards? And have you had late payments? How do you use social and how use WeChat pay or Alipay? Using both structured and unstructured data. They can use it as a sales and marketing tool, on a SaaS recurring revenue basis to banks or to insurance companies that they’re happy to pay because it’s like a targeted leads. It has a higher promotion rate, as opposed to just shooting your marketing dollars to Google or Facebook. But they clearly have the system in China as well. So those are the three components of their revenue and the bulk of their expenses. Essentially sales and marketing because that’s how they acquire their customers online. The marketplace, that’s the products and marketing development team are the R&D bucket. So essentially every single periodical time you need to introduce new products to catch new users. And then the other one is SG&A, which is the management overheads. Not people who are not directly involved in acquiring customers, but people who are the managers, the admin managers, like the CFO and the COO. So those are main expenses and they are in the right place in the right markets doing online and mobile, acquisition of consumers on behalf of all the financial institutions. So that’s a nutshell of the business model.
S2: 09:13 Okay. But it seems that they have quite the very interesting business model but from– of course from all we have heard about China is they are so big in mobile payment and mobile banking, right? Especially through Alipay and WeChat Pay. Does this Jianpu technology work with WeChat Pay or Alipay to link up the data or to link up the loans connection or are they merely servicing the offline financial institution?
S3: 09:47 So one thing is that they are an independent platform, or independent marketplace. There’s a vast difference between a marketplace and platform but I can elaborate further for the benefit of your audience. So they do have working arrangements with Alipay and WeChat Pay. But when I say working arrangements, meaning they don’t advertise on Alipay and WeChat Pay, but they have like a traffic sharing where the data is being shared across online and on the mobile app with big payment providers like Alipay and WeChat Pay. And the reason why they can differentiate themselves with, say, Alipay and WeChat Pay is, you don’t want to be being bundled and being sold with your interests not necessarily aligned with, say, a provider. And consumers today would like to have choices, they need to know what they’re buying and not just being spoon-fed. So there’s an element of independence and there’s an element of choice that allows them to differentiate from, say, Alipay and WeChat Pay. But if you have used WeChat Pay and Alipay, there are also literally a library of products there because they don’t give you the, what I call, by the curated financial content that is pertained to your needs. So typically they also go through other independent other platforms like RONG360 which is a very good example. So the–
S2: 11:12 Right. Okay. Yeah. Yeah. Definitely. And would you consider them being the largest player, if we disregard WeChat Pay and Alipay having their own database, but this kind of marketplace is the largest one in China right now, or there’s a lot of competition?
S3: 11:33 They are the largest, just by the sheer 120 million users in pure financial recommendations. So because there are also many other financial intermediaries and they have larger user base. I can give you an example, like Lufax, that’s an online insurance and they have many more other users than Jianpu but they are, in essence, you just buying a product from Lufax or insurance product from Lufax but you’re not giving the consumers the ability to research and read up and educate themselves on what is my– is that banking product suitable for my– so the ability to give choices and price transparency or price comparison in that format as well as very targeted to the way you live and way you work and how much income you get. So that, I think, is one of the many reasons that I like about Jianpu that I think can work in China.
S2: 12:31 Right. Interesting. Okay. And apart from the description of the business itself, what ends up attracting you to this company? Maybe you share some of the growth matrix, and how do you see them becoming in the next few years?
S3: 12:51 Yeah. So very good question. I came across Jianpu two, three years ago as a private company trying to raise capital from us. And I was blown by alot of their metrics. But then we never participated. We just thought that the private sector valuation was a big frosty at the time in China, and that’s proven out to be the case when we got listed But let me just share you what I think about Jianpu by end large. First of all, they’re in the right market, it’s China. They have the largest population not only in the planet, but also on mobile and also online. And they’re very engaged. They use the phone for a variety of reasons, mainly powered by WeChat and Ali ecosystem. So that’s one thing. There’s a rising middle class and they have rising credit needs. And it’s the largest online mobile penetration in China around the world. And with rising disposable income, they will require more credits. And just like how you might say 50 providers in, say, Holland or in, say, Thailand. In China, you are talking about thousands and thousands of financial service providers just on loans itself. It’s just mindboggling when you have so many choices and they have a lot of price competition where it’s so difficult to differentiate what is the interest rate and what is the components that I’m paying for, whether it’s a referral fee or interest fee or whatever it’s a click fee or there’s advertising fee. So it’s mindboggling that it’s hard for a consumer to really figure out what they need. So this marketplace model, I think can work in China because it’s just facilitating the user to the need, so bridging a user to a financial product. And the financial product could come from a banking institution or a financial institution, and they collect a fee in the middle. Why it seems important is there is no credit risk, right? So they’re not a vendor. So they don’t need a license in the first place and they don’t need to worry about bad debt. So it’s all bear by the user. So once the content that is on the platform in generated by the platform, it serves to educate consumers so that they are financially literate to chase and produce, and confirm, and procure their own product on their own merit. So when you do that, the liability ends with the consumer or the banks. So it’s not for the platform because they are just facilitating the meeting of people. And what I like about this model in the sense is that there’s no credit risk, and it’s a very scalable model. The co-founders, one of which is a Baidu search engine manager, so they have managed to amass 120,000 million users. That’s really impressive. The way they scale and acquire consumers at a much lower rate and I would say, a much better unit economics than all the banks online banks or whether they are offline banks. As just be the way where there is the same principle. I aggregate users on behalf of all the banks and financial institutions and I commoditize their products. And that’s how I commoditize them, by getting them to pay for the data and for the users. And in the process, I collect a fee whenever a transaction is made. And they have become the Baidu of financial services. That’s their bread and butter. They want to be the search engine platform where they can advertise and monetize at the pricing fees, but in the process, they added transactional functionality, where they can also collect a fee based on the volume. So they have multiple ways where they can continue to grow. And that’s one of the few reasons what I like about the business. And given that it’s a mobile and online driven business, this is a typical venture capital type of deal where it’s highly scalable. About 60 to 70% of the expenses are tied to sales and marketing. And that’s just acquire more and more users. But once you’ve had all these engaged users on your platform, you can turn that off. And once you turn it off, all the incremental revenue flows straight down to your bottom line. And that’s a venture business where you pay a lot upfront, and you pay a little bit market to establish your brand name. And the marginal cost get better and better with scale and unit economics. So, in a way, your revenue will be growing at a much quicker rate than your expenses, maybe five, ten years down the road. And that’s the beauty. And that’s what you’re paying for. And then, that’s what I like about Jianpu.
S2: 18:08 Yeah, the business model seems quite easy to understand. And also, like you said, highly scalable. And if they turn off the marketing costs, it’s almost like a fixed-cost business. But you also talked a little bit about competition, right? Competition in China is almost like cutthroat amongst the financial institution. But I would expect the competition for this type of marketplace is also immense. In your own research, have you seen how they are able to gain an edge over competition or do you already consider them as the de-facto platform going forward? Or do you still see some risk that it’s very possible it could be replaced by something else in the future for this company?
S3: 18:58 Yeah, so I’ll just give my lens on the competition. Like you say, in China, competition is on another planet. There are thousands of other marketplaces, just like what [Jen Pu?] is doing. And the differentiator is execution risk. And building a marketplace, especially a two-sided marketplace is extremely [inaudible]. You need to know,– for the sake of discussion, it’s hard to have only five banking partners. And when the user comes, only have five choices, and they might just need ten choices. And whence the users don’t come, the banking partners don’t come over. So it’s hard to beat this liquidity, which is why a lot of marketplaces cannot work by much. You need to have the breath of both the user as well as the financial partners in this case. So typically, as the industry matures, there will only be one, if not two wins. The market is not large enough to have the third or the fourth because your margins will only come down. That’s just natural trajectory. And the winner takes all. And the odds are by far the largest. And I attribute that to the founder. They have the payments and financial know-how. And they have the search engine background to power the business. I find the combination between the founders really appealing when the scale approaches. So that’s one thing. Second thing, competition is always going to come. I do think the management team is weaponized here that the company like you said might come from Alipay, or the Ant Financial, or even a WeChat system because just by nature of the number of users, they have 800 million users over there in WeChat or even TikTok, which is another company that has a Toutiao business as well. That’s my fear. But what could be comfort is the WeChat ecosystem is, in essence, a social platform. And they also have a gaming platform. What’s give me comfort is Pony Ma has always tried to venture into e-commerce. And they have never done so. It’s not in it. It’s game and social. Likewise, Jack Ma of Alibaba– we also would love to have their e-commerce together with social and together with gaming. But Jack Ma and the whole team– the DNA is e-commerce. And finance is a secondary tool to facilitate e-commerce. So that gives me comfort that the gene pool network and the DNA of their team is essentially consumer marketing and financial products. And it’s hard to venture elsewhere. And therefore, it gives me comfort that WeChat– it’s hard for them to replicate what they do for financial products and end services. And it’s hard for people to say, “I go to WeChat for social and gaming. And I just buy lots of services.” But when it comes to independent of us, I’m not so sure that I trust WeChat. I might trust a lot of people within WeChat Pay. But they’re also using any other brand. So the market might be large enough for a few brands. But I don’t think it’s– the nature of a marketplace– there’s only one or two things. And then, the rest will just peter out because more and more users migrate to more and more social elements and more and more banking elements. And that’s how I see it. So I don’t have a crystal ball. But I know that the brand name is really difficult to establish. You need to invest above the line. And the testament that gives me comfort is the 120 million users. And it’s this transaction of platform, meaning it’s not just a social linking here and there. It’s not just content-driven. But people actually do transaction on the platform. And the ads actually pay on the SaaS model to require the users. And all of the 120 million users as of the prospectus in 2017 I remember 18 million monthly active users. So that’s quite a high component of an engaged user and also more importantly, a transactional user where you can click like revenue. On top of that, you can modify selling advertisings.
S2: 23:39 Okay. Yeah. Maybe we talk a little bit about the shareholder structure as well. Given that a lot of tech companies in China right now– although they might be founder-led, but they have a– get investment from either Tencent or Alibaba. In this case, have any of the two giants invested in them or are they still pretty much founders-led, founders-owned?
S3: 24:06 Yeah. There’s a common saying in China. As you grow to a certain size, you will end up getting into either the Tencent or the Alibaba ecosystem. And in a way, it’s like say you take my capital. If not, I’ll invest in other companies. But fortunately, this team of founders– although they own about 25, 30 percent of the company. But they have absolute little rights who they trust these shares. And that’s very typical of the tech industry, whether it’s in China or in the West. But they have managed to secure funding from other VC funds not only in China, but also in the West. And they’ve managed to institutionalize that process, which in a way is big comfort. That sets a level of governance in Chinese entity at least in that aspect. So yes, they have managed to be truly independent from the shareholder base and staying true to the mission of being an open and independent platform for the users by not taking– by not mixing shareholder relationship with business alliances like most of the tech companies.
S2: 25:28 Yeah. Okay. Yeah. You mentioned that they have market cap roughly about 600 million US dollars right now. Given that their sales is about close to 300, that’s about two times sales, right? And they don’t have much– they don’t have profit. So it’s hard to value them on a PE basis. How would you value this company on your own research?
S3: 25:52 Yeah. So valuation is not my forte not much. But I can give you some of the frame or some of my numbers to figure out what is a decent valuation. So 600 million– that’s the market cap. They have about 120 million registered users. So that translates to five US dollars to acquire user. And that’s really cheap. I know very established startups whether it’s a marketplace or a platform. You typically pay about 25 to 50 thousand dollars per lead. That’s not registered. That’s not active. So on that basis, it’s a bargain for me. And going forward, let a good comparable interest by the name of Lending Tree. Ticker is TREE. They have a million users. And its end of the market value’s at $4.2 billion as of today. Obviously, they have a high revenue. They have managed to monetize and sell many other products in a mission to credit and loans. So they manage to get mortgages, meaning home mortgages, which is by far a larger ticket number. And it has a more lucrative product, but much lower volume and manage to sell insurance products as well. So in that context, yeah. It is growing not only the user base from 120 to say maybe 300, 400 over the next 5, 10 years, but also the number of other financial products that they can sell, so across many multiple verticals. And they can continue to grow their SaaS model through advertising and targeted marketing. So by and large, I– like I said, when I am concentrated, high conviction portfolio. And I don’t intend to sell. and the only reason why I sell is when others have cashed out like WeWork founder or when they keep with another competitor or the wrong assumption– I made another form of error type related to company that we just another marketplace and I don’t see that happening. So that’s how I look at valuation of Jianpu.
S2: 28:21 Cool. Cool. I get a sense that this company, maybe, is more of a tech startup type of company where maybe the business risk itself might be quite high. But the potential of it– like you said, the prospect of it not only growing its user base but also integrating it, increasing more product range through its platform. That could have a huge impact in the future as well. Right? That’s the sense that I’m getting about this company.
S3: 28:54 Yeah.
   
S2: 28:57 Oh, and that sounds pretty interesting and fascinating. So for you as a investor, when you say that you are very concentrated and if you have invested in– I guess you have invested in Jianpu. How do you look at allocation on this part? How much have you actually been invested into Jianpu on your portfolio basis?
S3: 29:25 So typical allocation of mine would be ten stocks. And that would would be 10% of my portfolio.
S2: 29:35 Okay.
S3: 29:35 And typically, I look at different sectors, different currencies, different geographical regions. So Jianpu is a pure China play. So there’s no influence of trade war. It’s pure operating in China. It’s very isolated from the rest of the world. And then when you buy a Jianpu ADR, you have the US dollar hedged in a way. And obviously, for the rest of the portfolio, I would look out for very uncorrelated assets, like a sterling pound equivalent of oil and gas sector or something that would just diversify away my risk. So that’s how I lay out my portfolio. But then again, it’s very difficult to find non-correlated assets. If you’re daring enough, you can go to other cryptocurrencies. But no. I would take with a grain of salt. For very cyclical sector like the oil and gas, you are basically timing the ups and the downs. It’s not something that you can hold for the long term because they are in cycles.
S2: 30:51 Yep.
S3: 30:52 But for Jianpu, it is a tech play, It’s consumer play. It’s financial need. It’s a big market to grow. And they will continue to grow. And then it defys traditional physics where the bigger you grow the higher you can charge and the faster your bottom line grows quicker than your top line. True examples would be eBay. The bigger you are, the stronger you are.
S2: 31:25 Yeah, definitely. Wow. Okay. I’m very amazed by this company. And thank you so much for introducing this company to our audience. Once again, this is Chun How from Skyfield Capital based out of Sydney. Thank you so much for your time. I hope to chat with you again soon. Thanks. [music]
S1: 31:47 Thank you for listening. You can subscribe to our show on Apple Podcast, Google Podcast, Spotify, or wherever you get your podcast. If you are feeling generous, please give us a rating and review as well. This would greatly help other investors find out about our podcast. To access our show notes, please go to valueinvestasia.com/investingideas. And be sure to sign up for our email newsletter for more outstanding content and reports about investing. The show is for entertainment purposes only and should not be taken as investment advice. Please seek professional advice or do your own research when making any investment decision.

****Disclaimer: The show is for entertainment purposes only, and should not be taken as investment advice. Please seek professional advice or do your own research when making any investment decision. 
Disclosure: Stanley owns Tencent Holdings and Alibaba Group, Chun How owns Jianpu Technology and Lending Tree at the point of recording.

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