First Ever Facebook Face-Off: Xiaomi Corp Vs Vicom Limited
November 14, 2018
we have held our first ever Facebook Face-off back in Oct 2018 for our VIA Club Members!
It is an experimental program we are trying out where our team with pitch 2 stocks during the show and fight it out among ourselves.
It was held in our Club Members Facebook Group and members have been very interactive with us.
We hope it was enjoyable for all of you. Do let us know your feedback on the show and how we can make it better as we are still Beta-testing it.
Here is the show.
Stanley: Hello, hello welcome everyone to our Facebook live Facebook face-off our first ever Facebook face-off today, we’re going to talk about two very interesting stock which is decided by me and Willie we decided that we’ll try to pitch a stock, one that we are optimistic about at this moment and we try to pitch it to each other and then try to argue our way with each other and see if we can find out the real truth about these stocks. So, without further ado I’d like to welcome my opponent hey Willie, let the battle begin Willie.
Willie: Hey, what’s up? If you can hear me say hi!
Stanley: As you know, we’re going to talk about Xiaomi and also Vicom, I think because in my VIA club we have already discussed a little bit about Xiaomi, I realized that you told me that you recently just invested in Vicom, maybe you share a little bit when did you actually invest in this company
Willie: Yes, I was looking at the latest results, I actually bought into Vicom just two to three weeks back, so it’s about average price is about six dollars, per share.
Stanley: 6 dollars, per share, not too far from what it is now,
Willie: Yes, so the share price is still relatively stable, so when I bought it I think the dividend you was paying about five plus percent
Stanley: Okay, good let’s dive right in I think you can maybe give some summary of what really is Vicom is about, what is its business and why do you like it so much.
Willie: Sure! So, Vicom is basically Singapore’s leading testing and inspection company and they have basically two core segments, one is the physical inspection business which has more than 75 percent market share across all there seven inspection locations in Singapore. So for people who actually own cars in Singapore you’ll all be very familiar with this this company Vicom, because all of us we definitely to bring this vehicle our vehicle to this dreadful places every single year and get trash, a certain amount for some 20 minutes to 30 minutes routine work and sometimes it just doesn’t seem very clear to us why this actually has to be done just to please the Singapore government.
It’s second business is in industrial testing and certification, basically which is done by a subsidiary SETSCO, so the what they do is they calibrate tests, they certify services for various industries so this includes construction, oil gas and aviation. The last part of the drive of profits is doing its – coming from it’s vehicle inspection business, the second business which I mention about because of the slowdown in oil and gas slowdown in construction, so there’s actually impact findings but it’s not a significant contribution to its overall net profit.
Stanley: Okay, now I can see more and more people joining us now, hello to everyone I can see Peter, Charles, Mann Hong is here, Debbie, hello Desmond. Welcome, welcome, welcome if you have has any question, just put down your question below and if we have come around to our question-and-answer session we will definitely try to answer them. Okay Willie, so they are in quite a general boring business, doing vehicle testing and also industrial testing but they don’t really specify that what kind of Industrial testing right do they?
Willie: No, they don’t really disclose much of their industrial testing business, so basically what they do is basically using their equipment they were basing, just calibrate, they will test to make sure that all these are all in working order, otherwise they were actually to be taken out for maintenance and servicing.
Stanley: Okay so for those of you who are in Malaysia, you can see that Vicom is similar to your Puspakom right? In Malaysia I think that company is called Puspakom, but they basically just do the testing, do a chop so that you can renew your test in a way right, I understand they have the largest market share more than 75% of the market, but why are you buying this company, what attracts you to this company?
Willie: For Vicom, it’s thesis is very simple, Vicom is a very stable cash generative business, it’s free cash flow use is roughly about five plus percent, so this is basically from its strong operating cash flow, low key packs and it pays out most of its dividends or its cash flow as dividends, Vicom for the past few years has distributed its earnings as dividends, with a payout ratio of more than eighty percent so it has been increasing. One key issue which I like about Vicom is that, there is always this need of vehicle inspection in Singapore, this actually continues to drive Vicom’s revenues. Earnings tends to be more predictable, considering the ability to estimate the number of cars on the road, the number of course being an issue, so and on top that Vicom also retains its leadership position.
We’ve close to 75% market share which I’ve mentioned, and this is largely because of its reputation, with [inaudible 00:08:18] so [inaudible 00:08:22] still own some majority stake in Vicom. one last thing is of course Vicom is in a highly regulated business so it’s a lot like highly rated agencies right? Where it provides a relatively high barrier to entry for market entrance so unless the regulator’s sort of approve or the Singapore government approve another company to come into the market, usually this incumbents will dominate the market share for these industries.
Stanley: So, you so you mean there’s no one can just set up shop and say I want to be vehicle tester, that’s not possible right?
Willie: No, because; you still need you see to go through some form of criteria or checklist by the government in order to get your cars or vehicles being certified and be able to actually continue utilizing on the road, so I do believe there can’t be any emergence over the next few years, that’s why coming back to my point the earnings will be relatively stable.
Stanley: So, you’re basically buying it because; the dividend is high, and you think that the dividend is sustainable, that’s the key right is sustainable and you’re getting right six percent yield from this company roughly–
Willie: Between five plus to six percent, so based on its share price six plus per share most of all, especially you are roughly getting about five percent dividend yield okay and I think the that’s there’s also a floor on its stock price which is obviously underpinned by strong operating cash flow, low key tax and its high dividend payout. So, I’ll expect its share price so actually remain stable, I think what the market is really paying for or getting in return is an adjusted dividend new base on its predictable cash flow, it’s predictable earnings and it’s very strong market position in Singapore.
Stanley: Okay, okay. I think that I understand as it is now, this actually is the first time he is articulating his thesis to me and now I say this is and now it’s my turn to attack you, we’re doing it in good favor, because we do it quite often. But I have issue with you saying that this company has a sustainable dividend right and I kind of disagree with you that the company has a sustainable dividend. Number one because over the past few years we have seen that the revenue and the net income actually has been coming down, and there is a news report, not constantly but very obvious that car population is also dropping, although the government say they’re going to have zero car Groveland they so they’re going to cap the car population in Singapore, but the reality is car population has actually been dropping since 2013, I think.
As car population decrease, number one how can the revenue be sustainable in a way right, and as cost increases and less cars to test, doesn’t that mean that getting lesser and lesser margins for them, plus their payout ratio now they have increased to I think roughly a hundred and twenty percent of earnings, and compared to the cash flow is also roughly a hundred percent of cash flow now. I’m not sure, I would argue the other way that this is actually a structural decline company, I’m not saying that it would decline to zero, but I think because of the lack of growth and as inflation keep on increasing the cost will keep increasing I’m not very sure if they can really sustain that dividend.
Willie: Let’s put on our second level thinking cap for a moment, yes it’s true that there are news articles saying that the number of cars being taken off the road has actually been increasing and Vicom in its report also stated that the number of vehicles have actually declined and there’s really on the model car because that means in layman terms, it’s basically you and I when we buy a car right now, we are we are taking less cars to Singaporeans or locals are actually utilizing less of their cars, like have mentioned to take more public transport, but if we look at the COE being released every year, the number of COE have been increasing, the subscription rate has always been increasing as well, every time when the government release its new certificate of entitlement, there is still a huge demand.
This led me to think or to suggest that the need for Motor Vehicles for private use will always would still be there, I would think that over the past few years maybe the four plus four or five years there might be a slight drop, but I feel that this is probably a temporary decline, I think that going forward even though the government has mentioned that they want to reduce the number of cars but I find it’s very difficult, Singapore is a society which I will consider a fast-growing economy where you have you have rising affluence, people in middle income rising and these are people who want to continue to buy cars. If you think about it, even though public transport has actually improved drastically the infrastructure, so it’s very easy to actually take– the number of MRT now has actually increased, from two right now you have your Circle Line, your North East line, downtown line and soon in 2019 2020 the Congress will roll out their coms line as well, so of course there’s a huge densification of public transport but that doesn’t mean it will outweigh away people who want to take cars, because there is that convenience, where families they will still want to be able to ferry their kids around and it’s so much easier.
Stanley: So, basically you’re saying that although the government now is saying that Singapore’s going to have zero cargo flaw and but because the innate demand for cars is always there, and Singapore population is always increasing and Singapore is the place where all the crazy rich Asians are, and they can definitely afford the cars so no matter how the coe price increases, they will push for that the current population to still be increasing even though the government will try to control it that’s what you are saying right?
Willie: Yes, yes!
Stanley: Okay, but wouldn’t that be you know stretching it a little bit plus because they are paying out almost all the profit and all the cash flow back to shareholders especially to funnel it back up to comfort outgrow wouldn’t that left them very little to reinvest the capital right which is I think Mahone is asking, is Vicom even trying to have any new business opportunity, because they have these two business, the vehicle cars one hasn’t been doing their well these past few years and non-vehicle one industrial testing they constantly keep saying that it is extremely competitive very competitive, but they don’t break it down so we don’t know how much each segment is contributing. But the revenue has been dropping so we can say that both are not doing that well, are they trying new things do you want them to try new things?
Willie: I don’t think Vicom should be trying new things to me the reason why, what Vicom was precisely because it’s a very boring business, boring businesses as new businesses are for after all and as long as it generates a decent return on capital, decent return on equity, it’s still something which I like as long as I think that the dividend yield is sustainable, so that the question really lies whether the dividend is sustainable right, so I’ve actually thought about it for a while and if Vicom as a business is service base so you don’t really need to reinvest in huge amount of money into capex, that’s all you see their capex needs are always very low, is roughly less than five million per annum whereas on their operating cash flow they are actually generating about 29 to 33 million per annum.
So, that actually gives them a lot of positive free cash flow generation and with that in mind, the revenues which they collect through their vehicle inspection and their non-inspection vehicle segments, a lot of this earnings a cash flow it trickles down directly to the net earnings. So the odd they don’t disclose their gross margins, but I will give a sense however sense that if they will disclose gross margins, would be roughly north of 80% at least, because; they don’t really have a lot of other variable costs in play.
At least, largest operating cost is labor and rental but if you’ve seen from their past early reports, operating margins has always been roughly stable about 30 plus percent. I mean cost increase definitely is a concern and a slight increase would of course move the needle in the bottom line but, revenue can also increase, don’t forget that Vicom is an incumbent in the vehicle inspection market in Singapore, it’s not easy for another company to come in and attack them so let’s…
Stanley: The have pricing power.
Willie: They have pricing power, let’s say the government needs to increase say for example $60 per year to actually inspect your vehicle, there is the increase in next year and consumers like us we can’t do anything about this so —
Stanley: Who dictate the price, the government dictate the price or Vicom can have to say on the pricing?
Willie: I believe it’s a discussion between the two, I don’t necessarily think for such cases the government will impose an immediate pricing increase so I think always a discussion between the regulators and the incumbent themselves. It’s probably it’s the same for transport fares as well, bus fares or your train, train faces well there’s always that discussion and it’s a formula based, it’s not disclosed.
Stanley: Right, okay I think we have getting everybody so I think, more and more question is coming see how and they are mostly asking very similar things right, Grace is asking has the revenue contribution from the non-industrial, non-vehicle testing one fix, been growing over the years and I think they don’t disclose that right so we don’t really know, we’re not really able to tell but we can sort of guess, given that vehicle numbers is going down, so we know that vehicle testing should be going down, but revenue is going down not very fast like that, slower rate, so maybe the non-vehicle ones at least growing, maybe single-digit growing, we can make that assumption right?
Willie: correct, correct.
Stanley: Okay and Quan want to know that other than this two, do you see any real growth factor for Vicom.
Willie: I don’t necessarily put Vicom as a growth–I don’t really think it has huge growth potential but what the thesis here really is focused on is the stable cash flow which it generates, so Vicom can actually generate revenues in a certain range, so let’s say some years the revenues less than year in year on, yes increase going forward but with that in mind I would think that the dividend payout ratio about dividend which Vicom earns distributes from his earnings I would think that is roughly stable over time because; my thesis for holding Vicom is also more for a long-term, so there will be some fluctuations there’ll be definitely some years where the dividend will be slightly less, some years where the dividends would be more. But I always think that you were just average out right over time.
Stanley: Okay, you’re buying this for dividend, this is a dividend stuff for you right, you are assuming that the dividend will at least be stable or if not growing with inflation now because as inflation grows they just raise the prices even though car population don’t increase, they just raise the prices and they publish their revenue and income slowly just grow over time all right I think Lim Mech sorry if I pronounced your name incorrectly, she’s trying to defend for you also like big business like crap and now okay grab an uber combine together that really encourages more car population also in Singapore in a way. But we saw the Lion Rental, they are trying to auction out more than ten thousand cars or something yes, cheap cars is on the horizon everyone, time to buy. Korn and Grace says I love this, I should do more. Thank you very much, let’s see how we do this time around. Going back to the vehicle testing right, are they really, may be able to grow by M&A; can they just buy all the rest of the guys, do they need any approval if they want to do that?
Willie: The other guys are basically JIC and another guy I think it’s SET or something, I can’t remember exactly so yeah no real big players they are basically nine centers–
Stanley: Those are private or government link?
Willie: Those are private, so they are real small players, so Vicom yes they can actually buy them up but I don’t think that really moved move the needle, so they can just sit back just enjoy the amount of cash flow they generate, ROI is roughly about 20 percent if they were actually have to do an M&E; then offer some borrowing and then after have to start acquiring the remaining few but for Vicom the profit doesn’t really make much sense because the amount of capital you should recoup should actually be much more than what you actually get back at the end of day and the payback could be much longer in terms of the duration–
Stanley: I think Peter is telling you that the other player is called STA yes. Okay so but even without buying them if you track them over the past year will ST be getting more market share from these guys or is it always stable?
Willie: The market share is generally stable is roughly about 70 to 75 percent so I think it really depends on the revenue fluctuate ratio. I’m not really concerned over that so it is a it is a very stable business, I think for dividend use stocks like Vicom, sometimes it’s always very good to pay attention to the probability at which its earnings visibility is I mean at some companies where the they also did dividend yieldy stock, they are also very dividend yieldy, sometimes the introduction of new players or new competitors for example like the telco business that could actually affect when is visibility very easily for Vicom because the market is very niche, is very small, to actually introduce another player might not be as
Willie: It is such a small sector it is a risk more industrial today I mean we for seventy-five percent market share Vicom generates about say I think about two hundred two hundred and twenty million, so it’s a very small market in in Singapore so to actually introduce another competitor it might not make much economic sense in my opinion for the government to do so.
Stanley: Okay, cool, understand, I think Grace agree with you saying that dividend at five percent better than putting money– I think let’s finish it up maybe you talk a little bit about what’s your expectation on the good case and the bad case for this company and yeah Eric also has a question for you to finish it off, do you think Vicom as the chance of being privatized?
Willie: I think there’s a question everyone’s – specially for shareholders like us I reckon yes it is possible for [inaudible00:27:15] to actually privatize Vicom because it’s such a cash flow generated business right? And they only need to acquire the remaining 33 percent but let me sit don’t forget that [inaudible 00:27:26] is also facing a lot of heat from your grip as well so my thinking is that as [inaudible] they are probably also trying to save the dry powder to fend off their competition on the public transport side Vicom has a market cap of about 500 million so you probably require come with the rule probably require an additional two to plus two hundred plus million to actually privatized business which they probably you have to stop borrowing to in order to do so and there to use up capital and it’s about capita allocation at the end of the day, if they do privatize, to me it could be one less interesting dividend new stock on the Singapore Stock Exchange
Stanley: Okay, cool maybe what’s the bad case, what will happen if to me you reconsider and maybe even sell out the stock?
Willie: Bad case for Vicom really is like what you mentioned if there is a huge structural decline in the number of vehicles coming onto the road and if that is a secular trend in Singapore, there’s something we shall definitely look out for. Another thing it’s a huge rising costs in your labor and your rental cost, Vicom I think you can really control the top line, but the operating cost level that the fixed cost, the variable cost there’s something which they are able to control, but if that goes out of hand, then there’s something which also take note as well and lastly of course if they are trying to do M&A; if they’re trying to go overseas there’s something we shall pay a lot of attention to because number one they’ll need cash and if they’re going to do M&A; the dividend which they pays out will definitely drop, so that’s something we shall look out for.
Stanley: Okay, good so on summary a dividend stock for you are five to six percent and you feel that is quite sustainable if they just continue to cruise the road down you’ll be quite happy with them, the five six percent right?
Stanley: Okay, very good okay, yeah all right so good I think you survive the–lets go to Xiaomi now, we all know that the thesis you have it just got IPO basically it’s right now a Hong Kong listed company with a market share of about 280 billion Hong Kong dollars, huge and they’re doing hardware, they are doing smartphones they also trying to get into the internet of things, so maybe for a start, why don’t you just quickly describe the business in detail for our audience here.
Stanley: Okay, Xiaomi, they are in three main business right now, so you can see them as of course the one that we are most familiar with they are the smartphone manufacturer, they manufacturing a high quality but yet affordable pricing of Android smartphones and second part of them is IOT Internet of Things so they have a wide range of things from your tooth electrical tooth brush, your weighing machine, electrical scooter, your Smart TV, power bank, water filter, rice cooker everything they’re not available here right now but their two biggest market for it right now is actually China and India right, these are two biggest market and that’s a part that they actually one of the fastest-growing ones, and of course at the end of it they have all these devices there are their plan is to just get all these devices onto the hands of consumer or into the home so consumer for a very low margin, so they even specify in the Prospectus and n report saying that they will only they will cap their hardware devices at a net margin of 5%.
So, the only one make to make 5% from all these hardware, and how they want and more money is, once the all these devices is on the hands of the consumer they have all the default apps right no default apps something like micro sofa so when you buy windows buy a laptop the windows and all the default app that you have and people start using all these default apps mainly there Xiaomi internal app store, because China in China they of course in here when we buy a smartphone is either your iOS where Apple App Store or your Android and so then we use the Google App Store, but Google is sort of block in China so there’s no really Google App Store at least nobody really uses google app store, what the Chinese guys are doing is every single phone they will have their sort of the internal app store which is modeled after Android, so the biggest one is the 10cent app store and then the second biggest one I think is the PI to app store so means none way around the fourth one I think both one together with Huawei and Oppo app store.
So, all these are extremely valuable because owning the app store, when people download and people pay money for an App store they earn a cut right ,and so they have been making a lot of money from this Internet services, right now though Internet services only about 9% of revenue but it give them more than 50% of their gross margin coming from Internet services. so that’s their basic idea, that’s why they see themselves as a software company, they’re just trying to almost the strategy of Amazon you know why Amazon make the Kindle, and try to make the and Amazon phone and also they are Amazon tablet because they just want to get the device into the hands of the consumer first and then tried to shop more on their on their platform, which is similar to what Xiaomi is trying to do.
I really like it because; they are very strong in the two largest market China and India, they are now the number one smartphone brand in India and it only took them three years to boost it up, in such a competitive market, it only took them three years and they are number two now smartphone brand in Indonesia, that’s another one of the top 5 largest market in the world, so I see it as extremely high growth company and I bought it, because it’s a high-growth company, and I think that they have the potential to really become the next Sony or Samsung right you know state they produce all these different out electronics not just smart phone so they can really become the Sony and Samsung of our time.
Willie: So, from my understanding is that last part of their revenue is coming from the smartphone right, but yeah at the same time they are growing their IOT business, so going forward, do you think that the contribution from the IOT would surpass that of their smartphone or would it be an even split?
Stanley: Okay, I wouldn’t be able to answer that in certainty, but definitely the IOT segment is growing much faster than the smartphone segment, theoretically it should become a much bigger revenue stream for them because smartphone is just one product, you have different SKU, just one product but IOT. How they do it is not just by developing it themselves, they work with a lot of new startup or IOT startup, like their fitness tracker is actually not done by them, it’s just a company that they invested in and they just help them on the manufacturing and distribution and branding so they will be all these IOT guys and able to bring everything under the Xiaomi brand and distribute out from the distribution point.
All is controlled under their home app which is the me home similar to I guess from here is our Google home right now Google home you can connect to your IT device. If your home is already, say you buy a CCTV of Xiaomi CCTV which is already linked to me home and then me home is sell every time you open the app they’ll try to promote you every other their devices if you have access to them would it make sense that you know just you will continue to buy everything and so that you only need to use one app to control your whole house especially if you feel that your future house will be all connected you can use them, I can see great, great synergy in this.
Willie: You seem very optimistic about that there’s a lot of prospects and optimism about this, which I don’t really like because like what you say Xiaomi in three years entered in the Indian market with a smartphone and is easily one of the top or if not the top sellers of these devices, so what we should think that other tech companies like Apple Samsung, Huawei, Amazon this guys wouldn’t actually stop Xiaomi in his track and surpass them because these guys are way much larger number one, in terms of their market capitalization, in terms of their market share, in term of their smartphone, they are so equally competitive and lastly they have a lot of cash on their balance sheet so it’s very easy to replicate what Xiaomi does in terms of the Internet of Things smartphones etc.
Stanley: Okay, I agree some part and don’t agree some part, okay. I agree on the part that smartphone is very competitive for them and you can see that previously when they first started, they are really the one of the top one or two guys up there and after that Oppo, vivo are coming up with very strong marketing you see them taking some market share and Huawei phone is actually getting very much better and I personally use Huawei and I think Huawei phone is right on point, I think they have a very strong– say I counted as economic mode on the IOT device because they not just produce it themselves, they are the ecosystem they can work with all this startup, if you’re a startup they were just basically saying focus on your design, focus on the design everything else we help you sort it out, we help you with pre finding suppliers, your manufacturing, your distribution, your branding, your marketing everything, so it’s very attractive for a startup and they are able to bring in a lot all these people on board.
Competitors, you say a company like Apple, Apple don’t do that right Apple do everything they want to do themselves, because they are the best, they do everything themselves, they don’t work with people so their level of innovation is not that fast, in say if you go to China yes from what I heard and from all my research, Xiaomi install itself every week, they will have new products because they are constantly trying to experiment new products see which one flies which one won’t, so they can take that risk and they are the one that you know with the fastest I think an all integrated one yeah so that’s my point on it. But the smartphone, yes I think the smartphone market is very competitive for them and I think, ok Peter is asking if in India market do they use Xiaomi app store and Peter also commented that Xiaomi, if you buy the Xiaomi phone in Singapore it actually uses Google App Store right yes.
I think that that’s a key reason that the app store outside China they might not have that strong advantage because; everyone else is using Google app, and but you are still able to download the me home from the Google App Store, so the IOT have to be connected to me home plus. I think one of their fastest growing product and most I guess one of the most high value product is the smart TV, it’s a smart TV and smart TV because when you buy a TV right, the app is already connected on the TV. unlike your phone is very hard for you to say I want to jailbreak it and a download different app, I try to buy a Xiaomi box TV, and they control it like Apple interface everything must use their own app, and it’s just control our entire ecosystem and when you buy shows from your Xiaomi from your TV you have to pay them, they even have like courses, like yoga courses or type G courses where you can just buy directly on the TV, and even children tuitions courses you can buy directly from the TV so content providers are creating this content for this Xiaomi, I guess their Xiaomi video iPod part of this Xiaomi TV. I think that is a very strong ecosystem that that people really cannot kind of jailbreak either so that’s a good buy.
Willie: Before I before I continue to grill you with more questions let’s look at some of our comments let’s see if we can get some questions answered. Yeah, so Adrian Adrian Lee his question is the IPO stock usually list at a premium Xiaomi, still non profitable what’s the reason to invest now instead of wait for a better entry price or better valuation yeah so I mean before I hand over the answers to you, I did look at the second quarter results and Xiaomi is still making net losses, so this is also a puzzling question for me and I find very difficult to understand if they’re actually able to turn their business around.
Stanley: Okay,, a big part of why they’re making losses during the IPO is because of the IPO costs and many of the a stock option got vested and then they got they have to be vested at a high price, their IPO price so the expenses showed up and plus they have a huge I think hundred and fifty billion Hong Kong dollars, I can’t remember, 150 billion of convertible bonds they also all been converted to two shares during an IPO and so they have to write that off also, so all the expenses has been seeing, I think you’ll continue for a few quarters yet because they’re quarter close now is 30th of June but the IPO is still ongoing like around June and July they’re still figuring out. So, I think the expenses will continue for a few more quarters, but from their internal they say adjusted Ning slap but they just basically take off all this one off they actually profitable and the earnings had actually grown from correct me if I’m wrong I think the last night check is the previous quarter was 1.6 billion Remy be, but then now this quarter is 2.6 billion Remy be, right so and the revenue itself is growing or 60-70%, year on year, on the quarter basis.
So, I’m not really sure would there be a better time to invest because as a growth company right if is continue to grow at such a such a rate 50-60% year-on-year they actually doesn’t take that long for them to grow into the valuation and why would they really see a big drop in prices if they are continued to grow. and if you’re talking about finding it better valuation the buy goes a lot into timing the market which I’m not very sure how to really find the perfect time to buy into this company when they have a crisis, and what determines a crisis, is it something like JD, where the chairman has to be caught for doing something so…
Willie: Maybe let me just rephrase and follow up from agents question like what sort of valuation do you see or how big do you think Xiaomi can grow in terms of its market cap, if let’s say, it’s Internet of Things would continue to pick up and its smartphone would continue business will continue to grow like what sort of number or valuation would you give sell Xiaomi?
Stanley: Okay, I would say that I don’t really know, I don’t really know but the way I see it is so far they have really still been very focused on just their smartphone devices, there’s my own devices right and I think the future of Xiaomi would not stay in smartphone that’s number one and with all the growth in IOT and most likely I think the trend will continue that we would one wired up devices in our in our home sooner or later and that that should actually be a key part of the growth in the future and if you compare it with the say there volumes of sales they are even lower volume of sales than Apple right now but Apple is a luxury product. So, Apple should actually have low volume high margin right, but because Apple is so desirable it has high volume and high margin but Xiaomi is a product for the masses, it might not be for all the crazy rich Asians in Singapore. It’s is a product for the masses and the volume should actually be to me at least it should actually be much bigger than what Apple has in the long term and that’s what I see. I feel Xiaomi is only at the tip of where it’s supposed to be, if it’s successful, of course it’s high risk company a high growth and high risk company, if it’s not successful we will see it very fast.
Willie: For me, when I compare Xiaomi and Vicom, I see Xiaomi has a very huge growth potential like what you described, but it seems like the probability of actually achieving this growth potential seems to be much smaller than the Vicom where the earnings visibility is much higher, I mean with this in mind and like I say there is a lot of risk in there, so how would you actually try to position you Xiaomi stock in your portfolio, how would you actually do that to me this kind of high risk.
Stanley: So, I think every time you buy a growth company for me at least I would not take a very big position in it, that’s because there’s just inherit risk with the company even if you say today Amazon right it’s such a big company, is there really growth visibility for this company I’m not sure because they go into so many different tire business and they’re constantly innovating new things now they are saying they’re going into finance, which is a totally something, no one has a clue how they’re going to do it. So I think as a growth company because the founder itself is constantly looking for new ways to innovate and then bring in new ways of doing things this will never really have visibility in a sense. So, I position it roughly just around 2% I think 2% of my stocks portfolio and I think most growth stock I do position it around that that region only, yeah so definitely not a stock that I will buy like 20% on my portfolio. But definitely one I think it’s interesting enough for me to continue because I see it as the only company that has integrated IOT products for now, all its competitor what would have one or two products right in the toothbrush will be doing it, rice cooker and maybe Panasonic will be doing it, there may be in the future refrigerator will be Samsung, but every single company have one or two of their competitor but they are the only one that built the entire range of electronics or on the Xiaomi brand, all controlled by Xiaomi.
Willie: I like this internet-of-things story, I mean I’m quite amazed by it, when I went for a showroom to see a flat sometime back so they have this Internet of Things by Samsung where you can actually track your refrigerator how much eggs have been used up, how much of the fruit juice have been used up so when okay when to replace it okay so it’s all links back to your smartphone so you have that lights you can actually link with your smartphone your washing machine as well, but the question is I’m very skeptical about this Internet of Things, like so many things are right now integrated into your phone, what if one day your phone dies out all the machine needs to be replace and you might not necessarily want to get a Xiaomi device or Samsung device you might want to get something else right so with that then would sort of break this huge ecosystem or sort of make it non-viable going forward I want the–
Stanley: I will argue the opposite way because of this ecosystem and you can definitely change phone what you can change fun because everything is on the cloud anyways right? So, once I change phone I log into my Google account everything is linked back they can see my download app history they downloaded back for me so you can definitely change the device. but if in your home you are already using a lot of Xioami-product all linked to your me home, if one break down I think there’s even a higher chance that you end up buying back the Xiaomi product just because it’s all integrated in the same app rather than you buy another one then then you have to download another app to control that particular thing separately right it’s the same issue with why if the same issue is why so many people hate Facebook and want to kill Facebook but Facebook is still around it’s still around because; it is the main platform that we do a lot of things, we get our news, we connect with our friends and because we are already doing so many things, it’s easier for say a company to just tack onto this platform and access rather than I have to build entire platform just for you to use my product that’s even harder because people already here so I think that kind of my work for Xiaomi.
I might sound very optimistic about this company, I understand the risk and number one they’re not really targeting I guess a lot of the affluent consumer, their consumer more mass-market so there is a limit on their I guess they are spending power and so maybe their products will never really be meaningful high margin for them and as a software company yes they have a default they have the default advantage where people use them as a default app. but you know compared to a lot of software guys that doing just pure software I do think that they might not they might still be considered like not below, they’re not really like be the high end software guys.
Willie: So, for Xiaomi I mean they just IPO at all and for me I always think that there must be some form of valuation right like is there any ratios any specific valuation you will use to try to determine its value for Xiaomi.
Stanley: Right now, I think using price to earnings you will you will get roughly 60 70 I can remember oh I have to check it back, but definitely valuation is a tricky thing I would most likely use maybe price to sales, at this moment from my from my correct collection okay you caught me there I had to go back and check about maybe I’ll comment it down below I think they are priced to sales is around three to four times at this moment which compared to a lot of other high growing companies it’s not too far I think it’s not too for retailers and I think at a clip of growing at sixty seventy percent year on year they could quite easily grow into the evaluation if they continued to do that. I think Linda is asking this question yeah he she’s interested in him she has been invested in Singapore and KL by interested to know how to open up to account to invest globally right, I will comment down below for you later and just as a disclaimer actually FSM one is one of our sponsor to some of our events and content so that’s one of the companies brokerage that we are using right now as well.
Willie: So, just now you’re saying that you are very optimistic and then you also point out some risk so maybe just share about some of your bad case for Xiaomi.
Stanley: Bad case for Xiaomi, okay, yes, so I think I sort of mentioned it just now which is this company is not a high-end company so unlike Apple where their margin is extremely high, their margin is not that high for the hardware products and especially in in China as people start to get more affluent, will they say that Xiaomi is the first phone that I buy but as I become richer and richer I would I would want to upgrade away from Xiaomi and even India that I was just researching India’s yummy wise yummy has been fastest growing because Xiaomi is the one the phone that is transitioning most of the people from normal feature phone to smartphone, so when people is buying their first smartphone or device they buy Xiaomi, because; it’s very cheap just to try it out but then, once they become richer and richer maybe they were upgrade away from Xiaomi, me.
So, this one risk for them, are they really able to market themselves as higher range with people just upgrade together with them, tell me I’m not sure on that one. Also the second risk is the Internet services, although it is default like Microsoft they have default they are Microsoft previously the Internet Explorer, but people can download Chrome people can download Firefox and I have never used, I hate that Internet Explorer although is a default choice. but there is a study that actually still a lot people use Internet Explorer and still a lot of people use Bing just because; it’s the default do you do okay do you know watch the top five search on Bing is Google, because people were trying to get to Google, search for Google from Bing to go to Google and search for something
Willie: I always see them on my home page but I never really got down to using Bing before is any different from MSN.
Stanley: It’s actually quite useful say we can try it on maybe for next month. That’s all for I think for this this month’s Facebook face off, for the rest of the question we are unable to answer will try to comment down on your comments tab later me really will continue to work through crew the question that you have but yeah it’s been fun Willy so you guys decide you know you guys this is Willy the winner or Stanley the major contender put your comments below, maybe we should we get a poll set up or something try that out later as you try to do a poll, and let’s see which is the more popular one so we use that and see which of us get roasted next time.
We should have some punishment I think [Laughter] let’s try out next time another game so maybe just to quickly react to Urilla before we call it a night so it’s Xiaomi versus Vicom, the exciting huge growth potential stock when Stanley has mentioned that he’s banking a lot on IOT, a lot more on the IOT and of course you have the smartphone as well even though the margins are very thin of course you also have other contenders like your Apple, Samsung, Huawei also coming fighting for the market share especially in China, and then of course on the other side you have me who presented Vicom, just now and getting grilled by Stanley, Vicom is a boring business but it offers a very huge difference dynamic to Xiaomi where there is a lot of instability, revenues might not be crazily high like Xiaomi, but you really have that kind of very stable revenue growth, is somewhat so that the cash flow is a lot like recurring like a wreath or bond of course the risk then lies where is the growth coming from and is Vicom able to actually expand out overseas.
Stanley: It’s been great fun, thanks Willie, I’ll see you next month. Thanks guys!
Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer of the investment book: “Value Investing In Asia”, published in 2018. Stanley is currently the chief editor of Value Invest Asia.