Weekly Stocktake

Weekly Stocktake with Danyaal

25 January 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

The success of Netflix over time

Netflix have been a company that has been able to pivot their business model quite successfully over their lifetime.

• Netflix, the streaming service that most of us use, initially started their business by delivering physical copies of Videos and DVD’s to people.
• They then transitioned to streaming, where members pay a monthly subscription fee to watch content, they licensed from others, online.
• Netflix then took a swing at producing their own content, that they would exclusively show on their platform. The reason for this was that popular content can be expensive to license from third parties. In 2019, it cost Netflix $100 million to secure the exclusive streaming rights for the popular sitcom, Friends. And this was just for one year.

But now, Netflix have been looking for more ways to increase their revenue. Along with gaming and live shows, they believe the below will help them increase their revenue.

• Netflix have piloted a cheaper, ad-based subscription-service in 12 countries. They believe this will allow them to gain more revenue from advertising companies and new subscribers who want to use their service for a lower price.
• They have also been trying to crack down on password sharing. They’ve piloted password crackdowns in a few Latin American countries. In the pilot, Netflix charged “add-on” fees to subscribers who have multiple accounts on one subscription. They believe this will initially hurt their revenue in the short term, but over the long term they will be able to gain more additional revenue from the “add-on” subscribers.

Last week Thursday – Netflix released their Q4 2022 results. During the year, Netflix added 8.91 million subscribers to their platform, bringing the total number of subscribers to 230.8 million. Netflix’s revenue for the year was $31.6 billion, up 6,5% since the previous year. Netflix’s cost of revenue for the year, which is primarily made up of what they pay for producing their own content and what they pay to license 3rd party content equated to $19,17 bn. Netflix also recorded a net profit of $4,5bn. This represents a net margin of 14,2%.

Netflix, and other streaming services pay lot of money for content. The risk, particularly with content, is that it won’t necessarily always be a hit. Streaming companies operate in a very competitive industry. Streaming services compete for screen time. They also compete with platforms such as YouTube, linear tv, gaming etc. The life of the content, more often than not, depreciates relatively quickly and so, it can become quite tough to draw revenue from the same asset over multiple years. With multiple streaming services and platforms out there, the fight for top-tier content can become particularly expensive to produce. There is also no guarantee that the content will be a hit.

Key Indicators

Source: iress

Company and Market News

This will be our last weekly roundup until January. Whilst the holiday mood is settling in, we at Lunar Capital will still keep our eyes and ears on the market.

One of our core investment themes is Health. We often talk about why we are invested in Healthcare companies. Our view is innovative advances in biotechnologies, people having a more acive lifestyle and fewer violent conflicts over the years are helping people to live longer as well as other socio-economic progresses. Behind these health themes are businesses that are developing and offering people products and services to help maintain and improve their lifestyles; and providing preventative and curative treatments for diseases.

Recent advances include:

• Biogen and Eisai having completed the early-stage trials for an Alzheimer’s treatment that has produced the first set of promising results in a while. The results show the treatment can help reduce the effects of dementia, if caught early enough.
• Novo Nordisk has completed late-stage trials for an obesity drug that has shown it can help patients lose weight and keep their weight off.
• Lululemon like Nike and others, creates athleisure products and promotes a healthy lifestyle.

Even though health and healthcare are good investment themes, the best investment we can make is in our own health. As we head into the holiday season, we tend to over indulge. Holiday traffic and bad driving also increase during the season.

Our final words to you are to use this extra time to reflect and take concrete actions on improving your health and staying safe. Invest in your mental health by resting, in your physical health by exercising and not over-indulging, and in your safety with safe driving.

See you in the New Year.

Lululemon and Novo Nordisk are held in the Lunar BCI WW Flexible Fund.

Key Indicators

Source: iress

Company and Market News

PHALA PHALA

Just as we were all about to get into the December spirit, an independent parliamentary panel released a report concluding that President Cyril Ramaphosa may have violated the constitution in his capacity as President. Earlier this year, evidence was released of thieves raiding Ramaphosa’s game farm (Phala Phala) and stealing around $580 000. The panel recommended that the relevant authorities and parliament do a full investigation to determine if Ramaphosa may have violated the Constitution by taking paid work outside his government role, not declaring foreign currency holdings with the exchange control; and contravening the Prevention and Combating of Corrupt Activities Act.

South African markets reacted negatively. The financial services sector (which is generally a good indicator for the economic stability of a country) decreased 5,9% during the week. And the USD/ZAR rate increased by 2,4% during the week; despite the USD weakening against other currencies. There is still quite a bit of uncertainty around what could happen from here. Below are some scenarios that we think could play out for Ramaphosa and the ANC.

1. The ANC can recall Cyril Ramaphosa. Either David Mabuza, Paul Mashatile, or someone else from the ANC could then become acting president until the 2024 general election.
2. Ramaphosa can take the findings under review and let the courts decide if the findings of the panel were sufficient to allow parliament to impeach him. If parliament does agree to go through an impeachment process, then at least two thirds of parliamentarians would need to vote to remove him from office.
3. Ramaphosa could also be charged by either the exchange control (for not declaring the foreign currency holdings,) SARS (for not declaring the income,) or by the Hawks (for not following the correct procedure for reporting the crime.) This may then require him to “step-aside” according to ANC internal rules.

All the scenarios bring about uncertainty. And this uncertainty is not beneficial for the ANC and the country as a whole. There is a high chance that the ANC could lose its majority position in the next general elections. The political parties in SA will need to form coalitions to gain seat majority in parliament. How the parties cooperate in a coalition will be its own question.

Having a reasonable level of diversification in one’s portfolio thus provides some level of protection when an event such as the Phala Phala scandal occurs. Diversification can be attained through investing in different currencies, industries and/or asset classes; thus, avoiding country specific, industry specific or market specific events from negatively impacting one’s portfolio. In the Lunar BCI Worldwide Flexible Fund, approximately 60% of the portfolio is invested offshore.

Key Indicators

Source: iress

Company and Market News

Prosus and Naspers are related companies, through crossholdings with each other. Both are listed on the Johannesburg Stock Exchange and Prosus is also listed on the Amsterdam Stock Exchange. Their largest investment is a 28% stake in Tencent – one of China’s biggest technology companies. Tencent has multiple different businesses in entertainment, social media and video gaming. One of their most well-known products is the WeChat platform, that is used for chatting, but also for payments and other services. In 2001, Naspers acquired a 46.5% stake in Tencent for roughly $32 million. Today, that investment is worth approximately $95bn. An incredible investment.

The market however values Naspers and Prosus approximately 36% below the value of their assets less liabilities (Net Asset Value, or NAV). Generally, holding companies trade at a discount to NAV; but not by that high a discount value. This high discount may be due to: the high management fees, complicated crossholdings between Naspers and Prosus, potential risks associated with investing in Chinese companies and the poor performance of Naspers’s and Prosus’s other investments. At the last earnings call, Naspers and Prosus said that they were going to sell small stakes in Tencent so that they could buy back their own shares in an effort to unlock value for their shareholders. Since June this year, Prosus and Naspers have purchased a combined $5.8 bn worth of their own stock.

Naspers, released their H1 2023 results last week. A great amount of focus was put on their ecommerce businesses. Naspers has multiple investments within the classifieds, food delivery, fintech, and education technology spaces. Some of the more noticeable companies in their portfolio include: Takelot, OLX, iFood, PayU and Udemy. The ecommerce space is proving quite tricky for Naspers and Prosus to get right, requiring high levels of investments to build scale and become profitable; and operating in highly competitive environments. In all their ecommerce categories, revenue grew but all recorded trading losses. Last week, the share price for Prosus decreased by 3,35%.

Lunar Capital Weekly Roundup

Source: iress

Lunar Capital on Eastwave Radio

Every Tuesday, at 07h45, Sabir chats with Nazia from Eastwave Radio (92.2 fm, live stream on www.eastwave.co.za) on investing and the markets.

Company and Market News

Last week, Walmart released their Q3 2022 results. Total revenue increased by 8.7% quarter on quarter to $152,8 billion. However, cost of sales increased at a higher rate of 10.1% to $115,6 billion. The higher cost of sales growth than revenue growth impacted Walmart’s gross margin, which decreased from 32,5% for Q3 2021 to 31,0% for the current quarter (Q3 2022). The gross margin of a company is a good indicator when looking at their ability to withstand the impact of inflation. The higher the gross margin, the better the company’s ability to withstand the impact of inflation. Despite the still high gross margin, Walmart registered a loss of $1,8 billion for the quarter largely because of opiod legal settlements. This is down from a profit of $3,1 billion for the same quarter last year. For the full fiscal year, Walmart expects year on year sales growth of 5,5%. They also expect fiscal year earnings per share to decline by 6% to 7% YoY.  The share price for Walmart increased by 5,37% during the week.

Walmart were still able to grow sales in the current inflationary environment and they indicated that their share of higher income earners has increased as inflation and high fuel costs impact people’s buying power. In general, big retailers, such as Walmart are able to perform well when inflation is increasing. They are able to negotiate prices months before delivery (when inflation is lower.) And when they actually sell the goods, if prices for the goods are higher in the market, they are able to increase their prices accordingly.

Walmart faces competition from many different companies, including Amazon and Costco. These three companies try to gain market share by reducing their margins They can do this through the general way they set prices, or through loyalty programmes – which incentivise people to spend more but at discounted rates. Amazon does both of these, and they also have an additional super strength: their cloud business. Their cloud business has a much higher operating margin compared to the other segments of their business. Amazon are then able to subsidise their other businesses using the profits from their cloud segment.

Disclosure: Walmart and Amazon are held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.

Lunar Capital Weekly Roundup

Source: iress

Lunar Capital on Eastwave Radio

Every Tuesday, at 07h45, Sabir chats with Nazia from Eastwave Radio (92.2 fm, live stream on www.eastwave.co.za) on investing and the markets.

Listen to last week’s session here: https://youtu.be/ALBFYZEj89E

Company and Market News

The global markets have come down quite significantly since the beginning of the year. The US Federal reserve has been raising interest rates at a record rate to attempt to tame rapidly rising inflation. The global economy has also been facing supply chain issues that started at the beginning of the Covid-19 pandemic and was exacerbated by the Russia/Ukraine war. With higher energy costs and interest rates, consumers have less disposable income, thus reducing the demand for goods and services, which will likely result in a recession in many countries. China, which is the second largest economy in the world, has also maintained strict Covid-19 restriction policies since the beginning of the pandemic. An example of the effect of China’s strict Covid-19 policies on their economy is that Apple, earlier this year, decided to move some of the manufacturing of their iPhone 14 from China to India.

Despite all the above, last week, we saw a significant rally in the market. During the week, the S&P 500 gained 5.9% and the JSE ALSI increased by 4%. This can be attributed to several reasons. Year-on-year inflation for October in the US came in at 7.7%. The market expected 7.9% and this lower-than-expected inflation pointed to potentially lower than previously expected interest rate increases by the US federal Reserve. Other news that could have also resulted in the market rally is that Russia have been forced to retreat from the major city of Kherson in Ukraine. This indicates that the war could end and possibly alleviate the energy crisis. China has also started to relax some of their Covid restriction methods. Certain measures such as the quarantine length for close contacts has decreased from 7 days to 5 days; and people that are secondary contacts do not need to quarantine anymore. Lastly, there is hope that US/China tensions could be eased at the G20 Meeting this month when Joe Biden and Xi Jinping have a face-to-face meeting to try and resolves these tensions. Other technical issues (like short-covering by traders) may also be the reason for the rally.

China still enforces a Covid Zero policy and could reverse course if they feel that these new measures aren’t getting them the results they want. Another risk the market faces is that inflation could remain high despite October’s lower than expected inflation. In the US, housing accounts for the highest weighting (33.8%) in determining CPI. Housing inflation is generally quite sticky and is often one of the trickiest to bring down. The war in Ukraine could also carry on for longer than people anticipate, which could result in pro-longing the energy crisis and further increasing geo-political tensions.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Novo Nordisk released their Q3 2022 results last week. Novo Nordisk is a health-care company that primarily focuses on producing treatments for diabetes, obesity and rare blood diseases. For the quarter, Novo Nordisk’s net sales increased by 28% to DKK (Danish Krone) 45,6 million compared to the same quarter last year. Net profit for the quarter was DKK 14,4 million, up 19% compared to the same quarter last year. Novo Nordisk’s Total Diabetes Care segment for the quarter accounted for 79% of their total sales. This segment also grew 26% compared to the same quarter last year. While their Total Obesity Care segment for the quarter accounted for 10% of total sales and grew by 81% compared to the same quarter last year.

On top of the solid growth metrics, Novo Nordisk remains very profitable. For the trailing twelve months (TTM), the gross margin for Novo Nordisk was 84%. This high gross margin indicates that Novo Nordisk has the ability to navigate a high-inflation environment without having to find significant ways to decrease their input costs. The net margin for Novo Nordisk was also strong. For the TTM, Novo Nordisk had a profit margin of 32%. Novo Nordisk also had a very high return on equity of 69%. This is partly due to high leverage through debt. Their debt-to-equity ratio is 217%. Their current liabilities are also greater than their current assets. If there were to be any significant impact to their operation, they could find it quite difficult to pay off their current liabilities for the year.

Another risk that Novo Nordisk faces is that they are in a highly regulated environment. Novo Nordisk also operates in multiple countries that will have their own set of regulatory requirements. The initial costs, in both time and money to develop and manufacture drugs can be quite high. There is always a possibility that a significant investment in a new treatment may not pay off.  Conversely, if they can develop a new treatment that works well and is approved by the health authorities; it can pay off handsomely. Our view is that the potential for their Total Obesity Care is quite significant.

Disclosure: Novo Nordisk is held in the Lunar BCI Worldwide Flexible Fund.
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Last week, Alphabet, Microsoft, and Amazon released their results for the quarter ended 30 Sep 2022. These companies have a huge focus on cloud computing, and see it as a major driver of growth for their companies. Alphabet, Microsoft, and Amazon, along with the other services that they offer, offer customers the server infrastructure and platform to build and run their companies on. Overall revenue for the quarter was lower than the market expected. For the quarter, Alphabet’s total revenue was $69.1 billion compared to revenue of $65.1 billion for the same quarter a year ago, revenue for Microsoft was $50.1 billion compared to $45.3 billion for the same quarter last year;. And for Amazon, revenue for the quarter was $127.1 billion compared to $110.1 billion for the same quarter last year. However, net income for these companies for the quarter was lower compared to the same quarter last year. Amazon’s net income decreased by 9%, Microsoft’s net income decreased by 14%, and Alphabet’s net income decreased by 27%.

The companies all noted that they have seen noticeable decreases in consumer spending for all their segments. The one exception is that their cloud computing segments have still seen significant growth. Alphabet, Microsoft, and Amazon expect to see consumers further dial back their overall spending as the US economy likely goes into a recession. The negative outlook resulted in the share price for all these companies decreasing during the week. During the week, Alphabet’s share price decreased by 4.8%; Microsoft’s share price decreased by 2.6%; and Amazon’s share price decreased by 13.3%.

Below is a table showing certain metrics of the overall cloud-computing segment for each company. Alphabet, Microsoft, and Amazon’s revenues all increased by between 22% and 41% for the trailing twelve month (TTM) period. Despite Alphabet having the highest cloud revenue-growth, they still managed a negative cloud operating margin of -13.8% compared to Amazon and Microsoft, who had healthy operating margins above 30%. Alphabet are aggressively trying to expand their cloud computing business. The majority of the Alphabet’s capital expenditure for the quarter went towards their cloud computing operation. Setting up the infrastructure for cloud computing requires a lot of upfront capital, and is one of the reasons this segment for Alphabet is currently running at a loss. If Alphabet maintain their revenue trajectory for this operation, and are able to be disciplined with their cost structures, they could likely add another strong segment to their overall business.

Disclosure: Alphabet, Microsoft, and Amazon is held in the Lunar BCI Worldwide Flexible Fund.
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.
A&EO.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Last week, ASML released their Q3 2022 results. ASML is an innovation leader in the semiconductor industry. They provide chipmakers with hardware, software, and services to mass produce patterns on silicon through lithography. In simple terms, to manufacture chips. For the quarter, net sales were up 10.25% to €5.8 billion compared to the same quarter last year. Net profit, for the quarter remained flat at €1.7bl and ASML recorded a net margin of 29.4%. For the last 5 quarters, the orders received have surpassed net sales, reflecting growing demand for their machines. Their results have shown more resilience compared to some of the other semiconductor companies. During the week, the share price increased by 17.93%. However, the share price has decreased by 33.5% since the beginning of the year.

One of the main reasons that ASML’s results have been so resilient, is that ASML has an effective monopoly on the sale of lithography machines. The demand for their lithography products has remained above their current supply levels. Some of their current customers are decreasing their forecasts of capital expenditure. They asked ASML to delay the delivery time of their orders. Most of ASML’s clients, however, have urged ASML to get their machine orders as soon as possible. In 2021, around 67% of the sales were accounted for by 2 customers, and roughly 40% of the net sales were recognised in Taiwan. This poses a risk to ASML. If there were to be any sudden demand side shocks to these customers or Taiwan – it could negatively affect the short-term prospects of the company.

Before ASML released their results, The USA put severe export controls on the sale of advanced semiconductor products to China. While this has a negative outlook for certain US producers, ASML is not directly affected by it, as they are based in the Netherlands. A few years ago, the European Union had already put export controls on specific semiconductor equipment, which includes the EUV (Extreme Ultra-Violet) lithography machines that ASML sells. ASML is still currently able to sell the Deep Ultra Violet (DUV) machines to China. If the EU were to put more strict controls on semiconductor companies, ASML may likely not be as badly affected as some of the other semi-conductor companies. 85% of their current order-book is for their EUV and immersion technology, which they have already been banned from selling to China.

Disclosure: ASML is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

A&EO.

Lunar Capital Weekly Roundup

Source: iress

Company and Market News

Source: Iress

                                       The graph is for illustrative purposes only

Source: Iress

                                       The graph is for illustrative purposes only

There has been a lot of talk in the news about how poorly the South African Rand (ZAR) has done this year. We think that is a misconception since it doesn’t necessarily tell the full story if we only compare how the Rand has performed against the US Dollar (USD).

Over the last decade, the ZAR has depreciated almost 50% against the US Dollar, and approximately a third against the British Pound (GBP) and the Euro (EUR). Graph 1 shows this inversely since 31 March 2013. The USD/ZAR exchange rate has increased by nearly a 100% (i.e. 50% depreciation of the Rand), while the GBP/ZAR and the EUR/ZAR have both increased by just under 50% each (i.e. 33% depreciation of the Rand).

This year, the ZAR has also depreciated against the USD. However, Graph 2 shows that the ZAR currency isn’t the only currency that has depreciated this much against the USD. The British GBP, EUR and the Japanese Yen (YEN) have depreciated even more against the Rand. The main reason of the USD’s strong performance against all or at least most currencies this year is that the US Federal Reserve has been increasing interest rates in the USA at a much quicker pace compared to its economic peers. This is to try and tame high inflation in the US. The higher interest rates relative in US Dollar interest paying assets makes it more attractive to be invested in than interest paying assets in other currencies. Further, the dollar is considered as a safe haven and approximately 60% of globally disclosed foreign reserves is denominated in USD.

So, why has the ZAR held up better than other arguably stronger currencies? South Africa’s main export is mineral resources. Most mineral resources are priced in USD. When South Africa wants to export minerals to other countries, the other countries will pay the SA companies in USD. The South African companies will then need to convert the USD to ZAR. Which will result in the price of the ZAR increasing. Another reason the ZAR has performed relatively well, is that some of the long-term SA Bonds also have relatively attractive rates. For e.g. the R2044 offers investors current yield of 11.85%. This still gives holders of the bond a positive real return, when taking inflation into account.

Disclosure: The R2044 bond is held in the Lunar BCI Worldwide Flexible Fund.

Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/

Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/

The Lunar BCI Worldwide Flexible Fund Fact Sheet together with our Disclaimers can be read here.

A&EO.