Thursday, March 30, 2017

Mallrats - Jared Dillian, Mauldin Economics


A lot of electrons have been spilled in the last couple of weeks about the demise of retail. Particularly malls and mall retailers. Nobody goes to the store anymore. They all have Amazon Prime.
If you are an amateur trader (or even an experienced trader), you might think that this is a good time to short retailers.
Take it from an even more experienced trader: By the time you hear about the trade, it is at least half over, and maybe more.
That’s not to say that there isn’t money to be made shorting retail—the JCPenneys and Sears of the world are probably not going to make it. But trading this sort of thing is a dangerous game. At some point, some of these stocks look like a tasty treat to private equity.
I’m more interested in talking about this from a philosophical standpoint.
We’re on the precipice of seeing a big slice of American culture get wiped out. Someday, people will find a VHS tape of Mallrats and look at it like an archaeological treasure. 

Tape World

There was a mall near where I grew up. It opened to much fanfare on March 17, 1983. I used to save my allowances and go to Record Town (or Record World, or Tape World, all in the same mall) and buy a Depeche Mode cassette tape or something like that.
Read that sentence over again and marvel at how foreign it seems.
  • There are no record stores
  • There are no cassette tapes (or CDs)
  • There are no malls
But Depeche Mode is still around!
Have you ever wondered how Planet Fitness can be so disruptive in the gym space?
A lot of it has to do with the fact that they’ve been able to move into these giant spaces in malls, once held by anchor tenants that have since moved out, paying a fraction of the rent that was previously being paid.
Their strategy actually doesn’t work at all unless they have cheap real estate. And with shopping centers struggling mightily, it’s been a boon for Planet Fitness.
So you have to wonder what this world is going to look like. I think about my drive along Highway 17 on the way to work. There is already one defunct mall. Will there be more? Will I drive past a half-dozen vacant shopping centers on the way to my office? Will everyone just sit at home and order stuff?
Will all retail go out of business?
That is what people fear.
But probably not.

Ulta

Recently in The Daily Dirtnap, I did a write-up on Ulta Beauty Inc. (ULTA), a beauty products store/salon chain.
Technically, Ulta is a retailer, but have you seen a chart of the stock?
I thought all retailers were going out of business?
Ulta is an exception, because they have made themselves un-Amazonable. Yes, it is a store. But there is a salon, and a brow bar, and makeup counters, and Ulta has gotten to where it is today almost entirely by being helpful and friendly.
Ulta is a community. People go there to hang out and put on makeup. The staff will try to upsell you occasionally (and succeed!).
You can’t do Ulta in your home.
When I think about successful businesses in an Amazon world, I think about businesses that are successful in building a community.
For example: I take my cats to a cats-only vet where they also do boarding and grooming. It has become a hangout for all the cat ladies in town. They go to the waiting room and hang out and chat and play with the kittens that are up for adoption. I will admit that I stop by every so often when I have nothing to do (it is on the way home).
The only way my vet’s office is going out of business is if they are chronically undercharging for services. Because they have turned into one of the most popular places in town.
If you are starting any sort of retail business, it has to be the sort of place that builds a community and gives people a reason for going there, even if they have nothing to buy. They might end up buying something anyway.

The Trade

There’s an old saying on Wall Street that with any disruptive technology, it’s a lot easier to pick the losers than the winners. I can confirm that this is true. For an obvious example, BlackBerry (RIMM) should have been an easy short when the iPhone came out.
Finding the ULTAs of the world is hard. If I ran a retail long/short hedge fund, I wouldn’t be confident in my ability to do it. Picking losers = easy. Hard to imagine a scenario where JCPenney (JCP) and Sears (SHLD) are still around in a couple of years.
The irony, of course, is that 100-odd years ago, Sears was Amazon! Catalogue retailing—what an innovation.
That is the nature of capitalism: the disruptor gets disrupted. Sometimes it takes 100 years (which is why short selling is the hardest thing you can ever do).

America Needs Small Apartment Buildings. Nobody Builds Them


Urbanists often lament that developers no longer erect the small apartment buildings that were once a staple of city neighborhoods. Instead, they construct single family homes or large apartment buildings.
There are good reasons to revive this “missing middle,” however: Small buildings are a good way to add density without compromising the character of quiet, single-family districts. They also provide a convenient way for older homeowners to downsize without leaving their neighborhoods.
But the best reason is that smaller apartment buildings are often cheaper for renters.
According to new research from Enterprise Community Partners, an affordable housing nonprofit, and the University of Southern California, apartment buildings with between two and nine units offer the lowest prices available to U.S. renters. 
  
As noted, America isn’t building as much of this kind of housing as it used to. Small- and medium-size apartment complexes account for a quarter of existing units built in the 1970s and 1980s, according to the report. Since 1990, though, the category has accounted for just 15 percent of new housing stock.
There are a few reasons for that shift, according to Andrew Jakabovics, vice president for policy development at Enterprise Community Partners and one of the authors of the paper. Another author is Raphael Bostic, who was just named president of the Federal Reserve Bank of Atlanta.
Zoning rules have developed to favor single-family construction, making it harder to win approval for larger projects. There are regulatory costs to building multifamily housing, and developers that go through all the trouble to win approvals want to build more than just a few apartments. 
In general, there are economies of scale in operating larger complexes. If two units are vacant in an 8-unit building, the landlord is missing out on a quarter of her potential income. In a 100-apartment high-rise, a couple of vacancies are less of a big thing. Those operating efficiencies also make lenders look more favorably on larger apartments, Jakabovics said. It’s a virtuous circle for ever-bigger residential developments, though not so much for smaller ones.    
Seeing why builders have abandoned the small apartment complex is easier than figuring out how to rekindle interest in the concept. Rewriting zoning codes to favor the missing middle would be a good start, Jakabovics said.
The flip side is that if builders don’t develop more small- and medium-sized buildings, an important source of unsubsidized, affordable housing may dry up. Rental units tend to get cheaper as they age. The trend in recent decades toward single-family homes and high-rise apartment buildings means that there are fewer smaller apartment buildings to age into affordability. 
“We need to build stuff today that’s affordable today,” Jakabovics. “We also need to future-proof ourselves by building stuff today that will be affordable 10 or 20 years from now.”

Technological breakthroughs in India - Raoul Pal


I’m going to blow your mind with this following article. My mind is still reeling from my discovery and from writing this piece.
Let me enlighten you...
Companies that create massively outsized technological breakthroughs tend to capture the investing population’s attention and thus their share prices trade at huge multiples, as future growth and future revenues are extrapolated into the future.
From time to time, entire countries re-model their economies and shift their growth trajectory. The most recent example was the liberalisation of China’s economy and massive spending on infrastructure, which together created an incredibly powerful force for growth over the last two decades.
But it is very rare indeed that a country develops an outsized technological infrastructure breakthrough that leaves the rest of the world far behind.
But exactly this has just happened in India... and no one noticed.
India has, without question, made the largest technological breakthrough of any nation in living memory.
Its technological advancement has even left Silicon Valley standing. India has built the world’s first national digital infrastructure, leaping at least two generations of financial technologies and has built something as important as the railroad was to the UK or the interstate highways were to the US.
India is now the most attractive major investment opportunity in the world.
It’s all about something called Aadhaar and a breathtakingly ambitious plan with flawless execution.
What just blows my mind is how few people have even noticed it. To be honest, writing the article last month was the first time I learned about any of the developments. I think this is the biggest emerging market macro story in the world.
Phase 1 – The Aadhaar Act
India, pre-2009, had a massive problem for a developing economy: nearly half of its people did not have any form of identification. If you were born outside of a hospital or without any government services, which is common in India, you don’t get a birth certificate. Without a birth certificate, you can’t get the basic infrastructure of modern life: a bank account, driving license, insurance or a loan. You operate outside the official sector and the opportunities available to others are not available to you. It almost guarantees a perpetuation of poverty and it also guarantees a low tax take for India, thus it holds Indian growth back too.
Normally, a country such as India would solve this problem by making a large push to register more births or send bureaucrats into villages to issues official papers (and sadly accept bribes in return). It would have been costly, inefficient and messy. It probably would have only partially worked.
But in 2009, India did something that no one else in the world at the time had done before; they launched a project called Aadhaar which was a technological solution to the problem, creating a biometric database based on a 12-digit digital identity, authenticated by finger prints and retina scans.
Aadhaar became the largest and most successful IT project ever undertaken in the world and, as of 2016, 1.1 billion people (95% of the population) now has a digital proof of identity. To understand the scale of what India has achieved with Aadhaar you have to understand that India accounts for 17.2% of the entire world’s population!
But this biometric database was just the first phase...
Phase 2 – Banking Adoption
Once huge swathes of the population began to register on the official system, the next phase was to get them into the banking system. The Government allowed the creation of eleven Payment Banks, which can hold money but don’t do any lending. To motivate people to open accounts, it offered free life insurance with them and linked bank accounts to social welfare benefits. Within three years more than 270 million bank accounts were opened and $10bn in deposits flooded in.
People who registered under the Aadhaar Act could open a bank account just with their Aadhaar number.
Phase 3 – Building Out a Mobile Infrastructure
The Aadhaar card holds another important benefit – people can use it to instantly open a mobile phone account. I covered this in detail last month but the key takeaway is that mobile phone penetration exploded after Aadhaar and went from 40% of the population to 79% within a few years...
The next phase in the mobile phone story will be the rapid rise in smart phones, which will revolutionise everything. Currently only 28% of the population has a smart phone but growth rates are close to 70% per year.
In July 2016, the Unique Identification Authority of India (UIDAI), which administers Aadhaar, called a meeting with executives from Google, Microsoft, Samsung and Indian smartphone maker Micromax amongst others, to talk about developing Aadhaar compliant devices.
Qualcomm is working closely with government authorities to get more Aadhaar-enabled devices onto the market and working with customers – including the biggest Android manufacturers – to integrate required features, such as secure cameras and iris authentication partners.
Tim Cook, CEO of Apple, recently singled out India as a top priority for Apple.
Microsoft has also just launched a lite version of Skype designed to work on an unstable 2G connection and is integrated with the Aadhaar database, so video calling can be used for authenticated calls.
This rise in smart, Aadhaar compliant mobile phone penetration set the stage for the really clever stuff...
Phase 4 – UPI – A New Transaction System
But that is not all. In December 30th 2016, Indian launched BHIM (Bharat Interface for Money) which is a digital payments platform using UPI (Unified Payments Interface). This is another giant leap that allows non-UPI linked bank accounts into the payments system. Now payments can be made from UPI accounts to non-UPI accounts and can use QR codes for instant payments and also allows users to check bank balances.
While the world is digesting all of this, assuming that it is going to lead to an explosion in mobile phone eWallets (which is happening already), the next step is materializing. This is where the really big breakthrough lies...
Payments can now be made without using mobile phones, just using fingerprints and an Aadhaar number.
Fucking hell. That is the biggest change to any financial system in history.
What is even more remarkable is that this system works on a 2G network so it reaches even the most remote parts of India!! It will revolutionise the agricultural economy, which employs 60% of the workforce and contributes 17% of GDP. Farmers will now have access to bank accounts and credit, along with crop insurance.
But again, that is not all... India has gone one step further...
Phase 5 – India Stack – A Digital Life
In 2016, India introduced another innovation called India Stack. This is a series of secured and connected systems that allows people to store and share personal data such as addresses, bank statements, medical records, employment records and tax filings and it enables the digital signing of documents. This is all accessed, and can be shared, via Aadhaar biometric authentication.
Essentially, it is a secure Dropbox for your entire official life and creates what is known as eKYC: Electronic Know Your Customer.    
Using India Stack APIs, all that is required is a fingerprint or retina scan to open a bank account, mobile phone account, brokerage account, buy a mutual fund or share medical records at any hospital or clinic in India. It also creates the opportunity instant loans and brings insurance to the masses, particularly life insurance. All of this data can also in turn be stored on India Stack to give, for example, proof of utility bill payment or life insurance coverage.
What is India Stack exactly?
India Stack is the framework that will make the new digital economy work seamlessly.
It’s a set of APIs that allows governments, businesses, startups and developers to utilise a unique digital infrastructure to solve India’s hard problems towards presence-less, paperless and cashless service delivery.
  • Presence-less: Retina scan and finger prints will be used to participate in any service from anywhere in the country.
  • Cashless: A single interface to all the country’s bank accounts and wallets.
  • Paperless: Digital records are available in the cloud, eliminating the need for massive amount of paper collection and storage.
  • Consent layer: Give secured access on demand to documents.
India Stack provides the ability to operate in real time, transactions such as lending, bank or mobile account opening that usually can take few days to complete are now instant.
As you can see, Smart phones will act as key to access the kingdom.
This is fast, secure and reliable; this is the future...
This revolutionary digital infrastructure will soon be able to process billions more transactions than bitcoin ever has. It may well be a bitcoin killer or at best provide the framework for how blockchain technology could be applied in the real world. It is too early to tell whether other countries or the private sector adopts blockchain versions of this infrastructure or abandons it altogether and follows India’s centralised version.
India Stack is the largest open API in the world and will allow for massive fintech opportunities to be built around it. India is already the third largest fintech centre but it will jump into first place in a few years. India is already organizing hackathons to develop applications for the APIs.
It has left Silicon Valley in the dust.
Phase 6 – A Cash Ban
The final stroke of genius was the cash ban, which I have also discussed at length in the past. The cash ban is the final part of the story. It simply forces everyone into the new digital economy and has the hugely beneficial side-effect of reducing everyday corruption, recapitalising the banking sector and increasing government tax take, thus allowing India to rebuild its crumbling infrastructure...
India was a cash society but once the dust settles, cash will account for less than 40% of total transactions in the next five years. It may eliminate cash altogether in the next ten years.
The cash ban digitizes India. No other economy in the world is even close to this.
Phase 7 – The Investment Opportunity
Everyone thinks they know about the Indian economy – crappy infrastructure, corruption, bureaucracy and antiquated institutions but with a massively growing middle class. Well, that is the narrative and has been for the last 15 years.
But that phase is over and no one noticed. So few people in the investment community or even Silicon Valley are even vaguely aware of what has happened in India and that has created an enormous investment opportunity.
The future for India is massive technological advancement, a higher trend rate of GDP and more tax revenues. Tax revenues will fund infrastructure – ports, roads, rail and healthcare. Technology will increase agricultural productivity, online services and manufacturing productivity.
Telecom, banking, insurance and online retailing will boom, as will the tech sector.
Nothing in India will be the same again.
FDI is already exploding and will rise massively in the years ahead as technology giants and others pour into India to take advantage of the opportunity...

The internet of things: Home is where the hackers are


When George Orwell envisioned the “telescreen” — the TV that keeps constant tabs on its viewers — in 1984, he predicted that governments would use technology to cross the threshold into our private lives. Confidential documents published by WikiLeaks this week purport to show that the Central Intelligence Agency created its own 21st century telescreen by hacking into smart TVs. You may be watching YouTube or Netflix, not forced military propaganda, but spies are still able to listen into your living room. Developers used vulnerabilities in Samsung TVs to ensure the products would capture conversations even when they appeared to be switched off. In what WikiLeaks describes as the first instalment of the “largest intelligence publication in history”, the CIA appears eager to exploit the new spying opportunities created by the internet of things — everyday objects that are connected to the web. Market research group Gartner forecasts there will be more than 20bn appliances, TVs and other devices connected to the internet by 2020.  

The CIA’s engineering development group had a “to do” list for the smart TV that included the ability to record video and break into its browser and apps. Other documents seemed to show it had explored infecting vehicle control systems used by connected cars. “This is the most troubling WikiLeaks ever. We’ve learned the CIA has all the tools to spy on American citizens,” said John McAfee, the antivirus pioneer who is now chief executive officer of MGT Capital Investments. “And now it is in the hands of some unknown hacker organisation or nation state.” The CIA has refused to comment on the veracity of the documents. Samsung says it makes security a top priority and is looking into the matter. The basic vulnerabilities inherent in the internet of things — one of the biggest concepts being pursued in the technology industry — have been known for some time. Samsung even warned customers in 2015 that “if your spoken words include personal or other sensitive information, that information will be among the data captured and transmitted to a third party through your use of voice recognition”. 

Cyber security researchers have highlighted holes in everything from cars to cameras, robots to refrigerators. It was revealed last month that children’s conversations with WiFi-enabled teddy bears from one toymaker had been leaked online. Law enforcement has become interested in using audio collected by devices such as Alexa, Amazon’s voice-controlled personal assistant. A prosecutor in an Arkansas murder case has requested the data from Alexa. Amazon resisted the request until the suspect said the recordings could be handed over. Related article Tech groups push back at collaboration offer from Julian Assange WikiLeaks founder willing to work with Silicon Valley after leak of alleged CIA cyber weapons Cyber criminals are also targeting the internet of things, infecting systems with malicious software that demands a ransom, usually to be paid to an anonymous account in bitcoin. Hackers repeatedly struck a hotel in the Austrian Alps last year by attacking the electronic key card system. The hoteliers are returning to old-fashioned locks after being forced to pay €1,500 to allow guests back into their rooms. Last Christmas, one family in the US had their smart TV taken over by ransomware, disabling it for four days. Vulnerabilities in connected devices risk destabilising the entire web. A malicious network known as a botnet built from tens of millions of internet-connected cameras and DVR players was last year harnessed to attack Dyn, a domain-name services provider used by websites from the New York Times to Twitter. Millions in the US were unable to access services including Spotify and Airbnb as Dyn struggled to resist the distributed denial-of-service attack. Cesar Cerrudo, chief technology officer at cyber security company IOActive, says hackers from the CIA to less sophisticated cyber criminals will invest more in finding vulnerabilities in the internet of things. “We are getting extremely dependent on technology. We need to start understanding that cyber security is important,” he says. “We suffer the consequences, are attacked, hacked, lose information. And it has a big impact on our daily lives.” The enthusiasm to connect everything to the internet shows no sign of letting up: there is a kettle that messages instead of whistling, a rice cooker controlled by smartphone and shoe insoles connected to a map app that vibrate to push you toward your destination.  

But cyber security has been sidelined in the rush. Security defences are often decades out of date — if they exist at all. Many lack passwords, or have a default password that cannot be changed. The signals that devices send to connect with a server are often barely encrypted. Mikko Hypponen, chief research officer of Finnish cyber security company F-Secure, says the attackers who created the botnet to target Dyn only tried 35 passwords before hitting on the right one. The lax security within the internet of things is repeating “the same mistakes we already fixed 20 years ago”, he warns. “It is a clear and present danger to the internet.” The most vulnerable products are produced by companies that specialise in making toasters or blood sugar monitors, not in software or security. The budding industry is fragmented, regulation has not kept pace and consumers either do not care or struggle to judge how secure a product is. Eric Ahlm, research director at Gartner specialising in security, says the these manufacturers have no incentive to spend time or money on security. “It is more of a question of economics than security,” he says. “A consumer buying a smart TV is probably going to buy the one with equivalent features at a lower price. It is almost a penalty for manufacturers of these smart consumer devices to go the extra mile.” Even if consumers wanted to, they could not buy additional protections because the devices are powered by tiny computers that security software makers cannot access, like those in fitness wristbands or vacuum cleaners. “You can’t put antivirus software on your Fitbit or Roomba,” Mr Ahlm says.  

The idea is to prevent attacks like the data breach at US retailer Target in 2013, when hackers accessed the system through the air conditioning provider. He says it is a “myth” that manufacturers will be able to solve the security problem. But there is a large industry built around protecting smartphones and PCs, which are made by more sophisticated companies than those creating devices for the internet of things, Mr Abreu says. “Even those with the best profit margins cannot secure their devices; imagine the guy building the device in the garage next door from parts built in China,” he says. “But that should not prevent us from demanding manufacturers have better standards.” But a push to tackle serious flaws in device security has begun. Vizio, a manufacturer of smart TVs, paid $2.2m last month in a settlement with the US Federal Trade Commission and the New Jersey attorney-general after it was caught collecting viewer data and selling the information to advertisers without their permission. Terrell McSweeny, FTC commissioner, says she supports comprehensive data security legislation that would allow a “regulatory approach” for the whole sector. WikiLeaks documents, SoftBank’s Arm stake Play video The FTC has been putting more resources into prosecuting connected device makers and improving its in-house tech capabilities. It is also working on international co-operation for privacy enforcement as devices are often exported from other countries, and looking at whether manufacturers have an obligation to still secure a device once they have stopped making it. 

US regulators are also taking an interest: the National Highway Traffic Safety Administration has created best practices for the car industry, and the Food and Drug Administration has issued guidelines for making medical devices secure. Other organisations are playing a role. The Mayo Clinic, a non-profit medical group, has written specific security measures into its contracts with medical device makers. Podcast Are you listening, Langley? What you need to know about state surveillance and the security of our smartphones The European Commission is pushing for a system of certification for devices and has set up a group called the Alliance for Internet of Things Innovation. In the US, the President’s Commission on enhancing cyber security, which reported in December 2016, said consumers should be informed about the security capabilities of devices. Beau Woods, deputy director of the cyber statecraft initiative at the Atlantic Council, says he hopes the commission’s work will lead to products coming with security labels or information sheets, which will in turn deter retailers from selling vulnerable goods. Consumers may be able to better protect themselves from everyday hackers demanding ransoms, but the manufacturers of internet-connected devices may never outrun the CIA. “My advice for people concerned is update everything and unplug things when they are not in use, if you don’t want them to have a surveillance capacity,” Mr Woods says.

For first time, India becomes net exporter of power


India became a net exporter of electricity during the April-February period for the first time, the Power Ministry said on Wednesday.
“As per the Central Electricity Authority (CEA), the designated authority of the Government of India for Cross Border Trade of Electricity, (for the) first time India has turned around from a net importer to net exporter of electricity,” the Power Ministry said in a statement.
In FY17 up to February, India has exported around 5,798 million units to Nepal, Bangladesh and Myanmar, which is 213 million units more than the import of around 5,585 million units from Bhutan. Export to Nepal and Bangladesh increased 2.5 and 2.8 times respectively in the last three years.
Ever since the cross border trade of electricity started in mid-1980s, India has been importing power from Bhutan and marginally exporting to Nepal in radial mode at 33 kV and 132 kV from Bihar and Uttar Pradesh. On an average, Bhutan has been supplying 5,000-5,500 million units to India, it said.
India had also been exporting around 190 MW power to Nepal over 12 cross border interconnections at 11kV, 33kV and 132 kV levels.
The export of power to Nepal further increased by around 145 MW with the commissioning of the Muzaffarpur (India) - Dhalkhebar (Nepal) 400kV line (being operated at 132 kV) in 2016, the statement added.
The export of power to Bangladesh from India got a further boost with the commissioning of the first cross border interconnection between Baharampur in India and Bheramara in Bangladesh at 400kV in September 2013.
It was further augmented by commissioning of second cross border interconnection between Surjyamaninagar (Tripura) and South Comilla in Bangladesh. At present, around 600 MW power is being exported to Bangladesh.
The export of power to Nepal is expected to increase by around 145 MW shortly over 132 kV Katiya (Bihar) - Kusaha (Nepal) and 132 kV Raxaul (Bihar) - Parwanipur (Nepal).
A few more cross border links with neighbouring countries are in the pipeline which would further increase the export of power.

Tuesday, March 28, 2017

PVR looking beyond cinema screenings


Gurgaon-based PVR Ltd is looking to shore up customer footfalls and revenues by exploring streams that go beyond traditional cinema screenings.
New streams include theatre on-demand services like ‘Vkaao.com’. Rolled out in January, the service allows viewers to select a movie from its library and organise a screening at a convenient place, date and time.
According to Kamal Gianchandani, CEO, PVR Pictures, Vkaao has the potential to generate 5-7.5 per cent of the company’s total box-office revenues (through ticket collections) in the next two-to-three years. A lot of independent films (including regional cinema) that struggle to get a release will look at Vkaao as an exclusive launch platform.
“About 4-5 per cent of the Vkaao library consist of exclusives. This number will go up,” he told BusinessLine.
This incidentally is a part of the customer segmentation strategy that the multiplex chain is putting in place over the few years. The aim is to increase footfalls and utilise assets (days on which theatres have less occupancies), say sources.
Other strategies
Other customer segmentation strategies by PVR include creation of theatre-oriented differentiated offerings such as Director’s Cut, Gold Class and so on. A recent addition was a virtual reality platform in association with HP.
“It is too early to comment on revenues arising out of the (virtual reality) segment,” Gianchandani said. While more such innovations are on cards, online streaming or production are not on the company’s immediate radar.
Interestingly, market sources point out that western countries have seen collections from movie screenings (at theatres) dip with advent of “on-demand streaming services” (like Netflix) picking pace.
However, PVR on its part claimed that its new initiatives are not a knee-jerk reaction to such services. Rather they are based on customer preferences.
With nearly 55-60 per cent of its ticket bookings being done online, the company claims to have an enormous amount of data which it can use and analyse to understand customer preferences, identify need gaps and then innovate.
The company, at present, has 570-odd screens across the country and competes with other multiplex majors such as Inox, Carnival and Cinepolis here.
“A lot of segmentation or sub-brands (that) we have done are based on getting information about customer behaviour,” he said, adding that new initiatives are being worked upon. He, however, did not elaborate on the new initiatives.
While PVR did not give a budget that it has worked out , Gianchandani said: “Such initiatives go through rigorous feasibility studies”.
DT Cinemas integration
Meanwhile, the integration of DT Cinemas, the 32 screens that the company acquired last year, is expected to be completed by the first quarter (April-June) of FY-18.
“The integration is work-in-progress and by next 2-3 months it should be complete,” he said.

Limited pre-buying of BS III vehicles disappoints truck-makers


Commercial vehicle manufacturers are disappointed as pre-buying of BS III truck sales ahead of costlier BS IV coming in from April 1 has belied expectations.
Slow business environment and the proposed shift to GST are cited as key reasons, for fleet operators postponing their new truck purchases, according to industry representatives and analysts.
With the transition to new emission norms from April 1, the CV industry expected pre-buying in this quarter as trucks could be costlier by 6-10 per cent.
Vinod Aggarwal, Managing Director and Chief Executive Officer of VE Commercial Vehicles (VECV), felt that pent-up demand due to demonetisation and modest pre-buying spurred sales in this quarter but it was not in the double digits.
Total truck volumes (medium and heavy duty segment) during January and February were up just four per cent at 51,733 units when compared with 49,842 units in the same period a year ago.
During November and December 2016, total sales were 33,873 units as against 41,181 units in the corresponding period previous year.
So, the recovery in demand was visible after the effects of demonetisation, but growth owing to pre-buying has been limited.
Among the CV makers, Ashok Leyland has been able to show better performance than others with 17 per cent growth at 18,560 units during first two months of 2017.
VECV registered four per cent growth at 5137 units. However, leader Tata Motors saw its sales drop four per cent at 26,100 units.
Key factors
Subrata Ray, Group Vice-President (Corporate Ratings), Icra, highlighted that weak cargo availability from industrial sectors and uncertainty related to effective taxation on CV industry under the GST regime contributed to slow down.
Meanwhile, uncertainty relating to sale of BS-III compliant vehicles post April 2017 has led to spike in industry-wide inventory levels. OEMs had scaled up production during this quarter, though sales have been below expectations. “The total inventory of CV makers is estimated at about 74,000 units, which is around 1.3 x the average monthly sales,” said Ray.
SP Singh, Co-ordinator, IFTRT (Indian Foundation of Transport Research and Training), stated that the trucking industry was feeling that the GST regime might create surplus fleet due to barrier-free and prepaid electronic tolling at toll plazas on highways.
Overall, CV industry is expected the end this fiscal with a marginal growth of 5-6 per cent against 11.5 per cent in the last year.

China joins race for booming Indian car market


Shanghai-based SAIC Motor is talking with three Indian states about setting up manufacturing operations, a company executive told CNNMoney. The automaker is also discussing the possibility of taking over a factory in Gujarat owned by General Motors (GM) -- SAIC's main partner in China -- but labor disputes have held up a deal.
"It's a growing market, so we need to have a presence," said P. Balendran, SAIC's chief representative in India.
The company, which is owned by the Chinese government, is planning to sell cars under the British brand MG Motor, one of its subsidiaries.
Balendran would not say when he hopes to begin making cars in India. That depends on how the talks go, he said.
China is the world's biggest car market, but automakers are being lured to India by the prospect of faster growth. Nearly 3 million passenger vehicles were sold in India in the financial year ending March 2016, according to the Society of Indian Automobile Manufacturers -- an increase of more than 7% over the previous year.
Sales of cars in China rose by nearly 14% in 2016, thanks to a tax waiver on smaller vehicles, but growth is expected to slow to 5% this year.
Get in line!
Global players are already lining up. German giant Volkswagen (VLKAY) announced a strategic partnership with leading Indian manufacturer Tata Motors earlier this month, a day after the heads of Japanese rivals Toyota (TM) and Suzuki met Indian Prime Minister Narendra Modi to discuss jointly developing new technologies in the country.
France's PSA, which owns Citroen and Peugeot (PUGOY), is getting back into India after staying away for two decades. 
The market may be attractive, but a new, relatively unknown entrant like SAIC could find the going tough.
"To be successful, Chinese [manufacturers] need to build a clear brand positioning in a highly competitive market," said Rakesh Batra, lead automotive analyst for Ernst & Young in India.
The country's top two carmakers -- Suzuki's Indian subsidiary Maruti Suzuki and Korea's Hyundai (HYMTF) -- account for about two-thirds of sales.
"These two have been steadily at this kind of level for a number of years," Batra said. "New entrants have had to come in and fight for the 30%."
Still, India appears irresistible to Chinese carmakers looking to expand beyond their own borders. The South Asian nation is expected to become the world's third largest automobile market by 2020, after China and the United States.
"Overseas sales are a very small portion of overall sales of Chinese manufacturers, in particular for state-owned companies like SAIC," said Jing Yang, an automotive analyst at Fitch Ratings.
Price advantage?
Balendran, a former senior executive at General Motors India, recognizes there are many obstacles ahead but is confident SAIC has something to offer.
"It's a new market," he said. "Competition is a big challenge."
"If you can stand out...in terms of product attributes and innovations, obviously [you] stand to benefit," he added. 
Chinese companies may also have an edge in a market where price can make all the difference.
"Relative to the European or American brands they have better value for price, so their products are relatively cheaper," Yang said. "They [also] have a very good understanding of rural markets and small cities."

Monday, March 27, 2017

The Temptations of a Resilient China - Steve Roach


Another growth scare has come and gone for the Chinese economy. This, of course, is very much at odds with Western conventional wisdom, which has long expected a hard landing in China. Once again, the Western perspective missed the Chinese context – a resilient system that places a high premium on stability. 

Premier Li Keqiang said it all in his final comments at the recent China Development Forum. I have attended this gathering for 17 consecutive years and have learned to read between the lines of premier-speak. Most of the time, senior Chinese leaders stay on message with rather boring statements about accomplishments, targets, and reforms, toeing the official line of the annual “Work Report” on the economy that is delivered to the National People’s Congress two weeks earlier. 
This year was different. Initially, Li seemed subdued in his ponderous responses to questions from an audience of global luminaries that focused on weighty issues such as trade frictions, globalization, digitization, and automation. But he came alive in his closing remarks – offering an unprompted declaration about the Chinese economy’s underlying strength: “There will be no hard landing,” he exclaimed.
The all-clear sign from Li was in sync with official data in the first two months of 2017: solid strength in retail sales, industrial output, electricity consumption, steel production, fixed investment, and service sector activity (the latter signaled by a new monthly indicator developed by China’s National Bureau of Statistics). Meanwhile, foreign-exchange reserves rebounded in February for the first time in eight months, pointing to an easing of capital outflows.
At the same time, the People’s Bank of China took its cue from the US Federal Reserve’s rate hike this month, boosting Chinese policy rates by about ten basis points. The PBOC would not have taken that step had it been overly concerned about the underlying state of the Chinese economy.
But the icing on the cake came from the trade data – namely, annual export growth of 4% in January and February, following a 5.2% contraction in the fourth quarter of 2016. This underscores a key contrast between the latest and previous Chinese growth scares.
Call it the Trump effect: the revival of the global economy’s “animal spirits” in recent months has provided important relief for a Chinese economy that is still heavily dependent on exports. Whereas earlier growth scares were exacerbated by chronic downward pressures from sputtering post-crisis global demand, this time external headwinds have given way to tailwinds.
But while the near-term prognosis for the Chinese economy is far more encouraging than most had expected, an eerie sense of denial, bordering on hubris, appears to be creeping into China’s strategic groupthink. With the United States looking inward, Chinese decision-makers seem to be pondering the opportunity that might arise from a seismic shift in global leadership.
I was repeatedly asked about the possibility of a China-centric globalization – reinforced by Chinese leadership in multilateral trade (the 16-nation Regional Comprehensive Economic Partnership, or RCEP), pan-regional investment (China’s One Belt, One Road initiative), and a new institutional architecture (the Chinese-dominated Asian Infrastructure Investment Bank and the New Development Bank). It’s as if China had been preparing to fill the void being left by Donald Trump’s “America first” US.
The Chinese are keen students of history. They know that shifts in global leadership and economic power are glacial, not abrupt. Yet I get the sense that they view the current circumstances in a very different light: Trump, the great disruptor, has changed the rules of engagement for what had long been a US-centric globalization. Many in China are now wondering whether this may be an opportunity to seize the reins of global power.
Anything is possible – especially in a world where uncertainty is the only certainty. But there is another lesson of history that the Chinese must bear in mind. As Yale historian Paul Kennedy has long maintained, the rise and fall of great powers invariably occurs under conditions of “geostrategic overreach” – when a state’s global power projection is undermined by weakness in its domestic economic fundamentals. Global leadership starts with strength at home, and China still faces a long road of rebalancing and restructuring before it reaches the Promised Land of what its leadership calls the “new normal.”
But here there is another important disconnect between the view inside China and perceptions in the West. The view from outside is that Chinese reforms, the means to rebalancing, have stalled over the past five years under President Xi Jinping. The same view prevailed under the prior ten-year leadership of Hu Jintao. But is this really the correct way to assess what is happening in China? 
Results matter more than grand pronouncements. Since 2007, when former Chinese Premier Wen Jiabao laid down the rebalancing gauntlet for a Chinese economy that had become “unstable, unbalanced, uncoordinated, and unsustainable,” China’s economic structure has, in fact, undergone a dramatic transformation. The GDP share of the so-called secondary sector (manufacturing and construction) fell from 47% in 2007 to 40% in 2016, whereas the share of the tertiary sector (services) increased from 43% to nearly 52%. Structural shifts of this magnitude are a big deal. The key point missed by reform deniers is that China is actually making rapid progress on the road to rebalancing.
All of which brings us back to the questions raised at this year’s China Development Forum. The combination of near-term resilience and an inward-looking US appears to offer a tantalizing opportunity for China. But China should resist the temptations of global power projection and stay focused on executing its domestic strategy. The challenge now is to realize the “tremendous opportunity” that Li touted in ruling out a hard landing.

Howard Marks Redux: "There They Go Again" - Why Stock Investors Develop Amnesia


One of our favorite memos is his May 2005 piece where Marks discusses why investors develop amnesia when it comes to share-market history. It’s a must read for all investors.
Here’s an excerpt from that memo:
Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory.

. . . There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.  
John Kenneth Galbraith - A Short History of Financial Euphoria, Viking, 1990
The above observation has appeared in lots of my memos, second only to Warren Buffett’s reminder that our need for prudence in a given situation is inversely proportional to the amount of prudence being displayed by other investors. Neither of these favorite quotations says much for the average investor: Buffett urges us to adopt behavior that is the opposite of John Q. Investor’s, and Galbraith points out how prone John Q. is to repeating the mistakes of the past.
It may sound cynical, but most outstanding investors – especially members of the “us school” (see “Us and Them,” May 7, 2004) – understand that the path to superior results lies in taking advantage of other people’s mistakes. (The alternative is to think everyone can succeed simultaneously.) It’s when most investors take a trend to excess, or the price of an asset to an extreme, that the few people smart and resolute enough to abstain from herd behavior can make truly exceptional profits.
I think both Buffett’s and Galbraith’s dim views of the average investor are well founded. Although there exist a few rules and reminders that can make it easier to avoid the costliest investing mistakes, most investors rarely heed them.
Investors truly do make the same mistakes over and over. It may be different people doing it each time, and usually they do it in new fields and in connection with new assets, but it is the same behavior. As Mark Twain said, “History doesn’t repeat itself, but it rhymes.”
Rarely is the same error repeated in back-to-back years. Usually enough time passes for the repetitive pattern to go unnoticed and for the lessons to be forgotten. Often it’s a new generation repeating the errors of their forefathers. But the patterns are there, if you observe with the benefit of objectivity and a long-term view of history.
Why do the mistakes repeat? That’s a good question, but not much of a mystery. First, few investors have been around long enough to recognize reoccurrence of the errors of twenty or forty years ago. And second, the greed that argues for ignoring “the old rules” easily trumps caution; hope truly does spring eternal. That’s especially true when the good times are rolling. The tendency to ignore the rules invariably reaches its apex in periods when following them has cost people money. It is thus, as Galbraith points out, that those who harp on the lessons of the past are dismissed as old fogies. What are some of the recurring mistakes investors make?

It’s Different This Time – Trends in investing are carried to their greatest (and most punishing) extremes by the belief that something has changed – that rules that applied in the past have been rendered obsolete by new circumstances. (E.g., the traditional standards for reasonable valuations weren’t applicable to shares in tech companies whose products were likely to change the world.)

It Can’t Miss – The fact is, anything can miss. There’s no asset so good or trend so strong that you can’t lose money betting on it. No investment technique is guaranteed to deliver high returns or keep risk low. Smoothly functioning markets don’t permit the combination of high return and low risk to persist – good results bring in buyers who raise prices, lowering future returns and elevating risk. It’ll never be otherwise.

The Explanation Couldn’t Be Simpler – By this I mean to poke some fun at investors’ tendency to fall for stories that seem true on the surface but ignore the workings of markets. The stage was set for some of the greatest debacles by platitudes that were easy to swallow – but too simplistic and, in the end, just plain wrong. These include “For a company with good enough growth prospects, there’s no such thing as too high a price” (1969 and 1999) and “Emerging markets are a sure thing because of the terrific potential for growth in per capita consumption” (1994).

This Tree Will Grow to the Sky – The fact is, no trend will go on unabated forever. Most trends are limited by cycles, which are caused by people’s reaction to developments. Buyers, sellers and competitors respond to trends, altering the current landscape and the future.

The Positives of Today Will Still Be Positives Tomorrow – From time to time, some combination of optimism and greed convinces people that the favorable elements in the current environment – responsible for today’s high asset prices – will stay that way. But (a) things usually turn less rosy, and (b) even before they do, investors take prices to levels that are too high even for today’s positives.

Past Returns Are a Good Guide to Future Returns – The greatest bubbles stem from the belief that high returns in the past foretell high returns in the future. The most successful investors – the longest-term survivors – believe in just the opposite: regression to the mean. The things that have appreciated the most will slow down (or decline), and those that lagged will catch up or move ahead. Instead of being encouraged by months or years of price appreciation, investors should be forewarned.

It’ll Always Beat the Cost of Borrowing – Speculative behavior usually features the belief that assets will always appreciate faster than the rate of interest paid on money borrowed to buy them with. We saw a lot of this in the inflationary 1970s. But for the most part, statements including the words “always” and “never” are usually a sign of trouble ahead.

The Supply/Demand Picture Doesn’t Matter – The relationship between supply and demand determines the price of everything. The higher the demand relative to the supply, the higher the price for a given asset or strategy. And, the higher the price, the lower the prospective return (all else being equal). Why can’t investors remember these two absolute rules?

Higher Risk Means Higher Return – There are times, especially when the prospective returns on low-risk investments appear inadequate, when people reach for more return by going out further on the risk curve. They forget that riskier investments don’t necessarily bring higher returns, just higher projected returns. Forgetting the difference can be fatal.

Anything’s Better Than Cash – Because it entails the least risk, the prospective return on cash invariably is lower than all other investments. But that doesn’t mean it’s the least desirable. There are times when the valuations on other investments are so high that they entail too much risk.

It May Be Too Good to Be True, But I Don’t Want to Miss Out – There’ve been lots of times in my career when people knew something was unlikely to keep working but jumped on the bandwagon anyway. Usually they did so because they thought there was a little bit more left in the trend, or because not being aboard – and watching from the sidelines while others got rich – had become too painful.

If It Stops Working, I’ll Get Out – When people invest despite obvious danger signs, they usually do so under the belief that they’ll be able to get out when the market turns down. They rarely ask how it is that they’ll know to sell before others do, or to whom they’ll sell if everyone else figures it out simultaneously.
As I sit here in 2005, the picture seems “as plain as the nose on your face.” Investors have found new darlings – real estate, private equity, hedge funds and crude oil – to replace the favorites of ancient history (that is 1999) – technology-media-telecom, biotech and venture capital funds. As I read articles about the new favorites, I find myself saying one thing over and over: “There they go again.”