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Value investors tend to be keen social observers. Paradigm shift and new trends often produce exciting new investment opportunities.
The internet age has brought about many such opportunities. Take for example this social phenomenon: people now stay home much more than they did in the last century. Driving this trend is the possibility and eventual popularity of working from home, as seen in the rise of SOHO (small office/home office). Japanese coined the term “Otaku”, which describes a person who lives on his computer and never leaves home, at the detriment of real-life social interaction. The name is slightly negative, but nevertheless a spot-on description of a sign of our times.
Let’s look at 3 businesses that are benefiting from this “stay-at-home” trend.
Hong Kong’s e-tailing business is under-developed compared to many other countries. The key barrier has been the cost of delivery, given Hong Kong’s congested traffic, expensive warehousing, and a high cost of manpower. Nonetheless, we are seeing substantial growth in online shopping. Apart from the considerable popularity of Taobao and T-Mall (NYSE: BABA), home-grown e-tailer HKTV Mall (SEHK:1137) recorded a 75% increase in daily order for the first 6 months of 2018 compared to 2017. The number of unique customers also increased more than three times to 427,000 in 2018, from just 149,000 in 2017.
Meanwhile, the scope of online shopping continues to broaden to cover most consumer goods. Even retailers that have a strong brick-and-mortar presence is expanding online, like Uniqlo which just rolled out their online store in Hong Kong end of last year (Fast Retailing Co Ltd, TSE:9983/SEHK:6288).
Online Food Delivery
One would have thought that in Hong Kong, restaurants are so close by that takeaway would have limited demand. To the contrary, we see the fast growth of online food delivery service the likes of Food Panda, Uber Eats, and Deliveroo. The attraction is the variety of food and the convenience it provides, literally at your finger-tips.
While Deliveroo is the late-comer to the party, it is most aggressive in elevating the user experience including service quality, app user interface and restaurant selection. The company is said to be eyeing an IPO in 2019. It would be interesting to watch if it will follow the footstep of Just Eat (LSE: JE) – despite a slight dip last year, Just Eat stock price is now almost 3 times its IPO price in 2014.
Gaming continues to be a favourite pastime with homebodies. It is, however, a saturated and extremely competitive market. In 2017, Razer (SEHK:1337) had a phenomenal IPO in Hong Kong, attracting over 227,000 subscriptions with a total value of HK$124 billion. Its current stock price is only a third of its IPO price, reflecting a possible over-valuation and subsequent operational challenges – the company is yet to report a profit. Tencent (SEHK:700) is also an active player in this space with its WeTest platform. This January WeTest released a research report that candidly highlighted their immediate challenges – system compatibility with IOS and Android, and the need to break-through the crowded market place with innovative offerings. The path to profitability looks to be a rocky one.
These are just three of the sectors whose business is very much in step with the way we live today. Most companies are relatively young, and some are not yet profitable. Whether these will become high growth companies is yet to be seen. For value investors of the enterprising type, companies in these sectors are worth watching.
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Disclosure: Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance. Wendy So doesn't own any shares mentioned above.