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Three Wireless Carriers Set To Dominate World’s Second Largest Telecom Market

Pie chart showing Indian operators’ wireless subscriber base market share as at August 2017. Bharti Airtel led the way with a market share of 23.70%. Other players ranked in order of market share are Vodafone (17.55%), Idea Cellular (16.11%), Reliance Jio (11.19%). BSNL (8.88%), Aircel (7.52%), Reliance Communications (6.51%), Telenor (3.96%), Tata (3.96%). Sistema (0.31%) and MTNL (0.30%).

Darwinian forces are at work in India’s debt-laden mobile network operator market where fierce competition has brought forth a wave of consolidation which is expected to result in an oligopoly of three major carriers, namely Bharti Airtel (BOM:532454) (NSE:BHARTIARTL), Reliance Jio (BOM:500325) (NSE:RELIANCE) and a merged entity between Idea Cellular (BOM:532822) (NSE:IDEA) and Vodafone India which is the Indian arm of British telco Vodafone PLC (LON:VOD) (NASDAQ:VOD). Brokerage firm CLSA says the trio could account for as much as 90% of industry revenues going forward.

India’s anticipated triopolistic mobile operator market is akin to the mobile operator market in countries such as China (China Mobile, China Unicom and China Telecom), South Korea (SK Telecom, KT Corp and LG Uplus Corp), Japan (NTT DoCoMo, KDDI and Softbank Mobile) and Canada (Telus Corp, Rogers Communications and Bell Canada Enterprises).

The catalyst is newcomer Reliance Jio, the telecom arm of Reliance Industries which is owned by India’s richest man Mukesh Ambani. Founded less than a decade ago (in 2010) but having begun operations in September last year, the new kid on the block disrupted the Indian mobile operator market with free voice calls and ultra-low price data services - a game-changing move in India’s price sensitive market. In less than a year of its launch, Reliance Jio amassed over 100 million subscribers (132.67 million subscribers as at August this year according to data from the Telecom Regulatory Authority of India) and emerged as India’s fourth largest wireless carrier by subscriber number.

Pie chart showing Indian operators’ wireless subscriber base market share as at August 2017. Bharti Airtel led the way with a market share of 23.70%. Other players ranked in order of market share are Vodafone (17.55%), Idea Cellular (16.11%), Reliance Jio (11.19%). BSNL (8.88%), Aircel (7.52%), Reliance Communications (6.51%), Telenor (3.96%), Tata (3.96%). Sistema (0.31%) and MTNL (0.30%).

Jio’s aggressive entry forced India’s Big Three operators - Bharti Airtel, Vodafone and Idea Cellular - to cut tariffs which squeezed profits and put pressure on smaller, financially distressed operators. The turmoil spurred a wave of consolidation in what was a Darwinian moment in which the weaker players were gradually being forced into extinction while only the fittest survive and thrive. Heavily indebted Tata Teleservices, owned by Tata Group was acquired by Bharti Airtel at a bargain price, marking Airtel’s seventh acquisition in five years.

Malaysia’s Maxis-owned (KLSE:MAXIS) Aircel which is heavily in debt may be forced to close shop according to news reports after a failed merger with Reliance Communications (BOM:532712) (NSE:RCOM), which is owned by Mukesh Ambani’s younger brother Anil. Reliance Communications, also faced with its own set of financial troubles, is now forced to make operational changes to pay off its debt such as by scaling down operations (it is shutting down its voice services for its 2G and 3G customers which account for the majority of its revenues and customer base) and selling assets (such as its cell towers). Having missed local and international debt interest payments this month, Reliance Communications’ stocks and bonds tumbled are at record lows.

Meanwhile, Vodafone India (India’s number 2 telco) and Birla-owned Idea Cellular (India’s number 3 telco), have agreed to merge, which would create India’s largest telecom company with over 400 million customers and a market share of 34%, overtaking Bharti Airtel which will have a market share of less than 32% after its acquisition of Tata Teleservices and Telenor (India) Communications (the Indian arm of Norways’ Telenor). According to data from the Telecom Regulatory Authority of India, as of August 2017, Vodafone India had 208,144,702 subscribers while Idea Cellular had 191,059,301. By contrast, Bharti Airtel served 281,043,837 subscribers.

Reliance Jio’s advantage could partly be attributed to its new all 4G LTE network, touted as the world’s largest 4G LTE network when launched in September last year. The network cost US$ 25 billion and six years to build which meant Reliance Jio was a late entrant to India’s 4G arena, given that competitors Bharti Airtel, Vodafone India and Idea Cellular launched 4G services much earlier, despite all players receiving the spectrum at the same time in 2010. Reliance Jio’s 4G LTE network, based on the VoLTE protocol, offers lower operational cost, spectral efficiency and better user experience compared to previous telecommunication technologies.

VoLTE is essentially HD voice calling services over a 4G LTE network rather than over 2G/3G networks. This means voice calls and mobile data are sent over one network i.e. 4G LTE, rather than managing different network layers for voice and mobile data. This compares with the traditional circuit-switched networks in which data would be sent through 4G for instance but the customer would switch to 2G during a voice call. For the customer, call quality is inferior on the older technology compared to VoLTE. For the wireless carrier, a VoLTE network is considered to be more cost efficient to operate, compared to managing multiple network layers i.e., 2G, 3G and 4G. Additionally, with a VoLTE network, operators can free up spectrum that had been used for traditional voice services and put them to use for more lucrative data services. The end result is that VoLTE network operators can deliver voice services at a lower cost per minute compared to traditional voice and it is this technology that enables Reliance Jio to offer ultra-cheap data services and free voice calls without a significant dent to their bottom line. Reliance Jio surprised analysts when it reported a solid ARPU (Average Revenue Per User) of 156.4 during the quarter ended September 2017, and is expected to post a net profit in its next financial year.

Reliance Jio’s disruptive entry with its all-VoLTE network hastened the demise of 3G in India. Reliance Jio is currently the only operator offering VoLTE services throughout India and while the company has the first mover advantage, incumbent operators, which currently offer voice calling services on legacy circuit-switch technology, are moving quickly to narrow the technology gap. Bharti Airtel, Vodafone India and Idea Cellular all plan on introducing VoLTE services throughout India in the coming months. Bharti Airtel is particularly aggressive having plans to, shift its 3G users to 4G, shut down its 3G services within two years and refarm the spectrum linked with it for 4G services.

 

Enormous growth potential

The surviving trio stands to gain from India’s mobile market, the world’s second-largest. India has witnessed a steady increase in its mobile phone user base over the past decade. However, with nearly 1.2 billion mobile subscribers currently, the vast majority of India’s population (estimated at some 1.3 billion) has a mobile subscription, and thus subscriber growth in the country is likely to have reached its zenith even if the potential growth of users with two or more handsets is considered. According to data released by the Telecom Regulatory Authority of India (TRAI), the number of mobile phone subscribers in India fell by nearly one million from 1,186,790,005 at the end of July this year to 1,185,841,228 at the end of August this year.

The growth opportunity is likely to lie in mobile data consumption which is projected to rise exponentially as India’s telecom sector shifts from a voice-based model to a data-centric one driven by rising smartphone penetration among other factors.

This year, India overtook the US to be the world’s second largest smartphone market in the world, behind China according to tech analyst Canalys. However, nearly half of India’s over 1 billion mobile phone users are on feature phones, making up the largest feature phone population in the world. The majority of India’s feature phone users are located in rural towns and villages where smartphones are relatively unaffordable for compared to urban dwellers. This may explain why despite offering data services at cut-throat prices, Reliance Jio’s customer base is relatively urban-centric compared to the incumbent telecom operators Bharti Airtel, Vodafone and Idea Cellular which all have a balanced mix of urban and rural subscribers.

Bar chart showing the proportion of rural vs urban subscribers of Indian wireless carriers’ mobile subscriber base. The breakdown is as follows: Idea Cellular (55.2% rural, 44.8% urban), Vodafone (54.2% rural, 45.8% urban), Bharti Airtel (50.3% rural, 49.7% urban), Aircel (35.5% rural, 64.5% urban), BSNL (32.2% rural, 67.8% urban), Telenor (28.8% rural, 71.2% urban), Reliance Jio (24.8% rural, 75.2% urban), Reliance Communications (21.8% rural, 78.2% urban), Sistema (21.8% rural, 78.2% urban), Tata (20.4% rural, 79.6% urban) and MTNL (1.3% rural, 98.7% urban).

Noticing a business opportunity, Reliance Jio launched a cheap 4G enabled feature phone, targeted at price-sensitive rural customers. To counter Jio’s move, Airtel quickly moved to launch its affordable Airtel 4G smartphone in partnership with Indian handset manufacturer Karbonn, and is also reportedly partnering with Lava, another homegrown manufacture to launch another affordable Airtel 4G smartphone.

Smartphone companies are also getting into the game. China’s ZTE (SHE:000063) is targeting India’s rural mobile phone user base with its entry-level smartphones while Xiaomi and Samsung (KRX:005930) are ramping up their retail networks to better serve rural customers. Over the long run, these feature phone users will upgrade to smartphones, which should drive India’s mobile data consumption.

Indian telcos currently derive bulk of their revenue from traditional voice however the ratio is expected to reverse as the country is expected to follow a trend playing out in major telecom markets in which rising mobile data usage is leading to rapid data revenue growth while voice revenues decline. For instance, in China, the world’s largest mobile market by subscriber number with about 1.3 billion subscribers, booming data consumption is a major growth driver and the country’s Big Three carriers China Mobile (HKG:0941) (NYSE:CHL), China Telecom (NYSE:CHA) and China Unicom (HKG:0762) (NYSE:CHU) have seen mobile data emerge as their largest revenue source, surpassing the combined revenues from traditional voice and text messages.

By contrast for wireless operators in India, the world’s second biggest mobile market after China, traditional voice remains their biggest cash cow although this is changing. According to a report by Deutsche Bank, in FY 2015, voice revenue accounted for 80% of India’s telecom industry revenues. In FY 2016, this declined to 74.3% and to 73.45% in FY 2017. It is expected to fall to 69% in FY 2018, 61% in FY 2019, 56% in FY 2020 and will make up less than half of total industry revenues in FY 2021 which means data revenues will emerge as the sector’s dominant revenue source for the first time.

As the battle for mobile data revenue heats up, the incumbent operators may have a near term opportunity in their hands that disruptor Reliance Jio may be unable to reach. Reliance Communications has announced its intentions on exiting the 2G business by the end of November this year, which means all of the company’s 2G customers, numbered at approximately 40 million, would need to port out to another network operator, presenting an opportunity for Bharti Airtel, Idea Cellular and Vodafone India which operate 2G networks. This customer base is out of reach for Reliance Jio, a pure-play 4G operator and while Jio could woo them with its 4G feature phone, how many take the offer remains to be seen.

 

2G likely to remain strong

The world has been moving away from 2G. Japan was the first country to begin switching off 2G networks and South Korea followed suit, setting off a trend worldwide as countries see declining numbers of 2G users. For instance, when Singapore switched off its 2G networks in April this year, the country’s 2G user population amounting to about 100,000 people made up less than 3% of the country’s mobile user base at the end of March according to data from the Infocomm Media Development Authority (IMDA). In Australia, where 2G networks were retired a few months later, less than 2% of mobile phone users were using 2G services.

By contrast, about 50% of India’s mobile phone users are still on 2G networks. According to the Indian Cellular Association, India has about 400-500 million feature phone users (roughly half of the country’s total mobile phone user base) with 130-140 million feature phones being sold each year. These feature phone users, mostly located in rural towns and villages, are still on 2G networks, primarily to make voice calls. Although they will account for a shrinking portion of mobile subscribers with cheap 4G LTE devices are gradually penetrating the market such as those by Reliance Jio and Airtel, the high number and proportion of 2G users means 2G is unlikely to fade away in India in the near future - offering a captive market for operators Bharti Airtel, Idea Cellular and Vodafone.

 

 

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Indonesia’s Thriving Startup Scene Has Ample Potential For Growth

Pie chart showing startup investment in Indonesia by sector (% of total investment value during 2012 - Aug 2017). 58% of startup investments during the period were taken up by the e-commerce sector, 38% in the transport sector, 1% in the finance sector, 1% in the classified/directory sector, 1% in the payment sector and 2% in other sectors.
Indonesia’s startup scene is booming as investors and startup entrepreneurs scramble to capitalize on a potentially lucrative opportunity in the Southeast Asian archipelago’s emerging digital economy which is driven by a growing middle class, a young demographic, rising internet penetration and a supportive regulative environment.While the United States remains the world’s “startup hub” accounting for over 50% of deals and investment value, Singapore is the main startup hub in Southeast Asia. However, other Southeast Asian nations led by Indonesia are fast catching up leading to a flurry of views that Indonesia could emerge as a startup hub in Southeast Asia in its own right.

Two pie charts showing startup investment in Southeast Asia in 2012 and 2016. In 2012, startup investment in Southeast Asia was US$ 0.3 billion, with 83% of that amount invested in Singapore, 14% in Indonesia and 2% in other Southeast Asian countries. In 2012, startup investment in Southeast Asia was US$ 6.8 billion (23 times higher than in 2012) with 41% of that amount invested in Singapore, 19% in Indonesia, and 40% in other Southeast Asian nations.

A report by consulting firm AT Kearney and Google found that startup funding in Indonesia soared 68 times in the last five years reaching US$ 1.4 billion in 2016. The funding momentum accelerated this year with the report stating that in the first eight months of 2017, Indonesian startups collectively raised US$ 3 billion in 53 investment deals.

Bar chart showing startup investment in Indonesia (in US$ billions) in 2012, 2016 and Jan-Aug 2017. Startup investment in Indonesia amounted to US$ 0.44 billion in 2012, US$ 1.4 billion 2016 and US$ 3 billion during the first eight months of 2017.

Most startup investments in Indonesia are still in the seed or early stages by volume, but by value, late stage investments account for the lion’s share.

Pie charts showing venture capital investment in Indonesia by stage during the January - August period of 2017. Indonesia saw a total of 53 deals during the period, of which 43% were seed stage, 30% were Series A, 8% were Series B, 15% were Series C or later and 4% were debt/PE. By deal value, total venture capital investment in Indonesia during the period amounted to US$ 3 billion, of which 0% were seed stage investments, 15% were Series A, 1% was Series B, 43% were Series C or later, and 40% were debt/PE.

Indonesia’s e-commerce and transport sectors have taken the lion’s share of startup funding over the past few years.

Pie chart showing startup investment in Indonesia by sector (% of total investment value during 2012 - Aug 2017). 58% of startup investments during the period were taken up by the e-commerce sector, 38% in the transport sector, 1% in the finance sector, 1% in the classified/directory sector, 1% in the payment sector and 2% in other sectors.

 

Tremendous Potential

Still, Indonesia offers vast untapped potential. With a population of over 250 million, Indonesia is the fourth most populous nation in the world. Over 60% of Indonesians are aged between 20 to 65 i.e., their principal working years, and 27% of Indonesians are less than 15 years of age. Thus, Indonesia has a young demographic, a low dependence ratio and a sizeable domestic market (over 50% of Indonesia’s GDP is derived from domestic demand).

Consequently, the country has the ingredients for strong economic growth which in turn is contributing to an expanding middle class; according to the International Monetary Fund’s “World Economic Outlook” report published this month, Indonesia is among the top five ASEAN countries to surpass 5% GDP growth rate this year. Already Southeast Asia’s largest economy, the Indonesian government aims to be a top ten economy by 2030 and Pricewaterhouse Coopers projects Indonesia to be the world’s fourth largest economy (in terms of GDP at PPIs) by 2050, up from 8th place in 2016.

In 2016 Indonesia had the world’s fourth largest middle class with 19.6 million households according to Euromonitor International and this is set to increase to 23.9 million by 2030, making this group a significant consumption driver in the country.

Indonesia’s growing young consumer base is also increasingly getting connected; the country has over 100 million internet users (the majority use their smartphones for the purpose) and with just 53% of Indonesia’s population having internet access, there is tremendous potential for the country’s internet population to expand. Indonesia is poised to be the world’s fourth largest internet market by 2020 according to a joint report by Google and Temasek.

With Indonesia’s growing population of young consumers increasingly turning to the internet for a multitude of reasons, be it to look for online shopping deals or watch online videos the country is seeing a growing digital population which in turn is giving rise to a growing digital economy with tremendous opportunities.

 

Thriving Startup Ecosystem

Unsurprisingly, Indonesia is becoming a hotspot of startup and investor activity. A number of homegrown startups have mushroomed and foreign players have jumped in as well. Notable homegrown success stories include Go-Jek, Taveloka, and Tokopedia, and there are numerous others aiming to strike gold. Kredivo (an online credit provider), Investree (a P2P lending marketplace), CekAja (a financial product comparison service), Bukalapak (an e-commerce platform), DokterSehat (an online health portal), Mivo (a life streaming service) and Socialla (an e-commerce platform focused on cosmetics) are just a few examples in Indonesia’s long list of startups.

Kredivo, an Indonesia-based online credit provider successfully completed its Series A round, co-led by Jungle Ventures and Singapore-based NSI Ventures earlier this year. The amount raised was undisclosed.

This January it was reported that Socialla raised an undisclosed amount in its Series B round from Japanese fashion platform Istyle (TYO:3660) and East Ventures.

Foreign startups are also circling the Indonesian opportunity. For instance, Singapore-based ride hailing app Grab is acquiring Indonesia-based O2O payments startup Kudo in a deal that could be worth over US$ 100 million. Grab also launched a ‘Grab 4 Indonesia’ 2020 master plan aimed at supporting Indonesia’s goal of emerging as Southeast Asia’s largest digital economy by 2020. Under the plan, Grab will invest US$ 700 million in Indonesia over the next four years which includes opening an R&D centre in Jakarta and US$ 100 million to be invested in Indonesian startups in the mobile and financial services space.

On the investor side, funding is pouring in from local and foreign players and the investor enthusiasm appears robust; AT Kearney and Google in their “Indonesia Venture Capital Outlook 2017” report found that 57% of Indonesian investors and 80% of foreign investors plan to increase their investments in the country.

Notable venture capital firms from America’s Sequoia Capital, Singapore’s Monk’s Hill Ventures, Japan’s Rakuten Ventures (the investment arm of Japanese internet company Rakuten) (TYO:4755), and tech companies such as Alibaba (NYSE:BABA) and Expedia (NASDAQ:EXPE), have pumped billions into Indonesian startups.

Chinese tech giants, perhaps in their quest for global dominance have been the most aggressive investors lately; a report by consulting firm AT Kearney and Google states that in the first eight months of 2017, Chinese firms accounted for a staggering 94% of total startup funding by value in Indonesia, a massive leap from the previous year when Chinese firms accounted for about 2% of Indonesian startup funding by value.

Notable Chinese investments include Alibaba’s investment in online marketplace Tokopedia, Tencent’s  (HKG:0700) (OTCMKTS:TCEHY) (OTCMKTS:TCTZF) and JD.com’s (NASDAQ:JD) US$ 1.2 billion investment in motorbike-on-demand platform Go-Jek.

Singapore-based East Ventures known for backing notable Indonesian startup success stories such as Tokopedia and Traveloka has raised a sixth fund focused on Indonesia.

American VC firm Wavemaker Partners is closing a US$ 50 million Southeast Asia-focused fund, with Indonesia placed as a key market.

Local investors are also hungry for a share of the opportunity on home soil. Bank Mandiri (IDX:BMRI), one of Indonesia’s largest banks, launched its VC unit Mandiri Capital Indonesia (MCI) with 500 billion Indonesian rupiah of initial capital to invest in startups.

State-controlled Telekomunikasi Indonesia’s (IDX:TLKM) (NYSE:TLK) Metra Digital Innovation Ventures (MDI Ventures) led a pre-series A round SaaS firm Kofera in June this year, and led a B series funding round for Wavecell the same month. Last year, MDI Ventures announced its plans to invest US$ 100 million into global and domestic startups.

This year, Indonesia’s largest private bank Bank Central Asia (IDX:BBCA) (OTCMKTS:PBCRY) launched a VC unit called Central Capital Ventura to invest 200 billion Indonesian rupiah in fintech startups, joining the race to use fintech to reach Indonesia’s unbanked population.

In March this year, Bank Rakyat Indonesia (IDX:BBRI) hired an executive from state-owned Telekomunikasi Indonesia (also known as Telkom) Indonesia’s largest telco, Indra Nutoyo to help bolster the bank’s fintech plans and in July it was reported that the bank was in the process of acquiring a venture capital firm, the process of which will be concluded by the end of the year. Indra Nutoyo is likely to head the new VC unit.

In another sign of investor confidence, early this month, Indonesian e-commerce startup PT Kioson Komersial Indonesia Tbk (IDX:KIOS) raised 45 billion rupiah by selling 150 million shares, or 23.1% of the company’s total share base, at 300 rupiah each, in what was Indonesia’s first e-commerce IPO. Riding on a thriving startup landscape and voracious investor appetite, the offering was oversubscribed 10 times and could pave the way for more startups to take the IPO route as Kioson had done.

With Kioson’s stock price closing at 2,120 rupiah yesterday (October 16), Kioson investors have been handsomely rewarded with a massive 600% capital gain since the shares began trading less than two weeks ago on October 5th.

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Electric Car Boom Offers Opportunities In Metals Markets

Petrol and diesel cars will be phased out in Scotland by 2032 and in Norway by 2025. Netherlands has also mooted a 2025 ban on fossil fuel cars. India will end sales of fossil fuel cars by 2030 while France and UK will see the end of fossil fuel vehicles beginning in 2040. Germany is considering a ban on internal combustion engines as is China, the world’s largest car market (accounting for about a third of global passenger car sales), which is working on implementing a ban on petrol and diesel cars. China is already the world’s biggest electric car market accounting for over 40% of global electric vehicle sales, more than double the number sold in 2016 according to the a report by the International Energy Agency titled “Global EV outlook 2017”.

Supportive government policy combined with falling battery prices are expected to help propel electric vehicle growth. Battery pack costs have dropped from about US$1000 per kWh in 2010 to US$227 per kWh in 2016 according to McKinsey and this trend is expected to continue which should help narrow the cost gap between EVs and internal combustion engines.

 

Line graph showing the average electric vehicle battery pack price (US$ per kWh) from 2010 to 2016E. In 2010 the average battery pack price was US$1,000 per kWh, in 2011 US$800, in 2012 US$642, in 2013 US$599, in 2014 US$540, in 2015 US$269 and in 2016E US$277.

Bloomberg New Energy Finance projects electric vehicle production will grow thirty-fold by 2030. According to the IEA’s “Global EV Outlook 2017”, electric car sales in 2016 surpassed 750,000, bringing the total number of EV vehicles on the road to over two million. Yet, electric cars are estimated to make up about 0.2% of the passenger light-duty vehicles in service, indicating immense potential for growth. Electric cars will account for 14% of global car sales according to UBS. Deutsche Bank expects annual global electric vehicle sales to increase from about 900,000 in 2016 to about 4 million in 2020 at a compound annual growth rate of roughly 40%.

While Tesla (NASDAQ:TSLA) is considered to be the star of the show, the stage is going to get increasingly competitive as car companies worldwide electrify their cars. The trend is not exclusive to global car companies such as BMW (ETR:BMW) (FRA:BMW), Mercedes Benz (ETR:DAI) (FRA:DAI) (OTCMKTS:DDAIF) (OTCMKTS:DDAIY), Audi (ETR:NSU), Volkswagen (ETR:VOW) (ETR:VOW3) (FRA:VOW) (FRA:VOW3) (OTCMKTS:VLKAY), Ford (NYSE:F), General Motors (NYSE:GM), Great Wall Motor (HKG:2333) (SHA:601633) (OTCMKTS:GWLLY), Geely (HKG:0175), Toyota (TYO:7203) (NYSE:TM), Nissan (TYO:7201) (OTCMKTS:NSANY) and Honda (TYO:7267) (NYSE:HMC) to name a few. Even regional/national players such as India’s Mahindra & Mahindra (BOM: 500520) (NSE:M&M) and Tata Motors (BOM:500570) (NSE:TATAMOTORS) (NYSE:TTM) and Romania’s Dacia are getting into the game.

The opportunity could transform the demand-supply dynamics of certain metals, akin to the rise of digital photography having the effect of reducing silver demand from 7,000 tons a year in the late 1990s to just 45 tons last year. In similar fashion, the rise of electric cars could shake up metal markets; platinum and palladium may be negatively affected while lithium, cobalt and copper to name a few are poised to benefit.

 

Platinum and palladium

About 40% of all platinum demand and about 80% of all palladium demand is from the auto industry which uses the metals to manufacture catalytic converters to reduce harmful emissions from internal combustion engines.

Platinum is mostly used in diesel engines while palladium is mostly use in petrol engines.

With electric vehicles disrupting the fossil fuel vehicle industry, platinum and palladium could see a negative impact on demand although the latter is likely to be hit harder than the former. UBS expects demand for platinum-group metals (i.e., platinum, palladium and rhodium) to decline 53% in a 100% EV world.

The rise of electric vehicles is an opportunity for a number of other metals however.

 

Lithium

Already used in smartphone, tablet and laptop batteries, lithium is also being used in electric vehicle batteries which should drive long-term lithium demand as electric vehicle sales grow. Lithium demand stems primarily from the sectors of lubricating grease, glass and batteries. Other sectors that also demand lithium include ceramics and health products. Lithium demand for batteries however has been steadily increasing over the years and a growing electric car fleet should see this sector’s share of lithium demand grow even further in the coming years.

Bar chart showing world lithium demand by sector (specifically, glass, battery, lubricating grease and other) during the years 2007-2017. In 2017, 30% of global lithium demand was from the glass sector, 39% from the battery sector 8% from the lubricating grease sector and 23% from the other sector. By comparison, in 2007, 21% of global lithium demand was from the glass sector, 19% from the battery sector, 16% from the lubricating grease sector and 44% from the other sector.

Tesla for instance has plans for a Gigafactory in Nevada which aims to produce 500,000 car batteries per year.

The trend is a positive for lithium companies such as America’s Albemarle Corporation (NYSE:ALB), FMC Corp (NYSE:FMC), Chile’s Quimica y Minera (SQM) (NYSE:SQM), China’s Tianqi Lithium Industries (SHE:002466), Jiangxi Ganfeng Lithium Co Ltd (SHE: 002460), Australia’s Mineral Resources Ltd (ASX:MIN) and Galaxy Resources (ASX:GXY) all of which have seen surging share prices year to date. SQM, FMC, Albemarle and Tianqi Lithium dominate global lithium production having accounted for about 80% of global lithium output in 2015.

Australia is the world’s top lithium producing nation and growth in the sector has been rapid. In January this year, Western Australia (which is considered to be the modern-day mining capital of the world) had just one mine producing lithium. By July, the number increased to four and exports surged six-fold.

Bar chart showing the top lithium producing countries in the world (in metric tonnes) in 2015 and 2016. Australia was the world's top lithium producer producing 14,300 tonnes in 2015 and 14,100 tonnes in 2016. Chile, Argentina, China, Zimbabwe, Portugal, and Brazil are second, third, fourth, fifth, sixth and seventh larget lithium producers in the world respectively.

However, in terms of reserves Chile is in number one position with an estimated 7.5 million metric tonnes of lithium.

Pie chart showing world lithium reserves by country in 2016. Chile had the highest reserves (7.5 million metric tonnes). China (3.2 million), Argentina (2 million) and Australia (1.6 million) round out the top four countries with the largest lithium reserves as of 2016.

To secure lithium supply, Great Wall Motor, China’s largest producer of SUVs, paid A$28 million for a 3.5% stake in Australian miner Pilbara Minerals (ASX:PLS). The deal, announced last month, will see Great Wall buy 75,000 metric tons per year of lithium-ion battery-grade lithium carbonate for the next five years as well as the option to buy another 75,000 metric tons annually by loaning an additional US$50 million to Pilbara. The debt funding will be used to support the stage 2 expansion of Pilabara’s Pilgangoora lithium mine.

 

Cobalt

Cobalt is almost exclusively mined as a by-product of copper and nickel mining. Like lithium, cobalt is a key metal for producing batteries used in laptops, smartphones, tablets and the rechargeable batteries which power electric vehicles. According to estimates from Sydney-based energy solutions firm Cobalt Blue Holdings (ASX:COB), a smartphone requires about 6 grams of cobalt, a laptop requires about 33 grams and an electric car battery would require about 15 kilograms.

Consequently, cobalt demand is projected to grow in leaps and bounds as a result of rising EV production. Analysts at CRU Group forecast the battery sector will require 75,000 tonnes of cobalt annually by 2025, up from around 41,000 tonnes this year.

However, with over 50% of the world’s cobalt supply being produced from cobalt mines located in The Democratic Republic of Congo (DRC),  a country rife with political instability, concerns about a cobalt supply bottle neck has resulted in soaring prices for this key metal.

Bar chart showing world cobalt production in 2015 and 2016. Congo is thw world's largest cobalt producer producing 63,000 metric tonnes in 2015 and 66,000 metric tonnes in 2016 accounting for over 50% of global cobalt production which amounted to 126,000 metric tonnes in 2015 and 123,000 metric tonnes in 2016. Other major cobalt producers include (in order of production in 2016) China, Canada, Russia, Australia, Zambia, Cuba, Philippines, Madagascar, New Caledonia, South Africa and the United States.

Congo also has the world’s largest cobalt reserves.

Pie chart showing world cobalt reserves by country in 2016. Congo has the world's largest cobalt reserves amounting to 3.4 million metric tonnes. Other major countries, by order of cobalt reserves in 2016 - Australia (1 million), Cuba (500,000), Philippines (290,000), Canada (270,000), Zambia (270,000), Russia (250,000), Madagascar (130,000) and China (80,000).

With the global cobalt mining race heating up, cobalt mining in Congo is gaining pace with new entrants entering the sector and existing players expanding operations. Canadian miners Ivanhoe Mines Ltd (TSE:IVN), Banro Corporation (TSE:BAA) and Alphamin Resources Corp are expanding their operations in Congo.

Glencore is the world’s largest cobalt producer in the world. The company produced over 28,000 tonnes of the metal last year accounting for almost a third of global cobalt supply which amounted to about 100,000 tonnes. Most of Glencore’s cobalt is sourced from Congo and the cobalt boom saw the company agreeing to a US$960 million deal with Fleurette Group (owned by Israeli billionaire Dan Gertler’s family trust) to purchase Fleurette Group’s remaining 31% stake in Mutanda Mining (the world’s biggest cobalt mine) and an approximately 10.25% stake in Katanga Mining Ltd (a huge copper and cobalt mine). The transaction will see Glencore having a 100% ownership stake in Mutanda Mining and an 86% stake in Katanga Mining.

Volkswagen is looking to secure long-term cobalt supplies as the company ramps up its electric car plans in which it aims to make up to three million EVs a year by 2025.

 

Copper

Electric vehicles contain about three times more copper than a regular vehicle according to Glencore and charging stations will increase copper demand further. Exane BNP Paribas estimates charging station infrastructure alone will add about 5% to copper demand by 2025.

A report by consultancy firm IDTechEx commissioned by the International Copper Association (ICA), projects global copper demand to grow nine-fold by 2027. While regular internal combustion engine vehicles use up to 23 kg of copper, a hybrid electric vehicle uses 40 kg of copper, a plug-in hybrid electric vehicle uses 60 kg, a battery electric vehicle 83 kg, and a hybrid electric bus 89 kg according to the report. A battery-powered electric bus can use 224–369 kg of copper, depending on the size of battery used.

Copper mining giants such as BHP Biliton (ASX:BHP) (LON:BLT) (NYSE:BHP) (NYSE:BBL), Chilean miner Codelco, Glencore (LON:GLEN) (HKG:0805), Southern Copper (NYSE:SCCO) (BMV:SCCO), Rio Tinto (ASX:RIO) (LON:RIO) (NYSE:RIO) (OTCMKTS:RTPPF), Vale (NYSE:VALE) (BVMF:VALE5) (BVMF:VALE3) and Freeport-McMoran (NYSE:FCX) are poised to capitalize on this growth potential.

Bar chart showing the world's top copper producing companies in 2016 (by copper production). Codelco was first having produced 1.8 million metric tonnes of copper in 2016. Freeport-McMoran (1.69 million), Glencore (1.28 million), BHP Billiton (1.1 million), Southern Copper (900,000), KGHM (677,000), Ro Tinto (523,000), First Quantum (494,000), Antofagasta (477,000) and Vale (453,000) rounded out 2016's top 10 copper producers in the world.

The opportunity has prompted the world’s biggest miner and one of the largest copper miners BHP Biliton to put copper on its list of key priorities and last month the company sanctioned a $2.5 billion project to expand its Spencer copper mine in Chile. This comes after BHP Biliton’s decision last year to boost its exploration spending by 29%, allocating nearly its entire US$900 million budget towards exploration of copper and oil.

Chile is the world’s largest copper producing country and also has the world’s largest reserves. Unlike cobalt however, copper is in relatively plentiful supply. According to estimates from a UBS report, in a 100% EV world, incremental annual copper demand would deplete copper reserves by less than 2%. By contrast, the figure for cobalt is 33.9%.

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China’s Online Reading Market Is A Compelling Read

Infographic on China's digital publishing market. China had 333 million online readers in 2016, reading e-books on mobile devices such as smartphones and e-readers. The market value of China's digital publishing industry has grown from CNY 3.9 billion in 2012 to CNY 12 billion in 2016. Demographics: 17% post-'70s, 64.1% post-'80s and '90s, 18.8% post-'000s. © Copyright LD Investments.

The number of people reading e-books on mobile devices has been steadily rising in China over the past few years. As of last year, China had 333 million online readers (the majority of whom are under 30 years of age) engrossedly reading favored genres such as fantasy, romance and historical biographies on mobile devices such as smartphones or e-book readers such as Amazon’s Kindle (NASDAQ:AMZN).

The digital publishing market (comprised of hardware such as reading devices and software such as e-books) grew 25% last year, generating total revenue of CNY 12 billion (about US$ 1.76 billion) for the year according to a report by the China Audio-Video and Digital Publishing Association.

China’s digital publishing market is expected to reach CNY 14 billion this year, an 18% increase over last year, according to estimates from Beijing-based consultancy firm Analysys.

Bar chart and line graph showing the total revenues and revenue growth rate of China's digital publishing market (comprised of hardware such as e-readers and software such as e-books) during the years 2012, 2014 and 2016. Revenues in China's digital publishing market totaled CNY 3.9 billion in 2012, CNY 8.1 billion in 2014 and CNY 12 billion in 2016 representing growth rates 44.4%, 37.3% and 25% respectively.

The opportunity could be a boon for e-bookstores and e-reader manufacturers. On the hardware side, currently Amazon’s Kindle and Beijing-based iReader Technology (SHA:603533) are the two major players in China’s e-reader market. JD.com is one of the newcomers. On the software side i.e., e-bookstores, popular names include China Literature (backed by Chinese tech giant Tencent) Migu (owned by China Mobile (NYSE:CHL) (HKG:0941), which is China’s largest telecom company) and Amazon’s Kindle Store.

However, despite the steady growth of China’s e-book reading population, e-reader device sales growth in China has been comparatively mild as Chinese online readers turn to their smartphones which come in handy to read e-books during spare time, for instance while commuting.

According to data from Shenzhen-based consultancy firm Qianzhan Industry Research Institute, 3 million e-book reading devices were sold in China in 2011, a figure which has never been surpassed since that year. As of last year, 2.3 million e-readers were sold in China.

However, this relatively mild performance looks much brighter when compared to the rest of the world where sales of e-readers are witnessing negative growth. Introduced to the world in 2006 by Amazon with its Amazon Kindle, global e-reader sales skyrocketed from 1 million units in 2008 to 23.2 million units in 2011 according to data from London-based analytics firm IHS Markit (NASDAQ:INFO). Since reaching its 2011 peak however, e-reader sales have declined precipitously with no sign of recovery. Global e-reader sales are expected to decline to about 7.1 million units in 2016 (latest figures have not yet been released).

The decline is attributed to consumers replacing e-readers (which are essentially single-task devices) with tablets (which are multi-task devices).

Noticing an opportunity, China has seen the launch of a few dual screen smartphones with an E-Ink screen on one side of the device and an LCD screen on the other.

The Russian-made Yotaphone is perhaps the most well-known. Chinese white goods giant Hisense (SHA:600060) is also in the running with its latest dual screen smartphone, the Hisense A2 Pro dual screen smartphone which debuted in China last month.

Despite its unique selling point however, the Yotaphone has not enjoyed the level of success of other smartphone brands such as Samsung (KRX:005930) (KRX:005935), Apple (NASDAQ:AAPL), or Huawei. How well the Hisense phone performs remains to be seen.

Bright prospects

While China offers a ray of hope for e-reader manufactures faced with waning global e-reader sales, the more compelling opportunity in China’s online reading market is likely to be in e-book sales and subscriptions (some e-reader brands such as Amazon Kindle tend to be sold at cost anyway, with profit being earned through sales of online content).

Not only is China’s digital reader population growing in number, they are also increasingly willing to pay for online books.

E-book sales are still a relatively small proportion of China’s entire publishing industry, indicating ample potential for growth; with total sales of CNY 62.4 billion in 2015, printed book sales were nearly six times higher than e-book sales which totaled CNY 10.8 billion in sales the same year.

The potential has heightened competition in the market as existing players up their game and new players make their entrance.

Amazon, the pioneer e-book reading device maker in the world introduced the Kindle to China in 2012. Now, with the Middle Kingdom being the biggest market in the world for Amazon’s Kindle, Amazon has been aggressively working to capitalize on the growing interest in online reading among Chinese. This year, Amazon, in partnership with Migu (one of China’s most popular e-bookstores which is backed by China Mobile, China’s largest telecom operator) launched a customized Kindle exclusively for Chinese readers – the Kindle X Migu. The made-for-China Kindle comes bundled with Amazon bookstore which will offer over 460,000 e-books as well as the Migu bookstore which will offer over 400,000 selected online literature works, and thus will offer a combined selection of over 800,000 e-book choices to Chinese e-readers. It also marks the first time Amazon has launched a Kindle together with another party.

Amazon also launched a new advertising campaign to rekindle the love for reading among Chinese adults, particularly those aged 30 and over. These adults have a relatively stronger passion for reading compared to the younger generation which grew up in an era of abundant entertainment that came with the rise of the internet and smartphones.

Amazon also partnered with e-commerce rival Alibaba for a large Kindle promotion across Alibaba’s online shopping sites this month.

Beijing-based iReader Technology’s latest e-reader called the iReader Light, was released in September last year and China’s second-biggest e-commerce firm JD.com (NASDAQ:JD) launched its JDRead e-reader device last year.

Tencent’s (HKG:0700) (OTCMKTS:TCEHY) (OTCMKTS:TCTZF) China Literature is planning an IPO in Hong Kong aiming to raise as much as US$800 million to fund acquisitions and expansion plans.

 

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ZhongAn, World’s First ‘Insurtech’ IPO Oversubscribed 400 Times By Retail Investors

Infographic - China insurance industry in 2016, at a glance.

Opportunities in China’s fast-growing insurance market coupled with exciting insurtech future prospects entice investors

China’s largest online insurer and China’s first internet-only insurer, ZhongAn Online Property and Casualty Insurance Co Ltd raised US$ 1.5 billion in a Hong Kong flotation which was oversubscribed by nearly 400 times by retail investors while the institutional order book was more than 10 times oversubscribed as eager investors looked to ride on what will be the world’s first ever ‘insurtech’ IPO, and Hong Kong’s second-largest IPO this year, following the US$ 2.2 billion flotation of Chinese brokerage firm Guotai Junan Securities (SHA:601211) in March.

The IPO was priced at the top of its range at HK$59.70 per share valuing ZhongAn at US$ 11 billion, a hefty price tag for a company that generated just CNY 3.4 billion (a little over US$ 500 million) in total insurance premiums and CNY 9.3 million (about US$ 1.4 million) last year. That revenue however, grew 49.28% year-on-year, with a CAGR of 107.16% between 2014 and last year. In the first half of the year, ZhongAn’s insurance premium revenue reached approximately CNY 2.6 billion and the annual revenue is expected to be reach CNY 6.5 billion.

The company is backed by some of China’s most prominent firms including e-commerce giant Alibaba (NYSE:BABA), social media behemoth Tencent Holdings (HKG:0700) (OTCMKTS:TCEHY) (OTCMKTS:TCTZF) and one of China’s largest insurance firms Ping An Insurance (HKG:2318) (SHA:601318). Japan’s Softbank (TYO:9984) (OTCMKTS:SFTBF) (SFTBY) is a cornerstone investor in ZhongAn’s IPO (committing to hold its shares for a minimum number of months) having confirmed its purchase of a 5% stake in the company. Alibaba affiliate Ant Financial is the largest shareholder in ZhongAn with a 16% stake.

Since its inception in 2013 when the company started off selling “shipping return insurance” at Alibaba’s online marketplaces Taobao and Tmall, the company now offers a variety of insurance products classified into five segments: travel, consumer finance, health, auto and lifestyle consumption.  “Shipping return insurance” which insures the cost of returning goods purchased online (mostly on Alibaba’s Taobao and Tmall platforms), still remains as ZhongAn’s biggest business, having accounted for about one-third of the company’s total gross written premiums last year. Shipping return insurance is classified as a “lifestyle consumption” product.

Bar chart showing ZhongAn Insurance's gross written premium (GWP) during the financial year 2016, by segment, namely “Lifestyle Consumption”, Travel”, Consumer Finance”, “Health”, “Others” and “Auto”. At 47.6%, the “Lifestyle Consumption” segment accounted for bulk of ZhongAn’s GWP. “Travel” accounted for 31.7%, “Consumer Finance” accounted for 9.3%, “Health” accounted for 6.9%, “Others” accounted for 4.4% and “Auto” accounted for 0.1%. Data taken from ZhongAn’s prospectus.

ZhongAn plans to use proceeds from the IPO to strengthen its capital base to accelerate its growth plans which includes adding life insurance and healthcare products to its range of policies. Both of these insurance segments have considerable growth potential in China.

 

China’s fast-growing insurance market still has room to expand

China is the world’s third largest insurance market accounting for a 9.85% share of total world premiums written in 2016 according to data from SwissRe.

Pie chart showing the top 10 countries in the world by share of total world premiums written in 2016. The United States was the largest accounting for 25.58% of total world premiums written. Japan was second with 9.96% and China third with 9.85%. United Kingdom (6.43%), France (5.02%), Germany (4.54%), South Korea (3.61%), Italy (3.43%), Canada (2.42%) and Taiwan (2.14%) rounded out the top 10.

China’s insurance market has been growing at a rapid clip, with insurance companies benefiting handsomely in the process; over the past two years premium revenue has ballooned 88% and total assets have grown 49%.

According to data from German insurance giant Allianze, global insurance premiums (excluding health insurance) grew 4.4% in 2016, with nearly half of that growth driven by China alone; without China, the global insurance industry would have seen a growth rate of just 2.7%.

 

Life insurance drives China’s insurance industry

Much of China’s insurance industry growth was driven by the life insurance segment which soared 30% last year, the highest rate of growth since 2008.

China’s booming life insurance market accounted for half of the world’s life insurance market growth of 4.7% in 2016; without the Middle Kingdom the global life insurance industry would have notched a growth rate of just 2.3% in 2016.

Yet, there is still ample room for growth; according to data from Allianze, China’s per capita spending on insurance products is just about 170 euros, leaving a long road ahead for the Middle Kingdom before it catches up with the average for developed countries, or even with neighboring Hong Kong and Taiwan, both of which have are within the top 10 countries with the highest per capita gross written premiums.

Bar chart showing the top 10 countries in the world by per capita gross written premium (GWP) in 2016 (in euros). Hong Kong was ranked number one with 6,410 euros of gross written premiums per capita, Switzerland was ranked number two with 5,200 euros of GWP per capita and Denmark was third with 4,470 euros of GWP per capita. Singapore (3,930 euros), Taiwan (3,560 euros), United Kingdom (3,560 euros), Norway (3,560 euros), United States (3,470 euros), Japan (3,160 euros), Ireland (3,120 euros), Sweden (3,080 euros) and France (3,060 euros) rounded out the top 10.

Multiple forces to drive health insurance market in China

The vast majority of China’s citizens are covered under a public insurance system. However, a number of forces are expected to drive the country’s private healthcare insurance sector going forward.

First, as Chinese citizens get increasingly wealthier, a growing number of Chinese are succumbing to “diseases of affluence” such as diabetes and cancer. Second, China’s population is ageing. According to data from the World Bank, as of 2016, about 10% of China’s population was aged 65 and older (compared to about 6% in India) and this percentage has been on an upward trend; in 1960 the 65-and-over population as a percentage of the total population stood at around 3% of the population in both countries, but by 2016, the proportion of this age group in China was double that of India.

Line graph showing the 65-and-above population as a proportion of the total population (%) in China and India between 1961 and 2016. In 1961, 3.7% of China’s population was aged 65 and above while in India the proportion was 3.1%. By 2016, 10.1% of China’s population was aged 65 and above while in India 5.8% of the population was aged 65 and above. Data from the World Bank.

Third, the Chinese government is encouraging private sector health insurance, through supportive government policies, (such as tax breaks for individuals who purchase private insurance), in an effort to alleviate the burden on state finances and the state healthcare system. Finally, China is witnessing a growing proportion of middle class and affluent citizens who are increasingly placing great value on health and well-being, which in turn is encouraging them to seek better quality care than that provided by public hospitals.

Consequently, private health insurance penetration is rising and still has potential to continue growing; according to Boston Consulting Group, in Australia, one in two people have private health insurance while in China, the figure is just one in 20.

China’s fast-growing insurance market has attracted an increasing number of entrants keen to grab a slice of the growing pie. China’s No.1 life insurance player, China Life Insurance, has seen its market share cut by more than half to 20%, from 45% a decade ago. China Life’s president noted that three years ago, China’s seven largest insurers commanded 80% of the market, but now they control less than 60%.

The growth story is not over yet. MunichRe forecasts China’s insurance industry to grow at twice the growth rate of the overall Chinese economy between 2017 and 2020.

Bar chart showing the average inflation-adjusted annual growth rate of China’s GDP, China’s insurance sector overall growth, China’s life insurance overall growth and China’s non-life insurance overall growth between 2012-2016 and 2017(e)-2020(e) according to data from MunichRe. During 2012-2016 China’s GDP grew 7.3%, China’s overall insurance sector grew 14.3%, China’s life insurance segment grew 12.7% and non-life segment grew 16.5%. During 2017 and 2020, it is forecasted that China’s GDP will grow 5.9%, China’s overall insurance sector will grow 11.8%, China’s life insurance segment will grow 13.2% and non-life segment will grow 9.7%.

 

Insurtech is being touted as the future of growth in the insurance industry

A report released by London-based international law firm Clyde & Co found that 94% of insurers expect digital initiatives to have the greatest impact on their distribution channels such as through the achievement of cost efficiencies and the development of new insurance products. Optimism in this area of insurance helped insurtech startups worldwide attract US$ 1.7 billion of investments in 2016.

And growth has been accelerating. A new report by PwC states that global investment in insurtech in the second quarter of 2017, surpassed that in the previous three quarters combined.

For ZhongAn investors, the opportunity lies in China, ZhongAn’s home base. China is expected to ride the global insurtech wave; consulting firm Oliver Wyman expects China’s insurtech market to expand from CNY 250 billion in 2015, to over CNY 1 trillion by 2020.

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For Tata Steel, Thyssenkrupp Tie-Up Comes As India’s Steel Demand Shows Promise

Infographic - five facts and figures on steel in India

Indian steel giant Tata Steel Ltd (NSE:TATASTEEL) (BOM:500470) and Germany’s Thyssenkrupp AG (ETR:TKA) (FRA:TKA) signed an MOU a few days ago to merge Tata Steel’s and Thyssenkrupp’s European assets in a 50:50 joint venture which will be named Thyssenkrupp Tata Steel. The flat steel business of the two companies in Europe will be combined along with Thyssenkrupp’s steel mill services. Thyssenkrupp Tata Steel will focus on three main production hubs: IJmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales. The merger, expected to be finalized by end-2018, will create Europe’s second biggest steel producer. Luxembourg-based ArcelorMittal (NYSE:MT) remains as Europe’s, and the world’s largest steel maker.

Bar chart showing the top 25 steel producing companies in the world by tonnage (million metric tonnes) as of 2016. ArcelorMittal leads the ranking as the world’s biggest steel producer by tonnage. China Baowu Group, HBIS Group, NSSMC Group, POSCO, Shagang Group, Ansteel Group, JFE Steel Corporation, Shougang Group and Tata Steel Group round out the top 10 global steel making companies.

About a decade after Tata Steel’s acquisition of Anglo-Dutch steel-maker Corus Group PLC for £6.2 billion (the largest acquisition by an Indian company at the time) a global oversupply of steel which resulted in a sharp decline in steel prices pushed Tata Steel to put up for sale its loss-making British operations in March last year – a plan which was subsequently abandoned. Despite muted demand for steel, global steel production dipped only in 2008 then resumed its climb, peaking in 2014.

Line graph showing world annual crude steel production between 1996-2016 (million tonnes).

For Thyssenkrupp, the merger will allow the German industry giant to focus on its more profitable industrial capital goods business. For Tata Steel which failed to sell its loss-making operations in Britain (where the company was reportedly losing as much as £1 million a day), the JV with Thyssenkrupp is a welcome development. The deal will reduce Tata Steel’s exposure to Europe which is facing heavy headwinds. And since Tata Steel’s Indian operations are more profitable than Europe, the company’s profitability should improve which would help Tata Steel’s steel expansion plans in India.

For the world’s steel industry which is plagued with overcapacity and financial strain, India is being touted as the next growth opportunity, partly thanks to a government-backed construction effort which is expected to drive Indian demand for steel. Already the world’s third largest steel consumer and third largest steel producer, rising steel demand and capacity additions are expected to help the country emerge as the world’s second-biggest steel consumer and producer in the years to come.

Of the world’s top five steel consuming countries, only India has shown consistent increases in steel consumption over the past few years according to data from the World Steel Association.

Bar chart showing the annual steel consumption increase/decrease (%) in the top 5 steel consuming nations i.e., China, United States, India, Japan and South Korea, during 2011-2016.

According to data from the World Steel Association, India’s steel consumption stood at 83.5 million tonnes last year and is expected to reach 88.6 million tonnes this year, representing a 6.1% increase in 2017. Increasing demand for steel in India has led to the country catching up with the United States. The World Steel Association expects India to overtake the United States as the world’s second-biggest steel consumer, a view that is echoed by the Indian Steel Association.

Line graph showing annual steel consumption (million tonnes of finished steel products) 2010-2016, in the top 4 steel consuming countries in the world after China i.e., United States, India, Japan and South Korea. In 2016, steel consumption (in million tonnes of finished steel products) in the United States was 91.6, in India 83.5, in Japan 62.2 and in South Korea 57.1.

India still has considerable potential to increase steel consumption. India used just 63 kilograms of steel per person in 2016, compared with 493 kilograms in China and 207 kilograms worldwide.

Bar chart showing steel use per capita in 2016 (in kilogrammes of finished steel products) by region (EU 28, Other Europe, C.I.S., NAFTA, Central and South America, Africa, Middle East, Asia, Oceania and World) and selected countries within the regions (Netherlands, United Kingdom, Germany, Turkey, Russia, Canada, Mexico, United States, Brazil, Egypt, South Africa, Iran, China, India, Japan, South Korea, and Taiwan China).

This low per capita steel consumption coupled with the Indian government spending big on infrastructure projects such as affordable housing, are expected to help drive Indian steel demand. Under the recently approved National Steel Policy 2017, the government aims to increase per capita steel consumption to 160 kg by 2030. The policy also aims to invest INR 10 lakh crore towards increasing the country’s’ steel production capacity.

India is already the world’s third-biggest steel producer accounting for a 5.9% share of global crude steel output according to data from the World Steel Association. With the Indian government’s effort towards boosting production and consumption of steel in the country, India is projected to overtake Japan as the world’s second-biggest steel producer by 2019.

Pie chart showing the percentage share of crude steel production in 2016 by region/selected countries (China, Japan, India, South Korea, Europe, north America, C.I.S., Other Asia & Oceania, Africa & Middle East, and South America). In 2016, China accounted for 49.6% of global crude steel production, Japan 6.4% India 5.9%, South Korea 4.2%, Europe 12.3%, North America 6.8%, C.I.S. 6.3%, Other Asia & Oceania 3.4%, Africa & Middle East 2.7% and South America 2.5%.

The opportunity has led to a flurry of investment activity in India’s steel sector which contributes about 2% to the country’s GDP. Tata Steel plans to double Indian steel capacity over the next five years. India’s biggest steel producer JSW Steel (NSE:JSWSTEEL) (BOM:500228) plans to double its size by 2030, spending billions in the process. Towards that goal, the company plans to build two new plants of 10 million metric tonnes each in the resource-rich states of Odisha and Jharkhand, as well as expand existing mills. State-run SAIL (Steel Authority of India Limited) (NSE:SAIL) has so far spent over INR 600 billion on the expansion and modernization of its Indian steel plants. SAIL was India’s leading steel producer for years before being overtaken by JSW Steel this year.

 

 

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China’s Live Video Streaming Market Is Thriving, Lucrative And Has Tremendous Growth Potential

Infographic on China's live video streaming market in 2016 - Copyright LD Investments

China’s live video streaming market grew 180% last year, with the market valued at an estimated RMB 20.8 billion (around US$ 3 billion) according to data from iResearch.

The trend has been a boon not just for dedicated live streaming platforms such as YY (NASDAQ:YY), but also for Chinese tech giants who have swiftly jumped into the arena either by integrating live streaming functionality into their ecosystem of services (similar to Facebook’s (NASDAQ:FB) integration of its live streaming service Facebook Live), or by acquiring live streaming platforms (similar to Twitter’s (NYSE:TWTR) acquisition of Periscope); Chinese e-commerce behemoth Alibaba (NYSE:BABA) has integrated live streaming functionality into its Taobao platform (Taobao Live), Chinese social media goliath Tencent (HKG:0700) (OTCMKTS:TCEHY) has integrated live streaming functionality into its messaging app WeChat, Chinese e-commerce company JD.com (NASDAQ:JD) has integrated the functionality into its online shopping platform (JD Live) and other tech players such as Weibo (NASDAQ:WB), Momo (NASDAQ:MOMO) and Inke to name a few all offer live streaming services.

Bar and line graph showing China's live streaming video market total revenue (RMB billions) and growth rate (%) between 2014 - 2019 (E)

A report by Goldman Sachs says live streaming generated the highest revenue per hour in 2016 in China, at U$ 0.54 per hour, more than double that of PC games which generated US$ 0.21 per hour.

Bar graph showing the estimated revenue per hour generated in China from live streaming, PC games, mobile games, TV, online video and online music in 2016. Live streaming generated the highest revenue at US$ 0.54 per hour.

Live streaming in China offers a plethora of live content such as live concerts, live sports, and live streaming content generated by users etc. These different areas of live streaming have different revenue drivers. For instance, live sports streaming generates revenue from subscriptions, premium access and advertising while gameplay generates revenue from advertising, game publishing and virtual gifts. However, the majority of China’s live streaming revenues are derived from user-generated content where virtual items and virtual gifts are gifted to live streaming content creators from their viewers.

Needless to say, it is this area of China’s live streaming market that has got the most attention. User-generated live streaming has witnessed explosive growth in China over the past few years as broadcasters (who are usually ordinary people broadcasting themselves eating, chatting, singing, dancing or performing stunts, pranks etc), amass huge followings and receive virtual gifts from adoring fans propelling these ‘average Joes’ to internet stardom and money, with some earning thousands of dollars a month.

These virtual gifts (such as virtual flowers which could cost less than RMB 1 each, or virtual yachts and Lamborghini cars which may cost about RMB 100 or more each)  can be converted to hard cash. The more successful broadcasters have an additional gravy train; product endorsements from top brands. Maybelline for instance sold 10,000 lipsticks in two hours after a live streaming campaign last year with Chinese celebrity Angelababy on the streaming platform Meipai.

However, the industry’s rapid ascent may decelerate in the near future with the Chinese government clamping down on unsavory live streaming content such as provocative dancing and other suggestive movements, revealing clothing, obscene language and so on. Seductive eating of a banana for instance, is now banned. With over 60% of live streaming hosts being female and over 60% of viewers being male, a number of those hosts end up making use of their sex appeal to boost views and revenues as well. While such seductive teasers may have appealed to their male-dominated viewers, it certainly didn’t appeal to the Chinese government.

In July, China’s culture ministry announced that it had shut down 4,313 online show rooms, and fired or punished more than 18,000 anchors. 12 platforms, including major players such as Panda TV, 6.CN and Douyu, were punished and ordered to make changes after offering illicit content that “promotes obscenity, violence, abets crime and damages social morality”.

While the government’s moves may impede short term growth rates, predictions of doom and gloom may be exaggerated, and the crackdown may actually help promote a healthier and more sustainable expansion of the industry in the longer term.

 

Evolving and ample potential for growth

According to data from China Internet Network Information Center (CNNIC), by the end of 2016, 344 million people in China have used a live streaming service, a number greater than the entire population of the United States. Yet there’s still room for growth; at 344 million, just 47% of China’s internet population have used a live streaming service.

Furthermore, as the industry matures, other live streaming content types are increasingly gaining popularity. Virtual gifts from user-generated content was still the biggest money-generator for China’s live streaming market, however in terms of users, gameplay and live sports streaming had a greater share of users than user generated content in 2016. Gameplay enjoyed a notable increase in users which allowed it to surpass user generated content’s share of users. Live concerts also grew, closing the gap with user generated content.

Bar graph showing the percentage share of users by content type (namely concerts, user-generated content, gameplay, sports and others) in China's live streaming video market in 2016.

This in turn may be a contributing factor towards a gradual demographic alteration of live streaming viewers; according to a study by Tencent, last year the share of female viewers increased while the share of male viewers decreased.

Bar graph showing the gender ratio of China's live video streaming audience in January 2016 and December 2016. Male viewers made up 69.5% while female viewers made up 30.5% of China' live streaming audience in January 2016. In December 2016, male viewers were 63.4% while female viewers were 35.6% of China's live video streaming audience in December 2016.

Goldman Sachs forecasts China’s live streaming market to grow from US$ 2 billion in 2015 to US$ 15 billion by 2020.

The rapid rise of the industry (which barely existed three years ago), coupled with the ample potential for future growth has fueled a rush of investments.

Early this month, Chinese marketing agency Shunya International purchased a 50% stake in Chinese live streaming app Inke, in a deal worth just under RMB 3 billion (US$ 460 million).

Taking a broader view, China’s live streaming platforms raised more than RMB 10 billion (US$ 1.5 billion) in the first half of this year with the largest players capturing bulk of the funding according to a report by 21st Century Business Herald..

Live.me which is owned by China’s Cheetah Mobile (NYSE:CMCM) and Huya.com which is games-based broadcasting platform owned by YY Inc (NASDAQ:YY) raised US$ 60 million and US$ 75 million respectively in their Series A financing rounds.

Huajiao.com which is backed by Qihoo 360 Technology Co Ltd (NYSE:QIHU) raised RMB one billion in its Series B financing.

PandaTV which is owned by Wang Sicong (the son of Chinese property mogul Wang Jianlin who was China’s richest man a few months ago) also raised RMB one billion in its Series B funding round.

Competition in the industry is intense with over 200 apps in China catering to different markets and audiences such as gamers and fashion. However, with bulk of the funding being channeled towards the largest players, the number of live streaming platforms dropped by 60% year on year, as the weaker players were squeezed out of the market according to the report by 21st Century Business Herald. Moreover, a report by TrustData found that 97.5% of total user engagement was captured by the top 10 platforms.

 

 

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Mobile Wallet Transactions In India Soared Last Year But Still Less Than 1% Of Digital Transaction Value

Mobile payment transactions in India surged following the government’s demonetization program in November last year which forced the cash-reliant economy towards alternative payment methods, benefiting mobile wallets such as PayTM, MobiKwik and FreeCharge.

Bar chart showing mobile wallet transactions in India between FY2013 and FY2017, by volume (billions) and value (Indian Rupees trillions).

The government’s monetary shakeup in November last year saw the country’s INR 1,000 and INR 500 notes withdrawn from circulation in an effort to purge black money from the system. The notes accounted for over 80% of the bills in circulation causing a cash crunch among nearly 75% of India’s citizens who operate in a largely cash-based economy.

Almost half of India’s one billion population hold no bank accounts, and only 15% of account holders use them to make payments according to a 2015 World Bank report.  And just a fraction of small Indian merchants accept credit card payments; in India, there is only one POS terminal also known as card-swipe terminal for 40,000 people, while in China, it is 3,000-4,000 people per machine. As a result, millions of Indians turned to mobile payment apps helping the industry see increases in adoption rates and overall transactions. Homegrown unicorn PayTM, which is India’s biggest mobile payments company, saw a 435% jump in traffic and a 200% surge in the number of downloads within hours of Prime Minister Modi’s demonetization announcement.

Eight months after the November demonetization program, PayTM’s user base tripled from 700,000 in November 2016, just before the demonetization, to over 220 million. The app allows consumers to pay for groceries and make individual payments without using cash, similar to Alibaba affiliate (NYSE:BABA) Ant Financial’s Alipay and Chinese tech giant Tencent’s (HKG:0700) (OTCMKTS:TCEHY) WeChat Pay. Alipay and WeChat Pay are the two most popular mobile wallets in China.

Despite the increase however, mobile wallets account for 10% of overall digital transactions by volume and less than 1% of digital transactions by value according to a report by Deloitte indicating ample room for growth going forward.

Digital transactions in India grew 25% by value and 31% by volume last year, helped by the government’s demonetization program which led to an increase in non-cash modes of payment such as mobile wallets and credit and debit cards.

Bar and line chart showing digital payment transactions in India during FY2013 to FY2017. by volume (billions) and by value (Indian Rupees trillions).

Card transactions dominate India’s digital payments market in terms of volume and value, accounting for 60% of transaction value in FY2017. Although card transactions have seen a decline in their share of India’s digital transactions as a result of increasing adoption of other modes of payment, post-demonetization, card circulation in India actually increased dramatically – a boon to card companies such as Visa (NYSE:V) and Mastercard (NYSE:MA); debit card circulation grew from 553 million in FY2015 to 867 million in April 2017 while credit card circulation grew from 21 million to 31 million during the same period. “Prepaid Instruments (PPIs)” under which mobile wallets make up the biggest category, saw the biggest increase in volume share of Indian digital transactions, accounting for 10% of digital transactions in FY2017, a ten-fold increase from FY2013 when it accounted for just 1%.

Pie charts showing the volume share of various digital transaction modes in India in FY2013 and FY2017. Cards accounted for 74% of India's digital transaction volumes in FY2013 and 59% in 2017.

 

Mobile wallet limitations may have contributed to low transaction value share

Despite accounting for 10% of digital transaction volume, mobile wallets accounted for just 1% of transaction value. While this reflects good potential for growth, this imbalance in volume and value may have been due to some hindrances to mobile wallet usage. Mobile wallets are not connected to a user’s bank account and as a result, the wallet had to be reloaded with cash before it could be used. In India, currently the maximum amount that could be maintained in any given mobile wallet is INR 20,000. To reload an amount exceeding this stipulated maximum, users will have to submit KYC documents which would allow the user to maintain a mobile wallet balance of INR 100,000 (or in Indian parlance, “INR one lakh”).

However, this was a troublesome process and consequently mobile wallet usage had been confined to low-value purchases such as grocery purchases at small vendors, mom-and-pop stores and shops, where pre-demonetization, cash ruled as a mode of payment. Unsurprisingly, the average mobile wallet balance in India amounts to about INR 87 (which amounts to less than US$2), an abysmally low figure, just about enough to buy 2-3 mineral water bottles.

For big-ticket purchases at department stores, mobile wallets could not compete with credit and debit cards which offered an unparalleled level of convenience in paying for such purchases since the cards are directly linked to the card holder’s bank account.

Another hindrance was inter-operability; funds and payments could only be made between the same mobile wallet app and so a user with a PayTM mobile wallet is only able to transfer money and make payments to another PayTM mobile wallet. This closed-loop system meant that for instance, a PayTM user and a FreeCharge user will find themselves unable to make payments to each other. This restriction on mobile wallet interoperability was imposed by the Reserve Bank of India and only a few months ago was this restriction lifted.

Nevertheless, amidst these initial teething problems, the Indian mobile wallet market has ample room for growth driven by increasing mobile wallet adoption and mobile internet penetration. A report by Internet and Mobile Association of India (IAMAI) released in April this year projects India to have about 420 million mobile internet users by June, up from around 389 million users in December 2016. That still puts the penetration rate at less than 50%, indicating ample room for growth particularly in rural India where the mobile internet penetration rate is just 16% compared to urban India where it is 51% according to the report. Increasing competition among Indian mobile operators is helping lower mobile users’ monthly average mobile data bills, which is expected to help spur mobile internet penetration among rural Indians – a potential market of 750 million currently offline citizens.

With millions more Indians yet to get online through mobile, the country’s mobile wallet market is an enormous opportunity, perhaps akin to China which leapfrogged the credit card era and jumped directly into mobile wallet payments. Deloitte expects India’s mobile wallet transaction volumes to touch 45 billion by 2021 while transaction value is expected to reach INR 32 trillion the same year.

Bar and line chart showing the value and volume forecast for mobile wallet transactions in India from FY2017 to FY2021.

The potential has not gone un-noticed and as competition in India’s digital transaction market intensifies, PayTM is finding itself in more challenging waters. PayTM is already faced with a heap of domestic competitors, numbering nearly 100; apart from the banks, non-banking mobile wallet players include Hike Messenger (founded by Kavin Bharti Mittal the son of billionaire entrepreneur Sunil Bharti Mittal, and backed by China’s tech giant Tencent and Bharti Softbank), Jio Money (launched by Reliance Jio Infocomm which is owned by Indian conglomerate Reliance Industries (NSE:RELIANCE) (BOM:500325)), FreeCharge, MobiKwik, ItzCash, Citrus Pay, Oxigen Wallet, PhonePe, PayU, Ola Money.

Going forward, PayTM may find itself racing against global tech giants as well; the sheer growth potential of India’s mobile wallet market has attracted the attention of players such as Samsung, Google (NASDAQ:GOOG)(NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Watsapp which is owned by Facebook (NASDAQ:FB).

Watsapp could emerge as a serious contender. The world’s most popular messaging app is reportedly looking to launch a UPI-driven payment system in India.

UPI (Unified Payments Interface) is a government project in which a national registry known as Aadgar records consumers’ biometric details, assigns a unique ID and stores the combined information in a centralized database. Currently, the UPI platform is accessible only to registered banks which means mobile wallet operators will either have to obtain an RBI (Reserve Bank of India) license or partner with a registered Indian bank. Hike Messenger for instance, partnered with Yes Bank (NSE:YESBANK) (BOM:532648) to launch its in-app mobile wallet. However RBI is expected to open the platform to non-banking mobile wallets such as PayTM and MobiKwik.

The UPI platform addresses much of the current limitations of mobile wallets; UPI-based mobile wallets can connect the app directly to the user’s bank account, allowing consumers to make payments using their mobile phone without having to undergo the cumbersome process of topping it up with cash once the balance runs empty. And given that any UPI-based banking mobile wallet could make a payment to any user that is registered on the database, regardless of the mobile wallet used by user, UPI-based mobile wallets are interoperable. So a user with a mobile wallet from Axis Bank (NSE:AXISBANK) (BOM:532215) can transfer funds to a user with a mobile wallet from ICICI Bank (NSE:ICICIBANK) (BOM:532174) (NYSE:IBN) as long as both users are registered on the UPI platform.

Watsapp is India’s most popular messaging platform and with a user base close to 200 million, Watsapp has the potential to give current mobile wallet leader PayTM a run for its money. Watsapp’s position is akin to Tencent in China which owns China’s most popular messaging app WeChat and the second-most popular mobile wallet WeChat Pay (also known as TenPay). Tencent launched its mobile wallet after Alibaba, yet building on its position as China’s most popular messaging platform, WeChat Pay rapidly gained market share.

Cognizant of this potential threat, PayTM has been stepping on Watsapp’s turf, with the company planning to expand its services by offering messaging services, games and other content within the app. PayTM’s parent company One97 Communications has considerable experience in this space, given that the company started out producing mobile content before venturing into India’s mobile payment space and hence PayTM is not likely to be an easy pushover.