Local investing

Structural challenges to business models

At the core of our investment philosophy we look for companies we believe are priced below our estimate of their true worth and sell them when they reach fair value. While many interpret this simply as buy low sell high, there are important nuances, chief of which is understanding if a company is temporarily unloved by the market, or if it is facing insurmountable challenges, such as the huge structural changes in business models being brought about by  technology and ecommerce.

Innovation is happening fast and furiously and there is an incredibly quick rate of adoption of new technologies. New, often unexpected, competitors are emerging all the time, putting pressure on incumbents.  Uber is the most popular example, with Graph 1 showing how it has shaken up the yellow taxi industry in New York.

Even if you are not investing in tech shares, it is important to understand their impact on other industries. Amazon is a great example. Whenever the company announces it is entering an industry the shares in that industry typically fall – e.g. when it acquired Wholefoods, all US grocers lost value.

Changing lanes

A good example of a traditional business that has disrupted its own traditional model is Auto Trader Plc. The vehicle marketplace managed to migrate its successful classifieds business from print magazine to online, takings motor vehicle buyers and sellers along. This GBP3.4bn business now gets most of its revenue from online classified spend which has effectively replaced print advertising, as shown in Graph 2.

Margins that accrue to the eventual number one player in any given vertical are very attractive. Rightmove Plc, the top online residential housing website in the UK, is another example. It currently has a marketcap of US$5.8bn.

The success of these businesses illustrates why other companies are willing to invest a lot of money in an attempt to become the top classified player in a vertical market – which is exactly what Naspers is doing: if you look at Naspers’ market share of classified businesses in various countries and categories, as shown in Graph 3, it ranks number 1 across many categories, suggesting that there is potential for it to become the leading player in some of these online markets.  Even if Naspers can get just a few of these classified businesses to profitability, it will significantly add to its overall valuation.

Another example of disruption and how strong the tech ecosystem is in China can be found in the Chinese mobile payment market. WePay, which is Tencent’s mobile payment system, has grown massively on both an absolute and relative basis despite the incumbent AliPay’s initial dominance and resultant scale advantage.  There are close to 1bn users on WeChat (similar to What’s App) pointing to the large market opportunity.

How to access the tech sector as a South African investor

Other than Naspers, it is difficult to get tech exposure through local investments as there are very few tech companies on our local exchange; an alternative is to invest offshore. If you do go offshore, it is important not to invest blindly into the index; rather hunt for the best value opportunities or invest through a manager who will do this for you.

Most people think “value investors”, like our offshore partner Orbis, don’t invest in the tech sector but that view is very influenced by the 2000 tech bubble, when Orbis had very little tech exposure. Excluding this period, Orbis has historically been overweight the sector, as shown in Graph 4, and is currently finding value in some US tech names and Chinese technology company NetEase.

Our local funds, such as the Allan Gray Balanced Fund, have up to 30% exposure offshore. Alternatively, interested investors can access the Orbis funds via Allan Gray’s offshore platform. Minimums have recently been reduced to US$1500.

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