Business Strategy & Outlook:
With over 600 million monthly active users, or MAU, Tencent Music Entertainment, or TME, is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 60% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making. A low subscriber-to-user ratio in the mid-teen percentages offers a long runway for paying user growth in music streaming. With platforms putting more content, such as popular songs, behind the paywall, more users would subscribe, and fuel top-line growth. Potential revenue growth also comes from advertising, where the firm’s investments into long-form audio are likely to open up more ad inventory. Even though social entertainment (mainly video live streaming) contributes most of the firm’s revenue, it is believed that there will be minimal growth ahead given competition from Douyin and Kuaishou.
With China’s antitrust laws putting an end to TME’s exclusive music copyright agreements, it’s anticipated more competition for users. Its peer Cloud Music is aiming to bridge the content gap by signing with previously inaccessible labels. Despite competitive headwinds, the TME will remain the largest platform for music streaming, benefiting primarily from network effect and intangible assets that maintain user engagement and stickiness. The subscription prices are unlikely to go lower because: 1) competitors are making losses and have little incentive for price competition; and
2) Chinese streaming platforms offer almost the lowest prices worldwide, so more discounts will be less effective in attracting users.
Unlike developed markets, the supply side of music in China is more fragmented, with just 30% of licensing from top five labels. As licensors sell their content on a mostly fixed cost basis, TME is well-positioned to see margin expansion as revenue grows.
Financial Strengths:
TME is financially sound. As of the end of 2021, the firm was sitting on a net cash position of CNY 22 billion, more than three times that of peer Cloud Music. Despite some near-term industry challenges, the firm to generate positive free cash flows over the next years. Taking advantage of the low interest environment, the company issued a total of USD 800 million (CNY 5 billion) senior unsecured notes at below 2% interest in 2020.
The debt/equity ratio is running at a manageable 30%, and debt/EBITDA is maintained below 1.5 times as at the end of 2021. The firm is believed to maintain this capital structure. Given the positive free cash flow assumptions the firm can easily fulfill its debt obligations while simultaneously funding future investment initiatives. The business has been generating positive free cash flows since 2016. In 2021, it generated a free cash flow of CNY 3.5 billion. This is significantly better than peer Cloud Music, who will be burning through cash for the next couple of years.
Bulls Say:
- Compared to Spotify, TME has plenty of room for subscriber growth that should come about as it moves more music content behind the paywall.
- TME piggybacks off Tencent’s billion-plus user network. This relationship allows for better retention of users while attracting new ones.
- By investing in independent artists and long-form audio, TME could better manage content cost over the long term.
Company Description:
TME is the largest online music service provider in China. It was founded in 2016 with the business combination of QQ Music (founded in 2005), Kuwo Music (founded in 2005) and Kugou Music (founded in 2004) streaming platforms. Tencent is the largest shareholder of TME with over 50% shares and over 90% voting rights held. TME also provides social entertainment services, including music live audio/video broadcasts and online concert services through the three platforms mentioned above, and online karaoke through an independent platform WeSing.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base.
Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity.
With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.
Financial Strength
Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus.Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance. Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.
Bulls Say’s
- Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U. K. and France, as well as people spending more time indoors during the pandemic.
- Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations.
- As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.
Company Profile
Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Veolia Environment is the world’s largest water company. Treatment and distribution of water accounts for 30% of the group’s revenue. In France, where Veolia is the historical leader, the business has been affected by a wave of contract renewals since 2010, which reduced profitability. Still, the indexation of those contracts to inflation should support earnings if high inflation persists.
Veolia’s waste management accounts for 40% of turnover. This business is more cyclical and was hit by economic crises in Europe over 2009-13. Since 2015, the economic recovery in Europe has boosted waste volumes and enhanced margins. The group intends to increase the profitability and structural growth of this division by expanding exposure to hazardous waste treatment, which exhibits efficient scale. Veolia’s third main business is energy. This business makes up 20% of the turnover and encompasses energy services, heating and cooling networks, and electricity. This is more defensive than waste management. However, the weight of municipal clients limits pricing power.
In April 2021, Veolia and historical rival Suez reached a merger agreement after seven months of fierce battles for the former to acquire the 71.1% it did not hold in the latter at EUR 19.85 per share in January 2022. Veolia agreed to relinquish activities representing EUR 7 billion or 40% of Suez turnover and EUR 1.2 billion of EBITDA comprising French waste and water businesses and some international water activities like in Italy or Morocco. Importantly, Veolia managed to seize all the assets it’s deemed strategic: water activities in Spain and Chile (Agbar), the U.S. regulated water business and waste activities in the U.K. and Australia. Despite the high price paid, it is alleged the acquisition of Suez will be significantly value-accretive for Veolia thanks to the high amount of synergies. The European Commission cleared the deal on Dec. 14, 2021, conditional on remedies representing around EUR 0.3 billion of turnover. The last antitrust issue is the U.K. where the CMA is conducting an investigation that might lead to a disposal of some of the local waste assets acquired from Suez.
Financial Strength
Veolia’s standalone net debt decreased from EUR 13.2 billion in 2020 to EUR 9.5 billion at the end of 2021. This drop was notably driven by a EUR 2.5 billion rights issue in October 2021 and the issuance of EUR 0.5 billion of hybrid bonds accounted as equity to fund the acquisition of Suez which was completed in January 2022. On a proforma basis, net debt amounted to EUR 18.2 billion at year-end 2021. In 2022, projections are done on pro forma net debt to decrease to EUR 17.14 billion as the EUR 9 billion cash outflows dedicated to the tender offer for 71% of Suez shares not held by Veolia in January are more than offset by the EUR 10.4 billion disposals of Suez assets that Veolia agreed to relinquish to a consortium formed by GIP, Merdiam, Caisse des Depots and CNP Assurances. Experts’ 2022 net debt estimate implies a net debt/EBITDA ratio of 2.7, below the group’s guidance of around 3 times. Beyond 2022, it is foreseen the leverage ratio to decrease to 1.7 in 2026 on EBITDA growth notably fuelled by the achievement of the EUR 0.5 billion synergies. Analysts forecast dividend to grow by 14.9% per year on average between 2021 and 2026, in line with the current income growth, as targeted by the group. This points to a 2026 dividend of EUR 2, twice as higher as the EUR 1 paid on 2021 results.
Bulls Say’s
- The acquisition of Suez will be significantly value accretive for Veolia thanks to high synergies despite the high price paid. To get the comparable international assets through bolt-on acquisitions would have been much more costly.
- Inflation is positive for Veolia thanks to the indexation of 70% of its contracts, the ability to pass through cost increases in other contracts and the long position in electricity and recycled materials.
- Increasing exposure to hazardous waste will structurally increase the group’s margins and returns on invested capital.
Company Profile
Veolia is the largest water company globally and a leading player in France. It is also involved in waste management with a significant exposure to France, the United Kingdom, Germany, the United States, and Australia. The third pillar of the group is energy services, giving the group significant exposure to Central Europe. Veolia started to refocus its activities in 2011, leading to the exit of almost half of its countries and of its transport activity, which should be completed within the next few years.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
