• A conversation with one of the owners of the largest residential builders has revealed that the slowdown in construction activity has indeed commenced. read here

Owning mobile payments in Asia

01082018_mobile payments

Owning mobile payments in Asia

When navigating global equity markets, it helps to align one’s sails to the major tailwinds of growth. We have written about the advantages of investing with tailwinds on numerous occasions in the past (most notably here), and in summary: businesses in industries that are growing naturally will typically find it much easier to grow revenues, expand profit margins and ultimately earn higher returns on capital investment.

One such global mega trend is the growth in the Asian middle-class associated spending. Based on analysis by Brookings[1], of the US$29 trillion increase in global middle class[2]spend between 2015 and 2030, more than 84 percent will stem from Asia Pacific. And of this, the vast majority stems from China and India.

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Now, if global middle class spend is going to be dominated by growth in the Asia-Pacific region, then exposure to payment providers in this region may well make a lot of sense.

The Wall Street Journal (WSJ) published an incredible graphic last year which is worth revisiting. Shown below, the key message is this: “When it comes to mobile payments, China dwarfs the US.” You see, the Chinese have not followed the same path of technology adoption as those of us in the West; in many areas, they have leapfrogged the West and adopted the latest technology up front.

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As the WSJ notes: “In China, QR codes are used widely by smartphone owners to pay bills and make purchases in shops and at vending machines—contributing to a $9 trillion mobile-payment market last year, according to iResearch. That is almost 90 times the size of the U.S. mobile-payment market of $112 billion, according to data from research firm Forrester.”

And here is the kicker: approximately 90 per cent of China’s online payments by transaction value are handled by the payments businesses of just two companies: Alibaba (NYSE: BABA) and Tencent (HKEx: 700).

In this sense, these two businesses hold dominant market positions in a rapidly growing global space. That is, they are sailing in a two-yacht race with strong industry tailwinds firmly at their back. And we happen to believe that these businesses remain materially undervalued today.

[1](Brookings) The Unprecedented Expansion of the Global Middle Class (February 2017)

[2]The middle class has been defined by Brookings as comprising those households with per capita incomes between $10 and $100 per person per day (pppd) in 2005 PPP terms. This implies an annual income for a four-person middle-class household of $14,600 to $146,000.

The Montgomery Global Funds own shares in Alibaba and Tencent. This article was prepared 01 August 2018 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Alibaba or Tencent you should seek financial advice.

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Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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3 Comments

  1. If there are two players in the mobile payments market, what are the barriers to entry for another entity starting a mobile payments system.

    • Very difficult, in our view.
      Consumers (and merchants) in China have already formed the habit of transacting via Alipay or Ten Pay.
      It would be difficult for a new entrant to amass the many hundreds of millions of users that these two platforms already have.
      All the best,
      -AM

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