Mind-boggling - (DJI)
It hardly seems right to use, barely a grown-up expression, but 'mind-boggling' is utterly appropriate when it comes to addressing the latest deal from DJI Holdings (DJI), the stop-start Chinese lottery provider.
It arises, of course, because this is business in China, and the numbers there can be truly difficult to grasp for Westerners. With one bound, DJI is being transformed from a re-born lottery business to potentially one of the biggest providers of 'apps' in the world. That is the power of China, make it big there, and it is pretty much bigger than anywhere else.
The names and locations are unfamiliar and confusing for most of us, but the strategy and the numbers tell a terrific story. Put simply, DJI is being transformed from a company which relies heavily on the fast-growing Chinese online lottery business to the provider of a major State-supported online payment platform through which 700 million people could pay their utility bills.
Think about it. A vast number of electricity, gas, water, mobile phone top-ups and traffic fines all being paid by hundreds of millions of people, with DJI taking a small percentage commission each time. Sounds good? You bet.
Skip the detailed names. DJI is working, in effect, with Xinhua, the official news agency of the Chinese government, the channel through which the President recently said would be his main means of mobile communication with his people. Xinhua launched a mobile news app in June 2015 and had 120m registered users by February. The number is growing by 10m a month, and is expected to hit 300m during 2017
So far, seven provinces with a combined utility spend of more than £100bn in 2014 have agreed to launch this mobile payment facility through the Xinhua News App. Five more are targeted for launch in the months ahead.
Xinhua operates in all 31 provinces of China, with complete nationwide coverage. The government has been bringing 4G services to the nation. Xinhua gives mobile access for state-run media, and is a platform for government administration and service information. It currently provides local and national news, and limited payment features. They will be expanded across local government and commercial services. The possibilities are enormous.
DJI has worked with the companies concerned in the lottery business, mobile payments and online bookings and has established a reputation for a strong technology [platform.
Mobile app usage in China is growing strongly. Smartphone users downloaded 38bn apps in 2015, and could hit 90bn in 2020. Daily usage is growing fast, along with mobile top up payments. In 2014, about £475bn was spent on utilities, with mobile phone top ups at £67bn and traffic fines £23bn.
In 2014, about 90% of utility bills were paid through physical outlets, and online payments were largely confined to larger cities. In the twelve provinces targeted by Xinhua, the combined utility spend was £407bn in 2014, but gas, water and electricity payments collected less than 15% of payments online. The continued migration from country to town and to smartphone ownership and the expansion of the 4G mobile network where online access has been limited leave ample room for massive growth.
The twelve provinces targeted by Xinhua cover three quarters of all existing utility payments in China, and the initial launch in Zhejiang and Shanghai provinces is planned for May this year, and should be generating revenue with weeks.
Clearly the potential for adding all sorts of services and business facilities is enormous, and this latest deal leaves DJI's mobile and other online lottery opportunities way behind in profit promise. A tiny fraction of billions of payments quickly adds up to a substantial sum. Small wonder chief executive Darren Mercer suggests that the new partnership could make a substantial contribution to DJI's revenues in the remainder of 2016 and beyond.
There is to be a new share issue at 60p to raise £10.5m gross to cover the costs of developing the new partnership and guaranteeing initial returns to partners. The fund-raising appears to have been well over-subscribed, and though there are no profit projections in the market, house broker Mirabaud could be releasing a report soon.
Along the way the company is tidying up the expensive convertible loan notes and swapping £2.4m of outstanding interest for an extra £2.4m of notes on top of the current £6m. The interest rate is being cut from the high teens and upwards to 6%, with the conversion price set at the lower of 115p and the market price on December 31. That gives an interesting target price for the shares.
The Xinhua deal is of such significance that it would have required documents seeking a Nasdaq listing to be re-written, so the intended listing has been delayed until early in the third quarter. While Mercer appears to have worked wonders as chief executive, shuttling back and forth to China non-stop, management appears thin. It is to be supplemented by a top-line UK finance director and more talent in China.
After dipping initially to 61p, DJI shares closed unchanged on the day at 69p (68p to 70p). While the market capitalisation of £100m (not sure if that includes the new shares being issued) looks high for a company which has not been making money, the potential looks terrific.
Many companies have tried to get into the rocketing Chinese market (never mind that growth is slowing - it is still phenomenal by Western standards), and many have stumbled. UK listings for Chinese shares have often proved totally shambolic. DJI has UK management married to strong local Chinese management, and appears to operate to proper standards. It has survived the impact of a government suspension of the main business which would have killed many companies, and has emerged stronger.
Crucially, it has major Chinese partners. The Xinhua deal effectively emphasises that DJI is accepted at government level. It has a technology platform which reaches throughout China and across the Chinese business community. The numbers are staggering.
Many major international companies would love to have DJI's presence in China, and as the Xinhua deal swings into operation, the significance of it will become increasingly apparent. UK investors have rightly been wary of companies in China, but experience will change that perception at DJI, and the Nasdaq listing is likely to attract attention of US investors ready to rate such a stock more highly.
It will be fascinating to watch for the first research note from house broker Mirabaud. The potential number of customers is - well - mind-boggling. That could perhaps translate into quite startling profit projections, all being well.
After first recommending DJI here at over 100p, I bought a few shares, and held them as they more than halved, and have recommended them as a speculation several times since. I bought more after this morning's announcement (before speaking to the company). A gamble? Of course. But this could yet be a real cracker.
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