Much has been said about the mobile phone revolution in Nigeria –the depth of its penetration even in remote areas, and how this technology has become a growth enabler, just like the railroads were in the US.
However, one critical but muted perspective to this story is the role played by the calculating, intense, ruthless and prolific Chinese OEMs (Original Equipment Manufacturers) in the mobile phone penetration drive. Though these OEMs have historically played in the back-end of the value chain as manufacturers and wholesalers, a remarkable shift into front-end retail is occurring.
This shift is upending the industry and illustrating the scale of their dominance and impact in the Nigerian market.
For those who may be unfamiliar, the story started sometime in 2006, when the Nigerian mobile phone market was dominated by brands from developed markets. This was an era where phones were expensive, and mainly the preserve of the middle-upper class.
The multitude of lower income consumers were cut off, as they couldn’t afford to own phones. The gap in the market was identified, and a little-known Shenzhen, China-based phone maker went into action to scoop up one of the most promising phone markets in the world: Nigeria.
The firm, named Transsion Holdings (formerly called Tecno Telecoms), an unknown in its home country, sought a market in Africa as competition in China was intense. To fill the gap left by the bigger established brands, Transsion produced low-priced phones for the bottom-end market in 3 brands: Tecno, Itel, and later, Infinix.
To lock in its customers, it established a customer support center to provide free repairs so that buyers wouldn’t have to spend considerably on phone repairs. It entrenched itself in the market, by setting up an R&D center in Lagos to identify local market trends which it could incorporate into its phones for a more tailor-made experience.
The most famous example of local trends built into its mobile phones was customers’ preference for 2 or more phones numbers due to poor mobile networks. Tecno was thus one of the first brands to launch dual-SIM phones.Other features aimed at localizing its products were: strong batteries, in recognition of the epileptic power supply in Nigeria; a collaboration with Opera so that users browse the internet cheaply; Flash Share, which came pre-installed on its phones to allow users share files without consuming data; and preinstalling 2GO, the popular chat app that helped migrate droves of Nigeria’s rural dwellers and poor to the cyber universe of online relationships and even online dating.
Using more formal channels, it customized its phones for telcos including MTN, Etisalat and Airtel who sought to provide cheap phones to boost their subscriber numbers. All these features were meant to contextualize its products for the Nigerian market, and needless to say, they made them a hit.
Aggressive transition from an OEM to a retail and lifestyle brand
Being a budget phone, its appeal was limited only to those at the bottom of the pyramid. But that was not where Transsion intended to stay; it was just the beginning. Its strategy was simple: start from the bottom to get to the top. First, target the low-income users who mostly dwell in the rural areas, then move to the semi-urban consumers, and finally climb slowly to the metropolitan clientele.
Over subsequent years, it would produce upgraded models, adding high-spec features that sold it to the more tech-savvy smartphone users and those with a little more cash to spend. In all these, it ensured that its phones were priced well below the trendier brands.
To seize the higher socio-economic classes, Transsion spent a boatload of money on marketing.According to a source, a marketing officer for the company was given a budget as large as $1 million to spend on campaign and promotion efforts. It recruited local celebrities, including musicians, for its marketing campaigns in a bid to be presented as classy brand.
In one particular marketing campaign, it hired a celebrity photographer and film director to endorse the camera on its new Phantom 8 smartphone. The company hired swathes of marketers from tech firms that were close to celebrities. Its marketing budget easily exceeds those of its rivals.
Transsion was not satisfied with being just an OEM or a supplier. It aimed to become the consummate technology and consumer electronics company involved in hardware, software, and even lifestyle– it has a software arm called Afmobi and sources say that the company is set to introduce other electronic products soon.
It aims to be the most ubiquitous consumer brand that would become part of the daily lives of users. To achieve this, it saw a need for a vastly improved presentation of its products at the retail level. The company has since begun a retail program aimed at building a direct relationship with consumers that will see it side-step middlemen – distributors and retailers– in the process.
To this end, the company established a chain of retail stores which it named 3C Hub. To further bolster the 3C Hub brand and flesh it out, Transsion systematically swallowed up big local retail operations. This aggressive consolidation move has seen it go after at least 5 big indigenous phone dealers/retailers who have either of the following qualities: a desired level of geographical spread around the country; a recognizable brand name; huge size of turn over; and a robust distribution/dealership operation.
It has successfully acquired 2 of these kinds of retailers: Zenco Communications, which was acquired for an unknown fee, and Micro-Station for $5 million, according to sources. It attempted but failed to acquire its original target, Slot Communications – the king of them all. It also attempted and failed to acquire a Port Harcourt based retailer named Carlos Milla Communications.
Zenco Communications was targeted because of its strategic importance in the value chain as an enormous dealer/distributor, with a strong presence in Akwa Ibom. Its retail assets, though deep but not as extensive as Slot, has now been rejigged and converted to a 3C Hub Plaza, while its distribution business is now being devoted to the marketing and distribution of Transsion’s phones. Micro-Station seems assigned to a similar fate as Zenco.
Transsion’s retail program has been its most controversial move since it entered the Nigerian market. It is instigating unease in Nigeria’s phone retail and distribution hub, the Ikeja Computer Village. Local retail or wholesale businesses, which once complemented Transsion in its early stages are now increasingly seen as its rivals in the phone distribution business. And as a rival, Transsion has been aggressive or even hostile towards them. Armed with vast amounts of cash, Transsion presents its takeover targets with acquisition offers.
Those that accept would have their operations rolled into 3C Hub, while those that refuse would inadvertently enter into a heated battle for customers. Observers say that one of Transsion’s retaliatory tactics is to try to open 3C Hub stores in close proximity to the ‘dissidents’, thereby engaging them in a fight for survival. Of course, Transsion would have more staying power in such cases because of its huge cash hoard (which observers say is partly the result of China state-aid or ultra-low interest rates). Indigenous businesses are typically in a weak position because their financing options are limited, and local banks have not been helpful with their high interest rates.
Foreseeing that this would happen, the incumbents (i.e., phone traders under the industry union) initially put up a resistance, by preventing Chinese phone sellers from owning shops and warehouses in Computer Village. They argued that Transsion’s bid to open retail stores would cannibalize their own sales, since it was already their supplier.
Transsion would be able to sell at much lower prices with the added advantage of product warranties, rendering them uncompetitive and at risk of extinction. They accused the Chinese firm of trying to become a monopoly by controlling the entire value chain. But these attempts were ineffective against the flood of cash flowing from China.
Transsion’s 3C Hub has since grown on the strength of strong consumer acceptance. It has, over a relatively short period, expanded its geographical coverage and the number of its retail locations. By public accounts, 3C Hub is now present in at least 12 states of the Federation, including: Lagos, Abuja, Ogun, Oyo, Ondo, Delta, Rivers, Akwa Ibom, Abia, Enugu, Kogi, and Kwara states.
After completely dominating the feature phone market, Transsion is now on course to dominate the smartphone market, as other flagship brands and ‘spec’d out’ models of established phone makers like Samsung and Apple surge past the N100,000 (~$300) and N200,000 (~$500) price points, which are very critical price points for emerging market consumers. The purchasing power of Nigerians have stagnated or even declined following the economic recession, inflation, and the excruciating impact of the exchange rate crises and Naira devaluation. It is in this kind of environment that Transsion thrives.
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Why Insurance firms are selling off their PFAs
It has not been uncommon over the years to have insurance companies with pension subsidiaries.
The idea of mitigating risks and curtailing losses at the bare minimum begins from the insurance industry and only crosses into the pension space with the need for retirement planning. For this reason, it has not been uncommon over the years to have insurance companies with pension subsidiaries. However, controlling the wealth of people is no easy feat – and crossover companies are beginning to think it might not be worth it competing with the big guns; that is, the pension fund administrators (PFAs) that already cater to the majority of Nigerians.
A few months ago, AXA Mansard Insurance Plc announced that its shareholders have approved the company’s plan to sell its pension management subsidiary, AXA Mansard Pensions Ltd, as well as a few undisclosed real estate investments. It did not provide any reason for the divestment. More recently, AIICO Insurance Plc also let go of majority ownership in its pension arm, AIICO Pension Managers Ltd. FCMB Pensions Ltd announced its plans to acquire 70% stakes in the pension company, while also acquiring an additional 26% stake held by other shareholders, ultimately bringing the proposed acquisition to a 96% stake in AIICO Pension. The reason for the sell-off by AIICO does not also appear to be attributed to poor performance as the group’s profit in 2019 had soared by 88% driven by growth across all lines of business within the group.
So why are they selling them off?
Pension Fund Administration is, no doubt, a competitive landscape. Asides the wealth of the over N10 trillion industry, there is also the overarching advantage that pension contributors do not change PFAs regularly. Therefore, making it hard to compete against the big names and industry leaders that have been in the game for decades – the kinds of Stanbic IBTC, ARM, Premium Pension, Sigma, and FCMB. Of course, the fact that PFAs also make their money through fees means the bigger the size, the more money you make. With pressure to capitalize mounting, insurance firms will most likely spin off as they just don’t have the right focus, skills, and talents to compete.
The recent occurrence of PENCOM giving contributors the opportunity to switch from one PFA to another might have seemed like the perfect opportunity for the smaller pension companies to increase their market shares by offering better returns. More so, with the introduction of more aggrieved portfolios in the multi-fund structure comprising of RSA funds 1, 2, & 3, PFAs can invest in riskier securities and enhance their returns. However, the reality of things is that the smaller PFAs don’t have what it takes to effectively market to that effect. With the gains being made from the sector not particularly extraordinary, it is easier for them to employ their available resources into expanding their core business. There is also the fact that their focus now rests on meeting the new capital requirements laced by NAICOM. Like Monopoly, the next smart move is to sell underperforming assets just to keep their head above water.
Olasiji Omotayo, Head of Risk in a leading pension fund administrator, explained that “Most insurance businesses selling their pension subsidiaries may be doing so to raise funds. Recapitalization is a major challenge now for the insurance sector and the Nigerian Capital Market may not welcome any public offer at the moment. Consequently, selling their pension business may be their lifeline at the moment. Also, some may be selling for strategic reasons as it’s a business of scale. You have a lot of fixed costs due to regulatory requirements and you need a good size to be profitable. If you can’t scale up, you can also sell if you get a good offer.”
What the future holds
With the smaller PFAs spinning off, the Pension industry is about to witness the birth of an oligopoly like the Tier 1 players in the Banking sector. Interestingly, the same will also happen with Insurance. The only real issue is that we will now have limited choices. In truth, we don’t necessarily need many of them as long all firms remain competitive. But there is the risk that the companies just get comfortable with their population growth-induced expansion while simply focusing on low-yielding investments. The existence of the pandemic as well as the really low rates in the fixed-income market is, however, expected to propel companies to seek out creative ways to at least keep up with the constantly rising rate of inflation.
Nigerian Banks expected to write off 12% of its loans in 2020
The Nigerian banking system has been through two major asset quality crisis.
The Nigerian Banking Sector has witnessed a number of asset management challenges owing largely to macroeconomic shocks and, sometimes, its operational inefficiencies in how loans are disbursed. Rising default rates over time have led to periodic spikes in the non-performing loans (NPLs) of these institutions and it is in an attempt to curtail these challenges that changes have been made in the acceptable Loan to Deposit (LDR) ratios, amongst others, by the apex regulatory body, CBN.
Projections by EFG Hermes in a recent research report reveal that as a result of the current economic challenges as well as what it calls “CBN’s erratic and unorthodox policies over the past five years,” banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022, the highest of all the previous NPL crisis faced by financial institutions within the nation.
Note that Access Bank, FBN Holdings, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa and Zenith Bank were used to form the universe of Nigerian banks by EFG Hermes.
Over the past twelve years, the Nigerian banking system has been through two major asset quality crisis. The first is the 2009 to 2012 margin loan crisis and the other is the 2014 to 2018 oil price crash crisis.
The 2008-2012 margin loan crisis was born out of the lending institutions giving out cheap and readily-available credit for investments, focusing on probable compensation incentives over prudent credit underwriting strategies and stern risk management systems. The result had been a spike in NPL ratio from 6.3% in 2008 to 27.6% in 2009. The same crash in NPL ratio was witnessed in 2014 as well as a result of the oil price crash of the period which had crashed the Naira and sent investors packing. The oil price crash had resulted in the NPL ratio spiking from 2.3% in 2014 to 14.0% in 2016.
Using its universe of banks, the NPL ratio spiked from an average of 6.1% in 2008 to 10.8% in 2009 and from 2.6% in 2014 to 9.1% in 2016. During both cycles, EFG Hermes estimated that the banks wrote-off between 10-12% of their loan book in constant currency terms.
The current situation
Given the potential macro-economic shock with real GDP expected to contract by 4%, the Naira-Dollar exchange rate expected to devalue to a range of 420-450, oil export revenue expected to drop by as much as 50% in 2020 and the weak balance sheet positions of the regulator and AMCON, the risk of another significant NPL cycle is high. In order to effectively assess the impact of these on financial institutions, EFG Hermes modelled three different asset-quality scenarios for the banks all of which have their different implications for banks’ capital adequacy, growth rates and profitability. These cases are the base case, lower case, and upper case.
Base Case: The company’s base case scenario, which they assigned a 55% probability, the average NPL ratio and cost of risk was projected to increase from an average of 6.4% and 1.0% in 2019 to 7.6% and 5.3% in 2020 and 6.4% and 4.7% in 20201, before declining to 4.9% and 1.0% in 2024, respectively. Based on its assumptions, they expect banks to write-off around 12.3% of their loan books in constant currency terms between 2020 and 2022, a rate that is marginally higher than the average of 11.3% written-off during the previous two NPL cycles. Under this scenario, estimated ROE is expected to plunge from an average of 21.8% in 2019 to 7.9% in 2020 and 7.7% in 2021 before recovering to 18.1% in 2024.
Lower or Pessimistic Case: In its pessimistic scenario which has a 40% chance of occurrence, the company projects that the average NPL ratio will rise from 6.4% in 2019 to 11.8% in 2020 and 10.0% in 2021 before moderating to 4.9% by 2024. It also estimates that the average cost of risk for its banks will peak at 10% in 2020 and 2021, fall to 5.0% in 2022, before moderating from 2023 onwards. Under this scenario, banks are expected to write off around as much as 26.6% of their loan books in constant currency terms over the next three years. Average ROE of the banks here is expected to drop to -8.8% in 2020, -21.4% in 2021 and -2.9% in 2022, before increasing to 19.7% in 2024.
Upper or optimistic case: In a situation where the pandemic ebbs away and macro-economic activity rebounds quickly, the optimistic or upper case will hold. This, however, has just a 5% chance of occurrence. In this scenario, the company assumes that the average NPL ratio of the banks would increase from 6.4% in 2019 to 6.8% in 2020 and moderate to 4.8% by 2024. Average cost of risk will also spike to 4.2% in 2020 before easing to 2.4% in 2021 and average 0.9% thereafter through the rest of our forecast period. Finally, average ROE will drop to 11.6% in 2020 before recovering to 14.4% in 2021 and 19.0% in 2024.
With the highest probabilities ascribed to both the base case and the pessimistic scenario, the company has gone ahead to downgrade the rating of the entire sector to ‘Neutral’ with a probability-weighted average ROE (market cap-weighted) of 13.7% 2020 and 2024. The implication of the reduced earnings and the new losses from written-off loans could impact the short to medium term growth or value of banking stocks. However, in the long term, the sector will revert to the norm as they always do.
Even with a 939% jump in H1 Profit, Neimeth still needs to build consistency
Neimeth has been one of the better performers in the stock market in the last one year.
Neimeth’s profit after tax for H1 2020 might have jumped by 939% from H1 2019, but there’s still so much the company needs to do to remain in the game.
For the first time in years, Pharmaceutical companies across the globe are in the spotlight for a good reason. As the COVID-19 pandemic rages on, the world waits patiently for this industry to produce a vaccine that can once again lead us back to the lives we all missed. Nigeria is also not an exception, it seems. One of Nigeria’s oldest pharmaceutical companies, Neimeth, has been one of the better performers in the stock market in the last one year. However, there is still so much the company needs to do to earn profits consistently.
Neimeth’s recently released H1 2020 results show a jump of 19.4% in revenue from ₦976 million earned in H1 2019 to ₦1.165 billion in H1 2020. While this is impressive, its comparative Q2 results (Jan-March ‘ 20) show a drop in revenue of 25.4% from ₦748.8 million earned in Q2 2019, to the ₦568.7 million revenue in Q2 2020. In similar vein, while its profit-after-tax soared by 939% from ₦5.447 million in H1 2019 to ₦56.596 million in H1 2020, its quarter-by-quarter results show a drop of 118%. While there is a truth that some months are better performers than others, Neimeth’s extreme profit jump in the half-year results juxtaposed with the more-than-100% drop in the first quarter of this year, reveal wide-gap volatility in its earning potential. Its revenue breakdown attributes the quarter-by-quarter drop in revenue to a comparative drop in its ‘Animal Health’ product line by a whopping 897.42%. The ‘Pharmaceuticals’ line also only experienced a marginal jump of 2.57%.
Full report here.
Current & Post-Covid-19 Opportunities
A 2017 PWC report had revealed that by 2020 the pharmaceutical market is expected to “more than double to $1.3 trillion. Mckinsey had also predicted that come 2026, Nigeria’s pharma market could reach $4 billion. The positive outlook of the industry is even more so, following the disclosure by the CBN to support critical sectors of the economy with ₦1.1 trillion intervention fund.
The CBN governor, Godwin Emefiele, had stated that about ₦1trillion of the fund would be used to support the local manufacturing sector while also boosting import substitution while the balance of ₦100 billion would be used to support the health authorities towards ensuring that laboratories, researchers and innovators are provided with the resources required to patent and produce vaccines and test kits in Nigeria.
While manufacturing a vaccine for the Covid-19 pandemic might be nothing short of wishful, the pandemic presents a global challenge that businesses in the healthcare industry could leverage. Through strategic R&D, it could uncover a range of solutions, particularly those that involve the infusion of locally-sourced raw materials.
In order for the company to attain sustainable growth, it needs to come up with structures and systems that are dependable, while also tightening loose ends. One of such loose ends is its exposure to credit risk. It’s Q2 2020 reports reveal value for lost trade receivables of N693.6 million carried forward from 2019. To this end, it notes that while its operations expose it to a number of financial risks, it has put in place a risk management programme to protect the company against the potential adverse effects of these financial risks.
At the company’s last annual general meeting (AGM), the managing director, Matthew Azoji, had also spoken on the company’s efforts to gain a larger market share through its initiation of bold and gradual expansion strategies.
The total revenue growth and profitability of the half-year period undoubtedly signals a potential in the company. However, we might have to wait for the company’s strategies to crystalize and attain a level of consistency for an extended period before reassessing the long-term lucrativeness of its stock or otherwise. That said, it certainly should be on your watchlist.