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A look at the secret behind Chinese companies’ success in Nigeria

China’s economic exploits across Africa have continued to fascinate observers.

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Behold! Some NSE’s oldest firms, A look at the secret behind Chinese companies’ success in Nigeria, These are the best Nigerian companies to work for according to Jobberman , How the Chinese are taking over Nigeria’s economy 

China’s economic exploits across Africa have continued to fascinate observers. Here in Nigeria, the Asian superpower has been able to successfully establish itself as an important ally, a situation that has resulted in some very positive outcomes.

One of the outcomes of the economic partnership between Nigeria and China is the growing number of Chinese-owned enterprises in the country. Typical examples include the likes of  Boomplay, Opera (and its many subsidiaries), and CWay among others.

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Focus on Boomplay’s success

The rate at which Chinese companies are expanding in Nigeria is something that should be emulated. As you may recall, Nairametrics reported last month that Boomplay was set to expand into some Francophone African countries. The move came after the Chinese-owned music streaming company had consolidated on its Nigerian operation, thanks to the millions of dollars’ worth of investment funding which it recently secured.

A look at the secret behind Chinese companies’ success in Nigeria

The company’s recent partnership with Warner Music gave it an edge over competitors by allowing it to bring international contents to Africa. This is part of the company’s strategic effort to become a one-stop-shop for local and global contents.

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The Opera family is also doing well

As you can expect, Chinese-owned companies in Nigeria specialise in offering solutions to basic Nigerian problems, thereby creating value in return. In the case of OPay, which is a subsidiary of Opera, the company has brought so much vigour into the Nigerian payment ecosystem within a rather short period of time.

[READ MORE: Quoted Companies post N4.2 trillion combined profits since 2015]

While its competitors like Paga and QuickTeller agents use kiosks and other means to remain visible, OPay developed “nearby agent”, an in-app feature for finding agents. It uses GPS to connect users with the nearest agents.

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Along with its components such as ORide (a bike-hailing service) and OFood, which specialises in food delivery, the company has continued to expand. In the meantime, the parent company (Opera), which was bought over by its current Chinese owners from some Norwegian owners in 2016, has continued to be the internet browser of choice for many Nigerians.

Other notable Chinese companies

In the same vein, CWay Nigeria Drinking Water Science & Technology Co. Ltd came into the Nigerian market in 1999. Although the Nigerian portable water industry was already saturated at that time, the Chinese-owned company was able to create a niche for itself. Since then, it has diversified its operation in Nigeria with the launch of several beverage brands, even as it has also expanded operations into five other countries including Kenya.

Let’s not even talk about the story of Huawei, the globally successful phone manufacturer and ICT infrastructure company which has long established its presence in Africa’s most populous country. Perhaps the success of Huawei in Nigeria is what motivated several other Chinese companies to set up shop here.

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A look at the secret behind Chinese companies’ success in Nigeria

Back to the issue at hand…

That said, it is important to note that the ability of these Chinese companies to meet basic needs in Nigeria is not necessarily the only factor behind their success. After all, there are many Nigerian businesses (with good business models) that are still struggling to survive despite many years of being in operation. Let’s not even talk about the thousands of Nigerian entrepreneurs with incredible business ideas whose businesses have yet to take off.

What secrets are the Chinese using? 

Well, apart from their viable business models, another thing that is really helping Chinese companies in Nigeria is easy access to funding. According to a report published by the Institute of Developing Economies, which is under the Japan External Trade Organisation, China’s financial institutions play an immense role when it comes to supporting Chinese businesses in Africa.

The likes of Industrial and Commercial Bank of China, the China Export-Import Bank, the China Development Bank, etc., are reportedly willing to stake parts of the huge financial resources at their disposal just to support Chinese enterprises in Nigeria and elsewhere.

“Critical to China’s economic successes in Africa has been the important use of the country’s state backed banking institutions. Under-pinning the aggressive buy-out of foreign resource companies, mineral and energy reserves and large institutional investment projects in the continents oil and infrastructure sectors, are a phalanx of state funding agencies supported by massive national reserves of accumulated liquidity of over US$2 trillion, ready to be shifted into the global market at a moment’s notice.”

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This is probably nothing new, especially to those in the know. However, it underscores a very important point – the fact that adequate funding is necessary for business growth and success.

[READ ALSO: Indigenous companies, Oando and JV Partner Promote Health Initiative in Kwale Delta]

A look at the secret behind Chinese companies’ success in Nigeria

What Nigeria should learn from this?

Again, let it be argued here that the greatest problem facing Nigerian entrepreneurship is not the dearth of viable business plans, but the absence of adequate funding. There are many business plans by Nigerians that could solve Nigeria’s problems. Sadly, not enough funds are readily available to finance these business ideas. Unfortunately, no business can succeed without adequate funding.

The issue of lack of adequate funding for Nigerian businesses by Nigeria’s financial institutions is so serious that majority of the country’s tech ecosystem is built almost exclusively with foreign capital. This situation has elicited concerns from stakeholders, with a Nigerian VC expert (Abasiama Idaresit) highlighting its problematics.

That said, it is high time Nigeria’s financial institutions began to try harder to provide financial support to Nigerian businesses. This is the only way they too can succeed like their Chinese counterparts. Already, the Central Bank of Nigeria has given the country’s lenders till next month to ensure that they maintain a loan-to-deposit ratio of 65%.

If this directive is strictly implemented by the CBN and adhered to by the lenders, it will go a long way towards ensuring that entrepreneurs in the country are availed access to finance. This will, in turn, enable them to grow/expand their businesses.

Patricia

Emmanuel covers the financial services sector for Nairametrics. Do you have a scoop for him? Well then, contact him via his email- [email protected]

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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.

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Why Insurance firms are selling off their PFAs

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.

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 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.

READ MORE: AIICO seeks NSE’s approval for conducting Rights Issue

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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.

 

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Patricia
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Nigerian Banks expected to write off 12% of its loans in 2020 

The Nigerian banking system has been through two major asset quality crisis.

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Nigerian Banks expected to write off 12% of its loans in 2020 

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 disbursedRising 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 2022the highest of all the previous NPL crisis faced by financial institutions within the nation.  

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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.  

READ MORE: What banks might do to avoid getting crushed by Oil & Gas Loans

Background  

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Over the past twelve years, the Nigerian banking system has been through two major asset quality crisisThe 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.  

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 READ MORE: Ratings firm explains why bank non-performing loans could be worse than expected

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. 

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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 2022a 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 occurrencethe 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 2024It 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 quicklythe 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 2024Average 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.   

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Patricia
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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. 

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Even with a 939% jump in H1 profit, Neimeth still needs to build consistency 

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. 

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READ MORE: Covid-19: List of pharmaceutical firms that will receive grants from the CBN

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. 

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READ MORE: Nigeria records debt service to revenue ratio of 99% in first quarter of 2020.

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.  

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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. 

READ MORE: Airtel to acquire additional spectrum for $70 million 

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.  

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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.  

Patricia
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