The Weekly Horse: My thoughts on iQiyi (the Netflix of China)

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All Financial Horse does in his free time during the week is read financial news. With this new initiative, hopefully some good can come out of it. During the week, I post articles that I enjoyed on the Financial Horse Facebook group (do join if you want a sneak peak), and every Sunday I will collate the top links of the week. I also take the opportunity to address queries from readers, or share any thoughts that I have for the week. If you enjoy this post, do share your thoughts in the comments below!

iQIYI And Chill: The ‘Netflix Of China’ Can Be Your Next Multibagger

A couple of readers have brought iQiyi (NASDAQ: IQ) to my attention recently. My thoughts on this “Netflix of China”:

What I like

Favourable demographics – The China market has unbelievable growth potential, with a massive population and a burgeoning middle class. If iQiyi can capture this, there is a lot of upside here.

Fast growing industry – I think video streaming is still in its infancy. There is a lot of potential to grow user penetration, raise subscription rates, and create original content. Video streaming has the potential to disrupt the traditional TV or movie industry.

Favourable valuation – It’s rare to see companies IPO at such an early stage these days. Companies are usually backed by private capital via PE/VCs up to a very advanced stage before they do a massive IPO. iQiyi’s market cap of 6 billion (versus Uber’s 72 billion or Grab’s 10 billion) reflects this. With iQiyi, you are getting an early stage company with favourable valuations, but you are also taking on the execution risk.

What I am concerned with

Execution Risk – China is a hypercompetitive market and iQiyi’s biggest competitors are Tencent Video (Tencent) and Youku Tudou (Alibaba). Whether iQiyi (Baidu backed) can win against these juggernauts remains to be seen.

Political Risk – In China, business and the state are intertwined. iQiyi has to remain in the ruling party’s good books for its business to thrive. Given that they are Baidu backed, this is probably fine, but when your competitors are Tencent and Alibaba, you never know.

Trade war – The ongoing trade war between US and China has not been resolved. In the short term, this can create negative pricing pressure.

Post IPO volatility – iQiyi raised $2.25 billion off a 5 billion market cap. That’s a lot of shares to go around, and I suspect there may be a lot of volatility in the next few months post IPO.

Additional fundraising – Video Streaming is a winner takes all battle, as the winner has massive economies of scale, and marginal costs to add new subscribers.  iQiyi had to IPO to raise the necessary funds to keep up with its competitors, while its competitors can simply tap cash from their Sponsor. iQiyi will need to raise a lot more money going forward to fuel its growth, and if this is done via equity, it can be potentially dilutive.

What I am less concerned with

VIE Structure – As I mentioned in my Alibaba article, I am less concerned with the VIE structure. I don’t see the Chinese government disturbing this too much, as the potential consequences for Chinese companies globally will be devastating.

Closing Thoughts

I personally quite like this one. It’s a very early stage company, and its rare for retail investors these days to have the chance to participate in a tech company’s growth so early on. I anticipate massive volatility and execution risk going forward, but the risk-reward return looks attractive to me. I may consider opening a position.

Why Winners Keep Winning – On Cumulative Advantage and How to Think About Luck

Great article that really illustrates how important starting conditions are when determining long term outcomes. A small advantage (eg. parents funding your education, a helping hand to pay the deposit on your house) can have a massive impact on your future financial well-being.

“We like to think in America that most things come down to hard work, but a few lucky (or unlucky) breaks early on can have lasting effects over decades. If we look at luck in this way, it can change the way you view your life…”

Buyback Top or just Needless Worry

Debunking the myth that record share buybacks are signalling a market top

“It makes little sense to look at buybacks in absolute terms, but instead we should be focusing on buybacks relative to total market capitalization.

Suddenly, it’s not nearly as scary. In fact, 2017 was the second lowest amount of buybacks as a percentage of market capitalization.”

Investing and the Art of Cloning

Quite a thought provoking article on the pitfalls of blindly copying the investment strategy / purchases of a more prominent investor. Something that I am also guilty of myself.

“Choose the right people, then clone their behaviour, thinking, process, and orientation – and never blindly their ideas – and you will become like them over time.”

Does WeWork at all

It’s a permabear site (like zero hedge), but I found this critique of WeWork really insightful.

Unlike ride sharing, the coworking business model requires signing onerous long term leases with existing property developers. This really drives up the fixed cost, and a small downturn in startups can be devastating for these players. A 60% occupancy just to break even can be tough to achieve.


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2 COMMENTS

  1. Hey Financial Horse, did you buy into this stock? The price of this counter has risen 50% since you published this article. Nice spotting!

    • Hey James, unfortunately I never got around to buying it as I was tied up with work matters. I think there is an important lesson to be learnt here about how in life, sometimes you just have to get down and get stuff done. 😉

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