“We penetrated deeper and deeper,” Charles Marlow recollects of a journey into Africa. The fictional sailor appears in Joseph Conrad’s 1902 novel Heart of Darkness, a critique of colonial exploration in Africa. Marlow’s phrase might also be used to describe China’s engagement with the same continent in the past two decades. Since the formation of the Forum on China-Africa Cooperation in 2000, the Chinese government, its banks and the nation’s contractors have lent an estimated $143 billion to over 50 African states (as of 2017). But the Chinese involvement in Africa goes beyond roads, bridges, airports, power stations and railways. It is also supplying affordable consumer goods, such as mobile phones that are proving indispensable to the continent’s burgeoning digital economy. This business is flourishing – so much so that a key industry player successfully listed on Shanghai’s new STAR Market this week. Backed by NetEase and Singapore’s sovereign wealth fund GIC, Transsion surged 64% from its offer price on its debut on Monday (we first mentioned the company in early 2018; see WiC402). Its market value is now Rmb46.2 billion ($6.5 billion).
Investors’ enthusiasm for Transsion can be gleaned from its bookbuilding process, which saw its shares heavily oversubscribed. That enabled the phone maker to price its initial public offering at a trailing earnings multiple of 42.8 times, compared with Apple’s 18.98 times or its local rival Xiaomi’s 17.8 times (in terms of its forecast earnings for the next four quarters).
Much of Transsion’s appeal is because of its dominance in Africa’s mobile market, which is still transitioning from traditional feature phones (think of those Nokia phones from the nineties) to smartphone devices. Through its trio of brands Tecno, Infinix and Itel, the Shenzhen-based firm commanded 49% of the African pie last year, versus Samsung’s 10% and Huawei’s 4%, according to US market researcher IDC. Although some of its devices were sold as cheaply as $9 (and none for more than $88), shipments of 124 million units last year helped the company rake in Rmb22.6 billion in sales. The firm has achieved compound annual revenue growth of nearly 40% since 2016.
Transsion’s ‘localisation’ strategy is widely cited, alongside low prices, as its key competitive advantage across Africa. On the hardware side, a number of its models come with multiple SIM slots as local users often need to switch between carriers to lower their expenses on out-of-network calls. Other features include long battery lives (up to 30 days of standby duration) and fast charging (a half-hour charge delivers seven hours of usage) which can matter in a continent with unpredictable power supply.
On the software side, Transsion has also tailored various mobile applications for locals, including news aggregation and live-streaming platforms. Its instant messaging tool Palmchat boasts over 140 million registered users, while Boomplay, a music streaming platform co-developed with NetEase (see WiC468), is the largest of its kind in Africa with 43 million active users.
Transsion was founded in Hong Kong in 2006 by Zhu Zhaojiang. Thanks to his 15% stake his net worth has surged to Rmb7.1 billion. A native of Ningbo, Zhu was previously a senior executive at Bodao, China’s largest mobile phone vendor between 2003 and 2005. It was the rise of low price copycat phones in China (known as shanzhai) that prompted Zhu to export the model to other emerging economies. Last year Africa represented 77% of Transsion’s overall revenues, with the rest coming from India, Bangladesh, Pakistan, Indonesia and Vietnam. In its second largest market India, it has to battle against various entrenched players from China such as Oppo, Vivo and Xiaomi.
But one of the most pressing concerns for investors is the currency risk the company faces. Due to a hedging loss of Rmb716 million in 2018, Transsion recorded a 2% year-on-year drop in net profit. Without that one-off loss, its bottom line actually increased 94.6% to Rmb1.2 billion. Another risk is litigation. Caixin Weekly reported on September 30 that telecom major Huawei was suing Transsion in Shenzhen for intellectual property theft. Huawei has remained silent about the report but the speculation has drawn attention to Transsion’s relative lack of patents, and the potential for IP challenges when it tries to make more sophisticated phones.
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