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Rong360 on the potential of China’s fintech industry

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The growth in China’s financial technology industry may look like it’s peaking given the wide usage of internet payments, but the sector has yet to reach its full potential, one fintech firm told CNBC on Monday.

The world’s second-largest economy already has one of the highest fintech adoption rates, according to a 2017 report by consultancy EY. The report found that 69 percent of digitally active consumers in China use fintech services, compared to 33 percent in the U.S.

But a large portion of the current growth is driven by payments, David Ye, co-founder and chairman of Rong360, told CNBC’s Akiko Fujita at the Boao Forum in Hainan, China.

“China has been leading in some fintech space such as payments. China is way ahead of other leading countries in payments with 60 or 70 percent of penetration,” Ye said.

“However, in other parts of the fintech space, for example access to credit online, credit cards, credit infrastructure or access to insurance, are still under penetrated and have lots of room to grow. That’s why we expect the whole sector to grow double digit, in some sectors maybe high double digit in the next five, ten years to come,” he said.

The market size of China’s fintech industry already exceeded 12 trillion yuan ($1.9 trillion) at the end of 2015, with payments contributing close to 90 percent of that value, according to a report by McKinsey and Company.

The growth potential has fueled the expansion of a number of Chinese fintech companies. Multiple fintech firms, including Rong360’s subsidiary Jianpu Technology, launched initial public offerings in the U.S. over the past year.

“We see more than consumers and SMEs need access to credit, they want to buy insurance, they want to better manage their wealth, they want to get their first cars — that’s the biggest driver,” Ye added.

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Small and quiet, with no bankers

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Apple CEO Tim Cook

Spencer Platt | Getty Images

In February, Apple CEO Tim Cook told shareholders that the company had bought about 100 companies in the past six years. That works out to the iPhone maker buying a company every three to four weeks.

The statistic gives the impression of a dealmaking machine. But only a handful of those deals have been big splashy transactions like the $3 billion deal for headphone maker Beats Music in 2014. The vast majority have been for significantly smaller firms without a major public profile.

While big tech rivals routinely strike multi-billion dollar deals, Apple has followed a different strategy. It’s refined the “acquihire,” or strategic purchase of a small company primarily for its staff.

People who have joined Apple through an acquisition and participated in the acquisition process told CNBC that Apple’s acquisition strategy focuses on getting talented technical staff from smaller companies, often valuing those companies in terms of the number of engineers working there, and quickly and quietly integrating them into teams at Apple.

Apple has used acquihires to speed expansion in fields where it needs technical talent or it sees a specific technology that could set it apart from its rivals. While the acquihire is a common technique among big tech companies, Apple’s near-exclusive focus on smaller transactions sets it apart.

“We have seen companies such as Google, Facebook, Intel and Amazon going for many billion-dollar deals,” said Nicklas Nilsson, analyst at GlobalData, a firm that tracks M&A transactions. “Apple is buying more smaller startups while others spend more on established players.”

Cook said in an interview with CNBC in 2019 that the company’s approach is to identify where the company has technical challenges and then to buy companies that address them. One example was the acquisition of AuthenTec in 2012, which led to the iPhone’s fingerprint scanner. “We bought a company that accelerated Touch ID at a point,” Cook said.

Other past acquisitions have become features in Apple products. In 2017, Apple bought an iPhone app for power users called Workflow, which is the basis for Shortcuts app. In 2018, it bought Texture, which reemerged as Apple News+, its subscription news service. Even Siri, its voice assistant, was the result of an 2010 acquisition.

Apple has gone on sprees picking up multiple firms in augmented and virtual reality, artificial intelligence, maps, health, and semiconductors, presaging future products or features.

Buying technical staff

Many of Apple’s deals have flown under the radar. According to a CNBC analysis of public reports, Apple has purchased 55 companies since January 2015, in line with a congressional report from last year and significantly lower than Cook’s own tally.

People who have participated in Apple’s acquisition process say Apple expects discretion — unsurprising given how secretive the company is. Apple generally doesn’t announce small acquisitions and warns staff at the acquired companies not to update LinkedIn profiles to say they were acquired by Apple. If a member of the media gets wind of a deal and asks, Apple sometimes confirms deals with a boilerplate phrase that it “generally does not discuss” its purpose or plans for acquired companies.

One person who sold a company to Apple said that after news of his deal broke, he could not respond to friends and family congratulating him. He asked not to be named because he is under non-disclosure agreements.

While every deal is different in its specifics, there are a few commonalities to Apple’s approach. Apple is generally not interested in continuing the acquired company’s line of business, and forces acquired units to discontinue future products or shed customers. The revenue generated by smaller companies is usually immaterial and unimportant to Apple, which reported $274.52 billion in sales in its fiscal 2020.

Apple is particularly interested in technical staff, who are often called “individual contributors” in Silicon Valley jargon. It’s less interested in hiring sales or support staff, according to people who have participated in the process. Apple has put conditions on transactions that a certain number of technical employees must join Apple or the deal would fall through.

These technical employees get what are called “golden handcuffs,” or large stock packages that vest over three or four years. Acquired staff also get paid for their equity in the company that was acquired. Some people familiar with Apple’s process say that it assigns value to companies based on the number of technical employees, with a price tag of around $3 million per engineer, instead of basing it on the start-up’s revenue or fundraising track record.

No bankers

Often, Apple’s acquisition process starts after a demo to technical teams at Apple. Apple frequently invites other companies to show technology that Apple might want to partner with or license, and sometimes these meetings kick off an acquisition process.

When a manager on those teams decides they want the technology or talent, they bring it up to the M&A team, which acts as a service organization helping Apple’s engineering groups close the transaction smoothly, a person familiar with the process said.

Once the transaction is completed, Apple has a team that focuses on integrating the new employees into the specific technical group where they’ll contribute. Individual contributors who join Apple through an acquisition often stay past their first vesting cliff, meaning that their first large chunk of Apple stock has been granted to them, and can stay with the company for years, signaling an effective integration.

For smaller deals, Apple doesn’t typically deploy bankers. Apple’s M&A team does due diligence, interviews team members and keeps the transaction on track to close. One person who declined to be named because of NDAs said that Apple’s team was unusually trustworthy and professional compared to other companies he had engaged in talks with, although they knew what they wanted to pay for the company when the process started, he said.

A closer look at what Apple is buying can reveal where the company is expanding quickly. One field is in augmented and virtual reality technologies, where Apple has bought 12 companies since 2013 as it builds out the Technology Development Group (TDG) division, which is working on head-worn computers. Apple is working on a high-end VR headset for release in 2022 and more advanced, lightweight glasses in 2023 or later, according to reports.

For example, in 2018 Apple bought Akonia Holographics, which worked on smart glasses lenses. Last year, Apple bought NextVR, which wrangled content for virtual reality headsets, and Spaces, a spin-off out of DreamWorks Animation that built location-based virtual reality experiences.

More recently, Apple has been snapping up firms working on artificial intelligence, buying 25 companies in the space since 2016, according to GlobalData.

Skilled workers in AI can be difficult to hire because many companies want them. Apple is also working to improve its Siri voice assistant to compete with Amazon’s Alexa and Google‘s assistant.

Last year, Apple bought a Seattle-based firm called Xnor.ai for a reported $200 million. It followed that up by buying Ireland’s Voysis, which worked on understanding speech. In 2019, it bought Pullstring, which made tools to build talking toys like Barbie.

Apple could certainly go for bigger game with more than $200 billion of cash and liquid investments and over $80 billion in annual free cash flow. Wall Street bankers have encouraged a big purchase in the past, and Apple did spend $1 billion to buy Intel‘s wireless modem business, including 2,200 employees, in 2019. That year, Apple promoted its head of M&A, Adrian Perica, to its executive team reporting to Cook. Still, Apple has been judicious, leading many financiers to believe that a big acquisition is not part of the company’s DNA.

“We’re not afraid to look at acquisitions of any size. But our priority is on valuation and strategic fit, and our focus is generally going to be on small, innovative companies exploring technologies that complement our products, and help push them forward,” Cook said at the shareholder meeting. 

Apple declined to comment for this story.

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Why it’s being held earlier in the summer

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Amazon confirmed on Thursday that its annual Prime Day deals event will be shifting earlier this year, as the e-commerce giant looks to boost spending in what is normally a slower time in the retail calendar.

The company has yet to confirm the specific date. The two-day shopping extravaganza originally has been held in July, but Amazon said it will now take place in its second quarter, implying a June event.

Amazon has provided a second-quarter outlook for revenue of $110 billion to $116 billion — which surpassed Wall Street’s projection of $108.6 billion, as it included an expected bump from Prime Day.

During an earnings conference call, Chief Financial Officer Brian Olsavsky said Amazon intended to hold Prime Day earlier in the year in 2020, but those plans were thwarted by the Covid pandemic. Instead, the event was delayed until October, resulting in an earlier-than-ever kickoff to the holiday shopping season.

“There’re a number of factors,” Olsavsky said about why Amazon is moving the event up. Among those reasons, the CFO cited the Olympics taking place in July, as well as it being a “vacation month” for many families.

“It might be better — for customers, sellers and vendors to experiment with a different time period,” he said. “We experimented the other way … in 2020, by moving it into October. But we believe that it might be better timing later in Q2. So that’s what we’re testing this year.”

In past years, Prime Day has prompted retailers like Walmart, Target and Kohl’s to offer competing promotions. And it likely will do so again.

“It creates excitement out of nowhere, right out of a vacuum,” Marketplace Pulse founder and CEO Juozas Kaziukenas said about Prime Day.

“People will just buy more things … and maybe it is a good time to do it in June, earlier,” he said. “Because there’s a lot of excitement about things getting back to normal, and people probably are going to be buying more clothing items and more travel-related items — that they have not been buying for a very long time.”

In the past, Amazon has used Prime Day to push and promote its fashion offerings, a growing part of its business. This could be its biggest opportunity to do so, as many Americans are emerging from their pandemic cocoons and are refreshing their wardrobes.

The new timing could also prompt an earlier kickoff to back-to-school shopping for many parents. After the winter holidays, the back-to-school season is the second-busiest retail occasion.

By moving Prime Day into the second quarter, Amazon also could be looking to soften the comparisons it will face as it laps the stay-at-home lockdowns of last spring, when business boomed. In 2020, Amazon’s second-quarter revenue surged 40% to $88.91 billion, thanks in large part to shoppers’ stockpiling during the health crisis.

“They’ve got a big number to beat,” said Neil Saunders, managing director of GlobalData Retail. “All retailers are going to suffer from this. It’s not manipulation, but it’s definitely putting the trade where it needs to go to make the numbers look very positive.”

Other retailers, such as Walmart and Target, also saw a second-quarter surge in sales since they were deemed essential retailers and remained opened last spring. Others had to shut down stores temporarily due to Covid restrictions.

Amazon didn’t disclose the amount of sales it rang up on Prime Day last year, but it said third-party sellers on its marketplace earned more than $3.5 billion, an increase of nearly 60% compared with 2019 and a record for the small and midsize businesses that make up the marketplace.

“Prime Day is kind of a fake holiday,” Kaziukenas said. “But I think it has enough excitement and enough marketing that whatever they put out, will sell.”

—CNBC’s Annie Palmer contributed to this reporting.

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Berkshire’s annual meeting is Saturday with Buffett and Munger together again

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Warren Buffett (L), CEO of Berkshire Hathaway, and Vice Chairman Charlie Munger attend the 2019 annual shareholders meeting in Omaha, Nebraska, May 3, 2019.

Johannes Eisele | AFP | Getty Images

Warren Buffett will kick off Berkshire Hathaway‘s annual shareholder meeting on Saturday riding high, with shares of the conglomerate at a record and its myriad of operating businesses and equity investments primed to benefit from the U.S. economy reopening from the pandemic.

The event will be held virtually (1:30 pm ET) without attendees for a second time because of Covid-19. This year, however, the 90-year-old Buffett is taking the meeting to Los Angeles so he can be by 97-year-old Berkshire Vice Chairman Charlie Munger’s side once again. Munger resides in Los Angeles and missed the last annual meeting due to travel restrictions. It will be the first time that the annual meeting will take place outside of Omaha, Nebraska.

While “Woodstock for Capitalists” will be missing the capitalists once again, the tone of the meeting may more likely resemble the meetings of old with shareholders clamoring for Buffett’s outlook on the world following an unprecedented year.

“I hope there would be a pretty sharp contrast in the overall demeanor of the folks at Berkshire,” said Cathy Seifert, a Berkshire analyst at CFRA Research. “Last year, there was a degree of an alarm just because this was an event that was very difficult to price. It was kind of written all over his face. This annual meeting, the tone from an underlying operational perspective should be more relaxed.”

(You can view last year’s annual meeting and the others at the Warren Buffett Archive.)

Berkshire’s other vice chairmen, Ajit Jain and Greg Abel, will also be on hand to answer questions during the 3½-hour event. Berkshire’s B shares were up more than 1% on the week, bringing their 12-month gain to 50%.

Here are some of the big topics shareholders will want answers on:

  • Airlines: His thoughts on the industry after revealing at last year’s meeting he sold his entire stake (with the shares then subsequently roaring back)
  • Deploying the $138 billion cash pile: Why he’s been buying back a record amount of Berkshire’s stock instead of making one large acquisition and what his plan is going forward
  • Market outlook: His thoughts on the stock market’s overall valuation following the pandemic comeback
  • Bubbles?: Cryptocurrencies and the other possible market manias that have popped up amid the huge rush of retail investors into markets
  • Life after Buffett and Munger: Berkshire’s succession plan

Dumped airlines

At the last annual meeting, Buffett revealed Berkshire sold the entirety of its equity position in the U.S. airline industry. This included stakes in UnitedAmericanSouthwest and Delta Air Lines, which were worth north of $4 billion combined.

“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way,” Buffett said at the time. “I don’t know if Americans have now changed their habits or will change their habits because of the extended period.”

The sale conveyed a pessimistic view on the industry from the legendary buy-and-hold investor. Many Buffett watchers were left disappointed, however, as shares of those carriers soon embarked on an epic rebound, rallying triple digits from 2020 lows. Even former President Donald Trump weighed in on the trade back then, saying that Buffett has been right “his whole life” but made a mistake selling airlines.

“He might acknowledge that the velocity of this recovery was greater than anticipated,” CFRA’s Seifert said. “The airline disposal may have been a function of their belief that what’s going on in the airline industry may be secular and not cyclical. That’s the one fine distinction that investors may want him to make.”

While airline stocks have rebounded drastically over the past year, many argue that the industry may have indeed changed fundamentally due to the economic fallout and the road to a full recovery remains bumpy. United Airlines said this month that business and international travel recovery is still far off even as the economy continues to reopen.

“He may still be right about the airline industry with travel coming back slowly and there being too many planes,” Edward Jones analyst James Shanahan said. “Arguably he could still be right about that, but he’s certainly wrong on the stocks.”

New stock moves

Berkshire bought back a record of $24.7 billion in its own shares last year. Buffett also did some bargain-hunting amid the market comeback, taking sizable positions in big dividend payers Chevron and Verizon

Apple was still the conglomerate’s biggest common stock investment as of the end of 2020. Buffett’s conglomerate also appeared to dial back its exposure to financials. Berkshire exited its JPMorgan Chase and PNC Financial positions at the end of last year, while cutting the Wells Fargo stake was cut by nearly 60%.

“When you think about the legacy of Berkshire Hathaway and all the operating businesses, including railroads, manufacturing, retail, utilities, it’s all old economy type companies,” Shanahan said. “The way the portfolio is comprised now after the selling of airline stocks and selling of the financial stocks, together with huge performance in Apple, it looks a lot more new economy now.”

Shanahan estimated that Berkshire bought back another $5 billion of its own shares in the first quarter, based on proxy filings.

‘Elephant-sized’ deal?

The conglomerate was still sitting on a huge cash war chest with more than $138 billion at the end of 2020. Buffett has yet to make the “elephant-sized acquisition” he’s been touting for years. At last year’s meeting, the legendary investor gave a simple reason for his inaction.

“We have not done anything because we haven’t seen anything that attractive,” Buffett said. “We are not doing anything big, obviously. We are willing to do something very big. I mean you could come to me on Monday morning with something that involved $30, or $40 billion or $50 billion. And if we really like what we are seeing, we would do it.”

The deal-making environment has only become all the more competitive over the past year with the meteoric rise of SPACs, or special purpose acquisition companies. More than 500 blank-check deals with over $138 billion funds are seeking their target companies currently, according to SPAC Research.

“This is a significant company with a significant cash position. Investors have the right to know what they intend to deploy the cash,” Seifert said. “They are entitled to have more than just an excuse. Investors are going to start to grow a bit weary if it’s just the same old story. But the stock has recovered nicely, so they are not going to be grumbling too much.”

Succession

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