Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Pokémon GO - A Thought Snack IIa: What's It Worth To Nintendo? We Have Some Minimal Clarity

Pokémon GO - A Thought Snack I: Origin Earth (Week 1)

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/5415" target="_blank" data-smartkarma-citation="entities:5415:1">Nintendo</a> shares are up 90% in the last 8 trading days since the day before the launch of the newest product with Nintendo content. The market cap has gained $15bn+. It has been one of the top-traded stocks every day for the past several in Japan and has been as much as 15% of the Japan market's volume in the past week. Thursday and Friday saw 15% of Nintendo's shares outstanding trade and for the week it was 56%.Something is going on. As every knows by now, that something is Pokémon GO. This new game introduced by Niantic Labs (hereafter "Niantic") and The Pokémon Company (in which Nintendo owns a stake) was launched in the US, Australia, and New Zealand on July 6th and by the end of Day 1 was the top free app, and by Day 2 was the top grossing app in the Apple Appstore. By the end of Day 2, 5% of Android phones in the US had the download. By Day4, usage was topping twitter in the US, and by Day5 use of Google Maps by Pokémon GO was higher than for Google Maps itself. Last Wednesday saw the launch in Germany, Thursday in the UK, Friday in Italy, Spain, and Portugal. Saturday saw the launch in 26 European countries (and there are reports as of Sunday afternoon 3:30pm E.S.T (US) that Canada has just launched on the Apple AppStore, but the server went down almost immediately). Pokémon GO is a phenomenon, soon to be a global one, and analysts and observers expect it to be the top-grossing mobile game ever globally. And those prognostications started after less than a week and just three markets. In short, it's a hit. But analysts quoted in the press are all pretty blasé about its impact on Nintendo. Many see the impact on Nintendo's finances as extremely limited. Almost all of them claim the price rise in Nintendo completely overdone.What does the money look like? I explore below. MonetizationMonetization is easy. Almost every freemium game out there is based on allowing players to 'work' for currency (points, coins, whathaveyou) and spend time, waiting for points to accrue, or to shell out a little money to cut out the waiting time or the effort (called "training" in Pokémon GO). Pokémon GO is no different.Interestingly, trainers can also buy a special "Lure" in the game to attract a large number of Pokémon to a place in a short time period. Astute restaurants and shops are already buying Pokécoins to obtain Lures in order to bring Pokémon to their business locations to lure potential Pokémon GO-playing customers. A New York Post <a href="http://nypost.com/2016/07/12/pokemania-runs-wild-through-city-causing-crime-accidents/" target="_blank">article</a> looked at L'Inizio Pizza Bar in Long Island City, Queens which paid $10 for Pokécoins to have a dozen monsters lured to the store and they saw business pop 75%. You can be sure others have taken note. [Unfortunately, there are also reports of people buying Lures for more nefarious purposes - like robbing Pokémon GO players. One could easily imagine worse, which is why the Terms of Service seem to make it incumbent on parents to accompany children under the age of 13].SponsorshipNiantic's Ingress also has a corporate sponsorship system where it can designate a sponsor's stores or vending machines as spots in the game. Ingress has 8 corporate sponsors including Softbank. In a Reuters interview July 15, John Hanke said they are considering doing the same for Pokémon GO. Some corporate sponsors pay for locations in the game. These sponsors appear to include Vodafone (Germany, at the least), Jamba Juice, Duane Read, and Zipcar. In the Ingress game, sponsors pay per customer visit (tallied by GPS geo-location visit). Sponsors also attach their name to in-game equipment such as the "<a href="https://www.smartkarma.com/entities/21431" target="_blank" data-smartkarma-citation="entities:21431:1">AXA</a> Shield", the "<a href="https://www.smartkarma.com/entities/1040" target="_blank" data-smartkarma-citation="entities:1040:1">Lawson</a> Power Cube", the "<a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank</a> Ultra Link" and the <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">MUFG</a> Capsule", all of which are Very Rare and all of which perform significantly better than the nonsponsored versions which users can collect over time.In an interview with the FT earlier this week, John Hanke indicated corporate sponsorship in the form of 'sponsored locations' was coming. Does this matter?  Yes. If Niantic limits it to 8 sponsors like in Ingress, that will disappoint a lot of people but corporate sponsors will get around this by buying lures. Lures are cheap and do much the same thing. But if you as a sandwich shop think you will boost your customer base by $20 of profit by buying $10 of Lures, you'll do it. It's a decent margin. And it's relatively immediate. In a large city could have thousands or many tens of thousands of convenience stores, gas stations, delis, bars, newsstands, restaurants, hotdog vendors, etc which will set up Lures 2-3 times a day at the high points of the day. That could be $20-30/day times thousands upon thousands. For one city. Multiplied by all the major urban areas in the world. One example:  New York City has 24,000 restaurants, 240 performance venues, 1500-2000 bars at any one time, 834 square kilometers of parks, forest, and wildland (1700 parks), 150 museums, 400 art galleries, 79 library branches, 270 Starbucks. And there are tens of thousands of stores catering to the 50+ million domestic and international tourists welcomed in the city every year. How many of those places would spend US$10/day, or more, to get people to visit their store? Remember one is not paying $10 for a visitor, one is paying $10 for the hordes.So HOW MUCH is all that worth?<ul><li>The easy answer is "Who knows!?"  But we can have a crack at it.</li><li>One reasonable starting point comes from a quote all over the media in the last several days from Australian investment bank M--q--rie analyst David Gibson. He assumed the revenue split was 30% to Apple/Google (AppStore owners), 30% to Niantic, 30% to The Pokémon Company, and 10% to Nintendo. One assumes the 10% to Nintendo is because of Pokémon character rights ownership as <a href="http://www.pokemon.com/us/legal/" target="_blank">described</a> on the pokemon.com website.</li><li>If we assume those ratios, we also have look-through data. As noted above, Nintendo owns 32% of the voting rights in The Pokémon Company, and both TPC and Nintendo own stakes in Niantic (I will assume 7% each but I have zero hard evidence of that - see the full calc in the <a href="https://www.smartkarma.com/insights/pokemon-go-a-thought-snack-i-origin-earth-week-1" target="_blank">first Thought Snack</a> or below).</li><li>On a look-through basis therefore, Nintendo would have 10% of revenue, plus 32% of 30% (roughly another 10%) plus 7% of 30% (from ownership in Niantic), plus 32% of TPC's 7% stake in Niantic. Going a little deeper, Nintendo also owns 10% of Creatures Inc, which was founded by Tsunekazu Ishihara (currently also CEO of TPC) which is one of the other two owners of The Pokémon Company. The look through on that would be (assuming the split is 34/34/32 at TPC) would be another 3% of TPC which would add another 1% of gross Pokémon GO revenues. All told that is just under 24%. David Gibson comes up with a number of "Around 20%" quoted in one article and "about 13%" in another.</li><li>Separately, another analyst from a four-letter-named broker (perhaps a Currently Large Securities Agent) has said that conversations with Nintendo in the past have indicated some royalties are paid on Pokémon games but that direct revenue is low. He does not suggest there is much juice in it for Nintendo other than reviving the brand. </li><li>If one looks at the <a href="https://www.nianticlabs.com/terms/pokemongo/en" target="_blank">Terms of Service</a> for Pokémon GO, there is no mention of Nintendo, though TPC and its international subsidiary are mentioned a few times. Most all reports I have seen suggest that Nintendo was in fact a bystander in this process though was certainly notified and kept up to date of progress because Nintendo is the producer of the Pokémon GO Plus gadget.</li><li>How much does it cost Nintendo to be involved? Almost nothing. Will it make any money from the $35 Pokémon GO Plus gadget? Probably a lot. This gadget is sold by Nintendo only, and one might imagine it sells several tens of millions of units. Assuming it costs very little (Bluetooth chip, LED, plastic case, battery, tiny processor - probably doesn't cost more than $5 to make), operating profits could be well over $100mm, but really that is tiny for a company now worth $35bn in market cap.</li></ul>So what's a good game worth in gaming revenue?<ul><li>If you look at the top-grossing games of 2015 (generally thought to be Game of War, Clash of Clans, Candy Crush Saga) they grossed $1.0-1.5mm/day by mid-year last year (though slowed into year-end from the stats I see). </li><li>Reports from various analysts peg Pokémon GO US-only revenue at $2mm/day early this week to well over $6mm/day by weekend. Historically, Japan and US gross revenues per #1-5 games are not too dissimilar. Germany is about a tenth of Japan or the US. Asia outside Japan is almost twice the size of the US market according to the <a href="https://newzoo.com/insights/articles/the-2015-gmgc-global-mobile-games-industry-whitebook-is-now-available/" target="_blank">2015 GMGC Global Mobile Games Industry Whitebook</a>.</li><li>Iterating that out over 200 countries by end-August would get you to most of the global market except possibly for China and/or Korea based on lack of Google Maps availability (S Korea has some and John Hanke suggested it was technically possible to adapt; China would be more of a problem. Assuming South Korea can be solved, that still leaves roughly 85% of the global mobile game revenue wallet to be tapped (the US is a bit under 20% in 2014 and estimates for 2015). </li><li>It was reported Monday the 11th that analytics company (and AppStore optimization company) SensorTower had estimated 7.5mm downloads (SimilarWeb reported that fully 5% of Android phones in the US had downloaded the game in the first two days) and expected the game was earning US$1.6mm/day only off iOS. Given iOS is a bit less than half of the market for smartphones, one might reasonably expect the run-rate Monday was close to $3mm/day. Since then US downloads have basically doubled. </li><li>SuperData had the total spend across both platforms at US$14mm as of the 12th, 6 days in. It has undoubtedly gone higher since.</li><li>If we assume that European monetization rates and penetration will be slightly lower than US rates, and well below Japan and Korea rates, but that popularity will be largely global, then a market size of $20+mm of revenue per day by one month in is not out of the question.</li><li>And it will go higher still.<ul><li>The user count is there.  Though the US is the largest market, it is just the start. If I look at the largest user-supported Ingress fan site I know, there are 4.7 million portals registered (i.e. 80% of the 5.9 million in existence) in 127 countries and municipalities. Of those, 1.43mm or just over 30% are in the <a href="https://ingress-intel.com/country/united-states/" target="_blank">US</a>, Australia, and NZ (the three markets which got the initial launch of Pokémon GO). The top 20 markets were about 80% of the total. </li><li>The content is there. Pokémon GO is launching with 150 monsters. There are a total of 570 monsters in the existing Pokémon canon and more are coming later this year with Pokémon Sun and Moon.</li><li>The content is only part of it. The Pokémon content is actually an excuse to get out there and do something with friends, families, kids, etc. </li><li>The game WILL evolve. I expect story lines, clubs, official events and sponsored events, </li></ul></li></ul> While it is early days and it is almost ludicrous to suggest one knows how this will pan out 2yrs in, we do what we must. My first cocktail napkin crack at suggested Pokémon GO revenues for Nintendo comes to a run-rate of $1bn-1.5bn a year from equity affiliate earnings and royalties based on a popular idea of the split, and perhaps $200-300mm in OP in Year 1 (assuming manufacturing can be solved) from the Pokémon GO Plus gadget.My early arithmetic suggests that this could be the industry's first $5bn/year grossing game. Will the game last? I think so. But that means looking into the future, which is the next Insight (after this one).In the meantime, for even more discussion about the economics to Nintendo and its relations, subscribers can continue below the fold....  And for those of you who aren't Smartkarma subscribers but want more info, hit the button below...

Nintendo shares are up 90% in the last 8 trading days since the day before the launch of the newest product with Nintendo content. The market cap has gained $15bn+. It has been one of the top-traded stocks every day for the past several in Japan and has been as much as 15% of the Japan market's volume in the past week. Thursday and Friday saw 15% of Nintendo's shares outstanding trade and for the week it was 56%.Something is going on. As every knows by now, that something is Pokémon GO. This new game introduced by Niantic Labs (hereafter "Niantic") and The Pokémon Company (in which Nintendo owns a stake) was launched in the US, Australia, and New Zealand on July 6th and by the end of Day 1 was the top free app, and by Day 2 was the top grossing app in the Apple Appstore. By the end of Day 2, 5% of Android phones in the US had the download. By Day4, usage was topping twitter in the US, and by Day5 use of Google Maps by Pokémon GO was higher than for Google Maps itself. Last Wednesday saw the launch in Germany, Thursday in the UK, Friday in Italy, Spain, and Portugal. Saturday saw the launch in 26 European countries (and there are reports as of Sunday afternoon 3:30pm E.S.T (US) that Canada has just launched on the Apple AppStore, but the server went down almost immediately). Pokémon GO is a phenomenon, soon to be a global one, and analysts and observers expect it to be the top-grossing mobile game ever globally. And those prognostications started after less than a week and just three markets. In short, it's a hit. But analysts quoted in the press are all pretty blasé about its impact on Nintendo. Many see the impact on Nintendo's finances as extremely limited. Almost all of them claim the price rise in Nintendo completely overdone.What does the money look like? I explore below. MonetizationMonetization is easy. Almost every freemium game out there is based on allowing players to 'work' for currency (points, coins, whathaveyou) and spend time, waiting for points to accrue, or to shell out a little money to cut out the waiting time or the effort (called "training" in Pokémon GO). Pokémon GO is no different.Interestingly, trainers can also buy a special "Lure" in the game to attract a large number of Pokémon to a place in a short time period. Astute restaurants and shops are already buying Pokécoins to obtain Lures in order to bring Pokémon to their business locations to lure potential Pokémon GO-playing customers. A New York Post article looked at L'Inizio Pizza Bar in Long Island City, Queens which paid $10 for Pokécoins to have a dozen monsters lured to the store and they saw business pop 75%. You can be sure others have taken note. [Unfortunately, there are also reports of people buying Lures for more nefarious purposes - like robbing Pokémon GO players. One could easily imagine worse, which is why the Terms of Service seem to make it incumbent on parents to accompany children under the age of 13].SponsorshipNiantic's Ingress also has a corporate sponsorship system where it can designate a sponsor's stores or vending machines as spots in the game. Ingress has 8 corporate sponsors including Softbank. In a Reuters interview July 15, John Hanke said they are considering doing the same for Pokémon GO. Some corporate sponsors pay for locations in the game. These sponsors appear to include Vodafone (Germany, at the least), Jamba Juice, Duane Read, and Zipcar. In the Ingress game, sponsors pay per customer visit (tallied by GPS geo-location visit). Sponsors also attach their name to in-game equipment such as the "AXA Shield", the "Lawson Power Cube", the "Softbank Ultra Link" and the MUFG Capsule", all of which are Very Rare and all of which perform significantly better than the nonsponsored versions which users can collect over time.In an interview with the FT earlier this week, John Hanke indicated corporate sponsorship in the form of 'sponsored locations' was coming. Does this matter?  Yes. If Niantic limits it to 8 sponsors like in Ingress, that will disappoint a lot of people but corporate sponsors will get around this by buying lures. Lures are cheap and do much the same thing. But if you as a sandwich shop think you will boost your customer base by $20 of profit by buying $10 of Lures, you'll do it. It's a decent margin. And it's relatively immediate. In a large city could have thousands or many tens of thousands of convenience stores, gas stations, delis, bars, newsstands, restaurants, hotdog vendors, etc which will set up Lures 2-3 times a day at the high points of the day. That could be $20-30/day times thousands upon thousands. For one city. Multiplied by all the major urban areas in the world. One example:  New York City has 24,000 restaurants, 240 performance venues, 1500-2000 bars at any one time, 834 square kilometers of parks, forest, and wildland (1700 parks), 150 museums, 400 art galleries, 79 library branches, 270 Starbucks. And there are tens of thousands of stores catering to the 50+ million domestic and international tourists welcomed in the city every year. How many of those places would spend US$10/day, or more, to get people to visit their store? Remember one is not paying $10 for a visitor, one is paying $10 for the hordes.So HOW MUCH is all that worth?The easy answer is "Who knows!?"  But we can have a crack at it.One reasonable starting point comes from a quote all over the media in the last several days from Australian investment bank M--q--rie analyst David Gibson. He assumed the revenue split was 30% to Apple/Google (AppStore owners), 30% to Niantic, 30% to The Pokémon Company, and 10% to Nintendo. One assumes the 10% to Nintendo is because of Pokémon character rights ownership as described on the pokemon.com website.If we assume those ratios, we also have look-through data. As noted above, Nintendo owns 32% of the voting rights in The Pokémon Company, and both TPC and Nintendo own stakes in Niantic (I will assume 7% each but I have zero hard evidence of that - see the full calc in the first Thought Snack or below).On a look-through basis therefore, Nintendo would have 10% of revenue, plus 32% of 30% (roughly another 10%) plus 7% of 30% (from ownership in Niantic), plus 32% of TPC's 7% stake in Niantic. Going a little deeper, Nintendo also owns 10% of Creatures Inc, which was founded by Tsunekazu Ishihara (currently also CEO of TPC) which is one of the other two owners of The Pokémon Company. The look through on that would be (assuming the split is 34/34/32 at TPC) would be another 3% of TPC which would add another 1% of gross Pokémon GO revenues. All told that is just under 24%. David Gibson comes up with a number of "Around 20%" quoted in one article and "about 13%" in another.Separately, another analyst from a four-letter-named broker (perhaps a Currently Large Securities Agent) has said that conversations with Nintendo in the past have indicated some royalties are paid on Pokémon games but that direct revenue is low. He does not suggest there is much juice in it for Nintendo other than reviving the brand. If one looks at the Terms of Service for Pokémon GO, there is no mention of Nintendo, though TPC and its international subsidiary are mentioned a few times. Most all reports I have seen suggest that Nintendo was in fact a bystander in this process though was certainly notified and kept up to date of progress because Nintendo is the producer of the Pokémon GO Plus gadget.How much does it cost Nintendo to be involved? Almost nothing. Will it make any money from the $35 Pokémon GO Plus gadget? Probably a lot. This gadget is sold by Nintendo only, and one might imagine it sells several tens of millions of units. Assuming it costs very little (Bluetooth chip, LED, plastic case, battery, tiny processor - probably doesn't cost more than $5 to make), operating profits could be well over $100mm, but really that is tiny for a company now worth $35bn in market cap.So what's a good game worth in gaming revenue?If you look at the top-grossing games of 2015 (generally thought to be Game of War, Clash of Clans, Candy Crush Saga) they grossed $1.0-1.5mm/day by mid-year last year (though slowed into year-end from the stats I see). Reports from various analysts peg Pokémon GO US-only revenue at $2mm/day early this week to well over $6mm/day by weekend. Historically, Japan and US gross revenues per #1-5 games are not too dissimilar. Germany is about a tenth of Japan or the US. Asia outside Japan is almost twice the size of the US market according to the 2015 GMGC Global Mobile Games Industry Whitebook.Iterating that out over 200 countries by end-August would get you to most of the global market except possibly for China and/or Korea based on lack of Google Maps availability (S Korea has some and John Hanke suggested it was technically possible to adapt; China would be more of a problem. Assuming South Korea can be solved, that still leaves roughly 85% of the global mobile game revenue wallet to be tapped (the US is a bit under 20% in 2014 and estimates for 2015). It was reported Monday the 11th that analytics company (and AppStore optimization company) SensorTower had estimated 7.5mm downloads (SimilarWeb reported that fully 5% of Android phones in the US had downloaded the game in the first two days) and expected the game was earning US$1.6mm/day only off iOS. Given iOS is a bit less than half of the market for smartphones, one might reasonably expect the run-rate Monday was close to $3mm/day. Since then US downloads have basically doubled. SuperData had the total spend across both platforms at US$14mm as of the 12th, 6 days in. It has undoubtedly gone higher since.If we assume that European monetization rates and penetration will be slightly lower than US rates, and well below Japan and Korea rates, but that popularity will be largely global, then a market size of $20+mm of revenue per day by one month in is not out of the question.And it will go higher still.The user count is there.  Though the US is the largest market, it is just the start. If I look at the largest user-supported Ingress fan site I know, there are 4.7 million portals registered (i.e. 80% of the 5.9 million in existence) in 127 countries and municipalities. Of those, 1.43mm or just over 30% are in the US, Australia, and NZ (the three markets which got the initial launch of Pokémon GO). The top 20 markets were about 80% of the total. The content is there. Pokémon GO is launching with 150 monsters. There are a total of 570 monsters in the existing Pokémon canon and more are coming later this year with Pokémon Sun and Moon.The content is only part of it. The Pokémon content is actually an excuse to get out there and do something with friends, families, kids, etc. The game WILL evolve. I expect story lines, clubs, official events and sponsored events,  While it is early days and it is almost ludicrous to suggest one knows how this will pan out 2yrs in, we do what we must. My first cocktail napkin crack at suggested Pokémon GO revenues for Nintendo comes to a run-rate of $1bn-1.5bn a year from equity affiliate earnings and royalties based on a popular idea of the split, and perhaps $200-300mm in OP in Year 1 (assuming manufacturing can be solved) from the Pokémon GO Plus gadget.My early arithmetic suggests that this could be the industry's first $5bn/year grossing game. Will the game last? I think so. But that means looking into the future, which is the next Insight (after this one).In the meantime, for even more discussion about the economics to Nintendo and its relations, subscribers can continue below the fold....  And for those of you who aren't Smartkarma subscribers but want more info, hit the button below...

Mitsubishi UFJ Financial (MUFG) (8306 JP)

Pokémon GO - A Thought Snack II: What's It Worth To Nintendo?