Friday, August 28, 2015

Linear Trip on a Volatile Ride

The last post “View on a Sea of ‘Mostly’ Green” published on August 28, 2015, was written mid-trading day when the U.S. equity market was staging a comeback after precipitous losses the day and week before.  Alas, indices took a nose dive back ‘into the red’ later in the day.  Throughout the week stocks have gyrated up and down on the way to higher closing prices.  Volatility measures have skyrocketed.  It can be an interesting ride in a volatile market when investing in companies that by definition are operating with linear goals for higher sales and fatter profits.

The last post promised two micro-cap ideas that prove life  goes on after a market rout.   At least the life of an entrepreneur goes on.  Management teams at the two smallest companies in the Crystal Equity Research coverage group are bravely or perhaps just innocently forging on without pause. 

The first is a developmental stage company deploying digital commerce technologies in the Asia market.  Moxian, Inc. (MOXC:  OTC) is developing a social commerce platform for the China market that will allow retailers and consumers to trade, communicate and locate goods and services.  Named Moxian+, the platform employs sophisticated, data-driven marketing techniques in a leading-edge social interaction architecture to guide consumers from online resources to offline retailers.  The Company plans to initially deploy the ’online-to-offline’ platform in major metropolitan areas in China, Singapore and Malaysia.
Social commerce may present a compelling market opportunity in Asia in general and China in particular.  True enough old line industry in China appears to be falling off.  Economists around the world have sounded the alarm over falling growth rates in China, several charging that China is not growing anywhere near the 7% target set by its policy makers.  Notably China’s imports, which used to include large volumes of raw materials for the country’s industrial complex, have declined by 6.7% in the most recently released data from the PRC.  However, China’s economy is probably just shifting, which would be a plus for Moxian even if the shift is accompanied by a slow down.

First, there is the large number of digital-savvy consumers.  While per capital income in China is still below world averages at approximately US$7,000 per year, Chinese people have sipped the cool-aid of consumer goods and are enthusiastically embracing the digital world for commercial purposes.  According to the China Internet Network Information Center, by the end of 2014, there were as many as 618 million Internet users in China, representing a penetration rate of 46%. 
There is also the power of the social element.  China is enamored with social media in a way that is unparalleled even in the U.S. where the social media phenomenon began in the 1990s.  Yodo1, an advisor to social media developers in Beijing, estimates that the vast majority of Chinese Internet users are engaged on social media sites such as QQ, China’s first social network.  Reportedly, over 90% of China Internet users have a social media account.  This compares to 67% of the online population in the U.S.  According to the Data Center of China Internet, the Chinese spend an average of 46 minutes per day on social media and 38% claim they are more likely to buy items recommended by other social media users.   

Most Chinese social media activity takes place on mobile devices.  Sina Weibo, China’s second largest social network, reported in 2014, that more than 60% of the time its network was accessed from a mobile device. Not surprisingly, user interests reflect Chinese culture, with an emphasis on marriage, family and gift giving on China holidays.
Well positioned in a growing market and perhaps even better positioned than most industrial companies in China, it will be up to Moxian leadership to execute on the company’s strategic growth plan.  Although still considered a developmental stage company for accounting purposes, Moxian began recording revenue in the second half of the fiscal year ending September 2014.  The Company has continued to record modest sales, bringing total revenue to $142,475 since inception.  The company is still reporting deep operating losses. 

Like most software-based business models, the Company could benefit from relatively low direct costs.  The most significant expenditures in Moxian’s business model are likely to be for sales and marketing as well as product development.  Selling, general and administrative expenses totaled $3.6 million in the first nine months of fiscal year 2015, bringing the operating loss for the period to $3.7 million.  Software-as-a service business models such as the Moxian platform, typically afford operating leverage.  Management believes that operating breakeven can be achieved with the accumulation of 25,000 paying merchants.  At an average of $100 per month in merchant fees a customer base of 25,000 could deliver an estimated $30 million in annual sales.

Moxian recently raised equity capital to support further development and launch of its mobile app.  The $8.2 million private placement, which is expected to be closed in September 2015, has triggered the conversion of $12.5 million in existing debt to equity and additional conversions of the remaining $4.9 million in debt are expected. 
The private placement was well underway and valuations already agreed upon before the U.S. and China equity markets began to pitch and roll.  It would not be surprising to find private investors as keen as ever to support a small, early stage company like Moxian.  All other elements of business and investment risk aside (and there are always some), investing in an innovative business with products to address the coming economic environment may seem more interesting than investments aimed at curing the ills of yesterday’s economy.

The next post features a company in the global renewable energy industry.  

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. MOXC is featured in a research report published by Crystal Equity Research on August 25, 2015.  Please note the important disclosures at the end of all Crystal Equity Research reports.


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