Government crackdowns in China have had a big negative spillover effect on many Chinese stocks. DiDi Global (NASDAQ: DIDI) has been acting as a proxy for the rest of the Chinese stocks. Chinese stocks listed in the U.S. are getting pummeled on security and data-privacy concerns. Big Data and Chinese stock went into a tailspin after the Cyberspace Administration of China took down Didi’s main app on Independence Day “pending a cybersecurity review.” The timing of the takedown was one week after its IPO debut and just happened to be on July 4th. It doesn’t take a detective to figure out politics was in play. The focus of this article is on 2 Chinese Big Data stocks that are immune from this regulatory risk and were brought down without any thought to the fundamentals. The key test of Chinese data immunity lies in who owns the data versus who processes the data. Eventually stocks will decouple and the ones with the strongest fundamentals will rise again.
Luokung Technology – Leader in Mapping Technology
Luokung Technology (LKCO) is known for its “spatial-temporal big data ” which is really the study of objects or in this case vehicles moving around the city. Their data is primarily used by ride hailing services. This means they need to account for vehicle movements, traffic around the vehicle, obstacles, and the movement of people during the planned pickup. The company has also developed a smart city concept that ties traffic, emergency services, delivery, mass transit, and even road repairs into one map that seeks to optimize the movement within the city factoring different priorities like emergency services when they are needed. A future facet of their business is autonomous driving which will have to factor in not only other vehicles, but pedestrian movements. If all vehicles have a common interface and are interconnected there can be a general awareness between vehicles allowing everyone to stay safe. The most difficult part of determining a universal map that consists of cars and pedestrians is connecting to the Internet of Things (IoT) to assist in confirming and predicting pedestrian movement. The universal driver behind each of their business segments is big data.
Investor Presentation – BigData Hub Concept
Many data feeds from their digital partners who own and store the data feed into a centralized server where they are dissected, interpreted, and prioritized. From these data feeds they are able to render a multilayer dimensional map (see below). From this map they are able to generate predictive algorithms capable of figuring the optimal route factoring in traffic.
In essence the company provides DaaS (Data as a Service), SaaS (Software as a Service), PaaS (Platform as a Service), and combinations in between. Saleya Holdings (eMapgo) which was purchased for $120 million on August 28, 2019 has 3 main revenue stream classifications. They have map data services, autonomous driving map data services, and in-dash navigation.
The revenues of the subsidiary are modest at the moment, but represent an enormous emerging market and almost a pure play on the autonomous driving market segment.
The mobile application known as Luokung is primarily a Business to Customer (B2C) situation that utilizes railroad-WiFi in concert with its software apps to provide tailored content that contains relevant information, entertainment, travel, and e-commerce to the long distance rail rider. The guiding principle behind the service that has over 51 million users is to reduce boredom on the trains and push the idea of discovering new things to do upon arrival. Advertising is a key component of their model that includes online to offline (O2O) which hopes to engage passengers while enroute, to purchase or do something once they arrive at their destination. Recommendations are based on users interests which include restaurants, entertainment, accommodations, local snacks, local products, scenic spots, or points of historical significance.
The Grecent deal with Tencent Holdings (OTCMKTS: TECHY) initially expanded the base of passengers and increased revenue per customer because high-speed rail customers typically spend more. This eventually morphed into Luokung Location-based Services (LBS) Data Marketing Platform that is a combination of advertising and very detailed maps, points of interest, 20,000 commercial buildings, train stations, shopping malls, and airports.
They also have Business to Business (B2B) and Business to Government (B2G) services. These programs operate in real time allowing the business customers like ride hailing services to predict pickup and drop off points and arrival and departure times with greater accuracy. Smart cities seek to control the port of entry, traffic monitoring, and logistical movement using proprietary systems covered by patents and copyrights that allow for the transmission and rendering of extremely detailed maps that are graphically optimized to operated in a low bandwidth infrastructure while bringing the equivalency of terabytes of data.
The company has high R&D expenses and high marketing expenses because they operate in a state of continuous improvement in order to keep customers satisfied and retained on their platforms. The focus of their efforts are on additional features and performance enhancements while at the same time expanding markets and acquiring business or technology that fits. Notes 4&5 in the cost of revenues was primarily intercompany receivables and amortization of intangible assets which serve to only weaken the earnings outlook only in the short run. .
LKCO currently has a market capitalization of $515 million and has 318 million shares outstanding. The company made 3 offerings in 2021 and brought in about $120 million in cash. They also completed the acquisition of Saleya on March 17, 2021 for $102 million in cash. They also have strong backing from Geely, a large Chinese car manufacturer and other notable entities and wide industry connections not to mention their cooperation deals with Beidou positioning, Dell, and National Goepspatial.
Busy Start / Future Catalysts
March: LKCO announced the acquisition of 100% equity interest in EMG, the first-class mapping company. Following the Company’s successful financing of US$120 million, LKCO has completed the acquisition, which has become a wholly owned subsidiary of the Company.
April: The company received a notification letter from Nasdaq stating that it has regained compliance with the requirement rule of minimum bid price in 5550(a)(2).
May: LKCO obtained the contract which is about the new traffic control system and Intelligent Road.
July: It announced a formal strategic cooperation agreement with the National Geospatial Information Center (NGIC) in a range of sectors including geospatial information services. Besides, recently LKCO revealed that it will cooperate with one of the top China’s automakers collecting and managing the data of autonomous driving vehicles.
The stage is set for more acquisitions around the core mapping technology. They are also winning more contracts in government and with car manufacturers which will boost the financial outlook and perhaps generate the cash they need for more acquisitions. Processed data is what they sell and it’s quite valuable but the raw data is not something they own. This is why they are immune to government crackdowns. The drop in stock price was completely unrelated to government regulation and people will eventually understand that these autonomous cars will need virtual drivers and when they do only a few players in the world like LKCO will be able to take the wheel.
FingerMotion – Leading InsureTech Player
FNGR has 3 primary business silos. They have a mobile data and recharge platform, an SMS and MMS payment solutions, and their big data solutions wrapped up in their subsidiary called Sapientus. These silos are all interconnected because FNGR has direct access to the mobile carriers. This gives them an unprecedented number of users that can be converted into buying goods and services that FingerMotion is reselling. This availability of user metadata helps them create extremely accurate algorithms that can better predict user behavior in its Big Data arm.
Top Up & Mobile Recharge
The company started in the Top up and mobile recharge business. In the United States most cell phones are on monthly plans that are paid after usage, but in China the phones add minutes or data in incremental amounts. FingerMotion has the wholesale license to sell Top up minutes from China Mobile and China Unicom which are the largest telecoms in China, to e-commerce platforms that include AliBaba (NASDAQ: BABA), PingDuoDuo (NASDAQ: PDD), and JD.com (NYSE: JD). These e-commerce platforms have well over a billion users and allow FNGR to market Top up minutes to their respective user bases. FNGR gets a small sliver of millions of transactions daily. Their margins are quite thin, but they have no marketing expenses and don’t have to spend money to retain customers like the e-commerce platforms do.
SMS & MMS
The SMS and MMS business are responsible for most of the gross profit and has been one of the fastest growing business silos in the company.
The Big Data business is held in the subsidiary Sapientus. It is run by a team of seasoned actuaries and data scientists with a specialty in creating algorithms. The life blood of the insurance industry comes down to risk analysis. The developing insuretec business at Sapientus is driving innovation in the insurance business that enables the real time assessment of an individual based on risk scoring. They currently have big data agreements with Pacific Life Re and Happy Life Insurance with many more on the way.
The algorithms developed by their big data research team take many personal factors into account. However, the data that goes into these algorithms is from non-identifiable people whose information resides on the host server where the data was sourced from. Think of it as taking a personal profile and instantly type casting them so that they fit into many different molds like a fitness fanatic or a video gamer.
Their personal identity is lost but their behaviors and what they typically do are turned into an algorithm that uses distributional statistics and cluster variables that would mimic their actual behavior. Insurance risk algorithms would assign risk scores to these behavioral profiles so when queried in real time, that particular individual would be matched against a behavioral profile that was already assigned a risk score and can be immediately quoted.
The behavioral analytics also have far reaching consequences inside and outside the insurance business. For example, another application within the field of insurance is fraud detection to ensure the claims match up to the risk profile. Outside the insurance sector, big data can profile people seeking credit or financial services which represent a huge untapped market due to the unavailability of credit scores in China. Morphing into the largest credit scoring reporter in China means FNGR could eventually challenge Visa (NYSE: V) or MasterCard (NYSE: MA), American Express (NYSE: AXP) or PayPal (NASDAQ: PYPL) and become a ripe acquisition target for one of these behemoths.
In fact FNGR should be able to do anything big data provider Snowflake (NASDAQ: SNOW) can do because SNOW is focused behavior around product sales of merchandise while FNGR is more focused on the consumer who is infinitely more complicated. FNGR uses practically the same structure as SNOW just liess the centralized storage of data. If SNOW was looking toward international expansion FNGR would be on the short list. When considering the $78 billion market cap of SNOW versus the $120 million FNGR, FNGR might not last even a year on the NASDAQ before they get gobbled up for their unparalleled access to all of China.
Heavily Shorting the Macro Without Paying Attention to Core Fundamentals
Both stocks FingerMotion and Luokung Technology have active shorts. The shorts expect continued sector weakness and they have literally done no due diligence on these names. LKCO has had its short interest rise from 69K to 8.7 million shares in just the past 6 months. Average daily volume has exploded to 16.5 million. The short volume is much harder to see in FNGR because it’s traded in the OTC market. There are 4.2 million shares held at DTC and only 750,000 shares are held by retail as evidenced by the average volume of 20,000 shares traded daily. That’s only 3% turnover of the real float daily. The smoking gun signature of the short presence in FNGR are large orders that have been pummeling the bid in quick succession.
The market is playing the guilt by association game when it comes to Chinese big data plays. Any Chinese company that collects, stores, or owns personal data seems to be a target. Since Chinese companies are not really that well covered or known for their transparency, shorts are pounding on names hoping to play on investors fears that they don’t understand the fundamentals of the business. This has created an enormous opportunity in a couple of e-commerce and big data plays growing extremely quickly and quietly in China. Most notably are LKCO and FNGR. Both of these companies are provided with Big Data and then analyze and manipulate into something that is actionable by the user. They DON’T OWN THE DATA so they are immune from government intervention.
Whether it’s finding out where your pickup location is scheduled or an optimized quote on car insurance, Big Data is transforming the lives of the Chinese people. The Chinese market is enormous so creating disruptive technologies like autonomous drivers or insuretech solutions will catch on and scale very rapidly. LKCO has invested a tremendous amount into R&D and is on the cusp of monetizing their disruptive solutions to the market. FNGR is on the verge of rolling out insurtech products that could ultimately transform the Chinese insurance industry and its unthinkable that this name is only worth $120 million when it could completely dominate the insurance market in the coming 2 years. They are also moving forward with a NASDAQ uplisting that could provide institutional interest that has been lacking while squeezing to shorts to cover their naked positions ahead of the uplisting.
Disclosure: we hold no position in LKCO or FNGR either long or short and we have not been compensated for this article.