Oyo Ma, Renowned Financialist
Malt Liquidity 13
Oyo? Oh no
As Jerry Seinfeld once famously said, “the reservation keeps the car here. That’s why you have the reservation.”
In a similar vein, a revenue guarantee is a guarantee. You have to pay the money - that’s the point of a guarantee. Oyo seems to be a bit mistaken on what this means:
The closely held company, which is unprofitable, offered a guaranteed monthly revenue to many hotels that signed on, digging into its own pockets if necessary to make the payment. The incentive helped quickly boost Oyo’s room count.
But some owners said they were shortchanged. Quan Zhangyue, a 30-year-old hotel owner in the Chinese city of Xi’an, said he accepted the offer in July 2019. Months later, after Oyo refused to pay almost $6,000 Mr. Quan said they owed him, he left the chain. He protested at the company’s office and joined an online group of aggrieved owners. “100%, I am not going to work with them again,” he said.
Numerous hoteliers in various countries told of similar experiences.
Rupert Murdoch’s outfit has had a tremendous hit-rate on exposing gaping holes in privately held companies. WSJ reporting was the catalyst for both the Theranos and WeWork failures, so when they publish a longform exposé on a start-up, it feels like a business version of the Ronan Farrow bombshell. The details of Oyo, however, are particularly hilarious as the pandemic forced fiscal reality on a company that depended on not acknowledging it at ever-increasing rates:
The company is still losing money, around $15 million a month, even after cutting expenses by around 70% compared with the previous year, according to a person with knowledge of the figures. The company has around $500 million in cash, the person said.
It seems particularly appalling that even after reducing your workforce by 66% and cutting costs by 70%, you can’t even become cash flow positive. What does this imply for how far below market rate you’re actually charging for rooms and vacation homes? There is no way to bend reality - much like a trading desk must be profitable to pay for its support staff, its tech, its data, and its shoe-shiner, the revenue from your customer base has to pay off all the costs of the revenue at some point in the future through a reasonable projection. The entire cheap money Softbank equation - set money on fire to become the biggest platform, and then raise prices - has a core flaw in that they are subsidizing by so much, that they have to inevitably 4x or 5x their revenue at some point, thus leaving themselves open to another competitor undercutting, which they are forced to acquire, burning even more cash. This is how Postmates got acquired by Uber - they knew they were never going to be profitable, but for Uber to maintain its clientele, it was simply cheaper to acquire Postmates than to continue subsidizing customers.
The Vision Fund, stung recently by investments in WeWork and other overvalued companies, has written down the value of its stake in Oyo by more than half, said the person familiar with the matter. That was a costly blow: The fund had invested more than $2 billion for around half of Oyo, and it had been booking paper gains on its stake for years, the person said.
Softbank suffers from a particularly unique structuring of their Vision fund: they hold a pure equity exposure to these companies, but they have essentially borrowed from the Saudis in large part to fund Vision fund, and thus they owe interest. Plus, Saudis are notorious for not wanting to write down their stakes in companies. While you can fudge private company valuations by “raising” money from yourself at higher valuations, as Softbank commonly does, it also means that the potential market correction is much, much higher. One truly wonders what the market correction of the valuation of Son’s investing prowess will look like.
Oyo’s game plan included lowering room rates, often dramatically, to boost occupancy. Oyo executives said the strategy, powered by machine-learning algorithms, would produce higher revenue for hotel owners in the long term…
Oyo’s first U.S. property was a Dallas hotel that typically charged around $70 a night. Within a day of landing on Oyo’s website, the hotel doubled its occupancy rate to 60%, said Ken Masters, the owner.
Eager to boost guest numbers, Oyo’s Mr. Agarwal ordered the room rate cut to about $20, said people familiar with the matter. A line of customers, including some homeless, soon stretched outside from the lobby.
“We had no control over pricing,” Mr. Masters said. “They controlled it and made it impossible for us.”
While most of us understand that “AI”, “machine learning”, and “big data” are buzzwords, imagine for a second that these pricing changes actually were the result of machine learning optimally solving a problem for once - it filled the rooms with people that need housing. Filling empty rooms with homeless people is perhaps too optimal a solution to be good business.
Oyo had planned to become Japan’s biggest hotel chain by early last year, according to a 2019 company document viewed by the Journal. The company signed up hotels before its Japan platform was fully ready, according to hoteliers and former Oyo employees. Its India-built website often didn’t correctly display Japanese text…
Well, this is just embarrassing.
I wrote earlier about how Softbank was taking the concept of Blitzscaling and cheap cash and wantonly trying to implement this concept everywhere. Really, they are more of an experiment on how long market conditions can stay untethered to reality. What we would roll our eyes at hearing at a Ted talk in 2010 is now listened to with rapturous attention whether or not there is a product at all because the funding is always there, and Softbank is just a maximalist bet on the combination of the two. It is so inefficient to sit on cash right now that, who knows, maybe the landscape can be turned entirely into SaaS, bogus ML and deep learning, and gig economy companies off the back of cheap money just so we can sit in our apartments and houses and get lukewarm food delivered to us while we watch stuff that an algorithm suggests not because we’ll like it, but because we’ll bear it.
Better Delisted than Red
I continue to be more confused at how delusional people have gotten when it comes to investing in Chinese companies after ANT Group’s IPO was oversubscribed to an insane degree, and where the CCP bailed everyone out by disappearing Jack Ma.
The concept of “priced in” no longer seems to make a difference as everyone is so desperate for an actual return that it is now incentivized to pay a premium just to get exposure to something huge that you know other money will flow into. Now, with Congress finally acting, we are seeing some sort of reversion, where the market is finally realizing that owning Chinese stocks also means you are long their compliance with both the CCP and American listing institutions. Shares traded down as, naturally, US holders sold them off, but they pared most of their losses:
Stock in the largest, dropped as much as 4.5% before paring losses to close 0.8% lower. Its closing price was still the lowest since June 2006. Competitor China Telecom Corp. closed 2.8% lower, while China Unicom, the smallest of the three, eked out a 0.5% gain.
Traditionally, the purpose of going public was to raise money for expanding the business when private funding dried up. Now that private money is available in much larger quantities (and the compliance is lower), companies are staying private much longer. But what exactly are Americans buying publicly listed shares of Chinese Telecoms for? These companies are cash flow machines, and there is no logical rationale to argue the money raised in US listings somehow contributes to the “expansion” of these state-approved businesses. In some way you are “exposed” to the company, but given that these companies can just be delisted, shouldn’t these shares be trading at a discount, rather than the roughly 4-7% premium as evidenced by the price action?
In some sense, I feel like permanently low rates are the endgame of the Fiat economy. If the government can manipulate its balance sheet and ‘create’ money by shifting zeros on the basis of “I owe you, because we’re the government” (as many governments - including the entire EU, China, Japan, and more - are doing now, not just the US), it naturally lends itself that currency becomes more and more meaningless as a reflection of fiscal reality, and consequently, the fiscal future projection of companies. Thus stimulus money becomes an indirect pump of Tesla calls, crypto, and sneaker resale. Prices are increasingly not reflecting reality because currency is no longer a measure of reality in any way, and any extra liquidity goes into paying a premium for the assets we know that people will naturally gravitate to (hence the 80% correlation of stocks in the market, whose rise is fueled by the biggest NASDAQ weighted stocks.)
On that note…
JusT bUy CryPtO