Business

Just days after Chinese e-commerce giant Alibaba rolled out its online Yu'ebao personal finance platform in mid-June, Liu Shaohua, 24, transferred in several thousand yuan from a low-interest savings account that was wilting in the face of inflation.

Given Yu'ebao's current annual interest rate of more than 6 percent (compared to Chinese banks' one-year deposit rate of 3.5 percent), its lack of a minimum deposit requirement, and the ability to transfer and withdraw funds easily without paying a commission, Liu says it was a no-brainer to invest in China's newest , and most-buzzed about, online investment service.

"It's the convenience of investing in this fund that's made it popular. I don't have a lot of money as I'm not working yet, but I'd like to make investments and I have certain amount of money which I don't need to use right now. To take your money out of Yu'ebao is just as easy as putting it in." Liu, who lives in Beijing, said.

Public thumbs up

He was not alone. In just a week, the online platform that works through Alibaba's online finance arm Alipay (a Chinese version of Paypal) and partners with Tianjin-based Tian Hong Asset Management Co., had attracted 1 million users, with deposits approaching $1 billion. A month after it was unveiled, in mid-July, it had 4 million users and more than $2 billion in deposits.

Yu'ebao's popularity has rocketed, in large part, because of consumer confidence in its parent company, Alibaba, and its link to the company's online payment platform, Alipay, which claims close to 600 million active worldwide users (800 million registered accounts according to the company's website).

Hangzhou-based Alibaba, which runs Taobao, TMall, and a host of other e-commerce sites, accounted for 70 percent of package deliveries in China last year, with sales reaching $163 billion, or 2 percent of China's GDP, according to statements released by Yahoo. The American tech giant currently owns a 24-percent stake in Alibaba and gave investors a glimpse into the company's finances during its latest earnings report.

"Chinese trust Alibaba as an established brand with the finances to sustain products like this. If all did go pear shaped, they'd be confident that their money would be returned, and when you have millions of other depositors, the likelihood of drastic government measures diminish," said Mark Tanner, Managing Director at Shanghai-based China Skinny, an online market-research firm.

Big player

In preparations for a possible public listing in the months to come, some financial analysts have estimated Alibaba's worth at more than $100 billion, rivaling Facebook's $104 billion valuation last year before its $16 billion IPO - the largest ever for a tech company, and the third largest of all time.

Analysts are able to justify the sky-high valuation because of the explosive growth in China's online retail sector. McKinsey's estimates the Chinese online retail economy, with Alibaba's operations as a core engine, will reach $650 billion by 2020, eclipsing the United States to become the world's largest market. China is currently the second largest market in the world, with online retail sales reaching $210 billion in 2012, and an annual growth rate of 120 percent since 2003.

In announcing Alibaba's intention for Yu'ebao and Alibaba's foray into financial services to Chinese media, the company's founder and chairman, Jack Ma, said, "China's financial industry, especially the banking industry, only serves 20 percent of clients, and I see there are 80 percent of the clients [who] are not covered. Financial services should be about serving the layman, rather than playing inside your own circles and making money yourself."

Risk factor

Despite its enthusiastic embrace by investors, Yu'ebao does face uncertainties. Foremost among them is regulatory limbo. It hasn't yet been cleared by the China Securities Regulatory Commission (CSRC), although company spokespeople said the requisite paperwork has been submitted, and Yu'ebao risks fines or even forced closure if it doesn't pass that process soon. Observers believe, however, that Alibaba, and in turn Alipay, have enough clout and reputation to gain government approval.

Also, because deposits are transferred to the oversight of Tian Hong, which invests them in various funds and bonds, there is a certain degree of investment risk. Although handsome returns are loudly broadcast, the fine print warns of potential losses.

"The underlying investments are meant to be relatively risk free bonds and bank deposits, so the risk to the consumer is somewhat less," said Zennon Kapron, founder of KapronAsia, a financial industry consultancy. "Considering the recent high-profile failures of several bank wealth management products (WMPs), we think the general public users are aware of these risks, however small they may be."

To date, Yu'ebao has only been used in China and is unlikely to expand internationally due to currency and financial regulations.

Jack Ma

Excellent timing

In June, China's banks experienced a cash-squeeze that spurred the Shanghai interbank overnight lending rate to a record-breaking 13.44 percent on June 20. Although the liquidity crunch has since abated, with the central bank taking steps on July 20 to liberalize interest rates and promising stricter regulation of murky WMPs offered by banks as an alternative to low-yielding accounts, Chinese investors were rattled.

Up to then, there were few clear-cut, ostensibly low-risk, investment vehicles besides the bank-offered WMPs that commonly have a minimum deposit requirement of at least 50,000 yuan ($8,000), can carry stiff penalties for early withdrawal, and are under scrutiny for their rapid proliferation and uncertain sustainability. Alipay's Yu'ebao, with an attractive yield, immediate liquidity and no limit on deposits, seemed irresistible. All a user has to do is clicking a button to transfer idle cash sitting in their Alipay account into the fund, and clicking another button to transfer it back.

"[Yu'ebao] Reaching 100 million users is conceivable," Li Xiaohui, a researcher at China Security News, said, citing Alipay's 500-million-plus user base.

"It's an easy process that seems hard to refuse. The money is just idle on your account, why not invest it into something with a little return, then switch it back when you need it?" Li said, adding that users must not overlook the risk associated with entrusting a fund-management company to invest their deposits.

While Yu'ebao continues to tempt Alipay users into transferring at least a portion of their balances into the fund, it won't be long before other major players enter the online finance arena, Kapron said.

"There will certainly be imitators. As an example, Tencent has a very large customer base and also has a payment product, so could quickly move into the space," Kapron said, clarifying that he doesn't expect Yu'ebao or its imitators to impact the popularity of banks' WMPs, because most Yu'ebao deposits come from idle Alipay funds, rather than "large amounts of money in the short term."

Currently, it's not possible to withdraw Yu'ebao funds without first transferring them back to an Alipay account, and then depositing the amount into a tied-in bank account. That extra step has not deterred Liu Xiaohua, who plans to continue using the platform ahead of any other investments.

"We all know Alibaba's excellent reputation, and were quite excited and surprised to have this opportunity. As long as I'm not investing thousands of yuan, why not [continue]?" Liu said. CA

MovingBeyondCopper

Zambia's agricultural sector is gearing up to provide ample investment opportunities By Simon Schaefer

Think of Zambia and what it produces and chances are, the first thought that comes to mind is the country's rich copper mining industry. However, in terms of contribution to GDP, the nation's agricultural sector is more important than its relatively mature mining sector and presents attractive investment opportunities.

In 2012, the primary agricultural, forestry and fishery sector contributed 18.2 percent to Zambia's GDP, while the food, beverage and tobacco sector contributed an additional 5.3 percent to GDP (captured in the manufacturing sector). In the same period, mining only contributed 2.1 percent to Zambia's economy. The agricultural sector is also a key employer in the country, providing more than 65 percent of all jobs, and has the potential to make a major contribution to poverty reduction.

Farm blocks

In order to diversify its economy and reduce over-reliance on export of mining products, which account for approximately three quarters of the country's export earnings, the Zambian Government is making concerted efforts to promote investment in the agricultural sector. Cash crops such as cotton, coffee, tobacco, sugarcane, pineapple, cashew nuts, mango, citrus fruits and horticultural/floricultural crops have been identified as key priority crops. These crops also show great potential for further investment as well as the diversification and expansion of Zambia's agricultural sector and its export composition. The biofuels sector presents further potential, given the country's reliance on costly fuel imports.

In recent years, Zambia's food exports to neighboring countries such as the Democratic Republic of the Congo (DRC) and Zimbabwe have increased rapidly. In 2011, for instance, food exports to the DRC surpassed the $135 million mark – up from $42 million in 2005, reflecting the importance of Zambia as a regional food exporter. The development of the agricultural sector in countries such as Zambia, which is among the top four countries in Africa in terms of available cropland, will play a fundamental role in ensuring food security in the Southern African Development Community (SADC) region and in reducing the continent's annual food import bill of close to $4 billion.

With the intension of attracting investment in the farming sector, the government has earmarked agricultural sites for the development of so-called farm blocks. Each of these farm blocks will have at least one core farm of 10,000 hectares and a number of commercial farms of between 1,000 hectares and 3,000 hectares. By providing key infrastructure such as trunk roads, bridges, electricity, dams, schools and health centers, the government is aiming to create a supportive and attractive environment for farming investment.

In addition to the production of agricultural commodities, the agro-processing industry presents investors with attractive investment opportunities. The example of Zambeef Products PLC, a diversified agro-processing company that grew in less than 20 years into a major agricultural conglomerate, with annual revenues exceeding $120 million, showcases the potential of the agro-processing industry. Zambeef Products PLC exports its products to regional markets such as Angola, Botswana, the DRC, Malawi, Namibia, South Africa, Tanzania, Zimbabwe, and further abroad to China, England, India and Italy.

Another success story in Zambia's agricultural sector is Zambia Sugar, one of the largest agricultural employers in Zambia. In 2007, South Africa's Illovo Sugar, which holds an 82 percent stake in Zambia Sugar, invested $200 million in the Nakambala Expansion Project to more than double the company's production capacity. This investment also turned Zambia into the second largest sugar producer within the Illovo Group.

Agricultural opportunities in Zambia have not gone unnoticed by international investors. In early 2012, for instance, JSE-listed Zeder Investments acquired a 96 percent stake in Chayton Africa, a Zambian agricultural operation, for $38.2 million. Saudi investment company Manafea Holdings announced in 2011 a $125 million investment to a pineapple project in Zambia. In September 2012, Singaporean Olam International Ltd. acquired Zambia's largest coffee estate, Northern Coffee Corporation Ltd. for $6.15 million and committed to investing further $40 million to fully develop a 2,000 hectare Arabica coffee plantation in the next five years.

Land-locked to land-linked

In order to unlock its economic potential, Zambia requires significant investment in the construction and maintenance of key infrastructure. Most of the country's existing infrastructure is outdated and insufficient to accommodate the requirements of its growing economy. For instance, only 9,403 km of Zambia's 40,265 km of core road networks are tarred. Due to insufficient investments and maintenance of the national rail network, average locomotive speeds have dropped significantly to an average of 15 km/h.

In order to address the issue of inadequate road transport infrastructure and to turn Zambia from a land-locked into a land-linked economy, President Michael Sata launched the Link Zambia 8,000 Program in September 2012. This five-year road rehabilitation and upgrading project is expected to cost more than $5 billion. It is planned that 8,200 km of roads will be tarred during the project period. In the 2013 budget, approximately $825 million has been allocated to transport infrastructure developments and upgrades.

In September 2012, Zambia issued its inaugural Euro bond. International investors placed about $12 billion in orders for Zambia's maiden dollar-denominated bond, allowing it to increase the size of the issue from the proposed $500 million to $750 million, while lowering the cost to just 5.63 percent – lower than the equivalent borrowing cost of Spain at the time of the bond issuing. The oversubscription of the bond reflects the confidence international investors have in the Zambian economy. The government intends to use $685 million (>90 percent) of the proceeds from the bond issuance for infrastructure developments.

Energy potential

In addition to transport infrastructure, energy infrastructure remains insufficient and negatively impacts the expansion of economic activities. Being endowed with large hydropower potential, Zambia could emerge as a key energy supplier for the region. The example of the Copperbelt Energy Corp. (CEC) reveals the potential of private sector involvement in the energy sector. Founded in 1997 and listed on the Lusaka Stock Exchange in 2008, the CEC has grown into a major player in Zambia's energy sector and provides half of the electricity consumed in Zambia. In March 2012, the CEC signed a Memorandum of Understanding with the Nigeria-based Africa Finance Corp. with the aim to develop energy assets in Africa, reflecting CEC's ambitions to further extend its footprint on the continent.

Zambia's proximity to a number of fast-growing economies, such as Angola, the DRC and Tanzania, makes it well positioned to serve as a platform to access these markets. Given the government's determination to diversify the economy and to upgrade the country's infrastructure to facilitate and accommodate economic growth as well as trade, Zambia presents a range of attractive opportunities and investment incentives for international investors that are interested in exploring opportunities beyond the mining sector. CA

(Simon Schaefer is senior analyst at Frontier Advisory)

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