I had the pleasure of meeting Shing Tao, the CEO of Remark Holdings (NASDAQ:MARK), on Monday night. He had just flown into San Francisco from Beijing and I was meant to be his first meeting before dinner and some shut eye; he had a big Tuesday in front of him with Roth Capital (whose analyst loves MARK, although they haven’t been their bankers) taking him on a Non-Deal Roadshow and introducing him to several institutional investors.
Remark has been very hot lately, jumping almost 200% in value since the company reported Q3 earnings in mid-November. The move came on the back of 2018 revenue guidance for their Artificial Intelligence operating subsidiary, KanKan. They guided to $30M in KanKan AI revenues for next year, which would be a 500% increase over 2017. This got the stock jumping.
The business development front has been super active. First, they have been spending a lot of time with the CP group, a massive conglomerate out of Thailand (https://en.wikipedia.org/wiki/Charoen_Pokphand). What are they working on? I haven’t a clue, but, judging from the Twitter feeds, something’s brewing.
Following the time in Thailand, Mr. Tao had the opportunity to present at the 4th World Internet Conference. He was one of only three presenters from U.S. public companies, the other two being Tim Cook (CEO of Apple) and Sundar Pichai (CEO of Google). Needless to say, that’s pretty good company to keep.
The result of Kankan gaining more visibility in AI, a 200% increase in stock price and hanging with the CEOs of the tech giants, is that CEO Tao’s time is now in great demand. Upon arrival in San Francisco, he had a full dance card and my meeting was sandwiched between meetings with a prominent investment boutique company and an investment banking group. His Tuesday with Roth was going to see him missing several meetings (which were covered by his CFO), as several major news outlets were looking to interview him.
The point behind this prelude being that as a result of Kankan, Remark is really gaining much momentum and increasing visibility. I was very fortunate to get time with the CEO. Hopefully, we can all benefit from this.
Without further ado, my notes from the meeting…
I think all investors realize that MARK shares suffer a “China discount”. This means that since their KanKan business is in China, and most investors don’t fully trust Chinese companies or managements, the shares suffer in terms of relative valuation. The history of Chinese companies listing in America is one littered with investor fraud…this is a difficult bias to overcome and few companies trade at decent valuations as a result.
This leads me to what, for me, was by far the most important part of my meeting. The first thing I learned, and what has given me MUCH more comfort with Remark, is the background and experience of their CEO.
Here’s the rub…while Shing Tao has a Chinese name, and while he has a Chinese heritage, he is 100% American. Born in NY and brought up in New Jersey, Mr. Tao graduated from NYU and spent his early business career working in the hedge fund industry. This man is as American as baseball and apple pie.
Based on this, my comfort level with the business, the financials, the guidance…well, with everything, increased dramatically. In my opinion MARK has been suffering from a China discount. It shouldn’t be.
Now, if you already knew this about the CEO, maybe you think it’s no big deal. For me, I bought more stock the next morning just based on the fact that I believe the story is 100% real. Most of us recognize that the stock represents great value down here, but now I’m further convinced in the numbers underlying it.
Over our drinks, we discussed the business of KanKan in some detail. The company has guided to $30M in 2018 revenue for this unit; a number that is hardly reflected in the stock at all. Yet, on the earnings call, management seemed very confident that this number was easily achievable and could likely be exceeded.
In our meeting, this degree of confidence came through loud and clear. More interesting than supporting the number was the fact that it appears the current 2018 Kankan revenue guidance will be blown away. This was relayed to me through the comment that, “bonuses at KanKan are based off a multiple of this revenue number ($30M).”
For the avoidance of doubt, employees bonuses next year are based around KanKan achieving multiples of $30M in revenues. What are those multiples? Do these multiples represent KanKan revenues of $60M, $90M, more?
I could probably just stop writing here as I’ve told investors just about all you need to know with MARK currently valued at approximate $220M market cap. The numbers are real and from the CEO’s body language they are going to be huge.
There was, however, more to this fascinating meeting with the CEO. Here are some of those highlights:
Random information related to Sensetime…
For those who are unfamiliar Sensetime is a Chinese company that focuses on facial recognition. It has been in the news a lot lately, having just scored investments of around $1B from the likes of Qualcomm and Alibaba. The latest pre-money valuation of Sensetime was rumored to be well over $2B. Or, more than 10X that of MARK.
Remark has a facial recognition software that is competitive with Sensetime. How do these companies stack up to each other? When I asked Shing, his response was, “first off, we’re profitable.”
Realizing that Remark as a company is losing money right now, what he was referring to is the gross margins on business at their respective AI units. Sensetime is doing about $100M in revenue right now and losing money on gross margins.
According to Shing, Sensetime is no better than Remark when it comes to facial recognition. Using LFW (Labeled Faces in the Wild) as a barometer of effectiveness, both companies rank in the top 10 globally when it comes to percentage of faces successfully identified.
However, what separates the companies is Remark’s cost structure. For performing the same job, Kankan can do it at much lower cost. This has led Remark to winning business head to head, unless Sensetime is willing to work on negative gross margins – which they appear to do from time to time – especially on government contracts.
Another difference according to Shing is that Sensetime is only in China, while KanKan is in the US as well. Which led me to the question of, “where?” because I’ve only seen contracts for KanKan in China.
The response to this was clear and unequivocal: “wait and see…there is a ton of opportunity in the US and Remark will be here soon enough, and in a big way.” So, we have that to look forward to as well.
Based on all I learned, according to the CEO, Remark appears to be equal if not better than Sensetime. We all know the valuation disparity.
Other random notes…
Shing is a go-getter, make it happen type of leader. He is lightening smart, works 24×7, and is passionate about his company’s technology, employees, customers and shareholders. He is, however, in need of more help. When I asked about the sales team, he said “you’re looking at it.” We know he has a KanKan business development team in China but clearly they need more manpower to reach all the opportunities ahead of them. KanKan’s opportunities are almost without limit was the direct inference from Shing.
They are hiring like crazy and doing deals with huge companies. He needs to increase the talent resource pool around him rapidly, and is focused on this. But, it’s no easy task to hire in a red-hot space like AI.
The “sum of the parts” analysis that many (myself included) have used to value Remark is not, according to Shing, the right way to look at the company. Admittedly, the Sharecare investment is just that; an investment that’s worth about $100M (or more) and there’s little they can do to influence it.
However, when you look at websites like Vegas.Com, which they own, these are not random, unrelated businesses. In the new economy, data is king. For AI, the quality of the product depends to a large extent upon the quality of the data. So, when you look at Vegas.Com, realize that it’s the number one booking site for Las Vegas, doing about $300M a year in gross revenues.
With Remark’s Kankan AI platform combined with Vegas.Com, they have now exponentially added to the targeted demographic as Remark can see who is visiting Las Vegas real time, who has travelled to Las Vegas over last three years, and who travels to places similar to Las Vegas in the same period.
Instead of thinking of the website businesses as a possible spinoff, think of them as a treasure trove of data for MARK to start selling AI to anyone looking to get smarter about the consumers who spend money in Vegas. This is actually a very synergistic business and one that is highly leverageable.
That about sums up the key takeaways from my meeting with Shing. I went in loving the story, but wondering just how confident I should be in the management and the business out of China. And, I left buying more shares at $9 the next morning, which says it all.
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