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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
For most enterprises, wage inflation is a worry. Not for top football clubs like Manchester City, which reported its latest financial results on Wednesday.
A mark of success for clubs is not just how they perform on the pitch, but their ability to buy top players and sell them profitably. On this score, City has thrived.
Measuring the returns from football clubs depends on one’s perspective. Operating profits, covering the day-to-day activities of the club, are a good yardstick. These earnings subtract most input costs from earnings, but not net interest charges and any taxation.
In the complicated accounting of football clubs, profits and losses on purchases and sales of players may be excluded from that metric. Even so, this trading can make a big difference to the real outcome.
Despite its success on the pitch — winning both the English Premier League (EPL) title and Europe’s Champions League — privately owned City consistently loses money at the operating level. Last season, its losses widened by two-thirds to £35.6mn. Over a decade they have amounted to £334mn, according to data from football analyst Kieran Maguire.
The club’s annual wage bill is one of the highest in the EPL at £354mn. Its wage to revenue ratio of 59 per cent, one measure of a club’s overheads, has not shifted since 2019.
But City, like some other top EPL clubs, makes tidy profits from trading in players. In the decade through to last season, City earned nearly half a billion pounds in this way. Even less successful rival Manchester United made £150mn.
These transactions have kept City’s pre-tax profits — those after interest and player sales — in the black in every year bar one since 2014. The club, it must be added, faces 115 charges from the EPL over financial fair play rules, raising questions over how sustainable its returns are.
Player sales income at Man City could go higher. This year’s figures do not include the large sums the new Saudi Pro league teams have spent to lure top stars from leagues everywhere, such as Cristiano Ronaldo. So far this season the figure stands at €145mn (£126mn) for all leagues, similar to the transfer fees for France’s Ligue 1.
City’s results show that Europe’s top football clubs can turn a profit if they put their minds to it. The era of all football clubs as sinkholes for cash has come to an end.
Didi: hail and hearty
Another type of enterprise which has taken a long time to turn a profit has been the ride-hailing market. Asia’s answer to Uber, Didi, has recently accomplished this feat.
Didi is making a comeback. The Chinese ride-hailing group has posted its first profit since Beijing’s crackdowns in 2021. Back then, regulators launched a probe into its data handling and forced a delisting in New York, where it briefly had a valuation of more than $80bn. These latest earnings numbers boost the outlook for a Hong Kong listing.
Net income after taxes was Rmb107mn ($14.7mn) on revenues that increased by a quarter to Rmb51.4bn in the third quarter, Didi said on Monday. This follows a sales jump of more than 52 per cent in the June quarter.
That was quite a feat. Didi only resumed registration of new users in January after an 18-month ban imposed by Beijing. That gap not only put the brakes on sales growth but allowed rivals such as Meituan to eat into its market share in the hyper-competitive Asian ride-hailing industry.
Didi’s share was more than 90 per cent before the crackdown began. Since then, the number of competitors has surged, with more than 300 ride-hailing apps now operating in the country.
The fallout from the crackdown lingers. Didi shares have gained about 40 per cent in the over-the-counter market from their May low. But a market value of about $17bn is a fraction of what Didi was worth in 2021.
Still, it is not too late for the company to win back lost users. Despite the inroads made by competitors, its market share was about 80 per cent last year. Didi has a history of crushing rivals, including Uber, which sold its China operations to its rival for $7bn in 2016. It has strong backers, including Tencent and Alibaba.
Costs are rising for US delivery groups. Protections for gig workers are increasing through such measures as minimum earnings guarantees. In China, costs are going down. Record youth unemployment means an oversupply of workers in the ride-hailing sector.
On an enterprise value basis, Uber trades at 2.7 times forward sales, a significant premium to Didi at its current valuation. The market in China is expected to grow 12 per cent a year in the next four years.
Didi has a good chance of proving that weak profitability is a problem for western ride-hailing and delivery businesses, not Asian peers.
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