ASEAN Insight Provider, CrossASEAN Research

Angus Mackintosh

ASEAN Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> announced its 1Q2021 results which look like a blowout set of numbers with +147% growth in total GAAP revenues with +117% growth in digital bookings for digital entertainment and +250% YoY growth in e-commerce GAAP revenues.</p>
<p>Gross Profit increased a staggering +212% YoY to US$645.4m in 1Q2021 and the company booked a positive EBITDA of US$88.1m versus a (US$69.9m) loss in 1Q2020.</p>
<p>The gross profit margin increased from 28% in 1Q2020 to 36% in 1Q2021, which is a testament to the fact that the company is moving along the path to profitability. Digital entertainment saw higher margins, while-commerce saw falling EBITDA loss per order.</p>
<p>In Digital Entertainment (DE) division continues to see strong growth in its user base with +61% YoY growth in quarterly active users (QAU) to 648.6m but more importantly quarterly paying users saw growth of +12.3% YoY to 79.8m signifying a higher level of monetization on its self-developed game <em>Free Fire.</em></p>
<p>The company continues to successfully expand its gaming business to new geographies, with India being the latest growth engine and players are spending more time on Free Fire and spending more. It continues to add new content and characters to increase the appeal and stickiness of <em>Free Fire</em>. It is also seeing huge response in the eSports arena for <em>Free Fire.</em></p>
<p>Shopee ranked number one in the shopping category by monthly active users and time spent in app in 1Q2021 for both South East Asia and Taiwan, according to App Annie. E-commerce continues to show supercharged growth and especially in the core market of Indonesia.</p>
<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a>'s move into digital payments in South -East Asia under SeaMoney and ShopeePay in Indonesia continues to see strong momentum.  The mobile wallet total payment volume saw total payment volume triple in 1Q2021 to US$3.4bn. </p>
<p>The company is also expanding the offline use-cases for ShopeePay most recently extending use to Indomaret in Indonesia, the largest mini-market operator in the country.</p>
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<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a>'s move into food delivery through ShopeeFood and evidence suggests that it has already had a strong reception to its launch in Jakarta, with growth similar to that in other categories.</p>
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<p>This latest set of results provides further proof of the success of the <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> growth model which generates huge EBITDA from gaming and reinvests that money into growing the company's e-commerce and digital finance businesses, whilst maintaining the investment momentum into the gaming cash cow, buy pushing out into new geographies such as India.</p>
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<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> continues to standout as the best way to play the explosive growth in e-commerce in South East Asia, funded by the popularity of its self developed game <em>Free Fire </em>and its gaming business, together with its move into digital payments a third leg to future growth.</p>
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<section class="figure"><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> valuations are higher than its listed peers on 13x and 9x EV/Sales for FY21E and FY22E respectively but it is growing at more than twice the pace in terms of sales to justify this. The market is also paying a premium for its unique financing plus its market leadership and strong track record on execution, with 11 consecutive quarters of triple-digit growth.</section>
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Sea Ltd (SE US) announced its 1Q2021 results which look like a blowout set of numbers with +147% growth in total GAAP revenues with +117% growth in digital bookings for digital entertainment and +250% YoY growth in e-commerce GAAP revenues.
Gross Profit increased a staggering +212% YoY to US$645.4m in 1Q2021 and the company booked a positive EBITDA of US$88.1m versus a (US$69.9m) loss in 1Q2020.
The gross profit margin increased from 28% in 1Q2020 to 36% in 1Q2021, which is a testament to the fact that the company is moving along the path to profitability. Digital entertainment saw higher margins, while-commerce saw falling EBITDA loss per order.
In Digital Entertainment (DE) division continues to see strong growth in its user base with +61% YoY growth in quarterly active users (QAU) to 648.6m but more importantly quarterly paying users saw growth of +12.3% YoY to 79.8m signifying a higher level of monetization on its self-developed game Free Fire.
The company continues to successfully expand its gaming business to new geographies, with India being the latest growth engine and players are spending more time on Free Fire and spending more. It continues to add new content and characters to increase the appeal and stickiness of Free Fire. It is also seeing huge response in the eSports arena for Free Fire.
Shopee ranked number one in the shopping category by monthly active users and time spent in app in 1Q2021 for both South East Asia and Taiwan, according to App Annie. E-commerce continues to show supercharged growth and especially in the core market of Indonesia.
Sea Ltd (SE US)'s move into digital payments in South -East Asia under SeaMoney and ShopeePay in Indonesia continues to see strong momentum.  The mobile wallet total payment volume saw total payment volume triple in 1Q2021 to US$3.4bn. 
The company is also expanding the offline use-cases for ShopeePay most recently extending use to Indomaret in Indonesia, the largest mini-market operator in the country.

Sea Ltd (SE US)'s move into food delivery through ShopeeFood and evidence suggests that it has already had a strong reception to its launch in Jakarta, with growth similar to that in other categories.

This latest set of results provides further proof of the success of the Sea Ltd (SE US) growth model which generates huge EBITDA from gaming and reinvests that money into growing the company's e-commerce and digital finance businesses, whilst maintaining the investment momentum into the gaming cash cow, buy pushing out into new geographies such as India.



Sea Ltd (SE US) continues to standout as the best way to play the explosive growth in e-commerce in South East Asia, funded by the popularity of its self developed game Free Fire and its gaming business, together with its move into digital payments a third leg to future growth.

Sea Ltd (SE US) valuations are higher than its listed peers on 13x and 9x EV/Sales for FY21E and FY22E respectively but it is growing at more than twice the pace in terms of sales to justify this. The market is also paying a premium for its unique financing plus its market leadership and strong track record on execution, with 11 consecutive quarters of triple-digit growth.

















Consumer Discretionary / Industrials

Henry Kwon

<p>CPNG's shares declined by 9.3% on May 13, the day following its 1Q21 earnings release, but has since recovered its loss as of close on May 17. A key question should be whether this represents a dead cat bounce, or whether it represents the beginning of a sustainable share price recovery?</p><p>Without reliable technical parameters established, we mainly rely on two factors, namely Fibonnaci retracement levels and a DCF analysis based on current consensus forecasts to determine how much growth CPNG would have to generate in order to justify its current share price levels.</p><ul>
<li>$39.95 represents the stock's 78.6% Fibonacci Retracement level which became resistance since it was breached on May 6 on intra-day basis and confirmed on May 7 close.</li>
<li>Taking current consensus 3-year EBITDA and Free Cash Flow Forecasts, with a 20% target Debt ratio in the mix, a DCF analysis suggests that current share price level would be sustainable on a terminal growth range of 9.6-10.1%. A terminal growth rate of 2% would suggest a $5.00 share price, on the other hand.</li>
</ul><p>In a flattening yield curve environment, we believe the market would not have much objections to 8-9% terminal growth assumptions at a practical level even though analysts would sound alarm bells. However, at this juncture we believe investors should pay heed to whether inflationary concerns will continue to lead to a steepening yield curve, thereby creating continuing headwinds for CPNG's share price performance over the next 3 to 6 months.</p>

CPNG's shares declined by 9.3% on May 13, the day following its 1Q21 earnings release, but has since recovered its loss as of close on May 17. A key question should be whether this represents a dead cat bounce, or whether it represents the beginning of a sustainable share price recovery?Without reliable technical parameters established, we mainly rely on two factors, namely Fibonnaci retracement levels and a DCF analysis based on current consensus forecasts to determine how much growth CPNG would have to generate in order to justify its current share price levels.
$39.95 represents the stock's 78.6% Fibonacci Retracement level which became resistance since it was breached on May 6 on intra-day basis and confirmed on May 7 close.
Taking current consensus 3-year EBITDA and Free Cash Flow Forecasts, with a 20% target Debt ratio in the mix, a DCF analysis suggests that current share price level would be sustainable on a terminal growth range of 9.6-10.1%. A terminal growth rate of 2% would suggest a $5.00 share price, on the other hand.
In a flattening yield curve environment, we believe the market would not have much objections to 8-9% terminal growth assumptions at a practical level even though analysts would sound alarm bells. However, at this juncture we believe investors should pay heed to whether inflationary concerns will continue to lead to a steepening yield curve, thereby creating continuing headwinds for CPNG's share price performance over the next 3 to 6 months.

CPNG: Dead Cat Bounce or a More Sustainable Price Recovery in the Cards?

Equity Analyst - Asia Consumer Sector, Investory

Devi Subhakesan

Equity Analyst - Asia Consumer Sector

ASIA CONSUMER: INSIGHTS AND INVESTMENT IDEAS

Investory

Investory is a Singapore-based boutique independent equity research firm founded in January 2017 with a primary focus on consumption themes across Asia-Pacific.

We aim to generate investible ideas based on consumption trends and outlook. We screen our ideas on several parameters - product potential, long-term growth and management commitment being the most critical.  We follow a fundamental analysis approach in our stock selection process and are not restricted by market cap.

We aspire to grow into a leading source of unbiased research, free of conflict of interest, for investors yearning for independent and disciplined analysis. 

We also undertake bespoke research mandates to support our Institutional clients’ investment needs.

Our team comprises of professionals with extensive experience in the Asian equity markets, in areas ranging from research, servicing institutional clients and investment management.

Equity Capital Markets

<p>In this IPO report on <a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOM IN)</a> we discuss the proposed issue details, <em><strong>likely valuation estimates based on recent pre-IPO fundraising</strong></em>, the company's operational basics, strengths, and risks as well as its reported financials.</p><p><a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOM IN)</a>, a leading online food delivery platform based in India, has filed with the regulator to raise more than a billion dollars through a combination of fresh equity and the sale of existing shares. Online food delivery services witnessed skyrocketing demand growth last year thanks to COVID-led restrictions. With India now being hit by another wave of the pandemic, which seems way stronger and deadlier than last year, lockdowns and travel restrictions are back; this could be another boom period for Zomato and its peers. However, we suspect the timing of the IPO may not be opportune given the country is reeling from the aftermath of a devastating new wave and the retail investment environment may not be enthusing. </p>

In this IPO report on Zomato (ZOM IN) we discuss the proposed issue details, likely valuation estimates based on recent pre-IPO fundraising, the company's operational basics, strengths, and risks as well as its reported financials.Zomato (ZOM IN), a leading online food delivery platform based in India, has filed with the regulator to raise more than a billion dollars through a combination of fresh equity and the sale of existing shares. Online food delivery services witnessed skyrocketing demand growth last year thanks to COVID-led restrictions. With India now being hit by another wave of the pandemic, which seems way stronger and deadlier than last year, lockdowns and travel restrictions are back; this could be another boom period for Zomato and its peers. However, we suspect the timing of the IPO may not be opportune given the country is reeling from the aftermath of a devastating new wave and the retail investment environment may not be enthusing. 

Zomato's USD 1Bn IPO: India Foodtech's Lead Play. Striking when the Market Is COVID-Hot.

<p>Coupang's (CPNG) first quarterly earnings call highlighted the lack of pricing power that CPNG currently has in the intensely competitive Korean E-Commerce market. Here are some of our initial thoughts on the 1Q numbers and management comments:</p><ul>
<li>
<strong>1Q Results Disappointing. </strong>Revenues grew at 74% YoY but Operating costs grew at 79.9% in the same period, with widening operating losses on both QoQ and YoY bases. 1Q21 Operating Loss of USD267.3mn was the largest quarterly loss that CPNG has seen in the 12 quarters disclosed by the company.</li>
<li>
<strong>Lack of Pricing Power and logistical cost burdens seem to be behind CPNG's margin compression. </strong>Based on CPNG's Korean annual disclosure from which it is easier to separate fixed and variable costs at the gross profit level, degree of operating leverage in FY20 was 1.8x. In other words, assuming fixed costs remain relatively constant, CPNG's gross margin should easily see expansion into the 20%+ range on a 74% revenue growth. It is clear in our view, however, that the margin deterioration is most likely being driven by both a) continued investments into logistics infrastructure and b) lack of pricing power that CPNG currently has with just 9% share of Korea's e-commerce market based on FY20 figures.</li>
<li>
<strong>Fierce Price Competition in the Domestic Market. </strong>Management stressed customer satisfaction with attractive prices and speedy delivery for customers on multiple occasions during the call, which only reinforced the observations we made in the previous bullet point on price competition. As if to confirm this observation Emart on May 13 announced that it will expand its lowest price guarantee on products for delivery, from 500 items to 2,000 (see <a href="https://www.smedaily.co.kr/news/articleView.html?idxno=203561" target="_blank" rel="noopener">https://www.smedaily.co.kr/news/articleView.html?idxno=203561</a>).</li>
<li>
<strong>Challenges to Market Dominance. </strong>As a point of comparison, AMZN in the U.S. had 25% of the American online retail market, versus CPNG's 9% share of the Korean E-Commerce market in 2020. With deep pocketed competitors such as Emart and LOTTEmart mall achieving market dominance will likely continue to prove costly in our view.</li>
<li>
<strong>Short term Headwinds to Share Price Performance. </strong>With inflation fears mounting in the equity market with a steepening yield curve, topline growth alone will make it challenging for NASDAQ-listed growth stocks to command valuation premiums in our view. The biggest challenge for CPNG in our view is that it is basically an emerging market stock listed on NASDAQ, a double hurdle at a time when systemic risks seem to be mounting.</li>
</ul>

Coupang's (CPNG) first quarterly earnings call highlighted the lack of pricing power that CPNG currently has in the intensely competitive Korean E-Commerce market. Here are some of our initial thoughts on the 1Q numbers and management comments:

1Q Results Disappointing. Revenues grew at 74% YoY but Operating costs grew at 79.9% in the same period, with widening operating losses on both QoQ and YoY bases. 1Q21 Operating Loss of USD267.3mn was the largest quarterly loss that CPNG has seen in the 12 quarters disclosed by the company.

Lack of Pricing Power and logistical cost burdens seem to be behind CPNG's margin compression. Based on CPNG's Korean annual disclosure from which it is easier to separate fixed and variable costs at the gross profit level, degree of operating leverage in FY20 was 1.8x. In other words, assuming fixed costs remain relatively constant, CPNG's gross margin should easily see expansion into the 20%+ range on a 74% revenue growth. It is clear in our view, however, that the margin deterioration is most likely being driven by both a) continued investments into logistics infrastructure and b) lack of pricing power that CPNG currently has with just 9% share of Korea's e-commerce market based on FY20 figures.

Fierce Price Competition in the Domestic Market. Management stressed customer satisfaction with attractive prices and speedy delivery for customers on multiple occasions during the call, which only reinforced the observations we made in the previous bullet point on price competition. As if to confirm this observation Emart on May 13 announced that it will expand its lowest price guarantee on products for delivery, from 500 items to 2,000 (see https://www.smedaily.co.kr/news/articleView.html?idxno=203561).

Challenges to Market Dominance. As a point of comparison, AMZN in the U.S. had 25% of the American online retail market, versus CPNG's 9% share of the Korean E-Commerce market in 2020. With deep pocketed competitors such as Emart and LOTTEmart mall achieving market dominance will likely continue to prove costly in our view.

Short term Headwinds to Share Price Performance. With inflation fears mounting in the equity market with a steepening yield curve, topline growth alone will make it challenging for NASDAQ-listed growth stocks to command valuation premiums in our view. The biggest challenge for CPNG in our view is that it is basically an emerging market stock listed on NASDAQ, a double hurdle at a time when systemic risks seem to be mounting.


CPNG: 1Q21 - Revenues Soar, Losses Deepen

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<p>Headline Developments The battle is on between Fortnite developer Epic Games (private) and Apple (AAPL) - a David and Goliath case which, in a nutshell, will ask whether Apple is acting fairly by charging developers a 15-30% fee for all revenues made via subscriptions and in-app purchases.</p>

Headline Developments The battle is on between Fortnite developer Epic Games (private) and Apple (AAPL) - a David and Goliath case which, in a nutshell, will ask whether Apple is acting fairly by charging developers a 15-30% fee for all revenues made via subscriptions and in-app purchases.

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