Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

In this insight, we compare the key financials and metrics of Kurly versus SSG.com. Kurly is a leading fresh food e-commerce company in Korea. Kurly is preparing for an IPO (most likely in the US) in 2H 2021. SSG.com is the e-commerce platform of <a href="https://www.smartkarma.com/entities/e-mart-inc" target="_blank" data-smartkarma-citation="entities:6993:1" rel="noopener">E Mart Inc (139480 KS)</a>. SSG.com is also an IPO candidate but its IPO is more likely in 2022/2023. After the hugely successful IPO of <a href="https://www.smartkarma.com/entities/coupang" target="_blank" data-smartkarma-citation="entities:28425:1" rel="noopener">Coupang (CPNG US)</a>, there has been a lot more interest in the competitors of Coupang that could also be the next IPO candidates. <a href="http://www.naeil.com/news_view/?id_art=382075" target="_blank" rel="noopener">Kurly</a> has selected Goldman Sachs, Morgan Stanley, and JP Morgan as its lead underwriters for the IPO listing in the US in 2H 2021. Kurly's founder &amp; CEO Kim Seul-Ah is an ex-Goldman Sachs banker. Kim Jong-Hoon, the CFO of Kurly, worked previously at Morgan Stanley. <div class="content-highlight">Attaching lower valuation multiples for Kurly (5x to 10x P/GP, using 2020 figures, which would be much lower than Kurly's P/GP ratio of 29.5x at $4.4 billion valuation), this would suggest potential valuation of 3.1 trillion won (US$2.7 billion) to 6.0 trillion won (US$5.4 billion) for SSG.com. Given that Emart has a 50.1% stake in SSG.com, this would represent a 32% and 65% in Emart's market cap, respectively. </div>

In this insight, we compare the key financials and metrics of Kurly versus SSG.com. Kurly is a leading fresh food e-commerce company in Korea. Kurly is preparing for an IPO (most likely in the US) in 2H 2021. SSG.com is the e-commerce platform of E Mart Inc (139480 KS). SSG.com is also an IPO candidate but its IPO is more likely in 2022/2023. After the hugely successful IPO of Coupang (CPNG US), there has been a lot more interest in the competitors of Coupang that could also be the next IPO candidates. Kurly has selected Goldman Sachs, Morgan Stanley, and JP Morgan as its lead underwriters for the IPO listing in the US in 2H 2021. Kurly's founder &amp; CEO Kim Seul-Ah is an ex-Goldman Sachs banker. Kim Jong-Hoon, the CFO of Kurly, worked previously at Morgan Stanley. Attaching lower valuation multiples for Kurly (5x to 10x P/GP, using 2020 figures, which would be much lower than Kurly's P/GP ratio of 29.5x at $4.4 billion valuation), this would suggest potential valuation of 3.1 trillion won (US$2.7 billion) to 6.0 trillion won (US$5.4 billion) for SSG.com. Given that Emart has a 50.1% stake in SSG.com, this would represent a 32% and 65% in Emart's market cap, respectively. 

2020 Financials Comparison of Kurly Vs SSG.Com (IPO Candidates in 2021 & 2022)

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

<a target="_blank"></a>Coupang is by far the leader in one of the most compelling markets for eCommerce globally and one of the most attractive of the Vision Fund portfolio companies. But it is expensive: the $30 max offer price implies a 5x appreciation in value from its last private funding round in 2018 and a FY21 EV/sales multiple of 2.6x almost on par with Amazon which is a global leader in both eCommerce and cloud.  We value Coupang below the range at $26 using a 9-year DCF driven by 17% revenue CAGR and an 8% terminal OP margin.    This report includes our initial forecasts, valuation, a summary of the investment highlights and a list of questions we would ask on the roadshow.<h2>Highlights</h2>Coupang dominates a very attractive eCommerce market.  Korea scores high on two measures of eCommerce predictive success, Internet penetration and population density and Coupang is by-far the leading provider. It helps that global competition has been unable to gain traction whilst traditional retailers are smaller scale relative to other markets.eCommerce demand has accelerated as Covid-19 accelerates augments a secular shift in retail sales to online platforms.  Revenue growth expanded from 71% in Q4 19 to 100% in Q4 20 but expanding growth was a feature through 2019 as well. eCommerce penetration of c. 25% may have nearly doubled in FY20 although some of that demand shift may revert as the impact of Covid-19 fades.The company is flirting with profitability. Operating margins have moved from -30% in FY16 to -4% in FY20 with corresponding improvement in EBITDA (-30% to -3%).  In our model, we assume Coupang breaks even in FY21 although higher share-based compensation and/or higher spending as it puts IPO proceeds to work could extend that.But it is still burning a lot of cash.  Coupang might be close to break-even operationally but it has largely spent the money it received from <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a>  in 2018. Over the last three years, $2.7bn has gone out the door including c. $800mn in FY20 alone (our measure of operating cash flow).Comparable valuations and relative changes to valuation highlight the premium valuation. <a href="https://www.smartkarma.com/entities/coupang" target="_blank" data-smartkarma-citation="entities:28425:1" rel="noopener">Coupang (CPNG US)</a>  max offer price values the company similarly to Amazon on FY21 EV/sales (2.7x v 2.8x) but the latter is a global leader and not just in eCommerce but cloud too. Similarly, Coupang’s value appreciation from its last private funding and March 2020 lows has outpaced peer group, sometimes significantly.

Coupang is by far the leader in one of the most compelling markets for eCommerce globally and one of the most attractive of the Vision Fund portfolio companies. But it is expensive: the $30 max offer price implies a 5x appreciation in value from its last private funding round in 2018 and a FY21 EV/sales multiple of 2.6x almost on par with Amazon which is a global leader in both eCommerce and cloud.  We value Coupang below the range at $26 using a 9-year DCF driven by 17% revenue CAGR and an 8% terminal OP margin.    This report includes our initial forecasts, valuation, a summary of the investment highlights and a list of questions we would ask on the roadshow.HighlightsCoupang dominates a very attractive eCommerce market.  Korea scores high on two measures of eCommerce predictive success, Internet penetration and population density and Coupang is by-far the leading provider. It helps that global competition has been unable to gain traction whilst traditional retailers are smaller scale relative to other markets.eCommerce demand has accelerated as Covid-19 accelerates augments a secular shift in retail sales to online platforms.  Revenue growth expanded from 71% in Q4 19 to 100% in Q4 20 but expanding growth was a feature through 2019 as well. eCommerce penetration of c. 25% may have nearly doubled in FY20 although some of that demand shift may revert as the impact of Covid-19 fades.The company is flirting with profitability. Operating margins have moved from -30% in FY16 to -4% in FY20 with corresponding improvement in EBITDA (-30% to -3%).  In our model, we assume Coupang breaks even in FY21 although higher share-based compensation and/or higher spending as it puts IPO proceeds to work could extend that.But it is still burning a lot of cash.  Coupang might be close to break-even operationally but it has largely spent the money it received from Softbank Group (9984 JP)  in 2018. Over the last three years, $2.7bn has gone out the door including c. $800mn in FY20 alone (our measure of operating cash flow).Comparable valuations and relative changes to valuation highlight the premium valuation. Coupang (CPNG US)  max offer price values the company similarly to Amazon on FY21 EV/sales (2.7x v 2.8x) but the latter is a global leader and not just in eCommerce but cloud too. Similarly, Coupang’s value appreciation from its last private funding and March 2020 lows has outpaced peer group, sometimes significantly.

Coupang IPO and Softbank Group - A Vision Fund Jewel Emerges but It Is Pricey

Event-Driven

Chung Yong-Jin (biggest shareholder of Emart) and Chung Yoo-Kyung (biggest shareholder of Shinsegae) will be having a happy Chuseok (Korean Thanksgiving day) holiday this week. This is because their mother (Lee Myung-Hee, the Chairwoman of the Shinsegae Group and the youngest daughter of the late Samsung founder Lee Byung-Chul, gave a lot of shares of Emart and Shinsegae to her son (Chung Yong-Jin) and daughter (Chung Yoo-Kyung) today.

Chung Yong-Jin (biggest shareholder of Emart) and Chung Yoo-Kyung (biggest shareholder of Shinsegae) will be having a happy Chuseok (Korean Thanksgiving day) holiday this week. This is because their mother (Lee Myung-Hee, the Chairwoman of the Shinsegae Group and the youngest daughter of the late Samsung founder Lee Byung-Chul, gave a lot of shares of Emart and Shinsegae to her son (Chung Yong-Jin) and daughter (Chung Yoo-Kyung) today. 

Lee Myung-Hee Gives Big Stakes of Emart and Shinsegae to Her Son & Daughter

Cross Asset Strategy

<div class="content-highlight">It has been reported in the past few days that <a href="http://www.koreaninvestors.com/?p=12175" target="_blank" rel="noopener">NPS</a> is likely to put a greater emphasis on ESG (environmental, social, &amp; governance) based investing for Korean stocks and bonds starting 2021. NPS has currently given a mandate to a company to help NPS to apply ESG based investment system. The ESG evaluations are expected to aid NPS to actively exercise shareholder rights and also to carry out negative screening of stocks.</div><h3>Implications of NPS Incorporating More ESG Criteria on Domestic Investments (Bonds &amp; Stocks)</h3><ul>
<li>Negative Impact on VICE industries </li>
<li>Positive Impact on Renewable Energy Industries</li>
<li>Negative Impact on Coal &amp; Oil Industries</li>
<li>Greater Representation of Women in Senior Management Team/BOD</li>
</ul>

It has been reported in the past few days that NPS is likely to put a greater emphasis on ESG (environmental, social, &amp; governance) based investing for Korean stocks and bonds starting 2021. NPS has currently given a mandate to a company to help NPS to apply ESG based investment system. The ESG evaluations are expected to aid NPS to actively exercise shareholder rights and also to carry out negative screening of stocks.Implications of NPS Incorporating More ESG Criteria on Domestic Investments (Bonds &amp; Stocks)
Negative Impact on VICE industries 
Positive Impact on Renewable Energy Industries
Negative Impact on Coal &amp; Oil Industries
Greater Representation of Women in Senior Management Team/BOD


NPS - Greater Emphasis of ESG Based Investing for Korean Stocks & Bonds Starting 2021

It was announced after the market close yesterday that the minimum wage for 2021 has been determined at 8,720 won, up 1.5% YoY, which would be the lowest increase ever. From 2013 to 2021, the average annual increase in the minimum wage in Korea was 7.7% so this low increase in minimum wage rates is much lower than the historical average.There are several sectors that are clear beneficiaries of this low growth in minimum wages in 2021. One of them is the convenience stores sector, which includes <a href="https://www.smartkarma.com/entities/gs-retail-co-ltd" target="_blank" data-smartkarma-citation="entities:3867:1" rel="noopener">GS Retail (007070 KS)</a> and <a href="https://www.smartkarma.com/entities/bgf-retail-co-ltd" target="_blank" data-smartkarma-citation="entities:26731:1" rel="noopener">BGF Retail (282330 KS)</a>.In addition to the CVS sector, the following companies should also benefit from the low minimum wage growth:<ul>
<li><a href="https://www.smartkarma.com/entities/6993" target="_blank" data-smartkarma-citation="entities:6993:1" rel="noopener">E Mart Inc (139480 KS)</a></li>
<li><a href="https://www.smartkarma.com/entities/2338" target="_blank" data-smartkarma-citation="entities:2338:1" rel="noopener">Lotte Shopping Co (023530 KS)</a></li>
<li><a href="https://www.smartkarma.com/entities/cj-korea-express-corp" target="_blank" data-smartkarma-citation="entities:11557:1" rel="noopener">Cj Logistics (000120 KS)</a></li>
<li><a href="https://www.smartkarma.com/entities/20987" target="_blank" data-smartkarma-citation="entities:20987:1" rel="noopener">Shinsegae Co Ltd (004170 KS).</a></li>
<li>
<a href="https://www.smartkarma.com/entities/cj-cheiljedang-corp" target="_blank" data-smartkarma-citation="entities:1970:1" rel="noopener">CJ Cheiljedang (097950 KS)</a> </li>
</ul>

It was announced after the market close yesterday that the minimum wage for 2021 has been determined at 8,720 won, up 1.5% YoY, which would be the lowest increase ever. From 2013 to 2021, the average annual increase in the minimum wage in Korea was 7.7% so this low increase in minimum wage rates is much lower than the historical average.There are several sectors that are clear beneficiaries of this low growth in minimum wages in 2021. One of them is the convenience stores sector, which includes GS Retail (007070 KS) and BGF Retail (282330 KS).In addition to the CVS sector, the following companies should also benefit from the low minimum wage growth:
E Mart Inc (139480 KS)
Lotte Shopping Co (023530 KS)
Cj Logistics (000120 KS)
Shinsegae Co Ltd (004170 KS).

CJ Cheiljedang (097950 KS) 


A Surprising Low Increase of Minimum Wages in Korea in 2021

South Korea

Shinsegae Co., Ltd. operates department stores in South Korea.  The Company retails food, clothing, household goods, electronics, and other items through several branch stores.

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Shinsegae (004170 KS)

2020 Financials Comparison of Kurly Vs SSG.Com (IPO Candidates in 2021 & 2022)

In this insight, we compare the key financials and metrics of Kurly versus SSG.com. Kurly is preparing for an IPO (most likely in the US) in 2H 2021.

Douglas Kim

Coupang IPO and Softbank Group - A Vision Fund Jewel Emerges but It Is Pricey

Coupang's IPO is a win for the company and its largest holder Softbank but the max offer price of $30 is too pricey - we think it is worth closer...

Kirk Boodry

Lee Myung-Hee Gives Big Stakes of Emart and Shinsegae to Her Son & Daughter

Chung Yong-Jin (biggest shareholder of Emart) and Chung Yoo-Kyung (biggest shareholder of Shinsegae) will be having a happy Chuseok (Korean...

Douglas Kim

NPS - Greater Emphasis of ESG Based Investing for Korean Stocks & Bonds Starting 2021

It has been reported in the past few days that NPS is likely to put a greater emphasis on ESG (environmental, social, & governance) based...

Douglas Kim

A Surprising Low Increase of Minimum Wages in Korea in 2021

It was announced after the market close yesterday that the minimum wage for 2021 has been determined at 8,720 won, up 1.5% YoY, which would be the...

Douglas Kim

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