In this briefing:
- MercadoLibre: Competitive Headwinds in Brazil Payments, Macro and Political Concerns in Argentina
- So-Young (新氧) Trading Update – Getting Ahead of Itself
- 4751 🇯🇵 CyberAgent • Interim Update – Don’t Look Any Further
- Nippon Indosari Corpindo (ROTI IJ) - A Baker’s Dozen – On the Ground in J-Town
- Luckin Coffee (瑞幸咖啡) – Blue-Sky/Bear-Case Valuation
1. MercadoLibre: Competitive Headwinds in Brazil Payments, Macro and Political Concerns in Argentina
- MercadoLibre Inc (MELI US) is the leading e-commerce platform in Latin America, present in 18 countries in the region, with Gross Merchandise Volume (GMV) of USD12.5bn in 2018
- We estimate that in its fintech operations, the vast majority of the value lies in the MercadoPago payments business, with its growing presence in Brazil, versus the more recently established credit business MercadoCredito
- We estimate that our valuation of MercadoPago and MercadoCredito is in a range of USD3.6-6.8bn, equivalent to a range of 15%-28% of the market cap
- The first challenges we see for MELI going forward is that 26% of the group’s 2018 revenues were derived from Argentina; the economy is in deep recession, and the upcoming Presidential elections in October could result in a populist and market-unfriendly outcome
- In addition, the intensifying market share contest in the Brazilian payments industry, with incumbents increasing price competition, is likely to hit returns in MercadoPago Brasil
- We recognize the solidity and growth potential of the MELI e-commerce operations throughout Latin America, and the payment entity’s contribution to the overall group valuation; however, we are cautious on MELI shares due to valuation, and we expect the shares to de-rate going forward, especially as the negative catalysts of increased competition in Brazil payments and Argentina macro and political concerns make an impact
So-Young (SY US) raised US$179m at US$13.80 per share, the top of its IPO price range. We have previously analyzed the IPO in:
In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.
RECORD SALES – As the company never tires of pointing out, CyberAgent’s revenues continue to grow apace. The interim quarter saw a record amount of revenue in any quarter of ¥117b, an increase of 7% year-on-year and a record amount for any trailing-twelve-month (TTM) period of ¥440b, 10% above the level reached in FY18-Q2. The IR materials describe this achievement as ‘reaching cruising speed again’, although from the TTM chart above it is hard to see when there was any deceleration.
DON’T LOOK ANY FURTHER – The further down the Income Statment one travels, the less appealing the picture. The company likes to present its profitability in terms of what it describes as ‘existing business, excluding investment development’. The latter has produced over ¥20b in one-off gains over the last five years, which have helped offset nearly ¥62b in ‘up-front investment in the AbemaTV business’ which will presumably cease not to exist if and when it turns a profit. Even using CyberAgent’s logic, the second quarter was the third straight quarter of declining year-on-year profitability. Shareholders meanwhile have to make do with what is generated at the true bottom-line of the Income Statement – Comprehensive Income which saw an increase of just ¥3.2b in the quarter, 24% of ‘adjusted’ profits. CyberAgent’s Shareholders’ Equity (including Other Comprehensive Income) is ¥358m lower than at FY17-Q4 and has declined by 4% since peaking in FY18-Q3. It is no surprise therefore that the company’s PBR has declined by a third in less than a year, although it is still 39% above the FY17-Q4 low.
In the DETAIL section below, we shall cover the interim results in more detail and update the implied valuation for the AbemaTV business. In keeping with the previous report, we provide this brief musical interlude from M People in Berlin.
A meeting with Indonesia’s largest bread company, Nippon Indosari Corpindo (ROTI IJ) at the Lippo Mall at Puri Indah presented a palatable surprise. After a few false summits in its restructuring, the company now is starting to fire on all cylinders and seeing the benefits of the changes.
After increasing its SKUs from 55 to 100 in early in 2018, the company went through a period of digesting these new products in 1H18, whilst at the same time introducing a new forecasting model designed to bring down returns from modern retail. This paid dividends in 2H18, with returns of bread falling to record low levels and looks set to continue into 2019.
ROTI introduced its forecasting tool in 1Q18, gathering data from around 34,000 modern trade outlets and processing the data to enable the company to more accurately forecast supply and hence reduce returns.
The company continues to gain market share in modern trade (80% of sales) and now sells its products through more than 31,000 modern trade outlets. It is also significantly expanding its presence in general trade, expanding from 17,500 points of sale (POS) in 2Q18 to 44,000 POS by December 2018. Sales through general trade grew by 30% in 2018 versus overall sales growth of 11%.
Nippon Indosari Corpindo (ROTI IJ) remains one of the most interesting consumer staples companies in Indonesia, providing exposure to the growth in modern trade and changing consumption habits at the same time. The introduction of a new forecasting model for supply has dramatically improved return rates for its products and hence improved margins. It has more recently turned its focus to general trade, with a significant increase in POS and the introduction of new longer shelf-life products more suited to this space. After one year in the Philippines, the company has rapidly increased exposure there, which provides further long term growth potential. According to Capital IQ consensus, the company is trading on 36.4x FY19E and 32.0x FY20E, with forecast EPS growth of +26% and +14% for FY19E and FY20E respectively. Although not cheap in absolute terms, the company’s new initiatives have put it back on to a long-term growth trajectory.
Luckin Coffee (LK US) is looking to raise up to US$800m in its upcoming IPO. You can find our early thoughts in:
- Luckin Coffee (瑞幸咖啡) Early Thoughts – Caffeine Rush
- Luckin Coffee (瑞幸咖啡) App Walk-Through and Channel Checks
- Luckin Coffee (瑞幸咖啡) Vs. Starbucks (星巴克) – Still Has a Long Way to Go
- Luckin Coffee (瑞幸咖啡) – Base Case Valuation – Cheap Coffee Expensive Company
In this insight, we will derive the valuation of Luckin Coffee based on optimistic and bearish assumptions.