Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

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.<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>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'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?

Asia Consumer Research, Investory

Devi Subhakesan

Asia Consumer Research

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

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, likely valuation estimates based on recent pre-IPO fundraising, the company's operational basics, strengths, and risks as well as its reported financials.<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.

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.

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:<ul>
<li>
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.</li>
<li>
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.</li>
<li>
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 <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>
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.</li>
<li>
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.</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

Latest News from the World’s Leading Innovators

Granite Bay Capital

An innovation focussed investment company

Granite Bay Capital is an innovation focussed investment company with a deep focus on the companies at the leading edge of innovation across major themes such as AI, ubiquitous computing, sustainability, automation and longevity.

Thematic (Sector/Industry)

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.

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.

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

The merger of <a href="https://www.smartkarma.com/entities/matsumotokiyoshi-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:2259:1" rel="noopener">Matsumotokiyoshi Holdings Co., Ltd. (3088 JP)</a> and <a href="https://www.smartkarma.com/entities/cocokara-fine-inc" target="_blank" data-smartkarma-citation="entities:15447:1" rel="noopener">Cocokara Fine (3098 JP)</a> is just one symptom of the growing concentration of market share in the drugstore sector.But the sector's leaders are no longer just battling for dominance in drugstore retailing; increasingly drugstores are evolving far behind this niche sector.Drugstore retailing is growing faster than any sector other than e-commerce because drugstores are positioned to meet customer needs for well-being, health and, nowadays, a broad range of daily necessities including food, and so becoming ever more integrated into consumers’ daily shopping experience.Their eclectic ranges also mean they perform well in the middle of natural disasters and crises of various forms and many chains have seen good results thanks to earthquakes, extreme weather and especially thanks to Covid, but this doesn’t fully explain the sector’s success.Crises may have helped, but Japan’s top drugstores are today some of the country’s best retailers in their own right.The following is a complete, in-depth review of the drugstore sector, including rankings, KPIs, and future trends on the sector and the potential winners.Jun Tsuruha, the current <a href="https://www.smartkarma.com/entities/tsuruha-holdings-inc" target="_blank" data-smartkarma-citation="entities:9536:1" rel="noopener">Tsuruha Holdings (3391 JP)</a> CEO, was widely quoted last year as saying the sector would soon be dominated by just “four or five” major firms. This is far from fantasy, with Tsuruha, <a href="https://www.smartkarma.com/entities/welcia-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:20895:1" rel="noopener">Welcia Holdings (3141 JP)</a>, Matsukiyo-Cocokara, <a href="https://www.smartkarma.com/entities/cosmos-pharmaceutical-corp" target="_blank" data-smartkarma-citation="entities:3797:1" rel="noopener">Cosmos Pharmaceutical (3349 JP)</a> and <a href="https://www.smartkarma.com/entities/sugi-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:9255:1" rel="noopener">Sugi Holdings (7649 JP)</a> the most likely contenders.

The merger of Matsumotokiyoshi Holdings Co., Ltd. (3088 JP) and Cocokara Fine (3098 JP) is just one symptom of the growing concentration of market share in the drugstore sector.But the sector's leaders are no longer just battling for dominance in drugstore retailing; increasingly drugstores are evolving far behind this niche sector.Drugstore retailing is growing faster than any sector other than e-commerce because drugstores are positioned to meet customer needs for well-being, health and, nowadays, a broad range of daily necessities including food, and so becoming ever more integrated into consumers’ daily shopping experience.Their eclectic ranges also mean they perform well in the middle of natural disasters and crises of various forms and many chains have seen good results thanks to earthquakes, extreme weather and especially thanks to Covid, but this doesn’t fully explain the sector’s success.Crises may have helped, but Japan’s top drugstores are today some of the country’s best retailers in their own right.The following is a complete, in-depth review of the drugstore sector, including rankings, KPIs, and future trends on the sector and the potential winners.Jun Tsuruha, the current Tsuruha Holdings (3391 JP) CEO, was widely quoted last year as saying the sector would soon be dominated by just “four or five” major firms. This is far from fantasy, with Tsuruha, Welcia Holdings (3141 JP), Matsukiyo-Cocokara, Cosmos Pharmaceutical (3349 JP) and Sugi Holdings (7649 JP) the most likely contenders.

Japan Drugstores: Growing Leadership in Food, Household, Cosmetics – and the Odd Medicine Too

United States

Amazon.com, Inc. is an online retailer that offers a wide range of products. The Company's products include books, music, videotapes, computers, electronics, home and garden, and numerous other products.  Amazon offers personalized shopping services, Web-based credit card payment, and direct shipping to customers.

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Amazon.com Inc (AMZN US)

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Japan Drugstores: Growing Leadership in Food, Household, Cosmetics – and the Odd Medicine Too

The Japanese drugstore sector has seen a big merger but there will be more as the sector not only consolidates down to a few leaders but also...

Michael Causton

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