Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

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

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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.

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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

TMT & Consumer Independent Equity Research Analyst, Obex Capital Research

Aaron Gabin

TMT & Consumer Independent Equity Research Analyst

TMT & Consumer Independent Equity Research

Obex Capital Research

“Obex” is Latin for Barriers to Entry. Obex Capital Management’s investment philosophy is driven by an intense focus on which business model’s Barriers to Entry are able to withstand the ever increasing competitive disruption in the TMT and Consumer Sectors.

Amazon’s businesses are booming. Retail is on a $400B runrate growing 45%. AWS $54B, growing 32%, Advertising $25B, growing 73%. We think the company is worth $3T or $6000 a share.<div class="content-highlight">Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</div>

Amazon’s businesses are booming. Retail is on a $400B runrate growing 45%. AWS $54B, growing 32%, Advertising $25B, growing 73%. We think the company is worth $3T or $6000 a share.Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

Amazon 1Q21: The Fastest Growing Business in the World

Spotify printed a 1Q21 miss on MAUs and mediocre guidance update for 2021. We’ve said this before and we’ll say it again…Spotify strikes us as one of the worst business models of a large cap TMT company we’ve ever seen. The future bliss of podcasting driven profitability is clearly just that…future bliss. Management has NEVER explained how podcasting will translate into a more profitable business other than through hazy comments about “holistic nature of churn reduction and new users”…it reminds us of Reed Hastings when he promised that one day Netflix would be FCF positive years ago…but at least Netflix had an operating model with inherent operating leverage and pricing power, neither of which is present with Spotify. We can justify downside to $125, but realistically think $200 is a reasonable price target. Stay Short.<div class="content-highlight">Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</div>

Spotify printed a 1Q21 miss on MAUs and mediocre guidance update for 2021. We’ve said this before and we’ll say it again…Spotify strikes us as one of the worst business models of a large cap TMT company we’ve ever seen. The future bliss of podcasting driven profitability is clearly just that…future bliss. Management has NEVER explained how podcasting will translate into a more profitable business other than through hazy comments about “holistic nature of churn reduction and new users”…it reminds us of Reed Hastings when he promised that one day Netflix would be FCF positive years ago…but at least Netflix had an operating model with inherent operating leverage and pricing power, neither of which is present with Spotify. We can justify downside to $125, but realistically think $200 is a reasonable price target. Stay Short.Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

Spotify 1Q21 Earnings: What Is an Audio Platform Worth? 2-3x Sales?

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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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Aaron Gabin

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