Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Equity Bottom-Up

<h2>Why is Coupang below $30?</h2>Coupang's stock price finally fell below $30.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/696/original/Screen+Shot+2021-08-29+at+1.50.45+AM.png?1630216270" class="editor-image img-responsive" data-smartkarma-image-id="226696"></figure></section>As we all know, the main reason for this is the disappointment with the second-quarter results announced on August 11th. Coupang's stock has plummeted nearly 20% since the 11th.Coupang posted sales of $4.48B in the second quarter, which is pretty much in line with the market average forecast of $4.45B. However, EPS was -0.30 dollars, which fell short of the market average forecast of -0.13 dollars.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/695/original/Screen+Shot+2021-08-29+at+1.48.52+AM.png?1630216183" class="editor-image img-responsive" data-smartkarma-image-id="226695"></figure></section>It is true that the cost of the fire at the Deokpyeong Logistics Center that occurred on June 17, which was $295M, resulted in a significant increase in the net loss. Coupang has insurance to cover this cost. So, it is expected that insurance payments will cover these fire-related losses in the third quarter.However, even excluding these costs, the key point is that Coupang failed to reduce the size of its net loss as much as the market expected in the second quarter.<section class="figure">Although Coupang is not yet in the black, the secret to maintaining a huge market cap is the declining SG&amp;A ratio through economies of scale.
In fact, the SG&amp;A ratio to Coupang's total sales has continuously decreased from 31% in 2018 to 27% in 2019 and 22% in 2020. So, the market predicted that Coupang could turn to the black from 2023. The current market cap size requires both sales growth and SG&amp;A decline. However, as the SG&amp;A decline did not continue in the second quarter as in the first quarter, investors began to feel anxious.
These results are sufficiently expected. In the absence of a profitable anchor business like Amazon's AWS, Coupang's survival strategy is to continuously expand its market share. However, there are many questions about how Coupang could overcome and survive it from a cost perspective when the bleeding competition of local competitors intensifies to the extent that has never been seen.
Competition with Naver, an existing online commerce powerhouse, is a concern. But even more worrisome is Shinsegae, the strongest player in the local offline commerce market. It is making every effort to secure liquidity, which is the basis of the bleeding competition against Coupang, by selling most of its real estate assets.
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/226/698/original/Screen+Shot+2021-08-29+at+1.59.49+AM.png?1630217189" class="editor-image img-responsive" data-smartkarma-image-id="226698"></figure></section></section>

Why is Coupang below $30?Coupang's stock price finally fell below $30.As we all know, the main reason for this is the disappointment with the second-quarter results announced on August 11th. Coupang's stock has plummeted nearly 20% since the 11th.Coupang posted sales of $4.48B in the second quarter, which is pretty much in line with the market average forecast of $4.45B. However, EPS was -0.30 dollars, which fell short of the market average forecast of -0.13 dollars.It is true that the cost of the fire at the Deokpyeong Logistics Center that occurred on June 17, which was $295M, resulted in a significant increase in the net loss. Coupang has insurance to cover this cost. So, it is expected that insurance payments will cover these fire-related losses in the third quarter.However, even excluding these costs, the key point is that Coupang failed to reduce the size of its net loss as much as the market expected in the second quarter.Although Coupang is not yet in the black, the secret to maintaining a huge market cap is the declining SG&amp;A ratio through economies of scale.
In fact, the SG&amp;A ratio to Coupang's total sales has continuously decreased from 31% in 2018 to 27% in 2019 and 22% in 2020. So, the market predicted that Coupang could turn to the black from 2023. The current market cap size requires both sales growth and SG&amp;A decline. However, as the SG&amp;A decline did not continue in the second quarter as in the first quarter, investors began to feel anxious.
These results are sufficiently expected. In the absence of a profitable anchor business like Amazon's AWS, Coupang's survival strategy is to continuously expand its market share. However, there are many questions about how Coupang could overcome and survive it from a cost perspective when the bleeding competition of local competitors intensifies to the extent that has never been seen.
Competition with Naver, an existing online commerce powerhouse, is a concern. But even more worrisome is Shinsegae, the strongest player in the local offline commerce market. It is making every effort to secure liquidity, which is the basis of the bleeding competition against Coupang, by selling most of its real estate assets.


Thoughts on Short-Selling Coupang Aimed at September 6th Massive Lockup Release

Telco/Internet specialist

Kirk Boodry

Redex Research

Virtuous circle themes of Vision Fund IPOs, ongoing buybacks/MBOs and Alibaba expansion have been replaced by vicious circle narratives of China regulation, the reality of weak liquidity events and another pause in returns to shareholders. The net result is Softbank trades at a similar price and discount to what it did in September last year even as NASDAQ has climbed 25%. The sell off in Softbank shares since Q4 results in May was initially driven by disappointment on a buyback but the discount has stabilized and recent weakness reflects erosion in the underlying value/share.

Virtuous circle themes of Vision Fund IPOs, ongoing buybacks/MBOs and Alibaba expansion have been replaced by vicious circle narratives of China regulation, the reality of weak liquidity events and another pause in returns to shareholders. The net result is Softbank trades at a similar price and discount to what it did in September last year even as NASDAQ has climbed 25%. The sell off in Softbank shares since Q4 results in May was initially driven by disappointment on a buyback but the discount has stabilized and recent weakness reflects erosion in the underlying value/share.     

Softbank Group - The Great Unwinding Has Shifted from the Discount to Underlying Value

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Coupang's share price fell 8% in the first-day trading session after the company's 2Q21 results were announced.  Does this present an entry opportunity?  No, I believe there is still a downside to Coupang's story. I believe the results validated my concerns highlighted in my previous two reports ( <a href="https://www.smartkarma.com/insights/coupang-cpng-us-crack-in-the-armor" target="_blank" data-smartkarma-citation="insights:51455" rel="noopener">Coupang (CPNG US): Crack in the Armor</a> and <a href="https://www.smartkarma.com/insights/coupang-cpng-us-going-mano-e-mano-with-jd-com" target="_blank" data-smartkarma-citation="insights:49065" rel="noopener">Coupang (CPNG US): Going Mano E Mano with JD.com</a>): <ol>
<li>
Coupang's revenue growth is sharply decelerating towards 60% in 2H21.  In my "Mano e Mano" report, I highlight what happened to high-growth stocks when their growth slowed to 50% - 60% (e.g.,<a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a>, <a href="https://www.smartkarma.com/entities/vipshop-holdings-ltd-adr" target="_blank" data-smartkarma-citation="entities:1088:1" rel="noopener">Vipshop Holdings (VIPS US)</a>).</li>
<li>
Operating leverage has not been reached yet. In fact, operating losses still doubled even after excluding costs associated with the FC Fire as losses from Eats and Rocket Fresh grocery delivery continues.  </li>
<li>
 Adding new customers is key as revenue per customer growth continues to decelerate. </li>
</ol>Valuations remain uncompelling. Coupang trades at a significant premium to JD.com on EV/revenue and EV/Gross Profit even after considering the difference in growth. The key upside risk is if investors rotate from Chinese platforms to Coupang to mitigate Chinese regulatory risk.  I would note though that Coupang also faces regulatory risk and poor public perception as highlighted in my previous report, <a href="https://www.smartkarma.com/insights/coupang-cpng-us-under-the-regulator-s-microscope" target="_blank" data-smartkarma-citation="insights:54103" rel="noopener">Coupang (CPNG US): Under the Regulator's Microscope.</a>

Coupang's share price fell 8% in the first-day trading session after the company's 2Q21 results were announced.  Does this present an entry opportunity?  No, I believe there is still a downside to Coupang's story. I believe the results validated my concerns highlighted in my previous two reports ( Coupang (CPNG US): Crack in the Armor and Coupang (CPNG US): Going Mano E Mano with JD.com): 

Coupang's revenue growth is sharply decelerating towards 60% in 2H21.  In my "Mano e Mano" report, I highlight what happened to high-growth stocks when their growth slowed to 50% - 60% (e.g.,JD.com Inc (ADR) (JD US), Vipshop Holdings (VIPS US)).

Operating leverage has not been reached yet. In fact, operating losses still doubled even after excluding costs associated with the FC Fire as losses from Eats and Rocket Fresh grocery delivery continues.  

 Adding new customers is key as revenue per customer growth continues to decelerate. 
Valuations remain uncompelling. Coupang trades at a significant premium to JD.com on EV/revenue and EV/Gross Profit even after considering the difference in growth. The key upside risk is if investors rotate from Chinese platforms to Coupang to mitigate Chinese regulatory risk.  I would note though that Coupang also faces regulatory risk and poor public perception as highlighted in my previous report, Coupang (CPNG US): Under the Regulator's Microscope.

Coupang (CPNG US): Heavier Bleeding Takes the Wind Out of Coupang's Sails

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 On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic outright.  During the case, Epic Games outlined Google’s plans to develop “a series of internal projects to address the ‘contagion’ it perceived from efforts by Epic and others to offer consumers and developers competitive alternatives and has even contemplated buying some or all of Epic to squelch this threat”.

Headline Developments On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic outright.  During the case, Epic Games outlined Google’s plans to develop “a series of internal projects to address the ‘contagion’ it perceived from efforts by Epic and others to offer consumers and developers competitive alternatives and has even contemplated buying some or all of Epic to squelch this threat”.

The last three quarters have largely been defined by the potential for Vision Fund portfolio companies to go public but a new theme is emerging as Softbank starts to take money off the table. There was much less discussion of liquidity events but more on asset sales including partial sales of <a href="https://www.smartkarma.com/entities/uber-technologies-inc" target="_blank" data-smartkarma-citation="entities:430:1" rel="noopener">Uber (UBER US)</a> , <a href="https://www.smartkarma.com/entities/ke-holdings-inc" target="_blank" data-smartkarma-citation="entities:29213:1" rel="noopener">KE Holdings Inc (BEKE US)</a> , <a href="https://www.smartkarma.com/entities/doordash-inc" target="_blank" data-smartkarma-citation="entities:28881:1" rel="noopener">DoorDash Inc (DASH US)</a> , Guardant Health and Northstar public equities in the quarter. With a further sale of Uber shares this month, that theme probably picks up steam as the quarter goes on, particularly if <a href="https://www.smartkarma.com/entities/coupang" target="_blank" data-smartkarma-citation="entities:28425:1" rel="noopener">Coupang (CPNG US)</a>  can hold its value into September when lockups expire.Proceeds from these sales will be used to fund Vision Fund 2 commitments, which will get a further boost from Masa/management investing their own money alongside. That would seem to flag corporate governance concerns but as Masa already has an economic stake in Northstar and earlier plans for a management investment in VF1 passed board muster, this probably does not impact sentiment very much.There is some modest dissonance in the results as Softbank said that it was not announcing a buyback because it was not selling assets like it did last year. Apparently that definition excludes investments like the ones above although Masa did tease that they thought about share buybacks every day because of the depth of the holding company discount. That could just be noise as there is no upside in ruling out buybacks entirely but there is precedent as management has been incentivized to act in the past when discounts reached extreme levels. That used to be around 50% (we are at c. 46% now) but last year’s 67%+ discount may have reset the bar on where shares are too cheap.

The last three quarters have largely been defined by the potential for Vision Fund portfolio companies to go public but a new theme is emerging as Softbank starts to take money off the table. There was much less discussion of liquidity events but more on asset sales including partial sales of Uber (UBER US) , KE Holdings Inc (BEKE US) , DoorDash Inc (DASH US) , Guardant Health and Northstar public equities in the quarter. With a further sale of Uber shares this month, that theme probably picks up steam as the quarter goes on, particularly if Coupang (CPNG US)  can hold its value into September when lockups expire.Proceeds from these sales will be used to fund Vision Fund 2 commitments, which will get a further boost from Masa/management investing their own money alongside. That would seem to flag corporate governance concerns but as Masa already has an economic stake in Northstar and earlier plans for a management investment in VF1 passed board muster, this probably does not impact sentiment very much.There is some modest dissonance in the results as Softbank said that it was not announcing a buyback because it was not selling assets like it did last year. Apparently that definition excludes investments like the ones above although Masa did tease that they thought about share buybacks every day because of the depth of the holding company discount. That could just be noise as there is no upside in ruling out buybacks entirely but there is precedent as management has been incentivized to act in the past when discounts reached extreme levels. That used to be around 50% (we are at c. 46% now) but last year’s 67%+ discount may have reset the bar on where shares are too cheap.

Softbank Group - Q1 21 Results Reaction: A Slow Shift in Focus

South Korea

Coupang, Inc. operates as an e-commerce company. The Company offers dynamic end-to-end e-commerce and logistic solutions. Coupang serves customers worldwide.

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Coupang (CPNG US)

Thoughts on Short-Selling Coupang Aimed at September 6th Massive Lockup Release

This post delivers my thoughts on the short-selling opportunity on Coupang with a massive lockup release on September 6.

Sanghyun Park

Softbank Group - The Great Unwinding Has Shifted from the Discount to Underlying Value

Virtuous circle themes have been replaced by vicious circle narratives and share price weakness is now driven by declines in asset value with BABA...

Kirk Boodry

Coupang (CPNG US): Heavier Bleeding Takes the Wind Out of Coupang's Sails

Coupang's share price fell 8% after the company's 2Q21 results were announced. Does this present an entry opportunity? I believe there is still a...

Mitchell Kim

Weekly Innovation Review (WIRE) #44

Headline Developments On the back of the Epic v Apple case, documents were released highlighting that Google (GOOG) had considered buying Epic...

Granite Bay Capital

Softbank Group - Q1 21 Results Reaction: A Slow Shift in Focus

The messaging is changing at Softbank as the IPO flywheel (20+ liquidity events) gives way to investment sales and realized gains. There are no...

Kirk Boodry

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