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

Coupang's 1Q results are a disappointment, and it is a well-expected outcome. Total net revenues increased 74% year over year. Gross profit was $733M in the first quarter, a 70% increase from last year. But the operating loss has also deepened by 180% on a yearly span.<table class="table table-striped">
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<td data-sheets-value='{"1":2,"2":"(in thousands, except net revenues per Active Customer)"}'>First Quarter 2021 Results (US$M)</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":2021}'>1Q 2021</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":2020}'>1Q 2020</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"% Y/Y Change"}'>% Y/Y Change</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Total net revenues"}'>Total net revenues</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":4206860}' data-sheets-numberformat='{"1":4,"2":"\"$\"#,##0","3":1}'>4,206.9</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":2413259}' data-sheets-numberformat='{"1":4,"2":"\"$\"#,##0","3":1}'>2,413.3</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.74}' data-sheets-numberformat='{"1":3,"2":"0%","3":1}'>74.0%</td>
</tr>
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<td data-sheets-value='{"1":2,"2":"Gross profit"}'>Gross profit</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":732506}' data-sheets-numberformat='{"1":4,"2":"\"$\"#,##0","3":1}'>732.5</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":430295}' data-sheets-numberformat='{"1":4,"2":"\"$\"#,##0","3":1}'>430.3</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.7}' data-sheets-numberformat='{"1":3,"2":"0%","3":1}'>70.0%</td>
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<td data-sheets-value='{"1":2,"2":"Net loss"}'>Net loss</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-295033}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>-295.0</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-105353}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>-105.4</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1.8}' data-sheets-numberformat='{"1":3,"2":"0%","3":1}'>180.0%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Adjusted EBITDA1"}'>Adjusted EBITDA</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-132966}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>-133.0</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-41845}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>-41.8</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
</tr>
<tr><td colspan="4" data-sheets-value='{"1":2,"2":"Source: Coupang"}'>Source: Coupang</td></tr>
</tbody>
</table>Coupang's 74% YoY sales growth easily tops the local direct peers. Naver's commerce division posted a 40.3% YoY sales growth in the first quarter. SKT's 11st achieved only a 1.6% sales growth from the same quarter of last year. So, we know Coupang is still aggressive.But the problem is whether it could keep the cost under control. And apparently, it hasn't. Adjusted EBITDA loss was $133M compared to a $42M loss in the prior year’s quarter. Coupang acknowledged that the higher loss was driven by an increase in operating, general, and administrative costs. What are these costs? Yes, they are mainly marketing expenses. In this first quarter, the SG&amp;A accounts for 20.9% of total net revenues, compared to 19.8% in the prior year.

Coupang's 1Q results are a disappointment, and it is a well-expected outcome. Total net revenues increased 74% year over year. Gross profit was $733M in the first quarter, a 70% increase from last year. But the operating loss has also deepened by 180% on a yearly span.








First Quarter 2021 Results (US$M)
1Q 2021
1Q 2020
% Y/Y Change


Total net revenues
4,206.9
2,413.3
74.0%


Gross profit
732.5
430.3
70.0%


Net loss
-295.0
-105.4
180.0%


Adjusted EBITDA
-133.0
-41.8
-

Source: Coupang

Coupang's 74% YoY sales growth easily tops the local direct peers. Naver's commerce division posted a 40.3% YoY sales growth in the first quarter. SKT's 11st achieved only a 1.6% sales growth from the same quarter of last year. So, we know Coupang is still aggressive.But the problem is whether it could keep the cost under control. And apparently, it hasn't. Adjusted EBITDA loss was $133M compared to a $42M loss in the prior year’s quarter. Coupang acknowledged that the higher loss was driven by an increase in operating, general, and administrative costs. What are these costs? Yes, they are mainly marketing expenses. In this first quarter, the SG&amp;A accounts for 20.9% of total net revenues, compared to 19.8% in the prior year.

Coupang's Anticipated Disappointment, but 1P's Trouble Makes Us More Worried

Consumer Discretionary / Industrials

Henry Kwon

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

Telco/Internet specialist

Kirk Boodry

Redex Research

When you go to a live music show in Japan there is almost always an encore. In fact, that is the standard. If an artist has truly done well, there may be a second encore. And if the performance has been legendary, there might even be a third. That is how the last year with Vision Fund has felt...

When you go to a live music show in Japan there is almost always an encore. In fact, that is the standard. If an artist has truly done well, there may be a second encore. And if the performance has been legendary, there might even be a third. That is how the last year with Vision Fund has felt...

Softbank Group: Q4 20 Results – Will There Be an Encore?

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

There were more negatives than positives in Coupang's 1Q 2021 earnings.  <a href="https://www.smartkarma.com/entities/coupang" target="_blank" data-smartkarma-citation="entities:28425:1" rel="noopener">Coupang (CPNG US)</a> reported 1Q 2021 earnings after the market close today. Overall, the reports were a bit disappointing with a slight decline in gross margins YoY and operating losses that ballooned by 263% YoY in 1Q 2021. Despite these worsening profit margins, its sales increased by 74.3% YoY. The major negatives were as follows:<ul>
<li>Declining gross and operating margins on a YoY basis in 1Q 2021</li>
<li>Cash flow from operations turning negative driven by higher inventory in 1Q 2021</li>
<li>Despite a 74.3% YoY growth in sales, total active customers only increased by 21% YoY</li>
</ul>Recent Share Price Performance - After a blistering share price appreciation in the first few days after the IPO, Coupang's shares have continued to decline since then. Its current price is $35.33, which is close to the IPO price of $35. In our valuation assessment two months ago, we mentioned that our base case valuation of the company to be $35, which is close to the current price.<div class="content-highlight">In particular, the company's share price has declined by 19% in the past two weeks. Also, the company's big operating loss in 1Q 2021 was nearly the same as the consensus estimates. So our guess is that somehow the preliminary results of the company's results in 1Q 2021 may have been leaked a bit to the Street in the past couple of weeks, which explains how the stock price has fallen so much in this period. Overall, we believe that Coupang's shares are likely to remain weak following the lackluster 1Q 2021 results. </div>

There were more negatives than positives in Coupang's 1Q 2021 earnings.  Coupang (CPNG US) reported 1Q 2021 earnings after the market close today. Overall, the reports were a bit disappointing with a slight decline in gross margins YoY and operating losses that ballooned by 263% YoY in 1Q 2021. Despite these worsening profit margins, its sales increased by 74.3% YoY. The major negatives were as follows:
Declining gross and operating margins on a YoY basis in 1Q 2021
Cash flow from operations turning negative driven by higher inventory in 1Q 2021
Despite a 74.3% YoY growth in sales, total active customers only increased by 21% YoY
Recent Share Price Performance - After a blistering share price appreciation in the first few days after the IPO, Coupang's shares have continued to decline since then. Its current price is $35.33, which is close to the IPO price of $35. In our valuation assessment two months ago, we mentioned that our base case valuation of the company to be $35, which is close to the current price.In particular, the company's share price has declined by 19% in the past two weeks. Also, the company's big operating loss in 1Q 2021 was nearly the same as the consensus estimates. So our guess is that somehow the preliminary results of the company's results in 1Q 2021 may have been leaked a bit to the Street in the past couple of weeks, which explains how the stock price has fallen so much in this period. Overall, we believe that Coupang's shares are likely to remain weak following the lackluster 1Q 2021 results. 

Coupang 1Q 2021 Earnings - Decline in Profit Margins Raises Concerns

A 3% NASDAQ correction is a challenge for Softbank Group as it prepares to announce FY20 results later this week. The key takeaway for the quarter ended March is a $26bn gain for Vision Fund public companies led by the January IPO of Coupang which contributed $25bn of the upside as of quarter-end. But that same portfolio has given up almost half those gains QTD whilst sustained weakness would also impact the ability to get a Didi Chuxing IPO attractively placed even as the value of c. $22bn invested in public tech shares and derivatives could be at risk. The silver lining is that the chances of a new share buyback program have increased.

A 3% NASDAQ correction is a challenge for Softbank Group as it prepares to announce FY20 results later this week. The key takeaway for the quarter ended March is a $26bn gain for Vision Fund public companies led by the January IPO of Coupang which contributed $25bn of the upside as of quarter-end. But that same portfolio has given up almost half those gains QTD whilst sustained weakness would also impact the ability to get a Didi Chuxing IPO attractively placed even as the value of c. $22bn invested in public tech shares and derivatives could be at risk. The silver lining is that the chances of a new share buyback program have increased.

Softbank Group - Tech Weakness Hits on Multiple Levels but Boosts Chances of New Buybacks

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)

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Henry Kwon

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Softbank reported record earnings but this was anticipated and what happens moving forward is more relevant. It has high exposure to a tech sell...

Kirk Boodry

Coupang 1Q 2021 Earnings - Decline in Profit Margins Raises Concerns

Coupang (CPNG US) reported 1Q 2021 earnings after the market close today. Overall, the reports were a bit disappointing with a slight decline in...

Douglas Kim

Softbank Group - Tech Weakness Hits on Multiple Levels but Boosts Chances of New Buybacks

Softbank's is highly exposed to tech volatility which impacts current values in Vision Fund/Northstar and future values in the form of IPOs/SPACs....

Kirk Boodry

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