Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Equity Bottom-Up

<ul>
<li>B2W offers a broad range of categories of products and services through internet, telesales, catalogues, TV, and kiosk channels; its websites offer products and services in approximately 40 categories. B2W also runs a technology platform; logistics, distribution, and customer service platform; and its digital platform Marketplace</li>
<li>The company also operates Submarino Finance and Digital Finance, its consumer finance service platform, and has recently launched a fast-growing payment app (AME) in Brazil</li>
<li>B2W’s consumer credit operations are in growth phase, having registered a gross loan 2015-18 CAGR of 14.5% with the 2018 balance at BRL1.5bn (USD420m), and credit card issuance CAGR of 18.8% with total cards issued of 3.1m at YE 2018. We estimate that B2W’s consumer finance arm achieved an average ROE of 19.9% from 2015 to 2018 with the 2018 ROE at 18.9%</li>
<li>We estimate that our SOTP valuation values B2W’s share of the consumer credit business in a range of USD208-416m, equivalent to a range of 5%-10% of B2W’s market cap. B2W is a name to watch, as we believe that there is potential for it to leverage consumer finance – and its payment app – off its retail digital footprint over the medium term</li>
</ul>


B2W offers a broad range of categories of products and services through internet, telesales, catalogues, TV, and kiosk channels; its websites offer products and services in approximately 40 categories. B2W also runs a technology platform; logistics, distribution, and customer service platform; and its digital platform Marketplace
The company also operates Submarino Finance and Digital Finance, its consumer finance service platform, and has recently launched a fast-growing payment app (AME) in Brazil
B2W’s consumer credit operations are in growth phase, having registered a gross loan 2015-18 CAGR of 14.5% with the 2018 balance at BRL1.5bn (USD420m), and credit card issuance CAGR of 18.8% with total cards issued of 3.1m at YE 2018. We estimate that B2W’s consumer finance arm achieved an average ROE of 19.9% from 2015 to 2018 with the 2018 ROE at 18.9%
We estimate that our SOTP valuation values B2W’s share of the consumer credit business in a range of USD208-416m, equivalent to a range of 5%-10% of B2W’s market cap. B2W is a name to watch, as we believe that there is potential for it to leverage consumer finance – and its payment app – off its retail digital footprint over the medium term


B2W - Leading Player in Brazilian E-Commerce, with Small but Fast Growing Finance Arm

<ul>
<li>
<a href="https://www.smartkarma.com/entities/27954" target="_blank" data-smartkarma-citation="entities:27954:1">MercadoLibre Inc (MELI US)</a> 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</li>
<li>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</li>
<li>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</li>
<li>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</li>
<li>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</li>
<li>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</li>
</ul>



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


MercadoLibre: Competitive Headwinds in Brazil Payments, Macro and Political Concerns in Argentina

Thematic (Sector/Industry)

<ul>
<li>We lift the lid on the consumer finance arms of ten leading LatAm retailers, providing corporate summaries in this primer on those entities with “skin in the game” of LatAm consumer credit</li>
<li>Our top pick is Mexican department store retailer <a href="https://www.smartkarma.com/entities/27611" target="_blank" data-smartkarma-citation="entities:27611:1">El Puerto de Liverpool SAB de (LIVEPOLC MM)</a> , given its attractive valuations; it is also the third largest issuer of credit cards in Mexico and the portfolio has a relatively low NPL ratio with healthy NPL coverage</li>
<li>Brazilian department store and apparel retailer <a href="https://www.smartkarma.com/entities/28023" target="_blank" data-smartkarma-citation="entities:28023:1">Guararapes Confeccoes SA (GUAR3 BZ)</a> is the second largest private label card issuer in Brazil and an attractive value, we believe, even if in the consumer credit arm its NPL coverage levels are a bit lower than its peers</li>
<li>In Chile, we like the business and geographic focus of <a href="https://www.smartkarma.com/entities/28022" target="_blank" data-smartkarma-citation="entities:28022:1">Ripley Corp SA (RIPLEY CI)</a>, despite Ripley's high debt to equity ratio, and its high return banking business in Chile in particular</li>
<li>
<a href="https://www.smartkarma.com/entities/27954" target="_blank" data-smartkarma-citation="entities:27954:1">MercadoLibre Inc (MELI US)</a> is the leader in LatAm e-commerce, with structural growth potential. It has a fast growing and, we believe, profitable payments operation in MercadoPago and small but high growth potential credit business in MercadoCredito, yet we believe that the current intensifying Brazilian competitive climate and Argentine political and economic outlook are real and near-term headwinds for the share price</li>
</ul>


We lift the lid on the consumer finance arms of ten leading LatAm retailers, providing corporate summaries in this primer on those entities with “skin in the game” of LatAm consumer credit
Our top pick is Mexican department store retailer El Puerto de Liverpool SAB de (LIVEPOLC MM) , given its attractive valuations; it is also the third largest issuer of credit cards in Mexico and the portfolio has a relatively low NPL ratio with healthy NPL coverage
Brazilian department store and apparel retailer Guararapes Confeccoes SA (GUAR3 BZ) is the second largest private label card issuer in Brazil and an attractive value, we believe, even if in the consumer credit arm its NPL coverage levels are a bit lower than its peers
In Chile, we like the business and geographic focus of Ripley Corp SA (RIPLEY CI), despite Ripley's high debt to equity ratio, and its high return banking business in Chile in particular

MercadoLibre Inc (MELI US) is the leader in LatAm e-commerce, with structural growth potential. It has a fast growing and, we believe, profitable payments operation in MercadoPago and small but high growth potential credit business in MercadoCredito, yet we believe that the current intensifying Brazilian competitive climate and Argentine political and economic outlook are real and near-term headwinds for the share price


Banking on Retail: A Primer on The Credit Operations of Leading LatAm Retailers

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

<p>Global Emerging Market funds made a strong start to 2019, with just over two-thirds of funds outperforming the benchmark, generating an average alpha above the <a href="https://www.smartkarma.com/entities/438" target="_blank" data-smartkarma-citation="entities:438:1">IShares MSCI Emerging Markets Indx (ETF) (EEM US)</a> of 1.3%.</p><p>In this report, we look at the performance of 180 global emerging market strategies over the first quarter of 2019 and analyse the countries, sectors and stocks that helped generate that outperformance.  We also take a look at the longer-dated outperformance of active GEM funds.</p>

Global Emerging Market funds made a strong start to 2019, with just over two-thirds of funds outperforming the benchmark, generating an average alpha above the IShares MSCI Emerging Markets Indx (ETF) (EEM US) of 1.3%.In this report, we look at the performance of 180 global emerging market strategies over the first quarter of 2019 and analyse the countries, sectors and stocks that helped generate that outperformance.  We also take a look at the longer-dated outperformance of active GEM funds.

GEM Active Funds:  Big Q1 Outperformance

Accelerating Tomorrow’s Independent Research

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<ul class="">
<li>The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards</li>
<li>De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player <a href="https://www.smartkarma.com/entities/24750" target="_blank">Cielo SA (CIEL3 BZ)</a>, with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular</li>
<li>Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view</li>
<li>Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut</li>
<li>
<a href="https://www.smartkarma.com/entities/27564" target="_blank">StoneCo Ltd (STNE US)</a>and <a href="https://www.smartkarma.com/entities/27939" target="_blank">Pagseguro Digital Ltd (PAGS US)</a> are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation</li>
</ul>


The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut

StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation


Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

Brazil

MercadoLibre, Inc. operates an online trading site for the Latin American markets. The Company's website allows businesses and individuals to list items, conduct sales, and purchases online in either a fixed-price and auction format. MercadoLibre offers classified advertisements for motor vehicles, vessels, aircraft, and real estate, as well as online payment services.

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MercadoLibre (MELI US)

B2W - Leading Player in Brazilian E-Commerce, with Small but Fast Growing Finance Arm

B2W offers a broad range of categories of products and services through internet, telesales, catalogues, TV, and kiosk channels; its websites...

Victor Galliano

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...

Victor Galliano

Banking on Retail: A Primer on The Credit Operations of Leading LatAm Retailers

We lift the lid on the consumer finance arms of ten leading LatAm retailers, providing corporate summaries in this primer on those entities with...

Victor Galliano

GEM Active Funds: Big Q1 Outperformance

Global Emerging Market funds made a strong start to 2019, with just over two-thirds of funds outperforming the benchmark, generating an average...

Steven Holden

Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit...

Boost Research

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