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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