Y Ventures Group Ltd - DBS Research 2018-03-27: Data-driven E-commerce Player

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Y VENTURES GROUP LTD. 1F1.SI

Y Ventures Group Ltd - Data-driven E-commerce Player

• Early-stage yet profitable online distributor and retailer with a differentiated business model.
• EBITDA projected to grow at 92% CAGR over FY18F-20F.
• Initiate coverage with BUY and Target Price of S$0.77, offering potential upside of c.44%.

Proprietary data analytics capabilities cement its position as a value-adding partner to traditional businesses. 

• Y Ventures Group (YVEN) distributes products from third-party brands over some of the largest e-commerce platforms (including Amazon and Lazada) across ten countries. 
• Unlike traditional distributors & e-commerce platforms, YVEN stands out for its provision of value-added data analytics service to brand partners, allowing them to adapt their products to the market needs. In return, the brands offer significant price discounts to YVEN. 
• The launch of private labels in areas where YVEN is confident of achieving strong sell-through rates based on analytics, as in the case of JustNile and Faire Leather Co, further augments margins.

Multi-pronged approach to e-commerce driving 92% EBITDA CAGR over FY18F-20F. 

• Earnings growth should primarily be driven by the
  
  1. Expansion of YVEN’s brand partner network and product range. R3 Asian Gems – a fund linked to the founder of V3/OSIM group, will help to introduce new retail brands, strategic alliances and possible acquisition targets,
  2. Replication of the Elsevier partnership model to other book publishers and new product categories, and
  3. Acceleration of private label projects, which tend to have longer gestation periods but offer higher margins.
• Cross-border purchase platform AORA could start contributing from FY19F onwards, providing further upside. Due to limited visibility, we have yet to factor this into our projections.

Valuation

• Initiate with BUY and Target Price of S$0.77, based on 20x FY19F EV/EBITDA, at a 15% discount to larger peers’ 23x due to YVEN’s smaller scale. This translates to 3.2x FY19F EV/Sales vs peers’ 3.8x.
• Our bear case valuation of S$0.47 suggests an attractive risk-reward ratio at current levels.

COMPANY BACKGROUND

Young, promising and already profitable. 

• Leveraging on its proprietary data analytics platform, local e-commerce retailer and distributor Y Ventures Group Ltd (YVEN) has been profitable from the onset, which is rare among tech start-ups.
• Incorporated in January 2013, the group has grown quickly over a relatively short span and currently markets over 5,500 SKUs of private label and third-party branded merchandise through 25 online marketplaces (including Amazon, eBay, Lazada, and Tokopedia) across ten countries.
• YVEN's main value proposition lies in its ability to incorporate data analytics into the traditional e-commerce model, which helps optimise product and brand marketing efforts, and enhances sell-through rates. The company's strong sales performance (and profits) over FY14-17 demonstrates this.
• Gross merchandising value more than doubled from c.S$6.2m in FY14 to c.$14.2m in FY17, with a steady earnings base of roughly US$1.5-16m p.a (FY15-16). Apart from one-off IPO and marketing expenses, property impairment charges and exchange losses, YVEN should have otherwise been profitable in FY17.

Unique proxy to the global e-commerce secular growth story.

• Y Ventures Group Ltd (YVEN)'s Catalist Board listing in July 2017 breathed new life into SGX’s technology cluster, largely represented by manufacturing-related companies. Within this space, the group stands out for its proven data-driven approach to online retailing, and as a unique proxy to the fast-growing global e-commerce market.
• Still in the early stages of growth, we believe that YVEN's SGX listing adds credibility and serves as a valuable aid to the group’s ongoing efforts to further expand its brand partner network and product portfolio. Its exponential growth potential and unique exposure (vs technology cluster peers) should continue to drive investor interest in the stock.

Primarily derives revenue from e-commerce retail and distribution business. 

• Y Ventures Group Ltd (YVEN) derives revenue from three key business segments, primarily: - 
  1. E-commerce retail and distribution (c.96.4% of FY17 sales),
  2. Logistics and freight forwarding services (c.3.5% of FY17 sales), and 
  3. Waste management services (c.0.1% of FY17 sales) 
• Comprising third-party brands and private label product sales, contributions from the e-commerce segment have grown quickly alongside YVEN's expanding product portfolio - from approximately 300 SKUs as at end-2014 to c.2,500 by end2015 and over 5,500 currently, and continues to represent the bulk of the group’s consolidated revenues.
• YVEN's inventories are mainly held in third-party warehouses managed by various third-party logistics companies and lastmile fulfilment service providers, but also provides logistics and freight forwarding services to third-party customers from time to time.
• Through subsidiary Skap Waste Management, the group also provides waste management services (i.e. disposal of residential waste and secured disposal of sensitive documents and media containing confidential info, etc) in Singapore, but contributions remain small for now.

Stronghold in books a steady revenue source. 

• The group first began its e-commerce journey by procuring used textbooks from Singapore and selling them on online marketplaces in the US. Leveraging on its proprietary data analytics software, the group identified significant untapped potential in online book retailing, as most publishers had extensive offline distribution channels but often lacked the necessary tools and expertise to develop an online presence.
• A substantial proportion of YVEN's purchases are from book publishers, particularly medical textbooks and reference materials from Elsevier Group.
• YVEN's niche in online book retailing serves as a steady source of revenues – we estimate that c.80% of FY17 sales were derived from books - and has allowed the group to command superior gross margins of over 40% from FY14-17.

Upside from replication of successful partnership with Elsevier to other publishers and product categories. 

• Following the recent onboarding of a leading academic publisher (similar to Elsevier), YVEN's online book sales are likely to remain on a steady growth trajectory but ongoing efforts to replicate its successful model to other product segments should see proportions shift in favour of the budding Home and Décor and FMCG categories. 
• For FY18F, the company expects contributions from books to be closer to 65-70% vs average of c.77% over FY14-17.

Private label strategy taking shape. 

• In addition to distributing merchandises under third-party brands, YVEN also sells OEM merchandises of home and décor products on online marketplaces through its private label, JustNile, which was launched in 2015. Examples of OEM merchandise sold through JustNile include wall clocks, mirrors and bathroom accessories.
• Owing to longer gestation periods, private label sales growth of 16.1% CAGR over FY15-17 has lagged that of third-party brands (30.9% CAGR), but is set to accelerate going forward post the launch of Faire Leather, driving margin improvement.
• A quick scan of JustNile’s virtual store on Amazon also shows that the bulk of its data-backed product selections have generated positive ratings and reviews.

Synergistic collaborations with retail veterans a prelude of opportunities to come. 

• We see the slew of collaborative opportunities that YVEN has been accorded with by industry veterans over the past year as a strong vote of confidence in YVEN's complementary retail-focused data analytics capabilities.
• On 14 August 2017, a joint venture agreement was inked between YVEN and Toscano Pte Ltd to launch an online men’s leather goods label, Faire Leather Co. 
• The group also raised S$1.2m in January 2018 from strategic investor, R3 Asian Gems – a fund linked to the founder of V3/OSIM group, Ron Sim. Both parties have also signed a non-binding memorandum of understanding (MOU) in which R3 will help to introduce new retail brands, strategic alliances and possible acquisition targets that synergise with YVEN's longer-term growth objectives.
• Most recently, on 2 March 2018, YVEN also entered into a non-binding MOU with Singapore Post Limited to explore a potential collaboration for the development of an e-commerce buying platform and logistics-related technology, among others.

MANAGEMENT & STRATEGY

Led by an experienced management team. 

• Y Ventures Group Ltd (YVEN) is cofounded and led by brothers Adam and Alex Low. Combined, they hold a controlling c.71% stake in the company. 
• They each carry over 14 years of experience in e-commerce distribution and data analytics, and together with the key management team, have taken their expertise in the retail arena to new heights – starting with the onboarding of leading medical publishing house Elsevier Group to YVEN's online distribution network in mid-2014. The group has since expanded its client and product base to over 5,500 SKUs across > 20 brands, with a wider geographical coverage.

Dividend policy. 

• Y Ventures Group Ltd (YVEN) does not have a fixed dividend policy but expects to pay dividends of at least 20% in FY18F.

Ease of scale. 

• Y Ventures Group Ltd (YVEN)'s platform-agnostic data analytics capabilities can be readily customised and applied across product categories and geographies, which enables the group to identify and capitalise on market gaps and lucrative opportunities as they arise.
• Ongoing investments in R&D should further enhance the effectiveness of its data analytics programme. Coupled with greater visibility and working capital post-IPO, YVEN could easily replicate its success in books (Distribution) and launch of Faire Leather (Retail), as it expands its geographical coverage, brand partner network and product range.

Capitalising on new collaborative opportunities; OSIM could be one. 

• Y Ventures Group Ltd (YVEN)'s SGX listing has helped open new doors for the group. Per our conversations with management, it now has over 100 brands on its waiting list. The majority are likely to be traditional businesses which are still operating on a smaller scale.
• Given finite resources, not all will translate into actual collaborative opportunities – at the onset. We believe that priority will also be given to more established brands - but the strong interest provides a glimpse into YVEN's long-term growth potential.
• Further, following R3’s investment in the company earlier this year, we do not rule out a possible injection of selected products under V3’s established GNC, TWG and OSIM brands into YVEN's distribution portfolio. This could yield significant benefits for YVEN from both an earnings and brand equity perspective.

Adopting a consignment model could help unlock higher scalability. 

• Y Ventures Group Ltd (YVEN)'s inventory-taking model allows the group to maximise earnings potential per unit sale (i.e. higher margins) but on the flip side, ties up capital.
• Still in the early stages of growth, we opine that the adoption of a consignment strategy which runs parallel to, and could eventually replace the group’s existing inventory-taking model. This would free up working capital toward highermargin segments and unlock higher scalability for the group, allowing YVEN to expand quickly.
• While we are comforted by YVEN's inroads into the consignment market through its partnership with Taiwanese brand, Footpure, we acknowledge that it could take time before this strategy pans out on a larger scale.
• Launch of new e-commerce projects such as the potential collaboration with SingPost to develop a global cross-border buying platform, AORA. Given the non-binding MoU, we have yet to impute contributions from this project into our forecasts.

Upside from M&A. 

• In addition to organic growth, YVEN is also on the lookout for strategic acquisitions or joint ventures with synergistic parties, particularly distributors with strategic alignments and investment in consumer product brands, existing channel stores and overseas joint ventures.

KEY RISKS

Inherent risks in inventory-taking model. 

• Compared to a consignment-based approach, an inventory-based model carries substantially higher sell-through risks. Weaker-than-expected sales also ties up capital, which could have otherwise been redeployed to higher-margin projects. YVEN also bears the risk of inventory obsolescence.
• While there are clear risks to an inventory-based model, we believe that YVEN’s data analytics capabilities would help lower its sell-through risks substantially vs traditional distributors.

Possible equity fund raising to grow business. 

• YVEN’s inventory-taking model entails upfront payments to brand partners, which ties up working capital. Apart from capital required to expand its product range, its AORA project which is still in the early stages of development, also requires further investment.
• To grow its business and finance longer-term growth objectives, we believe that YVEN would likely have to re-tap the equity market. Conversely, inability to raise funds could impede growth.

AORA remains a wildcard. 

• We estimate that YVEN has invested at least US$500,000 to develop the AORA platform.
• While the capabilities and skills that have been developed in the process are transferable, there is no guarantee that the platform will be commercially viable.

Platform-specific risks. 

• YVEN is exposed to platform-related risks at both the data and sales level.
• YVEN’s data analytics capabilities are based off public and proprietary data obtained from online marketplaces. Insights derived from these datasets help formulate the group’s product and pricing strategies. If these marketplaces choose to withhold such data from users later on, or if these data sets turn out to be erroneous, it could have an adverse impact on the group.
• Additionally, YVEN is also susceptible to changes in commission rates charged by online marketplaces, which may have to be absorbed by the group.

Concentration risk. 

• Approximately 80% of FY16 revenues were derived from the books publishing category. The Elsevier Group alone accounted for c.67% of YVEN’s purchases.
• YVEN has benefited strongly from its entrenched relationship with Elsevier Group, which has translated to higher margins.
• Disruptions to their partnership could weigh heavily on the group’s profitability.

VALUATION

Base-case valuation is S$0.77 per share. 

• In our base case, we assume an acceleration in sales growth across third-party and private label products, but a moderation in margins vs FY16 levels due to the recent expansion of its team.
• Y Ventures Group Ltd (YVEN) typically stocks what it can sell within a three-month period. Given management’s conservative nature, the significant c.130% increase in inventory levels at end-FY17 implies that efforts to grow its brand partner network and product range are going according to plan, and signals its rising confidence in sell-through rates for the years ahead.
• Our revenue growth assumptions of 77% and 49% y-o-y for FY18F and FY19F respectively, thus seem reasonable in our view.
• Substantial investments have been poured into the development of the AORA platform alongside SingPost, which could result in recurring fee income for the group. Due to the lack of visibility, we have not factored in contributions from this project which could yield revenues of at least S$0.5m in its first full-year of launch.

Valuation based on 20x FY19F EV/EBITDA, at 15% discount to larger peers’ average of 23x. 

• Despite YVEN's high growth profile, we favour an EV/EBITDA to EV/Sales valuation metric for the company. We believe this better reflects the merits of YVEN's data-driven approach, which underscores its steady profit-generation ability, and is rare for an early-stage, highgrowth company.
• Given its smaller scale, balanced against projected EBITDA growth of c.92% CAGR over FY18F-20F, we see a multiple of 20x as fair. This translates to FY19F EV/Sales of 3.2x, which is also at a 15% discount to larger peers’ 3.8x.

Bull-case valuation of S$1.23 per share. 

• Under our bull-case scenario, we assume that sales would be supercharged by the onboarding of reputed brand partners, i.e. the V3/OSIM group and adoption of a consignment strategy for selected categories, which offers higher scalability.
• This would result in sales tracking closer to/outpacing inventory growth in FY18F/19F, to grow at 100%/60% y-oy respectively. As higher scalability kicks in, EBITDA margins could improve to 15.9%/21.8% for FY18F/19F, vs 10.1%/16.9% under our base-case assumption. Similarly, we have not factored in any contributions from AORA.

Bear-case valuation of S$0.47 per share. 

• In our bear-case scenario, we assume lower inventory turnover, presumably on a longer gestation period for new products as YVEN continues to expand into new categories, and impute lower growth given upfront purchase requirements inherent in YVEN's inventory-taking model, which could constrain the group’s strong growth potential.
• In this case, revenue growth for FY18F/19F would be more modest at 55%/45% respectively. Higher overheads and lower scale result in lower EBITDA of US$3.7m.

Carmen Tay DBS Vickers | Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2018-03-27

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