Y Ventures Group Ltd - CGS-CIMB 2018-05-25: Proxy To Big Data And E-commerce

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Y VENTURES GROUP LTD. SGX:1F1

Y Ventures Group Ltd - Proxy To Big Data And E-commerce

• Y Ventures (YVEN) is a proxy to rising e-commerce and big data trend with a turnaround story (c.207% core EPS CAGR over FY17-20F).
• It is a Singapore-based, data analytics-driven e-commerce retailer and distributor, with more than 20 online marketplaces globally, including Amazon, eBay, Qoo10, Lazada.
• Catalysts could come from onboarding of major brands to support its online distribution/ retailing business.
• It is trading at 23.2x CY19 P/E, 50% discount to its global peers average of 45x.
• Initiate coverage with ADD and a Target Price of S$0.62, based on 30x CY19F P/E (c.33% discount to global peers’ average).

Disrupting The Traditional Distribution Model With Data Analytics

More than just an e-commerce company

• Y Ventures (YVEN) is a big-data analytics firm operating in the e-commerce space. Management believes that what sets YVEN apart from any other e-commerce company is its wide array of data analytics tools used to help brand partners and its own in-house brands to increase sales in different marketplaces.
• YVEN’s data analytics capabilities include analysis of demand trends, pricing intelligence, merchandise planning, inventory management and consumer sentiment. What differentiates YVEN from other data analytics firms is that the group does not sell analytics solutions but instead leverages analytics tools for its own use to raise its online sales. The group utilises its data analytics tools to retrieve sales data and product reviews to better facilitate informed business decisions on the type of merchandise it should sell and distribute, optimal selling prices and quantities to stock.

Solidly anchored in book distribution

• A substantial proportion of YVEN’s purchases (67-83% in FY14-16) come under the book publishing category, comprising mostly medical textbooks and reference materials from publisher Elsevier Group and, to a smaller extent, academic books and publications from a number of book suppliers. 
• We estimate that sales from books would still account for c.85% of YVEN’s FY17 revenue.

Anticipate further sales growth after onboarding new publishers

• We expect YVEN’s online book sales to continue to rise steadily as we believe they have secured more publishers since its IPO. We think that YVEN still has untapped growth potential in this space in view of its historical revenue relative to the size of the academic publishing industry. According to the Global Ranking of Publishing Industry 2017 report, fifty major publishing groups, which include Pearson and Elsevier, brought in combined revenue of €53.5bn (c.US$56.4bn) in 2016.
• If we assume c.15% of that revenue is generated from print, of which c.10% is sold via digital/ecommerce sales channels, then a 5% share of the online book distribution/retailing market could net YVEN c.US$70.5m in revenue (5x FY17 revenue). The hypothetical revenue amount factors in mark-up prices that would yield 40% gross margin for YVEN.

Securing Pearson could be a major boost for YVEN

• Pearson is the top revenue-generating publishing group above Elsevier, according to the Global Ranking of the Publishing Industry 2017 report. Getting Pearson on board would be a major boost to YVEN’s future revenue, in our view. We believe the group could be trying to partner with Pearson, along with other big-name publishers that it has not entered into distributorship agreements with.

Inventory bulk-up in FY17 likely from new publishers

• We think the onboarding of new publishers has largely contributed to the significant step-up in YVEN’s inventory level, which rose sharply from c.US$2.6m as at end-FY16 to a record US$6.1m as at end-FY17. 
• Although average inventory days on hand have almost doubled to 192 days in FY17 as compared to 98 days in FY16, we are not overly concerned about this as management expressed confidence in turning over these inventories within the typical 3-4 month period. Thus, we expect inventory days to normalise and improve during our FY18-20F forecast period.

Books among top-selling product categories on Amazon

• According to One Click Retail (a subsidiary of Ascential, ASCL LN, Not rated), published goods comprising mainly books were amongst Amazon’s four best-selling categories in 2017 at c.US$5bn, albeit growing at a steady pace with 3% y-o-y sales growth. The home and kitchen products category under Amazon is growing much faster, with a 20% rise y-o-y in 2017, hinting at much bigger growth prospects for YVEN’s home and décor merchandise under its JustNile private label, in our view.

Beyond Books…

Anticipate more brand partnerships to come

• To date, Y Ventures (YVEN) has already formed a JV partnership with leather brand, Tocco Toscano, and plans to use its data analytic tools to develop a private label for men’s leather accessories under the brand Faire Leather Co. The JV raised over S$406,000 in a Kickstarter campaign to launch its first collection of leather bags and small leather goods, setting the record for the highest level of funds raised via a Kickstarter campaign in Singapore, as reported by Retail Asia on 15 Mar 2018. Following this success, we believe YVEN may seek more brand partnerships, similar to its venture with Tocco Toscano.

Value proposition from AORA platform with SingPost

• YVEN entered into an MOU with SingPost (SGX:S08) for the potential co-development of a cross-border e-commerce platform and logistics-related technology to enhance efficiency across the vertical logistics chain. We believe the platform, codename AORA, will focus on cross-border purchases by consumers across Asia, combined with proprietary built-in data analytics. 
• AORA is slated for a soft launch in the third quarter of this year. We understand from management that YVEN will primarily be involved in developing the platform and technology, with SingPost providing back-end logistics.
• A report by Google and Temasek Holdings forecasts that Singapore’s e-commerce market (sales) will grow from US$1bn in 2015 to US$5.4bn in 2025, representing an 18% CAGR over the period. Payvision estimates more than half of all e-commerce transactions in Singapore are cross-border transactions. Based on a 2% service fee charge on gross merchandise volume (GMV), we estimate AORA could generate an additional US$1m in revenue (c.3% upside to our FY19F forecast) for YVEN, assuming 5% market share in FY19F. We have not factored this into our earnings forecasts due to the lack of visibility currently.

Long-term goal: transformation into an analytics solutions provider?

• We opine that YVEN is still in the early stages of proving its ability to use data analytics to compete with online retail distribution for big-brand products and consumer electronics goods.
• Currently, YVEN leverages its own analytics tools to profit mostly from selling books, as well as home and living products online. However, we think the group could start to sell its analytics solutions to global brands and e-commerce platforms after establishing a track record in other product categories in the longer term. This is similar to how Qlik offers its analytics platform to Lazada Group, which operates one of Southeast Asia’s most popular online marketplaces.
• Selling analytics solutions would help YVEN to achieve faster revenue growth with reduced working capital constraints, in our view.

Industry Outlook: Robust E-commerce Industry Prospects

Riding on increasing US online sales momentum

• According to a FTI Consulting (FCN US, Not Rated) report, US online retail sales could top US$600bn by 2020, which represents an average increase of about US$50bn sales a year. E-commerce share of total retail sales in the US was c.9% in 2017. Amazon.com remains the dominant marketplace in the US with c.US$310bn in consumer spending generated. 
• Considering FTI Consulting’s view that future growth in online shopping channels is unlikely to come from new users as most Americans already shop online regularly, we believe growth in online shopping will come from increasing transactions across more product categories within the existing user base.

Faster growth prospects in Asia’s e-commerce market than the rest of the world

• Research firm eMarketer forecasts global retail e-commerce to reach US$4.5tr in 2021, increasing by c.18% CAGR over 2017-21. International Post Corporation expects Asia Pacific e-commerce retail sales to rise at a much faster rate of c.22% CAGR over 2017-21. This means Asia Pacific’s share of the global e-commerce market would expand to two-thirds (c.67%) by 2021 (compared to c.60% in 2017). 
• We believe Asia Pacific holds vast untapped sales growth potential for YVEN. Management believes that Southeast Asian consumers prefer to purchase from local and regional players that offer a more tailored experience, rather than global competitors, and sees opportunity in capturing value in the region.

Financial Forecasts & Assumptions

E-commerce retail sales accounted for 96% of FY17 revenue

• Y Ventures (YVEN) markets and distributes a wide range of merchandise under third-party brands though online marketplaces, mainly using a distribution model and occasionally, a consignment model. Its core e-commerce retail and distribution business made up 96% of its FY17 revenue. Third-party brand products accounted for the bulk (c.90% in FY17) of its e-commerce retail and distribution sales, compared to private label products.
• YVEN also provides waste management services in Singapore via its subsidiary, Skap Waste Management, which was incorporated on 25 Jan 2017. Services include the disposal of home appliances, residential waste, home and office furniture, documents and secure disposal of classified documents and media. This business accounted for c.4% of its topline in FY17.
• Another business in which YVEN is involved is logistics and freight forwarding services provided to third-party customers via its subsidiary, Skap Logistics. Services include working with third-party logistics companies and last-mile fulfilment service providers to deliver merchandise to respective jurisdictions where the goods are sold. This segment accounted for less than 1% of FY17 revenue.

Expect EBITDA margin expansion from economies of scale

• We project gross margin to remain steady at c.40% level, given that YVEN is able to use its know-how and analytics capabilities to consistently maintain optimum selling prices in online marketplaces.
• We expect selling and distribution expenses, including marketplace fees that account for a percentage of GMV transactions, to increase in line with topline growth.
• YVEN’s asset-light and analytics-driven business model allows for minimal capex spending and lean manpower structure that could lead to more subdued growth in other operating costs apart from selling and distribution expense. We believe this could result in gradual EBITDA margin expansion on an enlarged revenue base in FY18-20F.

Core EPS to rise by c.207% CAGR over FY17-20F

• Notwithstanding the net loss in FY17 due to one-off IPO-related expenses and loss of yield, possibly from the diversion of key resources towards getting several publishers on board in 2H17, we project net profit to recover from a loss of US$0.8m in FY17 to US$3.5m in FY20F. 
• We project FY17-20F core EPS CAGR of 207% (factoring in small equity dilution from share placement issued in Feb 2018).

Our FY18F net profit forecast expects stronger 2H18F than 1H18F

• 2H17 net profit was dragged down mainly by poor inventory turnover amid the onboarding of new publishers and suppliers that led to under-utilisation of key operating resources. We think 1H18F net profit could also be weighed down by higher operating costs, including start-up costs (c.US$0.5m) for the development of AORA.
• As e-commerce sales are typically stronger during the holiday season in the second half of the year, we expect much higher net profit contribution (c.US$1.1m) in 2H18F to our FY18F forecast of US$1.5m.

Dividend payout not less than 20%

• YVEN does not have a fixed dividend policy but stated in its IPO prospectus that it intends to pay out not less than 20% of net profit for FY17 and FY18F. 
• YVEN was loss-making in FY17. Hence, we expect to see some dividends being paid out of net profit in FY18F and onwards.

Valuation & Recommendation

Initiate with ADD and Target Price of S$0.62

• Y Ventures (YVEN) is currently trading at CY19F P/E of 23.2x, c.50% discount to its global e-commerce peers’ average of 45.0x. 
• Our Target Price of S$0.62 is based on CY19F P/E of 30x, based on a conservative 33% discount to its larger global peers’ average (excluding Shopify) CY19F P/E of 45.0x, against our forecast of normalised CY16-20F core EPS CAGR of 21% for YVEN. We used a US$/S$ exchange rate of 1.34 to derive our target price. 
• We initiate coverage with an ADD call on the stock.

Key risks

Overstocking inventory.

• Y Ventures (YVEN)’s success depends on its data analytics capabilities to predict consumer preferences and avoid overstocking merchandise. The group could face the risk of marking down unsold inventory, which could drag down its earnings, if it fails to predict consumer trends correctly in the fast-changing e-commerce landscape.

Sharp increase in fees charged by marketplaces.

• As online marketplaces continue to enjoy robust growth on GMV transactions, there could be a strong incentive for these marketplaces to increase seller fees and raise the percentage of the sale it takes from YVEN and other third parties. A sharp increase in fees could depress YVEN’s net margin. Amazon is reportedly raising fees for third-party sellers of apparel, accessories, handbags and sunglasses and could extend the fee increase to other product categories (e.g. books, home and living products), which YVEN generates the bulk of its sales from.

Cessation of relationships with key suppliers and principals.

• YVEN does not have formal supply agreements with all of its suppliers and principals as it may purchase merchandise ad hoc based on its analysis of demand trends. The termination of distributorship arrangements for any third-party brands could adversely affect YVEN’s sales, though this is unlikely to occur in the foreseeable future, in our view.

Company Profile

Historical background

• Y Ventures (YVEN) was co-founded in 2003 by two brothers, Adam and Alex Low. They began their e-commerce journey in 2003 by selling second-hand books on online marketplaces in the US and subsequently expanded the business to selling third-party brand products and to other online marketplaces in Europe (the UK, Germany, France, Italy and Spain) and Asia (mainly Singapore, Taiwan and Indonesia).
• Key third-party branded products sold in online marketplaces include books (mainly academic books and textbooks), home and living items (clocks), and fast-moving consumer goods (instant coffee mix and soy milk). In 2015, YVEN started to sell original equipment manufacturer (OEM) merchandise for home and living products under its JustNile private label.
• YVEN’s number of stock-keeping units (SKUs) – a unique identification number that defines an item at the inventory level – of active merchandises expanded to c.5,500 across 12,000 listings on over 20 online marketplaces in mid-2017.
• YVEN was listed on SGX’s Catalist Board on 11 Jul 2017 at an IPO price of S$0.22.

Warehouses to store merchandise

• YVEN keeps most of its stock in third-party warehouses managed by various third-party logistics companies. The group also keeps products sourced from OEMs in Taiwan and the PRC under its private label in a rented warehouse in Kaohsiung, Taiwan.

Key management and staff strength

• Key members are the co-founders, Adam Low Yik Sen (Executive Chairman and Managing Director) and Alex Low Yik Jin (CEO and Executive Director), who have over 14 years of experience in e-commerce distribution and data analytics each. The rest of the key management team include the CFO, Freight Manager, who oversees the logistics coordination and liaison, and the Data Analytics Manager, who is responsible for managing and enhancing the group’s data analytics capabilities.
• YVEN’s full-time staff numbered 40 in FY17, up from 37 full-time staff in FY16. Staff costs were generally kept in line with the increase in manpower over FY15-17. Both Adam and Alex draw 100% fixed remuneration without any variable components.

Major shareholders

• Based on Bloomberg data as at 9 May 2018, both co-founders hold a combined stake of 69.4% in the company. The third-largest stakeholder in YVEN is Prism Investment Ventures, which held an 11.1% stake (or 22.8m shares). Prism Investment Ventures is co-owned by two individuals and is under a 12-month moratorium period from the date of listing whereby it has undertaken not to sell 18.2m shares (c.8.9% stake).

Colin TAN CFA CGS-CIMB | https://research.itradecimb.com/ 2018-05-25

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