Y Ventures Group Ltd - DBS Research 2018-08-27: Cost-concerns In The Near Term 

Y Ventures Group Ltd - DBS Group Research 2018-08-27: Cost-concerns In The Near Term  Y VENTURES GROUP LTD. SGX:1F1

Y Ventures Group Ltd - Cost-concerns In The Near Term 

  • Y Ventures Group (YVEN)'s 1H18 EBITDA of US$226K (-64% y-o-y) was below our expectation of US$800K.
  • FY18/19F EBITDA cut by 56%/39% on potential delays in revenue generation from new partnerships, and cost escalations in the short term.
  • Downgrade to HOLD with Target Price cut to S$0.48.

Short term dip in performance may lead to range bound stock price.

  • 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. While we remain positive on the long- term growth potential of YVEN, we revised down our FY18/19F EBITDA by 56%/39% on the back of potential short-term delays in generating sales from new third-party brands, lower than expected sales of private labels due to challenges in establishing supply chains and cost escalation from expansion in geographical footprint and customer base.
  • We would re-visit our recommendation once YVEN shows success in tackling these challenges.

Where we differ: Our FY18F/19F revenue and EBITDA is below consensus.

~ SGinvestors.io ~ Where SG investors share
  • We project FY18F19F revenue of US$22m/US$32m vs. consensus estimate of US$25m/US$36m. We project FY18F19F EBITDA of US$1.2m/US$3.7m vs. consensus estimate of US$2.6m/US$4.7m.
  • YVEN could take time in setting up new logistics and distribution networks, particularly in segments other than books, potentially delaying revenue contributions from new partnerships. Operational expenses on the AORA platform for cross-border e-commerce and Chinese business are likely to grow in FY19F, with the launch of the platform and private labels in China in FY19F.

Potential Catalyst: Status of the AORA ICO.

  • A fully subscribed AORA initial coin offering (ICO) of ~US$50m would showcase investor confidence in the AORA platform. 


Downgrade to HOLD with a lower Target Price of S$0.48.

  • We lower our Target Price from S$0.77 to S$0.48 as we revise down our FY19F EBITDA by 39% on lower revenue projections and expected cost escalations over the short term. 
  • Our Target Price is based on 19x FY19F EV/EBITDA, at a 15% discount to larger peers’ 23x. 

Key Risks to Our View: 

  • Bear Case valuation of S$0.34 if expansions fail to materialise into sales. 
  • Longer gestation period for new products as YVEN expands into new categories, and impute lower growth given upfront purchase requirements inherent in YVEN's inventory-taking model coupled with higher operating expenses could translate to FY19F EBITDA of just US$2.6m vs. our base case assumption of US$3.7m. 

WHAT’S NEW - Expect cost escalations in the short term

1H18 revenue of US$9.3m (+27% y-o-y, +35% h-o-h) was below our expectations of US$10.5m.

  • YVEN’s topline was driven by the addition of new book publishers from the UK and growing uptake of YVEN’s private label, Faire Leather. Sale of books contributed ~70% to YVEN’s topline in 1H18 (vs. ~80% in FY17) with revenues from Faire Leather/private label sales, logistics services and waste management services contributing ~5%/25% respectively. 
  • YVEN’s inventory turnover dipped to 1.6x in 1H18 vs. ~4.5x in 1H17 (~1.1x in 2H17) with the onboarding of new publishers from the UK and ramping up of new stocks for the peak season of August-September. Gross margins improved to 45% (vs. 41/42% in 1H/2H17) supported by a higher mix of private label sales.

Seasonality effects should result in a better 2H.

  • YVEN’s management expects a better 2H18 led by
    1. the peak season of book sales which typically falls in 2H, particularly in the months of August-September;
    2. sales of Faire Leather and private labels which are seasonal and should edge up during the holiday season in 2H18;
    3. contributions from the sale of Disney products with the distribution agreement with Beast Kingdom.
  • We expect 2H18 topline to hover around US$12-13m, ~35- 40% growth over 1H18.

1H18 EBITDA US$226K (-64% y-o-y) was below our expectation of US$800K.

  • Excluding one-off IPO expenses and foreign exchange gains/losses, YVEN’s 1H18 EBITDA plunged 64% y-o-y owing to higher sales and distribution and administration expenses.
  • Selling and distribution expenses expanded ~52% y- o-y (~40% h-o-h) with the onboarding of new publishers and the subsequent set up of regional distribution channels and higher fulfillment and delivery costs pertaining to Faire Leather. Administration expenses excluding IPO expenses also expanded ~90% y-o-y with the growth in headcount to support expansions, expenses relating to the Initial Coin Offering (ICO) of AORA Coin and expenses in setting up operations in China. 
  • YVEN’s PBT excluding IPO expenses as a result dipped to US$ 169m from US$572m in 1H17 (-70% y-o-y).

Beta trials for AORA by November; China operations still at infancy.

  • YVEN expects to launch a beta version of the AORA platform by November and to list the AORA ICO, which was launched on 1 August 2018, on an exchange by January 2019. The accounting treatment for the ICO proceeds from the sale of AORA Coin is still under review and YVEN hopes to book the proceeds of the ICO in 1H19. Approximately US$ 300,000 has been already spent on the AORA platform.
  • In June 2018, YVEN set up a subsidiary to expand its third-party distribution and private label offerings to China. The company is actively seeking third party distribution partnerships in the country and leveraging on its success with Faire Leather, YVEN is vying the use of crowdfunding campaigns to launch new products under private labels in China. 
  • YVEN is already in the early stages of developing toys and fitness products for launch. However, we await better clarity to incorporate potential topline contributions from the AORA platform or Chinese operations.

We revise down our FY18/19F EBITDA by 56%/39%; Downgrade to HOLD with lower Target Price of S$0.48.

  • We revised down our FY18/19F revenue by 11%/14% on potential delays in the short term in generating sales from new third-party brands coming aboard YVEN’s platform and slower than expected ramp up of private label sales, particularly of Faire Leather, due to challenges in establishing supply chains despite strong demand. The impact of lower revenue was partially netted off as we raised our FY18/19F gross margin assumption to 41%/42% vs. 40% to reflect the growing mix of private label sales.
  • Operational expenses in the next 1-2 years would continue to remain above our previous expectations on the back of
    1. Higher expenses in setting up distribution networks as YVEN expands its customer portfolio to include new publishers and customers in Home and Décor and FMCG segments;
    2. Costs involved setting up fulfillment centers and delivery networks for Faire Leather as the brand expands outside Asia and higher expenses involved in the design and development of new Faire Leather products;
    3. Operational expenses in setting up operations in China - product development and marketing expenses incurred despite China not contributing any meaningful revenue in the short term;
    4. Expenses pertaining to the AORA platform and AORA ICO.
  • Taking these into account, we have revised up our projections of operational expenses by 6%/7% in FY18/19F, thereby bringing down our FY18/19 EBITDA margin assumptions to 5%/11% from 11%/16% before. However, we expect these cost escalations to be short term in nature, largely attributable to the ongoing expansions of YVEN’s operations.
  • We believe there is room for significant improvement in margins post FY19F with YVEN’s expansions yielding economies of scale and potential revenue contribution from the AORA platform and operations in China.
  • After revising down our FY19F EBITDA by 38% to US$2.6m, rrive at a lower Target Price of S$0.48. Downgrade to HOLD.

Sachin MITTAL DBS Group Research | Carmen Tay DBS Research | https://www.dbsvickers.com/ 2018-08-27
SGX Stock Analyst Report HOLD Downgrade BUY 0.48 Down 0.770