Hepsiburada - Ready for a 2023 turnaround

We reiterate our view that Hepsiburada should become profitable sooner than the street expects. We expect 2023 to be a turnaround year for Hepsiburada which should stand out and be an outlier amongst the global players in ecommerce.

Global ecommerce after a challenging year. That the ecommerce/marketplace space did not have a good year last year would be an understatement. The US market was particularly poor to put it mildly. There is a rich body of brokerage research that can cite us the reasons why that is so. It all comes down to one thing: earnings. We have picked up two broker reports recently, each covering over 50 stocks in ecommerce, marketplace, digital media and alike. The 2022 PE column in their comp sheets reads NM almost in its entirety. The number of stocks with positive PE is fewer than 5. The EV/EBITDA column reads somewhat better but far too many stocks do not have positive EBITDA. In comparison, Chinese ecommerce/market place stocks have fewer NMs. Where does Hepsiburada stand against this backdrop?

A turnaround in the making. Where we go from here and what it is that we should be looking at in 2023 is a different question to entertain when it comes to Hepsiburada. The difference between Hepsiburada and most ecommerce players around the globe is the outlook. There may be further downside in the global ecommerce outlook not fully priced in; but the operating outlook for Hepsiburada is improving and that is not yet given credit for in the market looking at the share price. We are of the view that Hepsiburada is to be an outlier in 2023 for all the good reasons. The company is quietly turning around its business. The September quarter marked the second quarter of significant margin gains across the income statement -see the chart below.- Margins gained despite the fact that Hepsiburada has not reduced any capacity or headcount unlike other ecommerce and fintech businesses. We would see any reduction or consolidation in the workforce as a source of upside risk to financials. An EBITDA breakeven in 2023 is not too stretched with earnings following soon after.

Hepsipay as a source of upside risk. Operating a FinTech/payments license in Turkey, Hepsiburada's home market, is a massive advantage over its rivals. This is because the marketplace regulators have ceased issuing licenses to operate payment systems in the country. Hepsipay, Hepsiburada's wholly-owned subsidiary, already commands a sizable market in Turkish payments: its wallet base stood at circa 9.2 million as at September 2022, up from 8 million as at June 2022. The wallet base is likely to approach/exceed 11 million count by year-end 2022. Total payment volume that goes through Hepsipay is at 44% of Hepsiburada’s GMV, as of September versus 39% in June. The BNPL functionality introduced earlier in the year is off to a good start. The customer base with limits issued exceeded 500K over 115K actively using the limits as of September 2022. More important is the outlook. Hepsiburada has not yet taken full advantage of Hepsipay's growing position in Turkish payments. Hepsipay's flexible use and functionality on both consumer and enterprise space and the rivals' lack of presence in direct payments operations will further differentiate Hepsiburada's products from the crowd. Also important is to stress that the payments business Hepsiburada operates and the impact of having an in-house fintech business on margins are not fully explored by the street, which is where we see a potential for positive surprise to outlook.

September quarter recap. Hepsiburada has reported September quarter financial statements and provided a trading update. The recovery has continued both at gross income and EBITDA levels. The EBITDA loss continue its trend down. The improvement in September loss readings is largely due to, in decreasing order of importance, (1) the gross contribution margin, (2) shipping and packaging expense margin, and (3) advertising expense margin. This is the second quarter Hepsiburada reports IAS29 inflation adjusted accounts. The gross merchandise value (GMV) reads TL11.0 billion, down 8.5% on the year. The share of marketplace GMV was 68.2% versus 69.7% the same period last year. Business volumes are looking good despite headwinds with the number of orders growing 26% year-on-year to reach 17.4 million. The active customers totaled 11.8 million adding 11.0% over the same period last year. The merchant base is reported at 94.3 thousand growing 41.5% year-on-year. At 145 million, the SKU count added 89% year on year. Gross contribution margin jumps. At an inflation adjusted 8.4%, September quarter gross contribution margin posts a significant 447bp improvement on the year (+337bp sequentially). This is in part due to the repricing gap now working to Hepsiburada’s favor as we have highlighted in our comments on June quarter results. Cost repricing may lag revenue repricing under inflation accounting temporarily overstating cost of sales while understating revenues masking the true state of profit margins. OPEX margin is down 181bp on the year. We see marked decline in advertising and shipping and packaging margins year-on-year. The outlier is the general and admin expense line, where the margin is wider both sequentially (+39bp) and on the year (+106bp). The improvement in other OPEX lines, especially in advertising, is large enough though to offset the deterioration in G&A expense margin. The total OPEX margin indeed reports a material 181bp improvement over the same quarter of 2021. EBITDA loss has narrowed both on the quarter and year-on-year. The loss at EBITDA level has narrowed sequentially to TL454M -excluding provisioning for a shareholder settlement charge-off- for the September quarter versus TL594M reported for the June quarter and TL1,245M for the September quarter of 2021. The EBITDA margin has improved by a significant 616bp over the same quarter of 2021 or +206bp on quarter-on-quarter comparison. Net loss follows the suit. The net loss -excluding one-off charge- has narrowed sequentially to TL387.4M (TL571.5M including one-off provisioning) for the September quarter versus TL554.1M reported for the June quarter. The loss posted for the September quarter of 2021 was TL1,511M. Free cash flow - positive readings two quarters in a row. Free cash flow, which had turned positive during the June quarter, posted improvement both sequentially and on year-on-year comparisons: +TL331M in 3Q22 versus +TL184M in 2Q22 or -1,290M booked in 3Q21, all cash flow figures are inflation adjusted. The reversal is again due to the positive reading in operating cash flow, which has posted +TL542M as at September 2022 versus +TL397M in June and -TL1,186M in September 2021.