Hepsiburada - Why are risks tilted to the upside?
/Hepsiburada - Labeling surprises
Share price trajectories respond to surprises if and when all publicly available information is fully priced in. Markets offer premia only for unpriced sources of risk and surprise is what is unpriced. We cannot predict surprises but we can form a view on the sources of surprise with direction, downside or upside. Here, we shall list those sources for Hepsiburada, in no particular order, and communicate our view with direction. We have found it hard to label any surprise with a negative sign. Please read and let me know your thoughts.
1. Compelling value unrecognized (++). Hepsiburada is and remains a growth stock. It is trading at unjustifiably low revenue multiples, incompatible with a growth stock and well below those of their North American or Chinese ecommerce counterparts. You would be paying about an EV of 7 cents to acquire $1 in sales versus 40-50 cents In Europe and Asia. The valuation gap of this magnitude is technically a source of upside risk.
2. EBITDA to break even sooner than the market thinks (+++). The EBITDA loss reported for the September quarter narrowed both sequentially and on year-on-year comparisons. The net loss is following the suit. If the EBITDA broke even sooner than the analysts factor in, a material adjustment in equity value would have to follow.
3. The management raised its GMV guidance twice last year and the street may be underestimating the outlook again (+++). Going through the September quarter financial statements and the GMV guidance update again, we tend to believe the street’s 2023 outlook is too bearish. At an inflation adjusted 8.4%, September quarter gross contribution margin posted a significant 447bp improvement on the year (+337bp sequentially).
4. Outlook stands out in the crowd (+). The difference between Hepsiburada and most ecommerce players around the globe is the outlook. There may be further downside risks in the North American and European ecommerce outlook not fully priced in; but the operating outlook for Hepsiburada is improving and the prospects are not factored in the shares. We are of the view that Hepsiburada should stand out in the group to be an outlier in 2023. The company is quietly turning around its business. The direction of surprise here is positive.
5. Margin gains with no layoffs or capacity reduction (++). The September quarter marked the second quarter of significant margin gains across the income statement. At an inflation adjusted 8.4%, September quarter gross contribution margin posted a significant 447bp improvement on the year (+337bp sequentially). There was also a marked decline in advertising and shipping and packaging margins year-on-year. Operating margins have 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.
6. Cash flow turns positive with risks to the upside (+). Free cash flow, which had turned positive during the June quarter, posted improvement both sequentially and on year-on-year comparisons. We expect positive readings both in operating and free cash flow lines. Cash flow remains a source of positive risk to financials.
7. New antitrust law, which has become effective from 1 January to benefit Hepsiburada (+) The regulators have introduced a new antitrust code of conduct governing over ecommerce platforms. The new ecommerce law, which restricts advertising, placing caps and ceilings on how much an ecommerce platform can spend and banning certain forms of marketing is a source of positive surprise to Hepsiburada's earnings outlook. Hepsiburada's main competitor in Turkish ecommerce business commands an estimated 45-50% of the market by transaction volume, which is hard to maintain once the new antitrust law gets implemented fully.
8. The competitors do not have the license to operate payments platforms (+++) The Turkish marketplace regulators have ceased issuing licenses to operate payment systems in the country. Hepsipay, Hepsiburada's wholly-owned subsidiary, already has a licence to administer payments platforms matching orders. This is a formidable advantage over rivals which do not have in-house payments capabilities. Hepsiburada's potential in fintech versus its peers is a competitive advantage little understood by the analysts; that is a source of material upside risk longer term.
9. Hepsipay indeed commands a sizable and growing 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.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.
10. Missed the rally in Turkish stocks (+). Turkish stocks finished the year on a high note with most blue chips at least doubling in value in dollar terms in 2022. The growth has been broad-based with all major sectors participating from retailers, manufacturers to various discretionary sectors and stocks. High frequency data readings from Türkiye show that the growth is likely to be as strong in 2023. Hepsiburada operates in the same market serving a range of consumer and enterprise customers, so wide that it can almost be used as a proxy for Türkiye. However, the stock has missed this significant rally in Turkish shares.
11. The P&L to credit any unpaid portion of the settlement charge (+). Hepsiburada provided against potential shareholder settlement expenses, charging its September quarter P&L by TL258 million (7.9% of 3Q GMV or 2.3% of operating revenues). Any amount that is not paid out should be credited back to the P&L, which we would treat as a source of positive surprise.