Tuesday, 16 June 2015

Rocket Internet (RKET GY) ... The Imitation Game

Tuesday 16th June 2015

This is the first in what will likely be a series of posts looking at Rocket Internet (RKET GY). It is too big to tackle in just the one.

Rocket Internet is an internet incubator. What Rocket broadly does is to imitate online business models in the United States or major European countries and attempt to roll out the concept, usually in South Asia, Eastern Europe or Latin America.

Capitalised at c. €6.3 billion, it is the major shareholder in a portfolio of companies which racked up combined losses of c. €586 million* in 2014.
*my estimates on an annual average respective euro rate basis to each winner.

So while the company plays the Imitation Game, I reckon there's another game also being played by its investors. A game of greater fools ...

Rocket Internet share price
Source: Bloomberg

The raise

Rocket Internet AG ("Rocket") arrived on the Frankfurt Stock Exchange in early October 2014, raising c. €1.4 billion through equity at €42.50/shr. It was reportedly Germany's biggest IPO since 2007

The capital raised at IPO, came shortly after it had raised €333 million from the Philippine Long Distance Telephone Company in August 2014, and €435 million from United Internet (€333 million of which was in cash).

In total, the group appears to have raised c. €2.1 billion during H2 2014.

Rocket is an internet incubator. What this means is described by Rocket more fully below in a segment from its prospectus:
We identify and build proven Internet business models and transfer them to new, underserved or untapped markets, mainly outside the United States and China, where we seek to scale them into market leading online companies. We started in 2007 with 4 employees and 2 consumer brands, based on an initial investment of €0.5 million from European Founders Fund GmbH & Co. Beteiligungs KG Nr. 1 (later renamed Global Founders Capital GmbH & Co. Beteiligungs KG Nr. 1 (“Global Founders Capital Fund”)). As of the date of this prospectus, on an aggregate basis, more than 20,000 employees work across our network of companies, which conducts business in 116 countries on 5 continents. Our most mature companies, which we refer to as proven winners, generated aggregate net revenues of €757 million (unaudited sum total of their net revenues based on the generally accepted accounting principles applicable for the relevant company, in each case taking the last fiscal year for which data was available) and aggregated net losses of €442 million (unaudited sum total of their net losses based on generally accepted accounting principles applicable for the relevant company, in each case taking the last fiscal year for which data was available and excluding extraordinary gains of Dafiti resulting from the measurement of limited partnership interests). The Issuer’s aggregate direct and indirect stakes in all of our companies, including proven winners, our growing companies that have already achieved a significant size, which we refer to as emerging stars, our regional Internet groups and our strategic participations and other investments, have a combined value of €2.6 billion(1) based on the respective latest third party financing rounds (as described in more detail below in this element B.3).
Germans aren't renowned for their sense of humour. And so it can only be concluded that Rocket's promoters are deadly serious about this operation. 

Before proceeding much further, a few items to note ...
  • Rocket has been rocking along since 2007, when it started with €500,000 and a few employees.
  • At its current €37.5/shr, Rocket is capitalised at €6.3 billion. 
  • As at 31 December 2014, Rocket's net asset value seemingly totaled c. €2.6 billion. However, ex-cash this was just c. €585 million. 
  • Rocket's NAV is therefore c. 41% of its market capitalisation, while its ex cash NAV is c. 14% of its ex-cash market valuation. 
  • The bulk of Rocket's €585 million ex-cash NAV is comprised of €554 million in "equity investments in associates".  
  • A further €20 million and €3 million of its asset base is attributable to "receivables from subsidiaries" and "receivables from associates" respectively.
  • At the time of IPO in October last, Rocket's portfolio of companies included: 
    • 11 proven winners
    • 9 emerging stars
    • 5 concepts
    • 4 regional Internet groups
    • 8 companies in strategic participations
    • 9 companies in other investments
    • and of course various other bits and bobs
Rocket's significant holdings as at time of IPO
Source: Rocket Internet Prospectus

11 proven winners

At the time of Rocket's IPO, its 11 proven winners (detailed below) reportedly generated aggregate net revenues of €757 million (unaudited sum total) in the most recent fiscal year leading up to the IPO. They also generated aggregate net losses of €442 million. You may well ask, with "winners" like those, who needs losers?

Below is the 2012 to 2013 headline revenue and EBITDA performance of Rocket's 11 proven winners as provided in its prospectus.
2012 and 2013 revenue and EBITDA of Rocket's 11 proven winners
Source: Rocket Internet Prospectus
2012 and 2013 revenue and EBITDA of Rocket's 11 proven winners
Source: Rocket Internet Prospectus
Two things are immediately apparent.
  • Although these 11 proven winners racked up aggregate losses of €442 million in each respective fiscal year leading up to 2013, it's not even as if there were any winners profitable businesses among the 11. Indeed, each and every one was loss making. 
  • Zalora, Lazada, and Jumia each had de minimis revenue during 2012, and yet went from this to €68.9 million, €56.8 million, and €29.0 million revenue respectively in 2013.     

And then there were 12 proven winners

The revenues didn't stop rocketing higher come 2014. Although this time where there once stood 11 proven winners, a 12th did emerge; Foodpanda/Delivery Hero with €6.7 million in revenue and €34 million in EBITDA losses.

The grand total revenues of the 11 12 proven winners climbed to c. €1,288 million* in 2014 . The EBITDA losses came in at a mere c. €586 million*.
*my estimates on an annual average respective euro rate basis to each winner.


Rocket Internet's 12 proven winners cumulative revenue and EBITDA,
my estimates in €m based on annual average respective FX rates
Source: Rocket Internet annual report and prospectus
Rocket Internet's 12 proven winners individual revenue,
my estimates in €m based on annual average respective FX rates
Source: Rocket Internet annual report and prospectus
Yet again, it was not even as if there was one single profitable concern among the winning 12.

Rocket Internet's 12 proven winners individual EBITDA,
my estimates in €m based on annual average respective FX rates
Source: Rocket Internet annual report and prospectus

Zalora - a winner

One of Rocket's winners is Zalora.

Zalora sells shoes and fashion online in Singapore, Malaysia, Indonesia, Thailand, Philippines, Vietnam, Hong Kong, Australia and New Zealand.

As can be seen in the table below, Zalora was valued at c. €524 million when Rocket came to market. Further, while Rocket had invested c. €2.6 million into Zalora, total funding into the business stood at c. €292 million. In light of the ongoing losses (highlighted further below) that Zalora has incurred since, one would expect this funding has increased further.

Information on proven winners, including valuation in the last financing round
(last portfolio value - LPV) leading up to IPO, and the corresponding value of
Rocket's direct and indirect stakes in the proven winners
Source: Rocket Internet Prospectus
As highlighted above and shown in the chart below, Zalora's revenue had risen to c. £95 million in 2014 (my estimate on an annual average £:€ basis). This is especially good going, since Zalora had de minimis revenue in 2012.

Zalora revenue - in £ million
my estimates on an annual average £:€ basis
Source: Rocket Internet 2014 annual results presentation & prospectus
To put this into some perspective, ASOS (ASC LN, mkt cap £3.2 billion) began its trading at the turn of the 21st century. It took ASOS around a decade to get to £43 million in sales. Zalora did twice that in three years.

Zalora's revenue progression as compared to ASOS' revenue progression from start-up
ASOS began in 1998 while Zalora was created in 2012

Source: Bloomberg, ASOS  & Rocket Internet annual reports and prospectuses 
Now one might argue that ASOS began from a standing start in the early days of the advance of the internet and in one single country; the UK. However, the internet was pretty much in full swing by 2008, when ASOS began to grow its European business in Denmark, Sweden and Ireland. ASOS then created country specific sites for Germany and France in 2010, and a year later in 2011 it added Spain and Italy to its country tailored offering; the big four of the EU.

And despite having all the technological know-how, experience from over a decade of trading in the UK, and supplier relationships to name but a few of ASOS' advantages, Zalora managed to broadly reach the level of sales in less than three years for which it took ASOS over five in Europe.

Zalora's revenue progression as compared to ASOS' EU related revenue progression from start-up
ASOS began to target European markets in 2008, while Zalora was created in 2012
Source: ASOS  & Rocket Internet annual reports and prospectuses
But then one might suppose that Zalora's rapid growth was perhaps driven by the fact that it had access to c. 575 million potential customers across the Asian markets^ it had targeted. Whereas ASOS had access to only c. 274 million by way of the major markets in the EU.  
^Malaysia, Brunei, Philippines, Thailand, Singapore, Hong Kong, Vietnam, Indonesia, Australia and New Zealand.  

However, what Zalora's Asian exposure makes up for in sheer population, it possibly loses in terms of GDP per capita and internet access.

Zalora's markets as compared to ASOS EU markets -
internet users per 100, GDP per capita (US$), and population (relative bubble size)
Source: The World Bank, ASOS & Zalando annual reports
In fact while Indonesia. Thailand, Philippines and Vietnam may well have populations greater than those of Germany, France, Spain and Italy, they also have GDP per capita rates of less than US$6,000, as compared to the EU nations where it ranges from c. US$29,000 for Spain, to as high as c. US$46,000 for Germany, and higher still for Denmark and Sweden. In Indonesia's case, which has the largest population by far, its GDP per capita is as low as c. US$3,500, while in Philippines it is lower still at c. US$2,800 and in Vietnam lower again at just c. US$1,900.

Further, internet access per 100 of the population is generally below 50% in Zalora's markets as compared to rates in the 70's to 90's for ASOS's EU exposure. According to the World Bank it is as low as 16% in Indonesia.

All this makes Zalora's growth relative to ASOS's endeavors in the EU even more impressive.

I will follow up shortly.

In the meantime, the FT's Dan McCrum has written some good posts on Rocket that are well worth a read:

Rocket from the shelf
This is nuts. Enjoy your trip to the moon

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

1 comment:

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