Rocket Internet (RKET GY) ... And So It Goes

Monday 25th July 2016

Groupon (GRPN US, mkt cap $2.2bn) acquired CityDeal Europe GmbH in May 2010. CityDeal was owned and founded by Oliver Samwer, Marc Samwer, and Alexander Samwer; the Samwer brothers. They are also the founders of Rocket Internet (RKET GY, mkt cap €2.9bn). CityDeal was effectively a replica of Groupon, although principally focused on the German market.

We began our international operations in May 2010 with the acquisition of CityDeal Europe GmbH, or CityDeal, which was founded by Oliver Samwer and Marc Samwer. Since the CityDeal acquisition, Messrs. Samwer have served as consultants and been extensively involved in the development and operations of our International segment. 

Source: Groupon 2012 10-K filing 

GRPN's 2012 10-K filing suggests that it paid up to $204 million for CityDeal in May 2010, five months after the business was launched in January 2010. Yes months!

Acquisition‑Related
In May 2010, we acquired CityDeal, a European‑based collective buying power business launched in January 2010 that provided daily deals and online marketing services substantially similar to the Company. As part of the overall consideration paid, we were obligated to issue additional shares of our common stock in December 2010 due to the achievement of financial and performance earn-out targets. We recorded a liability on our consolidated balance sheet as of the original acquisition date for this consideration and subsequently remeasured the liability on a periodic basis until final settlement. As a result of this remeasurement, we recorded a total charge of $204.2 million in acquisition‑related expenses in 2010, which was partially offset by other nominal acquisition‑related items.

Source: Groupon 2012 10-K filing

GRPN has been something of a disappointment. Having floated at around $20 a share in late 2011, its share price is now some 82% lower at $3.76/shr. Whether the CityDeal acquisition created value or destroyed value for GRPN is uncertain. What is more clear cut is the destruction brought about by the other business which the Samwer brothers sold to GRPN; E-Commerce King Limited.

E-Commerce King Limited

According to GRPN's 2012 10-K filing, in January 2011, GRPN acquired 40% of the ordinary share capital of E-Commerce King Limited in exchange for $4.0 Million.

Equity Investment in E-Commerce King Limited
In January 2011, the Company acquired 40.0% of the ordinary shares of E-Commerce King Limited (“E-Commerce”), a company organized under the laws of the British Virgin Islands, in exchange for $4.0 million. The Company entered into the joint venture along with Rocket Asia GmbH & Co. KG (“Rocket Asia”), an entity controlled by former CityDeal shareholders Oliver Samwer, Marc Samwer and Alexander Samwer (the “Samwers”). Rocket Asia acquired 10.0% of the ordinary shares in E-Commerce. E-Commerce subsequently established a wholly-owned foreign enterprise that created a domestic operating company headquartered in Beijing, China (“GaoPeng.com”), which operates a group-buying site offering discounts for products and services to individual consumers and businesses via internet websites and social and interactive media. GaoPeng.com began offering daily deals in March 2011 in Beijing and Shanghai with expansion to other major cities in China to follow.

Source: Groupon 2012 10-K filing

This would suggest a $10 Million valuation for the entire issued ordinary share capital. GRPN's stake in E-Commerce King, was with a joint venture with Rocket Asia GmbH & Co. KG, which was controlled by the Samwer brothers. Rocket Asia acquired 10% of the ordinary share capital in E-Commerce King.

GRPN went on to highlight that around six months later, GRPN acquired a further stake in E-Commerce King, purchasing its increased stake in E-Commerce King from the Samwer brothers', Rocket Asia, for $45.2 Million. GRPN also injected a further $26.7 Million into the E-Commerce business during the same year.

On July 31, 2011, the Company entered into an agreement to purchase additional interests in E-Commerce for a purchase price of $45.2 million from Rocket Asia consisting of 2,908,856 shares of non-voting common stock. See Note 15 “ Related Parties ”. The investment increased the Company's ownership from 40.0% to 49.0%. In addition, the Company made various cash investments for an aggregate amount of $26.7  million in the year ended December 31, 2011. At the same time, the remaining investors made additional proportionate investments that resulted in no change to the Company's ownership percentage in E-Commerce.

Source: Groupon 2012 10-K filing

GRPN's stake rose from 40% to 49%, suggesting that the $45.2 Million purchase valued E-Commerce King at c. $502 Million. That's an impressive 50x increase in valuation in a matter of six months. Although somehow the remaining investors made proportionate investments which resulted in no change to GRPN's ownership percentage in E-Commerce King.

Incidentally, E-Commerce King appears to have racked up losses of $26.5 Million during its first year of trading.

The Company recorded its share of the loss of E-Commerce in the amount of $26.5 million within “Equity-method investment activity, net of tax” in the consolidated statement of operations for the year ended December 31, 2011.

Source: Groupon 2012 10-K filing

A few observations:

• Incredible uplift in valuations in short order. 
• As astonishing losses in short order. 
• The Samwer brothers didn't stick around. 

Skip forward a year

During 2011 and 2012, GRPN made additional cash investments into E-Commerce King of $32.9 Million, increasing its stake to 49.8% along the way. Then in June 2012, E-Commerce King was absorbed by Life Media Limited (F-tuan). In return for GRPN's 49.8% stake in E-Commerce King and a further $25 Million in cash, GRPN received a 19% interest in F-tuan.

In June 2012, Life Media Limited ("F-tuan"), an exempted company incorporated under the laws of the Cayman Islands with operations in China, acquired E-Commerce. In exchange for its 49.8% interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19% interest in F-tuan in the form of common and Series E preferred shares. The Company paid $5.0 million of the cash consideration on June 25, 2012 and the remaining amount was paid on July 2, 2012.

Source: Groupon 2013 10-K filing

However, GRPN's stake in E-Commerce King was seemingly valued at $128.1 Million when it was transferred to the new entity, F-tuan. Then this value was impaired by $50.6 Million to $77.5 Million by December 31, 2012. This was c. 85% lower than the heady times when it bought an additional 9% for $45.2 Million from the Samwer brothers at an implied valuation of c. $502 Million, just 18 months earlier.  

Cost Method Investment in Life Media Limited (F-tuan)
The investment in F-tuan is accounted for using the cost method of accounting because the Company does not have the ability to exercise significant influence. Accordingly, the investment is adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The $77.5 million carrying amount of the investment represents the $128.1 million fair value on the date the Company obtained it less the $50.6 million impairment discussed below. The estimated fair value of the investment as of December 31, 2012 was $77.5 million.

Source: Groupon 2013 10-K filing

Skip forward another year

By 2013, GRPN's full investment in F-tuan was written down to ZERO!

Investments in E-Commerce and Life Media (F-Tuan)
In June 2012, Life Media Limited ("F-tuan"), an entity with operations in China, acquired the Company's 49.8% interest in E-Commerce King Limited ("E-Commerce"), an entity with operations in China. In exchange for its interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19.1% interest in F-tuan in the form of common and Series E preferred shares. The Company recognized a non-operating gain of $56.0 million as a result of the transaction, which is included within "Other expense, net" on the consolidated statement of operations for the year ended December 31, 2012. The gain represented the excess of the fair value of the Company's investments in F-tuan over the carrying value of its E-Commerce investment as of the date of the transaction and the $25.0 million of cash consideration. 

In August 2013, the Company entered into an exchange transaction with F-tuan whereby it received newly issued shares of Series F preferred stock in exchange for all shares of F-tuan common stock previously held by the Company and $8.0 million of cash consideration, which was paid in two installments of $6.5 million and $1.5 million in August and October 2013, respectively. The transaction was recorded at cost. The Company’s investments in F-tuan following this transaction are in the form of Series E and Series F preferred shares. Those preferred shares rank pari passu with certain other classes of F-tuan’s outstanding preferred stock and have an aggregate liquidation preference of $85.5 million. The Company’s voting interest in F-tuan remained 19.1% after the transaction. 

The Company's investments in the Series E and Series F preferred shares of F-tuan are classified as available-for-sale securities because the investee's Memorandum of Association provides for redemption of the preferred shares at the Company's option beginning in October 2017. The Company's investment in the common shares of F-tuan, which were held prior to the August 2013 exchange transaction, was accounted for using the cost method of accounting because the Company did not have the ability to exercise significant influence over the operating and financial policies of the investee. As discussed below, the Company's investments in F-tuan were written down to zero through an other-than-temporary impairment charge as of December 31, 2013, and continue to have an estimated fair value of zero as of December 31, 2014.

Source: Groupon 2014 10-K filing

That's some ride from a $10 Million valuation in January 2011, to an implied $502 Million valuation six months later, and all the way back down to ZERO within a few years.

This is precisely what I expect will happen to almost if not all of Rocket's "proven winners". And for that reason I am short Rocket.

Now ... how about those Kinnevik write downs, huh?
Hint: FT Alphaville Markets Live: Friday, 22nd July, 2016

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. 

Just Eat (JE/) ... more fine dining than Grub?

Tuesday 27th October 2015

Pursuant to today's warning by the US listed online restaurant order and delivery service, GrubHub (GRUB US, mkt cap $2.2 billion), I sold short a few Just Eat (JE/ LN, mkt cap £2.9 billion), the UK listed online restaurant order and delivery service. 

This was not a difficult decision to make. 

You may reckon that JE/ with its superior market capitalization to GRUB is as distinguished in terms of its prospective P&L. However, this is not the case. 

For sales:

• GRUB is forecast* to achieve £237 million in sales in 2015, rising 29% to £305 million in 2016. 

by contrast

• JE/ is forecast* to achieve £235 million in sales in 2015, rising 34% to £315 million in 2016.

In terms of EBITDA and EBIT:

• GRUB is expected* to deliver £72/44 million in EBITDA/EBIT in 2015, rising to £96/63 million EBITDA/EBIT in 2016. 

while

• JE/ is penciled* in for £55/48 million in EBITDA/EBIT in 2015, rising to £89/83 million in EBITDA/EBIT in 2016. 

The major difference between the two companies appears to be in valuation:

• GRUB trades* on 40x this year's earnings, falling to 31x 2016. Or alternatively an EV/EBITDA multiple of 16.9x 2015 falling to 12.7x 2016.

as compared to

• JE/ trading* on 76x this year's earnings, falling to 47x 2016. Or alternatively an EV/EBITDA multiple of 49x 2015 falling to 30x 2016. 

*Bloomberg consensus

So what gives? 

I reckon one set of valuations is wrong. US investor appetite would suggest it's Just Eat's. 

Consequently I sold short. 

GRUB share price as compared to JE/
Source: Bloomberg

GRUB P/E de-rating as compared to JE/
Forward P/E multiple
Source: Bloomberg

GRUB EV/EBITDA de-rating as compared to JE/
Forward EV/EBITDA multiple
Source: Bloomberg

And another thing

GRUB's warning (and subsequent slide in value) is probably unhelpful for any positive read across to Foodpanda, which no doubt explains why Rocket Internet fell 6% on the day. 

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.

Rocket Internet (RKET GY) ... enough to put you off your dinner

16th September 2015

Below is a link by www.livemint.com, to a riveting read on Rocket's Foodpanda business in India. It's a real page-scroller with claims of dodgy cupcake orders, related party transactions, ghost restaurants and shambolic controls. 

The trouble with Foodpanda

Sunny Goel seems to be on Foodpanda India's most wanted list. Most wanted for reportedly setting up 70 fake restaurants. 

If I was an investor in Rocket, it would be enough to put me off my Foodpanda order. Fortunately, I am short. 

Incidentally, according to Rocket's 2014 report, Foodpanda racked up an impressive €6.7 million in revenue and a €38.5 million EBITDA loss during 2014. Which is obviously why it was reportedly valued at €403.8 million, with Rocket's share being 52.1% or €210.5 million. Hmm ....

Foodpanda valuation
Source: Rocket Internet 2014 annual report

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. 

Zalando (ZAL GY) ... H1 prompts further observations

Monday 17th August 2015

Zalando (ZAL GY), currently capitalized at €7.9 billion, last week reported its half year performance to 30th June 2015. This is a follow-up to a prior post on five observations. 

Here are some further observations ...

As I understand matters, in late 2014 the group decided to extend its practice of invoice billing. Zalando indicates that this is "... a popular payment method in several countries, e.g., DACH, Benelux and Nordics, driving customer satisfaction and check-out conversion."

The customer takes receipt of their package of clothing, shoes, onesie, etc, accompanied by a bill requesting that they settle payment due within a certain period. According to Zalando it is 14 days to pay in Germany; mail order's buy now - pay later.

Apparently, Zalando has an algorithm for weeding out worthy buy now - pay later invoice billing customer types, which historically has proven to be "... robust, successfully limiting risk."  Then - as already mentioned - in late 2014 it extended the invoice billing offer to capture new customers. Low and behold, this together with a rise in systemic fraud resulted in an increase in bad debt, which largely occurred in Q1 2015.

Trade receivables totaling €18.5 million were seemingly written off.

Zalando write down of trade receivables
Source: Zalando H1 2015 report

This would appear to have knocked c. 2.3 percentage points from the Zalando's adjusted EBIT margin.

Impact of receivables write down on group margin
Source: Zalanda H1 2015 report

Several points may wish to be considered:

1. The chickens are coming home to roost

One has to wonder what Zalando expected as a result of loosening whatever qualifying conditions were required in order to extend invoice billing. You hand over your goods on an IOU, you takes your chances.

2. Quality of sales is vital on wafer thin margins

While in the context of €1,377 million of H1 2015 sales an €18.5 million write down is relatively small, it is still c. 5.6% of the incremental €329.5 million increase in sales as compared to H1 2014 sales of €1,047 million. Further still, as profit margins are thin, it has a significant impact. Ex the receivables write down, EBIT would have been 36% higher in H1 2015.

3. Does the maths stack up?

I may well be wrong here but the numbers provided by Zalando in its presentation are somewhat unclear.

As highlighted in the receivables write-off above. €18.5 million was:

"... recorded as an expense in the second quarter of 2015 in line with IAS 8 as a change in estimates. Those changes in estimates relate predominantly to trade receivables originating from the first quarter of 2015."

The group then goes on to highlight that:

"In the second quarter of 2015, Zalando generated adjusted EBIT of EUR 30.2m (prior year: EUR 35.1m). This decrease of 2.3 percentage points in the adjusted EBIT margin from 6.4% in the second quarter 2014, to 4.1% in the second quarter 2015 is due to the afore-mentioned increase in payment costs offsetting the fundamentally strong operating performance of the business."   

So as I understand matters, €18.5 million was expensed in Q2 2015, and without this adjusted EBIT would have been €18.5 million higher at €48.7 million (€30.2 million + €18.5 million), so the adjusted margin would have been 2.3 percentage points higher at 6.4% as compared to the out-turn of 4.1%.

Q2 2015 sales were reported to be €733 million.

Adjusted EBIT of €30.2 million = an adjusted 4.1% EBIT margin, which tallies up as reported.

However, if adjusted EBIT was higher by €18.5 million (due to the impact of the receivables write down) and this was equivalent to an adjusted EBIT margin of 6.4%, then ...

An adjusted EBIT margin of 6.4% on adjusted EBIT of €48.7 million = implied sales of €761 million.

I.e. sales would have been €28 million higher.

I may indeed have my maths wrong on this or there may be rounding errors involved so any light on this would be welcomed.

4. What does this say for some of the businesses in Rocket's portfolio?

If Zalando is experiencing "unexpected systematic fraud" in those bastions of online shopping rectitude being Germany, Austria, Switzerland, Benelux and the Nordics, then what are the chances of systematic fraud for Rocket's Zalora operating in Thailand, Indonesia, Philippines, etc? Or Rocket's Dafiti operating in Brazil, Argentina, Chile, Colombia, and Mexico? Or Rocket's Lamoda operating in Russia, Kazakhstan, and Ukraine?

Rocket's Jumia/Zando business operating in Nigeria, Cameroon, Ghana, Uganda, Ivory Coast etc, is probably a safe bet. This is especially as the majority of its c. €62 million of 2014 sales would likely have been settled by cash on delivery in a market where according to Rocket itself "... approximately 80% of the population does not have a bank account to overcome fears of internet fraud."

And another thing ... 

The company is seemingly awash with cash and yet ...

Zalando reported €974 million in cash and cash equivalents to 30th June 2015. Cash and cash equivalents decreased in the period by €77.4 million, the main driver indicated to be due to investment of funds into term deposits.

Here is the group's condensed statement of cash flows and accompanying text.

Zalando H1 2015 condensed statement of cash flows
Source: Zalando H1 2015 report

Here is the group's fuller cash flow statement from H1 2015

Zalando H1 2015 cash flow statement
Source: Zalando H1 2015 report

And here is the group's discussion on the movement in its current liabilities.

Increase in liabilities
Source: Zalando H1 2015 report

A few items to note.

1. In the accompanying text to the condensed statement of cash flows, Zalando points to positive cash flow from operating activities which had "... mainly been achieved through longer payment terms with suppliers."
2. As per the cash flow statement, there was a €78.2 million cash inflow attributable to increased trade payables in H1 2015. As highlighted above, this was seemingly a principal driver of the €23.3 million in total operating cash inflow during the same period. 
3. The cash flow statement shows that total cash outflow into "investments in term deposits" totaled €110 million in H1 2015.
4. The group again highlights in its discussion on movements in current liabilities, that trade payables rose "... from deliveries of goods and was achieved through longer payment terms with suppliers."
5. It also indicates that "Under reverse factoring agreements, selected suppliers transferred their receivables due from Zalando totalling €128.2m to a factor as of June 30, 2015 (prior year: €90.5m)."

I'd highlighted the group's use of reverse factoring agreements in my prior post and these arrangements would appear to be forming an increasing proportion of its trade payables and similar liabilities.

In fact, according to Zalando's accounts, its trade payables and similar liabilities have risen as follows:

• 2013: €410 million
• 2014: €492 million
• H1 2015: €569 million

Meanwhile, the group's use of reverse factoring (included in its reported trade payables and similar liabilities) has risen as follows:

• 2013: €38 million
• 2014: €91 million
• H1 2015: €128 million

Hence, reverse factoring liabilities as a percentage of trade payables and similar liabilities have risen as follows:

• 2013: 9%
• 2014: 18%
• H1 2015: 23%   

One possible interpretation of what is occurring is that Zalando is using a third party financier to settle an increasing proportion of its trade payables. Presumably the third party financier is paying a supplier (or suppliers) to Zalando on the date due and Zalando pays the third party financier at a later date.

If this is the case, then it looks increasingly like this reverse factoring arrangement is akin to a loan, benefiting Zalando.

Assuming this interpretation to be correct, then one could be forgiven for thinking it slightly strange. Especially as Zalando would appear to be awash with cash, so much so that it is having to shove increasing amounts into term deposits.

Of course, the upshot of all this is that Zalando's operating cash and free cash flow is materially boosted, while investing cash flows out.

I am short Zalando.

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. 

Zalando (ZAL GY) ... five observations

Tuesday 11th August 2015

Zalando (ZAL GY, mkt cap €7.7 billion), arrived on the Frankfurt stock exchange in October 2014. Founded in 2008, Zalando is an online clothing, shoes and accessories company. 

It is seemingly very much alike to UK listed ASOS (ASC LN, mkt cap £2.8 billion). However, whereas it took ASOS sixteen years to arrive at £1 billion in sales, Zalando, marked its €1 billion sales card in under four years, and went on to double this within the next two years through to 2014. 

Zalando - share price
Source: Bloomberg

Zalando was founded by the same team behind Rocket Internet (RKET GY, mkt cap €5.4 billion) and each of these promotions (ZAL & RKET) largely share the same major holders on their registers. Indeed in late 2013, Rocket Internet sold and transferred nearly its entire stake in Zalando, to its then existing shareholders, which included the Global Founders and affiliates of Kinnevik (KINVB SS, mkt cap SEK 76 billion). The Zalando spin-off. 

The Zalando spin-off by Rocket
Source: Rocket Internet prospectus

The brief background over, here are 5 observations which prompted me to open a short:

1. Astounding operational leverage

The phenomenal growth in revenue in such a relatively short period of time aside, on my estimates:

Zalando reported a €59 million EBIT loss in 2011, followed by an €84 million EBIT loss in 2012, then a €114 million EBIT loss in 2013. The group then reported a €62 million EBIT profit in 2014, the year of its IPO. This is an astounding €176 million swing in one year.  

Zalando revenue, € million
Source: Zalando prospectus and accounts

Zalando EBIT, € million
Source: My estimates from Zalando prospectus and accounts

As shown in the above charts, Zalando's revenue rose by €452 million in 2014, to €2,214 million. This €452 million increase in revenue was accompanied by the fore-mentioned €176 million swing in EBIT.

The operating leverage is especially strong when considering that €274 million, or 61% of the increase in sales came from outside DACH (Germany, Austria, Switzerland), where - one presumes - greater distribution and marketing costs would have been incurred.

Zalando segment reporting - 2013-14
Source: Zalando annual report

2. Recent trends in site visits

With the use of Similarweb.com, a web traffic data analytic site, I've monitored the monthly desktop visits to Zalando's country* sites as estimated by Similarweb, during the period September 2014 to July 2015.
* zalando.de, zalando.fr, zalando.nl, zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se

These estimates by Similarweb appear to show that while total monthly site visits rose in the period September 2014 to a peak in January 2015, they have fallen sharply since.

Zalando total monthly site visits according to www.similarweb.com
The total includes combined visits to the sites: zalando.de, zalando.fr, zalando.nl,
zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se
Source: www.similarweb.com

A few things to consider:

1. I cannot qualify the accuracy of Similarweb's estimates.
2. There may well be some seasonal influence on monthly site visits, notably greater visits in the run up to Christmas and the January sales. 

However, using the same source (Similarweb) here is the trend of monthly desktop site visits to the ASOS sites^.
^ asos.com, asos.de, asos.fr, us.asos.com

Asos total monthly site visits according to www.similarweb.com
The total includes combined visits to the sites: asos.com, asos.de, asos.fr, us.asos.com
Source: www.similarweb.com

As can be seen - presumably under the same methodology - whereas Similarweb's estimates show a sizeable decline in Zalando's monthly site traffic since September 2014, there has been a significant increase in monthly site traffic to ASOS's sites.

Further, the monthly site traffic to ASOS's sites would appear to have risen even though there may be seasonal headwinds.

Zalando and ASOS monthly site visits according to www.similarweb.com
The total includes combined visits to the sites: zalando.de, zalando.fr, zalando.nl,
zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se
and
asos.com, asos.de, asos.fr, us.asos.com
Source: www.similarweb.com

In fact, Similarweb's estimates suggest that monthly traffic to Zalando's sites has fallen by 16% on July 2015's data as compared to September 2014's count. This compares to a 32% increase in monthly traffic to ASOS's sites on the same basis.

Zalando and ASOS percentage change in site visits according to www.similarweb.com
The total includes combined visits to the sites: zalando.de, zalando.fr, zalando.nl,
zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se
and
asos.com, asos.de, asos.fr, us.asos.com
Source: www.similarweb.com

Here is Similarweb's data on a country site specific basis.

Zalando and ASOS percentage change in site visits according to www.similarweb.com
Sites: zalando.de, zalando.fr, zalando.nl, 
zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se
and
asos.com, asos.de, asos.fr, us.asos.com
Source: www.similarweb.com

As a whole, these would not appear to be encouraging trends for Zalando.

3. Reverse factoring

Zalando would appear to use a third party to engage in reverse factoring; whereby this is likely to mean that the third party will have paid Zalando's suppliers in advance of the normal payment terms. While this is not altogether unusual, nonetheless, there was a marked increase in the value of supplier payables transferred to the factor. These rose from €37.6 million in 2013, to €90.5 million in 2014.

Reverse factoring can help the buyer to improve the efficiency of its invoice management. But the generosity on the part of the buyer in assisting its suppliers to collect payments early can also come at a price. It can help the buyer to strengthen its terms of contract, which in some cases can result in a discount in its cost of goods.

Increase in reverse factoring during 2014
Source: Zalando 2014 annual report

4. Increase in related party transactions

In addition to a rise in reverse factoring, Zalando also reported a not insignificant level of goods purchased from related parties.

Goods purchased from related parties totaled €75.7 million during 2014, up from just €1.9 million during 2013. However, it should be noted that it is not clear when the party became related during 2013.

Increase in goods purchased from related parties during 2014
Source: Zalando 2014 annual report

And another thing ...

I've always found insider selling proves a pretty good steer.

The founders and insiders sold c. €434 million worth of stock in March last.

Key shareholders selling
Source: Bloomberg  

This was shortly followed by a further €244 million sale of stock by two holders in July last.

Further initial investor selling
Source: Reuters

I sold short at just shy of €32.

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. 

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

Thursday 23rd July 2015

Some of the text in Rocket Internet's prospectus is pretty amusing. It sounds impressive but when one dwells on it for longer than a second, one appreciates its absurdity. 

Dafiti

Take for example the background information Rocket provides in its prospectus on Dafiti, the online clothing, shoe and accessory retailer in Brazil, Argentina, Chile, Colombia and Mexico:  

Dafiti brand recognition in Brazil
Source: Rocket Internet prospectus

As highlighted above, according to Rocket, by March 2014 the Dafiti brand was recognized by almost 90% of the Brazilian population. That's not bad going considering the brand was launched three years earlier in 2011 and probably puts it up there with Coca-Cola for brand awareness. 

Of course according to the World Bank, 24% of the Brazilian population is 14 or under, while a further 7% is over the age of 64. So 90% brand recognition for an online clothing and shoe retailer amongst the entire Brazilian population (under 14's and over 65's included) within 3 years is a sterling effort.  

Lamoda   

Another example is, Lamoda, Rocket's online clothing, shoe and accessory retailer, this time focused on Russia, Kazakhstan and the Ukraine. Lamoda has also has gained impressive and rapid brand recognition: 

Lamoda brand recognition in Russia
Source: Rocket Internet prospectus

As highlighted above, according to Rocket, by March 2014 the Lamoda brand was among the most recognized fashion retail brands in the CIS, with an impressive 84% of the Russian population recognizing its brand. Lamoda was launched in 2011.

Jabong

A further example is Jabong, another online fashion company, operating in India:

Jabong's market opportunity
Source: Rocket Internet prospectus

In its prospectus, Rocket indicates that the Indian fashion retail market " ... is expected to amount to US$55 million in 2014."  This looks to be an innocent typo and more likely supposed to say US$55 billion instead. Especially as Rocket continues to suggest that it will grow "... to US$88 billion by 2018." This is a minor typo. What appears somewhat less straightforward is the commentary regarding internet penetration of India's fashion market.

Rocket indicates that "the online fashion penetration rate in India is expected to be a relatively low level of 0.8% of the overall fashion retail market compared to 11.3% in the United States in 2014." If that is the case, then on the basis of the overall fashion retail market amounting to some US$ 55 billion, that would suggest that the online fashion market was worth c. US$ 440 million in 2014. As Rocket highlights further up, Jabong reported "... INR 4,385.7 million in net revenues in fiscal 2013." This is c. $US 76 million at an average 58 USDINR exchange rate during 2013, which suggests that from a relatively quick start of a matter of a few years, Jabong had captured 17% of the online fashion retail market in India.

In its 2014 annual report, Rocket goes on to revise Jabong's 2013 revenue to INR 3,443 million or c. $US 59 million. But Jabong's 2014 revenue was reported to have risen to INR 8,114 million or c. $US 133 million at an average 61 USDINR exchange rate in 2014. On Rocket's information provided that would suggest that within a matter of a few years, Jabong had captured over 30% of India's online fashion market by 2014. Remarkable.        

Namshi

Rocket's online fashion offering to the Middle East, Namshi, has seemingly topped India's Jabong for market share gain. 

Namshi's market opportunity
Source: Rocket Internet prospectus

On Rocket's market information provided above of a $US 30 billion total fashion retail market but 0.4% online penetration by 2014, the online fashion market was worth $US 120 million in 2014. Hence with Rocket reporting net revenue of AED 53 million in 2013, rising to AED 168 million in 2014 or c. US$ 15 million and US$ 46 million respectively, this would imply 38% market share by 2014. Another remarkable result in a matter of two years since inception.

------------------------------------------------------------------------------------------------

In many cases the numbers provided are also as amusing.

Dafiti again ...

The table below is from Rocket's prospectus, highlighting Dafiti's key performance indicators, among which, unique visitors to Dafiti's site is included:

Dafiti's key performance indicators
Source: Rocket Internet prospectus

Rocket indicates that the Dafiti website received 208 million unique visitors in 2013, which was up from 167 million unique visitors in 2012. That's a lot of visits for a website that didn't exist a few years prior. In fact ...

Dafiti is targeted at Brazil, Argentina, Chile, Colombia and Mexico. According to the IMF, in 2013 these countries populations were:

Brazil ................. c. 201 million
Argentina ........... c. 42 million
Chile .................. c. 47 million
Colombia ........... c. 18 million
Mexico ............... c. 118 million

A combined population of c. 426 million.

Populations of Dafiti's markets in 2013 (million)
Source: Rocket Internet, IMF for population data

According to the World Bank, in 2013 the number of persons per 100 with access to the internet in each of these countries were:

Brazil ................. 51.6 (per 100)
Argentina ........... 59.6 (per 100)
Chile .................. 66.5 (per 100)
Colombia ........... 51.7 (per 100)
Mexico ............... 43.5 (per 100)

Internet users per 100 in Dafiti's markets in 2013
Source: Rocket Internet, World Bank for internet users

Hence, if Brazil's population in 2013 was c. 201 million and 51.6% of the population had access to the internet then that would suggest c. 104 million Brazilians had access to the internet in 2013.

On a similar basis the others work out as follows:

Brazil ................. c. 104 million
Argentina ........... c. 25 million
Chile .................. c. 31 million
Colombia ........... c. 9 million
Mexico ............... c. 52 million

A combined population of c. 220 million with access to the internet in Dafiti's markets.

Now Rocket reckons Dafiti had 208 million unique visitors to its website in 2013. Which is commonly understood to mean, the number of distinct individuals requesting pages from the website during 2013, regardless of how often they visit. I.e. 208 million individual sets of eye balls looked at Dafiti's website in 2013. So if Dafiti's markets have c. 220 million individuals with access to the internet, then practically 95% of them went onto Dafiti's website at some point during 2013? Of course some eyeballs may have inadvertently oggled the website from other countries but even so, most of the traffic must surely come from Brazil, Argentina, Chile, Colombia and Mexico.

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.

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

Tuesday 7th July 2015

Below is a copy of a presentation that the German business publication, Manager Magazin, posted in April 2013. The presentation itself is in English but I've used Google's translate function to translate Manager Magazin's accompanying text into English. The original German version may be found via the link above.  

Manager Magazin - on Rocket Internet presentation to investors
Source: http://www.manager-magazin.de/

It's reportedly a presentation used by Rocket Internet in marketing itself to potential investors in January 2013. I assume this presentation is not some sort of spoof and that it is the actual material used by Rocket Internet, which at the time would have been a private concern. If it is a spoof, then I'd be surprised - as Germans aren't renowned for pulling legs - but if it is then you may as well disregard the rest of this post.  

Manager Magazin - on Rocket Internet presentation to investors - January 2013
Source: http://www.manager-magazin.de/

Clearly, January 2013 is some time ago. However, if I'd been on the receiving end of this pitch, then in hindsight I'd be a touch disgruntled and left with a feeling I'd been somewhat misled. And here's why ... 

On the final page of the presentation, it highlights the revenue run rates for the major companies in Rocket's portfolio, based on November 2012 trading. Given that most of these companies had been established in less than 24 months prior, this is a great way to leave would be investors positively purring at the prospect of a bite at - not one - but eight incredibly rapidly growing online businesses.

Manager Magazin - on Rocket Internet presentation to investors -
revenue run rates of leading portfolio companies
Source: http://www.manager-magazin.de/

The big five: Lamoda, Dafiti, Home 24, Zalora and Lazada

As of January 2013, it would appear that Rocket presented its top five revenue generating businesses to investors as achieving run rate revenue based on November 2012 annualized run rates as follows:

• Lamoda, founded two years prior in 2010, was achieving €233 million in run rate revenue.
• Dafiti, also founded in 2010, was achieving €225 million in run rate revenue.
• Home 24, founded in 2009, was achieving €151 million in run rate revenue.
• Zalora, founded one year prior in 2011, was achieving €97 million in run rate revenue.
• Lazada, founded two years prior in 2010, was achieving €42 million in run rate revenue. 

Rocket Internet annualised run rate revenue based on November 2012 trading
Source: Manager Magazin, 19 April 2013

These are truly remarkable revenue run rates for businesses which had only been in operation for between one to two years. In my prior post I highlighted how much longer it had taken ASOS to grow its revenue base (as compared to Zalora) whereby ASOS was targeting richer nations with significantly higher internet penetration rates: The Imitation Game

Skipping forward to Rocket's IPO documentation from September 2014, and there are some sizeable differences between the suggested revenue run rates that were marketed to potential investors in January 2013 and the actual revenue out-turns for 2013. 

For example: 

• Lamoda's revenue was reported to be RUB 5,150 million for 2013, or c. €122 million at annual average EURRUB rates for 2013. This is 48% below the run rate indicated to potential investors in January 2013. 
• Dafiti's revenue was reported to be BRL 419 million for 2013, or c. €146 million at annual average EURBRL rates for 2013. This is 35% below the run rate indicated to potential investors in January 2013.
• Home 24's revenue was reported to be €93 million for 2013. This is 38% below the run rate indicated to potential investors in January 2013.
• Zalora's revenue was reported to be €69 million for 2013. This is 29% below the run rate indicated to potential investors in January 2013. 
• Lazada's revenue was reported to be €57 million for 2013. This is 15% below the run rate indicated to potential investors in January 2013. 

In fact only the smaller revenue generating companies from the presentation: Jabong and Linio achieved 2013 revenue that was actually in line with that of the run rate presented to potential investors in January 2013.

Rocket Internet annualised run rate revenue
based on November 2012 trading as compared to 2013 full year revenue
Source: Manager Magazin, 19 April 2013, and Rocket Internet IPO Prospectus

On a cumulative basis, while as at January 2013 Rocket's management were implying total run rate revenue for the combined businesses of €855 million, in the event the out-turn for full year 2013 was 32% less, at €579 million.

Rocket Internet annualised run rate revenue based
on November 2012 trading as compared to 2013 full year revenue
Source: Manager Magazin, 19 April 2013, and Rocket Internet IPO Prospectus

As I mentioned prior, had I invested at a private investing round in January 2013 on the back of that presentation, I might feel a bit miffed. As there are sizable losses and an accompanying large cash burn pretty much across all of Rocket's portfolio, which have only continued to increase since, Rocket must be valued on some sort of revenue multiple. And yet the revenues fell short of what may have been expected from the run rates indicated from November 2012.

Maybe Rocket's big five just had a blitzing November 2012 in the run up to that marketing round in January 2013?

Of course the silver lining for any 2013 investor is that Rocket's valuation has rocketed higher since then, while revenues have also risen dramatically into 2014. More on each later ...  

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. 

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.