21 May Coupang (CPNG)
With the markets heading lower over the last few weeks it’s time to do a bit of bargain shopping. To me, it looks like we’re going to see just another run of the mill pull back. They happen all the time and are a great way to pick up stocks that you have been keeping an eye on and waiting for a better deal.
Today’s stock report subject, Coupang, only IPO’d in March and quickly rose above the $50 mark. It was the largest IPO of a foreign entity since Alibaba in 2014. Whenever there is this much hype around an IPO I like to sit back and let the dust settle before I venture in and invest my hard-earned dollars. This is because you can often find common sense overtaking reality in the initial stages of a listing.
In Coupang’s case, we definitely saw a little bit of overhyping, however, its pullback has also coincided with a nice little fall in growth stocks over the last few months. We saw the share price fall as low as $32 a few weeks ago and then quickly bounce up to around the $37 mark. I’d like to think this is a good anchor point to work from. A point where buyers are willing to jump in and support the company.
Coupang is crudely referred to as the “Amazon of South Korea”. It is the country’s largest online marketplace and has also, like Amazon, recently expanded into video streaming. It has copied and surpassed the Amazon Prime delivery service with its own version, Rocket Delivery, which is free for subscribers and has a record of 99.3% of products being delivered within 24 hours. The Rocket Wow service takes it a step further and offers free returns, discounts and fresh food delivery service where items are delivered before 7.00 am if ordered before midnight the night before.
The company was originally started by a South Korean studying at Harvard University – Bom Kim. It was initially registered as a limited liability company in the US which crucially gave it access to US funding. You’ll find major investors include Soft Bank, who pumped in US$2 billion, BlackRock and Fidelity. The headquarters is now based in Seoul, amidst its current major market, however, head offices can also be found in Beijing, Shanghai, LA and Seattle.
South Korea is the perfect place for such a business model to start life. A highly developed nation where people have high incomes and are technologically savvy. It has a population that sits around 51 million jammed into an area that is approximately 100,210 km². To put that in perspective South Korea has a population density of around 527 people per km². Comparatively the US has 36, while here in Oz we have a minuscule 3.3. Because of this, it is estimated that more than 70% of the population live within 11 KMs of a Coupang fulfilment centre.
Its e-commerce market share in South Korea is somewhere in the region of 25% and its reach is expanding at record levels. Revenue grew by around 50% in 2019, and it then benefitted from a locked-down population during 2020 where revenue grew by a whopping 90%. In its latest earnings report, it announced Q1 revenue was up an again impressive 74% year on year and the company is well on its way to turning profitable by 2023.
For the moment though its big cash hoard, sitting at around $5.5 billion following the $4.5 billion they collected in the IPO, is being invested in infrastructure and technology. The aim is to improve logistics and end-to-end delivery times even as they expand in size and take on more customers. As management stated recently “whenever we see attractive opportunities to maximize long-term cash flow over short-term profit optimization, we will always choose long-term cash flows.”
I expect that as they keep growing in South Korea they will eventually look to expand into other countries. Singapore has already been earmarked as a target, with small incursions already happening, and Japan is another potential market with Softbank being a major shareholder. Each move will be tricky, however, as logistics and delivery services will be expensive to set up. But there is plenty of cash lying around and there are signs from management that it is strongly on the cards. Amazon has had little problems expanding into different regions. I would imagine an Asian based supplier could have a lot of success in the rest of the region if it is done correctly.
At $50, the valuation of Coupang was way too high at this early stage. But back around the $35 mark, where it based its IPO price, it is a much more viable bargain. We’re still relying on plenty of growth for the share price to continue higher but with the expected increase in online e-commerce sales across the globe, it is certainly doable. South Korea is the sixth-largest e-commerce market in the world, and in 2020 alone, business increased by 22%. Online retail sales are expected to reach more than $200 billion a year by 2024. I’ll be looking for any more weakness in the share price and buying for anything in the low $30’s.