CPNG - Coupang: Leading Player In South Korea's Thriving E-Commerce Market

2023-05-23 02:37:33 ET

Summary

• Coupang is a leading player in South Korea's rapidly growing e-commerce market.
• The South Korean e-commerce market is one of the largest and fastest-growing globally.
• The company differentiates itself through its emphasis on first-party products and efficient end-to-end logistics.
• I view CPNG stock as a long-term buy.

Investment Thesis

Coupang, Inc. ( CPNG ) is a dominant player in the rapidly growing e-commerce market of South Korea and has been successful in expanding into related markets. South Korea's e-commerce market is one of the largest and fastest-growing globally, driven by robust technology infrastructure and tech-savvy consumers. CPNG stands out with its focus on first-party products and efficient end-to-end logistics. As the market consolidates, I expect CPNG to become a dominant force with a significantly higher market share. Hence, I view the stock as a long-term buy.

Solid Q1 Results: Continued Market Share Gains

Coupang's total net revenues for the quarter exceeded market expectations, reaching $5.8 billion. The company achieved a net income of $91 million in the first quarter, supported by a six-percentage-point rise in adjusted EBITDA margin compared to the previous year. Although this is a solid outcome, it indicates a decrease in margin growth compared to the previous quarter, which saw a nine-percentage-point increase.

After experiencing a downward trend in the previous four quarters, Korean retail sales rebounded in the first quarter with a 4.8% year-over-year growth, an improvement from 2.9% in the previous quarter. However, this growth is only 0.6% higher than the Consumer Price Index ((CPI)). Online sales, on the other hand, increased by 9.8%, showing a 2.3-percentage-point increase quarter-over-quarter. Online sales have consistently outpaced overall retail sales by approximately five percentage points since the fourth quarter of 2021. In this context, Coupang's success is impressive. I expect a lot of the pick-up has come from adding Fresh, but management cites across-the-board growth and sees opportunities to grow in electronics, fashion and beauty.

The improved results in the first quarter and recent periods can be attributed to several factors: 1) fading Covid-related costs and spacing requirements resulting in cost improvements; 2) economies of scale; 3) efficiencies gained from supply chain optimization, new infrastructure, and technology; and 4) a better sales mix, with a higher proportion of high-margin products. Lower food delivery volumes have also contributed to the company's performance. Although the market experienced a 10% decline in the first quarter (still double the pre-Covid levels), Coupang states that the business is now self-sustaining and is launching a renewed effort by introducing permanent 5-10% discounts for Rocket Wow members, starting in Seoul and expanding nationwide in the coming quarters.

Korea's E-Commerce Market

Korea boasts one of the world's largest and fastest-growing e-commerce markets, supported by the country's robust technology infrastructure (ranked first worldwide for 5G download speed) as well as its tech-savvy customers (over 99.5% of households have internet access). The growth momentum has been further accelerated by the COVID-19 pandemic and subsequent lockdown and social distancing measures. Despite being only the tenth-largest economy in the world, South Korea is home to the fifth-largest e-commerce market globally. According to GlobalData , total e-commerce spending in South Korea reached $115 billion in 2022 and is expected to increase at an ~9.7% CAGR to approximately $167 billion by 2026.

Leading Player in the Korean E-commerce Market

CPNG, a prominent player in the competitive and fragmented South Korean e-commerce market, has distinguished itself through its emphasis on first-party products and a well-established end-to-end logistics infrastructure. Unlike its counterparts, CPNG stands out by ensuring reliable and prompt delivery, with the majority of orders arriving on the same day and within 12 hours. The company also prioritizes hassle-free returns by picking up items directly from consumers' doorsteps and optimizing product shipment packaging. While traditional retailers struggle to adapt to the e-commerce landscape and internet-only players lack the necessary expertise, CPNG excels in both online and offline operations, consistently gaining market share since its IPO. As the market consolidates, CPNG is expected to emerge as a dominant force with a significantly higher market share.

Key Risks

Coupang faces intense competition from a wide range of online and offline companies in the highly competitive South Korean e-commerce industry. The company must attract customers and merchants in both online and offline markets while also meeting the high expectations of consumers for exceptional customer service and a seamless purchasing experience. Moreover, some of Coupang's competitors may offer products and services that it doesn't provide and may have control over critical elements like credit card interchange, internet search, and mobile operating systems.

Moreover, the growth of Coupang heavily relies on the sustained tailwinds of the COVID-19 pandemic. The company experienced significant year-over-year revenue growth and an increase in active customers from 2019 to 2021 due to COVID-related restrictions and changing consumer behaviour. However, there is a risk that Coupang may struggle to retain suppliers, merchants, advertisers, and customers or maintain the current level of demand once the effects of the pandemic subside. The company already observed slower growth in its core e-commerce and Fresh services in 2022, and the Eats offering saw a decline in active customers in the second quarter of 2022, partially attributed to a contraction in the overall online food delivery segment following the relaxation of COVID restrictions.

Conclusion

Coupang is a prominent player in South Korea's thriving e-commerce market. South Korea's e-commerce market is one of the largest and fastest-growing globally, supported by advanced technology infrastructure and tech-savvy consumers. The COVID-19 pandemic has further accelerated its growth. CPNG has emerged as a leading player by focusing on first-party products and a robust end-to-end logistics system. What sets Coupang apart from its competitors is its extensive vertical integration of logistics infrastructure, which allows them to deliver products to customers more quickly, efficiently, and with enhanced customer experience. As the market consolidates, I expect CPNG to become a dominant force with a significantly higher market share. Hence, I view the stock as a long-term buy.

For further details see: