CPNG - Coupang: Making Its Move Into Taiwan

2023-06-23 04:12:57 ET

Summary

• Coupang is starting to expand internationally and it is starting to see accelerating momentum in Taiwan with its app reaching the number one spot in both the iOS and Android.
• Taiwan presents huge market opportunities and the company should be able to gain meaningful market share due to favorable market dynamics and its unique value proposition.
• The latest earnings remain very solid as active customer growth reaccelerates while the bottom line continues to improve, with the company posting its first-ever positive free cash flow.

Investment Thesis

Coupang ( CPNG ) has historically solely focused on South Korea and has minimal presence in the international market. I believe this is about to change as the company is starting to see accelerating traction in Taiwan after its trial launch in October last year. I believe this may become an unexpected growth driver as Taiwan presents a surprisingly large opportunity.

The company currently has two offerings in the country which include Rocket Delivery and Rocket Overseas. Rocket Delivery focuses on next-day delivery for local products while Rocket Overseas offers 4-day delivery for international products. The company is already seeing excellent momentum with its app quickly reaching the number one most-downloaded spot in both the IOS and Android , surpassing other viral apps such as TikTok and Facebook ( META ). As shown on Google Trends, the popularity of Coupang has been increasing exponentially since its formal introduction in the country earlier this year.

Huge Market Opportunity

Taiwan is a small island but it actually presents a surprisingly large opportunity. For context, the country has a decent population of roughly 24 million, similar to Australia. According to IMF (International Monetary Fund) , it also ranks 21st in nominal GDP, higher than many notable countries such as Argentina, Singapore, and Thailand. As the country's technology and infrastructure continue to improve, the adoption rate of e-commerce has also been rising quickly, which should present strong tailwinds for the company moving forward.

According to Research and Markets , the market size of e-commerce in Taiwan is forecasted to grow from $19.6 billion in 2023 to $25.4 billion in 2027, representing a solid CAGR (compounded annual growth rate) of 6.7%. The market expansion is mainly driven by the increasing preference for convenience and the rising popularity of digital payments. According to the International Trade Administration , around 49.9% of Taiwan consumers prefer mobile payments, while only 16.4% prefer cash.

Despite the rapid emergence in the past few years, the penetration of e-commerce remains relatively low. As shown in the chart below, Taiwan’s e-commerce penetration rate is only 8.7%, significantly lower than the United States' 16.8%. At the moment, only 43% of consumers shop online regularly , which leaves ample room for further expansion moving forward.

Favorable Market Dynamics

The Taiwan e-commerce market is also less competitive compared to North Korea, with the major players being Shopee ( SE ) and Momo, which have a market share of 49% and 27% respectively . I believe Coupang should be able to grab meaningful market share due to its unique value proposition.

Fast delivery is a must but there is more to it. Thanks to its Korean roots and broad seller presence, the company’s Rocket Overseas offering allows Taiwan customers to easily buy millions of Korean and American products with free shipping for orders over TWD 690. This is something neither competitor can offer and it should be attractive to most consumers.

I believe the company should do well in Taiwan as the country is similar to South Korea in many ways. This allows management to use the same playbook in Taiwan, which makes operations much smoother and easier. For instance, both countries are quite small but have relatively large populations. This resulted in them being quite crowded, with most of the population residing in major cities such as Seoul and Taipei. This allows Coupang to easily build out its logistic infrastructures as it can narrow the focus on the larger cities. and the cost for last-mile delivery is also lower due to the short delivery distance.

They are also both developed countries with wide technology penetration, which allows the company to scale its app and website easily without having to put too much extra effort into onboarding customers. The favorable market dynamics in Taiwan should make the company's expansion much easier.

Decent Q1 Earnings

Since Coupang announced its first-quarter earnings last month, I also want to briefly discuss its results. While the market reacted negatively to the print, I personally really like the progress the company is showing. Despite the gradual slowdown in the economy, the company still reported revenue of $5.8 billion, up 13% YoY (year over year). On a constant currency basis, the revenue growth was 20%. I particularly like the rebound in active customer growth, which was 5% compared to just 1% reported in the fourth quarter.

The bottom line also continues to show great improvement amid strong operating leverage, which I highlighted in my previous article . Gross margin expanded 400 basis points from 20.5% to 24.5%, resulting in the gross profit growing 36% YoY to $1.4 billion. Thanks to improved efficiency, OG&A (operating, general and administrative) expenses as a percentage of sales declined 180 basis points from 24.4% to 22.6%. The lowered costs and operating spending resulted in the company flipping from an operating loss of $(205.7) million to an operating income of $106.8 million, or 1.8% of revenue. The diluted EPS was $0.05 compared to $(0.12). It also posted a $451 million free cash flow for the trailing twelve months, making this the first free cash flow positive quarter in history.

Investor Takeaway

Taiwan should be a great place for the company to start its international expansion as the country has similar market dynamics compared to South Korea (the company failed in Japan as their market is quite different). Besides boosting revenue growth, a successful expansion can also reduce the company's sole reliance on South Korea and diversify its revenue stream.

The growth in Taiwan should continue to accelerate as the company has yet to introduce its WOW membership, which is a key to its flywheel and bottom line. Back to its latest financials, the company continues to report solid numbers and I am pleased with the result. The bottom line once again showed excellent improvement and there is still ample room for further margin expansion. Coupang continues to show great execution and I rate it as a buy.

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