SE - WeBuy: Aggressively Undercutting The Competition

2023-09-25 02:05:16 ET

Summary

• WeBuy is going public, offering 3.5 million ADS shares at an indicated price range of $4.00-4.50 to raise up to $17.1 million.
• The company's rapid revenue growth may not be sustainable due to the one-off effect of lockdowns and social distancing regulations during the pandemic.
• WeBuy faces mounting risks in execution, including competition from larger competitors in the social commerce market in Southeast Asia.

Introduction

WeBuy ( WBUY ) is going public next Friday, offering 3.5 million ordinary shares (ADSs) on the NASDAQ at an indicated price range of $4.00-4.50 to raise $14.9 million at the midpoint (assuming the underwriter does not exercise its option to purchase up to an additional 525,000 shares), which would give the company a market cap of $218.9 million. The offering has been upsized from a prior 2 million shares at an indicated price of $4.00 and the bookrunner was changed from Univest Securities to EF Hutton (a division of Benchmark Investments LLC). Each of the company's directors, executive officers, and certain shareholders have agreed to a 180-day lock-up period, subject to certain exceptions.

The company is incorporated as an exempted holding company in the Cayman Islands. As a foreign private issuer and emerging growth company, it is subject to reduced disclosure and reporting requirements. Moreover, as revenues and employee compensation and other costs are denominated in Southeast Asian currencies, the company is also exposed to currency rate fluctuations. In addition, as officers, directors, and other holders of 5% or more shares will hold up to 68.74% of the ordinary shares following the offering, they will continue to have a controlling influence on the company's strategy and decisions.

The community-oriented e-commerce retailer, which currently operates in Singapore and Indonesia, primarily markets its products on social media, including Facebook, Instagram, WhatsApp ( META ), WeChat (Tencent ( OTCPK:TCEHY )), Line (Z Holdings ( OTCPK:YAHOY )), TikTok, and YouTube (Alphabet ( GOOG , GOOGL )), via commissioned “community leaders” who promote the company's products to friends, family, and followers with the help of live streaming, videos, and product demonstrations. WeBuy's business can be divided into the following segments: Food and beverage (32% of FY 2022 revenue), Fresh produce (48% of FY 2022 revenue), Lifestyle and personal care products (6% of FY 2022 revenue), and Packaged tours (14% of FY 2022 revenue). The company has existing relationships with farmers and manufacturers in China and buys direct to pass the savings on to customers. The company explains the benefits of this approach as follows:

We believe that our ‘group buy’ business model has transformed conventional shopping avenues, as we are able to achieve attractive efficient cost-savings for our customers to enjoy, which are...similar to that enjoyed as a group purchase and bulk order, without having to undertake bulk purchases individually, through a community-centric approach. Our business model has also disrupted the traditional supply chain by cutting out intermediaries to provide a “farm-to-table” supply model.

WeBuy claims that this community-based marketing approach yields lower customer acquisition costs and higher retention rates. The company saw the benefits of this approach last year as revenues rose by nearly 100% from $22.30 million in 2021 to $44.56 million while SG&A expenses as a percentage of revenues decreased from 39.2% in 2021 to 22.1%. The company attributed this decline to lower promotional expenses associated with the WeBuy platform along with successful recruitment of community leaders and customers in 2021.

WeBuy plans to use the funds from the offering to expand into neighboring Southeast Asian markets and to update its technology and customer support platforms. The overall e-commerce industry in Southeast Asia has grown at a CAGR of over 54% from $9.3 billion in 2016 to $82.0 billion in 2021 and is expected to continue to expand by around 20% annually over the next four years to reach approximately $234.5 billion. In the F-1/A, the company states that “the market size of community e-commerce (in Southeast Asia) increased from US$225.0 million in 2016 to US$4,030.0 million in 2021, at a CAGR of 78.1%.". The popularity of community e-commerce in the region has been facilitated by high rates of mobile internet adoption and consumers who spend increasing amounts of time engaged with social media, and the company indicates that the overall market for community e-commerce is expected to reach $15.503.0 billion in Southeast Asia in 2026, a CAGR of 31.5% from 2022.

Competitors in the region include Bukalapak and Tokopedia in Indonesia, Snatch, Fresh4ALL, andQoo10 ( EBAY ) in Singapore, Lelong in Malaysia, Tiki and Sendo in Vietnam, PowerBuy and HomePro in Thailand, and Resellee in the Philippines along with larger cross-regional Southeast Asian e-commerce players such as Shopee (Sea Limited ( SE )) and the Lazada Group (Alibaba, BABA ).

The management team is headed by CEO Vincent Bin Xue, former co-founder of Ezbuy Group (now part of LightInTheBox Holding ( LITB )), CTO Lei Liu, former Chief Technology Officer of Chang Zheng Group and a System Architect at JD.com ( JD ), and COO Michelle Ting Tan, previously a management trainee at Ezbuy while the Board of Directors have upper-level management experience from companies such as Nortel, Nokia Siemens ( NOK ), the BDO Unibank ( OTCPK:BDOUY ), and Global Foundries.

Management compensation looks reasonable, with no executive officer exceeding $100,000 in compensation last year and a performance-based bonus system in place. No compensation (aside from expense reimbursement) was provided to board members.

While the amounts somehow add up to over 100%, the August 3 F-1/A reports the following ownership by major investors post-IPO: Vincent Bin Xue and entities controlled by him (74.28%), TLCW Ventures Ltd (12.18%), Wavemaker Pacific 3 L.P. (7.9%), and Rocket Internet Ventures (7.11%).

The following is a summary of relevant financial information:

Key performance indicators (FY 2022):

Gross Transaction Volume (GTV) growth over prior year: +11.5%

Revenue growth over prior year: +99.9%

Gross profit margin: +8.4% (decreased from 11.2% in 2021)

Net loss: $6.70 million (decreased from a loss of $8.17 million in 2021)

Net loss per share: $0.16 (decreased from a loss of $0.21 per share in 2021)

Net cash used in operating activities: $4.12 million (increased from $3.99 million used in 2021)

Total Shareholders Deficit: -$2,775,749

Key financial ratios/figures : *

Market cap: $218.9 million

Price/Sales: 4.25

Enterprise value: $228.2 million

EV/Revenue: 5.12

EV/Cash Flow: Negative

*Data based on FY 2022 figures and assumes that the offering is priced at the midpoint and the underwriter does not exercise its option to purchase additional shares.

The Bull Case

As social commerce has already expanded at a blistering rate in China , where lockdowns and strict social distancing measures during the pandemic encouraged people to turn to social media when shopping for groceries and other essentials, the market for this emerging segment can be expected to grow along a similar trajectory in Southeast Asia. Specifically, in China, social commerce has grown 25-fold between 2014 and 2021 to $2.5 trillion yuan (USD $343 billion). Across the region, social commerce sales are estimated to make up 44 percent of the $109 billion e-commerce market, accounting for around 66% of the e-commerce GMV in Vietnam, 50% in Thailand, 38% in the Philippines, 30% in Malaysia, and 25% in Indonesia. With an established network of 269,115 customers and 4,692 community leaders, who collate and place orders, there is an enormous market opportunity for WeBuy if it can successfully expand its social commerce business model into other Southeast Asian markets.

The company has rapidly made inroads in Indonesia, which grew from 16% of overall revenue in 2021 to 44% in 2022, thanks to the acquisition of group buying platform Chilibeli . The company's marketing strategy revolves around mom-and-pop shops known as warung , which account for up to 70% of the retail market. These stores, which are usually run by individuals and operated out of their homes, typically purchase products from distributors or other intermediaries and get by on very slim margins. By sourcing directly from growers and manufacturers in China, WeBuy is able to offer the warungs an attractive value proposition.

The company believes that it can apply this business model to other Southeast Asian markets. While I don't have exact figures on every individual market in the region, my impression from repeat visits to Indonesia, Thailand, Cambodia, and Malaysia (to a lesser extent) is that such mom-and-pop shops still account for a large proportion of retail sales. In the Philippines, for example, sari saris , as they are called, accounted for 58% of retail food sales in 2019. Anecdotal evidence (courtesy of my wife, a former sari sari owner and operator) suggest that small shop owners in the Philippines also struggle with similar small margins (with the majority of owners ordering products from distributors at around a 10-20% mark-up).

In theory, by marketing via social media and word-of-mouth and cutting out the middleman, WeBuy should be able to grow its revenues more cost effectively, which would filter down to the bottom line. Due to the region's high reliance on social media and widespread adoption of smartphones, Southeast Asia is the ideal market for social commerce. In Southeast Asia people spend an average of around three hours a day on social media – 35 minutes longer than the global average. There is a cultural explanation for this phenomenon as a community orientation is more common than in Western countries, where people tend to be more individualistic.

The company feels that it also has an opportunity to expand into additional market segments such as travel, where it achieved $6.43 million in sales (14.4% of overall revenue) since it launched the service in Singapore in January 2022. While, on the surface, packaged tours may not seem particularly complimentary to their existing grocery and personal care business, the strong relationship of the community leader with friends, family, and followers on social media makes this a logical add-on sale (especially if the community leader is personally leading the trip). Moreover, as the company has indicated that regulatory measures and travel restrictions during the pandemic had a negative impact on this part of their business, growth in this area should accelerate now that the restrictions have eased.

If WeBuy can successfully apply its business model to neighboring Southeast Asian markets, its growing network of customers and influential social media marketers might make it an attractive acquisition target for larger competitors with a better cost structure, such as Sea Limited and Lazada, as a way to rapidly make inroads in social commerce in the region.

The Bear Case

Aside from the obvious disclosure and reporting, currency, and geopolitical risks, there are a number of reasons to stay away from this IPO. For example, one can question how durable their revenue growth will be moving forward. As draconian regulatory restrictions and social distancing measures were still in effect in Southeast Asia throughout most of the year in 2022, the company's core online grocery business clearly benefited. In its F-1/A, the company states:

Although the COVID-19 pandemic impacted our operations during the years ended December 31, 2022 and 2021, we have also benefited from the pandemic as follows:

• usage of online technology has widened and become more common to the general public of various age groups, people prefer to go online and make purchases from the features Webuy App offers;
• during the pandemic “lockdown” phases, our business operations have carried on without significant disruption as customers preferred to purchase groceries in a handier manner through online;

Moreover, it appears that the company's gross profit margin, which fell from 11.2% in 2021 to 8.4% in 2022, may continue to contract, with the company stating that:

We expect to continue to invest in our technology capabilities and infrastructure, which will lower our margins but deliver overall long-term growth.

Although the company states that its relationship with low-cost suppliers in China enables it to pass savings on to customers, the modest gross margins (12% in Singapore, where it began operations) suggest that it still needs to ramp up sales considerably in order to increase its negotiating power with suppliers and approach profitability. I personally think that it will be challenging for them to compete on a cost basis with larger competitors such as Shopee or Lazada with more purchasing power and greater economies of scale.

As the company continues to burn cash at a high rate ($4,117,551 in cash flow used in operating activities last year) and indicates that it expects to need to raise additional funding in the form of convertible notes, equity, or bank loans, we can count on more dilution in the future. Furthermore, in relation to its sizable shareholders' deficit ($2.8 million as of 12/31/2022), the company states that the conditions raise doubt to its ability to continue as a going concern.

While at first glance, the company's rapid revenue growth in Indonesia seems impressive, their gross profit margin there in 2022 was just 2.6% and they specifically mention that this "was mainly due to increased cost of groceries coupled with sales markdown offered by us...which resulted in lower percentage gross margin as our strategy of providing (a) competitive discount to attract more users to sign up with our platform."

As WeBuy expands geographically, it can therefore be expected that the gross margin will continue to contract as part of the company's strategy to quickly capture market share in neighboring markets. Moreover, due to the considerable differences in languages, cultures, and customs within the region, there is no assurance that they will be successful in expanding their business model into additional markets. For example, the Philippines is largely a cash economy where most goods are paid for either via the GCash cash app or COD. As the company's accounts receivables ballooned to $2.57 million last year from just $58,712 in 2021, with 3 customers accounting for $1.57 million (61%) of the balance, what kind of effect would such cash payments have, especially on perishable goods such as fresh fruit and vegetables?

This is a valid question as many of the negative reviews customers left on Google Play concerned spoiled products, which brings me to my next concern.

While the company has existing direct relationships with suppliers in China who provide “below-market” prices, without the cold-storage infrastructure in place to ensure that products arrive fresh and in good condition, the cost advantage to customers may take a back seat to quality. This is not the only area where execution appears to be lacking as numerous customers also complained that the WeBuy mobile app was buggy and difficult to use (3.5/5.0 overall rating based on 1,420 reviews).

My final concern deals with the implied valuation. At the midpoint of the indicated price range, the company has an EV/R of 5.1 compared to a mean EV/R of 1.3 for companies in the e-commerce vertical (perhaps a fairer comparison would be to online marketplaces such as DoorDash ( DASH ), Delivery Hero ([[DELHY]], [[DLVHF]]), and Just Eat Takeaway.com ( OTCPK:JTKWY ), which have a mean EV/R of 2.5, or online travel companies, whose mean EV/R is 3.8). While this is perhaps not excessive if we assume that the company can continue to grow revenues by around 100% annually, in light of the extreme effects of the pandemic on results last year, I don't believe it's reasonable to make this assumption.

The Sizzle

Due to the low float to outstanding share ratio (7.75% if the underwriter doesn't exercise its overallotment option), it's possible that speculative investors pile into this IPO and it enjoys a big first-day pop. If so, retail investors will be focusing on the company's near-100% revenue growth rate last year and the rapid rise of social commerce in Southeast Asia while ignoring the considerable risks. Nevertheless, in light of the current risk-off market environment and lack of any visible earnings or positive cash flow, I believe the IPO will receive a cool reception.

Rating (on a scale of 1-5, where 1 pepper is a supreme fail and 5 peppers is a smashing hit)

The Steak

There are numerous reasons to avoid this IPO, including the regulatory and disclosure concerns, the controlling interest of the CEO and co-founder, the low profit margins, and the premium valuation supported by what I believe to be unsustainable revenue growth. In addition, as the company has indicated that certain major investors are exempt from the 180-day lock-up period, I expect heavy selling pressure in the days ahead as one or more of the company's venture capital backers seek to lock in their profits and make an exit.

Rating (on a scale of 1-5, where 1 pepper is a supreme fail and 5 peppers is a smashing hit)

Overall Rating

While the market for social commerce in Southeast Asia is promising, due to the numerous red flags outlined above and concerns about revenue growth and profits in a normalized post-pandemic environment, I prefer to watch this IPO from the sidelines. While I plan to track the company's progress as it expands into new markets, paying special attention to their execution in key areas such as logistics, improvements to their mobile app, and customer satisfaction, I think they are still a long way from profitability and feel confident that a better entry point will present itself down the road.

Rating (on a scale of 1-5, where 1 pepper is a supreme fail and 5 peppers is a smashing hit)

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