Flash Report - Equity / India

Facebook's Indian foray raises stakes for EM e-commerce firms

  • Beaten down emerging market e-commerce firms could attract attention
  • Economies of scale will be the lure
  • Investors need to monitor cash-burn rates

Facebook has made a US$5.7bn investment in Indian telco company Reliance Jio for a 10% stake a major vote of confidence in EM e-commerce in the midst of the devastating Covid-19 pandemic. 

Reliance Jio is controlled by Mukesh Ambani, India's richest person, and has reached 388mn subscribers since launching in 2016. It has a 65% market share of the booming Indian 4G mobile market. 

Facebook and Reliance Jio are looking to dominate India' e-commerce. India has 400mn Whatsapp users the largest number in the world   and most are Reliance Jio subscribers. The alliance is looking to link consumers with grocers through Reliance Jio's platform.

Online grocery sales are the holy grail of EM e-commerce. The industry is highly dispersed and is ripe for disruption. Few players, not even AliBaba, have mastered it. Moreover, India's e-commerce market is far more dispersed than China's. We think Reliance Jio and Facebook may well be eyeing further acquisitions. 

India e-commerce market share breakdown (%) 

Source: Tellimer Research

Implications for EM e-commerce 

1. Beaten down EM e-commerce such as Jumia could attract attention. EM e-commerce is an alluring prospect for tech giants such as Facebook and Amazon. Facebook and Amazon have net cash reserves of US$54bn and US$81bn. Jumia, which is down 65% since its listing, has played a pivotal role in e-commerce growth in Africa. 

Africa’s internet penetration is on an upward trajectory driven by smartphone usage (the continent is a ‘mobile-first’ market where people typically first access the internet via their mobile devices). The Jumia brand has managed to grow in popularity over the years and is currently regarded as the largest e-retail firm in Africa. 

2. Scale economics will be the allure. Reliance Jio has conquered India's vast 4G market by undercutting the competition. It has priced its data service to target the fortune at the bottom of the pyramid. Its average revenue per user (ARPU) is a mere US$1.42 (INR128). It still has a long way to go as it has only penetrated around-one third of India's market. Jumia and MercadorLibre could be potential targets for a similar approach to e-commerce given the demographic similarities.

3. Investors need to watch the cash burn. In the post-Covid-19 world, the market will be far less forgiving of cash-burning e-commerce ventures. Jumia itself is on course to deplete its cash by FY 21. 



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Global Themes / Brazil

WhatsApp Brazil’s digital payments launch changes the game in emerging markets

  • WhatsApp and Facebook payments services have access to 3.0bn active customers, dwarfing other digital payments platforms
  • The move mirrors the convergence of payments, messaging and commercial services we have seen in several Asian markets
  • Africa's telco-led digital payments model seems safe for now, due to high financial exclusion and fragmented regulations
Rahul Shah @
Tellimer Research
17 June 2020

Facebook-owned WhatsApp’s launch of its payments app in Brazil brings a potentially powerful new entrant to the global digital payments scene, one with a 2.0bn ready-made active user base (and access to an aggregated 3.0bn users within the Facebook family’s suite of products).

‘Facebook family’ monthly active users (bn)

Source: Company data, Tellimer Research. Note: Facebook family includes users of Facebook, Instagram, FB Messenger and WhatsApp.

This development mirrors the increasing convergence of messaging and payments we have seen in several Asian markets (notably WeChat Pay in China), represents a potential threat to the telco-led digital payments model that has dominated in Africa (notably Kenya’s MPesa) and follows-on from the launch of Facebook Pay in developed markets last November.

How will the app work in Brazil?

WhatsApp currently has 120mn customers in Brazil, making the country its second-largest market after India. WhatsApp payment transactions will be free to consumers but, according to TechCrunch, business owners will pay a 4% fee. This seems steep compared to M-Pesa's 0.5% charge to business owners in Kenya, bKash’s 1% charge (Bangladesh), Easypaisa’s c2% fee (Pakistan) and Visa/ Mastercard’s c1% interchange fee.

Currently, users need to link their payment accounts to a Visa/ Mastercard credit or debit card. Banco do Brasil, Nubank and Sicredi have been named as the initial partners (but we believe other banks will follow), while payments processor Cielo will also provide support. Over time, we think a service that does not require a user’s credit/debit card to be linked could be developed, to broaden the appeal of the service and bring in financially and digitally-excluded customers (this has been one of Facebook’s stated global goals, via its internet.org initiative, for example).

The service will link with the WhatApp business app, which allows small business owners to catalogue their products and services. WhatsApp has noted that there are around 10mn SMEs in the country. Peer-to-peer payments are also possible.

The launch of WhatsApp Pay could negatively impact some listed names, such as e-Commerce providers PagSeguro and Mercado Libre, if SMEs can bypass their platforms and transact directly with WhatsApp’s larger customer base. StoneCo, the cloud-based technology platform, could also be affected. Over the longer-term, as WhatsApp payments is launched across other markets (as per Facebook CEO Mark Zuckerberg’s comments earlier this year), there is also the real prospect of the platform having a meaningful impact on the global remittances industry.

Telcos seem ill-equipped to put up a challenge in Brazil’s digital payments space

With high levels of internet penetration in Brazil, widespread use of cards for digital payments and banks’ investments in agency networks, telcos have lagged banks in providing access to digital payments.

Telefonica’s Vivo, the telco market leader, announced in November 2019 that it was piloting Vivo Money, a service offering personal loans of BRL1,000-30,000 (roughly US$200-US$6,000) provided by Banco Digio and offered in partnership with digital lender Ibi Digital. Telecom Italia’s TIM Brazil has also signaled its intention to launch financial services by the end of 2020, in partnership with online lender C6 Bank. América Móvil's Claro Brasil announced a partnership to offer personal loans to pre-approved customers through Banco Inbursa Brasil.

However, with these initiatives at their maiden stages and being more lending-focused, together with the emergence of WhatsApp payments, we think it is unlikely that telcos will play a significant role in the development of the Brazilian digital payments sector.

India is likely to also be on the agenda for WhatsApp's payments service

India is WhatsApp's largest market, with 400mn registered users. For the past few years, the firm has been working on a payments service that would plug into the Unified Payments Interface, in conjunction with a range of banks such as State Bank of India, ICICI Bank, HDFC Bank, and Axis Bank.

Recent Techcrunch data places Google Pay as the market leader in Indian digital payments, followed by PhonePe and then Paytm. (Incidentally, we note that Paytm has moved in the opposite direction to WhatsApp, starting as a payments firm and then adding messaging functionality). However, none of these three platforms are comparable to Whatsapp in terms of the size of the user base. We estimate that the vast majority of India’s c500mn smartphone users have the Whatapp application on their phones.

We think the delay in Whatsapp’s roll-out in India may relate to regulatory difficulties. One of the key attractions for users of WhatsApp is its end-to-end encryption, which protects privacy but has drawn the ire of several governments, including India’s. WhatsApp has also come under fire for helping to spread false rumours, in some instances with fatal consequences.

However, the market clearly remains of interest to Facebook, as evidenced by its US$5.7bn investment earlier this year in Jio, the disruptive telecoms firm controlled by Mukesh Ambani.

What about Indonesia?

WhatsApp indicated last year that it was ready to launch a payments service in Indonesia and was looking for local partners (since digital payments operators can only be 49% foreign-owned).

Indonesia is Facebook’s fourth-largest market after India, Brazil and the US, and WhatsApp has over 100mn customers in the country. The firm’s interest in this market was confirmed with its recent investment in ride-hailing and delivery firm Gojek, a move that may give access to the industry-leading Go-Pay digital wallet. Provision of payments functionality to the firm’s users (whether on the Facebook or WhatsApp platforms) would immediately broaden the firm’s commercial opportunities in the country.

How does WhatsApp payments stack up against the global competition?

An obvious proxy for WhatsApp payments is WeChat Pay. Tencent-owned WeChat is a large messaging service with c1.2bn users. WeChat Pay has 800mn users and 50mn active merchants accepting payments. A key differentiator with WhatsApp is that WeChat has created its own ecosystem, using mini-programs, so that users do not need to leave the app to make use of a wide range of services such as ride-hailing, gaming, e-commerce and so on. China’s Alipay, with over 1.2bn users globally, has also created its own network of integrated products and services; over 80% of Alipay’s customers use at least three financial products from the company (ranging from payments, wealth management and insurance to loans)

However, outside of China, Facebook and WhatsApp are the clear dominant players in the messaging space.

Taking a broader view of the competitor space, and considering revenues rather than customers, Facebook is dwarfed by several players that are also looking to play in the digital payments arena.

Annual revenues for Facebook and selected peers (US$bn)

Source: Company data, GSMA, Tellimer Research

Low internet penetration and fragmented regulations will allow telcos to continue dominating in Africa

Turning to one of the financial inclusion success stories of the last decade, we note that Africa telcos have taken the lead in offering digital payments, anchored to the SIM toolkit. To bypass the issue of low internet penetration, these services have largely been delivered via USSD (ie text-based) rather than through applications.

GSMA estimates the number of internet users in Sub Saharan Africa to be 271mn. The potential scale of WhatsApp payments in Africa thus dwarfs current mobile money subscriber bases such as Safaricom's 25mn M-Pesa users, Airtel Africa’s 18mn and MTN Group’s 31mn MoMo subscribers. The ubiquity of the messaging service and the continued decline in the cost of smartphone devices make WhatsApp a potential disruptor for mobile payment services; it is the most dominant app across the vast majority of sub-Saharan Africa.

A successful launch of WhatsApp payments in Africa would likely require partnering with a bank with extensive cross border operations (such as Attijariwafa, EcoBank, Equity Bank Standard Bank or UBA) to service the largest possible number of customers across the continent in one go. Another option could be to work with the best financial sector partners on a market-by-market basis. However, neither of these options addresses the issue of Africa's low banking penetration. A third, albeit less lucrative, route would be for WhatsApp to partner with telcos, charging them for integrating their mobile money payments into the WhatsApp platform.

More broadly, we think that due to the generally low levels of financial access on the continent and the vast array of different regulatory frameworks, a pan-African digital payments network will not be easy to realise, particularly in the near-term. We therefore do not see much of a threat from this development for Africa telcos and their digital wallets.


 
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Flash Report / United States of America

Uber's appetite for food delivery will go beyond Postmates deal

  • Uber has acquired food delivery rival Postmates for US$2.7bn
  • The deal touches the top of the valuation range for the industry at 6x EV/Sales
  • We expect more food delivery acquisitions in emerging markets by Western giants
Nirgunan Tiruchelvam @
Tellimer Research
7 July 2020

Yesterday, Uber announced an all-share US$2.7bn acquisition of food delivery player Postmates, which will merge with Uber Eats, Uber's food delivery arm. The deal comes shortly after Uber failed to acquire another competitor, Grubhub, which was instead acquired by Just Eat Takeaway, the market leader in Europe, for US$7.3bn.

The Postmates deal is valued at 6x EV/Sales, according to our estimates. The combined Uber Eats-Playmates entity would control 37% of the US food delivery market. It would place Uber (the parent company) just behind the market leader Grubhub (45% market share).

The latest deal has significance well beyond the developed markets of the US and Europe:

  1. The Covid-19 pandemic has increased the attraction of food delivery businesses. While the typical valuation in the industry has ranged from 3-5x P/Sales, at 6x EV/Sales, Uber is demonstrating its hunger for scale in this business.

  2. UberEats has lost 30 cents for every dollar of business in the last three years. Massive cash burn is common in the industry across Developed and Emerging Markets, with only few, such as Meituan-Dianping in China, generating operating profits. However, the market leaders in the West and China have the cash for acquisitions in the fledgling markets and at the same time, loss-making players are looking to increase scale and eventually turn around.

  3. We can therefore expect a series of acquisitions in emerging markets, where revenues are growing even as companies burn cash. We think investors would be well-served to pursue food delivery opportunities in Nigeria, Indonesia, Kenya, Vietnam and Pakistan.


 
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Flash Report / Brazil

WhatsApp Brazil's payments roll-out hits a regulatory roadblock

  • Central bank, competition authority cite monopoly and pricing concerns, particularly given Cielo’s dominant position
  • WhatsApp taken by surprise. Stresses the open nature of its payments platform but may need to re-work its local strategy
  • We think the forthcoming launch of the central bank’s PIX instant payments system could have influenced its decision
Rahul Shah @
Tellimer Research
25 June 2020

With parent Facebook facing a growing advertiser backlash, Whatsapp’s own business plans have also been dealt a severe setback. After experiencing protracted delays to its Indian payments plans (where it has c400mn customers), WhatsApp last week debuted its payments platform in its second-largest market, Brazil. However, the Banco Central do Brasil has suspended this initiative and asked Visa and Mastercard to halt payments through the WhatsApp platform. The central bank indicated that its ‘motivation for the decision is to preserve an adequate competitive environment, which ensures the functioning of an interoperable, fast, secure, transparent, open and inexpensive payment system’. It also cited concerns regarding data privacy.

In addition, CADE, the competition authority, has suspended WhatsApp’s payments partnership with Cielo, due to the latter’s high market share of the card payments business in Brazil, and WhatsApp’s huge (120mn+) customer base in the country. The authority noted that such a partnership ‘would be difficult to create or replicate by Cielo's competitors, especially if the agreement under investigation involves exclusivity between them. In any case, it is evident that the WhatsApp user base provides a very large potential for transactions that Cielo could explore in isolation, depending on the way the operation was designed'.

To ease regulators' concerns, we think WhatsApp will stress the open nature of the payments platform (perhaps by making adjustments to the business model) and the broader economic benefits, particularly to lower-income/ financially excluded individuals and businesses. ‘Our goal is to provide digital payments to all WhatsApp users in Brazil using an open model and we will continue to work with local partners and the Central Bank to make this possible,’ WhatsApp said.

Alternatively, the firm may take the same route it has taken in Indonesia, and partner with a local entity that has already achieved regulatory clearance. Brazil already has a vibrant payments fintech scene from which it could choose; we estimate that c30% of all fintechs in the country have a payments focus.

We think at least part of the reason for the regulators' reticence is that the central bank’s PIX digital payments system is due to launch in November. PIX has two notable features: it will allow transactions to clear directly within around 10 seconds; and transactions will not need to go through an intermediary (such as a bank) but will instead clear directly using the central bank’s immediate payments system (SPI). This environment could provide a significant growth kicker to the local fintech scene, as it should lower transaction costs and be more accessible to financially-excluded segments of the population.

The Brazilian central bank's instant payments system

Source: Central Bank

If a dominant payments platform were to emerge before PIX is launched then its development could prove redundant. Again, WhatsApp has already sought to assuage the central bank’s concerns in this area: ‘We support the Central Bank’s PIX project on digital payments and together with our partners are committed to work with the Central Bank to integrate our systems when PIX becomes available’.

Ultimately, we think WhatsApp will find a way to operate its payments platform in Brazil, and its other target markets such as India, Indonesia and Mexico. But its launch delays, particularly relative to that of Facebook Pay (November 2019 in the USA), highlight the additional challenges companies face when operating in emerging markets.


 
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Flash Report / Germany

Wirecard bankruptcy could be a Lehman moment for e-commerce

  • Though the immediate financial exposure is limited, the fraud has reputational liability for EM e-commerce
  • Investors will increase their focus on the cash generation in EM e-commerce and the sanctity of the cash balances
  • We are still bullish on EM e-commerce such as JMIA US, MELI US and SEA US
Nirgunan Tiruchelvam @
Tellimer Research
25 June 2020

Wirecard, the German-listed payments giant, declared insolvency today. The collapse comes close on the heels of the disclosure that US$2.1bn was missing from its balance sheet. The company had drawn on almost all of its credit lines in the last few days and the previous CEO, Markus Braun, has been arrested. Further arrests of Wirecard personnel seem imminent.

This is the first ever bankruptcy of a member of the elite DAX Index of blue-chip German companies. It also has immense implications for EM e-commerce. Wirecard is one of the principal lubricants of e-commerce, particularly in emerging markets.

What is the risk for e-commerce players?

Wirecard's customers include the principal e-commerce players. Its business model is heavily exposed to the e-commerce space in emerging Asia, with its customers including Grab, Tencent and Alibaba.

Unlike the Lehman bankruptcy in 2008, Wirecard does not carry principal exposure. Wirecard connects merchants with credit card companies, collecting a commission for assuring merchants of payment. 

For example, the EUR3.8bn that Wirecard claimed to have on its balance sheet in 3Q19 was accrued from retained earnings that were driven from these commissions. The actual payments are guaranteed by the credit card payment systems run by giants such as Visa and Mastercard.

Therefore, the risk for EM e-commerce players is more reputational than an immediate financial risk. Many EM e-commerce companies have already distanced themselves from Wirecard. Yesterday, Grab Holdings Inc., the leading ride-hailing firm in ASEAN, announced that it would be reviewing its relationship with Wirecard.

What it means for EM e-commerce valuations

EM e-commerce companies are burning a lot of cash. Revenue growth has come at the expense of the cash flow statement, but Wirecard's insolvency will raise the scrutiny of these companies' cash balances. EM e-commerce companies use credit card companies to collect payments, and payment providers, such as Wirecard, collect the cash from the credit card companies. Third parties that hold cash in trust are often used for this purpose. The fraud takes us to the heart of the EM e-commerce model, and now investors are much more inclined to check that heart is fit and healthy.


 
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Flash Report / Global

How to profit from the rubber bounce

  • Rubber glove demand has risen sharply with Covid-19
  • Rubber has been in a long slump but could bounce back as supply is tightening
  • Proxies for the rubber rally include Thailand's Halcyon Agri and Singapore's Sri Trang
Nirgunan Tiruchelvam @
Tellimer Research
24 June 2020

Covid-19 has led to a huge boom in demand for rubber gloves. Rubber companies (producers and processors) are making hay while the sun shines by rushing to the market.

Thailand's Sri Trang Gloves, one of the largest rubber glove producers, has just announced plans to raise US$484m. Halcyon Agri (HACL SP – controlled by a Chinese state-owned enterprise), the world's largest rubber processor, is looking to raise S$175m in a rights rise. The rights are priced at a 36% discount to the last transacted price on 19 June. Halcyon Agri is.

Meanwhile, the world's largest rubber glove producer Top Glove, listed in Malaysia, has risen 251% this year. It expects to generate 35% of its revenue growth on the back of the Covid-19 surge.

Covid-19 drives demand for gloves

With rubber gloves being used by medical practitioners to prevent the spread of disease and by the general public as PPE (personal protective equipment), Covid-19 has seen orders swell.

Rubber glove demand is expected to rise by nearly 17% yoy to 330bn pieces in 2020, according to Margma, an industry observer. Top Glove has reported a four-fold increase in orders. The lead time for orders has risen from 30 days to almost 300 days.

Rubber prices could surge

The world tends to focus on industrial commodities such as oil and iron ore, disregarding rubber, but the latter is vital for car tyres – c70% of the world's natural rubber is used for tyres, with the remainder is used for rubber gloves, condoms and other applications.

Rubber has collapsed more sharply than oil in the recent commodity rout and is now at a 15-year low, more than 60% below its 2010 peak, mostly due to fear that travel would grind to a halt with Covid-19.

However, there are distinct signs that a rubber bounce is imminent. Demand for cars in China is robust and could rebound quickly, not least given that only c50% of Chinese families have a car. If car penetration doubles in China in the next decade, rubber supply will have to rise 50% to meet demand.

Rubber supply, though, emerges at a slow pace. It takes seven years to harvest rubber and another three to reach peak production.

Moreover, many rubber plantations are struggling, with Thailand, Malaysia and Indonesia (the main producers of the 13.9mn tonne rubber market, over 80% of which is produced in Southeast Asia) all having imposed moratoriums on rubber planting this year. Supply could contract, and 2020 could see demand exceed supply for the first time in three years.

Look out for stock market proxies

Therefore, investors would be well-served to focus on the proxies for a potential rubber price rise.

Halcyon Agri, which is listed in Singapore, with operations in Ivory Coast, Cameroon, Indonesia and China, is raising funding for an expansion and debt repayment at a turning point for rubber prices. As a processor with a tight grip on rubber supply, it could be viewed as the ideal proxy for a rubber rally.


 
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