Equity Analysis /
Indonesia

Bukalapak: Initiation – Grossly mispriced and facing oblivion

  • We initiate coverage on Bukalapak with a target price of IDR413 and a Sell recommendation

  • Bukalapak is a peripheral player in Indonesia’s ecommerce boom and its market share will contract

  • It has been grossly overvalued considering the substantial risks to its investment case

Bukalapak: Initiation – Grossly mispriced and facing oblivion
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
1 December 2021
Published byTellimer Research

Investment summary

We initiate coverage on Bukalapak with a Sell recommendation and a target price of IDR413, implying 24% downside.

Bukalapak is an Indonesian e-commerce player. It focuses on providing e-commerce to the country’s 13.5mn MSMEs (micro, small and medium enterprises). Its principal target is the tier 2 regions of Indonesia – ie those beyond metropolitan Jakarta and Surabaya.

The stock looks overvalued given the following chronic faults in Bukalapak’s business model:

  1. The ASEAN e-commerce space is increasing, but Bukalapak is a peripheral player that will be eroded by market leaders Sea Limited (SE US), Grab and GoTo. As the fourth-largest player in Indonesia’s e-commerce market, Bukalapak has only 7% market share, and it will be restricted by its lack of scale. The market structure in other countries suggests that the incumbent tends to consolidate its grip over time. For instance, Amazon’s competitors in 1999 were Buy.com and iMall, but they fell by the wayside as Amazon extended its dominance and market share in the 2000s. Similarly, Alibaba destroyed its competition in China in 2010. In a similar fashion, we expect GoTo and Sea Ltd’s Garena to dominate ASEAN e-commerce. 

  2. Bukalapak lacks an adjacent business such as ride-hailing or digital financial services to buttress its e-commerce business. GoTo’s e-commerce business has a ride-hailing segment to support it.

  3. The larger competitors are better funded. Bukalapak’s prospects of penetrating the MSME market are inferior to its competitors such as Sea Ltd and GoTo. Net cash levels for Sea Ltd and GoTo are US$4.7bn and US$2bn respectively, far above Bukalapak's US$1.6bn.

  4. Bukalapak is a cash-burning machine. Its revenue growth looks likely to trail that of the major players in Indonesia. We expect Bukalapak to generate FCF losses of IDR3.7tn in FY 21-23. There is no realistic prospect of FCF positivity, in our view. Total FCF losses will actually increase by IDR 2.5tn in FY 21-23 due to the intense working capital requirements.

  5. Bukalapak relies on third-party sales. Bukalapak has a limited logistics infrastructure, and third-party sales represent 76% of its e-commerce business. Instead of building out its logistics infrastructure, management intends to use the IPO proceeds for operating expenses such as sales and marketing.

Valuation summary

Bukalapak’s valuation of 32x FY 22 EV/sales is frothy. This is a premium of 334% to the 'Baby Amazon' (EM e-commerce) peer group. In our view, such a premium cannot be justified in light of the risks that Bukalapak presents. Bukalapak’s extravagant IPO valuation was partly a function of the scarcity of Indonesian tech issues.

We value Bukalapak at IDR413 per share using the DCF methodology, implying 24% downside. We assume a WACC of 8.01% and a terminal growth rate of 1.4%.

Company overview

Bukalapak, one of the five unicorn start-up companies in Indonesia, was founded in 2010 by Achmad Zaky and two of his college friends Fajrin Rasyid and Nugroho Herucahyono. The marketplace was originally developed to digitise micro, small, and medium enterprises (MSMEs).

In 2016, the company launched Mitra Bukalapak to support warungs – the traditional 'mom and pop' shops that proliferate in Indonesia, particularly in rural areas – which led to increased sales from the segment. At present, the Mitra Bukalapak platform is the biggest e-commerce platform with 8 million offline MSME partners.

Company dynamics

Exposure to one of the fastest-growing countries in Southeast Asia

The e-commerce market in Indonesia is set to grow at a CAGR of 18% in FY 21-25 to cUS$104bn.

Market leadership position in Mitra market space

There are 64mn MSMEs in Indonesia, with an estimated total size of US$110bn, contributing 61% of GDP in 2020. In the e-warung space, Bukalapak has made the most of its first-mover advantage to attain a market share of 39%.

Enhanced focus on beyond tier 1 markets

Contribution to GMV

Key offerings

Products and Services

Market-leading exposure in growing MSMEs market

MSMEs contributed c60% of Indonesia’s GDP in 2020. The MSMEs are set to grow at a CAGR of 7% over the period FY 20-25 to reach nearly US$600bn. Bukalapak offers the widest range of services to the segment and already has a sizable market share of 35% in the tier 2 markets in Indonesia. 

Penetration of Mitra Bukalapak in Indonesia

Bukalapak’s frailties

Market share will diminish

Though the ASEAN e-commerce space is increasing, Bukalapak’s market share is likely to contract. Bukalapak is a peripheral player that will be eroded by market leaders SE US, Grab and GoTo. As the fourth-largest player in Indonesia’s e-commerce market, Bukalapak’s market share is only 7%. Bukalapak will be restricted by its lack of scale.

It also lacks an adjacent business such as ride-hailing or digital financial services to buttress its e-commerce business. GoTo’s e-commerce business has a ride-hailing segment to support it. The market structure in other countries suggests that the incumbent consolidates its grip.

For instance, Amazon’s competitors in 1999 were Buy.com and Imall. They were blown away by the incumbent.

Amazon Market Share

Alibaba Market Share

Competitors have deep pockets and better technology

Bukalapak’s competitors are better funded and have superior technology.

Net cash position (US$ bn)

Cash-burning machine

Bukalapak is a cash-burning machine. Its revenue growth looks likely to trail that of the major players in Indonesia. The burden of funding heavy operating expenses and capex may deplete the IPO proceeds. We expect Bukalapak to generate FCF losses of IDR4.56tn in FY 21-23 and there is no realistic prospect of FCF positivity, based on our analysis. The total FCF losses will increase by IDR2.58tn in FY 21-23, due to the intense working capital requirements.

Bukalapak’s operating expenses are twice its revenue. We present the company's sales & marketing expenses and general & administrative expenses below:

Bukalapak Cashburn FY21 (IDR bn)

Net Working Capital (IDR bn)

CAPEX (IDR bn)

Free Cashflow (IDR bn)

Reliance on third-party sales

What we consider to be a key flaw in Bukalapak’s model is its reliance on third-party sales. It has a limited logistics infrastructure and third-party sales represent 76% of its e-commerce business. But instead of building out its logistics infrastructure, management intends to use the IPO proceeds for operating expenses such as sales and marketing. 

Indonesia's digital landscape

Indonesia is Southeast Asia's largest e-commerce economy

Indonesia has the largest digital economy in Southeast Asia with c40% of the total regional market share, and it is home to five tech ‘unicorns’:

  1. Gojek (ride-hailing).

  2. Tokopedia (e-commerce).

  3. Bukalapak (e-commerce).

  4. Traveloka (ticketing).

  5. OVO (digital payment).

Untapped potential

The digital economy in Southeast Asia had long been an untapped market.

Online consumption was accelerated due to Covid-19, and Southeast Asia now has a total of 440mn internet users, with an increase of 80mn new users in 2020-21. 

70% of the population is now online and the Education, Groceries, and Lending sectors have been the key beneficiaries. 

% of new digital consumers out of total service consumers (SEA aggregate)

Exponential growth prospects

The Southeast Asia internet economy is expected to achieve GMV of US$363bn in 2025, rising at a CAGR of 20% according to the latest report published by e-Conomy SEA in 2021.

South East Asia Internet Economy GMV (US$ bn)

The Indonesian digital economy is expected to have a GMV value of US$70bn in 2021. The forecast suggests that a CAGR of 20% will lead the industry to a GMV of US$146bn in 2025.

Indonesia Internet Economy GMV (US$ bn)

The country has a population of 271mn and online reach is widening. Over 56% of new consumers of digital services in 2020 came from non-metro areas.

% of new digital consumers to services, by geography

Indonesia's internet economy has been booming in recent quarters. Deal activity in H1 surpassed deal activity for each of the past four years.

Indonesia - Deal Value (US$ bn)

The e-commerce industry in Indonesia is estimated to grow at a rate of 52% yoy in 2021, from US$35bn to US$53bn.

Indonesia – e-commerce GMV (US$ bn)

The digital space grew at a sharp rate during the pandemic, with nearly a third of Indonesia's users having only come online since the start of 2020.

Indonesia - New consumers to Internet economy services

 

There is still huge room for growth in the digital economy space. Currently EdTech and HealthTech are at the forefront of the growth.

In 2020, e-commerce and online media generated growth. GMV rose, despite there being contractions in transport & food as well as online travel. Some of the players in the e-commerce industry have also set up mobile payments platforms, such as GoPay by Gojek and ShopeePay by Shopee.

Competitors

The major players in the Indonesian e-commerce industry are Tokopedia, Shopee, Bukalapak, Lazada and Blibli.

  • Shopee is an e-commerce arm of Sea Ltd, a Singaporean multinational company launched in 2015. It has operations in Malaysia, Thailand, Taiwan, Indonesia, Vietnam and the Philippines. It currently leads in terms of market share.

  • Tokopedia, a local Indonesian company launched in 2009, has the second-largest share. The company has exposure to multiple segments including marketplace, logistics, payments and financial technology.

  • Lazada was founded in 2012 and was acquired by the Alibaba Group in 2016. The platform actively operates in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, and has the third-largest share of the e-commerce market in Indonesia.

  • Blibli is a local Indonesian platform which was founded in 2010 and launched in 2011. The platform is based on B2B, B2C, and B2B2C models, with 100,000 + business partners.

Market Share Retail Sales (Indonesia)

Valuation

DCF

DCF is our principal valuation methodology. We assume an equity risk premium of 1.81%.

We assume a risk-free rate of 6.21% and a beta of 1 to arrive at a cost of equity of 8.02%. This leads us to a WACC of 8.01%.

Our valuation assumes a terminal growth rate of 1.4% into perpetuity.

We arrive at a target price of IDR413, implying 24% downside to the current share price.

FCFF Valuation

Comparative valuation

We use P/GMV as another yardstick. The following table presents a list of the leading players in the e-commerce industry. We find that Bukalapak is trading at a premium in terms of P/GMV multiples.

Relative Valuation

Comparables

Forecasts and assumptions

Revenue drivers

Bukalapak has three revenue streams:

  • Marketplace revenue, the largest revenue source for the company. The revenues are primarily derived from commissions generated from sales by merchants on the marketplace platforms. The segment also includes marketing and logistics revenue.

  • Mitra revenues are mainly driven from commissions generated from sales by Mitras (partners) on the Mitra Bukalapak platform and from logistic providers who provide logistics services to Mitras.

  • Revenue from Buka Pengadaan (BPI) is derived by the company on the company's own products. The revenue consists of the cost of goods and the company's margin on goods.

The revenue breakdown is provided below:

Bukalapak: Revenue Breakdown (IDR bn)

Marketplace revenue is a function of three factors.

  1. Annual transacting users (ATU)

  2. Transaction value per user

  3. TPV take rate

We expect the company’s GMV to rise by a CAGR of 17% in FY 20-24. We expect the company’s ATU to rise by a CAGR of 11% in FY 20-24. Transaction value per user is expected to grow at a CAGR of 5% in FY 20-24 and we assume the take rate to be 1.75% (H1 FY 21a: 1.62%).

Operating expenses 

Operating expenses include sales and marketing, general & administration. We assume operating expenses will increase 11% in FY 21 and normalise thereafter. 

Operating margins

Operating margins for FY 20 were -136%. We expect operating margins to improve during our forecast period and turn positive. We forecast the operating margin will reach 1.3% by FY 25.

Dividends 

Bukalapak does not have the capacity to pay dividends due to negative retained earnings. We assume no dividend payout in the forecast period.

Capital expenditure

We assume capital expenditure to be 11% of revenue in FY 21 due to the nature of the business.

Working capital requirements

Bukalapak has been in a negative cash conversion cycle. We assume this will continue in the forecast period. 

Cash Conversion Cycle (Days)

Forecasting Ratios (Days)

Balance sheet and gearing

The debt profile of the company mainly consists of lease liabilities. The breakdown of the entire financial liabilities of IDR61.6tn is detailed below. 

Financial liabilities breakdown

 

Risk analysis

Lack of logistics network

Bukalapak relies on third-party logistics partners, where the warehouse is primarily owned by the FMCG or wholesaler. This strategy does come with benefits in terms of lower capital requirements and operating costs. However, lack of communication, increased dependency and limited visibility of logistics operations may lead to restricted visibility on demand from consumers.

The negative cash conversion cycle

Bukalapak's cash conversion cycle in 2020 was -128 days. A drop in payables could increase the company’s working capital requirement, leading to higher interest expenses.

Highly competitive and evolving environment

The Indonesian market is concentrated, with giants like Tokopedia, Shopee and Grab. The recent merger between Gojek and Tokopedia means competition in Indonesia’s e-commerce market will only intensify.

Management & shareholding structure 

Company management

Shareholding structure 

Top 10 Holdings

The ownership structure can be summarised as follows:

Ownership Summary

Financial statements

Income Statement (IDR mn)

 

Balance sheet (IDR mn)

Cash Flow Statement (IDR mn)