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Which of the Baby Amazons will survive?

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Tellimer Research
    16 October 2019
    Published by
    • E-commerce is in the ascendancy in emerging markets, having grown by an estimated 18% per annum over the past five years. 
    • So-called ‘Baby Amazons’, such as Jumia, SEA, Flipkart and Ozon, are generating exceptional revenue growth, driven by higher internet penetration, smartphone usage and the novelty of e-commerce in the underpenetrated retail markets of the emerging world.
    • We are positive on the sector overall, despite reservations. However, the clincher for the sustainability of these enterprises will be their cash-flow management. In this report, we rate e-commerce companies on our Cash Sustainability Index (CSI), assessing which of them have what it takes to succeed and which do not.

    E-commerce presents a compelling opportunity in emerging markets. EM e-commerce players are replicating the success of Amazon. EM e-commerce revenue has grown by an estimated 18% CAGR in the past five years. So-called ‘Baby Amazons’, such as Jumia, SEA, Flipkart and Ozon, are generating exceptional revenue growth.

    The drivers of EM e-commerce are threefold. First, internet penetration in the EM world has leapt forward, powered by cheap data. Second, smartphones have become the principal means of e-commerce, as cheaper accessible models flood the market. Third, e-commerce is often the first step for millions of emerging market consumers to access retailing.

    The revenue and valuation gap could narrow in five years. Although EM e-commerce firms have just one-tenth of Amazon’s US$277bn gross merchandise value (GMV), the ratio could narrow to one-fifth in five years’ time. The combined value of EM e-commerce firms is currently just 7% of Amazon’s US$980bn market cap. In many cases, the market may be undervaluing EM e-commerce.

    The clincher in the sustainability of these enterprises will be their cash-flow management. EM e-commerce companies have high costs of goods, opex and capex. This means that they are negative CFO and FCF. We note that many in the peer group have been FCF negative in the past five years.

    We rate the companies on our Cash Sustainability Index (CSI).

    • BABA US and MELI US fare well on this metric as they are cash-generative, having achieved scale and consolidated their operating earnings.
    • JMIA US and SEA US fare poorly, with overstretched balance sheets. They are in a precarious position where they are depleting their cash reserves.
    Tellimer's Cash Sustainability Index (green = cash generative; red = danger zone)

    BABA US Equity

    42.2

    EBAY US Equity

    37.3

    MELI US Equity

    20.8

    CTRP US Equity

    17.2

    AMZN US Equity

    7.8

    BOO LN Equity

    8.1

    MAN FP Equity

    6.4

    ASC LN Equity

    5.6

    SHP SJ Equity

    4.3

    DUST SS Equity

    3.9

    DPEU LN Equity

    2.9

    PIK SJ Equity

    2.7

    ZAL GR Equity

    2.7

    CNV FP Equity

    -5.0

    MMYT US Equity

    -14.5

    FTCH US Equity

    -19.3

    3690 HK Equity

    -37.1

    SE UA Equity

    -44.5

    JMIA US Equity

    -74.5

    Source: Tellimer Research