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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

Wirecard bankruptcy could be a Lehman moment for e-commerce
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
25 June 2020
Published byTellimer Research

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. JMIA US, for instance, is expected to deplete its cash reserves by FY21 – its negative cash flow from operations (CFO) is almost as large as its revenue.

We are positive on JMIA US's investment case, as long as it can handle the cash burn. SE US could generate negative CFO of US$585mn in FY21. It needs to conserve its cash judiciously like JMIA US.

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.