Few trends are more mind-blowing than the rise of Asian middle-class consumers. The number of middle-class and affluent consumers in Indonesia, for example, is expected to double to 141 million by 2020, according to research last year by the Boston Consulting Group.
To put that in perspective, Indonesia’s middle class will roughly increase by the size of Australia’s population (23 million) every two years, creating a huge opportunity for business in the region. Extrapolate that trend to Thailand, Malaysia, the Philippines, and Singapore and the figures are even more powerful.
Asia’s middle class will comprise 52 per cent of Asia by 2020, according to estimates this year from Nielsen. The market researcher predicts up to US$5.3 trillion in new household expenditure will be up for grabs, and describes the region as “the next big shopportunity.”
Australia’s economy was worth US$1.5 trillion in 2013. So Asian middle-class consumers, who have new-found power to purchase more products and services, will spend at least three times the size of the Australian economy in this “shopportunity” in the next six years.
I could go on with statistics about the region. Those who want more should re-read my April 2013 The Bull column “Five stocks catching the Asian internet wave”, in which I singled out emerging internet advertising companies iCars Asia and iProperty Group.
iCars has soared from 50 cents in April 2013 to $1.34. iProperty has soared from 75 cents to $2.94 since that column for The Bull. Both stocks have terrific long-term potential, but are now overpriced. iCars, in particular, has run too far for now, and has a high price tag for an early-stage venture.
The third sharemarket float from the Catcha Group stable – iBuy Group – has had far less attention. The Asia-focused e-commerce provider raised $37 million in an Initial Public Offering on ASX in late December at 32 cents a share. After soaring to 66 cents in March, it tumbled to 31 cents.
I suspect iBuy was caught up in the tech bull run earlier this year and subsequently dumped amid the global rout in internet and lifescience stocks. Ironically, it is a more substantial business from the one that floated, having acquired LivingSocial, an Asia e-commerce business.
iBuy was arguably overvalued at listing – a $136 million valuation for a business that, at the time, owned five early-stage e-commerce sites, and was heavily in loss-making mode. The success of iCars and iProperty had rubbed off on iBuy’s valuation.
I am always wary of buying floats from vendors that have had a few recent IPO successes. The temptation is to invest in the new IPO only on the basis of the previous floats, ignoring the company’s prospects and valuation. This is a common trap in mining IPOs.
iBuy looks more interesting back below its issue price. But like all loss-making stocks, it is highly speculative and suits experienced investors. Its exposure to the volatile South East Asia market adds another layer of risk to an already high-risk internet sector.
iCars, iProperty, and particularly iBuy, are early-stage ventures. They are trying to get a foothold in huge South East Asian markets, and tap into strong expected growth in internet penetration, especially via smartphones. About 135 million people in iBuy’s core markets have access to the internet.
iBuy’s e-commerce sites in six South East Asian countries had 7.4 million subscribers at December 2013. Users spent US$130.6 million through the sites, of which iBuy takes about a quarter as commission, judging by its FY13 net revenue of $36 million.
The business focuses on “flash-sales”, where retailers, wholesalers and manufacturers clear excess, obsolete, out-of-season or unbranded goods in huge sales, at heavily discounted prices.
Like other flash-sale websites, iBuy is the middle-man connecting buyers and sellers. It collects buy orders from users, sends them to the suppliers, receives the product, packages it and ships it to buyers. The main benefit is low inventory risk because it is not holding stock.
As with iCars and iProperty, the twin goals are scale and speed. iBuy needs to build or acquire websites in the region before its rivals dominate the market.
iBuy acquired LivingSocial’s South East Asian operations for $20.2 million earlier this year. That business has 4.3 million users through its e-commerce sites in Thailand, Indonesia, the Philippines and Malaysia. Revenue of $13.3 million in FY13 takes iBuy’s pro forma revenue in FY13 to $49.4 million.
The market largely ignored this acquisition, judging by iBuy’s share price since March. Now with 7.4 million users, iBuy is rapidly building scale to attract more well-known manufacturers that are prepared to offer larger discounts, which in turns attracts more users.
This virtuous circle is a great attraction of successful internet advertising e-commerce sites. Having more users leads to greater sales volumes, attracting better products and pricing. This in turn attracts more users and so on as the network starts to build on itself and block out rivals.
However, it is still early days for iBuy. The site has only a tiny fraction of users in a region of 4.3 billion people across all of Asia. The flipside is iBuy has huge long-term growth potential with Asia e-commerce forecast to grow annually by 24 per cent over 2011-16, according to internetworldstats.com.
iBuy is, in fact, positioned for two trends: the “shopportunity” from middle-class consumers and strong expected growth in e-commerce as consumers buy more goods online and fewer in stores. Although internet penetration is still low in parts of South East Asia, the region is among the world’s heaviest users of smartphones, meaning web access is rapidly increasing.
Cynics will argue iBuy’s valuation is still too much to pay for a company that is essentially a collection of emerging websites. The same could have been said about iCars and iProperty. The sustainable competitive advantage of these businesses and iBuy is arguably the Catcha group’s knowledge and networks in South East Asia, which have been built over almost a decade.
iBuy is not for conservative investors. But with its valuation having halved since March, the entry point for long-term investors seeking exposure to Asia has improved. Although further share-price weakness cannot be ruled out in the next few months, iBuy has had some support around below 30 cents. More acquisitions later this year could be a re-rating catalyst.
– Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at May 28, 2014.
Click on the links below to read other articles from this week’s newsletter