A Tour of Asia Internet: Topsy-Turvy Valuations Distorted by China Fears

Given a slew of new tech IPOs across the Asian region and the extreme sell-off of China internet names, I got together with a few friends in the tech space across Asia to compare notes. The objective was to find the best opportunities ex-China and see just how cheap China internet is now after a nearly 60% drop in KWEB.

Let’s start with the recently listed ones: Bukalapak, Zomato, and KakaoBank. Bukalapak is the fourth largest e-commerce company in Indonesia after Tokopedia, Shopee, and Lazada. Luckily for Bukalapak, Sea Limited is the only listed competitor, and analysts have pegged Bukalapak’s valuation at 1.6x GMV, on par with Sea Limited. But given that SEA’s Shopee has a take rate of 7%, a 2018-2020 CAGR of 100%, and Bukalapak a take rate of 1.6%, and a much slower CAGR of 66% even given their smaller size; does that valuation parity seem justified? Now compare to JD.com, which is now trading at 0.25x GMV or PDD, at 0.3x GMV, or even Alibaba, at 0.22x GMV. PDD and JD are multiples bigger in scale that emerging markets peers, but PDD is still expected to deliver 55% GMV growth this year, and JD nearly 40%. That’s just the beginning of how cheap China stocks look right now.

Our next stop is food delivery, best represented by Zomato, the food delivery service, which trades at 30x 2021x P/S, whereas Meituan trades at 5x. While Zomato currently has higher take rates than Meituan, we expect those take rates to decline over time. Furthermore, we’d like to point out that all of India has less restaurants than Shanghai and Beijing alone. Zomato faces stiff competition from Swiggy who has shown impressive growth and is even ahead on top-line metrics, surpassing Zomato on top-line metrics at the end of May 2021. Swiggy has moved quickly following the breakout of COVID and even expanded offerings ahead of Zomato in areas such as grocery and dark-store fulfilment. We believe that the deteriorating competitive landscape is not factored into the significant valuation premium, whereas Meituan is the undisputed leader and may take market share in ridehailing from Didi amidst the recent reshuffle.

Finally we take a look at the online lenders. KakaoBank, a spin-off from Kakao, now trades at 195x 2021 P/E, on par with Upstart, the darling US online lender. While not a perfect comparison, as there are no other listed online banks in Asia, the China discount is probably the most severe for fintech, with the leading Chinese online lender, 360 Digitech, trading at 4x 2021 P/E. Even Kredivo, the Indonesian uncollateralized loan lender, is targeting 6.3x 2022E sales at IPO, vs. 360 Digitech’s 0.75x 2022E sales. This extreme discount exists because of regulations against online lenders, such as Ant Financial, which investors perceive as war against the whole industry; but the reality on the ground is that smaller online lenders are taking market share amidst the anti-trust efforts. Indeed, 360 Digitech recently announced an earnings beat of 25% and a plan to buy back 10% of outstanding shares.

We are looking forward to the upcoming IPOs of Indian start-ups PolicyBazaar and Nykaa. We like the businesses very much, as they are platforms for insurance policies and cosmetics sales, respectively. However the caveat on valuations remain – PolicyBazaar will go public at nearly 40x 2021 P/S, on par with Lemonade, versus China’s ZhongAn Insurance at 2x 2021 P/S. Nykaa will likely IPO at 10x GMV, compared to Yatsen Group which is trading at 2x GMV.

Before you say that valuation doesn’t matter, Coupang, the 2nd largest e-commerce player in Korea, which IPOed at nearly 2.5x P/GMV, has fallen 35% from post-IPO high to a P/GMV of 1.8, more in the ballpark range of where MercadoLibre and SEA trade.

Ultimately, we will need to see how much the recent regulatory drive impacts core earnings prospects for the companies. Yet some 2Q earnings have shown resilience thus far, such as the beats from JD.com, PDD, and Bilibili, with PDD even reporting a maiden profit. Regulations will continue to create overhead pressure in the short term, but some companies will benefit from the regulations; for example, companies like JD, PDD, QFIN, or Meituan may take market share from the tech hegemony in the wake of the anti-trust regulations. Indeed, the CPC press conference last Thursday clarified that the anti-trust is focused on giving SMEs and newcomers more opportunity and is focused on anti-market behavior – the objective is not to eliminate private enterprise or innovation entirely.

Lastly, emerging market countries are not without risks of their own, and US companies will deal with their own data privacy and internet regulations in the near future.

Although this analysis was much simplified for brevity and lacks more in-depth idiosyncratic analyses, we hope that this illuminates some of the strange valuations we are seeing across the region. China will continue to be a high earnings growth market, and while there will be more regulation in China going forward, we think select China internet names with solid and intact fundamentals look mighty attractive for long-term investors. For example, Tencent is trading at mid-teens P/E ex-cash and investments and has begun repurchasing a small number of shares since the 18th.

Disclaimer: Quaero Capital owns shares of Kakao, SEA Limited, Bilibili and 360 Digitech.

Alice Wang