What is the value of a listed profitable ASEAN payment infrastructure that is comparable in revenue scale and growth profile to India’s unlisted loss-making payments company Paytm which Berkshire Hathaway invested US$356m recently in Aug 2018 at a market valuation of US$18-20bn?
This week, we highlight the under-the-radar listed Asian exponential innovator M Cash Integrasi (IDX: MCAS), Indonesia’s leading digital kiosk & payment infrastructure network company with over 75,910 kiosks service points nationwide (+47.4% yoy as at end Dec 2018) to distribute digital products to 4.6 million users (+208.7% yoy from 1.5m users in 2017) who carry out recurring transactions through the O2O (online to offline) platform in which daily transaction value was US$1.22m in 2018 (+139% yoy; US$1.55m in 1Q FY2019) and MCAS takes a 2-4% cut.
Total revenue in FY2018 and 1Q FY2019 was US$442.6m (+139.3% yoy) and US$141.5m (+70.4% yoy) respectively and gross margin has expanded from 2.7% in FY2018 to 3.2% in 1Q FY2019. MCAS generates decent profitability with ROE (= Net profit/ Equity) of 20.6% and ROA of 14.4% on a decent balance sheet of Rp38.8bn (US$2.7m) in net debt with a debt-to-equity ratio of 3.5% (as at end of 1Q FY2019). In 2018, MCAS leveraged upon its network and user base to expand into a new revenue stream in digital cloud ad business with a gross margin of 76.9% and 1Q FY2019 revenue from digital cloud ad has already exceeded the entire FY2018.
Noteworthy is that MCAS revenue scale and growth profile is comparable to India’s unlisted payments company Paytm (One97 Communications Ltd) founded by Vijay Shekhar Sharma, which Berkshire Hathaway invested US$356m in Aug 2018 for an undisclosed stake. Paytm generates Rs3,314.8 crore (US$473m) in revenue in FY03/2018, remains loss making with losses of Rs1,599 crore (US$228.3m) which is expected to widen to Rs2,100 crore (US$300m) for FY03/2020, and has negative operating cashflow (OCF). In contrast, MCAS is profitable with net profit of US$15.9m and also generates positive OCF of US$5.4m, but its market valuation at US$212m is 85-94X smaller than Paytm’s US$18-20bn.
There are over 1,000 SKUs of digital products which include telco SIM cards, prepaid electricity vouchers, e-money cards with an automatic registration system without having to use a bank account, e-toll cards, gift cards, telco electronic vouchers, microloans, biller and payment points (especially for unbanked population to pay various routine bills, such as electricity, water, credit instalments, social security, insurance, pay TV, zakat/regular religious alms), transportation (airplane, train, taxi, tour and travel services), entertainment (concert and show ticketing system), games vouchers in collaboration with online game distributors, top-ups (prepaid phone credit, Grab Driver) etc.
MCAS digital kiosk & payment infrastructure services are taking hold of people’s everyday life and work routines across all age segments because there remains a digital gap divide In Indonesia. 46% of Indonesians live in rural areas and 97% of the population located in rural areas do not have access to a mobile phone, while the nation’s archipelagic geography makes expanding coverage costly, if not technically challenging. There is still a high preference for offline transactions (38.4% are afraid of online fraud, 32.7% prefer offline shopping experience), majority of the population are unbanked (only 20% have bank account, 11% owns debit/credit card), around 70% of consumer transaction is paid by cash, and internet access is mostly concentrated in the capital and provincial capitals (fixed broadband penetration is 9.38% nationally).
An example of MCAS relevance is the digitally-purchased prepaid electricity vouchers. In Central Java and Yogyakarta, two key provinces in Indonesia whose population represented about 15% of the country’s total, the number of prepaid PLN (the state electricity utility monopoly) electricity users reached 32% of the total 9.7 million household users. In South Sumatra, Jambi, and Bengkulu—all of them on Indonesia’s second most populous island—the number of household electricity users who have shifted to prepaid electricity has increased to 41%. Prepaid electricity gained in popularity quickly as it allows Indonesians to manage their own consumption.
Digitally-purchased prepaid electricity vouchers represent part of the rapid e-money digital payment transactions growth in 2018, both in terms of volume and value: The volume of transactions tripled from 943.3 million in 2017 to 2.9 billion transactions in 2018, while transaction value jumped 3.8X from Rp12.4 trillion (US$870m) in 2017 to Rp47.2 trillion (US$3.3bn) in 2018. This was also driven by the government campaign known as “National Cashless Movement” (Gerakan Nasional Non-Tunai or GNNT), a move to accustom citizens to non-cash transactions, which was issued in 2014.
MCAS has created a symbiotic partnership and alliance with leading players in major sectors in retail, telecommunication (SIM cards and prepaid top-ups); financial (e-money cards by banks e.g. Bank Mandiri and Bank Central Asia), and logistics. MCAS leveraged upon the multiple strategic partnerships to expand its user base without having to rely on any cash-burning subsidized model.
In retail, MCAS has exclusive agreements with retailers so that the placement of the kiosks become strategic to attract a good range of users. MCAS modern channels include minimarkets and supermarkets such as Ranch & Farmers Market, Carrefour, ACE Hardware and Informa (Kawan Lama), Chatime, Hero & Giant, Hypermart, MCA Mart, supermarkets in Shell stations, Telkomsel, Soekarno-Hatta International Airport (PT Angkasa Pura 2) etc and traditional channels such as small shops and restaurants. In logistics sector, MCAS collaborates which PT Pos Indonesia which has an extensive monopoly network of more than 4,800 post offices and 40,000 postal agents.
In addition to offline channels, MCAS also developed online marketing channels through the Android-based and iOS mobile application “MCash” and chatbots on the LINE and Telegram messaging platforms downloadable at Google Play Store. Both the MCash and LINE mobile applications and Telegram bot are primarily intended for MCAS business partners (resellers) in traditional retail to sell MCAs digital products, such as mobile reloads, biller payments, and ticket reservations using the deposit system through MCash Wallet and offer attractive system points & rewards for every transaction. Thus, customers simply need to use their mobile phones to get services and attractive offers from MCash.
The nearly 76,000 service points that have direct touchpoints with customers comprised of four distribution channels: 3% digital kiosks machines in modern and traditional retail, 11% digital wholesale networks in active traditional retail outlets, 1% cashiers at modern retail, 85% apps/chatbots in traditional retail. The first three channels primarily serve the unbanked segment, while the apps/chatbots are targeted at resellers, banked and tech-savvy segment.
To solidify its presence in both offline and online/mobile markets, MCAS has actively invested in expanding the digital product offerings through strategic investments and business partnerships together with its strategic shareholder Kresna (IDX: KREN) to further strengthen its existing infrastructure to create a “magnet factor” and “stickiness factor”.
MCAS strategic investments and subsidiaries are also hidden quality assets in the balance sheet that have the potential to have their value unlocked in listings and two of these investees are listed: its 15% stake in NFCX (PT NFC Indonesia) (IDX: NFCX) is worth US$18.7m and its 7% stake in DIVA (PT Distribusi Voucher Nusantara) (IDX: DIVA) is valued at US$10.1m. MCAS 58.6%-owned subsidiary PT Telefast Indonesia (TI), a leading telephone credit distribution company particularly strong in West Java, Central Java and Jakarta markets, aims to list 30% of its shares on the Indonesia Stock Exchange in 2H2019 and MCAS intends to leverage its digital wholesale network to empower TI’s 4,400 active partner outlets to become digital troops to sell MCAS various digital products. KREN owns 20% in MCAS, 26.25% in NFCX and 14% in DIVA. Key partnerships include:
• Digital cloud-based advertising with DMS: MCAS 30%-owned subsidiary DMS (PT Digital Marketing Solution) has developed a digital cloud-based ad exchange and accompanying mobile application that will allow even small retailers to bid for ad spots at competitive prices to promote their businesses. DMS has built a footprint of 4,105 advertising points across 24 cities in 2018, creating a new digital cloud ad revenue stream with gross margin of 76.9%. With digital cloud, management shared that MCAS will be able to manage advertising products without having to go to every distribution point. Some of DMS major clients from the FMCG industry include the Djarum Group, Indomaret, Circle-K, Bodyshop, and Soekarno-Hatta International Airport.
• Digital media & entertainment with OMI: MCAS 51%-owned subsidiary OMI (PT Oona Media Indonesia) launched in June 2018 its OTT mobile app OONA with over 200 free-streaming video-on-demand (VoD) channels and the app has attracted around 2.4m downloads and 2.1m active users, creating a new digital media and entertainment revenue stream in 2018 from top media-buying agencies and supply-side platforms (SSP), including GroupM, Spot X, Rubicon, InMobi, FreeWheel, IMX and Zapr. OONA also employs AI-powered analytics to provide customized content recommendations to its users. Users of the platform are not only allowed to interact with one another but also with the array of digital products and services that ride on its premium contents. OONA’s integrated Artificial Intelligent (AI) and interactive advertisement features allow users to have fun while enjoying premium free VoD Services. This interactive advertisement enables users to gather coins which can later be redeemed for other MCAS services.
• Transaction platform with NFCX: MCAS 15%-owned subsidiary NFCX (PT NFC Indonesia) (IDX: NFCX, market value US$124.8m, http://ptnfc.com), which was listed in July 2018, has developed a transaction aggregator/exchange platform that connects various types of businesses. NFCX has four platforms: (1) real-time phone-credit exchange marketplace Pulsa Aggregator; (2) second-hand goods marketplace Tawarin.com; (3) ecommerce portal SelaluAda.com which accept points from other platforms which are converted into physical and digital products/services such as airtime vouchers and ecommerce vouchers; and (4) cloud-based advertisement service. For instance, ads views on OONA converted into points which in turn are converted by NFCX into physical and digital products/services such as airtime vouchers and ecommerce vouchers. As of 2018, member numbers on the platform have risen 9.2% yoy to 25,918 members.
• Integrated card and e-wallet with MatchMove: MCAS 14.81%-owned associate MMI (PT MatchMove Indonesia, https://www.matchmove.com) offers cloud-based enterprise payment and banking solutions, including the technology provider for the integrated card and e-wallet product for Bank Rakyat Indonesia (BRI) (IDX: BBRI), one of the largest banks in Indonesia. Its banking operating system enables any mobile app or website to integrate and deploy full-featured banking-as-a-service, allowing users to get instant access to banking services such as payment, remittance, and credit services (Spend, Send, Lend) to all its customers online, as well as other features that include P2P transfers, Cross-Border Money Transfers, Top Up channels, Virtual Payment Cards, Loyalty Points & Rewards and Promotions & Offers. According to management, the most important thing is connectivity and because MatchMove has partnered with MasterCard, card users can enjoy cross country usage. An example is that of online shopping on ecommerce platforms such as Amazon, Indonesian customers cannot use payments through the local e-wallet platform currently available. But with MatchMove, the transaction can be done. Through MMI, MCAS can directly tap into customer loyalty businesses by providing points of exchange for MMI partners’ point and reward programs and gain access to 40 million potential customers emerging from MMI membership and MMI banking partners. Every product presented by MatchMove will be present in the MCAS digital kiosk, including on-demand bank accounts, onboarding and e-KYC. Kresna owns 14.81% in MMI.
• Integrated payment platform with MDD and TrueMoney: MCAS 20%-owned subsidiary MDD (PT Multidaya Dinamika, http://multidaya.id) is a fintech payment enabler specializing in developing and integrating non-cash payments to create an integrated joint payment system which connects financial and non-financial institutions with merchants and provides them with a comprehensive payment solution that is fast, accurate and secure. MDD’s clientele & partner portfolio covers banks, property developers and public facility operators. MDD entered into a strategic alliance with TrueMoney (PT Witami Tunai Mandiri, https://www.truemoney.co.id) in Aug 2018 to extend its distribution points by leveraging a business synergy for around 16,000 TrueMoney agents and 450,000 TrueMoney members who can top up their credit through MCAS distribution points across Indonesia, enriching the product variants offered at the MCAS digital kiosk. This strategic collaboration include several other services such as cross-billers, M Cash services such as PPOB products supplied from MCAS into TrueMoney Application and vice versa), and e-toll charging, expanding MCAS network of e-money partners. TrueMoney is one of the top three electronic money used in Thailand. TrueMoney products already have permission to operate e-money and Fund Transfer Organizers from Bank Indonesia. TrueMoney services can also be used to withdraw balances (through financial service agents who have collaborated with TrueMoney or through transfers to bank accounts) and transfers to the same bank account users and owners throughout Indonesia.
• Digitization platform services for SMEs with DIVA: MCAS 7%-owned investee company DIVA (PT Distribusi Voucher Nusantara) (IDX: DIVA, market value US$144.6m, https://ptdvn.com), which was listed in Nov 2018, has launched the Digital Cashier solution T-Kiosk in Nov 2018 in collaboration with Telkomsel, to enable the digitization of SMEs. T-Kiosk is a multi-functional, Android-based Electronic Data Capture (EDC) application service to accommodate transactions through debit cards, credit cards, and QR codes. Unlike EDC machines, which generally only function as payment terminals, T-Kiosk applications have many functions, including distribution of digital products, product updates, sales reports, financial reports, and others. Users of the T-Kiosk application at Rp100,000/month (US$7/month) will get benefits including a 2GB internet package for the Smart Outlet Diva connection to the application server and the use of the Diva Smart Outlet. Users can register through Telkomsel’s 200 dedicated account manager or agents who have been appointed as service providers. Another option is to register for access to Diva Intelligent Instant Messaging (for business). Over 30,000 SME accounts in Indonesia have partnered with Telkomsel and DIVA aims to serve 30,000 SMEs by leveraging Telkomsel’s user base. As of end-2018, DIVA had more than 18,000 SME customers.
• Smart electricity meter+internet device with SMC: MCAS 30%-owned associate SMC (PT Sistem Mikroelektronik Cerdas, http://www.pt-smc.com) has developed an Intelligent Metering Online (IMO) instrument that functions as a router and internet hotspot as well as a module interfacing with kWh meters and water meters installed on premises and integrated with PLN subscribers. Customers can thus monitor their utility usage remotely in real-time, through a mobile application, and avoid the risk of overcharge of electricity bills and running out of electricity in the middle of the night, while also connected to the IMO as a hotspot, when they are on site. MCAS believed the IMO smart device will open a new market opportunity to over 66 million households throughout the country of which 60% are prepaid customers. The IMO enables MCAS to analyze consumer behavior and develop consumption profiles, helping to craft a unique promotional package that suits each consumer. SMC provides various solutions for smart house, smart city and power management SCADA programs in Indonesia since 1999. SMC has also worked on prepaid energy metering projects and token generator vending system. SMC was able to provide a breakthrough power management technology and its solution was implemented by PLN since 1999. Integration of this technology in the Smart House and Building program in Bandung, West Java has been carried out since 2012. Kresna owns 20% in SMC.
• PPOB payment platform alliance with Alfamart: MCAS alliance in Feb 2018 with Indonesia’s second largest minimarket operator Alfamart (PT Sumber Alfaria Trijaya) (IDX: AMRT) expands its user base to over 50,000 member SMEs under AMRT’s Outlet Binaan Alfa (OBA) AlfaMikro Application (AMA) O2O platform (https://play.google.com/store/apps/details?id=com.alfacart.alfamikroapp), allowing them access to MCAS digital ecosystem as the exclusive digital contents aggregator and facilitating Payment Point Online Bank (PPOB) service to their respective customers. OBA members, or UMK stalls that work with AMRT as suppliers, have been provided by the AMA application as a medium for ordering goods through smart phones, which is also available in the Wagon services (Warung Goes Online), a blockchain-enabled digital service platform developed by MCAS strategic shareholder Kresna’s subsidiary PT Digital Artha Media (DAM Corp). Traditional shops (warungs) remain the leading retail distribution network in Indonesia where more than 80% of national grocery retail sales still originate from traditional stores. Thus, using the AlfaMikro app, warung owners will be able to sell “hundreds” of MCAS digital products (from phone credits to airline tickets) and accept a variety of digital payments methods, in addition to using the app as a medium to order inventory. Through the government initiative, ordinary households can operate as payment counters when they become fitted with an easy-to-operate digital platform provided by financial institutions. Banks utilize a PPOB system to extend their business reach beyond geographical barriers, a reality which often precludes them from opening physical branches to serve pockets of small populations; consumers are thus now empowered and transformed into service providers, as they adopt a PPOB system to earn additional income.
• Digital locker-kiosk and multi-biller alliance with Pos: Through the establishment of 80%-owned subsidiary MNI (PT Mcash Nasional Indonesia), MCAS alliance with Pos Indonesia (POS) allows the development of IoT-based services such as digital locker-kiosk MBOX-POS, which provides faster and more efficient delivery service. Through the drop-shipment service, people can send packages by dropping them at an MBOX-POS and the storage facility allows people to store things for a short period of time. MCAS and POS also collaborated to launch more than 300 variants of billers of Payment Point Online Bank (PPOB) products such as bill payments for Regional Water Companies (PDAMs) and Land and Building Taxes (PBB) through MBOX-POS. Various digital content owned by MCAS such as Vouchers Games, Restaurant Vouchers, Credit & Data Packages, will also be distributed through the POSPAY distribution channel which has reached more than 4,800 Post Offices and 40,000 post agents throughout Indonesia. Customers will also enjoy benefits as digital box services will be available not just in POS offices but also in many conveniently-located physical locations. MBOX-POS also offers both offline (monitor, body and surrounding premises as advertisement points) and online marketing channels for MCAS. MCAS owns 1,850 digital lockers-kiosks across Indonesia, up from 809 in 2017.
• Digital and cashless payment system of toll roads: MCAS has expanded its digital payment integration business into the new area of digital and cashless payment systems of toll roads. MCAS participated in the birth of a single-lane free flow (SLFF) technology named “FLO”, to be applied on numerous toll roads across Indonesia. Currently trials have been conducted at Bali Mandara toll gates and several toll gates in Jakarta, namely, Sedyatmo toll gate, Kamal toll gate, and Kapuk toll gate. Digital and cashless payment systems will be implemented among public facilities, ranging from toll roads to airports, seaports, trains, buses, and other public transportation networks. To use FLO, toll road users need to buy/top-up RFID stickers (from MCAS digital kiosks) where the balance of toll road payment transactions can be monitored through the FLO application. FLO embeds a server-based electronic money scheme, which is different when compared with previous technology that uses e-money based chips. Processing payments are now online and real-time so they can directly cut the duration of transactions that occur at the gate and are expected to reduce the number of long queues.
• MSME Digital Kiosk Partnership Program with Bank Permata: MCAS has partnered with Bank Permata to offer MSME (micro SME) to start a digital kiosk business with only Rp2.5m (US$175) in initial capital. There are two financing packages. The Mini Kiosk Package is equipped with 1 slot card dispenser with a capacity of 200 cards at Rp30m; the Wholesale Kiosk Package is equipped with 4 slot card dispensers at Rp75m (US$5,238) with competitive loan (9% interest) provided by Bank Permata and payments can be repaid up to 3 years.
• Cloud-printing with 24Print: MCAS 25%-owned associate 24Print (PT Dua Empat Print) is an cloud printing service company has integrated MCAS digital products into its existing 24Print laser-printing machines installed at public places such as schools, libraries, or cafes, which allow users to print documents via e-mail, website, Google Drive, or USB. KREN owns 35% in 24Print.
• Multi-functional card Flazz with BCA: MCAS collaborated in Feb 2019 with PT Bank Central Asia (IDX: BCA) to distribute BCA’s Flazz multi-functional card for fast transaction and easy payment on transportation. Flazz card can be used to pay at food and beverage, minimarket, supermarket, hypermarket, gas station, parking, book store, recreation, public transport (Transjakarta, Commuter Line Jabodetabek, and Trans Jogja) and more than 57,000 outlets.
MCAS has an IT team of 30 people to design and develop new features and changes to respond quickly to market dynamics in two weeks instead of six weeks if the work is outsourced to external parties.
With the community and compellingness exponential edge, MCAS’s business model generates stable and recurring revenue and healthy profitability in FY12/2018 with net margin of 3.6%, ROE 20.6%, ROA of 14.4%, propelling a 150% increase in market value from its IPO price of Rp1,385 on Nov 2017 to US$217m. Balance sheet is relatively healthy with Rp38.8bn (US$2.7m) in net debt as at the end of 1Q FY2019 which is around 1.3% of market cap. The IPO raised Rp300.5bn (US$22m) in cash (217m new shares at Rp1,385).
MCAS was first established on 1 June 2010 by Marwan Suharlie and later built by his brother and now CEO Martin Suharlie who came in at the end of 2016 and led the business transformation and growth. In March/April 2017, MCAS brought in strategic shareholders PT Kresna Graha Investama (IDX: KREN) and PT Hero Intiputra, the founding shareholder of pioneering modern retailer PT Hero Supermarket Tbk (IDX: HERO).
With the help of KREN and HERO, in a short period of time of around 7 months, MCAS was successful in obtaining contract commitments from several business partners, including PT Supra Boga Lestari Tbk, the operator of supermarket Ranch and Farmers Markets (IDX: RANC), Hypermart, Giant Mart – Hero, Red Bean, Kawan Lama (Ace Hardware and Informa), Transmart Carrefour, Era Mart, Hydro, CMN, and Shell.
KREN has been instrumental in helping MCAS in the corporate transformation, having a track record of helping several other well-known companies that include automotive group Indomobil, VIVA media group, PT Mitra Keluarga Karyasehat Tbk , PT Sido Muncul Tbk, PT Unilever Tbk, Medco group and Kalbe Farma group. Established in 1999, KREN is the only financial-digital hybrid company listed on the IDX and its subsidiaries include PT Kresna Asset Management and PT Kresna Securities. KREN has compounded over 100X to a market value of US$770m since its listing in 2005. Various business synergies and collaboration have taken place with KREN’s subsidiaries and network. A B2B collaboration that has been created is with KREN’s affiliated company PT Supra Boga Lestari Tbk through PT Supra Kreatif Mandiri which develops the online grocery platform Kesupermarket.com. MCAS digital kiosks throughout the Ranch and Farmers supermarket network function as express shopping and express check-out.
KREN’s subsidiary PT Digital Artha Media (DAM Corp), which pioneered and developed the e-wallet Mandiri e-cash and LINE Pay e-cash, has integrated its e-wallet as an alternative non-cash payment to MCAS digital kiosks. MCAS can also take advantage of the huge market potential of Mandiri e-cash, whose users have reached over 10 million. For tour & travel products, mainly train and airplane tickets, MCAS synergizes with Padiciti, an online travel booking platform developed by KREN’s subsidiary, PT Indo Corpora Investama (ICI). ICI is also the developer of the payment aggregator platform named Padipay which is also be integrated with MCAS digital kiosk platforms, especially those based on mobile, so as to increase the convenience of MCAS digital kiosk users in terms of a variety of alternative payments.
KREN’s subsidiary, the Nurbaya Initiative (NI), is an offline-to-online (O2O) platform development company enabling the online transformation of micro, small and medium enterprises (MSMEs). NI has received support from PT Pos Indonesia to develop a POS (point of sales) network, along with freight and payment infrastructure, in over 4,800 post offices throughout Indonesia. In these post offices, digital kiosk will be installed which will act as a sales platform for MSME products and marketplace for consumers of PT Pos Indonesia, mainly in the rural areas. The digital kiosk model being developed by NI has the same technology and target market with MCAS so the potential for business synergy between the two companies is very large.
KREN also has a subsidiary called DominoPOS, the developer and operator of cloud-based marketing platforms Orbit and gotomalls.com with modern shopping centers as the main customer target. Through this platform, DominoPOS helps shopping center visitors not only find the location of the merchant, but also helps find the products they are looking for and promotional information that is relevant to them in the shopping centers they are currently visiting. DominoPOS also provides big data for tenants to be able to know and analyze shopping patterns from mall visitors. This access is utilized to develop MCAS digital kiosk distribution network in modern channels. MCAS has cooperated with DominoPOS to develop an offline platform through digital kiosk technology, which is not only able to provide information on merchant location and products sold and events in a shopping center, but also promotion blast, promotional vouchers and digital products others, such as telephone credit, electric pulses, various tickets and bill payments.
MCAS competes mainly with 2 modern retailers – Alfamart and Indomaret – who also have digital kiosks in their stores. Established in 1999, Alfamart has over 11,000 minimarket stores across Indonesia and has also launched Alfaonline ecommerce platform in Mar 2013. Indomaret is a minimarket operator established in 1988 by the Salim Group with over 15,000 stores across Indonesia. Indomaret also developed an online retail business model by launching klikindomaret.com and the m-commerce application in 2015.
Forth Smart (SET/MAI: FSMART), which operates “Boonterm” kiosks (http://www.boonterm.com) in Thailand, relies heavily on prepaid mobile top-ups, which contributes 80% of its US$106m revenue, and money transfer which account for 10% of sales. 76% of total subscribers in Thailand are using prepaid mobile phones and 33% of total prepaid subscribers top-up through Boonterm kiosks. Management claims that revenue growth and margin of FSMART has deteriorated due to slowdown of the grassroots economy, and the usage amount of mobile top-up via Boonterm has been flat (Bt30.158m in FY2017 and Bt30.674m in FY2018).
FSMART started developing Boonterm kiosks to be “intelligent kiosks” that can sell SIM card and e-KYC services in 2018 which were launched in 2019 and the Boonterm kiosk has 52 services (excluding horoscope and weight scale). In contrast, MCAS digital kiosk has a wider and richer SKU of over 1,000 digital products and can sell physical SIM cards or starter packs and e-money cards, a differentiation compared to Boonterm and other kiosks. Also, prepaid mobile customers increasingly can choose a variety of payment channels through mobile apps. Unlike FSMART Boonterm which does not have online/mobile distribution channels, MCAS has developed online marketing channels through the Android-based and iOS mobile application “MCash” and chatbots on the LINE and Telegram messaging platforms downloadable at Google Play Store. Both the MCash and LINE mobile applications and Telegram bot are primarily intended for MCAS business partners (resellers) in traditional retail to sell MCAs digital products, such as mobile reloads, biller payments, and ticket reservations using the deposit system through MCash Wallet and offer attractive system points & rewards for every transaction.
MCAS CEO Martin Suharlie summed up by sharing that the promising digital transformation growth in Indonesia is still in the early stages and emphasizing MCAS mission to become a O2O lifestyle platform to enhance businesses and help people simplify their lives: “The digital transformation that has occurred over the past five years in Indonesia is still in its infancy. The arc of progress will be long and filled with excitement. Considering the massive potential behind Indonesia’s market economy, our core strategy will strongly guide our business endeavors in coming years. Supported by a robust financial platform and strategic alliances, MCAS will sustain a high rate of growth in 2019 and onward. 2019 will see multifarious synergistic initiatives and inter-operability among subsidiaries and investment companies, creating a strong bond, where each string of business will link with and strengthen another; an infrastructure network that is so massive and complete, one which generates a natural necessity for everyone to connect with, should they be considering expansion of their business in Indonesia. With the presence that this mode of distribution point offers, it functions as a bridge for Indonesians to morph into a digitalized society as well as working advertisement points closer to people’s lives. MCAS vision is to become a state-of-the-art O2O (Online-to-Offline) lifestyle platform, providing physical and digital content to enhance our commercial partners’ businesses and to help people simplify their lives.”
DO NOT invest in tech, that’s our first message to investors. Tech investing is overhyped, overcrowded, and illiquid in the private equity and venture capital space where entrepreneurs building me-too ‘We are the Uber for X’ loss-making and cash-burning business models have the entitled mindset of demanding an ever-richer valuation which is also egged on by dealmakers chasing increasingly fewer quality deals. The subsidized-till-you-are-profitable hyped-up model of growing quickly by raising money at rich valuation and burning through cash is proving to be increasingly unviable.
However, not only do the listed liquid and transparent H.E.R.O. innovators generate high profitability at the inflection point of their exponential growth trajectory, more importantly, they are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. The massive investment alpha in the years ahead is definitely in the overlooked listed public markets where there is transparency and liquidity, and long-term farsighted investors can avoid the FOMO (fear of missing out) with profitable innovators.
Many Value 2.0 value investors are unaware that they are complacent (and harming their clients) when they dismiss things which they do not understand or appreciate enough the long-lasting structural profound impact, even though the rules of the game has changed. Last week, we discussed briefly the rise of Square and the POS SaaS cloud innovators such as Smaregi whose recurring-revenue subscription-based business models have profoundly impacted the legacy business models. These disrupted conventional companies include Ingenico (EPA: ING), Taiwan’s Flytech (TWSE: 6206) and Posiflex (TWSE: 8114), HK-listed PAX Global (327 HK), Malaysia’s Cuscapi (KLSE: Cuscapi) and a number of Value 2.0 value investors have invested in them due to their seemingly decent historical quantitative financial numbers and healthy balance sheet – and all have seen their market cap halved and becoming cheap-gets-cheaper value traps. For instance, PAX Global is down 62% while Square is up 460% since Nov 2015.
Another example is Nearmap (ASX: NEA) vs Singapore-listed Boustead (whose Geospatial/Geographic Information System GIS business contribute 28.2% and 46.3% of FY2018 revenue and profit respectively). Nearmap has a recurring-revenue subscription-based business model vs the project-based business model of Boustead. Nearmap is up 700% while Boustead is down 56% in the recent five years.
How can we value exponential innovators? DCF analysis can be complemented by the lifetime value (LTV) of contracted subscribers. LTV is calculated by multiplying the annualized contract value (ACV) of its portfolio of customers by its gross profit margin and dividing it by the churn rate of the customers. ACV is the forward looking sum of all subscriptions from paying subscribers over the 12 months ahead, while churn is the number of clients leaving divided by the total number of clients. In other words, if ACV and gross profit margins are rising while churn is falling, three key operating metrics are moving in the right direction to produce a multiplier effect that delivers exponentially growing compound growth in LTV.
For example, Nearmap’s LTV is calculated by A$104 million in ACV multiplied by 82% gross margin divided by 6% churn equals A$1.42 billion in LTV. Nearmap’s LTV has grown from A$480 million as at December 30 2017 to A$1.07 billion as at December 30 2018 to over A$1.4 billion as at March 31 2019. This LTV valuation metric acts as a valuation support and guide for Nearmap whose market cap is now A$1.67bn. While Nearmap remains loss-making and is in our broader watchlist of 200+ stocks, Welby is profitable. As an example in applying this to Welby’s recurring-revenue capability to generate US$8-10m in ACV in the short- to medium-term with 68% gross margin and 2% churn rate from its portfolio of paying customers, its LTV would be US$272-340m (its current market value is US$279m).
The legacy business models that Value 2.0 value investors tend to feel comfortable/complacent investing in will likely be stunted cheap-gets-cheaper value traps in the exponential world of Value 3.0 because:
(1) Fundamental reason: The project-based business model is disrupted by recurring-revenue innovators as customers have the compelling choice to subscribe at an affordable monthly fee for the Adobe and Microsoft 365/Azure at a fraction of the cost instead of coughing up with huge upfront investment;
(2) Investment & multi-year market appraisal/valuation reason: Long-term investors/market now have a choice to invest directly in the disruptive innovators which are drawing the sunshine and nutrients away from legacy business models. There is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in; and
(3) Psychology reason: Old guard Asian CEOs will be frustrated and cry aloud that “Hey, I work so hard but the market does not recognize my value/worth”, so they succumb to temptations and distractions to invest in non-core/personal investments; or worse, work with syndicates to expropriate/tunnel out cash/asset from the listed entities which they treat as their personal ATM machine.
Cashflow from core business is not reinvested back into business to build competitiveness, creating a vicious cycle with an ever-larger invisible expense that needs to be deducted from under-investing or not-investing in innovation-related capabilities, and they find themselves persistently ever further behind the innovation cycle against the disruptors. The inexactitude of the deferred invisible expense is hidden; its wildness lurks and lies in wait. If comfortable/complacent Value 2.0 “value investors” were to keep learning and reassess their portfolio companies, would they still think they are “cheap” in valuations and would they perhaps view their investments in “cheap” stocks as reckless and risky?
Real quant and programming lovers would always remember the seminal Richard Sloan’s (1996) “abnormal accruals” (AA) anomaly that has seen over US$60 billion in assets deployed at its peak into the long-short strategy of “buying companies with high quality earnings as proxied by low abnormal accruals and shorting companies most dependent on accruals” since it is empirically shown that firms with high AA are predictive of negative future returns. This proved a good strategy that has clarity (as opposed to quant funds that hid behind the opaque “black box” and clients usually find it difficult to redeem their money from such funds) until the market figured it out and the anomalous returns get arbitraged away, especially in the long positions.
Quant philosophers would empirically discern that exponential innovators have been and will continue to be one of the biggest structural mispriced anomalies in generating double-digit excess returns by simply going long into the portfolio of recurring-revenue business models whose OCF (operating cashflow) is greater than the accrual accounting-based profit and who have passed the “Rule of 40” test (“recurring revenue growth” plus “FCF or OCF margin” should exceed 40%), restoring economic viability to the long position of the investment strategy which is critical, given short-selling constraints and limits to arbitrage in the short position. We believe that tech-focused innovators with non-linear exponential growth potential are the most mispriced and most relevant multi-year investment trend and opportunity.
We have recently operationalized a new bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors in designing a dedicated portfolio of listed exponential innovators using our H.E.R.O. investment framework and systematic process that is aligned to our clients’ needs and values system and enhances their investment returns.
We have won a long-term institutional client who is an established boutique fund management company in Singapore who manages sovereign wealth and pension/endowment money and we are grateful to be able to deliver this investment solution with satisfactory results to this business owner/CIO whom we like and respect and care for, while generating some recurring income to strengthen the upcoming birth of our H.E.R.O. in partnership with our Swiss family office-wealth & asset management partner.
For instance, a Korean-listed SMID-cap tech innovator with dominant 80% domestic market leadership in recurring information & big data services is up over 40% in the recent three months to a market cap of over US$760m since we highlighted this to this business owner/CIO client and this Korean stock was also up 2.7% in this week when overall markets corrected from the escalation in the US-China trade war. Another example is a Thai-listed innovator who had risen 15-16% to a market cap of US$3.1bn since we highlighted the variant perception in this mispriced opportunity to our client a month ago.
Most importantly, beyond individual stocks, this business owner & CIO is able to experience first-hand the flight-to-quality effect in the market to quality listed innovators most relevant in the Value 3.0 exponential world like this Korean innovator and benefit from this structural investment market trend, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators while the weaker short-term hands sell out, creating a resiliency in these Value 3.0 stocks, and our client is able to improve their investment process.
At the same time, Value 2.0 “value investors” find themselves increasingly locked into gazing at and holding the disrupted cheap-gets-cheaper value traps and in the companionship of more and more weaker-hand short-term opportunistic traders who are seeking to catch some form of price rebounds in these stocks. These Value 2.0 investors continue to espouse and lull themselves (and their clients) dangerously into time-tested attributes based on historical data that had worked in the past, without realizing or appreciating enough that there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in.
Self-righteous Value 2.0 investors join the chorus of tech-bubble talkers in the overhyped loss-making cash-burning overvalued Uber/WeWork (and we agree with them on this), without being curious, open-minded and diligent enough to understand or appreciate enough that there is an increasingly a flight-to-quality effect of longer-term farsighted investors into selected under-the-radar group of recurring-revenue, profitable, and cashflow generative tech-focused innovators that continue to compound in both their fundamentals and returns to their investors in volatile and uncertain markets.
As another illustration of our bespoke investment solution, we have designed a portfolio focusing on 10 under-the-radar listed Asian medtech innovators based on our H.E.R.O. systematic investment framework and process for a Southeast Asian UNHW/family office who owns a hospital operator in his business portfolio, amongst other business assets. Like our CIO client, this family business patriarch is able to track the corporate development and tipping point of companies, as well as both investment and business risks, with weekly and timely analysis, generating both sustainable investment returns and business returns as well as build a social reputation for bringing selected high-quality medtech innovations that benefit the health of his home country and society.
Asian-listed and global medtech innovator in disinfection
- Financial overview: +484% in recent 5 years, Market value US$1bn, Operating profit margin 27%, ROE (= OP/Equity) 36.9%, ROA 31.7%, 3-year sales growth 190%, 3-year OP growth 121%, net cash as % market value 4.8% (US$49.5m).
- MedTech innovation: Fully automated medical equipment with unique ultrasound technology that produces water-based super-oxidizer fine mist into the air to kill off super-bacteria, fungi, viruses (including the highly-resistant HPV virus) and cross-infection risks in the hospital environment, even in shadowed areas created by crevices, grooves and imperfections on the probe surface. Unlike other decontamination method, there is no exposure to harmful chemistries. Now a cornerstone in the emergency department, intensive care and obstetrics and gynaecology.
- Recurring-revenue low-risk business model: Recurring consumables >58% of revenue. Replacement/upgrade of capital equipment after 5-7 years.
- 10-year IP runway from now till 2029: Covered by 14 patent families, active to 2025, including patents relating to consumables to 2029.
- Global leader and underpenetrated: Global installed base over 17,000 units (>15,000 in US, >700 in EMEA, >1,390 in Asia/ME). Penetration rate: US (39%), UK (12%), Europe/ME (2%), Asia (3%).
- Governments around the world are issuing guidelines to adopt: French Ministry of Health recently issued in April 2019 a new guidance requiring high-level automated disinfection (bacteria, mycobacterial, virucidal and fungicidal) to protect patients and staff in hospitals/clinics, in line with international guidelines for high-level disinfection.
Portfolio of 10 Asian-listed profitable medtech H.E.R.O. Innovators – Investment solution for family office/UNHW/long-term institutional investors
- Investment returns: What if a Malaysian family business with a business portfolio that include a hospital operator had invested in this medtech innovator in the recent five years back in 2014? US$50m would compound to >US$292m. What if this medtech innovator compound another 5-6X from now?
- +Business & ESG returns: And this family business (hospital operator) could multiply its profits even further by becoming the (exclusive?) distributor in Malaysia for both equipment and consumables, a potential US$2-5m annual recurring profit – and benefiting the society/health of Malaysia.
- Investment solution with daily liquidity and transparency: Portfolio of 10 Asian-listed profitable medtech H.E.R.O. Innovators that are comparable or superior in business model & management quality to this disinfection innovator (e.g. profitable SaaS/AI innovator in medical diagnostics imaging software with OP margin 46.9%, ROE 37%, ROA 30%, etc). Daily liquidity and transparency. Track the corporate development and tipping point of companies, as well as both investment and business risks, with weekly and timely analysis.
Only emptiness (of open-minded curiosity to keep learning) is prepared for fullness. Our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.
Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our weekly research brief HeartWare, around one-third (22) are in our focused portfolio of 40 HERO Innovators, while the rest (50) are in our broader watchlist of 200+ stocks.
Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated and transparent UCITS fund structure to protect investors’ interests has deepened our conviction for the positive change that we will make together with H.E.R.O. – and we are now in the final stage of giving birth in May 2019 to H.E.R.O., the only Asia SMID-cap tech-focused fund in the industry and guarding investors’ interests in the regulated UCITS fund structure with daily NAV & daily liquidity and no exit fees.
To our interested clients who have been asking, we sincerely apologize for the prolonged labor in the birth of HERO over the past months as we have been preparing for a coordinated delivery of our whole family of Swiss fund series and HERO will also be invigorated with the healthy seed from farsighted committed long-term institutional clients to journey far to compound value for investors. Do watch out in the coming weeks for our press release on the birth and launch of H.E.R.O.
If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.
We wish all mothers a blessed and Happy Mother’s Day; whether they are by our side or resting peacefully, mothers hold their children’s hands for a while, but their hearts forever.
It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?
Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?
Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.
We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.
During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the H.E.R.O Innovators Fund, (surprisingly) the only Asian SMID-cap tech-focused fund in the industry.
The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.
As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.
The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our Asia HERO Innovators Fund to add value to our clients and the community. Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.
KB | firstname.lastname@example.org | WhatsApp +65 9695 1860