Y Ventures Group Ltd ("Y Ventures" or the "Company) is offering 35m shares at $0.22 each via placement for a listing on Catalist. There will not be any public tranche, hence my rating will not be meaningful. The market cap is around $44m and the IPO will close on 7 July at 12pm and starts trading on 11 July at 9am.
Principal Business
On first look, the name Y Ventures seemed to suggest that it is a venture capital company. However, it is far from it and it is a e-commerce company. If you want the history of the Company on how the founders started the business selling used text books in 2003, you can find them on page 88. I find those few paragraphs more interesting part of the prospectus as it talks about how they actually started the journey.
A little excerpt on the history for you if you are an aspiring e-commerce entrepreneur, maybe you should be selling your old text books on Carousel and writing your own story next time...
Our founders, Adam Low and Alex Low, began their e-commerce journey in 2003 by buying lower cost used textbooks from Singapore and then selling them on existing online marketplaces in the USA. Subsequently in 2005, they started a used textbook buy-back programme where they bought and sold used textbooks in tertiary educational institutions, namely National University of Singapore and Singapore Polytechnic. They moved the used textbooks buy-back programme online in 2006 by developing an online marketplace for the exchange of used textbooks among tertiary students in Singapore. In March 2007, our founders incorporated our first subsidiary, LYJ International, in Singapore to corporatise their business and began to distribute used textbooks to regional wholesalers. Please refer to page 88 of the prospectus to continue the story
The prospectus emphasized quite a bit in the prospectus that this is a "Singapore-founded" data analytics e-commerce retailer and distributor with presence on multiple online marketplaces in different jurisdictions.
Besides retailing 3rd party products, the Company also has its private label "JustNile" and the Company utilises its data analytic capabilities to analyse demand trends, pricing, consumer sentiment and sell the products on online marketplaces such as Amazon, eBat, Qoo10, Lazada and Tokopedia.
Future Plans
This is a pictorial view of how the company works with brands
The is the pictorial view of the online market places which Y Ventures operates
Financial Highlights
The Company is growing pretty quickly with revenue doubling from $6.2m to $12.1m in two years and enjoying a high gross margin of 43.9% in FY 2016.
While sales has doubled, what is less ideal is the "stagnating" profitability in FY2016 vis a vis FY2015. It is difficult to predict how the future will look like but i am assuming will continue its growth trajectory (after the listing) in FY 2017 and FY 2018 but have not taken that into account in my fair value assumption.
Dividend prospect
The Company intends to declare a dividend of no less than 20% of its net profit after tax for FY2017 and FY2018. Assuming EPS remain unchanged (worst case assumption), the EPS will be 1.2 divide by 200 x 165 = 0.99 Singapore cents. DPS = 0.198 Singapore cents and that represents a yield of around 0.95% on a conservative basis. There will be uplift to the yield should the Company performs
What i like about the Company
- Experienced "bro" team that have came a long way. This is similar to other "bro" team such as Charles & Keith or in Qian Hu. It is good to see them learning from their mistakes earlier on, learning from their mistakes and then establishing a profitable company. If not for the listing, we probably would have known this relatively "unknown" individuals who are raking in millions with a small team. Hopefully the listing status will help them scale up to a different league
- Scalable business - You don't need a lot of capital to create a online presence and this business is scalable. This is how Amazon and Alibaba disrupted the whole economy and business. In other words, the online world is a global one. The only question for Y Ventures is their "execution" and scaling into faster moving goods that have higher margin. In that way, their profit will scale up quite quickly
- Growing sector with strong tail winds - The traditional malls in United States are closing down in record time. Please see article on Bloomberg here. This trend and phenomenon is not going to stop any time soon and will probably exacerbate in Europe, China and rest of the world with the wide adoption of smart phones. The ability to sell goods online and cutting out the middle man is the name of the game. While Y Ventures is still an online "re-seller" at heart, the macro picture will underpin its growth. What Y Ventures need to do is probably to be a value adding partner to the owner of the products that it is reselling such that they are willing to let Y Ventures be the "exclusive" online agent
- Independent directors and family members are subscribing to the IPO - It is good to see that the independent directors are subscribing for the placement shares (~250,000 shares in total). In addition, Chien Chung Ming, the father-in-law of Adam Low (elder bro) will subscribe for 4.3m shares. This effectively reduces the placement tranche from 35m shares to 30.45m
Some of my concerns
- Y Ventures is still too small - They need a listing to first boost their profile and image so that bigger Companies will deal with them. They are currently suffering from a "chicken and egg" issue. They have the technological capabilities and skill set but they are too small for big business to take them seriously and they need someone to open the door to the big accounts. Hopefully a listing status in Singapore will help them achieve the branding and imagine
- Heavily reliant on Elsevier Group - Y Ventures is heavily reliant on the books publishing segment, in particular from Elsevier Group for the supply of medical textbooks and reference materials. While they enjoy an excellent relationship with them, any disruption in this relationship have a material impact to the Company
- High listing valuation premium - The Company is listing at a historical PER of 22x assuming the service agreement is in place and based on the post IPO 200m shares. While this may be considered "cheap" in countries like US, the local market is probably not adapted to such valuation premium
- Small cap company and shareholding is tightly controlled - The founders own about 71.2% of the Company with Prism Investment Ventures holding 11.4% and the public holding 17.3%. While the strong shareholding creates a tight supply and a good alignment of interest, it can also be a point of contention as the Bros management team continue to wield much control over how the Company is going to be run and may not take outside advice from their board or advisers well
- Storyline is still not clear - The value proposition to brands is still not clearly evident to me from the prospectus. Maybe they didn't want to divulge too much but if the Company wants to attract quality investors and quality brand partners, then its value proposition to them has to be better marketed and understood
Fair market value
Frankly i do not know how to prescribe a fair value to the Company that is in the e-commerce space as i have no clue how to project is profitability in FY2017 and FY2018. If it can grow by more than 30% every year for the next two years, then the 22x valuation mulitple will look cheaper progressively but otherwise, it can be quite difficult to convince yourself about the IPO valuation
My Chilli Ratings
I will give it a one chilli rating just to support our local boys as the IPO valuation is very stretched. I am vested through the placement tranche but investors may want to watch how this company progress over the next few quarters before deciding whether to bet on them for the longer term.
I understand the shares are pretty tightly controlled given its small float and are in strong hands. So do take that into account if you intend to "short" the counter on its debut.
Happy Y venturing
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Comments
If you take the IPO market capitalisation of S$44 million compared to their profits of US$1.531 million, the fully diluted PER will be between 19.8x (if you use year end exchange rate of US$1 = S$1.45) and 20.7x (if you use today's exchange rate of US$1 = S$1.39).
Frankly, it does not sound cheap.
Their retail and distribution biz contributes 95.7% of the total turnover for FY2016. Of this, 87.3% is "third party brands" and 8.4% is "private label products". This would mean to me that their purchase price is critical and I also wonder if the third party brands have any guided/recommended selling price for their products. So, how do they price these third party products when they sell over the various online marketplaces such as Qoo10 and eBay (see page 93)?
If you look at page 105 on the Inventory Turnover Days, the number it is on an upward trend (from 76 days in FY2014 to 98 days in FY2016). Although they have provided reasons such as increased inventory levels to be more competitive in meeting customer demands and avoiding lost sales due to lack of inventory, but a simple interpretation will be that a product will stay in the warehouse for 98 days before it leaves the warehouse (of cos the inventory opening balance and the inventory closing balance will have an impact on the turnover days figure). However, I would thought that a just-in-time model would be able to provide more cost savings, thus giving a higher profit margin.
Another interesting point relates to the investor, Prism. Prism invested S$1 million in Nov 2015 based on the approximate net asset value of the Group as at 31 December 2014 of US$1,522,349. This is less than 2 months to the financial year end and definitely the company would have known the management numbers for say 8 months ended 31 August 2015, if not 9 months ended 30 September 2015. For FY2015, the company made a profit after tax attributable to shareholders of US$1.67 million whereas the profit after tax attributable to shareholders in FY2016 was lower at US$1.53 million.
If you take a look at the NAV attributable to equity holders as at 31 December 2015, it was US$3.1 million. However, as at 31 December 2016, the NAV attributable to equity holders was lower at US$2.4 million.
In Nov 2015, the company was only valued at US$1.5 million. In less than 1 year 8 months, they are valued at S$44 million. Prism's stake in the company has jumped five folds from S$1 million in Nov 2015 to S$5 million (S$0.22 x 22,770,000 shares).
This is a pure placement IPO. Like what Amos said above, "low price ipo and tight placement, tml opening can be more than 30c".