17 Edu & Tech (YQ.US) – Note (pre-4Q20ER guess)

[March 8th, 2021]

This is an exercise on guessing (no research on underlying) the 4Q20 result of 17 Education & Technology Group (YQ.US). The information is based on F-1 where the company disclosed their unaudited financial data of October 2019 and October 2020 (page 7). I think it’s because the online education market in China is very competitive and YQ needed to give investors some confidence on IPO after spending 161.4% of net revenue on sales and marketing in 3Q20.

Financial data of 4Q19 & 3Q20

My 4Q20 guess is simply the quarterly run-rate of October 2020 result (Oct. 20 times three).

Unaudited Financial Data of October 2019 and October 2020
Guess based on quarterly run-rate

It’s impressive to see Oct was up 226% and the business had operating leverage on all cost and expense items compared to the results last year. However, the run-rate for the quarter is not impressive in terms of YoY and QoQ because the revenue distribution was skewed toward last two months in 4Q19 and the scale of company has grown over the last year.

My revised guess for 4Q20
– Net revenue YoY between 105% and 226%. Guess it’s mid-point, 165%
– GP margin between 67.5% and 73%. Guess: 70%
– S&M exp. ratio between 36% and 60%. I guess it’s 55%.
– R&D exp. ratio around 36.7% (same as Oct. 20)
– G&M exp. ratio around 15.2% (same as Oct. 20)

Revised guess (educated or not?)

If there’s a positive surprise, I guess it comes from improvement on conversion rate (better monetization).

Life is much easier if you have alternative data or check with industry expert.

YQ will report the 4Q20 result on March 8th, 2021 after the close of US markets.


Coupang (CPNG.US) – Note 1

[March 6, 2021]

Some thoughts after skimming through S1 and The Generalist’s briefing (Coupang: The Art of Obsession)

* * *

Coupang is a consumer internet company expanding verticals and gaining consumer’s wallet share in South Korea.

Coupang currently has 1P & 3P e-commerce business (with in-house logistics capacity), grocery offering, food delivery and digital financial service (these are interconnected platform businesses with shared user base/graph, logistics network/tech and payment processing leading to operating leverage when the business further scales).

The company might launch (expect more initiatives coming) any proven consumer internet business model around the world with some twists by leveraging existing user base, merchant base, logistics network and technology/data platform.

While constrained by geographical footprint at the moment, the expanded TAM for Coupang in South Korea is large enough that international expansion might not be a priority. South Korea faces higher geopolitical risk.

Roadmap to tackle next few invisible asymptotes is clear, the bet is simply on a founder-led management team’s execution and their ability fend off competition in each vertical. Growth comes from user base (ceiling) and increasing average spend fueled by typical e-commerce growth pattern and new offerings adoption (stacking s-curves).

In terms of financials, gross margin should gradually trend up as there will be more contribution from high margin revenue streams (including higher margin products for customers and high margin services for customers and merchants). In terms of operating margin, the company should enjoy operating leverage as businesses scale up but the associated marketing and technology “investment” (expensed at current period) for new initiatives & growth of existing businesses might grow in tandem which might slightly slow the speed to GAAP break-even. Operating margin was -3.6% in 4Q20 and on an upward trend. Due to the business model, Coupang needs to do heavy capex. Coupang has reached a scale where it could have positive operating cash flow. However, the company is still in heavy investment stage so it’s still free cash flow negative. It might stay free cash negative for a while. Capital shortfall will be covered by this IPO and future capital raising activities.

Coupang expects to debut on NYSE on March 11, 2021. The IPO price range is between $27-30/share and valuation is around $50B.

Roblox – Updated Charts

I update the slide with 4Q20 data in latest S1. Direct listing of Roblox will be interesting because market appetite has shifted in last two weeks and the underlying business of Roblox seems to be normalizing this year based on company’s expectation (conservative?). Roblox has strong cash flow and just raised a private round so the listing is simply to provide liquidity to existing shareholders without lock-up. If “tech rout” continues, we might see another last-minute decision to delay listing?

Valuation in the last round of financing was $29.5B.

Related posts:
– Roblox – IPO Note 1
– Roblox – IPO Note 2
– Roblox – IPO Note 3 (It’s Direct Listing!)
– Roblox – IPO Note 4 (Investor Day)

DaDa Group (DADA.US) – Note 2

[March 3rd, 2021]

Model

I put together a rough model to identify key lever. Most of assumptions are “reasonable” to me (my best guesses based on pattern without particular insights) so they might go wrong for many reasons (potential downside due to competition, execution…). The only parameter that might have substantial upside in the model is the average spend (TTM GMV / Active Consumer). I believe that average spend will go up for a long period of time but I’m not sure about the slope which depends on platform offering and consumer behavior.

Guidance & Consensus

The company gave 4Q20 top line guidance. The sell-side consensus is basically in-line with the guidance and even my number is very close to the lower bound of guidance. As for 1Q21, the top line should show some seasonality but if there are O2O trend and behavior change along with policy impact during Chinese New Year, I think it will have a better than normal seasonality in 1Q21.

Housekeeping

DaDa Group (DADA.US) – Note 1

[March 1st, 2021]

Dada Group is a local on-demand delivery and retail platform within JD.com’s ecosystem.

Retail platform

The retail platform, JDDJ, adopts 3P-only marketplace model and focuses on categories (in terms of merchants and SKU) where the value of on-demand sub-vertical of e-commerce is higher than costs for demand side and supply side in steady state (viable without subsidy).

It’s like typical two-sided platform that JDDJ needs to acquire customers and merchants. Since the company is within JD’s ecosystem, its user base can be partially thought of as adoption / penetration on-demand retail in JD user base. I believe the platform expands e-commerce market more than just converting non on-demand e-commerce market. On the supply side, JDDJ focuses more on acquiring large merchants (key account, KA) like chain store at the moment. JDDJ also provides merchants tools to empower them for on-demand retail digitalization. The tool might not be have strong lock-in effect but definitely increase supply-side stickiness.

JDDJ’s metrics as of 3Q20
– TTM 37M active consumers
– TTM 560 RMB ticket size (TTM GMV/TTM active consumers)
– TTM 9% of monetization rate (TTM revenue/TTM GMV)
– 150 RMB quarterly overall AOV (ticket size)

Consumer behavior
– 77% of existing consumers in 2017 is still purchasing as of 3Q20
– purchasing frequency:
– once a month for new consumers
– once a week for higher frequency consumers

Growth drivers
– On-demand retail trend picks up in China
– Adoption / Penetration
– Category expansion
– Geography expansion
– Increasing purchasing frequency driven by behavior change
-> Typical GMV growth model in e-commerce: user, frequency, basket size
-> Expect monetization rate stays stable in the near future

Charts

Delivery platform

The delivery platform, DaDa Now, adopts an open on-demand delivery model which connects merchants & individual senders and individual riders. The tech and ops parts in this model have been proven in food delivery and ride hailing businesses. The local liquidity is the key for this type of two-sides marketplace. JDDJ is a major order source for the delivery platform. The platform had more than 1B TTM orders delivered as of 3Q20 so I believe local cross-side network effect has been kicking in and most cities have enough order density and rider density. The company mentioned that the platform made profit at each city level so its financial will be relative healthy when further scaling up. The profitability of this business comes from scale and technology investment that improves efficiency. Like other consumer internet technology business, the overall business of DaDa Group is asset light but capital intensive, and once it breaks even it generally enjoys attractive margin.

Charts

Group level charts

Investment highlight

Proven models where scale is the competitive advantage or moat. Investor return comes from expanding moat. Scale comes from growth. I bet the team can properly manage growth and ride on the on-demand O2O trend.

The company is still loss-making in terms of GAAP earnings, Non-GAAP earnings, and Operating Cash Flow. The company is in high growth stage with improving margin but it might need to raise capital from time to time before its cash flow turns positive.

The stock had headwind after lock-up expired and follow-on public offering in December. I think the top-line guidance is reliable because the company had late earnings release. Thus I will focus on margin improvement and 1Q21 top-line guidance (if it releases earnings in mid March, then the guidance is like performance results…). The stock trading liquidity might be an issue which also creates opportunity.

Housekeeping