A harsh winter in the U.S. hammered sales at traditional retail stores – but online revenues continued to grow. That’s just one example of how e-commerce is one of the fastest-growing industries today. Our e-mail inboxes are now full of coupons, promotions, special offers and flash sale announcements good for 24 hours or less. Singapore-based iBuy Group Ltd. (IBY.AX) is targeting the flash sale market.
In 2012, U.S. online retail sales totaled $225.5 billion and are projected to grow to $434.2 billion in 2017, according to eMarketer. The average annual growth rate is estimated at more than 10%.
The European e-commerce market in 2012 stood at $145.6 billion, according to Forrester Research, and this is expected to increase by a rate of 11% annually through 2017 to $248.3 billion. It is Asia, however, that is shaping up to be the fastest-growing market for e-commerce, with online sales there registering a 33% increase in 2012 and analysts forecasting that they will rise at a compound annual growth rate of 24% leading up to 2016.
Given the tempting opportunities that online retail presents, such as lower funding needs, it’s hardly a surprise that e-commerce is a very competitive industry with a very low entry barrier. This competition is naturally breeding consolidation plans and strategies among market players aiming to maintain a solid position on this growth market and capitalize on its opportunities.
Acquisition Strategy
IBuy started on its growth path by acquiring three flash sales website operators in Southeast Asia, including Buy Together, Dealguru and Dealmates. The first deal, with the owner of Hong Kong flash sales website BeeCrazy, was valued at $21 million, including $8.4 million payable in cash and $12.6 million payable in company shares at the IPO price.
Dealguru, owner of Deal.com.sg and MyDEAL.com.my, was bought for $34.28 million, of which $11 million was in cash and $$23.28 million in stock at the offer price. The third deal iBuy closed after it went public was the acquisition of Dealmates in an agreement valued at $10 million in cash. Its latest acquisition was that of the Southeast Asian business of Living Social, yet another flash sales website. The deal was valued at $18.5 million.
Dealguru’s Deal.com.sg website had some 700,000 subscribers in the summer of 2013, and over a million unique visitors each month. MyDeal.com.my boasted 860,000 subscribers and almost three million unique visitors monthly over the same period. Hong Kong BeeCrazy, for its part, had close to one million subscribers and 690,000 unique visitors a month before iBuy acquired it.
Dealmates was the smallest member of the group in terms of subscriptions and unique visits, with a little over 400,000 subscribers and 318,000 unique visitors. All the acquired companies had a solid financial performance prior to their purchase, with combined gross turnover of $35.81 million for Buy Together, Dealguru and Dealmates at the end of June 2013. The combined revenues of the three flash sales website operators stood at $22.38 million.
Financials
IBuy raised A$37 million in its IPO, to which it added A$7 million in an offer of convertible notes. This brought its starting funds to A$44 million. Of this, A$31.562 million has been spent so far on the first three acquisitions as per the purchase agreements signed with the target companies, and A$300,000 has been booked in acquisition costs. It allocated A$2 million for advertising and marketing and the same amount was allocated to go toward future acquisitions. This left the company with a working capital of A$4.738 million at the end of 2013.
iBuy Share Price
Source: Thomson Reuters Eikon/StarMine
Bottom line
In a pro forma historical consolidated financial statement on the assumption that it acquired Buy Together, Dealguru and Dealmates at the end of 2010, iBuy reported a gross profit of $7.2 million at end-June 2013, on revenues of $22.38 million. Pre-tax loss for the first half of 2013 was $41,353 and net loss was $53,832 on this assumption.
Total current assets on a pro forma historical basis were $16.81 million, of which $11.17 million of cash in bank. Non-current assets were $72.7 million, bringing the total assets to $89.51 million. Liabilities stood at $10.66 million and total equity was $78.85 million.
iBuy Financial Strength
Source: Thomson Reuters Eikon/StarMine
Growth Drivers
In its expansion, iBuy is betting on the solid growth potential of its acquisition targets and their already-strong market position that also includes well-developed relationships with a wide variety of products and services suppliers. This robust supplier base will be a key factor in iBuy’s future growth strategy, organized around the idea of the virtuous cycle.
The idea is that the large number of suppliers will lead to a greater variety of types, amounts and quality of products and services, which in its turn will attract more customers and will increase the average they spend on e-retail. This will boost iBuy’s total sales and lead to further increasing the base of suppliers.
Looking at the performance of the first three acquisition targets, according to information contained in the company’s prospectus for its IPO, their combined orders had exceeded 1.2 million in the first nine months of 2013, with 250,600 new customers and 333,560 repeat customers. An additional factor to contribute to the success of the company was the existing logistics capabilities of the three flash sale website operators. In view of expected rises in such sales there is the potential danger of logistics systems overloading and creating problems for industry players, but iBuy is confident that its own logistics system has the capacity to withstand such a surge in sales.
Finally, the overall e-commerce market in Southeast Asia is estimated to be over 600 million people. What’s more, the region as a whole has been posting steady GDP growth over the last few years, with a 43% rise in per-capita GDP in Hong Kong, 117% in Singapore and 159% in Malaysia, three of the company’s core markets. This has led to higher consumer confidence on the back of rising wealth, which combined have pushed up retail sales as a whole.
Competition and Risks
The biggest e-commerce company in Asia and a principal rival of iBuy is Chinese Alibaba Group. Alibaba has announced it has filed for an IPO in the U.S., saying it is anticipating proceeds of $1 billion, without disclosing further details. However, analyst forecasts put the figure at $15 billion, making it one of the biggest IPOs in history. As a whole, competition in the e-commerce industry is intense and iBuy considers the biggest threat to come from startups adopting parts of its business model at no great expense, making it difficult for the company to stand out.
Among the main risks iBuy has identified for its development is system failures and disruptions in content integrity since the solid performance of the websites it owns is of central importance for its reputation. Another risk comes from unforeseen developments in the e-commerce sector, such as a decline in the sales growth rate resulting from falling economic growth in the countries where the company operates. Linked to this is the risk of slower Internet penetration rates in its core markets. A further danger comes from counterfeit goods that can be inadvertently sold on its websites, damaging its brand image and reputation and ultimately hurting its financial performance.
Taking the long view
At the end of the call, Linden reiterated that iBuy has a strong market position, having acquired successful e-commerce businesses with experience in generating turnover and demonstrating consistent growth. It is following an ambitious path of regional expansion, relying on revenues to fund its future acquisitions.
The fact that the company is focusing on a growth industry in a growth market contributes to its optimism but that does not eliminate external influences, such as economic trends and developments in Southeast Asia that could have an adverse effect on its performance. In light of our initial due diligence, we view this as ideal entry point for long-only value market players.
Receive stories like this to your inbox as they are published. Subscribe here and follow us @Alpha_Now on Twitter or check out the Thomson Reuters Eikon blog. If you are looking to access Thomson Reuters data or analytics, register for a free trial.
