Momo.com: Initiating Taiwan’s Leading Direct Sales E-Commerce Platform; TWD 760 Fair Value Estimate

We initiate Momo.com 8454 with a fair value estimate of TWD 760, representing a 20% upside as of the Aug. 1 close. We believe the direct sales e-commerce company has a sizable lead in its logistics capabilities that has boosted users and lifted operating margins compared with its closest competitor in Taiwan. Momo.com’s logistics advantage lies mainly in its distribution network that incorporates 60 warehouses and 800 other delivery kiosks. In addition, it plans to add two more distribution centers in southern Taiwan in addition to its northern hub, which should further solidify its logistic capabilities in all parts of the island. Comparatively, its closest competitor PChome, had only eight operating warehouses as of year-end 2022. We believe the firm is leveraging its advantage by offering lower prices to consumers relative to its competitors and we believe it is positioned for higher gross margins if discounting ceases. We assume scale efficiency leads to a modest operating margin expansion of 100 basis points in the long term.

In addition, we believe that e-commerce in Taiwan is still underpenetrated at only 9% (13% excluding autos, gas, and construction) of the entire retail industry, compared with other markets such as China and Korea at 31% and 21%, respectively. This underpins our assumptions that users should continue to grow on the platform and that orders per user will also grow at midsingle digits. We expect the two key variables to determine our gross merchandise value and revenue growth estimates. Given the undersaturation of e-commerce in Taiwan, we believe that 15%-20% revenue growth for the next five years is reasonable following a 25% revenue CAGR from 2018-22.

The company is adding new livestreaming and 3P platforms to its business, given their higher growth rates and popularity. We are uncertain if these platforms will succeed, since they are out of Momo.com’s core expertise, but their success could lead to a rise in our user and revenue estimates.