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Company Overview - iBuy Group Limited is an Australia-based e-commerce company. The Company is a retail Website operator. The Company is focused on acquiring e-commerce businesses in Hong Kong, Singapore and Malaysia that specialize in flash sales. iBuy Group Pte Ltd. operates as a wholly owned subsidiary of the Company. In April 2014, the Company announced that LivingSocial sold its Southeast Asia businesses to iBuy Group.

Analysis – IBY Group Ltd was formed to create a leading Asian e-commerce group focused on flash sales and via funds raised in an IPO in December 2013 acquired leading flash sales websites in Hong Kong (beecrazy.hk), Singapore (deal.com.sg), and Malaysia (mydeal.com.my and dealmates.com.my). Each of the businesses is well established in the respective markets with strong product representation and growing customer bases. Flash sales involve the sale of products or services via a website for a temporary period at discounted prices. There are a number of competitive advantages of flash sales when compared to the bricks and mortar alternative including (1) reduced inventory risk as stock is sold on consignment (2) reduced warehousing costs (3) reduced property costs (4) Substantially quicker turnover of obsolete or excess stock suppliers (5) ability to attract a broader customer base.


iBUY Markets (Source - Company Reports)

IBY is exposed to key markets characterized by strong GDP growth and growing retail sales underpinned by increasing populations, household wealth and consumer confidence. We estimate that the value of flash sales in IBY’s current markets was US$350-$400m in CY13 and will grow to US$750 - $800m by 2016. This is supported by growth in e-commerce in the Asia Pacific region which is forecast to be the fastey growing region for B2C e-commerce sales over the period 2011 – 2016 with a compound annual growth rate of 24% (Frost and Sullivan). The key drivers of this growth are; (1) internet penetration. (2) Smartphone penetration (3) Faster internet connectivity (4) consumer confidence in transacting online.


Global e-commerce spend (Source - Company Reports)

The management and board of IBY have significant experience in online businesses. IBY has been formed by Catcha Group founders, Patrick Grove and Luke Elliott, who have a successful track record in developing and growing online businesses in Asia, including the ASX listed iProperty (IPP) and iCar Asia Ltd (ICQ). In addition the founders of each of the flash sales businesses being acquired remain with the company including Patrick Linden, the founder of Deal Guru, who is the CEO of IBY. There is considerable incentive for the management team with a large portion of the consideration being taken in shares.


GDP of the countries in which iBUY has presence (Source - Company Reports)

Flash sales are essentially an online version of the bricks and mortar factory outlet, which typically sell excess branded inventory that is either out of season or obsolete. Flash sales involve the sale of these types of products or services, usually a fixed number at discount prices for a limited period of time. The combination of a limited supply and time frame is used to create a sense of urgency and a response from the customer base. IBY earns a sales margin on the sale of products on the websites and earns a commission on the services it sells. The online flash sales business model adopted by IBY has a number of competitive advantages over traditional clearance models: (1) Reduced Inventory Risk – IBY does not hold any inventory that isn’t paid for first by the customer. Products are only ordered with the merchant once payment is received from the buyers. (2) Reduced Warehousing Costs – IBY does not hold large inventory volumes in the hope  that it is able to successfully sell product via its websites  and therefore warehousing costs are minimal. (3) Reduced property costs – like with all online models, no bricks and mortar shop fronts are required. (4) Access to broader customer base – The flash sales model provides access to a broader customer base limited only to where the product can be delivered; where as traditional clearance sales are limited to foot traffic.


Population of the countries in which iBUY has presence (Source - Company Reports)

One of the key attractions of IBY is the large market opportunity in its existing markets of Hong Kong, Singapore and Malaysia. Each of these markets is characterized by strong forecast GDP growth and strong projected growth in retail sales. Moreover the key drivers of e-commerce including internet and smartphone penetration are trending up in these markets particularly which we believe bodes well for IBY as retail sales shift from bricks and mortar to online. Although IBY is a newly created entity, each of the businesses that make up the group is well established in its respective markets, having been launched in 2010/11. Collectively IBY has a subscriber of approximately 3 million, has a customer base of 750,000 – 800,000 and has sourced and sold branded products from 7000+ merchants throughout Asia. Our assessment of the markets in which IBY operates has led us to conclude that compared to other daily deal websites , IBY has the largest product offerings in each of its markets and is ran ked only second to Groupon in Malaysia and Singapore in the flash sales segment.


Living Social Acqusition (Source - Company Reports)

iBuy in April 2014 announced the acquisition of the South East Asian flash sale businesses of Living Social Inc (LSSEA) for US$18.5m. The acquisition significantly grows the company’s presence in the region by cementing its position in Malaysia and opening up a further 3 populous markets  being Thailand, Philippines and Indonesia.  The acquisition is a strong strategic fit for IBY providing the company with; (1) well known, established websites in 3 new growth markets in SE Asia (2) A strengthened position in Malaysia – we estimate IBY will have 40% market share post acquisition. (3) A 139% increase in the subscriber base. (4) Diversification across six markets. (5) Considerable synergies across product sourcing, distribution, finance and technology.


iBUY + Living Social Group Metrics (Source - Company Reports)

The acquisition will add a 3rd platform in Malaysia, remove a competitor, increase the group’s annual gross turnover by 85%+ to $30m and lift the subscriber base by 33% to 1.5 million. The acquisition puts IBY into 3 new large markets, being Thailand, Philippines and Indonesia. Each of these markets are characterized by high GDP growth, high single digit growth in retail sales and large populations that are shifting to the internet and smartphones. While internet and smartphone penetration is these markets is considerable lower than Singapore and Malaysia, this is compensated by the large populations which makes these markets extremely attractive. In addition to the scale efficiencies, IBY expects that there will be operating efficiencies in areas such as product sourcing, financing and technology development. Furthermore the management believes their model  will be able to improve LSSEA’s operations.


iBUY Daily Chart (Source - Company Reports)

The key investment risks for IBY include: (1) Competition – The flash sales industry in IBY’s target markets is highly competitive with a number of players having emerged in recent years. This is in part due to the low barriers to entry combined with the substantial market opportunity. (2) Merchandising and product quality – Sourcing quality products is one of the key success factors in acquiring and maintaining the customer base. An inability to source quality products that are value for money and hence appealing to the customer base could have an impact on the website’s reputation. (3) Supplier Relationships – IBY sources products from suppliers however they are not contracted to IBY on a long term basis. If IBY lost a number of suppliers simultaneously it could impact its product offering. (4) Customer acquisition or retention – The inability to acquire customers or retain existing customers could impact IBY’s revenue and also its ability to attract appropriate deals.

In its March Quarterly cash flow report receipts from customers which is a good proxy for gross turnover was $18.8m. Management noted that receivables from payment gateways at period end were up $2.5m and therefore gross turnover was probably more like $21.3m. We note that the quarterly reflects the initial 4 online platforms acquired at the time of the IPO. It’s also worth noting that the March Quarter is traditionally a seasonally lower quarter due to the impact of Chinese New Year on buying habits. Total payments to suppliers were $16.5m (this included amounts relating to the IPO which are one off in nature). Staff costs of $3.1m and marketing costs of $835,000 were broadly in line with expectations. These costs on a quarterly basis will increase post the LSSEA acquisition. Cash balance at the period end was $5.8m.

IBY provides exposure to the strong growth projected B2C e-commerce in the Asia Pacific via its well established flash sales websites in Hong Kong, Singapore and Malaysia. With a leading position in each of its markets and a highly experienced management team we believe IBY is well placed for growth. We put a BUY recommendation on the stock at the current price of $0.355.