Lazada partnership seen boosting Revenue’s earnings

This article first appeared in The Edge Financial Daily, on July 16, 2019.
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Revenue Group Bhd
(July 15, RM1.66)
Maintain buy with a higher target price of RM1.98:
We believe that Revenue Group Bhd (RGB) has become Lazada Malaysia’s partner to process payments made by Malaysian consumers via Internet banking for purchases on Lazada online marketplace.

The partnership, pending RGB management’s clarification, is expected to add RM4.6 billion worth of transaction value processed by RGB. As a result, we increase RGB’s financial year ended June 30, 2019 (FY19) to FY21 earnings by 6%-18% after factoring the expected incremental contribution from Lazada.

We purchased some items on Lazada over the weekend using Internet banking and noticed the name of Revenue Harvest Sdn Bhd (RGB’s 100%-owned subsidiary) on the receipts.

According to meta-search platform iPrice’s analysis, Lazada is Malaysia’s most visited e-commerce platform as at the fourth quarter of 2018 (4Q18) with average monthly visits of 26.2 million. Lazada is also the most visited e-commerce platform in Southeast Asia for 4Q18 with 183.4 million visits.

We deem RGB’s payment arrangement with Lazada is similar to that of company A’s affiliate online marketplace due to a similar nature of business. An explanation on the arrangement between RGB and company A would shed more light on the potential financial impact of Lazada’s onboarding.

Since 2013, RGB has been Company A’s only partner in Malaysia to process payments made by Malaysian consumers via Internet banking for purchases on Company A’s affiliate online marketplace in China (for desktop).

RGB processes online payments made via local banks’ current and savings accounts. In turn, RGB earns a pre-agreed commission on the transactional value it processes.

According to Statista’ latest data (February 2019), Malaysia’s e-commerce market is expected to expand 19% to US$4.5 billion (RM18.5 billion) in 2020 and will continue to grow at a compound annual growth rate of 9.1% from 2020 to 2023.

Inferring from iPrice’s data, Lazada commands about 50% of Malaysia’s e-commerce visitations which may imply that Lazada’s gross merchandise value is about RM9.3 billion in 2020.

Assuming an equal split between online banking and credit card payments, RGB may potentially be processing an additional RM4.6 billion in transaction value, or about four times more than what it had in FY18.

We like RGB as it is a rare proxy to the robust domestic e-payment industry which is undergoing multi-year of secular growth on the back of (1) the robust growth in electronic data capture terminals; (2) the regulatory push to drive e-payment adoption; (3) riding the e-wallet trend; and being a beneficiary of China’s cross-border e-commerce trend.

Near-term catalyst for the company is its potential of transfer to Main Market listing next year. — Hong Leong Investment Bank Research, July 15