Should you wee-wee on Qiwi?
QIWI plc (“Qiwi”) is in the midst of an IPO roadshow and has filed a fairly complete F-1 with the SEC, as it proposes to go public on the NASDAQ.
The following are some of the salient points concerning Qiwi’s proposed offering and its underlying business.
The offering is all about providing liquidity to existing shareholders. All funds being raised are going to the existing shareholders – no cash is being received by the company.
The offering is of 12 million American Depositary Shares representing (under) Class B shares of Qiwi, at an estimated offering price range of $16-18, which values the total transaction at $192-216 million before underwriting fees. At this price, the entire equity of the company is being valued at about $900 million, or slightly over 3x its 2012 annual revenue, which is more than twice the value of the recent private combination of Sberbank and Yandex.Money.
An additional 3.6 million Class B shares have been reserved for issuance under the company’s employee stock option plan, of which 2.2 million have already been awarded to 34 insiders.
The Class B shares have vastly inferior voting rights compared to Class A shares — each Class A share is entitled to 10 votes compared to each Class B share.
In addition to its officers and directors, Qiwi’s corporate shareholders include publicly-listed Mail.ru (20.6%) and Mitsui (14.5%).
As a result of the dual share class structure, existing shareholders will control 97.1% of the voting rights following the proposed IPO.
Qiwi is an electronic payment processor which operates a network of kiosks and payment terminals in Russia (population, 142 million) and Kazakhstan (population, 17 million), and also offers virtual wallets, similar to PayPal.
Typical indoor Qiwi kiosk
In 2012, total revenues were under $300 million, about 90% of which were earned in Russia.
The company has two principal business segments:
- Qiwi Distribution (2012 revenue ~ $174 million): Qiwi offers a network of about 129,000 payment kiosks and 40,000 terminals where customers can pay their bills and transfer money in cash, sort of like a reverse ATM. This appeals to those who prefer cash-based transactions due to convenience, anonymity, and also in smaller value, time-sensitive situations. Perhaps the largest individual segment of their payment volume is from customers topping up their mobile phone balances during times when fee-free methods are not practical.
- Virtual Qiwi Wallets (2012 revenue ~ $116 million): Qiwi also offers an e-wallet system. It has branded its e-wallet as the “Visa QIWI Wallet” since November 2012, and has about 11 million virtual wallet customer accounts. The company also sells Visa-branded prepaid cards.
(Source: TNS, based on a consumer survey conducted in Feb-Mar 2012)
As a payment processor, their critical business metric is “average net revenue yield” which are fees as a percent of total transaction value:
|Virtual Qiwi Wallets
(Source: Qiwi F-1)
The company also earns an increasing amount of fees from “value-added services” which are essentially ads it displays on its kiosks and sends via SMS to its registered users. Qiwi generated advertising revenues of about $15 million in 2012, up 73% from the prior year. The revenues are not separately reported and are presumably attributed to the Qiwi Distribution segment, which even further underlines the erosion in transaction fees — instead of being flat in 2012, the average net revenue yield would have been 0.56% were it not for advertising.
Qiwi has a large base of customers: the company states that 65 million consumers use its kiosks and terminals at least once a month. Stripping out the 15.7% of Russians under age 15, the company is asserting that it does business with more than half of the entire Russian population. This seems far fetched. Since they don’t necessarily know the identities of their kiosk customers, it would be more believable if they asserted that their kiosks are used 65 million times per month.
Looking at the company’s gross margins, there’s a curious dip in the Cost of revenue line between 2011 and 2012. During a period when revenues increased by RUR753 million, the cost of revenues actually went down by RUR119 million in absolute terms. This significant movement is unexplained in the MD&A.
Management seems ill equipped for running a public company, particularly in the heavily-regulated financial services sector and one subject to US financial reporting standards. The Chairman of the Board is all of 33 and the median age of the executive officers and directors listed in the prospectus is 39. The CFO has no formal accountancy qualification or even financial training. Their auditors found a material weakness in the company’s internal controls in 2011.
Qiwi faces intense competition in both of its major segments.
Typical outdoor payment kiosks (Qiwi’s machine is on the left)
While they are the biggest kiosk network, this type of business (by its nature) does not automatically lock in customer relationships. The Qiwi brand is well recognized in Russia, providing a certain level of consumer confidence in their terminals, but so are the other major dedicated cash payment networks like Elecsnet and Cyberplat.
The business is also vulnerable to some of its biggest customers encroaching on Qiwi’s turf, in particular the Big 3 telecom companies (Beeline, MTS, and MegaFon). As discussed in the prospectus, the Big 3 are exerting heavy pressure on Qiwi’s fees, to the extent that Qiwi has introduced more consumer fees to compensate. So, the fee structure of their core business model is unstable and experiencing stiff downward pressure.
Bank ATM networks in Russia also accept cash payments and are a source of significant competition. Sberbank, the largest domestic bank, operates a network of 68,000 ATMs and self-service terminals. While bank customers are withdrawing cash, it’s natural that they would pay their bills and top up their mobile phone balances at the same time, especially as such services are generally offered to customers on a commission-free basis.
To a certain extent, e-wallets are displacing the current method of paying in cash via kiosks and terminals. And in this, faster-growing segment, Qiwi is the #4 player in Russia and competes against such well-backed adversaries as Sberbank/Yandex.Money and PayPal, which has recently received a licence to offer Ruble payment services.
Not only this, but one of Qiwi’s main shareholders, Mail.ru, operates a competing e-wallet service called Money@Mail.ru, which had a greater mind share than Qiwi in terms of e-wallet providers (as of the latest publicly-available statistics obtained in Feb-Mar 2012, according to TNS).
(Source: TNS, based on consumer survey in Feb-Mar 2012)
However, in terms of actual usage, the statistics on Qiwi wallet are more encouraging:
(Source: TNS, based on consumer survey in Feb-Mar 2012)
The penetration of traditional credit cards continues to grow too. Russia is experiencing a roughly 30% annual growth in plastic credit card issuance, with about a 40-50% increase in credit card transaction volume. Russian consumers are increasingly comfortable using their credit cards for online and offline purchases.
At the same time, new and innovative payment methods such as those based on Near-field Communications are being introduced to Russia.
Smartphone-based payment services are being introduced in Russia – this particular NFC payment service is being promoted by Mastercard Russia and MTS
One can say that the success of Qiwi’s legacy kiosk and terminal payment business is inversely related to the modernization of the Russian payments sector.
Fees as a percent of each transaction are already stagnant in their core business and have nowhere to go but down.
While e-wallet revenue is rising rapidly and is offsetting the stagnation in their core business, this is due to volume growth, which has particularly spiked in the last fiscal year and which growth is difficult to reliably project in future.
Particularly concerning is the 22% drop in average net revenue yield from the Virtual Qiwi Wallet business between 2011-12, as this is the segment on which the company’s revenue growth largely depends.
Moreover, the company is not the market leader in this segment and faces very well-funded and committed competition from the likes of state-backed giant Sberbank and global leader PayPal.
Alternative payment technologies are being introduced rampantly in Russia, as the current antiquated system makes it an excellent candidate for payment technology leapfrogging.
Citibank Elecsnet kiosk in Moscow, located alongside Citi’s ATMs
As just one example, Citibank, one of the most active foreign retail banks in Russia, has a partnership with Elecsnet — a Qiwi competitor with a far smaller network of about 3,000 kiosks — which allows Citibank MasterCard PayPass top-ups through Elecsnet kiosks enabled with RFID technology. Some kiosks are even co-located with Citibank’s traditional ATMs (pictured at left). Citibank customers can also repay their loans and credit card balances in cash through Elecsnet kiosks. Of course, Citibank customers can also pay their mobile, Internet, and other bills through the Citibank ATM network, commission-free.
Speaking specifically of e-commerce, we work with a number of companies and have fielded thousands of customer enquiries. We haven’t had a single customer pay with their Qiwi wallet, or even request that we support it. As the chart above indicates, Russians tend to use e-wallets for paying mobile phone and Internet service fees, and relatively low-value Internet purchases, particularly for those who are underbanked, e.g. younger people who don’t have full banking and card privileges.
Qiwi’s IPO reminds me of the song by The Doobie Brothers, Takin’ It to the Streets, in particular this line: “I ain’t blind and I don’t like what I think I see.”
Head for the hills, just like the existing shareholders!
Seriously, this seems like a textbook case of a transaction and company to avoid, chock-full of red flags.
Of course, all of these negative points could be counterbalanced by valuation considerations once the IPO price is set, and in the immediate aftermath of trading (assuming the offering goes ahead). I haven’t taken into account pure supply and demand considerations for the company’s stock.
Unlike in most cases where the customary 180-day lockup period serves its purpose to help stabilize the stock in the period immediately following the IPO, in this case the entire offering is of a new class of shares so initial trading will be concentrated with the new shareholders and the investment banks who serve as market makers.
While the existing Class A shares are convertible into Class B on a 1:1 basis, this is unlikely to occur given the valuation premium which should accrue to the Class A due to their superior voting rights.
In addition to the 12 million Class B shares being offered publicly, there are slightly over 1.1 million such shares vesting under employee stock options, which will become eligible for sale in January 2014.
So, from a trading perspective it makes more sense to sell out-of-the money put options at the outset. Even better, sell the shares of any asset managers who were stupid enough to buy into this offering! We’ll revisit this deal in February 2014.