[ANALYSIS] Valuation mismatch hits Korea's e-grocery industry

Investors watch for updates on Instacart's revamped IPO, but still have questions over Kurly's successful listing

By Kim Yoo-chul

In the world of finance, a business valuation is the process of calculating the total economic value of a company and its assets, which helps determine the worth of an organization.

Since a unicorn or startup's initial public offering (IPO) is aimed primarily at raising money, its prospective shares should be valued fairly.

Given early private and institutional investors' demands for sizable returns, investment bankers and underwriters consider certain factors in evaluating a company prior to its IPO. Usually, potential for growth, demand for shares and potential industry competitors are key prerequisites that are reviewed in order to value the IPO and set a price target band.

While mainstream economists think global IPO markets will start seeing a "limited recovery" in the second half of the year, market sentiment is still dominated by concerns about inflation and interest rate hikes by the U.S. Federal Reserve.

Specifically, sentiment for IPOs could remain negative for Korea's e-grocery delivery industry, in which candidates can only avoid a valuation mismatch if they are profitable or can clearly demonstrate a clear path to profitability, according to executives at local private equity funds (PEFs).

"General market sentiment is pessimistic. Investors will need to see data showing inflation abating, allowing the Fed and central banks from advanced economies to tame interest rates and ensure recessions will be short lived. Because investors are focusing more on fundamentals and paths to profitability, it's very unlikely Korea's e-grocery delivery operators will reach their expected valuation until investor sentiment recovers," an executive at a local PEF said.

Oasis, one such company, decided to scrap its IPO as it received a very poor response from both foreign and institutional investors regarding its valuation during a demand forecasting session, a necessary step before setting an IPO price band here. Oasis is Korea's only local e-grocery platform operator that makes a profit, however, it apparently received an IPO price band of around 22,000 won per share from investors participating in the session.

Company management had hoped for the price band to be between 30,500 won to 39,500 won, equivalent to a total valuation of 960 billion to 1.2 trillion won. They said the decision to scrap the planned IPO was due to a valuation mismatch amid concerns of worsening investor sentiment and market conditions. Oasis had been expected to raise 207 billion won, which would have been the largest IPO in five months.

Federal Reserve Board Chairman Jerome Powell speaks during an interview by David Rubenstein, Chairman of the Economic Club of Washington, D.C., at the Renaissance Hotel on February 7. AFP-Yonhap

"The Oasis case illustrates that any IPO must be backed by companies with a solid proven track record of growth and profitability, supported by stable cash-flow structures and high potential to pay dividends. Despite Oasis making a profit, the total operating profit of 7.7 billion won in the third quarter of last year didn't convince investors that its desired 1 trillion won IPO valuation was justified," said Yoo Seung-woo, an analyst with SK Securities in Seoul.

PEF executives told The Korea Times to watch Instacart, a U.S.-based grocery delivery app that has kept its IPO paperwork up to date and could commence with an offering once market conditions improve. While valuing an IPO, the company's share prices are compared against those of their peers and their IPO valuations.

Instacart canceled its planned IPO as equity markets feared additional aggressive U.S. interest rate hikes. One PEF executive predicted that Instacart's listing could take place as soon as mid-2023. "What happens with Instacart's IPO will be interpreted as an indicator for additional IPOs to come in the e-grocery delivery industry."

Next-best exit plans

While equity market players see high volatility among institutional and foreign investors as they re-evaluate the fundamentals of Korea's e-grocery companies, including Kurly, SSG.com and 11street, a push to expand and strengthen business portfolios is underway.

Citing valuation declines in the local industry in terms of market size and growth potential, some investors are expecting more acquisitions this year.

While acquisitions aren't always necessarily bad ― they make it possible for founders to repay their investors and address any significant financial issues their companies may have to deal with ― Oasis representatives said they will proceed with an IPO when the company gets their desired valuation.

Despite repeated denials, investors are still concerned over a potential second attempt at an IPO by Kurly.

The country's top e-grocery delivery platform recently scrapped its plan to go public due to the worsening economic situation, it said. Although the company added it could resume the IPO later as it was holding "enough cash" to move forward with new business plans, its valuation was lowered to below 1 trillion won ― after having once risen above 4 trillion won ― according to estimates by local investment banking representatives.

People exit the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C., U.S., May 12, 2021. Reuters-Yonhap

"To expand volume before listing, Kurly is trying very hard to expand its non-grocery business, but the problem is Kurly's cash reserves are drying up. Kurly said it has 400 billion won in cash reserves as of January this year, down from the 900 billion won it raised since its 2015 inception," a PEF executive said.

Kurly's operating loss widened to 217.7 billion won as of 2021. And, given Kurly CEO Sophie Kim's small equity holdings, and the number of "return-hungry" venture capitalists, the company may face requests to come up with tangible plans to ensure profitability, said Lee Jong-woo, a professor at Yeonsung College.

Kurly representatives said its business is on a growth trajectory. Its investors include DST Global, Sequoia Capital China, Mirae Asset Venture Investment, Anchor Equity Partners, Hillhouse Capital, Aspex Management and strategic investors. Oasis, which reported 320 billion won in revenue for the first nine months of last year, is backed by investors such as Eland Retail, Kakao Investment and Unison Capital.

When it comes to the IPO for 11street, an SK Group-affiliated e-grocery delivery platform, its recent decision for a stock split is widely viewed as a group-wide effort to complete its listing by this year as scheduled. In 2018, 11street raised 500 billion won from investors including the National Pension Service, promising to complete the listing process by September this year.

"Early investors in 11street were looking at a valuation of around 2.7 trillion won, but there is a high possibility that the company will see a mismatch during its planned demand forecasting session, as general investor sentiment isn't good. This mood was confirmed with the cases of Kurly and Oasis. It's unfeasible that 11street's IPO valuation will be over 1 trillion won," the executive said. In the first nine months of last year, 11street reported 471 billion won in revenue, but it remained in the red.

Regarding any next-best exit plans, the executive said, "It's too early to predict."

While e-grocery delivery platforms have clear advantages as they are flexible, agile and not bound to parity with offline offerings, existing traditional players are positioned to benefit from scale, brand power and infrastructure.

Within that context, SSG.com is in no hurry to go public, as it met a put option, a contract that grants the owner the right to sell a certain amount of the underlying security at a pre-determined price during a specified time frame, by achieving over 5 trillion won in gross merchandise volume.

"SSG.com isn't being pressured to go for an IPO. We will focus on continuing retention, optimizing category management and expanding our overall business scale and partnerships," a company official said.