Description

Summary

Hong Kong Technology Venture (HKTV) is the leading local HK e-commerce platform. The stock has been in the doldrums following the pandemic and general malaise in the HK retail market which has led to a series of moonshot diversifications from founder Ricky Wong. Nevertheless, Ricky has been one of the most successful businessmen in HK and his lieutenants (in particular Jelly Zhou) have finally recognized the importance of investing in the customer, an attitude that was largely absent in the company’s initial years. Today, HKTV is selling for ~6-7x FCF ex-new ventures, 67% of tangible book value, and just recently completed a repurchase of 10% of the company (almost two-thirds of the market cap is in cash, mainly due to negative working capital). Given this valuation and the invigorated focus on the customer that should lead to higher long-term growth and profitability, I believe the shares could be a multi-bagger over the following few years.

History/management

The history of HKTV cannot be told without a brief discussion of the history of Ricky Wong, a Hong Kong-born visionary that spent his professional life making bold bets. His first was in 1992, when he founded City Telecom to provide international call back as an alternative to Hong Kong Telecom, the local monopoly that charged usurious rates for long-distance calling. The venture succeeded, and in 1999, Ricky was able to launch Hong Kong Broadband Network (alongside his cousin Paul Cheung, today the chairman of HKTV) as a unit of City Telecom. The business was the first in HK to offer triple-play on a single network and was also the first provider of residential broadband. In 2012, CVC Capital Partners acquired HKBN for nearly HK$5 billion. Ricky’s next bet was to focus on free-to-air television and he set his sights on TV monopolist Television Broadcast Network (TBN). In 2009, City Telecom applied for a domestic free-to-air TV license, and the company was renamed to Hong Kong Television (HKTV). In 2013, the HK government rejected the license application, and HKTV was not able to obtain it despite a protracted legal battle. Once more, Ricky pivoted, and thus was born the present-day e-commerce venture of HKTV. In February 2015, Ricky officially launched HKTV as an “online shopping mall” with more than 333 merchants. With the television venture behind him, the company was once more renamed in 2021, this time to Hong Kong Technology Venture. Today, the management group owns a little more than 50% of the business.

Business

HKTV provides both 1P and 3P e-commerce. The 1P helps to acquire customers and create repeat behavior (in particular with groceries). The 3P marketplace provides the long tail of selection via third-party suppliers. 1P is one-third of the GMV today and earns a 25% gross margin, while 3P is two-thirds of the GMV (beauty and health, electronics, pets, etc.) and earns a 22% blended commission. High-margin advertising revenue has grown past 1.5% of GMV. After fulfillment costs (11% of GMV), marketing (3% of GMV), physical shops (2-2.5%), and ecommerce operating costs (4.5-5%), the company generates around 2.5-3% of EBITDA to GMV, or approximately 2-2.5% FCF to GMV after maintenance capex (taxes are minimal in HK and the company has accumulated historical losses). HKTV generates ~ 50,000 orders per day, or nearly 20 million orders per year. The following chart shows the annual metrics since inception (2015 and 2016 are estimated):

A high-level view of the retail market size in HK is as follows:

HK retail sales: 400bn

Offline sales: 370bn

Online sales: 30bn

Pure e-commerce: 14bn

Online sales of B&M: 16bn

HKTV’s GMV of ~8.5bn represents ~60% of the pure e-commerce online sales, which in the past led HKTV management to declare victory in HK e-commerce. In one sense, they were right – both pure play competitors (like Ztore, acquired for HK$200m by TVB despite being only 4-5% the size of HKTV) and brick & mortar businesses with side e-commerce operations (like Wellcome and ParknShop) have been insignificant compared to HKTV. But in another sense, they were wrong – as the borders of e-commerce don’t stop in HK, and competition from China is abundant - in particular from Taobao (notwithstanding the fact that Alibaba shut down Tmall HK). This flawed/arrogant mentality led management to make decisions that reduced long-term value – for example, they raised supplier commissions (instead of reducing them to incent the addition of supply) and even began paying dividends to shareholders (again, instead of investing in the subpar customer value proposition).

But management’s tune appears to have changed. Much of the recent behavior has begun focusing on the customer value proposition (which in e-commerce has been evangelized by Bezos as price, selection, and convenience). Management has reduced commissions to inspire supplier growth, which has improved selection. And management has finally begun to recognize the convenience of lower order minimums and rapid delivery, particularly in an island as small as HK. Today, the entrance of more mainland Chinese nationals to HK will further accelerate that demand as they have been accustomed to wonderful logistics.

Valuation

Overall, GMV is currently HK$8.5 billion per year and the FCF to GMV ratio (after maintenance capex and taxes) is ~ 2-2.5%, representing HK$170-210m of FCF. The market cap today is ~ 1.2bn, representing 6-7x FCF on what is a somewhat recurring customer/order base. I believe FCF will grow over time as the company invests more into improving the customer value proposition, as there is a large untapped market but the HK local players have not adequately served it. Given the high contribution margins from advertising growth and incremental orders, the FCF as a % of GMV can increase over time. It is worth mentioning that management recently completed a repurchase of 10% of the company at a price nearly 40% above today’s levels.

It is important to mention that investors do not see the aforementioned FCF today as the company is aggressively re-investing into a number of new segments – both adjacent to the core business and not. In terms of adjacencies, the company is investing into a “wet market” delivery, which provides ecommerce to traditional fresh markets, as well as into internationalization of HKTVmall via global personal shopping for HK consumers or delivery for HK emigrants. The objective there is to generate new business that can’t be competed by Mainland players. In terms of non-adjacencies, Ricky is building a robotic grocery store (the first has been launched in Manchester) and some lightly-disclosed life science project. On one hand, this diversification raises concerns about focus, but at the same time, I believe some benefit of the doubt should be given to a successful repeat founder.

Risks

The main risk is simply that the HK e-commerce market doesn’t grow to the degree of other countries and the company makes poor diversification decisions into moonshot projects (currently the best argument against the company). Another risk is a loss of focus or attention to the customer and thereby a weakening competitive position (Ricky’s diversification may be an attempt to assuage boredom). Another risk is bad corporate governance into owned real estate (which appears to be a pastime of many HK corporates, including HKTV).

Catalyst

Growth in FCF, success or sunset of new ventures, further share repurchases