Description

Thesis

Kaspi superapp is a compelling long due to its high future growth trajectory (unassailable position in Kazakhstan’s growing digital economy, plus multi-country expansion plans), top notch and relentless management team with a deep bench and strong culture (founders built it from nothing and own 44% of it), world-class margins (40%+ net income margin), low valuation (trades at 10x PE on ‘24 and 8x on ‘25), and a declining country risk. It’s also an uncorrelated bet for one’s portfolio. 

For the reader who saw Kazakhstan and wants to move on: we rarely make investments in emerging or frontier markets. But over our decade+ history we have made selective and successful investments in various geographies when the opportunity was unusually compelling. We almost always looked for a company that paid dividends as this eliminated most frauds and too-good-to-be-true stories. Then we assessed if the jurisdiction was investable, and was likely to become “more investable” over our holding period, so that we get a chance at multiple expansion as market participants agree with us. Kaspi passed both of these tests when we invested over two years ago, and the story remains the same today, even as the price more than doubled. 

Business model

We don’t come across a business of this quality often. Kaspi is a superapp that provides payments, e-commerce (“marketplace”), banking (“fintech”), and government services (free) to both retail customers and merchants, creating a robust ecosystem that captures a large and increasing share of consumer spending in the country. They are in a unique position with no direct competition that can match this ecosystem. They are relentless in finding and integrating new services and verticals, which are in the early stages of growth but show significant promise​. As they successfully scaled, they have contributed to the digitization of the Kazakhstan economy, one of the key priorities of President Tokayev, who is in power until the end of 2029. 

We’re just going to scratch the surface here on TAM and penetration of various services (Morgan Stanley has good detailed coverage of those metrics). The bottom line is that there are several years of 35-45% revenue growth in Kazakhstan alone. With over 14 million MUAs, Kaspi enjoys a dominant market position in the country, where 70% of the population already uses some part of the app. Its strong brand recognition, network effects, integrated ecosystem which creates stickiness make for a formidable moat. The engagement is world class, with about 10 million DAUs, so roughly 70% daily usage. This apparently high penetration is not a problem, it’s an asset because the app is a must have, and the penetration inside some of the three main business lines is much lower. Payments started the journey and are most used, with 13 million users, Marketplace next with <8 million, and Fintech last with 5 million deposit customers. We believe there’s a lot of room for those numbers to converge over time. Within each of these three divisions there are several verticals, with some new and very large (like e-grocery and e-car sales) which provide ample room for growth.

Today, Kaspi is the payment network in the country, is deeply integrated in the lives of the population, and it keeps finding new services to provide and monetize. The other key advantage is that users love it because their culture revolves around driving high user NPS for any new service, and they kill products that fail this metric. The only past example we’re aware of is credit cards, which was supposedly around a third of the profits at the time but users hated it, and they shut it down. 

Digital Payments

Payments is the most penetrated segment. Their QR code and various cards are 80-90% penetrated in the user base and were the early leaders in growing the superapp. Bill payments followed while the monetization of P2P payments is well behind. 

On the merchant side, Kaspi is the underlying payment network of the country. They have acquired 700k merchants now and provided various other services like instant invoicing, B2B payments. 

Payments volumes are growing 30-40%. The take rate on the consumer side is over 1% (including all fees for related services), and the take rate on the B2B side is around 0.6%. B2B is growing much faster, so there’s a natural slow decline in the blended take rate of this business. Most revenues come from transaction fees (heavily weighted to consumer still), with a smaller portion coming from interest revenue on average free balances in people’s accounts. Transaction expenses are minimal since they built the payment network themselves. Payments benefit from the growth of the rest of the ecosystem, as the app is centered around transactions which involve payments. Net income here will be growing 25%+ with probably slight declines in that rate in future years due to the growing share of B2B payments. 

Marketplace

The marketplace segment includes e-commerce and mobile commerce (roughly a third of overall MAUs with underlying lower country online transaction penetration than the West), and then newer services with much lower penetration such as classifieds, travel, e-grocery, and e-cars (somewhere in the MSD-20% penetration). A new high growth division is e-car finance. This ongoing addition of verticals is driving a lot of the growth. 

On the merchant side mobile commerce is most penetrated (people paying with their app in store), while e-commerce participation is still very low, along with new services like delivery, “postomats” (automated delivery kiosks in urban areas), and merchant and brand advertising on the platform. 

Revenues here are largely comprised of fees taken on the 3P GMV that flows through the system. Their take rate is not high and has been growing, getting to 10% now. It’s growing because of the multiplication of services added in the division, which include newer and higher profit merchant “value added services” like advertising, delivery, postomats, etc. The 3P GMV is growing 50-60% (will be less in Q3 due to no Juma, see Catalyst), with e-cars and travel as big recent verticals accelerating this growth. The other part of marketplace revenue, and a recent one, is 1P services, where Kaspi is an intermediary, which is comprised of two things now: e-grocery, a very large multi-year opportunity, and 1P e-cars, also a big but somewhat more limited market where they intermediate on quick turnaround transactions of better cars (most cars are sold 3P, person to person). On the 1P verticals, they earn roughly 30% GM in grocery and 15% GM in e-cars, both just starting up, and both with MSD net profit margin already. The addition of the 1P adds significant revenue growth to the company, but lower margins. This has been been happening in 2024 and will continue. Overall marketplace is now growing revenue over 70% and we forecast 40-50% continued high growth in the next three years as grocery in particular has a very steep and long runway. Net income won’t quite keep up with that due to grocery margin dilution, but increasing take rates with more contribution from travel and value added services makes it fairly close in 2025 in our view.

Fintech

The Fintech division includes BNPL payments (40% penetration) and general purpose loans (20%), with a growing deposit customer base. This provides a predictable income through interest and fees. Halyk Bank has been trying for years to dent Kaspi’s dominance in retail banking​ to no avail. 

On the merchant side, they provide micro business financing and inventory financing. Increasing lending to SMEs is a growing priority for the government and a high area of growth for Kaspi. 

Revenues come vastly from 25-26% annual combined interest and fee yields on the outstanding loans. This is stable to lower in the future. Their loans to deposit ratio has been lower than normal in the last year and loans are now ramping. Interest costs will start coming down from Q3, Q4 and into 2025, as the central bank has started lowering rates (now 14.25% from 16.75% peak) and KSPI’s customers’ one year deposit locks start lapsing and rates will re-rate lower. So funding costs will be going down, and coupled with growing loan to deposit ratio back to the normal 90-100% range, should lead to significant net income improvement for fintech (which has been close to flat y/y), to roughly 35% in 2025. Note that the government has been discussing increasing the tax on banks from 20% to 25% for a while (as the budget has a ~3% deficit due to the growth & social investments undertaken by the president), and it will come up for discussion again in 2025, and for conservativeness we assume this happens in our forecasts.

Government services

This is not a reporting business line since the services here are free. This is Kaspi’s main value-add to the government ensuring long lasting regulatory stability, along with very useful services for the user and merchant base. They provide passport, driving license, car ownership, tax filings and payments, life events, business registration, and other services. 

Margins
This is not a margin expansion story. Kaspi has a highly efficient cost structure, as evidenced by its 41% net income margins, which are in rarefied territory. It helps that the founders came from a PE background and ran a scrappy small bank operation in the beginning. They are highly focused on cost control and streamlined operations. Their technology is built in house and the brand gives them first dibs to the best talent around.  Technology costs are leveraged across the three main parts of the app, creating significant leverage. Their #1 brand and vertical reach across services makes for ridiculously low S&M costs. G&A is low as Kazakhstan is a low cost jurisdiction. Credit risk has been low and declining over time as they have probably the most complete and accurate user profile of any company in Kazakhstan. 

The addition of the large grocery vertical with much lower margins has created a lot of topline growth and of course led to margin dilution over the last two years. BTW, we think that type of margin at the start of a grocery business is a big success. We think overall net margins will decline much less in 2025 (or possibly be flat) as the Fintech division ramps profits substantially.

Kazakhstan

Kazakhstan is a very rich country, with large deposits of oil and gas and the world’s largest deposits and production of uranium. Nuclear energy is having a global renaissance in the drive to net zero, with the uranium market in a large deficit, so access to Kazakhstan's production is becoming a sought-after economic and political lever. The country was mismanaged for 28 years under the former president who took over with the dissolution of the USSR. 

In our view, the new President Tokayev (whom we met) is a reformist focused on trying to bring his rich but under-developed country out of a corrupt and low-growth history under his predecessor. Tokayev was elected for a single seven year term in the fall of 2022 (he limited the presidential term to a single term), and is (slowly) opening up the political system to more opposition after he strengthened his position having passed through an attempted coup in early 2022, when he was effectively interim president before the elections. He has spent the last two years consolidating his mandate and creating a new ambitious plan of economic growth and diversification with strong FDI engagement, and social welfare measures for the rest of his term.

He promotes a digital-first Kazakhstan and regularly mentions Kaspi as a Kazakhstan regional and world champion in technology, meets with the two founders fairly regularly (e.g. including immediately after the successful Nasdaq IPO earlier this year). Kaspi provides a large array of government services for free, which make the citizen-government interactions work better, and everyone likes it. We believe the company is seen by the state as an aligned symbol of strength and leadership, and has the full support of the government. This is a period in Kazakhstan history where the president is engaged in a massive re-working of the economy over his remaining five years, has regional political leadership ambitions as as Central Asian rising “middle power” (deservedly, in our view), and is likely to maintain support behind a national technological champion like Kaspi. 

Importantly, China has strong business interests and a long historical connection to Kazakhstan. China launched their Belt and Road initiative here. President Xi’s first international visit post Covid was to meet Tokayev. Further, Xi was in Kazakhstan one two state visits in the last year. He considers Kazakhstan a key transit way for his good to Europe, and needs their uranium as China is the largest builder of nuclear power plants over the next 20-30 years. Famously, in 2022, Xi during his visit publicly stated that China “will protect its independence, sovereignty and territorial integrity” - it can’t be more clear than that. 

Management

The original business was Kaspisky bank, bought by Vyacheslav Kim (one of the two founders) along with Baring Vostok Capital (private equity firm, still a large shareholder). Mikheil Lomtadze (the CEO and the other founder) was a rising star partner at Baring Vostok and they gave him this bank to fix and grow. He became CEO in 2007 and the rest is history. The most important thing to note is that they had a massive competitor at the time in Halyk Bank (the other large bank in KAZ, more focused on business than retail), which was in part owned by associates of the former president until his resignation in 2019. It’s pretty clear that Kaspi management had to engage for more than a decade in serious hand to hand business combat against a much larger and well connected competitor, and won.

Lomtadze is an undisputed superstar. He is originally from Georgia, was a private equity investor in Russia, then took a small bank to a dominant superapp in Kazakhstan and made himself a billionaire in the process. He successfully navigated a run on the bank earlier in the history when the brand was not strong and other government-linked banks in Kazakhstan needed rescuing (not Kaspi). Then he successfully navigated one of the worst political crises you can think of: violent protests in Kazakhstan in January 2022 (most likely an attempted coup in the early tenure of the new President Tokayev, now firmly in power), and Russia’s Ukraine invasion in February. He posted a video on YouTube at this time. We think it’s a must watch for leadership under pressure, owner mentality, and putting users first, whether you buy this stock or not (https://www.youtube.com/watch?v=HxHPf3SslTA). He’s been named the #1 CEO in Kazakhstan for years in a row. HBS wrote two case studies on Kaspi and Lomtadze. He owns 23% of the company. He’s very cautious on new business lines which must go profitable almost immediately. He’s taking his time with the international expansion assessing country risks, brand values, and management teams on potential targets he’s being pitched. We had multiple discussions over time where he showed clear receptiveness to our feedback on dividends and buybacks.

Vyacheslav Kim is Chairman and the other original founder. His role lately has been less operational, with a heavy emphasis on government relations. Kaspi excels in government relations and this requires a lot of work, relationship building, and foresight. This is a key value add for a business operating with such a powerful position in an emerging market. The big government services vertical ensures that the company is in constant contact with regulators and top government officials, all the way to the President.

Catalysts

Continued strong and likely accelerating net income growth in 2025. The company already flagged Q3.24 will have lower than normal GMV growth due to a double impact of the Juma shopping holiday (eg “Black Friday”) which they hold three times a year and was in last year’s Q3 but not this year. We don’t think net income growth will slow down much, as Fintech starts to accelerate, and thus profit growth will accelerate from mid 20s to high 30s in Q4.24. There’s a chance the company actually raises the profit growth forecast for 2024 (guided to 25%, we think it ends up high 20%s) but you don’t need this for the stock to work. More importantly, in 2025 fintech profit acceleration (above) and continued strong marketplace should drive net income growth in our view to low-mid 30%s, above the 2024 rate.

International expansion: Kaspi's strategic goal of entering new countries could unlock significant growth potential within the next year. The company has hinted at targeting larger markets in their long term goal to get to 100 million users. Uzbekistan is clearly a target, with the announced bid for the second largest payment network, and it’s a large country at a much earlier stage of development and lower GDP/capita than Kazakhstan, with a lot of growth potential. Post war Ukraine is also clearly a significant target for Kaspi. They were close to launching there before the war. Ukraine will benefit from a large amount of rebuilding funds from the EU and the US and an educated internet-savvy population with a lot of pent up demand. Importantly, we think Kaspi will be an easy way for the market to play the Ukraine rebound. Other possible targets (speculating) could be Turkey and the Middle East​. Importantly, this moves Kaspi into a multi-market app, which the market should reward with a higher multiple given a larger avenue for growth via underpenetrated markets.

Growing familiarity to the US tech investor base. Kaspi IPO-ed in London in 2020 as a stepping stone to an eventual US listing, which happened in January 2024. The Nasdaq move was already beneficial as $ADV had an order of magnitude step up to over $20m but we don’t think it had much impact yet on the multiple. If you look at the holder list, there’s a lot of room for adding US tech investors. In many of our conversations to date people have not yet heard of this company, or heard Kazakhstan and moved on. 

Dividends and Buybacks: Kaspi pays a 6% dividend yield now for a tech company growing earnings at 30%. They also bought back a chunk of stock at lower prices and have the ability to continue doing that anytime. We believe they are temporarily banking more cash to fund an eventual acquisition as the dividend could have been otherwise (could also take on some debt of course). 

Continued steady improvement in country risk: Kazakhstan’s geopolitical situation is already much improved post the Ukraine invasion fears. The 5 year CDS is around 110, down from 300 in early 2022, but still above 60-70 pre-invasion. As discussed, President Tokayev is a very able strategist, balancing the relations with China, Russia, US, and US, and emerging as the leader of Central Asia. This is a key country for the West’s power projection in the region and a key supplier of uranium for the nuclear plant renaissance under way. We believe the Chinese territorial guarantee takes any tail risk off the table. As President Tokayev progresses on his term and maintains his key priority on FDI and development, country risk will keep coming down. 

Valuation

For 2024, we forecast Kaspi will earn roughly $12 per share. For future years we assume the Tenge currency continues depreciating vs. the dollar M-HSD%, in line with history, though it’s important to note that the Tenge is flat vs. the dollar in the last two years, over a strong dollar period. Obviously this lowers our future EPS in USD. We don’t hedge the tenge as we believed the hedging cost (HSD% last we looked) was not worth it.

For 2025 we get close to $15 (so 8x+ PE) and for 2026 we get close to $18 (so 7x PE).

The stock traded at 15x (and above) before the Ukraine invasion. As argued above, we think a discount due to Russia is now unwarranted. We do think the multiple will keep increasing as we approach the end of the war and US investor familiarity with the stock increases. Our current target price is $210 using a 14x multiple on $15 EPS.

A few relevant examples: 

• MELI and NU, both high growth apps in Brazil (but multi-country), and both inferior in our view as a user and merchant ecosystem vs. KSPI. We can debate the relative jurisdictional and presidential risk profiles of the two countries. MELI trades over 40x PE on ‘25, and NU trades at 22x PE on ‘25. 

• Allegro in Poland trades at 26x PE on ‘25.

• Tencent in China trades at 16x PE on ‘25. Again we think the political and regulatory environment in China is significantly worse than in Kazakhstan.  BABA trades at 9x on ‘25 but has idiosyncratic issues (though this one seems very cheap to us). 

Risks

• Government Intervention: This is probably the most significant long term risk. The government could decide to exert more control over Kaspi due to its dominant market position. The obvious example is Ant Financial in China, where government intervention derailed a massive IPO, restructured the business for the worse, and removed the leadership. Jack Ma openly and strongly criticized the Chinese regulatory system and state banks (thus the system) as being outdated and stifling innovation. This was a sensitive political time for the leadership in China and he was immediately sanctioned from the top down.  As highlighted above in the Kazakhstan section, we think Kaspi’s position is night and day vs. the situation Ant Financial found itself in.

• Geopolitical Risks: While the geopolitical situation in Kazakhstan has improved and we argue is continuing for the better, the proximity to Russia and the ongoing war in Ukraine present a degree of uncertainty. Any deterioration in regional stability could negatively impact Kaspi’s operations and investor sentiment​.

• Execution Risks: Geographical expansion, especially in emerging markets, always carries execution risks. We think the team is careful and very good at making political and economic decisions given their history to date.

• Lower level risks: slowing growth and competition: At some point the runway in Kazakhstan will slow. We don’t see this happening for 3 years. There is low level competition from Halyk and a few other ecom players which mostly compete on price, but are unable to offer a full suite of services. However, Kaspi is likely to be in multiple countries within a year.

Catalyst

• Continued strong and likely accelerating net income growth in ‘25

• International expansion 

• Growing familiarity to the US tech investor base

• Dividends and Buybacks 

• Continued steady improvement in country risk