Description

Mobile World (MWG) is the largest retailer in Vietnam, with over 5k stores across 5 formats and 74k employees. The company was founded in 2004 by Mr Dai, beginning as a phone retailer before branching out into consumer electronics, grocery, pharmacy and children stores. It has been a perennial favourite of investors in the Vietnamese market since its listing, but with the selloff in Vietnam (index is down over 30%) because of some high profile arrests of real estate developers and the growing uncertainty that their grocery business can reach breakeven by the end of the year, I believe at this price, investors are paying for their ICT business and the other formats are almost free.

Investment highlights:

• MWG has 3 key categories that make up 95% of sales and 3 retail formats that are 99% of sales. If we split by category: Phones and accessories / Consumer electronics / Food and FMCG are 40% / 32% / 23% respectively. By format, their revenue split: TGDD / DMX / BHX are 26% / 51% / 23%

• For their traditional categories of phones and consumer electronics, MWG holds 60% and 55% market share respectively. However, for the grocery market, MWG is either the leader or the second place, but both combined have less than 5% of the overall grocery market in Vietnam. Thus, a board member I spoke to said that they expect the grocery business to eventually become "the biggest cash business of MWG by a long way"

• As the company is very well-known amongst Vietnam investors, as seen from the FOL premium that has touched 50% in the past, I believe the main crux of the investment will be around 2 questions:

  • Can Mobile World turnaround Bach Hoa Xanh (BHX), their grocery business, and make it profitable?

  • Can Mobile World still rely on their traditional businesses, mobile phones and consumer electronics, to drive growth?

• The company is trading at 13x FY24 P/E and 7.6% FCFy, quite an affordable price for a company that grew sales by 33% CAGR since 2012 or 22% for the last 5 years. However, I must admit that valuations for electronics retailers are notably lower in developed markets with lower margins and returns, therefore one could argue that MWG is doubly overvalued (e.g. multiples and earnings can both get halved)

• MWG has structurally higher margins due to three key reasons: i) Huge economies of scale in purchasing (MWG has 2,962 electronics stores vs FPT Retail's 647 who is #2), ii) stores are more productive, 50% higher sales on a side-by-side comparison to FPT Retail, and iii) in-house construction team that helps MWG achieve the lowest cost store construction and fastest store expansion. Moreover, with grocery, BHX, still being EBITDA negative, we will start seeing margin accretion as BHX reaches a fork in the road where it either reaches breakeven or shuts down

• Finally, another catalyst that could be realised within 6 months is the sale of 17-20% of BHX that values BHX at $1.5bn, giving them $300m that can be used to pay down debt or fund their expansion for a few years

Brief history of key formats:

Mobile World was founded in March 2004, starting in HCMC under their first format, The Gioi Di Dong (TGDD), paying special attention to customer service from day one. After receiving investment from Mekong Capital in 2007, they launched their second format, Dien May Xanh (DMX), to extend into the burgeoning consumer electronics segment and quintupled their total store count in 2 years to 200 at the end of 2011. 

Subsequently, MWG listed on HOSE in July 2014 and started rolling out Bach Hoa Xanh (BHX) in 2015 as the company felt they could offer a unique value proposition to consumers who frequented wet markets. By 2018, MWG had 45% and 35% of Vietnam's mobile phone and consumer electronics market share respectively with that figure reaching 60% and 50% at the end of 2021. 

Types of formats:

• TGDD (970 stores): 100-200sqm stores that sell phones, tablets, laptops and SIM cards

• DMX (1992 stores, of which 800 are Supermini): 500-1000sqm stores that sell consumer electronics (TVs, fridges, washing machines, ACs) and TGDD's products. Started launching DMX mini (300-400sqm) and DMX Supermini (120-150sqm) to tap into rural areas and offer after sales services

• BHX (1889 stores): Grocery format, strong in central and southern Vietnam, tend to open outlets beside wet markets

• An Khang (178 stores): Pharmacy chain that offers both drugs and supplements. Operated as a minority shareholder from 2018-2021. MWG acquired the remainder of shares in 2021 to take full control

• Bluetronics (50 stores): TGDD + DMX in Cambodia. Similar to what MWG did in Vietnam, they started with mobile phone stores in Cambodia in 2017. After 2 years, they launched their first CE store in 2019. Took the top position for both phones and CE since 2020

• Ava: Started piloting new formats to tap into mom & kids (AvaKids) and sports (AvaSports) in Jan 2022

Management and culture:

The feedback I've heard about MWG and Mr Dai (founder and chairman) have been overwhelmingly positive. Dai holds 13% of the CSO and there are 11 other insiders that own between $1m to $130m of stock, of whom 6 hold over $10m. 

Since inception, Dai has drilled the concept of customer centricity into the DNA of the company. An example from an ex-employee in the strategic planning department:

• MWG has priorities when making a decision or exploring new formats, but the highest priority is customer centric 

• While being customer centric is a common slogan in many companies, in MWG, when there's a conflict between shareholders and customers, Dai will choose the customer

• MWG has a process that encourages deviation that improves the customer's life. The company is very flexible, and if it really works, they will implement it

Furthermore, the company spends time developing middle management and giving managers the opportunity to shine. There are 3 striking examples from a supplier, ex-employee and BOD member.

1. According to their BOD member:

• Dai has been focused on training years ago, and each year, the board spends an entire day talking about succession and how to improve training. MWG's middle management is very strong, no one will miss old farts like me if I die

• Doan Hieu stepped up to manage DMX 1.5 years ago and he's been a huge success. The market was surprised but it was not shocking to MWG because they saw his potential years ago and have been training him for this day

• MWG sticks to the philosophy of "Tell me what to do, show me how to do it, and let me do it". Most companies fail at the third step because founders don't want to give up control

2. From a supplier (Digiworld):

• MWG's training system is very good. FPT Retail and others try to copy but fail

• MWG can train 2-3k staff each year who are very high quality even though they recruit less credentialed people, never university grads, but they come out very good after 2-3 weeks. We call it the University of Mobile World

• All of them smile the same, wave the same and do the same job. They cannot work anywhere else because they're too used to the Mobile World system

3. From an ex-employee:

• Most of MWG's middle management started from the bottom, spent many years in MWG, so they're more loyal

• Because they know the DNA of the company, they are more resilient, very open minded and can adapt to changes because many are below 40

• Masan (Vinmart's owner) grew by M&A, so their middle managers are all new to Masan, might not understand the business and processes very well

Finally, MWG seems to be the most adventurous retailer in the country, constantly trialing new experiments. New formats and categories launched from 2020 contributed to 12% of FY21 sales. Since 2019, these are the initiatives that MWG has piloted:

• Mar 2019: Piloted shop-in-shop selling watches

• Sep 2019: Launched laptop centers and increased POS of laptops in TGDD

• Dec 2019: Launched the first CE store in Cambodia 

• July 2020: Experimented with DMX Supermini (reached 800 by Dec 2021)

• May 2021: Piloted freelancer model of mom & pop shops to penetrate lower tier cities

• May 2021: Piloted selling bicycles 

• Oct 2021: Launched mono-brand Apple stores, Topzone

• Jan 2022: Piloted AvaSports (sportswear) and AvaKids (mom & kids)

• Upcoming in 2022: JV with Erajaya (#1 phone retailer in Indonesia) to operate CE stores in Indonesia

Since everything looks so good, you may ask, what is the contention in the market? The big debates right now are twofold. One is whether they can solve a different type of business, while the other is partly due to being a victim of their own success: i) Can they turn BHX, their only perishable business, profitable? ii) Do their traditional businesses still have juice to drive growth since they are over 55% of the phone and CE market?

Can MWG turn BHX profitable?

The question that most investors are pondering and upon which their buy/sell decision should hinge on. Ever since I first met the company in 2018, the company has been very bullish on the opportunity presented to them if they manage to crack the grocery code. From Dai's POV, the grocery market is the perfect combination of a huge TAM + blue ocean (when they entered in 2015, the penetration of modern trade was <5%). However, MWG's subsequent woes in this space made me suspect they didn't fully comprehend the difference in skill set needed to manage a business that relies on fresh produce, most having shelf lives of a couple of days.

If I do a DCF on just the phone and CE business with these assumptions: i) TGDD and DMX combine for 12% growth in FY22 and a 7% annual growth to 2030, ii) EBIT margin normalises to 5.2% for electronics compared to an estimated 7.5 to 9% now and 5.6% in 2015 when there were just 7 grocery stores, iii) shut down BHX and all non-electronics business. We arrive at a value of VND 59k per share or 9% downside from current market price. Thus, we can conclude that today's price tells us that either i) the market thinks MWG will not be able to turn BHX around and continue to burn cash or ii) our discount rate is too low.

This is no surprise as this is actually the second restructuring of BHX since they introduced the concept 8 years ago. In Q1 2018, MWG realised that their target of VND 1bn/month per store was not making progress at 355 stores.

To his credit, Dai replaced himself as the head of BHX with the head of DMX, Mr Tran Kinh Doanh, an eleven-year veteran of Mobile World. Dai admitted that his strategy of opening new grocery stores in densely populated residential areas was a mistake as their best performing stores were along major roads leading into these areas. They learned that their target audience, the wives, liked to shop everyday on the way back from work and didn't like to leave their house for groceries when they returned home. From Q2 2018, Mr Doanh introduced larger formats of 2-floor, 500+sqm stores beside traditional wet markets as compared to their standard 150-250sqm stores and increased the SKUs to 6-8k. He also added new KPIs for store-level employees: welcoming attitude, clean and neat displays, freshness, meat and fish processing skills.

By slowing the pace of store expansion and focusing on improving their operations, BHX added 50 stores by the end of 2018, bringing the total to 405 stores, 90% of which were based in HCMC. At that time, the company proudly reported that BHX was now EBITDA breakeven at the store level in Dec 2018. Taking that as a sign they solved grocery, MWG went on a ferocious expansion spree, growing store count from 405 in 2018 to 1,008 in 2019 and guided they would reach overall profitability by 2020.

As they have not reached profitability as of Q2 2022, you can guess that they missed that target, bringing us to the second restructuring that we're in now. When MWG saw BHX as the main winner during covid, they further accelerated their growth plans, more than doubling their store count in 2 years to 2,106 at the end of 2021. However, what they failed to notice was that their approach of opening beside wet markets and offering better quality products and ambience at similar prices had become outdated as consumer habits changed to prioritise convenience over prices. Ironically, BHX's initial strategy of opening smaller stores near residential areas would've been proven correct after covid. In Q4 2021, BHX was averaging VND 0.87bn monthly sales per store, the lowest since Q2 2018 despite having ~25% of their stores in the larger format compared to practially zero 14 quarters ago.

Furthermore, because of Doanh's experience in non-perishable goods and fewer SKUs in consumer electronics, BHX ran into high inventory shrinkage. One example that seems obvious that their BOD member gave me was stock rotation and depth of displays. As their display depth was too deep, when the afternoon delivery came, the workers would put new fruits and veggies on top of the old. That meant that the older products got picked last, causing high wastage for BHX.

Ultimately, Dai decided that Doanh was not cut out for the role and stepped back to run BHX temporarily until they found a suitable replacement (mentioned that they will announce the new CEO by the next AGM in April 2023). Since coming back at the start of 2022, he implemented the following changes:

• Closed 2-floor stores as they noticed shoppers rarely ventured to the second level

• Reduced SKU count from 6-8k to 2-3k, focusing on the bare essentials that serve necessities

• Shallower display depth to make it easier to remove older products to place new ones below

• Incorporated customer feedback that aisles were too narrow and layout was too complicated. Unified store size to 200-400 sqm as compared to the 150-250sqm and 500+sqm options to streamline purchasing, SKUs and layout 

• Smaller retail space led to more spacious area for warehousing, allowing staff to walk comfortably to easily identify items running out of stock

As a result, BHX closed 400+ stores and steadily increased monthly sales to 0.95bn in 1Q22, 1.19bn in 2Q22 and finally 1.4bn in Sept 2022. Surprise surprise, MWG announced they're EBITDA breakeven at the store level in June 2022 and target profitability by the end of the year. According to management, their magic number is 1.6bn per month which I estimate a 20-40% probability of them hitting by the end of the year. My justification is as follows:

• Typically I tend to give management guidance the benefit of the doubt and then adjust it starting from a number greater than 50%

• However, with this entire "restructuring > bump in monthly sales > announcement of EBITDA breakeven at store level > overall profitability coming soon" cycle playing out before, I have updated my priors to begin from 50%

• Furthermore, Dai was in charge of BHX prior to the first restructuring in 2018, so as long as he's in charge, I don't see why he can turn it around now while he couln't do it in the past. However, I can understand the argument that his formats are better suited to the post-covid consumer

• When quizzed on what could derail their profitability last week (Sep 2022), management said macro and it isn't looking very good right now, so another negative

• Some positives are that they mentioned that BHX's wastage is 3x higher than peers, so that's a lot of margin for improvement. Their logistics costs are also higher than other grocers but that's only something to be solved in the mid-term

• Finally the fact they are in discussions to sell 20% of BHX at a valuation of $1.5bn is viewed very positively by the market, but I wonder if BHX is supposed to be the biggest driver of cash and profits, why are they pricing it at 38% of EV and not at least 50%? If anything, it should wait to show profitability before selling to fetch a much higher valuation

Signposts to change my mind:

• BHX reaches VND 1.6bn monthly sales per store

• BHX breakeven (might miss a 20% jump but at least outcome is more certain)

Can we still count on their traditional formats to grow?

Much lower stakes question, but simply put, I believe the answer is yes, it should be able to grow at high single digit CAGR over the next 10 years at a 75% probability. 

From 2015-2021, MWG has grown TGDD and DMX sales at 24.6% CAGR. Looking at countries that are much further ahead of Vietnam in terms of middle class population and GDP per capita, I think it's not too far fetched to assume that Vietnam grows phone spend by 5% annually, somewhere in-line with GDP growth. If we layer on consumer electronics having much less penetration than mobile phones, I think our 7% growth for the next 8 years is quite conservative.

*All figures as of 2020 which was the most recent year I could get data for all countries

I tried to show a mix of DMs and EMs to illustrate the phone spend per capita, and it would seem the high end is $113 in Malaysia for an emerging market and Vietnam's $31 is almost the same as Indonesia and Philippines level. Assuming 5% growth for the next 8 years implies each person spends $46 a year on average on their phone, slightly below where China is today.

Understandably, Vietnam's phone expenditure as % of GDP per capita is on the high end, with India being the only example that is higher and that a base rate of 1.1% is probably more accurate for an emerging market as both the median and average are at that level. However, Vietnam's GDP is expected to grow 6.7-7.3% until 2027. If we assume a flat 6.5% growth rate until 2030, their GDP per capita would reach $4,634 compared to $46 which would be 1.0% of that.

Ultimately, I won't try to predict the short term trends in phone consumption, even though 1H22 phone sales have grown 25%, after a 19% growth in FY21. But if I were forced to guess, I'd say near term, we should (80%) see a positive surprise in 2H22 as 3Q21 was locked down and electronics sales fell 23%. Mid-term we might (30-40%) see some slowdown in 2023-2024.

Wild cards

Thus far, I have not priced in 3 formats because they are too embryonic and disclosure on them is minimal or too qualitative but could be meaningful in 5-10 years

• MWG's Bluetronics business which is the market leader for both mobile phones and CE in Cambodia

  • Cambodia's population is 17% of Vietnam's and their GDP per capita is 60% of Vietnam's level

  • They don't share the exact market share for either category, but if we assume 30% market share for both (half of their level in Vietnam) and simply scale it to their Vietnamese sales, it would be ~5% of MWG's phone + CE sales, so not meaningful now

  • Calculation: 

    • FY21 phone + CE sales: VND 88.7tn

    • Multiply by 50% (to account for 30% share instead of 60%), multiple by 17% (population) and multiple by 60% (GDP per capita) = VND 4.5tn

• Pharmacy is another large blue ocean market that MWG and FPT Retail (FRT) are very bullish on

  • FRT has 678 pharmacies with an annualised revenue of VND 8tn. They plan to open 400 pharmacies each year as the CEO said there are over 60k mom & pop pharmacies throughout Vietnam. FRT wants to position itself as the default chain to go when you need drugs, have the widest SKUs

  • MWG has 509 pharmacies but their approach is like Walgreens and Boots where they sell drugs very cheap but make margin on supplements, view it as a traffic driver and want to open them near to BHX. However, comments from the management make me believe this is on the backburner until they find a winning format for BHX

• JV with Erajaya (Indonesia's market leader in phones) to open CE format

  • You might be familiar with the name as Erajaya also brought in JD Sports to Indonesia, a competitor to MAPA

  • MWG said they will open 4 stores by the end of the year

  • Right now there is no one with more than 5% of the CE market in Indonesia and they think they have a good chance of consolidating the market

  • Dai didn't want to give too much guidance, playing down the opportunity as a trial but he mentioned that DMX's CEO and a team were in Indonesia when I spoke to him in May

  • MWG will handle the front end like training and store management because they think Erajaya doesn't know how to run stores well but Erajaya will handle the backend like procurement, training and accounting

  • Every Sunday at 7am, the chairman has a call with the Indonesians so I think it should be important to him

Catalyst

BHX reaching breakeven

Indonesia JV becoming meaningful (will be a mid-term driver)

Continued dominance in mobile phone and consumer electronics in Vietnam