China Small Cap Play
Disclaimer: This newsletter is not financial advice this is for educational purposes only so please DON’T take this newsletter as a buy or sell signal.
GigaCloud Technology Fundamentals:
Below is a checklist I normally use in my process when I look at the fundamental health of a company. If the company meets my criteria it will be colour-coded in green and if the company fails to meet my criteria it will be colour-coded in red which means I need to investigate further and ask myself why this is the case.
As you can see below there is 1 red box and I am going to explain it:
5-Year Profit Margin- When analysing a company I ideally want to see a 5-year average profit margin above 10%, however, because this is a logistic/supply chain business, I will not penalise them for not meeting my 10% target. GigaCloud Technology’s current profit margin is in line with what I expect from a company of this nature.
Founded in 2006 by Larry Wu, GigaCloud Technology provides end-to-end B2B e-commerce solutions for large parcel merchandise. GigaCloud Technology marketplace connects manufacturers primarily in Asia with resellers in the United States, Asia, and Europe to execute cross-border transactions across furniture, home appliance, fitness equipment, and other large parcel categories. The company was formerly known as Oriental Standard Human Resources Holdings Limited before changing its name to GigaCloud Technology in February 2021.
GigaCloud Technology’s goal is to connect its global B2B e-commerce platform by integrating everything from product discovery to payments to logistics tools into one easy-to-use platform. Sellers and buyers from their targeted markets around the world leverage the company’s cross-border fulfilment network, which is optimised for large parcel products, to trade with each other whilst saving costs. Underpinned by a network of strategically placed warehouses and supply chain capabilities, the company marketplace is designed to simplify and mitigate logistics and inventory requirements for both sellers and buyers. GigaCloud Technology provides value-added services like product sales forecasts to their sellers to allow them to efficiently manage their inventory and reduce costs. The value of GigaCloud Technology business model is demonstrated by the growth in gross merchandise value(GMV) from their new and existing buyers and sellers. In 2020, 2021 and 2022, GigaCloud Marketplace had 210, 382 and 560 active 3P sellers and 1,689, 3,566 and 4,156 active buyers. Sellers in their marketplace are typically manufacturers based in Asia, who can leverage the company’s supply chain capabilities to establish overseas sales channels without having to invest in logistics or rely on intermediaries. The buyers in GigaCloud Technology marketplace are typically resellers based in the U.S. and Europe that procure products at wholesale prices and subsequently sell on third-party B2C platforms.
GigaCloud 3p-GigaCloud 3P generates service revenues through the various 3P activities of sellers and buyers in their GigaCloud Marketplace. When a seller and buyer enter into a transaction in GigaCloud Marketplace, GigaCloud Technology generates revenues from platform services by earning a percentage commission depending on the transaction value. The standard commission ranges between 1% and 5% depending on the size of the transaction. GigaCloud Technology also charges warehousing fees in connection with the storage of products in the company’s warehouses, last-mile delivery fees if the buyer requires last-mile delivery services and fees for ocean transportation services such as the delivery of products via ocean and other transportation. In 2020, 2021 and 2022, GigaCloud Technology had excess fulfilment capacity and they also provided third-party logistics services to customers to help fulfil their large parcel transportation needs in The United States by leveraging the company logistics network. As GigaCloud Technology continue to grow GigaCloud Marketplace, they expect to dedicate their logistics capacity to products sold on their marketplace, and will only opportunistically provide third-party logistics services when there is excess capacity within their network.
The chart below displays the quarterly GigaCloud Marketplace GMV of their 3P sellers for the years 2020, 2021 and 2022. 2020 3P Sellers, 2021 3P Sellers and 2022 3P Sellers represent a group of sellers who first sold products in the GigaCloud Marketplace. The Active 3P Sellers shows the total number of sellers who have sold at least one item in the GigaCloud Marketplace in the last 12 months. 2020 3P Sellers, 2021 3P Sellers and 2022 3P Sellers have demonstrated attractive quarter-over-quarter growth in both the number of sellers and GigaCloud Marketplace GMV.
As shown below the number of active buyers in the GigaCloud Marketplace has increased every quarter since the first quarter of 2020. The company had 1,689 active buyers in 2020, 3,566 active buyers in 2021 and 4,156 active buyers in 2022. The company view the number of active buyers as a key driver of their GigaCloud Marketplace GMV and revenue growth, and a key indicator of their ability to attract and engage buyers in their marketplace. GigaCloud Technology expects continued growth in the number of active buyers through internal sales initiatives, referrals by existing users, word-of-mouth and direct visits to their website however, the growth rate may be slower than in previous years due to inflationary pressure and changes in the global economic conditions.
GigaCloud 1P-GigaCloud 1P further enhance the company marketplace experience by selling its inventory. GigaCloud 1P business creates more products for buyers, gives insights into seller needs, provides the company with proprietary data and increases the velocity of sales in their marketplace. Through GigaCloud 1P, the company generate revenues from product sales.
Off Platform E-Commerce-In addition to facilitating transactions in their GigaCloud Marketplace, GigaCloud Technology also procure highly rated products directly from manufacturers and sells them directly to and through third-party e-commerce websites such as Rakuten, Amazon, Walmart and Wayfair. Off-platform e-commerce sales deepen the relationships with sellers and provide the company with proprietary data. GigaCloud Technology expects the off-platform e-commerce GMV to GigaCloud Marketplace GMV as percentages of total GMV to gradually decrease. Through off-platform e-commerce, the company generate revenues from product sales.
When looking at management I like to judge the CEO in several different ways such as experience, capital allocation skills and Incentives. In this section, I will cover whether management incentives are aligned with shareholders.
Experience-Larry Wu founded GigaCloud Technology in 2006 and has been its Director, Chairman and Chief Executive Officer since then. Before Larry Wu founded GigaCloud Technology he served as the general manager of New Oriental Education & Technology Group from 2002 to 2006. Larry Wu is also the Director of Ji Xiang Hu Tong Holdings Limited and Talent Boom Group Limited. Larry Wu received his MBA degree from Yale University in 2002 and also achieved a bachelor’s degree in mechanical manufacturing from Beijing Union University in 1994.
Capital Allocation-When it comes to judging management I think capital allocation skill is very important because I want management to create shareholder value and not destroy it. So far GigaCloud Technology’s capital allocation has been spot on because they are giving value back to shareholders via reinvestment back into the business to further expand their logistic capabilities and they have a $25 Million share repurchase programme.
GigaCloud Technology DOES NOT pay a dividend. All their cash flow is being used as reinvestment into the business for future growth and share repurchase.
Incentive-If the current board is actively purchasing stock of their own business this is a positive indicator that shows that management believes the stock is undervalued and they believe in the long-term prospect of the company.
As you can see below we have 1 person buying GigaCloud Technology Stock and that is DCM Ventures which is a venture capital firm located in Silicon Valley, Beijing and Tokyo.
Bull And Bear Case:
Bull Case- The first bull case is a long runway for growth. GigaCloud Technology has highlighted four ways they can continue to grow their business and they are:
Grow & Diversify Seller Base And SKUs:
Grow and diversify existing seller base.
As of 31/3/23, 3P seller GigaCloud Marketplace GMV represented 51.5% of total GigaCloud Marketplace GMV, underscoring the platform's growth and market recognition as a thriving 3P-seller-dominated marketplace.
Expand existing offerings and extend their catalogue.
Grow Buyer Base & Engagement:
Attract new buyers to their marketplace.
As of 31/3/23, 4,255 buyers generated $553.5M of GigaCloud Marketplace GMV.
Continue to make investments to enhance brand awareness and improve product offerings to drive buyer stickiness to the platform.
Expand Product Service Offerings:
Continue leveraging data analytics capabilities to develop new tools and services to drive incremental revenue opportunities.
Launched supply chain financing services in September 2020 to select qualified sellers.
Plan to roll out paid advertising tools that promote products based on search results.
Inorganic Growth Opportunities:
Actively seeking M&A opportunities that will enhance their distribution channels and logistics offerings.
Plans have been prepared to invest in R&D in areas such as IT, AI, and machine learning.
Bull Case-The second bull case is the company ownership structure. Currently, the founder owns 20% of the company. This is usually a positive indicator because when the owner still has a large percentage of his net worth in the company he would want the company to do well. Secondly is JD’s (JingDong) 10% stake in GigaCloud Technology. GigaCloud Technology getting major funding from Chinese e-commerce Giant JD is positive because GigaCloud Technology can leverage the logistics experience of JD to benefit their business.
Bear Case-The first bear case is delisting. When it comes to Chinese stocks delisting is always a fear because investors aren’t sure if Chinese companies will comply with US regulators. In a CNBC interview, CEO Larry Wu discussed whether complying with US regulations would be an issue or not.
Bear Case-The second bear case is growth. GigaCloud Technology has grown rapidly over the last few years. Their revenues increased from $275.5 million in 2020 to $414.2 million in 2021 and further to $490.1 million in 2022. GigaCloud Marketplace GMV increased from $190.5 million in 2020 to $414.2 million in 2021 and $518.2 million in 2022. GigaCloud Technology cannot assure investors that they will be able to grow at the same rate as they did in the past or avoid any decline in the future. The company growth may slow or become negative, and revenues may decline for several reasons, some of which are beyond the company’s control, including decreasing consumer spending, increase in competition, declining growth of the overall market or industry, the emergence of alternative business models and changes in rules, regulations, government policies or general economic conditions. In addition, the B2B e-commerce platform, GigaCloud Marketplace, from which the company have generated 66.2%, 69.2% and 76.0% of their total revenues in 2020, 2021 and 2022, respectively, is a relatively new initiative and may not grow as quickly as the company have anticipated. GigaCloud Technology’s growth rate may also be slower than the previous years due to inflationary pressure and changes in global economic conditions.
Bear Case-The Third bear case is the relationship between the company and its partners. If GigaCloud Technology fails to maintain and expand its relationships with third-party platforms and sellers/buyers on their marketplace the company revenues and results of operations will be harmed. GigaCloud Technology’s business operations have relied on certain third-party e-commerce platforms such as Rakuten in Japan, Amazon and Walmart in the U.S. and Wayfair in the U.K. and the company still expects to be significantly influenced by these third-party e-commerce platforms in the foreseeable future. Such third-party e-commerce platforms have significant influence over how transactions take place on their e-commerce platforms, including how purchase orders are fulfilled by indicating to consumers the preferred express delivery companies for orders placed. GigaCloud Technology may have to accommodate the demands and requirements of various third-party ecommerce platforms such as packing standards and the selection of specified shippers.
In this section, I am going to talk about valuation. I will be valuing GigaCloud Technology by using a discounted cash flow model to come up with a price I am willing to pay based on a conservative growth rate and my desired return of 15%. Since GigaCloud Technology hasn’t got a like-for-like competitor that is publicly traded, there won’t be any industry comparison based on valuation.
In this final part, I will be valuing GigaCloud Technology by using a discounted cash flow model to come up with a price that I am willing to pay for the company. When valuing a company I tend to be conservative so below is the valuation of GigaCloud Technology based on a 6-year projection.
As you can see based on my conservative assumption, GigaCloud Technology is looking to grow 9-12% so I went conservative and assumed a 5% growth in the first 1-3 years then the growth will slow down to 2% 4-6 years out. In my assumption, I also went with an exit multiple of 10x earnings which is below the historical average that GigaCloud Technology has traded at. Based on my assumption I have come to a buy price of $12.05 compared to the current stock price of $9.16 which means right now GigaCloud Technology is trading below intrinsic value.
Thanks for reading my newsletter on GigaCloud Technology. Disclaimer this newsletter is not financial advice this is for educational purposes only so please DON’T take this as a buy or sell signal.
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