Bukalapak: Seeing Beyond Fantastic Q1 2022 Financial Results (Part 1)

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Source: Google Finance (screenshot on early May 2022)

1. Introduction

Bukalapak (or short as BUKA) Q1 2022 financial statements have been published, and from e-news reading recently it appears that with its Q1 2022 financial results, it might be welcomed with high-profile coverage, as BUKA has booked a fantastic positive bottom line at Rp 14,5 trillion (vs loss of Rp 323 billion in Q1 2021). Looking instantly into its vertical income statement (unaudited), that paper gain has been ever been mentioned though the figure had moved up (see the news of initial paper gain totaling Rp 12.98 trillion) https://investor.id/market-and-corporate/277669/jadi-investor-strategis-allo-bank-bbhi-bukalapak-buka-siang-ini-bisa-cuan-rp-1679-triliun, accessed on 30 April 2022). There is not much new information, as most that blue massive bottom line being posted shows that the equity investment in digital bank PT Allo Bank Indonesia Tbk (BBHI) – a listed company – had brought a paper gain of approximately Rp 13.5 billion (based on Note 8 to the Financial Statements) using its fair-value investment in BBHI at Rp 14.9 billion by end of March 2022. Since this has been?a publicly announced information when BUKA made the entry to BBHI to acquire through the rights issue process by taking 11.49% equity ownership (at a price of Rp 478 per share or in a total of Rp 1.19 trillion) in January 2022, the upswing of that market price of BBHI?share could be followed by public investors.?BBHI market price per share has been hovering around Rp 5,775 by March-end of 2022 (and Rp 6,500 per share at the time of this writing), a significant increase from the beginning of this year. As that 11.49% stake might not render BUKA the power to participate in the financial and operating policy decisions of BBHI, then by default, BUKA will book that equity investment at fair value, which by taking the number of shares BUKA owns multiplied by the market price per share of BBHI. Whatever the spread between the resulted number with the original rights issue exercise, will go straight to BUKA financial statements. Interestingly, BUKA has displayed that unrealized gain on investment under Income from Operations (the one that usually I call,?the “top” half).

I need to touch a bit on the accounting side of this reporting of this paper gain flowing into the Profit or Loss, which might expose BUKA’s Income Statement to the market sentiment affecting the market price of BBHI shares, though such a massive positive swing does not impact at all to the free cash flows (and its Cash flows from Operating Activities under BUKA’s Statement of Income) for the current period. IFRS has a view on having such changes of the fair value of BBHI’s shares reflected in the Profit and Loss of BUKA. However, with such massive paper gain, we will see whether this will be reflected in the future expected increases in the net cash inflows? If yes, this could result in an increase in share price.

First, International Financial Reporting Standards so far (IAS 39 and IFRS 9), still believe that reporting at the fair value of an equity investment on the balance sheet, and recognizing its changes of fair value into the profit or loss (the default), will give better information about the value creation over time, even though it is argued that BUKA’s equity investment in BBHI has taken a longer-term view.

Second, taking from the information disclosure being made by BUKA, we might think that by expanding its offering of financial services to its ecosystem, it might be critical value driver in the mid-term and even longer-term for BUKA’s business performance. So this could be seen as made for ‘strategic’ reasons, as specific competitive advantage, and the focus for BUKA is of course to get the synergistic economic and ecosystem benefits from such investment, and increase the value of its ecosystem, and not just a matter of seeing that investment will grow in value (through the market price of BBHI shares). Alternatively, IFRS 9 allows companies to choose to recognize changes in the value of equity investments under Other Comprehensive Income.

Although the above is more accounting focus than economic focus, I am suggesting that the relevant question is whether this equity investment performance that BUKA has made is relevant to measuring the company's performance. If that synergistic either contractual or non-contractual benefits could really come into reality, then somehow we will see that this will impact BUKA's level of its core-operating business’ Net Operating Profit down the road in the future, and expected economic reality.

1. Income Statement

Onside its income statement, we could distinguish two profit & loss items:

First, core operating profit/loss, which so far, still shows negative ink, is split into:

• gross loss of Rp 278 billion (vs gross margin of Rp 346 billion in Q1 2021), and
• after of Selling-General-Administrative-Others expenses, will stand at a loss of Rp 1,071.8 billion (or if we took out the stock option cost of Rp 666.9 billion, resulting to Rp 405 billion in Q1 2022 (vs loss of Rp 328 billion in Q1 2021).

Behind these abovementioned results, BUKA has indicated a strong push on overall Total Processing Value (TPV), both overall Mitra and Marketplace growth of +25% to Rp 34.1 trillion (with a target for 2022 of Rp 180 trillion, or +/- 19% achievement for the first 3 months), and with a better overall take rate to 2.31%, the top line reached Rp 787.9 billion (with 2022 target at Rp 3 billion, 26% achieved), another big jump of 86% from the same quarter last year. We need to factor as well there any seasonal cycle contributing to this higher jump in all TPV and revenue numbers for Q1 2022 as the Merchants and Mitra (M2) might load more stuff to their warehouse to anticipate the upcoming upsurge demand for Ramadhan and Idul Fitri long holidays in April and early May 2022?

Source : BUKA 1Q_2022_Results presentation deck page 15.

I am also intrigued to know the proportion of this higher TPV and whether it has come from the following sources:

• how many come from new M2 and as a result of penetration efforts?
• How many come from repeat orders from M2 (or its "replacement cycle")?

BUKA could boost more on the second point above while jacking up its new and penetrable market M2. For the latter, there is probably more challenging as BUKA’s challengers might include those conventional distributors in the market. If the industry overall does not grow or is growing at a rate lower than that of BUKA, arguably BUKA’s growth has been shifting away from some existing competitors’ shares in the market. It is likely they will not just sit nicely, right? Let alone, there will always be a threat of more competitors in the wings.

Using slide No. 23 of the BUKA Q1 2022 presentation deck as displayed below, we see that

Source: BUKA 1Q_2022_Results presentation deck page 23.

BUKA though seems to focus on driving the Mitra TPV, it just posted a single digit growth of 6% in terms of TPV from Q4 2021. Having shown an improving trend of its Mitra take-rate to 2.73% (note: BUKA’s administration fee for Mitra is 3% (https://www.bukalapak.com/bantuan/mitra-o2o/tentang-mitra/syarat-ketentuan-mitra-bukalapak)) and TPV per Mitra, BUKA gained more revenue and growth at 47%, while managed to maintain its revenue contribution to total Q1 2022 revenue at around 60% (Mitra: Marketplace = 60%:40% roughly).

BUKA seems to do something to bring back the lower revenue achievement for Marketplace business that just hit Rp 173 billion in Q4 2021, to the level higher than Q1 2021 by 15%. The prominent increase is at its take rate, which was down before to 0.94% in Q4 2021 to now 1.74% in Q1 2022, or 80 bps higher. Nonetheless, this is not sufficient to bring more TPV and revenue, as Marketplace TPV Q1 2022 is even lower than that of Q1 2021 by 4%, or a bigger 9% compared to Q4 2021. Marketplace competition is probably very challenging in view that other 3 leading marketplaces such as Tokopedia, Shopee, and Lazada, in the arena while maintaining a BUKA take-rate that is at the lower end of single-digit. In view of the website visits, these 3 marketplaces have really had the upper hand, as shown below for Q4 2021.

Source: https://iprice.co.id/insights/mapofecommerce/ (being accessed on 1 May 2022)

Bukalapak’s website visits by Q4 2021 of 25.8 million was even lower than visited in Q3 2021 (Rp 30.1 million), sliding down by 14%. From the BUKA slide deck as well, we observed that from Q4 2021 to Q1 2022, roughly there is no significant increase for its online merchants which stood at 6.8 million. If we include the micro-small-and-medium-enterprises (MSMEs) totaling 13.1 million by end of Q1 2022, then BUKA has more than 20 million. This might give a self-reinforcing network effect if BUKA could tap into further this 20 million of M2. This is why we see that BUKA is keen to forge an equity partnership with digital bank BBHI in early January 2022 to un-tap and explore BUKA financial services and solutions that could be made available to this 20mio+ M2. We could see the whole picture of its open and synergistic ecosystem on Page No. 7 of the slide deck, in which the presence of BBHI collaboration and its financial platform might be the bloodstream of the whole BUKA ecosystem.

Source: BUKA 1Q_2022_Results presentation deck page 7.

?To be continued..

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