Initial Report: Kaspi.kz (NASDAQ: KSPI), 117%% 5-yr Potential Upside (EIP, Dean Tay)

Dean presents a "BUY" recommendation based on Kaspi's fundamental strengths and long-term growth trajectory.

LinkedIn: Dean Tay

Executive Summary

I am issuing a strong "BUY" recommendation for Kaspi.kz, with a bullish outlook projecting a 68% upside over the next three years and an even more impressive 117% upside over a five-year horizon. This recommendation is rooted in Kaspi's demonstrated strengths: a robust business model, an exceptional management team, and attractive valuation metrics that present a compelling investment case.

Kaspi stands out in the market with its rare combination of high growth, exceeding 30% year-over-year, coupled with outstanding profitability, boasting net income margins above 40%, resulting in an ROCE of 88.63% in FY23. Despite these strong fundamentals, the company is trading at a reasonable 10.4x price-to-earnings ratio, suggesting it may be undervalued at current levels.

Furthermore, the recent 17% decline in Kaspi's stock price, triggered by a short report, has created an appealing entry point for long-term investors. While I acknowledge that short-term market sentiment may remain cautious, I believe the market's reaction has been overly pessimistic. The management team's proven ability to navigate past crises effectively bolsters my confidence in their capacity to address current challenges and steer the company towards continued success.

Investors should be aware of potential near-term headwinds, including an expected deceleration in growth for the third quarter of 2024 and the possibility of lingering negative sentiment in the short term. However, I firmly believe that Kaspi's fundamental strengths and long-term growth trajectory far outweigh these temporary concerns.

Company Overview

Kaspi.kz is a Kazakhstan-based fintech company that combines multiple services such as e-commerce, payments, lending and government services into one Super App platform.

Source: Kaspi Annual Report 2023

History

• Kaspi.kz, Kazakhstan's largest fintech company, began its journey in 2002 when Vyacheslav Kim acquired a small bank called Kaspiyskiy. Initially, Kaspi operated as a traditional bank focusing on corporate clients and small-to-medium enterprises (SMEs). During Kazakhstan's economic boom in the early 2000s, driven by high oil prices, global banks were eager to invest in emerging markets, and Kaspi was poised to benefit. However, the 2008 global financial crisis changed the landscape dramatically.

• Under the leadership of Kim and CEO Mikheil Lomtadze, Kaspi pivoted away from commercial lending, recognizing an opportunity to focus on retail banking. This shift marked the beginning of a strategic transformation. The company’s first major move was launching a mass-market credit card business in 2008, followed by the introduction of digital products such as an online bill payment system in 2012, an online marketplace in 2014, and mobile applications in 2017.

• Kaspi's transition from a traditional bank to a digital-first company was driven by an innovative approach to customer service. The leadership team re-engineered the company with cross-functional teams responsible for creating products that customers genuinely needed and loved. This customer-centric focus led to a series of bold decisions, such as exiting commercial loans and cutting product lines that weren’t popular, including a credit card product that had amassed over 1 million users.

• Over time, Kaspi evolved into a "super app" that now offers a wide array of financial and commerce services. The company's ecosystem includes consumer loans, e-commerce, payments, and peer-to-peer mobile transactions. Kaspi’s transformation has made it a key player in Kazakhstan's fintech landscape, known for its speed, simplicity, and innovation in digital financial services.

Kaspi's product timeline can be summarised in the diagram below:

Corporate Structure

Below outlines the structure of Kaspi.kz:

Source: Kaspi

Operating Segments

Kaspi.kz offers a range of services in Kazakhstan, focusing on payments, marketplace, and fintech solutions for both consumers and merchants. It operates through three main segments:

• Payments Platform: Facilitates transactions between customers and merchants. It includes shopping transactions, bill payments, and peer-to-peer transfers. Merchants can accept payments online and in-store, issue invoices, pay suppliers, and track turnover. Proprietary data helps inform business decisions. This segment contributes to 25% of total revenue and 36% of net income as of Dec 2023.

• Marketplace Platform: Connects merchants and consumers both online and offline. It supports an omni-channel strategy to boost merchant sales, allowing consumers to purchase products and services anytime with free delivery. Kaspi Travel offers bookings for flights, holidays, and rail tickets. The platform enhances sales by integrating payments, fintech products, advertising, and delivery services. This segment contributes to 53% of total revenue and 35% of net income as of Dec 2023.

• Fintech Platform: Provides consumers with buy now, pay later (BNPL) options, financing, and savings products. Merchants receive finance services through super apps like the Kaspi.kz Super app. This segment also covers banking, asset management, real estate, payment processing, online travel, and information services. This segment contributes to 23% of total revenue and 29% of net income as of Dec 2023.

The company also has a 4th segment: government services which do not contribute to revenue, but plays a significant role in customer acquisition and retention.

Payment Infrastructure and Financial Services

The platform connects the company's customers, comprising of both consumers and merchants, to facilitate cashless, digital payment transactions. Payments is Kaspi˖'s most profitable and second fastest growing business segment.

Source: Kaspi

Kaspi's payment ecosystem has demonstrated remarkable growth across key metrics, underscoring its expanding market dominance. The company's Total Payment Volume (TPV) has experienced substantial year-over-year increases at a CAGR of 69.4% from 2019 to 2023, reflecting the growing adoption and usage of Kaspi's payment solutions. Kaspi's revenue-generating TPV represented approximately 58% of all transactions that were conducted in Kazakhstan through mobile devices and the internet.

Source: Kaspi

This surge in TPV is closely tied to the impressive growth in both active consumers and merchants within the Kaspi network with a CAGR of 27.4% and 141.4% from 2019 to 2023.

Key products and services in the payments segment include:

Consumer-facing

1. P2P payments - enables consumers to transfer and receive money from other consumers instantly (similar to Paynow/Paylah in Singapore, and WeChat in China)

2. Kaspi QR technology - enabling end-to-end payments functionality between consumers and merchants using the Kaspi.kz and Kaspi Pay Super Apps, without the need for a card

Source: Kaspi

3. Kaspi Gold - a digital account and pre-paid debit card that consumers use to make everyday transactions in-store and online with Kaspi QR.

   1. This is used predominantly for payments with merchants which do not have Kaspi Pay or for overseas transactions) that our consumers can use to pay for purchases online and in-store.

   2. Consumers can top up Kaspi Gold through (i) the Kaspi.kz Super App from any Mastercard/Visa card, (ii) its network of Payment Kiosks and ATMs, or (iii) automatically through payroll systems

Source: Kaspi

4. Bill payments - enables consumers to pay recurring bills through the Kaspi.kz Super App, commission-free for services such as mobile, utilities, public transportation, internet and cable TV, education, health and beauty, financial services and taxes

Source: Kaspi

Merchant-facing

5. POS network - provide a convenient way for merchants to accept in-store and online payments from consumers using Kaspi QR technology, Kaspi Gold debit cards and third- party bank cards

   1. Includes m-POS and Smart POS, Kaspi's physical and app-based POS terminals respectively

   2. Kaspi Pay Mobile POS is a proprietary mobile application, available on iOS or Android devices and is aimed at SMEs and merchants with low transaction intensity.

   3. Kaspi POS Terminal has pre-installed Kaspi POS software and is designed to create convenient ways for merchants to accept payments in a high-transaction intensity environment, for example supermarkets. Kaspi POS Terminal enables merchants to receive payments from any bankcard and the Kaspi Gold pre-paid debit card or from Kaspi.kz Super App through Kaspi QR technology.

Source: Kaspi

6. B2B payments - enables suppliers and merchants to digitally issue and instantly settle invoices seamlessly between themselves

   1. Kaspi Pay is a digital finance mobile application that helps merchants manage business finances and transactions digitally. Merchants can view real-time transactions on Kaspi's Payments and Marketplace Platforms, make payments and transfers, track their finances, and generate account statements.

Pricing and Monetization

Source: Kaspi

Kaspi monetizes its services through various channels for the payment platform:

• Consumer fees for external bank transfers (2.8%)

• Kaspi QR consumer transaction (0.95%)

• Kaspi Gold transaction via physical card (1.7%)

Kaspi's revenue take rate on TPV of 1.3% is competitive with, and in some cases exceed, those of global payment peers like Nuvei, Mastercard, Visa, and Adyen.

Fintech Platform

Kaspi˖s Fintech segment is its consumer lending and deposit businesses. The platform enables consumers to access instantly and seamlessly, primarily through Kaspi.kz Super App, the Company’s digital finance products, including consumer finance and deposit. Fintech is Kaspi˖s largest, but slowest growing and least profitable (from a margin perspective) operating segment, accounting for 54% of revenue and 35% of net income, in 20˖23. It is notable that Kaspi originates 100% of loans from its own balance sheet (vs 2% for Ant/Alipay).

Kaspi's fintech platform has shown impressive growth, particularly in its Total Finance Volume (TFV), which serves as a key indicator of the platform's financial services adoption and usage. The TFV has exhibited strong year-over-year growth at 39.8% CAGR from 2017 to 2023, reflecting the increasing popularity and trust in Kaspi's lending and financial products.

Source: Kaspi

The trend of total active consumers parallels that of TFV, with a 22% CAGR from 2019 to 2023.

Source: Kaspi

Key products and services in the fintech segment include:

1. Car financing - online car loans for purchases through Kolesa.kz (a leading classified group that Kaspi acquired a majority stake in Jul 2023 - to be elaborated under "Marketplace")

   1. In order to secure financing, a consumer can select a car on Kolesa.kz and seamlessly apply for a loan originated through the Fintech Platform for the maximum term of 60 months.

   2. The loan approval process takes less than one minute, which then allows the consumer to complete the car purchase funded by Kaspi.kz via the Kolesa.kz website or the respective mobile application.

   3. Kaspi then credits the purchase price to the seller’s account. Purchased cars act as security for the financing provided.

   4. Consumers may prepay car loans without any penalty prior to contractual maturity.

2. General Purpose Loans - loans extended to consumers for day-to-day purchases outside of the Marketplace Platform

Source: Kaspi

3. Buy-now-pay-later - unsecured financing for Marketplace platform, provided for a period of up to 3 months, and from 6 to 24 months in specific promotion periods. Buy-now-pay-later products with a maturity of less than three months are provided to consumers interest free.

   1. Kaspi Red Shopping Club

      • Kaspi Red Shopping Club is a subscription-based programme which allows consumers to have a pre-approved revolving shopping limit and make purchases on the Marketplace Platform free of any interest through a buy-now-pay-later product, for a period of up to three months.

      • Kaspi offers free membership for the first year. If the consumer uses the services of the Kaspi Red Shopping Club, for each subsequent year we will charge a membership fee which varies depending on the shopping limit chosen by the consumer (ranging from KZT50,000 to KZT150,000).

4. Kaspi deposits - customer deposit accounts available through the Kaspi.kz Super App.

   1. Kaspi Deposit accounts are predominately denominated in tenge and U.S. dollars and are current and term accounts

5. Merchant finance - a working capital finance product for merchants operating in the Payments and Marketplace Platform with a targeted yield of 15-20%.

   1. The service enables merchants to drawdown a facility of up to 20% of GMV and TPV generated by the merchant through the Payments and Marketplace Platforms. The financing will be provided in local currency and we expect the average amount to be around U.S.$10,000 equivalent. The maturity of each drawdown is up to six months and is automatically repaid daily from the merchant’s GMV and TPV with Kaspi.kz. Online Merchant Finance is provided fully online through Kaspi Pay Mobile App.

   2. Lending is linked to transaction activity through Kaspi's Super App, in this case a merchant’s turnover through Kaspi.kz Pay or Kaspi Marketplace. Merchant financing is also low risk, with repayments taken directly from the merchant’s sales transacted through Kaspi.kz.

Pricing and Monetization

The Fintech Platform primarily generates interest revenue, fees from consumer finance loans and Kaspi Red Shopping Club membership and other fees.

Marketplace Platform

The platform allows consumers to buy a broad selection of products and services from a variety of online and offline merchants. Marketplace is Kaspi'˖s fastest growing segment. Kaspi reports four main businesses within Marketplace: m-commerce (in-store and services), e-commerce, Travel, and Grocery.

Kaspi's Marketplace segment has demonstrated remarkable growth, with its Gross Merchandise Value (GMV) serving as a key indicator of the platform's expanding reach and consumer adoption. The GMV has shown impressive 58.44 CAGR from 2017 to 2023, reflecting the platform's success in capturing a larger share of Kazakhstan's e-commerce market.

Source: Kaspi

This growth is similar for the marketplace active consumers and merchants as seen below.

Source: Kaspi

Note: Kaspi did not report active merchants in the marketplace for 2023

Key products and services in the marketplace segment include:

1. 1P marketplace

   1. Kaspi operates an e-Grocery platform that allows consumers to order groceries through the app with free home delivery within 24h.

   2. This was after an acquisition of an 51% stake in Magnum E-commerce Kazakhstan from Magnum Cash & Carry LLP for KZT 5000 million on February 24, 2023.

   3. Kaspi is responsible for the frontend user experience, product assortment, and pricing, while Magnum provides grocery expertise and leading purchasing terms. Magnum owns a 10% equity stake in Kaspi˖s eGrocery segment.

Source: Kaspi

2. 3P marketplace

   1. e-Commerce - consumers are able to select, purchase and receive products through the Kaspi app, powered by fintech and payments platform

      1. The take rate depends on the specific vertical; it ranges from 5.0% (for electronics) to a percentage level in the mid-teens (for jewellery).

      2. A variety of fulfilment options, including in-store pick-up or delivery by merchant or by Kaspi Delivery (to be elaborated below)

         

         Source: Kaspi

   2. m-Commerce - consumers are able to research goods and merchants in the app and complete purchases at the merchant's physical location with Kaspi QR and BNPL products

      1. Mobile Commerce is done through the Kaspi Red Shopping Club (a subscription-based service), which has a dedicated section for merchants and consumers in the Super App and is organised around popular shopping and lifestyle categories, which are not necessarily listed on the e-Commerce platform.

      2. Such categories include, among others, supermarkets, restaurants, petrol stations, medical services and beauty salons.

   3. Kaspi Travel - consumers are able to purchase rail and air tickets, as well as international package holidays within the Kaspi.kz Super App, with payments fully integrated with Kaspi Gold and BNPL products.

      1. Included in July 2020 when Kaspi.kz acquired a 100% share of LLC Traveleasy, whose primary business is selling online airline and railway tickets. Thereafter, the company started expanding into rail and more robust vacation packages. Most rail and airline tickets sold facilitate domestic travel, though anecdotally, Turkey, Egypt and Dubai are popular vacation destinations for Kazakhstanis Kaspi entered the sector via acquisition, picking up Santufei, a Kazak player in the space.

      2. Kaspi processed KZT 231 billion in travel volume in ˖22, accounting for roughly 25% of all travel spend in Kazakhstan, and KZT 353 billion in travel volume in ˖23, up 57% from the previous year

      3. Take rate for travel: 7.9% (according to Q2 2024 earnings call

         

         Source: Kaspi

   4. Kaspi Classifieds - consumers and businesses can advertise their used and new goods, services and jobs to consumers, including car and real estate with the Kolesa.kz and Krisha.kz acquisitions

      1. This process began in 2019 with the acquisitions of three classifieds companies in Azerbaijan - turbo.az (cars), bina.az (real estate) and tap.az (general). Then in late 2022, Kaspi Classifieds (general) was launched in partnership with Kolesa, a leading classifieds in Kazakhstan which Kaspi’s CEO, Mikhail Lomtadze, already had an 11% interest in. Roughly a year later in the fourth quarter of 2023, Kaspi acquired a 40% stake in Kolesa, effectively giving them a controlling interest when considering Lomtadze’s stake.

      2. Kolesa owns Kazakhstan’s no. 1 car classifieds site, kolesa.kz (13x better known than the next biggest) and Kazakhstan’s no. 1 real estate classifieds site, krisha.kz (4.6x better known than the next biggest). They also own the leading car classifieds in Uzbekistan, avtoelon.uz, which will provide a nice foothold for Kaspi.

         

         Source: Kaspi

3. Car e-commerce

   1. Facilitates buying and selling used cars by integrating the search, selection and legal registration steps required

4. Delivery services - Kaspi Delivery is a service that allows the reliable delivery of any product on the Marketplace to more than 150 towns and cities in Kazakhstan.

   1. Kaspi collaborates with more than 60 local logistics companies, including well-known names like DHL, DPD, KazPost, and Pony Express. This network employs around 2,500 couriers and 5,000 delivery personnel, primarily from small and medium-sized businesses.

   2. Two delivery options: Delivers straight to door or to Kaspi's own postomats (automated parcel machines) that improve courier efficiency, reduce last-mile delivery costs and improve consumer convenience.

      

      Source: Kaspi

   3. Some performance metrics include: 96% of e-Commerce orders were delivered through Kaspi Delivery, 51% of orders were delivered within 48 hours, 88% of orders were delivered free of charge for the consumer.

   4. It is important to note that the delivery times are impressive, considering the size of Kazakhstan (below picture for reference)

      

    Source: Very Good Value on Substack

   

   

   Source: Kaspi 2023 ESG Report

5. Advertising services - advertising campaigns on the platforms, which may display ads on the Kaspi.kz Super App to users through product searches, suggested products and banner ads.

   1. Two forms of ads - product ads and brand ads

      • Product ads

        

      • Brand ads

        

        Source: Kaspi Q2 2024 Report

   2. Promotional periods such as Kaspi Juma, a 3 day national shopping festival (Kaspi's version of 9.9 / 10.10 / 11.11 in the context of Shopee or USA's Black Friday or China's Single Day)

      • Kaspi Juma usually takes place twice a year, in the summer and the autumn, and allows consumers to purchase any goods from participating merchants via a buy-now-pay-later consumer finance product with interest-free instalments for up to 24 months. This will be changed to thrice a year from 2024 onwards to cater to the different seasonalities in the year as mentioned in its earnings call.

      • Kaspi Juma contributes to a significant amount of GMV in a year (with 14% GMV contribution in 2019 and 14.2% GMV contribution in 2023)

      • As Kazakhstan's largest shopping festival, merchants pay on average double the seller fees to participate in Kaspi Juma.

Government Services

Kaspi's GovTech platform, while not directly contributing to the company's revenues, plays a crucial role in enhancing user engagement and solidifying Kaspi's position as an indispensable part of Kazakhstan's digital infrastructure.

This innovative platform seamlessly integrates a wide array of government services into the Kaspi.kz Super App, offering users unprecedented convenience in accessing essential public services.The platform's functionality is extensive and user-centric.

For individual consumers, it serves as a digital hub for storing and accessing ID documents, renewing driving licenses, transferring car ownership, registering marriages, and obtaining birth certificates. Entrepreneurs benefit from streamlined processes for business registration, tax calculations, payments, and report filings.Kaspi's close collaboration with government agencies, particularly the Ministry of Digitalisation, ensures the continuous expansion of high-frequency GovTech services within the Kaspi.kz and Kaspi Pay Super Apps.

Source: Kaspi

In 2023, the most widely utilized services included digital document management, car ownership registration, driver's license issuance, and new business registration.

Source: Kaspi

Kaspi's integral role in Kazakhstan's economy cannot be overstated. Its deep integration into both the private and public sectors positions the company as a vital component of the nation's digital ecosystem. This strategic importance suggests that, if ever necessary, Kaspi could potentially rely on support from the Kazakh government, further underlining its stability and long-term prospects.

Kaspi˖s two-sided network consists of Kaspi.kz Super App (for consumers) and Kaspi Pay Super App (for merchants). The following image summarises the different offerings for both consumers and merchants, in the 4 segments as mentioned above.

Source: Kaspi, author's illustration

Revenue Split by Geography

Kaspi operates in 3 countries: Kazakhstan, Azerbaijan and Ukraine.

• Kaspi entered Azerbaijan in September 2019 through the acquisition of three leading marketplace platforms (Turbo.az (a car marketplace), Tap.az (a used and new items marketplace) and Bina.az (a real estate marketplace)). This expanded their addressable market by 10 million people

• Kaspi entered Ukraine in October 2021 when it acquired 100% of Portmone Group, a payments company operating in Ukraine.

Kazakhstan remains the largest contributor to Kaspi's revenues at 99.6%, with Azerbaijan and Ukraine both taking up 0.2% of total revenues.

Below is the revenue split by countries in Dec 2023:

Source: Kaspi 2023 Annual Report, author's illustration

Country Analysis: Kazakhstan

Located in Central Asia, Kazakhstan is a land-locked country bordering Russia, China, Kyrgyzstan, Uzbekistan and Turkmenistan.

Population and Demographics

Kazakhstan boasts a population of approximately 20 million as of 2024. The country's largest urban centers are:

1. Almaty: 2.16 million

2. Nur-Sultan (formerly Astana, the capital): 1.35 million

3. Shymkent: 1.19 million

These cities also serve as the primary operational hubs for Kaspi.

Source: Kazakhstan Discovery, author

Population Numbers

Kazakhstan's population is projected to increase from 18.51 million in 2019 to 21.12 million by 2029. The country has maintained a relatively stable population growth rate of around 1.5% from 2013 to 2023. As of 2024, the population stands at 20.59 million, with a 1.29% annual growth rate.

Source: IMF, Statista

Life expectancy in Kazakhstan has been on an upward trajectory and is expected to continue rising until 2100. Death rates have been steadily decreasing, with the exception of a temporary increase during the COVID-19 pandemic in 2020 and 2021. The long-term demographic outlook appears favorable, with working-age population growth aligning closely with overall population growth.

Source: IMF, Statista

Age Structure

As of January 2023, Kazakhstan's age structure is as follows:

• 0-14 years: 29.5%

• 15-64 years: 62%

• 65 years and above: 8.5%

The median age of the population is 30 years.

Source: Wikipedia

This demographic profile presents a favorable environment for Kaspi, offering:

1. A stable consumer base

2. A young population likely to embrace digital adoption

3. Increased demand for innovative financial and non-financial products and services

4. A tech-savvy younger demographic more open to digital financial services and mobile apps

The projected increase in life expectancy suggests a potentially high lifetime value (LTV) for customers.

Population distribution

As of August 1, 2024, Kazakhstan's population distribution is:

• Urban: 62.7%

• Rural: 37.3%

Projections estimate that the urban population will reach approximately 69.1% by 2050.

Source: Bureau of National Statistics

Internal migration has seen a significant uptick, with the number of people moving within the country increasing by 1.7 times compared to the same period in 2023. Four regions have experienced positive net population migration:

1. Astana: 29,305 people

2. Almaty: 15,750 people

3. Shymkent: 4,562 people

4. Almaty region: 1,258 people

Notably, these regions align with Kaspi's primary service areas.

Source: Bureau of National Statistics: the migration of the population of the Republic of Kazakhstan (January-June 2024)

The ongoing urbanization trend in Kazakhstan creates a favorable environment for digital-first companies like Kaspi, positioning them to capitalize on the changing needs and behaviors of Kazakhstan's growing urban population.

1. Digital Service Adoption

   1. Urban populations typically demonstrate higher rates of smartphone ownership and digital service usage.

   2. This trend aligns well with Kaspi's digital-first business model, potentially expanding their user base in urban centers.

2. Changing Consumer Behavior

   1. The shift towards urban living is primarily driven by a quest for efficiency and convenience, rather than laziness.

   2. Urban lifestyles, characterized by longer working hours and faster pace, are creating new consumer needs and preferences.

   3. E-commerce and digital services are increasingly seen as time-saving solutions for busy urban dwellers.

   4. As the e-commerce director of retail store "Kerege" notes:

   5.   "In Astana, the busy lifestyle has fueled the growth of e-commerce. With people constantly working, shopping online has become a convenient way to unwind. It's no longer just women; even men find relaxation in browsing online marketplaces from the comfort of their homes. This shift reflects a broader trend of convenience driving e-commerce growth in Kazakhstan."

3. Market Opportunities

   1. The concentration of population in urban areas creates dense markets, beneficial for businesses like Kaspi.

   2. Urban consumers are more likely to embrace new technologies and services, providing a fertile testing ground for innovative products

Other Factors

Beyond the growing young population and increasing urbanization, several factors contribute to the strong growth potential for consumer-based internet businesses like Kaspi:

1. Increasing data availability (4G and 5G)

2. Rising banking penetration

3. Growing debit and credit card adoption

4. Overall consumption growth

Internet and Mobile Usage

Kazakhstan demonstrates impressive internet and mobile usage statistics:

• Internet penetration: 92.3% as of early 2024 (18.19 million users) - this is the largest in Central Asia

• Mobile internet usage: 71.5% as of January 2024 (14.10 million social media users)

• Smartphone adoption: 83% as of 2023 and expected to increase to 86% in 2025

• Average daily time spent using the internet and mobile phones in Kazakhstan: 3.4h and 6h respectively

These high penetration rates provide a substantial potential user base for Kaspi.kz's digital services and align well with their mobile-only super app strategy. Furthermore, the rapid rollout of 5G is expected to significantly increase mobile internet speeds. It also provides a good backdrop for companies like Kaspi to capture significant portion of time spent online.

It is also pertinent to note that Kaspi is mobile only, and the above trends are tailwinds for Kaspi's continued adoption.

Consumer Expenditure

The average annual wage was approximately KZT 3.7 million, or approximately $8,000, in 2022. Annual wages in Kazakhstan increased at a 15% CAGR from 2017 to 2022 – see Figure 6,a v e r a g e An n u a l g e AW below. Interestingly, most families own their homes outright (i.e., no mortgage or rent payments), and it is common for children to live with their parents through their late 20s (until they marry). As such, a relatively large proportion of income is available for consumption spend.

In summary, Kazakhstan's demographics provide several favorable factors that support Kaspi.kz's growth potential. These demographic factors contribute to a favorable environment for Kaspi.kz's super app model, supporting its potential for continued user acquisition, engagement, and revenue growth in the Kazakhstan market.

Political Landscape and Government

Kazakhstan's political history has been marked by a gradual transition from Soviet rule to independence, followed by a long period of authoritarian leadership under Nursultan Nazarbayev.

History

Soviet Era and Independence

Kazakhstan was part of the Soviet Union from 1936 to 1991. During this period, it was governed as the Kazakh Soviet Socialist Republic. In December 1986, mass demonstrations by young ethnic Kazakhs took place in Almaty to protest Moscow's appointment of a non-Kazakh leader, signaling growing discontent with Soviet rule. As the Soviet Union began to dissolve, Kazakhstan declared its sovereignty within the USSR in October 1990. Following the failed coup attempt in Moscow in August 1991, Kazakhstan declared full independence on December 16, 1991.

Nazarbayev Era (1991-2019)

Nursultan Nazarbayev, who had been the leader of the Kazakh Communist Party since 1989, became Kazakhstan's first president after independence. Under his leadership, Kazakhstan implemented significant economic reforms to transition from a Soviet command economy to a market economy. However, political reforms lagged behind economic changes. Nazarbayev ruled in an authoritarian manner, consolidating power and limiting political opposition. Key developments during his rule included:

• The adoption of a new constitution in 1995, which expanded presidential powers.

• Moving the capital from Almaty to Astana (now Nur-Sultan) in 1997.

• Constitutional changes in 2007 that allowed Nazarbayev to be president for life

• Elections that were consistently criticized by international observers for falling short of democratic standards

Post-Nazarbayev Era (2019-Present)

In March 2019, Nazarbayev unexpectedly announced his resignation. Kassym-Jomart Tokayev, the former Senate chairman, became interim president and won the subsequent election in June 2019. Under Tokayev's leadership, Kazakhstan has begun implementing some political reforms:

• Constitutional amendments in 2022 reduced presidential powers and increased the authority of parliament

• The presidential term was limited to a single seven-year period

• Efforts have been made to foster a culture of opposition and loosen rules on forming political parties

Source: BMI

However, the country still faces challenges in fully transitioning to a democratic system. The ruling Amanat party (formerly Nur Otan) continues to dominate parliament, and while there are now more parties represented, true opposition remains limited.

Internal Reforms and Liberalization under the "New Kazakhstan" reform programme

Tokayev's administration is committed to a medium-term reform program targeting both political and economic sectors. Key aspects include:

1. Reducing the influence of former President Nazarbayev's legacy.

2. Decentralizing power from the presidential office.

3. Increasing transparency and operational efficiency in the economy.

4. Attracting foreign investment for economic diversification.

The government's economic reform program focuses on:

1. Reducing dependence on the energy sector (currently over 50% of GDP).

2. Diversifying economic partnerships to mitigate risks associated with Russian trade due to the Ukraine war and sanctions.

Three key areas of focus:

1. Infrastructure Development: Modernizing transportation, water management, and digital infrastructure to support economic growth and resource efficiency.

2. Energy Trade Diversification: Emphasizing renewable energy sources, exploring nuclear options, and expanding export markets to enhance energy security and sustainability.

3. Strategic Partnerships: Collaborating with international organizations and participating in global initiatives to access expertise, funding, and markets, while reducing dependence on Russia.

Other key areas:

4. Focus on Digital Development and Fintech: Kazakhstan has made progress in developing a supportive regulatory environment for fintech, notably benefiting companies like Kaspi.kz. Legislative reforms and initiatives like the "Digital Kazakhstan" program have fostered the growth of the fintech sector. Additionally, the government has launched an ambitious plan to roll out 7,000 5G base stations by 2025, though delays in infrastructure deployment could hinder progress. Tokayev has also called for a new banking law to support fintech development and increase lending to the real economy. The introduction of the digital tenge and efforts to digitize tax administration aim to improve transparency and reduce corruption. However, despite the rapid growth in e-commerce and digital payments, Kazakhstan remains behind regional and global peers in digital infrastructure. This provides a considerable runway for digitalization, both for the country and for Kaspi.kz, which stands poised to capitalize on this growth.

5. Privatization and Economic Liberalization: Efforts to liberalize the economy have included privatizing state-owned enterprises, though progress has been slow. Recent IPOs, such as those by KazMunayGas and Air Astana, reflect the government’s cautious approach to privatization, where only a small portion of shares are floated publicly. The state remains reluctant to relinquish control over key sectors of the economy, and significant progress on diversification and privatization is unlikely in the short term.

6. Support for SMEs: Tokayev’s economic reforms will support small and medium-sized enterprises (SMEs), aligning with Kaspi.kz’s marketplace platform. In order to reduce administrative barriers, the Government is working to introduce a new regulatory policy in the field of entrepreneurial activity. As part of this work identified 10.1 thousand unnecessary requirements for business. Today about 90% of such requirements have been canceled at the subordinate legislation level. The share of SMEs in the economy of Kazakhstan by 2030 will amount to 40%. This was announced by the Minister of National Economy of the Republic of Kazakhstan Alibek Kuantyrov at a meeting of the Government. Alibek Kuantyrov reported that in 2022 within the framework of SME support 46 thousand projects for the amount of loans over 1.3 trillion tenge were subsidized and guaranteed. For 5 months of this year subsidized and guaranteed more than 10.2 thousand SME projects for the amount of loans of more than 586 billion tenge. For the current year for these purposes allocated more than 266 billion tenge of budget funds, which is almost 96 billion tenge more than last year. Application of the regime is allowed at income up to 2 billion tenge. Taxpayers are exempt from VAT and social tax. The tax rate is flexible: in the amount of 4% of turnover. At the same time, the rate can be reduced to 2% based on the decision of the Maslikhat. In addition, since this year a single payment from the labor payment fund for micro and small businesses has been introduced. The total rate is reduced from 34.5% to 20%. Instead of 6 payments 1 payment will be paid," the Minister of National Economy noted.

Key Issues and Risk Factors

Kazakhstan's ambitious reform agenda, while promising, carries significant risks.

• Political Stability: Tokayev’s political future largely depends on his ability to navigate inter-elite competition and maintain control over factions loyal to former president Nursultan Nazarbayev. The social and political unrest seen in January 2022 also highlighted the significant, unresolved grievances of the population, such as demands for transparent governance, economic stability, and improved living standards. The country’s transition to green energy, including a controversial nuclear power plant project involving Russia, raises concerns about sovereignty and safety, further complicating social tensions. Additionally, fiscal reforms, while aimed at improving budgeting processes and reducing quasi-fiscal activities, may not fully resolve the country’s economic vulnerabilities. Kazakhstan’s reliance on volatile oil revenues and the decline in tax revenues pose risks that could fuel further unrest.

• Economic Growth and Living Standards: Improving living standards, managing inflation, and ensuring macroeconomic stability are central to Tokayev’s short-term economic goals. However, deep-rooted corruption within state institutions will continue to hinder governance reforms, despite pledges to reduce inequality.

• Labour and Social Unrest: Labour strikes, especially among oil workers, are expected to continue, posing a minor but persistent risk to social stability. Public dissatisfaction remains high, particularly in regions heavily reliant on oil exports.

Source: BMI

In the short term, Kazakhstan's economic policy will prioritize maintaining macroeconomic stability, improving living standards, and controlling inflation. The success of these efforts will depend on effectively managing internal and external risks. While the government's economic goals are ambitious, their full realization will likely take time.

Foreign Policy Dynamics and Regional Position

Kazakhstan's geopolitical landscape is undergoing significant changes, shaped by its historical ties to Russia, strategic location, and evolving multi-vector foreign policy. The country currently finds itself in a delicate position, balancing its dependence on Russia with the need to diversify its economic and diplomatic relationships.

At present, Kazakhstan's energy sector remains heavily reliant on Russia. Approximately 90% of its oil exports flow through the Caspian Pipeline Consortium (CPC), which traverses Russian territory and is partially owned by Moscow. This dependency has been highlighted by past pipeline interruptions, which have demonstrated Kazakhstan's vulnerability. A potential shutdown of this crucial export route could jeopardize up to 57% of the country's exports, significantly impacting its GDP. The ongoing Russia-Ukraine conflict has further complicated Kazakhstan's foreign policy strategy.

While maintaining cordial relations with Russia, Kazakhstan faces an urgent need to diversify its transport and infrastructure links away from Moscow, particularly in light of increasing economic sanctions against Russia. This situation has pushed Kazakhstan to seek alternative partnerships and routes for its economic activities.Interestingly, the current geopolitical shifts may present opportunities for Kazakhstan. As Russia's influence in Central Asia declines due to its military challenges in Ukraine, Kazakhstan is positioning itself to take on a more prominent leadership role in the region. This evolving dynamic is evident in Kazakhstan's recent diplomatic efforts, such as its key role in facilitating EU-mediated peace talks between Armenia and Azerbaijan.Kazakhstan's response to the Ukraine conflict further illustrates its nuanced approach to foreign relations. The government has refused to recognize Donetsk and Lugansk as independent regions and has abstained from voting on the conflict. While abstention is not outright rejection, it marks a significant departure from Kazakhstan's previous approaches to international relations.

Moreover, Kazakhstan has emerged as a crucial transit hub for Russian businesses affected by international sanctions. This role is strengthening Kazakhstan's trade ties, particularly with European nations, and provides an opportunity for the country to diversify its economy beyond its traditional reliance on oil and gas exports.

Research by Roman A. Yuneman on Kazakhstan's multi-vector foreign policy reveals some surprising insights. Contrary to expectations, China, rather than Russia, appears to be the main vector of Kazakhstan's foreign policy. The study, based on voting patterns on international resolutions, shows that Kazakhstan's positions align most closely with China.

Furthermore, Kazakhstan carefully avoids offering explicit support to Russia on initiatives related to armed conflicts, including the situation in Ukraine. This evolving geopolitical landscape presents Kazakhstan with an opportunity to reshape its relationships with major powers. By leveraging its strategic position in the Caspian region, Kazakhstan can potentially balance its interests between Russia, China, and Western partners, thereby strengthening its position on the global stage and fostering greater economic and diplomatic independence.

Economic Outlook

Economic Growth

Kazakhstan's economic growth is expected to slow from 5.1% in 2023 to 4.1% in 2024, largely due to fiscal tightening. The government has reinstated fiscal rules to control spending and reduce the budget deficit over the next decade. As a result, household transfers will remain low, which will limit domestic demand growth. Although easing inflation and lower interest rates may cushion the effects of fiscal tightening, wealth inequality could restrict the benefits to a small portion of the population. This could challenge growth with social instability.

Source: BMI

Growth is expected to pick up again in 2025, with a projected rate of 5.4%, driven by the government’s continued efforts to diversify the economy. Although the contribution of fixed capital formation to growth will decrease as state-backed projects dominate investments, capital formation is expected to remain robust.

Source: BMI

In the medium term, economic growth is expected to average 4% from 2025 to 2028, driven by increased oil production, strong exports, and favorable trade relations with China and the EU.

Note: Projections differ based on source

Source: EIU, IMF, Statista

Kazakhstan’s GDP per capita was estimated at $12,993 in 2023, supported by the recovery in global oil prices. GDP per capita is expected to exceed its previous peak of $13,000 by 2024, as economic growth and rising household incomes continue. Urbanization and higher income levels in major cities will create expanded market opportunities, especially in non-food sectors.

Inflation

• Inflation, which averaged 14.5% in 2023, is expected to decline to 8.7% in 2024 and further moderate to around 5%. Persistent inflationary pressures is driven by strong consumer demand and ongoing reforms in energy pricing. High prices, especially for food and fuel, will continue to affect consumer sentiment and increase demand for lower-cost goods. Real retail sales are forecasted to grow by 2.5% annually, while nominal sales in local currency are expected to increase at a compound annual growth rate (CAGR) of 9.1% through 2028.

  

Source: Statista, IMF

This of course impacts the results for Kaspi. For example, the marketplace GMV will increase by increased volume and increased prices which are partially related to inflation. We need to take this into account when assessing future growth prospects for the company, especially when looking at the performance of the year 2022 and this year.

Disposable Incomes

• Kazakhstan's economic landscape is poised for significant growth in the coming years, presenting a promising outlook for Kaspi's expansion. From 2024 to 2028, real personal disposable income is projected to increase by 1.4% annually, while the proportion of households earning over $25,000 per year is expected to nearly double from 23% in 2023 to 42.2% by 2028. This economic uplift is likely to fuel increased spending on discretionary and luxury items, with non-food retail sales projected to rise from 52% of total sales in 2023 to 54% by 2028.

Source: EIU

• In this thriving economic environment, Arthur D. Little, a renowned international management consulting firm, forecasts Kazakhstan's nominal retail and servicing spend to grow at mid-teens rates, reaching an impressive KZT 77 trillion (approximately $170 billion) by 2027. This robust market growth sets the stage for Kaspi's continued expansion.

• As Kazakhstan's economy continues to develop and consumer spending patterns evolve towards discretionary and luxury items, Kaspi stands to benefit significantly from these trends, particularly in the rapidly growing e-commerce sector and related services such as B2B payment solutions and merchant financing.

Currency

The National Bank of Kazakhstan (NBK) heavily manages the Kazakh tenge, but the currency remains vulnerable to frequent devaluations during risky external conditions. The last major devaluation occurred in 2015 when the NBK abandoned its USD peg due to historically low oil prices, which depleted the Bank's foreign exchange reserves.

Source: JP Morgan

While the risk of such an event is currently low, given the tailwinds oil prices are experiencing from the Middle East geopolitical crisis, the country's rising import needs amid an infrastructure construction boom and robust demand are expected to keep the current account in deficit over the coming years, placing depreciatory pressures on the tenge.

Analysts forecast the Kazakh tenge to trade within the range of KZT430-450 per USD over 2024 and 2025. The currency has appreciated modestly in the first four months of 2024, moving from KZT453.00 per USD in late December 2023 to KZT441.44 per USD by the end of April 2024, a 3.0% appreciation.

This appreciation is partly attributed to lower net-purchases and sales in USD terms in early 2024, reducing USD demand relative to KZT.The tenge's short-term outlook is closely tied to global oil prices and Kazakhstan's external trade. After declining by 6.4% on an annual average basis in 2023, Kazakh export growth has picked up modestly by 1.0% in the first two months of 2024. Oil exports, a key component of Kazakh trade, have risen by 8.1% in the same period, supported by upward pressures on global oil prices due to escalating geopolitical risks in the Middle East.

Experts expect global oil prices to remain slightly elevated in 2024 compared to 2023, supporting the view that Kazakhstan's export growth will accelerate to at least 10.0% in the year following a 7.0% decline in 2024. Firmer exports are expected to shore up demand for the KZT, anchored by the legal requirement for traders to transact solely in the local currency with Kazakh entities.

Over the medium-to-long term, depreciatory risks facing the KZT are expected to rise due to Kazakhstan's growing external financing needs. While the current account deficit is projected to narrow slightly in 2024 compared to 2023, from 3.3% to 2.7%, this shortfall is expected to persist over the coming years with modest widening likely as the country's imported capital needs increase amid infrastructure development and economic diversification goals.

Moreover, the country's substantial external debt load (72.0% of GDP as of 2023) will add pressure on the KZT amid rising debt servicing needs. In 2024 and 2025, a total of USD21.8bn worth of USD-denominated debt, which is 13.0% of the total external debt load, is due to be rolled over.

Given these increased financing needs, analysts expect the tenge to move closer to the KZT460-500 per USD range in 2025.Despite floating freely since 2015, the NBK manages the currency closely with various capital control measures and market interventions using foreign reserves. The NBK's gross international reserves stand at USD37.8bn, providing over 5.0 months of import cover. However, only 42.0% of the gross reserves are composed of readily available liquid foreign currency, reducing the cover to around 3.0 months. Liquid reserves held by the NBK have reduced materially since the 2015 currency devaluation and subsequent periods of oil price declines. While severe risks to the tenge are not immediately expected in the short-to-medium term, the NBK has less room to intervene in such an event.

An additional source of risk to Kazakhstan's external sector and the KZT is the country's continued trade and strategic dependence on Russia. Around 90% of Kazakh oil continues to be piped through the Caspian Pipeline Consortium that runs through Russia. This not only exposes it to the chances of secondary sanctions but also requires Kazakhstan to maintain a balanced and broadly positive relationship with Russia.

Industry and Competitive Analysis

Payments

Kazakhstan's payment landscape has undergone a dramatic transformation in recent years, with digital payments rapidly displacing cash transactions. In 2022, the total payment market in Kazakhstan reached 41.1 trillion Tenge, growing by 8.6 trillion Tenge from 2021. While this represents a significant increase, the growth rate moderated to 27% in 2022, down from 40% in 2021. The shift towards digital payments has also been swift and comprehensive. In 2022, digital payments accounted for 83% of all payments in Kazakhstan's economy, with cash payments reduced to just 17%. This represents a dramatic change from 2018, when cash payments were as high as 66%.

Source: PwC

A pivotal moment occurred in 2022 when non-cash payments surpassed cash withdrawals from ATMs for the first time, reaching 21.6 trillion Tenge, a 49% increase from the previous year. This shift reflects the country's growing digitalization, the expansion of e-commerce platforms (accelerated by the pandemic), and the proliferation of diverse payment methods.

Source: PwC

As of August 2024, the National Bank of Kazakhstan reported that the majority of non-cash transactions were conducted via Internet/mobile banking, accounting for 80.3% of transactions and 90.8% of transaction volume. POS terminals followed, representing 19.6% of transactions and 8.9% of volume.

Payments players in Kazakhstan

This digital transformation has benefited various players in the Kazakh financial sector, with Kaspi.kz emerging as a standout performer. However, competitors like Halyk Bank have also experienced significant growth, albeit not to the same extent as Kaspi. According to the government, Kaspi.kz and Halyk Bank together handles around 80% of payments in Kazakhstan.

While the threat of international competition appears limited due to Kazakhstan's relatively small market size and the complexities of entering a market with established local players, some domestic competitors are worth noting. Onai, originally a national bus-card company, has begun leveraging its extensive user base to expand into the broader payments space. With millions of users already familiar with its platform through public transportation, Onai possesses a significant potential customer base and a track record of successful product implementation.

Another notable competitor is Choco, which has developed products similar to Kaspi's offerings in areas such as marketplace and payments. However, Choco's strategic approach differs from Kaspi's in that it has not integrated its various services into a unified ecosystem, a decision that may have limited its competitive impact.

Despite these local challengers, Kaspi's position remains strong. The company's growing market share, combined with its competitive advantages and integrated ecosystem approach, provides a robust defense against current and potential competitors. The ecosystem strategy, in particular, has created significant switching costs for users, further entrenching Kaspi's market position. More importantly, Kaspi has captured a large part of the payments value chain as seen below and established almost a monopolistic position in payments.

Source: Atmos Invest on Substack

This has allowed it to displace Visa and Mastercard in Kazakhstan in its early days.

Source: Kaspi

Fintech

The overall health of Kazakhstan's banking sector appears robust, despite facing various economic challenges. Loan growth is projected to reach 17.1% in 2024, buoyed by a reduction in subsidized lending and a more relaxed monetary policy. The sector's resilience is further evidenced by the low level of non-performing loans, which stand at just 2.9%, a significant improvement from the 20% seen in the mid-2000s. This transformation is largely attributed to the National Bank of Kazakhstan's reform efforts, which have substantially enhanced regulatory practices.

Profitability in the banking sector remains strong, with a return on equity of 38.0% reported in 2023 and net interest margins of 6.4 percentage points. While the National Bank's policy easing may impact profitability to some extent, the sector is expected to maintain its stability in the coming months.

Source: BMI

Fintech and loan players in Kazakhstan

Kazakhstan's banking landscape is characterized by a mix of established institutions and innovative fintech players, with 22 banks operating in a sector dominated by a few key players. At the forefront is Halyk Bank, which holds a commanding position with over 30% market share in both loans and deposits across most segments of the banking system. However, this landscape is far from static, with recent political developments potentially paving the way for improved competition and efficiency gains monetization.

In this competitive environment, Kaspi Bank has emerged as a formidable challenger, particularly in the retail banking sector. While Halyk Bank maintains its overall leadership, Kaspi has carved out a significant niche, especially in consumer-focused services. Kaspi now stands as the second-largest bank in Kazakhstan by total assets and retail deposits, holding a 22% market share in the latter. Perhaps most notably, it has established itself as the largest local bank for unsecured consumer loans, a testament to its strong focus on retail banking and digital services.

Kaspi Bank's success in this competitive landscape can be attributed to its innovative approach and focus on digital services. Unlike traditional banks, Kaspi has achieved 100% digitalization of its services, compared to Halyk's 59%. This digital-first strategy allows Kaspi to offer superior customer experiences, such as approving loans within minutes, while traditional banks may take up to a week for the same process.

Looking ahead, Kaspi appears well-positioned to expand its services, potentially moving into the SME finance market through its merchant Super-app. This could further challenge Halyk's market leadership in various segments. Additionally, Kaspi's structure allows it to benefit from interest earned on user balances in transaction accounts, providing an additional financial advantage.

However, apart from Halyk, other players like Forte Bank (with its ForteMarket initiative), Home Credit Bank, and Alfa Bank are also vying for market share in the evolving fintech and loan market.

Marketplace

Market Size

Below is a table by JP Morgan and ADL that outlines the marketplace addressable market:

Source: JP Morgan

• Retail spending is projected to account for 16% of Kazakhstan's GDP in 2023, aligning closely with the United States' retail sector contribution.

• In 2022, e-commerce purchase volume reached KZT 1.3 trillion, representing approximately 7% of total retail sales. A compound annual growth rate (CAGR) of 38% is expected for e-commerce through 2027. By 2027, e-commerce is projected to reach KZT 6.9 trillion, accounting for about 21% of total retail sales. This is in line with the Russia (20%) and US (26%)

• In 2022, e-grocery sales volume was KZT 50 billion, less than 0.8% of total grocery sales. An impressive CAGR of 68% is forecasted for e-grocery through 2027. By 2027, e-grocery is expected to reach approximately KZT 600 billion, representing about 5% of total grocery sales.

E-commerce landscape in Kazakhstan

Kazakhstan's e-commerce market has been experiencing rapid growth in recent years. In 2023, the total volume of retail e-commerce reached 2.44 trillion tenge ($5.3 billion), representing a 79% increase compared to 2022. This surge in e-commerce sales has significantly increased its share of total retail trade, reaching 12.7% in 2023, up from 12.5% in 2022.

The market is expected to continue its strong growth trajectory. Forecasts predict the e-commerce market in Kazakhstan will reach $1.23 billion in revenue by 2024, with a compound annual growth rate (CAGR) of 17.7% from 2024 to 2028. Recognizing the sector’s importance for economic growth, the Kazakh government aims to increase the share of e-commerce in retail to 20% by 2030. This ambitious target involves developing local warehousing, logistics infrastructure, and enhancing consumer protection.

Central and Eastern Europe, where Kazakhstan is located, is one of the least penetrated regions for e-commerce, with online retail representing only 11.4% of sales in 2024—compared to the global average of 20.1%. This low penetration highlights significant growth potential for the region, and especially for Kaspi’s operations.

Source: eMarketer, author's own illustration

In Kazakhstan, the largest share of total retail sales of goods through e‑marketplaces were phones and gadgets at 27.5%, appliances at 11.6%, computer goods and software at 10.1%, and auto goods at 7.9%.

Source: HKTDC Research

E-commerce players in Kazakhstan

Merchants

Small businesses account for 92.8% of the total retail e-commerce volume in Kazakhstan, making them a vital segment for Kaspi's marketplace. Many of these small enterprises lack the resources to develop their own websites or marketing channels, relying heavily on social media platforms like TikTok and Instagram for promotion. Kaspi’s marketplace provides a vital platform for these businesses, enabling them to scale without the need for extensive infrastructure. According to Kaspi, their advertising services have been multiple times more efficient than traditional social media.

According to Euromonitor, Kaspi dominates the e-commerce market in Kazakhstan, with a market share of 57.7% in 2023, up from 51.4% in 2022. This dominance is notable considering Kazakhstan's fragmented e-commerce ecosystem, which comprises about 20 online marketplaces and 2,000 e-commerce sites. Competitors include prominent players like AliExpress, Wildberries, Ozon, and Zoodmall, along with local platforms such as Halyk Market, Jusan Market, and Forte Market. Despite the crowded field, Kaspi has managed to stand out by leveraging its logistics capabilities, economies of scale, and an expansive network of local merchants.

Source: Euromonitor

Competitive Challenges

While Kaspi holds a commanding position, the e-commerce marketplace is highly competitive and lacks strong barriers to entry. Unlike its payments business, where Kaspi has created a robust network effect, the marketplace side faces significant competition from both domestic and international players. Major competitors like Wildberries and AliExpress offer similar services, and customers are often indifferent about which platform they use, focusing more on price and convenience.

The commoditized nature of marketplaces, where customers can easily compare prices across platforms, makes it difficult for Kaspi to build the same network effects as it has in its payments business. Moreover, unlike companies like Amazon that invest heavily in logistics infrastructure, Kaspi does not manufacture or warehouse its products, relying instead on third-party retailers.

However, one area where Kaspi has been able to carve out a competitive edge is through its logistics capabilities. Much like Amazon, Kaspi has built a well-developed network of postomats (self-service parcel lockers), warehouses, and fulfillment centers, enabling quicker delivery at lower costs to merchants. This logistics infrastructure is critical in a country like Kazakhstan, where the vast geographic distances and underdeveloped transportation infrastructure present significant challenges for efficient e-commerce operations. While Kaspi has capitalized on these advantages, expanding logistics capabilities beyond major cities like Almaty and Astana remains a significant growth opportunity, particularly as rural areas become more integrated into the digital economy.

The below table highlights the differences between the prominent players in Kazakhstan:

Competing against foreign competitors

Local players, including Kaspi, enjoy advantages in logistics, faster delivery, and easier returns, which are critical factors for Kazakh consumers. Furthermore, the devaluation of the local currency makes foreign retailers more expensive, which can drive more consumers to domestic platforms. However, foreign competition, especially from China, remains strong. Companies like Alibaba are improving their logistics infrastructure with new fulfillment centers, enabling faster cross-border deliveries at competitive prices. Currently, cross-border e-commerce accounts for a higher sales value than domestic e-commerce, a trend that may continue as Chinese players optimize their supply chains. t the Russian players are more sophisticated at logistics and investing in a warehousing-heavy model

Moat and Competitive Advantage

Network Effects

Across segments

The largest moat that Kaspi.kz has is the network effects of its super app.

Source: Kaspi

Kaspi’s payment, marketplace, and finance platforms are highly interrelated. The growth and development of one platform naturally support and accelerate the growth of the others, reinforcing a virtuous cycle. For example, a consumer using Kaspi for managing finances can seamlessly browse the Marketplace for products. Once a purchase decision is made, the user can easily complete the transaction through Kaspi’s integrated payment system, given that their financial information is already stored in the app.

The interactions between Kaspi's various platforms create a self-reinforcing flywheel that drives profitable growth and provides significant competitive advantages, such as lower costs. Here's how the flywheel turns:

• The large base of active consumers, combined with a variety of convenient payment and financing options, drives higher consumer spending on the Marketplace.

• This increased spending on the Marketplace Platform boosts transaction volumes across the Payments Platform and increases demand for financing through the Fintech Platform.

• The growing consumer activity attracts more merchants to the Marketplace, expanding product selection and enhancing price competitiveness. As more merchants join, the platform becomes even more attractive to consumers, creating a positive feedback loop. Merchants recognize the value of Kaspi’s extensive user base and are often willing to pay higher commissions for access to it.

These synergies encourage consumers to transact and interact more frequently with Kaspi.kz, increasing the average number of monthly transactions per user. Frequent consumer engagement is key to the effective cross-selling and upselling of products.

This seamless integration fuels a self-perpetuating cycle: the more a user engages with one service, the more they are likely to explore and use others. For instance, a user who starts with peer-to-peer (P2P) payments might soon begin shopping on the marketplace or utilizing Kaspi’s "Buy Now, Pay Later" (BNPL) services.

This all-encompassing ecosystem also reduces the likelihood of users seeking alternatives, as Kaspi fulfills a wide array of daily needs while offering unmatched convenience. Standalone competitors struggle to replicate this breadth of services.

The customer stickiness that Kaspi possess and increasing engagement can be seen with the ratio of Daily Active Users (DAU) and Monthly Active Users (MAU) of 65%, which only trails behind WeChat.

Source: Kaspi 2023 Annual Report

There are benefits to such network effects:

• Kaspi’s fintech products, such as BNPL and consumer loans, benefit from the company's cross-selling strategy. Once consumers are using Kaspi’s payments or marketplace services, they are targeted with relevant fintech offerings, allowing Kaspi to grow its fintech segment with minimal customer acquisition costs. By leveraging consumer data gathered from payments and marketplace transactions, Kaspi can price risk more effectively than competitors, further driving adoption of its financial products. o, Kaspi knows how much money you're making on revenue line. Now you are starting to work with Kaspi to pay for your goods that you are getting either from manufacturer or distributor. You might have working capital needs. Kaspi may extend you a loan because they see everything and then they will just subtract it from your revenue coming in when you make those sales. Kaspi is learning right now about that product line, so, in the next couple year, maybe two years, we will learn a lot more, maybe even faster. But that is another way to increase your stickiness of a customer from business-to-business perspective.

• , having a large customers base makes it very easy for new services to scale rapidly and be used by consumers quickly. Kaspi Travel is a good example. After two years after launching, they managed to sell over 11 million tickets annually.

• Exceptional scalability and near-zero marginal cost structure. At the core of this advantage is Kaspi's ability to serve additional customers and introduce new services with minimal incremental costs, allowing the company to rapidly deploy and integrate new offerings across its large, established network. New customers and services contribute significantly to revenue without proportional increases in costs, resulting in high contribution margins. This dynamic sets the stage for exponential growth potential, as the combination of an expanding user base and growing service offerings can lead to multiplicative revenue increases. Moreover, the low-cost structure allows Kaspi to offer competitive pricing while maintaining profitability, further strengthening its market position.This scalability and cost efficiency further create a virtuous cycle for Kaspi. As the company grows its user base and expands its service offerings, its competitive advantage strengthens, solidifying its market position and erecting formidable barriers to entry for potential competitors

Silos in each business segment

Payments Segment: Two-Sided Network Effect

Kaspi's payment network is the cornerstone of its ecosystem. It has created a two-sided network effect where both consumers and merchants drive each other’s adoption:

• Consumers use Kaspi Pay for the convenience and ubiquity of its payment solutions, such as in-store QR payments, P2P transfers, and bill payments, which are often commission-free and deeply integrated into daily life.

• Merchants are incentivized to adopt Kaspi Pay because of the sheer number of consumers using it, especially since Kaspi controls both sides of the transaction with its POS terminals.

As more merchants accept Kaspi Pay, it becomes even more convenient for consumers to use the platform, which in turn attracts more merchants. This self-reinforcing cycle creates a high barrier for other payment services to compete, especially given Kaspi’s wide reach and track record of innovation.

Additionally, Kaspi’s closed-loop payment system (where most transactions happen within its ecosystem) further strengthens these network effects. Consumers using Kaspi's Buy Now Pay Later (BNPL) or Kaspi Gold products must transact through Kaspi’s platform, which increases the volume of transactions and deepens the integration between Kaspi’s payments, marketplace, and fintech segments.

Marketplace Segment: Pseudo-Exclusivity and Economies of Scale

Kaspi’s marketplace benefits from its vast consumer base, particularly because many users are acquired through the payments segment at minimal cost. This creates organic traffic for the marketplace, giving it a significant advantage over competitors. Merchants, who typically list on multiple platforms, prioritize Kaspi due to its high order volume and extensive customer base. In fact, 33% of merchants’ revenues come through Kaspi’s platform, leading to high retention rates of 99%.

Although merchants are not contractually exclusive to Kaspi, the platform creates pseudo-exclusivity by generating a disproportionate share of their sales. This leads merchants to invest more time, inventory, and marketing into Kaspi's marketplace, reinforcing the platform's dominance. The more merchants invest in Kaspi, the more selection and convenience consumers enjoy, creating a virtuous cycle of user and merchant growth.

Furthermore, Kaspi’s logistics infrastructure—including fast and free delivery—enhances the user experience and keeps consumers loyal. Similar to Amazon’s model, Kaspi’s scale allows it to offer competitive shipping solutions that are difficult for smaller platforms to replicate.

The closed-loop nature of Kaspi’s ecosystem is critical here. For example, customers using Kaspi's marketplace must use its fintech or payment products, which ensures high usage of these services. The more customers engage with Kaspi’s fintech offerings, the more valuable the entire ecosystem becomes, as it reduces friction for transactions across the platform.

Kaspi's cohort analysis indicates strong and sustained growth across consumer cohorts for both their Payments and Marketplace platforms:

For the Payments Platform:

• TPV per consumer grows significantly as cohorts mature, showing increasing usage over time.

• The 2018 cohort, for example, increased TPV per consumer by 12x by Year 5.

• Even older cohorts like 2017 and earlier continue to show growth in TPV per consumer year-over-year.

• Newer cohorts are starting at higher TPV levels and growing faster than older cohorts did at the same stage.

Source: Kaspi

For the Marketplace Platform:

• GMV per consumer also shows strong growth as cohorts mature over time.

• The 2018 cohort increased GMV per consumer by 4.4x by Year 5.

• Newer cohorts are starting at higher GMV levels compared to older cohorts at the same stage.

• 50% of Marketplace consumers are from the 4 most recent cohorts, indicating significant room to grow as these cohorts mature.

Source: Kaspi

Overall, the cohort analysis demonstrates:

1. Increasing engagement and spend from existing customers over time

2. Faster growth trajectories for newer cohorts

3. Continued growth potential as newer, larger cohorts mature

4. Strong retention and increasing value of customer relationships over multiple years

Growth Catalysts

Expansion into new geographies

Kaspi is well-positioned for regional expansion, leveraging its proven ecosystem and market leadership in Kazakhstan to tap into new high-growth markets. In April 2024, Kaspi partnered with Alipay to enable QR code payments across China, signaling the company’s ambition to expand its payment services beyond its home market. This partnership opens up access to the massive Chinese consumer base, potentially driving transaction volumes and cross-border growth.

In parallel, Kaspi has also adopted an innovative market entry strategy in Azerbaijan, starting with e-commerce and gradually layering in fintech services. This reversal of its traditional approach demonstrates the company’s adaptability in addressing diverse market dynamics. By acquiring key local players in categories like automotive and real estate listings, Kaspi is building a foothold in Azerbaijan, which could serve as a gateway for further expansion into neighboring countries like Georgia, Armenia, and even Turkey.

Uzbekistan, with a larger population but a smaller economy compared to Kazakhstan, represents another attractive target for Kaspi. The country’s growing economy and similar political structure make it a promising market for future growth. Kaspi’s interest in participating in the privatization of Uzbekistan’s leading payment system, Humo, highlights its strategic focus on expanding its payment infrastructure in the region.

Additionally, Kaspi’s prior acquisition of Ukraine’s Portmone Group, a fintech offering P2P and bill payments, provides a long-term growth opportunity once the geopolitical situation stabilizes. Despite current uncertainties, Ukraine’s pre-war GDP of nearly $200 billion and relatively weak competition in the digital finance space make it an attractive future market for Kaspi.

While Kazakhstan remains Kaspi’s primary focus, gradual expansion into these surrounding countries, coupled with favorable government privatization initiatives and strategic partnerships, will help the company capture new growth opportunities. The characteristics of CIS countries makes these markets easier to scale and localize compared to more diverse regions like Southeast Asia:

1. Population Composition in CIS Countries

   1. Predominantly Slavic and Turkic ethnic groups, creating relatively homogeneous populations within individual countries.

   2. Russian language acts as a common lingua franca, making communication and business operations more streamlined across the region.

   3. Impact: This population homogeneity could simplify product localization and marketing strategies, allowing for more efficient and cost-effective scaling.

2. Religious Landscape

   1. Dominated by Orthodox Christianity and Islam, with limited religious diversity within most CIS countries.

   2. Impact: The relatively uniform religious landscape reduces the need for highly tailored messaging, making it easier to implement standardized marketing campaigns across the region.

3. Economic Development

   1. CIS countries share a common history of Soviet-era economic planning, leading to a more uniform level of economic development across the region.

   2. Impact: This consistency in economic development creates fewer disparities in market demand, making it easier for Kaspi to implement uniform business strategies.

4. Urbanization and Digital Landscape

   1. Urbanization levels across CIS countries are more consistent compared to other regions.

   2. The digital landscape is also relatively uniform, with similar levels of digital infrastructure development.

   3. Impact: These factors allow for consistent urban-focused growth strategies, as well as easier implementation of digital marketing and e-commerce initiatives. Kaspi can efficiently roll out its digital platforms with fewer regional adjustments.

This positions Kaspi to replicate its successful super-app model across the region, driving sustained growth for the company.

However, Kaspi’s growth strategy is around acquiring or developing in-house almost all products it offers on the platform. With the exception of partnerships with government agencies on tax and traffic fine collections, Kaspi owns supply end-to-end. This approach is hard to scale when expanding abroad, as it will be faced with high costs, integration challenges and protectionist/regulatory pressure

Cross-selling into higher yielding verticals

Kaspi's cross-selling strategy has emerged as a powerful growth catalyst, propelling the company to new heights by leveraging its integrated ecosystem of Payments, Marketplace, and Fintech platforms.

Kaspi's strength lies in its comprehensive ownership of the entire transaction process and ability to capture multiple steps in the supply chain. By providing a marketplace for purchases, a payment method, and financing options, Kaspi creates numerous touchpoints for cross-selling opportunities, maximizing its profit potential from each consumer. This integrated approach allows a single transaction to generate revenue through multiple channels, allowing Kaspi to benefit more than once from each transaction

One example is the cars segment, one that the company is focusing on building out currently.

Source: Kaspi

The company's ecosystem synergy is particularly noteworthy, with significant potential for growth as it encourages users of one platform to adopt the others. As of Q3 2021, only 40% of customers were using all three platforms, indicating substantial room for expansion. However, it is worth noting that this 40% figure is from 2021, so the current percentage may have changed since then as Kaspi.kz has continued to grow and promote adoption across its ecosystem. Nevertheless, I believe there is significant white space that Kaspi can tap on.

Another example is the BNPL product, Kaspi's approach to BNPL is particularly innovative. Rather than focusing on maximizing standalone yields, Kaspi uses BNPL as an engine to drive average transaction value and volume across its entire platform, via 3 touchpoints for Kaspi: providing a place to purchase, a method to purchase and the means to fund that purchase. . This strategy has allowed Kaspi to thrive even as global BNPL giants struggled with profitability.

Source: Vergent Asset Management

For instance, a $50 online purchase funded through a 3-month, 0% interest BNPL product can yield $8.5 to $10.5 in revenue for Kaspi, an impressive 17-21% of the transaction value.

Source: Vergent Asset Management

Introducing new segments and expanding into higher margin businesses

Kaspi's relentless focus on controlling the customer experience has allowed it to build a highly interconnected ecosystem, where each new service strengthens user engagement and reduces the incentive to switch platforms. As the platform expands its product offerings, the growing variety of services and an increasingly diverse merchant network present key avenues for future growth.

A major opportunity lies in expanding Kaspi’s financial services portfolio. With its existing stronghold in payments, BNPL, and car financing, Kaspi is well-positioned to introduce new products such as home financing and investment tools like stock trading, enabling its customers to seamlessly access financial markets, following the Alipay, Tencent and MELI playbooks.

Source: Vergent Asset Management

Additionally, Kaspi's $6.4 billion in customer deposits (or float) presents a lucrative opportunity. The company could reinvest this float into bonds or explore new revenue streams by reintroducing insurance products, complementing its fintech suite and providing further customer value. Given its experience in car finance, offering bundled insurance services could generate additional growth in the near term.

Increasing Utilisation

Kaspi's growth strategy is evolving, focusing on a key lever that promises significant potential: increasing utilization across its diverse product offerings. While some traditional growth avenues may be nearing their limits, the company's vast ecosystem spanning payments, marketplace, and fintech segments provides ample room for expansion, particularly in terms of average revenue per user (ARPU).

Currently, there appears to be substantial untapped potential within Kaspi's user base. Many customers may be using only a fraction of the available services, presenting a clear opportunity for growth. As users explore and adopt more of Kaspi's offerings, the company stands to benefit from increased ARPU, enhanced customer loyalty, and potentially powerful network effects.

Source: Kaspi

Environment, Social and Governance

ESG Theses

ESG Thesis 1: Superior human capital and culture

Kaspi.kz presents a compelling investment opportunity not only due to its market dominance and product innovation but also because of its exceptional human capital and customer-obsessed culture. These factors create a sustainable competitive advantage that is difficult for competitors to replicate.

Elite Talent Acquisition and Development

Kaspi has positioned itself as the most desirable employer in Kazakhstan, attracting top-tier talent:

• The company's graduate program has an acceptance rate of just 2%, comparable to prestigious tech giants like Apple

• Kaspi Labs, introduced in 2021, offers courses in data science and software development, with an equally competitive acceptance rate

• The company employs over 9,000 people, with 1,200 in data science, IT, and product development

• Employee turnover has been reduced to 21.9% in 2022 from 25.4% in 2021.

• Conversations with a local contact confirm this point that Kaspi.kz is one of the top employers that students want to work for

This selective recruitment process ensures Kaspi maintains a workforce of highly skilled and motivated individuals, driving innovation and efficiency.

Innovative and Agile Workforce

Kaspi's approach to staffing and culture fosters innovation and agility:

• The company prioritizes hiring young, tech-savvy graduates over traditional banking professionals.

• The average employee age is 30, with an average tenure of 4 years, indicating a fresh and dynamic workforce

Source: Kaspi

• Kaspi's development teams consistently outperform larger competitors in both speed and quality of product development

Customer-Obsessed Culture

Kaspi's culture is singularly focused on customer satisfaction:

• Net Promoter Score (NPS) is the primary KPI for product heads, rather than traditional metrics like revenue or user growth

• The company makes 50,000 recorded phone calls to customers each month to gather feedback

• Kaspi's overall NPS has grown from the 40s in the early 2010s to 87.3 in 2020, indicating exceptional customer satisfaction

Management's Decisive and Customer-Centric Decision Making

Kaspi's management, particularly CEO Mikheil Lomtadze, has consistently demonstrated a willingness to make bold decisions in the interest of customer satisfaction. This commitment is evident in several key actions taken by the company over the years.

• Shortly after Baring Vostok invested in Kaspi, Lomtadze took another significant step by exiting the commercial lending business, which was then the bank's primary focus. Instead, he chose to concentrate on retail banking, estimating that the company could develop a competitive advantage in this sector. This bold pivot demonstrated Lomtadze's strategic foresight and willingness to make difficult decisions for long-term success.

• In 2012, Kaspi made a striking move by discontinuing its credit card business within 48 hours of receiving negative Net Promoter Score (NPS) feedback. This decision was particularly noteworthy as the credit card division represented one-third of the company's revenues at the time.

• A particularly challenging situation arose in 2014 when the Central Bank of Kazakhstan devalued the domestic currency by 25%. Amidst rumors of potential bank collapses, including Kaspi, customers across the country rushed to withdraw their money. While other banks imposed withdrawal restrictions, Lomtadze took a counterintuitive approach. He canceled cash withdrawal fees, extended branch operating hours, and ensured all customers in line were served. The bank even provided hot beverages and pizzas to waiting customers. This customer-centric response effectively halted the bank run within 72 hours, showcasing Lomtadze's ability to turn a crisis into an opportunity for building trust and loyalty.

Furthermore, Mikheil Lomtadze's track record as CEO of Kaspi is impressive, characterized by a relentless drive for improvement and a competitive make-or-break mentality. This mindset has been a key factor in Kaspi's successful execution of its strategies. Lomtadze has demonstrated a remarkable ability to set and achieve specific objectives. For instance, in 2020, he identified accelerating the adoption of Kaspi QR by consumers and Kaspi Pay by merchants as the primary goal for 2021. The following year saw QR payments increase eightfold and merchant adoption of Kaspi Pay grow by 4.5 times.This pattern of setting and achieving goals continued in subsequent years. In 2022, the focus was on merchant onboarding and increasing penetration of merchant products like the marketplace. As a result, merchant numbers doubled year-over-year, and marketplace penetration rose from 50% to 65%. For 2023, the priority was to increase users' average transactions per month, which successfully grew from 60 to 71 over the year.

Kaspi.kz has also largely met or exceeded its financial guidance in recent years.

Source: Kaspi

I see 2 benefits with Kaspi's superior human capital and culture:

1. Kaspi's talent and culture translate into operational efficiency:

• Technology & product development, sales & marketing, and G&A costs sum to less than 10% of net revenue, significantly lower than global tech giants

• This efficiency allows Kaspi to invest more in product development and customer acquisition while maintaining high profitability.

2. Kaspi's human capital and culture create a significant barrier to entry for competitors:

• The company is widely recognized as having the top technical team in Kazakhstan.

• Competitors struggle to match Kaspi's product quality and user experience, leading to Kaspi's continued market share gains in retail loans and deposits

ESG Thesis 2: Risks brought about by Kaspi's scandal have been overblown

On September 19, 2024, Culper Research published a report raising serious allegations about Kaspi.kz The report challenges Kaspi's claims and highlights potential risks for investors. Amongst the accusations are that Kaspi "systematically misled U.S. investors and regulators in its repeated claims-especially ahead of the Company's January 2024 NASDAQ listing-that the Company has zero exposure to Russia", when in fact "Russia has contributed materially to Kaspi's reported growth."

Culper Research outlined the following arguments:

1. Kaspi's claim of no exposure to "Russia or Russian businesses" is false, and as such face the risks of secondary sanctions and delisting from US exchanges

   1. Kaspi reportedly experienced significant growth from Russian customers seeking international accounts after sanctions.

   2. The company maintains an account at Raiffeisen Bank in Moscow, which is under investigation for money laundering.

   3. Kaspi's marketplace remains open to Russian buyers, sellers, suppliers, and goods.

   4. Partnerships with Russian companies like Yandex for deliveries and Smartix for payment integration.

   5. Use of Russian suppliers for equipment (e.g., Techline for postomats).

   6. Employing the same PR agency as the Kremlin

   7. Kairat Satybaldy, the imprisoned nephew of scorned dictator Nazarbayev, a former 30% shareholder of Kaspi, and someone who Kaspi Chairman Kim has called “a longtime friend and partner” – pled guilty to laundering money through multiple Kaspi bank accounts, then using the laundered funds to purchase properties in Russia.

2. Kaspi.kz has various concerning business relationships and deals

   1. Joint venture with Magnum Cash & Carry, linked to individuals with ties to former Kazakhstani leadership. Chairman Kim's alleged daughter Yulia Vyacheslava Kim is also running the venture but this was not disclosed in SEC filings

   2. Acquisition of Portmone LLC through a shell company allegedly connected to Russian organized crime.

   3. Purchase of Digital Classifieds from CEO Lomtadze at an inflated valuation.

   4. Chairman Kim's acquisition of Alseco from individuals in former President Nazarbayev's circle.

   5. Complex ownership history involving Kairat Satybaldy, nephew of former President Nazarbayev.

   6. Allegations of hidden beneficial ownership and questionable share transfers

   7. Mysterious death of a former legal advisor and board member who made accusations against Chairman Kim

3. Kaspi is currently overvalued based on selected valuation metrics

   1. Kaspi's valuation appears inflated compared to local competitors like Halyk Bank and CenterCredit.

   2. Questions about the company's valuation per user and price-to-revenue ratios.

This quote summarises Culper's short thesis on Kaspi.kz:

" Our research exposes this grave deception: we believe that not only do Kaspi’s relationships with Russian partners permeate every segment of its business, but that in the wake of Russia’s February 2022 invasion of Ukraine and into 2024, Russia has contributed materially to Kaspi’s reported growth. Our research further unmasks Kaspi’s history of shadowy dealmaking, which raises not only related party and self-dealing concerns, but also exposes the Company’s vast, longstanding ties to bad actors including sanctioned oligarchs and Russian mobsters. We believe Kaspi’s premium valuation and US listing are at risk, and shares are headed lower.

Beyond the Culper Short Research report, further research reveals potentially concerning business relationships and deals involving Kaspi. The Kolesa acquisition stands out as a particularly intriguing case:

4. In 2023, Kaspi acquired a 40% stake in Kolesa from Baring Vostok, with several noteworthy aspects:

   1. Valuation: The $222 million price tag represented just 8.3x earnings (based on H1 2023 results).

   2. Growth Discrepancy: This valuation seems low for a company that had experienced 302% year-over-year revenue growth.

   3. Potential Motivations:

      1. Baring Vostok, primarily invested in Russian companies, may have urgently needed to liquidate assets due to the Ukraine invasion's impact.

      2. Kaspi, recognizing Baring Vostok's position, might have leveraged its advantage to secure a favorable deal.

Response

Kaspi.kz replied shortly on the same day after the report with a statement: "In our view, the report is misleading, inaccurate and misrepresents our business. Being the first company from Kazakhstan to successfully list on Nasdaq has obviously raised our profile amongst short sellers. For those investors who have known us over the years, our reputation speaks for itself."

They later released a more detailed explanation about the arguments brought by Culpers:

1. The company emphasized that 99.6% of its 2023 revenue was generated in Kazakhstan, with the remainder coming from operations in Azerbaijan and Ukraine. This information is clearly disclosed in their US IPO prospectus and 20F filings.

2. The company operates under strict regulatory supervision, implementing comprehensive policies to avoid working with sanctioned entities. Kaspi Bank, a subsidiary, is a systemically important financial institution in Kazakhstan, subject to rigorous oversight by national regulatory bodies.

3. The company employs a thorough "know your customer" (KYC) process, including biometric identification for all account holders, whether they are Kazakh citizens or foreign nationals.

4. Kaspi.kz maintains international correspondent bank accounts with leading financial institutions worldwide, including those in the USA, France, Germany, Austria, and Russia. They stress their compliance with applicable laws and are not aware of any anti-money laundering investigations against them.The company reports that only 2.8% of their customer account balances come from non-residents of Kazakhstan as of Q2 2024, with non-resident accounts contributing only 4.5% to total account growth since the start of 2022. Their marketplace operations are primarily domestic, with only 0.3% of Gross Merchandise Value (GMV) coming from non-resident purchases in the first half of 2024.

5. Regarding international operations, Kaspi.kz acquired leading classified platforms in Azerbaijan in 2019 for KZT11,988 million, which generated KZT3,742 million in revenue in 2023. They also acquired Portmone Group in Ukraine in October 2021, which operates under Ukrainian regulatory licenses and serves as a platform for potential future growth in that market.In February 2023, Kaspi.kz acquired a 90.01% share in Magnum E-Commerce Kazakhstan, committing to invest KZT 70,000 million over three years to develop their e-Grocery business. This venture has shown significant growth, with GMV up 111% year-over-year to around KZT56,900 million in the first half of 2024.

6. The company clarifies that Mrs. Yulia Kim, who leads their e-grocery operations, has no family relationship to Mr. Vyacheslav Kim, despite sharing the same surname. They credit her leadership, along with the rest of their team, for the success of their e-grocery business.

Kazakhstan's financial regulatory body, the Agency for Regulation and Development of Financial Markets, has also publicly endorsed Kaspi's standing in the country's banking sector. In a statement released on September 23, the agency described Kaspi as a systemically important institution within Kazakhstan's financial landscape. The regulator highlighted Kaspi's consistent development, sustainable growth trajectory, and commitment to maintaining a high level of transparency in its operations.Furthermore, the agency addressed concerns regarding international sanctions compliance, particularly in light of the restrictions imposed on Russia following its full-scale invasion of Ukraine. The regulatory body unequivocally stated that Kaspi is in full compliance with the sanctions regimes established by the United States, the European Union, and other foreign nations. This affirmation from a key regulatory authority serves to reinforce Kaspi's reputation for adherence to international financial regulations and its importance within Kazakhstan's banking system.

Assessing the response

Comprehensiveness

Kaspi's response addresses many of the key allegations, but not all:

1. Strengths: The company provided detailed information on revenue sources, customer composition, and regulatory compliance.

2. Weaknesses: Some specific allegations, such as partnerships with Russian companies and complex ownership structures, were not directly addressed.

Transparency

Kaspi demonstrated a degree of transparency in its response:

1. They disclosed specific percentages of revenue and customer account balances.

2. The company provided details on international operations and acquisitions.

However, the response could have been more transparent by addressing all allegations point-by-point.

Credibility

Several factors contribute to the credibility of Kaspi's response:

1. The endorsement from Kazakhstan's financial regulatory body adds significant weight to their claims of compliance and importance in the domestic market.

2. Specific data points and percentages lend credibility to their statements about limited exposure to non-resident customers and Russian business.

Timeliness

Kaspi's initial response was prompt, followed by a more detailed explanation. This quick reaction demonstrates responsiveness to investor concerns.

Adequacy of Evidence

While Kaspi provided some concrete evidence to support their claims:

1. They cited specific percentages and figures from their financial reports.

2. The regulatory endorsement serves as external validation.

However, some allegations lacked detailed rebuttals or supporting evidence.

In summary, Kaspi's response can be considered adequate but not comprehensive. While it addresses many key concerns and provides valuable information to counter some of the most serious allegations, it falls short of a complete point-by-point rebuttal.

Strengths:

1. Kaspi effectively countered claims about significant Russian exposure with specific data.

2. They clarified the nature of their international operations and acquisitions.

3. The response addressed concerns about regulatory compliance and sanctions adherence.

Weaknesses:

1. The company did not directly address allegations about Russian partnerships or suppliers.

2. Claims about complex ownership structures and questionable deals were not fully refuted.

3. The response did not provide a detailed rebuttal to claims about overvaluation.

Assessing the other arguments

Investors Zhou Yu (Founder, Forward Horizon Investment LLC) and Timothy Liu (Managing Partner, Meditation Capital) put forth several arguments against Culper's statements on LinkedIn and X respectively, which I find pertinent to raise.

1. Misrepresentation of Non-Resident Deposits

• Unsupported Assumptions: Zhou Yu points out that Culper's claim about "If 50% of non-resident deposits went to Kaspi accounts, then 29% of Kaspi's deposits and nearly half of the Company's growth since the start of 2022 can be explained by non-residents" is based on an unsupported "if" statement without concrete evidence.

• Misunderstanding of Growth Drivers: The report overlooks Kaspi's evolving business model, where Payments and Marketplace segments have grown from 61% to 68% of net income in the past three years, while Fintech has decreased 39% to 32%.

• Deposit Growth Inconsistency: Timothy Liu points out that Kaspi's deposit growth doesn't match Culper's chart (as shown below) on Russians fleeing to Kazakhstan and the claim that Kazakhstan skyrocketed throughout 2022 and also continuing to grow throughout 2024:

Source: Culper Research

He points out that the biggest growth in Kaspi deposits occurred in 2023 when non-resident deposits were flat. It appears that Timothy's claim would be true in absolute terms, with 1.44 KZT bil increase in 2023 and 1.24 KZT bil increase in 2022.

Source: Kaspi

2. Misinterpretation of Russian Business Relationships

• Outdated Information: Timothy also points out that some claims about Kaspi's Russian business relationships are based on information predating Russia's 2022 invasion of Ukraine.

• Legal Business Operations: Furthermore, it is not illegal to conduct business in non-sanctioned goods with Russia. Kazakhstan has significant trade relations with Russia (13% of exports, 38% of imports).

• Yandex Partnership Misrepresentation: The Yandex Taxi partnership is ubiquitous in the region and not unique to Kaspi.

3. Inaccuracies in Corporate Relationships

• Misidentification of Yulia Kim: Timothy points out that Culper deliberately mistranslated Yulia Valerianovna Kim's name to falsely claim she's the daughter of Kaspi's founder, Vyacheslav Kim, which has been confirmed by Kaspi.

• Magnum Investment Clarification: Vyacheslav Kim's stake in Magnum was a personal investment made in 2017, long before Kaspi's entry into e-grocery.

• Azerbaijan Acquisition Valuation: The acquisition was made for approximately 10x 2020 revenue, not 84x as Culper claimed.

4. Misrepresentation of Historical Ownership

• Outdated Claims: Timothy further points out that the allegations regarding Kairat Satybaldyuly's ownership are old and illogical, given the thorough investigation by the Kazakh government. Furthermore, even though it had not been addressed by Kaspi, the point was extensively covered by Forbes before the report and thus has been priced in into the company as a risk

• Inconsistent with Asset Seizures: If Satybaldyuly truly had a 30% stake in Kaspi worth $7 billion, it would have been the largest asset seized by the government, which didn't occur.

5. Misunderstanding of Sanctions and Banking Practices

• Raiffeisen Relationship: Raiffeisen is not sanctioned, and having correspondent relationships with Russian banks is not unusual for Kazakh banks.

  • Raiffeisen, a major Austrian financial institution with a €210 billion balance sheet and a presence in 14 countries, has been working to scale back its Russian operations since 2022.

  • The bank aims for a complete withdrawal from Russia, but this process has been complicated by the need to adhere to sanctions and regulatory requirements imposed by national and European supervisory bodies.Recently, the U.S. Office of Foreign Assets Control (OFAC) reached out to Raiffeisen for information about its payment operations and related processes, given the ongoing situation between Russia and Ukraine. The bank clarified that this inquiry was not prompted by any particular transaction or business activity.

  • It's worth noting that Raiffeisen operates under the direct oversight of the European Central Bank and is not currently subject to sanctions, either at the group level or for its Russian subsidiary

• Customer Reviews Misinterpretation: Positive reviews from Russian users are due to Kaspi's efficient services, not indicative of illicit activities.

• Sanctions Screening Process: Culper misunderstands the sanctions screening process, which focuses on matching names against sanctions lists and monitoring for suspicious large deposits.

6. Selective and Misleading Use of Sources

• Cherry-Picking Information: Culper selectively highlights comments about Kaspi while ignoring similar information about other Kazakh banks.

• False Implications: The report falsely implies that only Kaspi opens accounts for Russians and that doing so for non-sanctioned individuals is illegal.

Furthermore, the assertion that Kaspi is overvalued compared to its peers, such as Halyk Bank, could be reinterpreted by considering the possibility that Halyk Bank is currently undervalued (which warrants another deep look into Halyk). It is plausible that Halyk Bank may experience a revaluation upward to align with Kaspi's valuation, rather than Kaspi's valuation decreasing to meet Halyk Bank's current level.

Understanding the risks of secondary sanctions and delisting from US exchanges

U.S. sanctions, like those from the EU, are focused on curbing financial support to Russia’s military-industrial complex. Although Kaspi does facilitate transactions for Russian nationals, this alone does not necessarily violate sanctions unless it also facilitates transactions for individuals or entities specifically blocked by U.S. measures, such as those under Executive Order (EO) 14024, which targets Russia’s war economy.

The U.S. Office of Foreign Assets Control (OFAC) uses a multi-factor test to evaluate the significance of transactions, considering aspects like size, frequency, and management awareness. If Kaspi is found to be conducting significant transactions with sanctioned Russian parties, it could face restrictions or full blocking measures on its operations in the U.S.

There are two key criteria and Kaspi will have to fulfil both criteria to be under sanctions

1. Significant Transactions: Kaspi appears to facilitate significant transactions for Russian account holders, which raises questions about compliance with sanctions prohibiting support to Russia’s military economy.

2. Blocked Persons: If Kaspi is found to be facilitating transactions for individuals or entities on the U.S. blocked persons list, it would be in direct violation of sanctions.

Regarding the risk of delisting from Nasdaq, Kaspi could face such action if its involvement with sanctioned entities is perceived as making its continued listing inadvisable. Nasdaq has broad discretion to delist securities based on conditions that may not align with its listing criteria.

Currently, there is no evidence that Kaspi is facilitating transactions for individuals or entities on the U.S. blocked persons list. If such facilitation were to occur, it would constitute a direct violation of sanctions and risk delisting, prompting close scrutiny from investors. However, in my opinion, this potential risk is not new information about Kaspi and has already been factored into a valuation discount associated with investing in a frontier market like Kazakhstan.

JP Morgan provides a good analysis of such a discount:

"Kaspi Trades at a Discount to Local and Frontier Market Indices (Despite Faster Growth and Higher Margins)

Kaspi shares fell 70% from January 1, 2022, to March 2, 2022, wiping away ~$15 billion in market cap, driven, in large part, by a string of violent protests in Kazakhstan in early January and the Russia-Ukraine invasion. The company has continued to execute, posting 47% and 40% compounded revenue and net income growth from ˖21 and ˖23, yet shares trade at a half-turn discount to and have underperformed the local Kazakhstan KASE Index by 12 points since January 1, 2022, despite faster growth and higher margins. We note Kaspi trades at just 8.5 times our ˖24 earnings estimates, versus the broader KASE Index at 9 times. Similarly, Kaspi is the largest holding (5.5% weighting) in the MSCI Frontier Market Index, which trades 9.8 times ˖24 earnings estimates, with just mid-teens aggregate operating margins. We note Kaspi has seen a surge in trading volume and interest since listing on the Nasdaq exchange in late January, with shares up 11% (vs S&P 500 up 6%)"

Engagement

Here are some key points of engagement:

Increasing Transparency

1. Encourage greater disclosure around risk management practices and compliance procedures, particularly given the company's dominant position in Kazakhstan's financial ecosystem

2. Suggest hosting a particular investor day separate from earnings call to provide deeper insights into the company's response to the accusations outlined in the short report

Enhancing Features for Foreign Users

1. Propose developing multi-language support within the Kaspi.kz Super App to cater to non-Kazakh speaking users, aligning with Kazakhstan's efforts to attract foreign investment

Given management's past receptiveness to investor feedback, as evidenced by the US IPO following liquidity concerns raised by Sands Capital, these engagement points are likely to be well-received.

Corporate Details

Board

Kaspi has implemented robust corporate governance measures to ensure effective oversight and management. The company's board structure comprises:

• Three independent non-executive directors

• Two non-executive directors

• One executive director

To enhance governance, Kaspi has established two key committees:

1. Audit Committee

2. Remuneration and Strategic Review Committee

Both committees are chaired by independent non-executive directors, ensuring impartial leadership.

Board members:

1. Vyacheslav Kim - Chairman of the Board

Background:

• Co-founder of Kaspi

• Extensive experience in retail

• Board member of Magnum, Kazakhstan's largest food retailer

• Board member of the Physics and Mathematics School

Education:

• Finance degree from Almaty State University

• Management degree from Russian-Kazakh Modern Humanitarian University

Experience

• Founded Electronics Network in 1993

• Acquired Bank Kaspiyskiy in 2002 to provide financing for electronics buyers

• Transformed Planeta Eletroniki into Kazakhstan's largest electronics retailer

• Sought investment partners to leverage the bank acquisition, leading to a partnership with Baring Vostok

• Was an advisor to the Prime Minister

2. Mikheil Lomtadze - Director, Chairman of the Management Board (CEO)

3. Nikolay Zinovyev - Non-Executive Director

Current Role:

• Founder and CEO of Superbrands.ru (since 2017)

Previous Experience:

• Founder and CEO of Europlan (1999-2015)

• Vice-president at U.S.-Russia Investment Fund (2000-2002)

Education:

• English Language Teacher diploma from State Pedagogical University, Rostov-on-Don

• Bachelor's degree in economics from Moscow State University of Commerce

4. Douglas Gardner - Independent Non-Executive Director

Current Role:

• Founder and CEO of CAIGAN Capital (since 2007)

Previous Experience:

• Managing partner for Russia, Kazakhstan, and CIS at Ernst & Young (2002-2006)

• Managing partner for Central Asia at Arthur Andersen (2001-2002)

Qualifications:

• Certified Public Accountant

• Extensive board and audit committee experience

Education:

• Bachelor's degree in business administration (accounting) from the University of Oklahoma

5. Szymon Gutkowski - Independent Non-Executive Director

Current Role:

• Managing partner of DDB Poland (since 2000)

Expertise:

• Brand building, marketing, and communications strategy

Other Positions:

• Board member of Meta's Client Advisory Board in Poland (since 2017)

• Board member of Stefan Batory Foundation (since 2020)

Education:

• Degree in theoretical mathematics and economy from Warsaw University

• Executive MBA and master's degree from University of Illinois Urbana-Champaign and Warsaw University

6. Alina Prawdzik - Independent Non-Executive Director

Recent Experience:

• Business director at Meta in Poland (February-December 2022)

• Managing partner at Innogy Innovation Hub (2017-2020)

Previous Roles:

• Adviser to Eurocash management board (2016-2017)

• Chief Operating Officer at Audioteka (2014-2015)

• Various positions at eBay, including country manager and general manager (2006-2013)

• Brand manager at Procter & Gamble (1993-2005)

Education:

• Master's degree in economics and organization of international trade from University of Gdansk

Below is a table of the Board's capabilities according to Kaspi:

Source: Kaspi

Management

1. Mikheil Lomtadze - Chairman of the Management Board (CEO), Director

Background:

• Born in Georgia

• Harvard Business School graduate (2002)

• Joined Baring Vostok Capital Partners, rising to partner in 2004

• Joined Kaspi in 2007 to restructure operations

Previous Experience:

• Founded GCG Audit (1995-2000), later part of Ernst & Young

Education:

• Bachelor's degree from European School of Management (Georgia)

• MBA from Harvard Business School (2002)

2. Pavel Mironov - Deputy Chairman of the Management Board (COO)

Background:

• Joined Kaspi as part of the founding management team in 2008

• Extensive experience in technology

Previous Experience:

• Worked at Tieto, a European IT and software company

Education:

• Degree in computer science from Moscow Institute of Electronics and Mathematics

• Harvard Business School GMP program graduate (2015)

3. Yuri Didenko - Deputy Chairman of the Management Board (Capital Markets)

Background:

• Joined Kaspi as part of the founding management team in 2007

• Responsible for capital markets and treasury

• Extensive experience in investment and financial analysis

Previous Experience:

• Director of investments at Baring Vostok Capital Partners

Education:

• Degree in finance from Kyiv National Economic University

• CFA charterholder

• Harvard Business School GMP program graduate (2015)

4. Tengiz Mosidze - Deputy Chairman of the Management Board (CFO)

Background:

• Joined Kaspi as part of the founding management team in 2008

• Extensive experience in finance

Previous Experience:

• Financial manager for Caucasus and Central Asia region at Ernst & Young

• World Bank team member for microfinance organizations in Georgia

Education:

• Bachelor's and master's degrees in finance from European School of Management (Georgia)

• Harvard Business School GMP program graduate (2013)

Shareholder Structure, Ownership and Voting Control

Kaspi.kz currently has 190 million outstanding shares. Free float represents ~30.8% of total shares. The largest stake in the company (31.29%) belongs to Baring Vostok Funds, one of leading investment firms in the CIS space, when they invested in the company back in 2007.

Source: Bloomberg

Kaspi.kz stands out for its noteworthy alignment of interests between management and minority stakeholders. This alignment is particularly evident in the case of Mikheil Lomtadze, a key figure in the company's leadership. Remarkably, Mikheil has concentrated the majority of his substantial personal wealth in Kaspi.kz, demonstrating an unwavering commitment to the company's success. His approach to personal investments is equally telling; he views any investments outside of Kaspi.kz as potential distractions from his primary focus. This level of dedication and financial stake in the company not only underscores Mikheil's confidence in Kaspi.kz's future but also serves to reassure minority stakeholders that their interests are closely aligned with those of top management. Such a strong alignment of financial interests can often lead to more prudent decision-making and a long-term orientation in corporate strategy, potentially benefiting all stakeholders involved.

Capital Allocation Decisions

Organic Investment

Kaspi.kz maintains a relatively low CAPEX spending profile:

• CAPEX as a percentage of net revenue ranges between 3-5% in its history.

• The highest CAPEX-to-gross profit ratio was 4.9% in 2023.

• Most of the CAPEX is allocated to developing new features for the business.

This low CAPEX spending is consistent with Kaspi.kz's asset-light business model, which focuses on providing software and banking solutions rather than investing heavily in physical infrastructure.

Kaspi.kz appears to take a careful and strategic approach to acquisitions:

• The company has made some acquisitions, but management has stated that they will only carry out acquisitions if it only makes sense to them.

• For example, they have stated that they are unlikely to enter the food delivery business due to the sheer competition of the business by large players such as Yandex

• Acquisitions are likely targeted to complement or expand their existing ecosystem of services.

History of acquisitions

Dividends and Buybacks

KSPI currently offers an annual dividend of USD 7.17 per share, with a dividend yield of approximately 5.78-6.96% (yield varies slightly based on current stock price). The company pays dividends quarterly, with a payout ratio of about 69.70%.

Recent dividend payments from KSPI:

1. August 28, 2024: USD 1.792 per share (ex-dividend date: August 22, 2024)

2. May 31, 2024: USD 1.91864 per share (ex-dividend date: May 23, 2024)

3. April 19, 2024: USD 1.90095 per share (ex-dividend date: April 12, 2024)

4. November 30, 2023: USD 1.84853 per share (ex-dividend date: November 16, 2023)

KSPI has shown significant dividend growth over the past few years:

• The company has increased its dividend payments consistently since 2021. The one-year dividend growth rate is reported to be 26.00%.

In addition to dividends, KSPI has a buyback yield of 0.67%, contributing to a total shareholder yield of 6.45%

The company's management has stated that their goal is to return approximately 50% of net income to shareholders. This return can be achieved through two primary methods: dividends and share buybacks, both of which Kaspi.kz has actively implemented.

In practice, the company's shareholder return strategy has been even more generous than its stated goal. On a quarterly basis, Kaspi.kz aims to return about 75-80% of its adjusted net income through a combination of dividends and buybacks. This commitment to shareholder returns is further evidenced by the fact that the company consistently returns over 60% of its net income to shareholders. This attractive yield is made possible by the company's high return on equity (ROE), which allows it to maintain its policy of returning 60-70% of earnings to shareholders while still investing in growth.

However, it's important for investors to note that while Kaspi.kz has demonstrated a strong commitment to shareholder returns, the company's primary focus remains on growth. Management has indicated that if significant growth opportunities arise, they may reduce profit distribution to capitalize on these opportunities.

Investment Theses

1. Demonstrated ability to introduce and rapidly scale services profitably

Kaspi has demonstrated a remarkable ability to introduce and scale new products quickly while maintaining profitability. Notable examples include:

• e-Grocery: Achieved 7-8% net income margins within one year of launch, serving 496,000 consumers by the end of 2023.

• Autos business: Reached profitability just four months after launch.

• Tax Reports: Collected KZT 660 billion in business taxes and contributions in its first year.

• Travel: Grew from zero to 8% of Marketplace GMV in just two year

Source: JP Morgan

Furthermore, Kaspi has shown an extraordinary capacity to disrupt established markets and achieve dominant positions:

• Payments: Increased market share of cashless transactions from 2% to 66% in just one year, displacing Visa and Mastercard.

• POS Market: Grew market share from 9% to 46%, with a 940% increase in POS installations.

• Travel: Captured 26% of the airline ticket market share within six months of entry.

Source: Kaspi

One reason why I believe so is Kaspi's unique market position that allows it to strategically subsidize key products while maintaining high profitability:

• In the marketplace business, 95% of deliveries are free, yet the segment operates at over 60% net margin.

• The payments business monetizes less than 10% of P2P transactions, forgoing interchange fees to drive customer acquisition.

• Despite these subsidies, Kaspi's standalone payments business delivers net margins comparable to global industry leaders

Another reason is Kazakhstan's relatively underdeveloped market which provides Kaspi with significant advantages:

• Weak competition allows Kaspi to fully capture and monetize each major area it enters.

• The company can avoid trade-offs faced by competitors in more developed markets, such as using payments as a loss leader for lending.

2. Demonstrated resilience to macroeconomic slowdown, being able to sustain growth even in unfavorable conditions

Amidst the COVID-19 pandemic, Kaspi has consistently maintained high ROEs of over 75% from 2019 to 2022, with expectations to remain above 70% through 2024. This indicates a robust ability to generate profits from shareholder equity, underscoring its financial strength and efficiency. This could be attributed to CEO Mikheil Lomtadze's leadership when Kaspi streamlined operations to focus on the short-term consumer credit market. This strategic pivot allowed for greater flexibility in pricing and financing size, as well as reduced risk costs. During the COVID-19 pandemic, Kaspi effectively scaled down lending and quickly ramped it up as macroeconomic conditions improved.

Furthermore, the company has a diversified revenue structure with over 55% of gross revenue coming from fees and ecosystem operations, reducing reliance on more volatile net interest income, which accounts for less than 40% of net revenue. This shift towards fee-generating payments and marketplace segments enhances earnings stability and reduces cyclicality.

Financials

Historical Revenue

Kaspi.kz (KSPI) has demonstrated strong revenue growth across its business segments from 2018 to 2023.

Over time, fintech has decreased as a proportion of revenue, while marketplace and payments are taking up more share of revenue.

Source: Kaspi

Historical Net Margins

Kaspi has demonstrated impressive net margins in recent years, reflecting its strong financial performance and efficient business model.

Source: Kaspi

In terms of proportion of net income, the trend mirrors that of revenue.

Source: Kaspi

From revenue to net revenue, Kaspi's cost structure can be broken down into three main categories:

1. Interest Expenses: Interest expenses include interest expenses on customer accounts, mandatory insurance of retail deposits and interest expenses on debt securities, including subordinated debt.

2. Transaction expenses are mainly composed of the costs associated with accepting, processing and otherwise enabling payment transactions. Those costs include fees paid to payment processors, payment networks and various service providers.

3. Cost of goods and services includes cost of goods sold, which is the price paid by us for consumer products, the subsequent sale of which generates retail revenue, and cost of services, which includes costs incurred to operate our retail network, 24-hour call support and communication with customers, product packaging and delivery, and other expenses which can be attributed to our operating activities related to the provision of products and services.

From net revenue to earnings before taxes, the cost breakdown includes:

1. Technology and Product Development: Technology and product development expenses consist of staff and contractor costs that are incurred in connection with the research and development of new and maintenance of existing products and services, development, design, data science and maintenance of our products and services, and infrastructure costs. Infrastructure costs include depreciation of servers, networking equipment, data center, Kaspi Kartomats, Kaspi Postomats and payment equipment, rent, utilities and other expenses necessary to support our technologies and platforms. Collectively, these costs reflect the investments the company make in order to offer a wide variety of products and services to Kaspi's customers.

2. Sales and Marketing: Sales and marketing expenses consist primarily of online and offline advertising expenses, promotion expenses, any charity and sponsorship expenses, staff costs and other expenses that are incurred directly to attract, engage or retain consumers and merchants to the platforms.

3. General and Administrative Expenses: General and administrative expenses consist primarily of costs incurred to provide support to the business, including legal, human resources, finance, risk , compliance, executive, professional services fees, office facilities and other support functions.

4. Provisions: Provision expenses. Impairment gains and losses recognized on financial assets are recorded in the “provision expenses” line item in the consolidated statements of profit or loss. Provision expense is recognized based on the expected credit loss (“ECL”) measurement in accordance with IFRS 9. ECL is a probability-weighted measurement of the present value of future cash shortfalls (i.e., the weighted average of credit losses, with the respective risks of default occurring in a given time period used as weights).

Below is a summary of expenses:

Ratios

Source: Kaspi

Kaspi.kz has demonstrated exceptional financial performance in terms of return on common equity (ROCE), return on assets (ROA), and return on capital (ROC).

Valuation

To determine a target price for Kaspi.kz, I used revenue projection model that incorporates dynamic growth rates and a forward-looking enterprise value-to-sales (EV/Sales) ratio.

The model begins with the actual revenue figure for FY2023 as its foundation. From there, I applied a conservative 20% year-over-year growth rate for the next three fiscal years (FY2024-FY2026), even though management has guided 70% YOY growth for FY2024.

For the subsequent two years (FY2027-FY2028), I implemented a more conservative 15% growth rate, accounting for potential market saturation and increased competition.

To derive the target price, I applied a 4x forward EV/Sales multiple to the projected FY2026 for the 3 year TP and FY2028 revenue for the 5 year TP . This multiple, while at the higher end of comparable ratios for payments and marketplace companies, is warranted due to Kaspi.kz's superior profit margins compared to industry peers, diversified revenue streams across fintech, e-commerce, and payments, strong market leadership in its core geographies, and potential for international expansion.

Below is the comp table comprising of global ecommerce payment processors, marketplace platforms, consumer fintechs and payment networks.

Source: Bloomberg

Other Risks

1. Geopolitical Risks

Kaspi's shares are highly sensitive to geopolitical issues in the region. Two notable events demonstrate this vulnerability:

1. In January 2022, widespread protests in Kazakhstan triggered by rising fuel prices and economic inequality led to a 27% decline in Kaspi's shares

2. Following Russia's invasion of Ukraine in February 2022, Kaspi's shares plummeted 55% over a five-day period

Source: Google

Mitigation

As outlined under the sections of "Foreign Policy Dynamics and Regional Position", Kazakhstan's approach to mitigating geopolitical risk is rooted in its sophisticated multi-vector foreign policy strategy. This nuanced approach allows the country to navigate the complex international landscape while maintaining its sovereignty and pursuing its national interests. At the heart of this strategy is a delicate balancing act between major powers.

Despite historical ties and economic dependencies with Russia and the perception of Kazakhstan's closeness with Russia amongst investors, Kazakhstan has been carefully distancing itself since the Ukraine invasion. This measured approach helps maintain foreign direct investment and avoid sanctions while preserving necessary economic links. Simultaneously, Kazakhstan has strengthened its partnership with China, which has pledged to support Kazakhstan's independence and sovereignty. This relationship, bolstered by initiatives like the Belt and Road, provides a crucial counterbalance to Russian influence.

Furthermore, Kazakhstan continues to foster relationships with Western nations, including the United States and European countries, as evidenced by high-level visits and strategic partnerships. The leadership of President Kassym-Jomart Tokayev significantly enhances Kazakhstan's ability to navigate these complex geopolitical waters. Tokayev's extensive background in diplomacy, including his experience as a diplomat in Singapore and China, and his involvement in nuclear disarmament issues, has established him as a respected figure in international relations. His ability to maintain good relations with Russian President Vladimir Putin while simultaneously pursuing Kazakhstan's independent foreign policy is a testament to his diplomatic acumen.

Kazakhstan is also strategically positioning itself as a regional leader, particularly as Russia's influence in Central Asia wanes due to its focus on Ukraine. This is exemplified by Kazakhstan's role in facilitating peace talks between Armenia and Azerbaijan. Economically, the country is diversifying its partnerships by becoming a crucial transit hub for businesses affected by sanctions against Russia, thereby strengthening its ties with various partners, particularly in Europe. The country's commitment to principled neutrality, as demonstrated by its refusal to recognize Donetsk and Lugansk as independent states, enhances its credibility on the global stage. This stance underscores Kazakhstan's respect for international law and territorial integrity, further solidifying its position as a responsible global actor.

Kazakhstan's active participation in various international organizations and initiatives also serves multiple purposes. It helps diversify the country's diplomatic and economic relationships, enhances its global standing and influence, and creates additional safeguards against undue influence from any single power. This multilateral engagement is a key component of Kazakhstan's risk mitigation strategy.President Tokayev has emphasized the need to update Kazakhstan's foreign policy strategy, indicating a willingness to adapt to evolving geopolitical realities. This flexibility is crucial in mitigating risks associated with rapid changes in the international order.By leveraging its strategic location, abundant resources, and sophisticated diplomacy, Kazakhstan continues to navigate the complex geopolitical landscape effectively. While challenges remain, particularly in balancing relationships with major powers, Kazakhstan's multi-vector approach provides a robust framework for mitigating geopolitical risks and maintaining its sovereignty and independence. This strategy not only helps Kazakhstan safeguard its interests but also positions the country as an important player in regional and global affairs.

2. Economic and Currency Risks

Kazakhstan's economy heavily relies on oil and gas exports, which constitute 20-25% of GDP and 55-60% of export. This dependence exposes the country to potential economic downturns if oil prices drop or if Russia cuts off the Caspian Pipeline Consortium for an extended period. Currency risk is also a concern. While the USD/KZT exchange rate has been relatively stable since 2015, gradual depreciation and potential spikes in inflation could impact Kaspi's performance in USD terms.

Mitigation

Kaspi.kz has implemented strategic measures to mitigate economic and currency risks, which are crucial given Kazakhstan's status as an emerging market and the potential for currency volatility.A key aspect of Kaspi's risk mitigation strategy lies in its revenue structure. As of 2022, a significant portion (56%) of Kaspi's revenue comes from fee-based businesses, primarily in the Payments and Marketplace segments. This structure serves as a natural hedge against currency depreciation, as fees can be adjusted more readily than interest rates.

The company's diverse business segments, encompassing Payments, Marketplace, and Fintech, provide additional insulation against economic fluctuations by reducing reliance on any single revenue stream.Kaspi's approach to currency risk management is equally noteworthy. The company primarily operates in the local currency (Kazakhstani tenge), which inherently reduces direct exposure to foreign exchange fluctuations.

Moreover, Kaspi reportedly does not borrow in USD, a practice that significantly reduces the risk of currency mismatch. This strategy insulates Kaspi from certain financial shocks that could arise due to currency fluctuations.The company's business model as a payments and e-commerce platform allows for relatively quick adjustments to pricing and fees in response to currency movements. This adaptability provides a natural hedge against gradual depreciation and allows Kaspi to respond swiftly to inflationary pressures.Kaspi's strong market position as Kazakhstan's largest ecosystem integrating Payments, Marketplace, and Fintech provides additional economic resilience.

3. Regulatory and Political Risks

The two primary concerns in this area are:

1. The possibility of the Kazakh government forcibly taking over Kaspi, given its fundamental role in the country's economy.

2. The potential for increased taxation on Kaspi

Mitigation

While Kazakhstan's political system has authoritarian elements, Kaspi.kz appears to have established a strong, mutually beneficial relationship with the government. This relationship likely mitigates potential risks associated with operating in such an environment:

1. Political Connections: Vyacheslav Kim, one of Kaspi's founders, has cultivated relationships within the government, having previously served as an advisor to the prime minister. These connections provide a level of protection and influence for the company.

2. Public Popularity: Kaspi.kz has garnered significant public support, with many Kazakhstanis proud of its homegrown success. The government would likely face public backlash if it were to target such a popular and widely-used service

3. Alignment with Government Objectives: Kaspi's services, particularly its online payment systems, align with the government's interest in reducing the shadow economy and increasing financial transparency.

4. Government Partnerships: President Tokayev's meetings with Kaspi founders and the integration of government services into the Kaspi.kz app demonstrate a strong public-private partnership. This collaboration extends to Kaspi's participation in the President's IT Committee and National Investor Committee

5. Economic Importance: As a success story in Kazakhstan's tech sector, Kaspi plays a crucial role in attracting foreign investment and showcasing the country's innovation potential, which is aligned to the government's focus on attracting foreign investment and maintaining Kazakhstan's reputation as an investment destination. Thus, the government has a vested interest in Kaspi's continued success and international reputation.

6. Public Service Integration: Kaspi's GovTech platform, which facilitated 9.6 million users accessing government services in 2022, has become an essential part of Kazakhstan's digital infrastructure. This integration makes Kaspi an indispensable partner in the government's digitalization efforts.

4. Operational Risks

   1. Credit Losses: As unsecured consumer loans make up the majority of Kaspi's loan portfolio, a rise in consumer credit losses could impact financial performance and investor sentiment

   2. Key Person Risk: CEO and founder Mikheil Lomtadze has been instrumental in Kaspi's success. His departure could negatively affect the company's performance and stock sentiment

Mitigation

1. I believe this risk is well mitigated. Kaspi.kz has demonstrated a robust credit profile, evidenced by recent upgrades and new ratings by rating agencies:

   

   Source: Wall Street Prep

   1. Moody's upgraded Kaspi Bank's long-term deposit ratings to investment grade Baa3 from Ba1 with a stable outlook

   2. Fitch assigned Kaspi.kz its first international credit rating of BBB- (investment grade) with a stable outlook (details behind its rating can be found in Appendix 2)

   Kaspi.kz has developed a sophisticated, data-driven credit risk management system that allows for highly efficient loan origination and risk assessment. Key aspects include:

   1. Centralized Process: All decision-making, verification, and accounting related to loan origination are centralized, ensuring consistency and control.

   2. Automated Approval: The company has developed an automated, proprietary loan approval process that enables instant credit decisions, with 99.9% of consumer loan approvals made within six seconds.

   3. Big Data Analytics: Kaspi's risk models analyze over 4,380 data points per applicant, drawing from an extensive database that includes:

      1. Data from over 97 million loan applications

      2. 24 billion transactions

      3. 31 billion user sessions in their Super Apps since 2021

   4. Diverse Data Sources: The company utilizes a wide range of data types, including:

      1. Financial data

      2. Shopping behavior

      3. Payment history

      4. Super App usage data

      5. External data from credit bureaus and the Pension Center

   5. Advanced Modeling: Kaspi employs proprietary risk algorithms, sophisticated predictive scoring models, and machine learning to assess credit risk.

   The effectiveness of Kaspi's credit risk management system is evident in several key metrics:

   1. Low Default Rates: The first payment default rate is reported to be less than 1%

      

      Source: Kaspi

   2. Moderate Cost of Risk: Over the last five years, Kaspi has maintained a moderate 2% cost of risk, indicating effective credit cost control

      

      Source: Kaspi

   3. High Collection Rate: Kaspi typically collects 97% of loans that are less than 90 days past due.

   4. Efficient Approval Process: 99.9% of consumer loan approvals are made within six seconds, enabling seamless shopping on their Marketplace Platform.

   5. Fraud Prevention: The percentage of transactions cancelled due to suspicion of fraud has been reduced to less than 0.1%.

  These other factors would also further mitigate the risk

1. Short-Term Focus: Loans are largely short-term, reducing long-term exposure to credit risk.

2. Repeat Customers: A vast majority of borrowers are repeat clients, as the group serves most of Kazakhstan's population, allowing for better risk assessment.

3. Smaller Average Loans: The bank's average retail loan is smaller than most peers, reducing individual exposure.

4. Biometric Security: Kaspi uses face recognition technology and electronic signatures (Kaspi eSign) to prevent fraud and ensure transaction security

  d. While it is possible, I believe that he is unlikely to leave due to retirement-related reasons as he is still relatively young.

Appendix 1: Interview with a local user of Kaspi

1. How frequently do you use the Kaspi.kz Super App, and which services do you use most often? What makes these services particularly valuable or convenient for you?

   1. Kaspi is ubiquitous in Kazakhstan, even for foreigners with salaries in other banks like Halyk.

   2. Most commonly used services are payments (QR codes, transfers) and marketplace (similar to Amazon).

   3. It's used for various transactions, from grocery shopping to informal e-commerce.

   4. The app is primarily in Russian and Kazakh, with no English translation, which can be challenging for non-Russian/Kazakh speakers.

2. How would you compare Kaspi.kz to traditional banks and other fintech platforms in Kazakhstan? What specific advantages or disadvantages have you experienced with Kaspi.kz?

   1. Halyk Bank entered the market later and is not as widely accepted as Kaspi.

   2. Kaspi is more widely accepted, especially in small shops and informal businesses.

   3. Halyk offers an English interface and multi-currency options, which Kaspi lacks.

3. Do you regularly shop on the Kaspi.kz Marketplace? What do you see as the biggest advantages of shopping there, and have you faced any challenges or limitations compared to other online retailers?

   1. Some users avoid the marketplace due to the Russian language interface.

   2. The marketplace is perceived as simple, fast, and economical.

4. How does Kaspi.kz verify customer information when opening new accounts or during transactions? Have you encountered any issues with the verification process?

• Account opening process is straightforward but requires assistance for foreigners due to language barriers.

• Verification requires passport, ID, and IIN (Individual Identification Number) after obtaining residence permit.

• The process takes about 20 minutes and includes facial recognition for large transactions.

• For large transactions, additional verification may be required, including calls from Kaspi. Kaspi may also block the transaction

5. From your experience or what you've heard, how easy or difficult is it for foreigners to open a Kaspi.kz account? Are there any special requirements or challenges they face?

   1. Some foreigners find Kaspi challenging due to the language barrier.

   2. Despite this, the general sentiment towards Kaspi remains positive.

   3. Assistance may be needed due to language issues.

6. Do you know if many Russians use Kaspi.kz services, either within Kazakhstan or across borders? How is the platform perceived by Russian users?

• There has been an influx of Russian immigrants living in Kazakhstan who use Kaspi services.

7. Are there any features or services you think Kaspi.kz could add to make the platform more useful or efficient for you?

   1. Easier transfers from Halyk to Kaspi accounts.

   2. Addition of English language support.

8. How do locals perceive Kaspi.kz as a place to work at?

   1. Kaspi is viewed as a good company to work for, especially in coding roles.

   2. It's seen as a growing company generating significant employment opportunities.

9. On a scale of 0-10, how likely are you to recommend Kaspi.kz to your friends and family? What specific factors influenced your rating?

   1. Kaspi is considered a must-have app for living in Kazakhstan.

   2. It's widely used for various services, including ride-hailing apps like Yandex.

Appendix 2: Fitch's assessment of Kaspi

Fitch outlined the key strengths of Kaspi:

1. Diverse Business Model: Kaspi.kz operates a unique two-sided mobile application model, combining banking, marketplace, and payment solutions

2. Stellar Profitability: The company has maintained an extraordinary 80% return on equity over the past eight years, with a four-year average operating profit of 22% of risk-weighted assets

3. Solid Capitalization: Kaspi.kz's consolidated Fitch core capital was 24% of risk-weighted assets at the end of 1H24, with an equity-to-assets ratio of 17%.

4. Efficient Risk Controls: The company employs big data-driven risk controls, benefiting from a vast majority of repeat clients

They also outlined the risks:

1. Consumer Finance Exposure: 79% of loan originations in 1H24 were in unsecured consumer finance, which could be vulnerable in economic downturns

2. High Funding Costs: Due to its focus on the consumer segment, Kaspi.kz faces higher funding costs compared to sector averages

3. Sovereign Correlation: The sustainability of Kaspi's performance is closely tied to Kazakhstan's broader economic stability

*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.