This write-up is very interesting although as mentioned by the others, the fear that exists in investing in a Kazakhstan based company is very real. Although I have no doubts that the business and economic moats exist, I wanted to ask some questions regarding the valuation of the company.
1. When you derived your valuation, you compared it against other developed companies, in developed countries. This includes Singapore’s SEA, China’s PDD, and BABA. I do not feel like you should use these companies and instead use another developing market fintech (if a comparable one exists) to compare.
2. Was wondering why EV/sales was used instead of P/E. Given the business’s existence in kazakhstan, I do not think that investors would use EV/sales to compare it as it would be heavily discounted relative to the others. Judging by the comparable you have listed, it seems like investors are valuing it using P/E more likely.
3. Even with the P/E, I agree that while it might see price growth which is where share price growth will come from, it would be heavily affected by any news that might happen in the surrounding regions (Ukraine, Russia, Kazakhstan itself) which will further discount the multiple. Would it not be easier to find another business to invest in a more developed market, with great uncertainty with the current regime change slated to happen?
4. Migrations seem to be stabilizing, which is an interesting statistic. But given the seeming corrupt state it is (38/100 score by the corruption perception index), would it be possible that many of the statistics you are giving here are faked/fraudulent?
Nevertheless, the report is very well-written with a great breakdown of its many businesses, and the short report (which I feel is the least of its concerns)
Hi Jo Vial, thanks for your comments. On your points:
(1) While using peers from similar emerging markets would be ideal for benchmarking Kaspi, there's a scarcity of directly comparable companies in Kazakhstan or Central Asia. In lieu of regional peers, utilizing developed market companies as benchmarks can offer valuable insights into Kaspi's relative position in terms of operational efficiency, innovation, and market penetration. This comparative analysis can help investors gauge Kaspi's potential performance in scenarios such as international expansion or the maturation of the Kazakh market. I would also love to hear if you have suggestions on which comps to use
(2) EV/Sales allow comparisons to comparable companies that does not have profit yet eg. Affirm. Nevertheless, I do think that using other ratios could be useful as well
(3) The primary objective of this report is to uncover fundamentally mispriced or misunderstood equities that have yet to capture significant investor attention. This approach aligns with the value investing philosophy, which seeks to identify undervalued assets in the market. While investing in developed countries generally entails lower risk due to more stable economic and political environments, these markets also tend to be more efficient. As a result, the opportunity to exploit information asymmetries—gaps between public perception and underlying value—is often more limited in developed markets.
In contrast, emerging or frontier markets may offer greater potential for discovering undervalued gems. These markets are frequently characterized by less analyst coverage, lower institutional investor participation, and sometimes, less transparent information flow. This environment can create inefficiencies that astute investors might capitalize on. However, it's crucial to note that these potential rewards come with heightened risks, including currency fluctuations, political instability, and less developed regulatory frameworks.
The challenge, therefore, lies in striking a balance between risk and potential reward. This report aims to identify opportunities where the potential for value discovery outweighs the inherent risks of less developed markets. By focusing on companies that are either misunderstood by the broader market or flying under the radar of most investors, we hope to uncover investment opportunities with attractive risk-adjusted return profiles.
(4) Your concern about data reliability in light of Kazakhstan's corruption perception score is entirely valid and merits careful consideration. However, several factors mitigate this risk in the case of Kaspi:
Firstly, Kaspi's listing on NASDAQ subjects it to stringent reporting standards and regulatory oversight. This includes regular audits conducted by KPMG, a globally recognized accounting firm. Such international scrutiny significantly enhances the credibility and transparency of Kaspi's financial reporting.
Secondly, Kazakhstan has been making concerted efforts to improve its transparency and reduce corruption. These initiatives include implementing anti-corruption reforms and strengthening key institutions. While progress has admittedly been gradual, these efforts signal a positive trend towards greater reliability of economic data emanating from the country.
It's important to note that while these measures don't completely eliminate doubts about data accuracy, they do provide a more robust framework for financial reporting and economic transparency. Moreover, multiple independent sources corroborate Kaspi's reported growth and market penetration:
- Recent reports from international financial outlets have consistently highlighted the rapid digital adoption in Kazakhstan.
- Fintech-focused research firms have documented the growing prevalence of digital financial services in the country.
- Cross-border transaction data provides additional verification of the increasing digital financial activity.
Kaspi's reported user base penetration aligns with these broader trends. Furthermore, anecdotal evidence suggests high adoption rates of Kaspi's services in everyday life in Kazakhstan, supporting the narrative of genuine consumer uptake.
Wow Dean, I very much enjoyed this read on Kaspi. I loved how you not only went in-depth into the business analysis, but the country (market) analysis, since Kazakhstan is a relatively niche market, one that most people don’t think of when it comes to fintech. Perhaps some feedback:
1. What made you decide to look at the Kazakhstan market, as its not the biggest market, as you stated it stands at 20.59m people and a 1.29% growth rate yoy. And not to mention its landlocked geographical features. What do you think of rapidly growing economics, such as Nigeria’s 223.8m with an almost 3% growth in GDP? Though I do agree with your points on a nice, young consumer base that is likely to adopt digital systems
2. Regarding the non-disclosure of merchants on the marketplace, and especially since the previous figure in 2022 was only estimated to be about 300, could this perhaps signal the loss of acquiring these merchants as clients? Have the merchants switched their operations to a competitor?
3. What were some key reasons that Kaspi didn’t excel as well as it did in Azerbaijan and Ukraine?
But overall, a very compelling read, and truly eye-opening!
(1) In approaching this investment analysis, I employed a bottom-up stock selection strategy rather than a top-down geographical approach. Also, Kazakhstan is a less well-known geography or even misunderstood by investors. Hence, it could provide opportunities to look at.
(2) An important update has emerged since the initial writing of this report, significantly impacting our analysis of Kaspi.kz's merchant growth trajectory. In its third-quarter report for 2023, released shortly after the completion of this analysis, Kaspi disclosed that its merchant base had grown to 581,000 as of December 31, 2023, representing a 83.2% YOY growth
(3) Kaspi.kz's approach to international expansion, particularly regarding Azerbaijan and Ukraine, reflects a cautious and strategic stance. The company's management has explicitly stated that these markets are not currently focal points for their growth strategy. Instead, they've adopted a wait-and-see approach, indicating that they will develop appropriate products and services for these markets "when the time is right." This measured approach underscores Kaspi's commitment to thoughtful expansion rather than aggressive growth at any cost.
The rationale behind this strategy is multifaceted. Both Azerbaijan and Ukraine present unique challenges and opportunities that differ significantly from Kaspi's home market of Kazakhstan. These countries have distinct economic landscapes, regulatory frameworks, and consumer behaviors that may necessitate substantial adaptations to Kaspi's existing business model.
Azerbaijan, while geographically close to Kazakhstan, has its own financial ecosystem and market dynamics. The country's economy is heavily dependent on oil and gas exports, which creates a different economic environment compared to Kazakhstan's more diversified economy. Additionally, Azerbaijan's financial technology sector is at a different stage of development, which might require Kaspi to adjust its product offerings and go-to-market strategies.
Ukraine, on the other hand, presents a more complex scenario. The ongoing conflict in the country has dramatically altered its economic landscape and risk profile. This geopolitical instability has likely had a significant impact on Kaspi's operations and growth potential in the Ukrainian market. The conflict has disrupted normal business operations, affected consumer spending patterns, and increased overall market uncertainty. These factors make it challenging for any company, including Kaspi, to operate effectively or plan for long-term growth in Ukraine at present.
This approach allows Kaspi to concentrate on consolidating its strong position in Kazakhstan while keeping an eye on potential future opportunities. It also provides the company with the flexibility to pivot or accelerate its plans should market conditions in Azerbaijan or Ukraine become more favorable.
Hi Dean, this was an exhaustive report and a great read. I agree that KSPI’s strong fundamentals and moats, paired with the uptick in internal migrations to the more populated and urban regions in Kazakhstan and their gradual expansion plans throughout Europe sets the company with a strong growth trajectory. I would like to ask you some questions based on points you’ve mentioned in your report.
1) With Azerbaijan and Ukraine both only taking up 0.2% of total revenues in the 3 countries that KSPI operates in, what are your expectations of the future revenue split by geography with KSPI gaining a foothold in Turkey through the acquisition of Hepsiburada?
2) Regarding your valuation, is there any particular reason why you decided to apply a conservative growth of 20% despite KSPI’s strong moats?
I also appreciated the comprehensive deconstruction of Culper Research’s short report and would like to know your thoughts on this.
3) With the publication of Culper Research’s short report, there has been a class action lawsuit filed against KSPI, with multiple law firms that specialize in securities litigation looking to represent investors that were affected. What are your views on the potential effects of this lawsuit based on your research?
(1) With Kaspi.kz's acquisition of a 65.41% stake in Hepsiburada, we can expect a significant shift in the company's geographical revenue distribution:
• Kazakhstan: Despite the expansion into Turkey, Kazakhstan will likely remain Kaspi.kz's primary revenue source in the short to medium term. The company's strong market position, with 99.6% of its revenue currently coming from Kazakhstan, indicates that this market will continue to be a significant contributor. However, the growth rate in Kazakhstan might moderate as Kaspi.kz focuses on international expansion.
• Turkey: Given Hepsiburada's significant market presence in Turkey, with 12 million active customers and 101,500 merchants, and its $4 billion in gross merchandise value (GMV) for fiscal year 2023, Turkey is poised to become a substantial contributor to Kaspi.kz's revenue. The acquisition expands Kaspi.kz's addressable market to 100 million people, suggesting a potential for significant revenue growth from this region. While exact figures are speculative, Turkey could potentially account for a notable portion of Kaspi.kz's revenue in the coming years, especially as the integration of Kaspi's technology and services into Hepsiburada's platform progresses.
• Azerbaijan and Ukraine: These markets currently contribute only 0.2% of total revenues. While Kaspi.kz has made efforts to expand into these regions, the revenue split might not see a significant shift in the near future due to the smaller market sizes and the challenges of establishing a strong presence in these markets.
A rough estimate for the medium-term revenue split could be:
• Kazakhstan: 70-80%
• Turkey: 20-30%
• Azerbaijan and Ukraine: 1-2%
(2) The decision to apply a conservative growth rate of 20% for Kaspi.kz's valuation, despite its strong moats, is rooted in a careful consideration of various factors that could potentially constrain the company's future growth.
a. Market Saturation:
Kaspi.kz has achieved remarkable success in its home market of Kazakhstan, capturing a significant share across its key business segments - payments, marketplace, and fintech. With a high penetration rate among the country's adult population, the company may be approaching a saturation point in its primary market. This level of market dominance, while a testament to Kaspi's strength, also implies that future growth within Kazakhstan may be more incremental rather than exponential. The company might need to focus more on increasing the average revenue per user (ARPU) and expanding its product offerings to drive growth, as opposed to rapidly acquiring new users.
b. International Expansion Challenges:
- Regulatory Hurdles: Navigating Turkey's regulatory landscape, which differs from Kazakhstan's, may require significant resources and potentially slow down the expansion process.
- Market Adaptation: Turkish consumers may have different preferences and behaviors compared to Kazakhstani users, necessitating adjustments to Kaspi's product offerings and marketing strategies.
- Competition: The Turkish fintech market is more developed and competitive, which could make it challenging for Kaspi to replicate its dominant position from Kazakhstan.
c. Kazakhstan's economy, like many others, has been grappling with inflationary pressures. While inflation rates are expected to moderate, they still pose challenges. High inflation can erode consumer purchasing power, potentially impacting transaction volumes in Kaspi's marketplace and payments segments. Increased operational costs due to inflation could pressure Kaspi's margins unless fully passed on to consumers. Moreover, persistent inflation may lead to economic uncertainty, affecting both consumer and business confidence, which could influence spending and investment decisions.
d. The regulatory environment also plays a crucial role in shaping Kaspi's growth trajectory. As the fintech sector matures, regulators may introduce new rules or tighten existing ones, potentially impacting Kaspi's operations or requiring additional compliance measures. Stricter data protection regulations could affect Kaspi's ability to leverage user data for product development and targeted marketing. Given Kaspi's dominant market position in Kazakhstan, there's also a risk of increased scrutiny from anti-monopoly regulators, which could limit certain growth strategies. As Kaspi expands internationally, it will need to navigate complex cross-border financial regulations, which could slow down its expansion efforts.
(3) The potential litigation against Kaspi.kz is a significant development that warrants careful consideration.
First and foremost, the lawsuit poses a reputational risk for Kaspi.kz. Even if the allegations prove unfounded, the mere existence of legal proceedings can cast a shadow over the company's image. This reputational damage could potentially hinder Kaspi.kz's ability to attract new investors or pursue international expansion plans. In the fintech sector, where trust is paramount, even the hint of impropriety can have far-reaching consequences.
The long-term effects of the litigation will largely depend on its outcome. A favorable resolution for Kaspi.kz could demonstrate the company's resilience and commitment to transparency, potentially reinforcing investor confidence. Conversely, if the allegations are substantiated, the impact on Kaspi.kz's operations and valuation could be more severe and long-lasting.
However, it is crucial to maintain perspective throughout this process. Many such lawsuits are filed in the wake of significant stock price drops, often as a matter of course rather than due to concrete evidence of misconduct. A considerable number of these cases do not result in findings of wrongdoing. Therefore, while the litigation presents serious challenges for Kaspi.kz, it's premature to draw definitive conclusions about the company's culpability or the ultimate impact on its future.
Interesting read, thanks Dean. $KSPI’s super app is indeed one of a kind and not easily replicable by its peers, as evidenced by Halyk Bank's attempt to do something similar. Aside from the political and geographical risks, the macro environment—particularly in terms of demographics, modes of payment, etc.—is highly favorable for $KSPI.
I do have some questions and would love to hear your thoughts–
1. What are your views on this super app when customers are only using a fraction of the available services. Would this still be considered a “successful” super app since the take up rate of the new products/services added should increase
2. As mentioned, the future growth is coming from the CIS region, given that Kazakhstan is considered one of the largest economies in the region with richest GDP, could we expect the expansion plans to see similar growth as seen in Kazakhstan?
3. What are some reasons for the slowly declining take rate especially from 2022 to 2023 (1.30 to 1.25)
4. Marketplace main merchants are mostly small businesses (92.8%), is this a potential hurdle for the business when considering the take rate? Is $KSPI act of not disclosing active merchants in marketplace recently hinting on something?
5. Considering the devaluation of the domestic currency in 2014, how do you think about the FX risks when investing into $KSPI
(1) The assessment of Kaspi.kz's take-up rate for new products and services as a "successful" super app requires a nuanced perspective that takes into account the temporal context of each offering's introduction (i.e. relative to the time it is being introduced). This approach provides a more accurate and fair evaluation of the company's performance in product adoption and market penetration
(2) While Kaspi's expansion into other CIS countries offers significant growth potential, it's unlikely to mirror the growth pattern seen in Kazakhstan exactly. The company will need to navigate a complex landscape of varying regulations, diverse competitive environments, and differing economic conditions. Success will depend on Kaspi's ability to adapt its model to each new market, leverage its technological expertise and ecosystem approach, and effectively localize its offerings.
Regulatory environments across CIS countries differ significantly, which could impact Kaspi's ability to replicate its full suite of services. Each country has its own financial regulations, data protection laws, and licensing requirements for fintech companies. Navigating these diverse regulatory landscapes will require substantial resources and may slow down expansion efforts. However, Kaspi's experience in adapting to regulatory changes in Kazakhstan could prove valuable in managing these challenges.
The competitive landscape in potential expansion markets varies considerably. Some countries may have well-established local fintech players or traditional banks with strong digital offerings, while others might have less developed fintech ecosystems. This diversity in competition levels could lead to different growth rates across markets, with potentially faster growth in less saturated markets and more gradual progress in highly competitive ones.
Economic factors, particularly GDP per capita, will play a crucial role in shaping Kaspi's growth trajectory in new markets. Countries with lower GDP per capita may present challenges in terms of consumer spending power and the adoption of premium financial services. However, these markets might also offer opportunities for Kaspi to introduce tailored products that address specific local needs, potentially tapping into underserved segments of the population.
On the other hand, countries like Uzbekistan, with its larger population, present significant growth potential. If Kaspi can successfully adapt its model to local preferences and regulatory requirements, the sheer size of the market could drive substantial growth.
However, it's important to note that larger populations don't automatically translate to larger addressable markets, as factors such as internet penetration, smartphone adoption, and financial literacy also play crucial roles.
Kaspi's initial forays into Azerbaijan and Ukraine have shown moderate but steady traction, which is encouraging. However, these experiences also highlight that replicating the phenomenal growth achieved in Kazakhstan is not a given. Each new market will require a tailored approach, taking into account local consumer behaviors, preferences, and economic conditions.
(4) When looking at the payment take rate, it is calculated as the ratio of fees generated from various payment transactions to the Total Payment Volume (TPV) for a given period. The decreasing trend would likely be due to the mix of transactions appears to be shifting towards services with lower profit margins. For instance, the increased adoption of Kaspi QR and card transactions, while driving volume growth, may be yielding lower fees per transaction compared to some legacy payment methods.
The introduction and scaling of newer services, particularly in the B2B payments sector, is another factor potentially impacting the take rate. These new offerings, while strategically important for Kaspi's long-term growth and ecosystem expansion, may initially operate at lower margins as the company seeks to establish market share and drive adoption among businesses.
The competitive landscape is also exerting pressure on Kaspi's take rates. The introduction of competing services, such as Halyk Bank's QR code payments, is intensifying competition in the digital payments space. This increased competition may be compelling Kaspi to adjust its pricing strategies to maintain its market position, resulting in some compression of take rates.
Nevertheless, when we look at the trend, it is relatively stable, hence I do not think it is worrying trend.
(4) I do believe it is the contrary though! ar from being pressured to lower its rates, Kaspi appears to be in a position of strength, able to command higher take rates from its merchant base, which is predominantly composed of small businesses.
This advantageous position stems from several key factors. Smaller businesses typically have less bargaining power compared to larger enterprises, allowing Kaspi to maintain more favorable terms. Moreover, many of these small merchants have become deeply reliant on Kaspi's platform for a significant portion of their revenue, creating a 'sticky' relationship that makes it challenging for them to consider alternatives. Kaspi's comprehensive ecosystem, offering not just payment services but also access to a large customer base, marketing tools, and financial services, further justifies these higher take rates as merchants perceive greater overall value.
An important update has emerged since the initial writing of this report, significantly impacting our analysis of Kaspi.kz's merchant growth trajectory. In its third-quarter report for 2023, released shortly after the completion of this analysis, Kaspi disclosed that its merchant base had grown to 581,000 as of December 31, 2023, representing a 83.2% YOY growth.
(5) I agree with you that foreign exchange (FX) risk is indeed a significant concern for USD-denominated investors considering Kaspi.kz, and it warrants careful consideration in the context of Kazakhstan's economic history and current market dynamics.
However, it's important to note that Kaspi has not been passive in the face of these risks. The company has implemented strategies to mitigate the impact of currency fluctuations on its business and, by extension, on investor returns. One key approach has been geographical diversification. By expanding into new markets beyond Kazakhstan, such as Azerbaijan and potentially other countries in the region, Kaspi is reducing its reliance on the tenge and spreading its currency risk across multiple economies.
Furthermore, Kaspi's business model provides some inherent protection against currency devaluation. Many of the company's services, particularly in its payments and marketplace segments, operate on a margin structure that can help cushion the impact of currency fluctuations. For instance, as a platform facilitating transactions, Kaspi can potentially adjust its fee structures or pricing to compensate for currency movements, although this ability is not unlimited and must be balanced against competitive pressures and regulatory considerations.
Additionally, Kaspi's strong market position within Kazakhstan provides it with a degree of pricing power that can be leveraged to mitigate FX impacts. The company's ability to maintain or grow its user base and transaction volumes even in the face of economic headwinds demonstrates a resilience that can help offset some of the negative effects of currency volatility.
On the surface, it is good news for investors. The main antithesis of investing into Kaspi has always been the saturating user growth due to how prevalent Kaspi is already in Kazakhstan. With the expansion into Turkey, there is a larger addressable market for Kaspi to address (ecommerce estimated at over 30bil USD). Kaspi’s core strengths could be highly relevant in Turkey, given the country’s growing appetite for digital payments, lending, and wallet solutions and Hepsi's strategic direction to scale its consumer fintech and payment business (HepsiPay) and increase merchant monetization through advertising and merchant lending
However, the Turkish market is much more competitive, with established players like Trendyol, GittiGidiyor, Amazon and n11.com. Thus there is reinvestment risk to be considered, and it will be difficult to replicate the success and profitability in Kazakhstan. Much is dependent on Kaspi's execution in this market, which is arguably its largest challenge since being dominant in Kazakhstan, and I would continue to monitor Hepsi's performance after the acquisition
That's a very good analysis. Unfortunately, it wasn't a 100% acquisition at the time of the acquisition of Hepsiburada, so earnings in Turkey are likely to be driven by higher shares of Hepsiburada.
The recent dollar loan is also an excellent company in terms of kapsi.kz 's health and capital allocation.
My understanding after talking to people from Kazakhstan is that without Kaspi life there would suck a lot.
High quality business led by a competent team, trading cheap.
Kazakhstan business environment is more developed than people realize regardless of the “stan” in the end, bordering Russia, being in the neighborhood of Iran and Afghanistan. It sounds more exotic than it is.
Hi Dean, I enjoyed reading your detailed and comprehensive analysis of Kaspi and the deep dive into Kazakhstan’s market dynamics. Your memo provided valuable insights into Kaspi’s unique value proposition, robust business model, and impressive financial performance. I learned so much about both Kazakhstan’s market landscape and Kaspi’s strategic positioning—thank you for the thorough research and clarity in your writing. While I find your arguments compelling, I still have some hesitation after reading Culper Research’s allegations (even though many of their claims have been proven inaccurate). Despite this, I agree that Kaspi’s strong market dominance and economic moat make it a noteworthy investment opportunity.
I do have a few questions that I’d love your thoughts on:
1. Why did Kaspi voluntarily delist from the London Stock Exchange in 2023? How has this decision affected Kaspi’s access to international investors and overall liquidity?
2. The memo mentions that merchant financing is repaid daily from GMV and TPV. What are the interest rates for these loans, and how do they compare to traditional bank loans and fintech competitors? Additionally, what is the default rate for merchant financing, and how does Kaspi mitigate credit risk?
3. What is Kaspi’s average interest yield on its lending portfolio, and how does this compare to peers? Furthermore, how sensitive is Kaspi’s interest income to changes in Kazakhstan’s central bank rates?
4. Kazakhstan’s reliance on oil exports and the Kazakhstani tenge’s historical volatility expose Kaspi to currency risks, particularly as it expands operations and reports in USD. How sensitive is Kaspi’s profitability and cash flow to a sharp depreciation of the tenge?
(1) Kaspi.kz's decision to voluntarily delist from the London Stock Exchange (LSE) on March 25, 2024, marks a significant shift in the company's approach to public markets and investor relations. This strategic move, coming shortly after Kaspi's successful debut on the Nasdaq in January 2024, reflects the company's evolving priorities and its response to changing market dynamics.
The primary motivations behind this delisting were multifaceted, addressing both financial and operational considerations. First and foremost, Kaspi had been experiencing persistently low trading volumes on the LSE. This lack of liquidity was a concern for both the company and its investors, as it potentially limited the ability to efficiently buy or sell shares and could lead to increased price volatility. The limited liquidity also raised questions about the true market valuation of Kaspi's securities on the LSE platform.
Compounding this issue was the disproportionate cost structure associated with maintaining the LSE listing. Public companies face significant expenses related to compliance, reporting, and administrative tasks required by stock exchanges. For Kaspi, these costs were increasingly difficult to justify given the low trading activity. The administrative burden of managing dual listings also diverted resources that could potentially be better allocated to core business operations and growth initiatives.
The contrast between Kaspi's experience on the LSE and its initial performance on the Nasdaq was stark. According to reports, trading liquidity for Kaspi's American Depositary Shares (ADSs) on the Nasdaq was approximately twelve times higher than what had been observed on the LSE. This dramatic difference in market engagement underscored the potential benefits of consolidating Kaspi's listing on a single, more active exchange.
Moreover, the move to focus solely on the Nasdaq aligns with Kaspi's strategic goal of attracting a larger pool of US-based investors. The United States boasts one of the world's largest and most sophisticated investor bases, particularly for technology and fintech companies. By concentrating its efforts on the Nasdaq, Kaspi aims to increase its visibility among this key investor demographic, potentially leading to improved valuation and access to capital.
(3) Targeted yield of the merchant finance product is 15-20%. In comparison, many established fintech lenders operating in similar consumer credit segments in emerging markets often report yields ranging from the mid-teens to the low twenties, depending on product mix, risk appetite, and regulatory constraints. Traditional commercial banks in these same regions typically have lower yields due to more stringent underwriting standards and broader access to cheaper funding.
Kaspi does not report their default rates for their merchant financing particularly.
On risks: The onboarding process for merchants begins with the signing of an agreement with Kaspi.kz. This agreement is the gateway to a multichannel sales environment, enabling merchants to leverage Kaspi's platform for online, in-store, and mobile sales. A crucial component of this onboarding process is the requirement for merchants to open accounts with Kaspi.kz. This account serves as more than just a transactional tool; it becomes the foundation for a broader financial relationship. Through the Kaspi Pay Mobile App, merchants gain access to a suite of digital finance products tailored to their business needs. This strategy not only enhances merchant loyalty but also creates multiple touchpoints for Kaspi to gather data and offer value-added services.
At the heart of Kaspi's credit risk mitigation strategy is its proprietary loan approval process. The company leverages information from various platforms within its network, including payment services for invoice settlement, marketplace platforms for turnover data, and even government services for tax reports. This comprehensive data integration allows Kaspi to build a more complete picture of a merchant's financial health and creditworthiness.
The system's efficiency is further enhanced by access to third-party data from credit bureaus, providing a more comprehensive view of potential borrowers' creditworthiness.
Furthermore, with a large number of merchants, Kaspi can spread risk across a broad base, reducing the impact of individual defaults.
(3) Average yield across the years 2021, 2022, 2023: 30%, 27%, 26% respectively. Fintech yield is not a common metric across competitors. However, Kaspi's net interest margin is 6.8% in 2023. This is compared to Nu Holdings' ~19% in 2023 and SoFi of 6.03% in 2023. This needs to be considered relative to each country's interest rate as well.
A super deep dive into Kaspi's business and even what their main country of business Kazakhstan is like. Appreciate it as I am sure many of us are unfamiliar with the demographics of Kaspi. I agree with you on Kaspi's dominance in the market due to them controlling a significant portion of the Kazakh fintech market. Agreed that this first mover advantage will allow them to see sustained dominance, a case study common in most emerging economies.
The key takeaways from this report on Kaspi's dominance are:
(1) Kaspi was early to recognize the potential of digital finance in Kazakhstan, establishing a strong brand and large user base before competitors emerged
(2) They then pioneered a super app ecosystem and held large market share, capturing a significant portion of revenue in each sector
(3) This allows for Kaspi to be recognized by the government. As a result, Kaspi's strong government relations allow them to integrate govt services into its app and participate in key initiatives well
(4) Stock is mispriced due to market overreaction to the short-seller report on Kaspi's ties to Russia
Just a few comments
(1) Firstly regarding the elephant in the room - Kaspi's alleged dealing with Russia. While indeed true that there may be flaws in Culper Research's allegations, it is true that management has not been fully transparent in their relations with Russia (although it is not illegal to do so). When do you expect these fears to tide over and how do you personally think they can improve transparency to quell investor fears?
(2) I was wondering on the long term plans that Kaspi has in expanding their business given that they have such a huge dominance in Kazakhstan already. Do you foresee them expanding to other countries successfully and do you think they are going to be as successful without government incentives? Beyond the countries laid out, are they able to compete with global peers in their respective business segments or do they see themselves as mainly a large player in their region (something like Grab in SEA)?
(3) Lastly on the valuation, I was wondering why you chose to use EV/Sales rather than other metrics such as EV/EBITDA given that Kaspi has been around for quite some time.
Nevertheless, great report diving deep into industry trends, management and the business model of Kaspi. I have faith in their business in the region but will understand investor reluctance to invest into a Kazakhstan-based company simply due to not understanding the country of business.
(1) I do not have a crystal ball as to when these fears will tide over and this "fear" per se will likely continue to create pressure on the valuation of Kaspi until the company:
- Provides more detailed disclosures about their customer base, including a breakdown of resident vs. non-resident accounts and transaction volumes.
- Conduct and publish an independent third party audit specifically addressing compliance with international sanctions.
- Offer more frequent investor updates and Q&A sessions to address concerns directly eg. cross-border transaction monitoring
Investor sentiment may also improve if Kaspi demonstrates consistent transparency in its business dealings and continue to deliver strong financial performance.
(2) I believe time will tell as to their expansion plans (eg. Turkey via Hepsi) will be successful as it depends on management’s execution, particularly:
- Adapting to locl market conditions, regulations and consumer behaviors
- Leveraging its technological prowess and innovation to improve customer value propositions and offer competitive services
- Forming strategic partnerships to gain market entry and local expertise
Kaspi's track record in Azerbaijan provides some encouragement for its expansion prospects. Despite not actively pursuing investments in the country, the company has seen significant growth in its classified platforms. For instance, the Turbo.az car classifieds business has grown from 1.9 million monthly active users (MAU) in June 2020 to 2.4 million in December 2023, a substantial figure considering Azerbaijan's population of 10.1 million. Similarly, the Bina.az real estate classified business has seen growth from 0.5 million to 0.7 million MAU. While the Tap.az general classified business has remained flat, the overall trend suggests Kaspi's ability to gain traction in new markets.
(3) EV/Sales is often favored for high-growth companies or those in sectors where profitability may be secondary to market share acquisition. This metric can be particularly useful when comparing companies with different capital structures or when dealing with businesses that have significant non-cash expenses. In the context of Kaspi, the EV/Sales ratio could be relevant given the company's continued focus on growth and expansion into new markets. It allows for broader comparisons with global peers, especially those in high-growth phases, and provides a consistent metric across Kaspi's diverse business lines (payments, marketplace, and fintech).
Nevertheless, I do agree with you that other valuation metrics do help in painting a better picture. As of Jan 2025, the company is trading at around 7x forward P/E and current EV/EBITDA multiple of 6.06x, compared to its peers (eg. MELI at 33.77x EV/EBITDA)
This write-up is very interesting although as mentioned by the others, the fear that exists in investing in a Kazakhstan based company is very real. Although I have no doubts that the business and economic moats exist, I wanted to ask some questions regarding the valuation of the company.
1. When you derived your valuation, you compared it against other developed companies, in developed countries. This includes Singapore’s SEA, China’s PDD, and BABA. I do not feel like you should use these companies and instead use another developing market fintech (if a comparable one exists) to compare.
2. Was wondering why EV/sales was used instead of P/E. Given the business’s existence in kazakhstan, I do not think that investors would use EV/sales to compare it as it would be heavily discounted relative to the others. Judging by the comparable you have listed, it seems like investors are valuing it using P/E more likely.
3. Even with the P/E, I agree that while it might see price growth which is where share price growth will come from, it would be heavily affected by any news that might happen in the surrounding regions (Ukraine, Russia, Kazakhstan itself) which will further discount the multiple. Would it not be easier to find another business to invest in a more developed market, with great uncertainty with the current regime change slated to happen?
4. Migrations seem to be stabilizing, which is an interesting statistic. But given the seeming corrupt state it is (38/100 score by the corruption perception index), would it be possible that many of the statistics you are giving here are faked/fraudulent?
Nevertheless, the report is very well-written with a great breakdown of its many businesses, and the short report (which I feel is the least of its concerns)
Hi Jo Vial, thanks for your comments. On your points:
(1) While using peers from similar emerging markets would be ideal for benchmarking Kaspi, there's a scarcity of directly comparable companies in Kazakhstan or Central Asia. In lieu of regional peers, utilizing developed market companies as benchmarks can offer valuable insights into Kaspi's relative position in terms of operational efficiency, innovation, and market penetration. This comparative analysis can help investors gauge Kaspi's potential performance in scenarios such as international expansion or the maturation of the Kazakh market. I would also love to hear if you have suggestions on which comps to use
(2) EV/Sales allow comparisons to comparable companies that does not have profit yet eg. Affirm. Nevertheless, I do think that using other ratios could be useful as well
(3) The primary objective of this report is to uncover fundamentally mispriced or misunderstood equities that have yet to capture significant investor attention. This approach aligns with the value investing philosophy, which seeks to identify undervalued assets in the market. While investing in developed countries generally entails lower risk due to more stable economic and political environments, these markets also tend to be more efficient. As a result, the opportunity to exploit information asymmetries—gaps between public perception and underlying value—is often more limited in developed markets.
In contrast, emerging or frontier markets may offer greater potential for discovering undervalued gems. These markets are frequently characterized by less analyst coverage, lower institutional investor participation, and sometimes, less transparent information flow. This environment can create inefficiencies that astute investors might capitalize on. However, it's crucial to note that these potential rewards come with heightened risks, including currency fluctuations, political instability, and less developed regulatory frameworks.
The challenge, therefore, lies in striking a balance between risk and potential reward. This report aims to identify opportunities where the potential for value discovery outweighs the inherent risks of less developed markets. By focusing on companies that are either misunderstood by the broader market or flying under the radar of most investors, we hope to uncover investment opportunities with attractive risk-adjusted return profiles.
(4) Your concern about data reliability in light of Kazakhstan's corruption perception score is entirely valid and merits careful consideration. However, several factors mitigate this risk in the case of Kaspi:
Firstly, Kaspi's listing on NASDAQ subjects it to stringent reporting standards and regulatory oversight. This includes regular audits conducted by KPMG, a globally recognized accounting firm. Such international scrutiny significantly enhances the credibility and transparency of Kaspi's financial reporting.
Secondly, Kazakhstan has been making concerted efforts to improve its transparency and reduce corruption. These initiatives include implementing anti-corruption reforms and strengthening key institutions. While progress has admittedly been gradual, these efforts signal a positive trend towards greater reliability of economic data emanating from the country.
It's important to note that while these measures don't completely eliminate doubts about data accuracy, they do provide a more robust framework for financial reporting and economic transparency. Moreover, multiple independent sources corroborate Kaspi's reported growth and market penetration:
- Recent reports from international financial outlets have consistently highlighted the rapid digital adoption in Kazakhstan.
- Fintech-focused research firms have documented the growing prevalence of digital financial services in the country.
- Cross-border transaction data provides additional verification of the increasing digital financial activity.
Kaspi's reported user base penetration aligns with these broader trends. Furthermore, anecdotal evidence suggests high adoption rates of Kaspi's services in everyday life in Kazakhstan, supporting the narrative of genuine consumer uptake.
Wow Dean, I very much enjoyed this read on Kaspi. I loved how you not only went in-depth into the business analysis, but the country (market) analysis, since Kazakhstan is a relatively niche market, one that most people don’t think of when it comes to fintech. Perhaps some feedback:
1. What made you decide to look at the Kazakhstan market, as its not the biggest market, as you stated it stands at 20.59m people and a 1.29% growth rate yoy. And not to mention its landlocked geographical features. What do you think of rapidly growing economics, such as Nigeria’s 223.8m with an almost 3% growth in GDP? Though I do agree with your points on a nice, young consumer base that is likely to adopt digital systems
2. Regarding the non-disclosure of merchants on the marketplace, and especially since the previous figure in 2022 was only estimated to be about 300, could this perhaps signal the loss of acquiring these merchants as clients? Have the merchants switched their operations to a competitor?
3. What were some key reasons that Kaspi didn’t excel as well as it did in Azerbaijan and Ukraine?
But overall, a very compelling read, and truly eye-opening!
Hi Joshua, thank you for your comments.
(1) In approaching this investment analysis, I employed a bottom-up stock selection strategy rather than a top-down geographical approach. Also, Kazakhstan is a less well-known geography or even misunderstood by investors. Hence, it could provide opportunities to look at.
(2) An important update has emerged since the initial writing of this report, significantly impacting our analysis of Kaspi.kz's merchant growth trajectory. In its third-quarter report for 2023, released shortly after the completion of this analysis, Kaspi disclosed that its merchant base had grown to 581,000 as of December 31, 2023, representing a 83.2% YOY growth
(3) Kaspi.kz's approach to international expansion, particularly regarding Azerbaijan and Ukraine, reflects a cautious and strategic stance. The company's management has explicitly stated that these markets are not currently focal points for their growth strategy. Instead, they've adopted a wait-and-see approach, indicating that they will develop appropriate products and services for these markets "when the time is right." This measured approach underscores Kaspi's commitment to thoughtful expansion rather than aggressive growth at any cost.
The rationale behind this strategy is multifaceted. Both Azerbaijan and Ukraine present unique challenges and opportunities that differ significantly from Kaspi's home market of Kazakhstan. These countries have distinct economic landscapes, regulatory frameworks, and consumer behaviors that may necessitate substantial adaptations to Kaspi's existing business model.
Azerbaijan, while geographically close to Kazakhstan, has its own financial ecosystem and market dynamics. The country's economy is heavily dependent on oil and gas exports, which creates a different economic environment compared to Kazakhstan's more diversified economy. Additionally, Azerbaijan's financial technology sector is at a different stage of development, which might require Kaspi to adjust its product offerings and go-to-market strategies.
Ukraine, on the other hand, presents a more complex scenario. The ongoing conflict in the country has dramatically altered its economic landscape and risk profile. This geopolitical instability has likely had a significant impact on Kaspi's operations and growth potential in the Ukrainian market. The conflict has disrupted normal business operations, affected consumer spending patterns, and increased overall market uncertainty. These factors make it challenging for any company, including Kaspi, to operate effectively or plan for long-term growth in Ukraine at present.
This approach allows Kaspi to concentrate on consolidating its strong position in Kazakhstan while keeping an eye on potential future opportunities. It also provides the company with the flexibility to pivot or accelerate its plans should market conditions in Azerbaijan or Ukraine become more favorable.
Hi Dean, this was an exhaustive report and a great read. I agree that KSPI’s strong fundamentals and moats, paired with the uptick in internal migrations to the more populated and urban regions in Kazakhstan and their gradual expansion plans throughout Europe sets the company with a strong growth trajectory. I would like to ask you some questions based on points you’ve mentioned in your report.
1) With Azerbaijan and Ukraine both only taking up 0.2% of total revenues in the 3 countries that KSPI operates in, what are your expectations of the future revenue split by geography with KSPI gaining a foothold in Turkey through the acquisition of Hepsiburada?
2) Regarding your valuation, is there any particular reason why you decided to apply a conservative growth of 20% despite KSPI’s strong moats?
I also appreciated the comprehensive deconstruction of Culper Research’s short report and would like to know your thoughts on this.
3) With the publication of Culper Research’s short report, there has been a class action lawsuit filed against KSPI, with multiple law firms that specialize in securities litigation looking to represent investors that were affected. What are your views on the potential effects of this lawsuit based on your research?
Hi Keagan, thank you for your comments:
(1) With Kaspi.kz's acquisition of a 65.41% stake in Hepsiburada, we can expect a significant shift in the company's geographical revenue distribution:
• Kazakhstan: Despite the expansion into Turkey, Kazakhstan will likely remain Kaspi.kz's primary revenue source in the short to medium term. The company's strong market position, with 99.6% of its revenue currently coming from Kazakhstan, indicates that this market will continue to be a significant contributor. However, the growth rate in Kazakhstan might moderate as Kaspi.kz focuses on international expansion.
• Turkey: Given Hepsiburada's significant market presence in Turkey, with 12 million active customers and 101,500 merchants, and its $4 billion in gross merchandise value (GMV) for fiscal year 2023, Turkey is poised to become a substantial contributor to Kaspi.kz's revenue. The acquisition expands Kaspi.kz's addressable market to 100 million people, suggesting a potential for significant revenue growth from this region. While exact figures are speculative, Turkey could potentially account for a notable portion of Kaspi.kz's revenue in the coming years, especially as the integration of Kaspi's technology and services into Hepsiburada's platform progresses.
• Azerbaijan and Ukraine: These markets currently contribute only 0.2% of total revenues. While Kaspi.kz has made efforts to expand into these regions, the revenue split might not see a significant shift in the near future due to the smaller market sizes and the challenges of establishing a strong presence in these markets.
A rough estimate for the medium-term revenue split could be:
• Kazakhstan: 70-80%
• Turkey: 20-30%
• Azerbaijan and Ukraine: 1-2%
(2) The decision to apply a conservative growth rate of 20% for Kaspi.kz's valuation, despite its strong moats, is rooted in a careful consideration of various factors that could potentially constrain the company's future growth.
a. Market Saturation:
Kaspi.kz has achieved remarkable success in its home market of Kazakhstan, capturing a significant share across its key business segments - payments, marketplace, and fintech. With a high penetration rate among the country's adult population, the company may be approaching a saturation point in its primary market. This level of market dominance, while a testament to Kaspi's strength, also implies that future growth within Kazakhstan may be more incremental rather than exponential. The company might need to focus more on increasing the average revenue per user (ARPU) and expanding its product offerings to drive growth, as opposed to rapidly acquiring new users.
b. International Expansion Challenges:
- Regulatory Hurdles: Navigating Turkey's regulatory landscape, which differs from Kazakhstan's, may require significant resources and potentially slow down the expansion process.
- Market Adaptation: Turkish consumers may have different preferences and behaviors compared to Kazakhstani users, necessitating adjustments to Kaspi's product offerings and marketing strategies.
- Competition: The Turkish fintech market is more developed and competitive, which could make it challenging for Kaspi to replicate its dominant position from Kazakhstan.
c. Kazakhstan's economy, like many others, has been grappling with inflationary pressures. While inflation rates are expected to moderate, they still pose challenges. High inflation can erode consumer purchasing power, potentially impacting transaction volumes in Kaspi's marketplace and payments segments. Increased operational costs due to inflation could pressure Kaspi's margins unless fully passed on to consumers. Moreover, persistent inflation may lead to economic uncertainty, affecting both consumer and business confidence, which could influence spending and investment decisions.
d. The regulatory environment also plays a crucial role in shaping Kaspi's growth trajectory. As the fintech sector matures, regulators may introduce new rules or tighten existing ones, potentially impacting Kaspi's operations or requiring additional compliance measures. Stricter data protection regulations could affect Kaspi's ability to leverage user data for product development and targeted marketing. Given Kaspi's dominant market position in Kazakhstan, there's also a risk of increased scrutiny from anti-monopoly regulators, which could limit certain growth strategies. As Kaspi expands internationally, it will need to navigate complex cross-border financial regulations, which could slow down its expansion efforts.
(3) The potential litigation against Kaspi.kz is a significant development that warrants careful consideration.
First and foremost, the lawsuit poses a reputational risk for Kaspi.kz. Even if the allegations prove unfounded, the mere existence of legal proceedings can cast a shadow over the company's image. This reputational damage could potentially hinder Kaspi.kz's ability to attract new investors or pursue international expansion plans. In the fintech sector, where trust is paramount, even the hint of impropriety can have far-reaching consequences.
The long-term effects of the litigation will largely depend on its outcome. A favorable resolution for Kaspi.kz could demonstrate the company's resilience and commitment to transparency, potentially reinforcing investor confidence. Conversely, if the allegations are substantiated, the impact on Kaspi.kz's operations and valuation could be more severe and long-lasting.
However, it is crucial to maintain perspective throughout this process. Many such lawsuits are filed in the wake of significant stock price drops, often as a matter of course rather than due to concrete evidence of misconduct. A considerable number of these cases do not result in findings of wrongdoing. Therefore, while the litigation presents serious challenges for Kaspi.kz, it's premature to draw definitive conclusions about the company's culpability or the ultimate impact on its future.
Interesting read, thanks Dean. $KSPI’s super app is indeed one of a kind and not easily replicable by its peers, as evidenced by Halyk Bank's attempt to do something similar. Aside from the political and geographical risks, the macro environment—particularly in terms of demographics, modes of payment, etc.—is highly favorable for $KSPI.
I do have some questions and would love to hear your thoughts–
1. What are your views on this super app when customers are only using a fraction of the available services. Would this still be considered a “successful” super app since the take up rate of the new products/services added should increase
2. As mentioned, the future growth is coming from the CIS region, given that Kazakhstan is considered one of the largest economies in the region with richest GDP, could we expect the expansion plans to see similar growth as seen in Kazakhstan?
3. What are some reasons for the slowly declining take rate especially from 2022 to 2023 (1.30 to 1.25)
4. Marketplace main merchants are mostly small businesses (92.8%), is this a potential hurdle for the business when considering the take rate? Is $KSPI act of not disclosing active merchants in marketplace recently hinting on something?
5. Considering the devaluation of the domestic currency in 2014, how do you think about the FX risks when investing into $KSPI
Hi Trinsy, thanks for your comments.
(1) The assessment of Kaspi.kz's take-up rate for new products and services as a "successful" super app requires a nuanced perspective that takes into account the temporal context of each offering's introduction (i.e. relative to the time it is being introduced). This approach provides a more accurate and fair evaluation of the company's performance in product adoption and market penetration
(2) While Kaspi's expansion into other CIS countries offers significant growth potential, it's unlikely to mirror the growth pattern seen in Kazakhstan exactly. The company will need to navigate a complex landscape of varying regulations, diverse competitive environments, and differing economic conditions. Success will depend on Kaspi's ability to adapt its model to each new market, leverage its technological expertise and ecosystem approach, and effectively localize its offerings.
Regulatory environments across CIS countries differ significantly, which could impact Kaspi's ability to replicate its full suite of services. Each country has its own financial regulations, data protection laws, and licensing requirements for fintech companies. Navigating these diverse regulatory landscapes will require substantial resources and may slow down expansion efforts. However, Kaspi's experience in adapting to regulatory changes in Kazakhstan could prove valuable in managing these challenges.
The competitive landscape in potential expansion markets varies considerably. Some countries may have well-established local fintech players or traditional banks with strong digital offerings, while others might have less developed fintech ecosystems. This diversity in competition levels could lead to different growth rates across markets, with potentially faster growth in less saturated markets and more gradual progress in highly competitive ones.
Economic factors, particularly GDP per capita, will play a crucial role in shaping Kaspi's growth trajectory in new markets. Countries with lower GDP per capita may present challenges in terms of consumer spending power and the adoption of premium financial services. However, these markets might also offer opportunities for Kaspi to introduce tailored products that address specific local needs, potentially tapping into underserved segments of the population.
On the other hand, countries like Uzbekistan, with its larger population, present significant growth potential. If Kaspi can successfully adapt its model to local preferences and regulatory requirements, the sheer size of the market could drive substantial growth.
However, it's important to note that larger populations don't automatically translate to larger addressable markets, as factors such as internet penetration, smartphone adoption, and financial literacy also play crucial roles.
Kaspi's initial forays into Azerbaijan and Ukraine have shown moderate but steady traction, which is encouraging. However, these experiences also highlight that replicating the phenomenal growth achieved in Kazakhstan is not a given. Each new market will require a tailored approach, taking into account local consumer behaviors, preferences, and economic conditions.
(4) When looking at the payment take rate, it is calculated as the ratio of fees generated from various payment transactions to the Total Payment Volume (TPV) for a given period. The decreasing trend would likely be due to the mix of transactions appears to be shifting towards services with lower profit margins. For instance, the increased adoption of Kaspi QR and card transactions, while driving volume growth, may be yielding lower fees per transaction compared to some legacy payment methods.
The introduction and scaling of newer services, particularly in the B2B payments sector, is another factor potentially impacting the take rate. These new offerings, while strategically important for Kaspi's long-term growth and ecosystem expansion, may initially operate at lower margins as the company seeks to establish market share and drive adoption among businesses.
The competitive landscape is also exerting pressure on Kaspi's take rates. The introduction of competing services, such as Halyk Bank's QR code payments, is intensifying competition in the digital payments space. This increased competition may be compelling Kaspi to adjust its pricing strategies to maintain its market position, resulting in some compression of take rates.
Nevertheless, when we look at the trend, it is relatively stable, hence I do not think it is worrying trend.
(4) I do believe it is the contrary though! ar from being pressured to lower its rates, Kaspi appears to be in a position of strength, able to command higher take rates from its merchant base, which is predominantly composed of small businesses.
This advantageous position stems from several key factors. Smaller businesses typically have less bargaining power compared to larger enterprises, allowing Kaspi to maintain more favorable terms. Moreover, many of these small merchants have become deeply reliant on Kaspi's platform for a significant portion of their revenue, creating a 'sticky' relationship that makes it challenging for them to consider alternatives. Kaspi's comprehensive ecosystem, offering not just payment services but also access to a large customer base, marketing tools, and financial services, further justifies these higher take rates as merchants perceive greater overall value.
An important update has emerged since the initial writing of this report, significantly impacting our analysis of Kaspi.kz's merchant growth trajectory. In its third-quarter report for 2023, released shortly after the completion of this analysis, Kaspi disclosed that its merchant base had grown to 581,000 as of December 31, 2023, representing a 83.2% YOY growth.
(5) I agree with you that foreign exchange (FX) risk is indeed a significant concern for USD-denominated investors considering Kaspi.kz, and it warrants careful consideration in the context of Kazakhstan's economic history and current market dynamics.
However, it's important to note that Kaspi has not been passive in the face of these risks. The company has implemented strategies to mitigate the impact of currency fluctuations on its business and, by extension, on investor returns. One key approach has been geographical diversification. By expanding into new markets beyond Kazakhstan, such as Azerbaijan and potentially other countries in the region, Kaspi is reducing its reliance on the tenge and spreading its currency risk across multiple economies.
Furthermore, Kaspi's business model provides some inherent protection against currency devaluation. Many of the company's services, particularly in its payments and marketplace segments, operate on a margin structure that can help cushion the impact of currency fluctuations. For instance, as a platform facilitating transactions, Kaspi can potentially adjust its fee structures or pricing to compensate for currency movements, although this ability is not unlimited and must be balanced against competitive pressures and regulatory considerations.
Additionally, Kaspi's strong market position within Kazakhstan provides it with a degree of pricing power that can be leveraged to mitigate FX impacts. The company's ability to maintain or grow its user base and transaction volumes even in the face of economic headwinds demonstrates a resilience that can help offset some of the negative effects of currency volatility.
What are your thoughts on the recent acquisition and the entry into Turkey’s market ?
Hi Niurn,
On the surface, it is good news for investors. The main antithesis of investing into Kaspi has always been the saturating user growth due to how prevalent Kaspi is already in Kazakhstan. With the expansion into Turkey, there is a larger addressable market for Kaspi to address (ecommerce estimated at over 30bil USD). Kaspi’s core strengths could be highly relevant in Turkey, given the country’s growing appetite for digital payments, lending, and wallet solutions and Hepsi's strategic direction to scale its consumer fintech and payment business (HepsiPay) and increase merchant monetization through advertising and merchant lending
However, the Turkish market is much more competitive, with established players like Trendyol, GittiGidiyor, Amazon and n11.com. Thus there is reinvestment risk to be considered, and it will be difficult to replicate the success and profitability in Kazakhstan. Much is dependent on Kaspi's execution in this market, which is arguably its largest challenge since being dominant in Kazakhstan, and I would continue to monitor Hepsi's performance after the acquisition
Thank you for your thoughtful answer.
That's a very good analysis. Unfortunately, it wasn't a 100% acquisition at the time of the acquisition of Hepsiburada, so earnings in Turkey are likely to be driven by higher shares of Hepsiburada.
The recent dollar loan is also an excellent company in terms of kapsi.kz 's health and capital allocation.
My understanding after talking to people from Kazakhstan is that without Kaspi life there would suck a lot.
High quality business led by a competent team, trading cheap.
Kazakhstan business environment is more developed than people realize regardless of the “stan” in the end, bordering Russia, being in the neighborhood of Iran and Afghanistan. It sounds more exotic than it is.
Hi Dean, I enjoyed reading your detailed and comprehensive analysis of Kaspi and the deep dive into Kazakhstan’s market dynamics. Your memo provided valuable insights into Kaspi’s unique value proposition, robust business model, and impressive financial performance. I learned so much about both Kazakhstan’s market landscape and Kaspi’s strategic positioning—thank you for the thorough research and clarity in your writing. While I find your arguments compelling, I still have some hesitation after reading Culper Research’s allegations (even though many of their claims have been proven inaccurate). Despite this, I agree that Kaspi’s strong market dominance and economic moat make it a noteworthy investment opportunity.
I do have a few questions that I’d love your thoughts on:
1. Why did Kaspi voluntarily delist from the London Stock Exchange in 2023? How has this decision affected Kaspi’s access to international investors and overall liquidity?
2. The memo mentions that merchant financing is repaid daily from GMV and TPV. What are the interest rates for these loans, and how do they compare to traditional bank loans and fintech competitors? Additionally, what is the default rate for merchant financing, and how does Kaspi mitigate credit risk?
3. What is Kaspi’s average interest yield on its lending portfolio, and how does this compare to peers? Furthermore, how sensitive is Kaspi’s interest income to changes in Kazakhstan’s central bank rates?
4. Kazakhstan’s reliance on oil exports and the Kazakhstani tenge’s historical volatility expose Kaspi to currency risks, particularly as it expands operations and reports in USD. How sensitive is Kaspi’s profitability and cash flow to a sharp depreciation of the tenge?
Once again, thank you for the excellent memo.
Hi Shun, thank you for commenting!
(1) Kaspi.kz's decision to voluntarily delist from the London Stock Exchange (LSE) on March 25, 2024, marks a significant shift in the company's approach to public markets and investor relations. This strategic move, coming shortly after Kaspi's successful debut on the Nasdaq in January 2024, reflects the company's evolving priorities and its response to changing market dynamics.
The primary motivations behind this delisting were multifaceted, addressing both financial and operational considerations. First and foremost, Kaspi had been experiencing persistently low trading volumes on the LSE. This lack of liquidity was a concern for both the company and its investors, as it potentially limited the ability to efficiently buy or sell shares and could lead to increased price volatility. The limited liquidity also raised questions about the true market valuation of Kaspi's securities on the LSE platform.
Compounding this issue was the disproportionate cost structure associated with maintaining the LSE listing. Public companies face significant expenses related to compliance, reporting, and administrative tasks required by stock exchanges. For Kaspi, these costs were increasingly difficult to justify given the low trading activity. The administrative burden of managing dual listings also diverted resources that could potentially be better allocated to core business operations and growth initiatives.
The contrast between Kaspi's experience on the LSE and its initial performance on the Nasdaq was stark. According to reports, trading liquidity for Kaspi's American Depositary Shares (ADSs) on the Nasdaq was approximately twelve times higher than what had been observed on the LSE. This dramatic difference in market engagement underscored the potential benefits of consolidating Kaspi's listing on a single, more active exchange.
Moreover, the move to focus solely on the Nasdaq aligns with Kaspi's strategic goal of attracting a larger pool of US-based investors. The United States boasts one of the world's largest and most sophisticated investor bases, particularly for technology and fintech companies. By concentrating its efforts on the Nasdaq, Kaspi aims to increase its visibility among this key investor demographic, potentially leading to improved valuation and access to capital.
(3) Targeted yield of the merchant finance product is 15-20%. In comparison, many established fintech lenders operating in similar consumer credit segments in emerging markets often report yields ranging from the mid-teens to the low twenties, depending on product mix, risk appetite, and regulatory constraints. Traditional commercial banks in these same regions typically have lower yields due to more stringent underwriting standards and broader access to cheaper funding.
Kaspi does not report their default rates for their merchant financing particularly.
On risks: The onboarding process for merchants begins with the signing of an agreement with Kaspi.kz. This agreement is the gateway to a multichannel sales environment, enabling merchants to leverage Kaspi's platform for online, in-store, and mobile sales. A crucial component of this onboarding process is the requirement for merchants to open accounts with Kaspi.kz. This account serves as more than just a transactional tool; it becomes the foundation for a broader financial relationship. Through the Kaspi Pay Mobile App, merchants gain access to a suite of digital finance products tailored to their business needs. This strategy not only enhances merchant loyalty but also creates multiple touchpoints for Kaspi to gather data and offer value-added services.
At the heart of Kaspi's credit risk mitigation strategy is its proprietary loan approval process. The company leverages information from various platforms within its network, including payment services for invoice settlement, marketplace platforms for turnover data, and even government services for tax reports. This comprehensive data integration allows Kaspi to build a more complete picture of a merchant's financial health and creditworthiness.
The system's efficiency is further enhanced by access to third-party data from credit bureaus, providing a more comprehensive view of potential borrowers' creditworthiness.
Furthermore, with a large number of merchants, Kaspi can spread risk across a broad base, reducing the impact of individual defaults.
(3) Average yield across the years 2021, 2022, 2023: 30%, 27%, 26% respectively. Fintech yield is not a common metric across competitors. However, Kaspi's net interest margin is 6.8% in 2023. This is compared to Nu Holdings' ~19% in 2023 and SoFi of 6.03% in 2023. This needs to be considered relative to each country's interest rate as well.
(4) Kaspi reports in tenge, not USD
A super deep dive into Kaspi's business and even what their main country of business Kazakhstan is like. Appreciate it as I am sure many of us are unfamiliar with the demographics of Kaspi. I agree with you on Kaspi's dominance in the market due to them controlling a significant portion of the Kazakh fintech market. Agreed that this first mover advantage will allow them to see sustained dominance, a case study common in most emerging economies.
The key takeaways from this report on Kaspi's dominance are:
(1) Kaspi was early to recognize the potential of digital finance in Kazakhstan, establishing a strong brand and large user base before competitors emerged
(2) They then pioneered a super app ecosystem and held large market share, capturing a significant portion of revenue in each sector
(3) This allows for Kaspi to be recognized by the government. As a result, Kaspi's strong government relations allow them to integrate govt services into its app and participate in key initiatives well
(4) Stock is mispriced due to market overreaction to the short-seller report on Kaspi's ties to Russia
Just a few comments
(1) Firstly regarding the elephant in the room - Kaspi's alleged dealing with Russia. While indeed true that there may be flaws in Culper Research's allegations, it is true that management has not been fully transparent in their relations with Russia (although it is not illegal to do so). When do you expect these fears to tide over and how do you personally think they can improve transparency to quell investor fears?
(2) I was wondering on the long term plans that Kaspi has in expanding their business given that they have such a huge dominance in Kazakhstan already. Do you foresee them expanding to other countries successfully and do you think they are going to be as successful without government incentives? Beyond the countries laid out, are they able to compete with global peers in their respective business segments or do they see themselves as mainly a large player in their region (something like Grab in SEA)?
(3) Lastly on the valuation, I was wondering why you chose to use EV/Sales rather than other metrics such as EV/EBITDA given that Kaspi has been around for quite some time.
Nevertheless, great report diving deep into industry trends, management and the business model of Kaspi. I have faith in their business in the region but will understand investor reluctance to invest into a Kazakhstan-based company simply due to not understanding the country of business.
Hi Brandon, thanks for your comments!
(1) I do not have a crystal ball as to when these fears will tide over and this "fear" per se will likely continue to create pressure on the valuation of Kaspi until the company:
- Provides more detailed disclosures about their customer base, including a breakdown of resident vs. non-resident accounts and transaction volumes.
- Conduct and publish an independent third party audit specifically addressing compliance with international sanctions.
- Offer more frequent investor updates and Q&A sessions to address concerns directly eg. cross-border transaction monitoring
Investor sentiment may also improve if Kaspi demonstrates consistent transparency in its business dealings and continue to deliver strong financial performance.
(2) I believe time will tell as to their expansion plans (eg. Turkey via Hepsi) will be successful as it depends on management’s execution, particularly:
- Adapting to locl market conditions, regulations and consumer behaviors
- Leveraging its technological prowess and innovation to improve customer value propositions and offer competitive services
- Forming strategic partnerships to gain market entry and local expertise
Kaspi's track record in Azerbaijan provides some encouragement for its expansion prospects. Despite not actively pursuing investments in the country, the company has seen significant growth in its classified platforms. For instance, the Turbo.az car classifieds business has grown from 1.9 million monthly active users (MAU) in June 2020 to 2.4 million in December 2023, a substantial figure considering Azerbaijan's population of 10.1 million. Similarly, the Bina.az real estate classified business has seen growth from 0.5 million to 0.7 million MAU. While the Tap.az general classified business has remained flat, the overall trend suggests Kaspi's ability to gain traction in new markets.
(3) EV/Sales is often favored for high-growth companies or those in sectors where profitability may be secondary to market share acquisition. This metric can be particularly useful when comparing companies with different capital structures or when dealing with businesses that have significant non-cash expenses. In the context of Kaspi, the EV/Sales ratio could be relevant given the company's continued focus on growth and expansion into new markets. It allows for broader comparisons with global peers, especially those in high-growth phases, and provides a consistent metric across Kaspi's diverse business lines (payments, marketplace, and fintech).
Nevertheless, I do agree with you that other valuation metrics do help in painting a better picture. As of Jan 2025, the company is trading at around 7x forward P/E and current EV/EBITDA multiple of 6.06x, compared to its peers (eg. MELI at 33.77x EV/EBITDA)