• Results were below expectations due to poor sales of non-book products, weaker gross margins, higher operating expenses and write-offs in inventory and bad debts.
• 80% of FY18 revenue is from the sale of books and YVEN has expanded their publishing principals from 1 to 8.
• A major change is strategy is to faster monetize their data analytics capabilities through the sale of services.
• We lowered FY19e earnings to marginal profitability. Any turnaround in profits is earmarked in FY20e. Our target price of S$0.16 will be based off FY20e earnings and PE of 30x. This is priced against other e-retailer comparables.

The Positives

+ Book sales rose 22% in FY18. YVEN added seven book publishers to its suite of products in FY18, from just a single publisher when it was listed in 2017. The relationship and commerciality of these new publishers will require some time to mature, especially the ability to select the choicest titles. Therefore, inventory will be sub-optimal and may  require a gestation period of 1 to 2 years.

+ Faire Leather is performing well. This new leather products brand that was launched on Kickstarter in December 2017 is now being distributed in Taiwan, China and Europe.

The Negatives     

– Margins collapsed in FY18.

• Gross margins were dragged down by GP margins in the non-books category, which fell from 56% to 29% in 2H18. There were also provisions in obsolete inventories. The non-books segment was hurt by the entry of Chinese manufacturers into the Amazon platform. Prices of these competitors were drastically below YVEN private label products. GP margins in the books category also suffered, by c.7 points, due to the aforementioned sub-optimal inventory.
• EBIT margins dipped due to provision of bad debts (trade and non-trade totaling US$0.5mn) as well as a surge in overheads as YVEN’s headcount jumped 60%. Selling expenses also increased due to higher commissions paid out.

– An external independent review. YVEN has been required to undertake an external review of its internal controls, which is estimated to cost the Group a five-figure sum.

Outlook

YVEN was pursuing several initiatives and projects to expand its non-books category in 2018. The outcome was less than favourable. The new focus will be to use crowdfunding platforms to launch products, monetise their data analytics capabilities through services and release more differentiated non-book products with a more cost-effective route to market. 

What did not work:

1. Selling own branded (private label) products such as JustNile home accessories. The competition was intense as Chinese manufacturers entered the Amazon platform to directly sell their products. YVEN will lower their exposure to this business to a fifth of the current size. There was insufficient differentiation in their products to command higher prices.
2. Representing brands to sell online in SE Asia such as Disney merchandise. The SE Asia e-commerce market is still at a nascent stage and requires much investment.
3. The response of ICO AORA was not up to expectations.

New focus:

1. Use crowdfunding platform to launch new products. YVEN will market their new products on global crowdfunding platforms such as Indiegogo and Kickstarter before launch and production. This form of marketing is less cash-intensive and enables YVEN to test the demand for the product before mass production. The key is to use their data analytics to find differentiated products that are in demand and where competition is fragmented.
2. Monetise the data analytics of e-commerce consumer spending. YVEN will now sell data analytics as a service – such as the study of distributors, brand competitors and demand before the launch of new products. The challenge for YVEN will be to build a timely track record of their methodology.
3. Rendering a service to help new brands to access online and offline distribution into SE Asia. This will help YVEN de-risk from taking inventory. A possible mode of pricing is a percentage of sales.

Maintain BUY with a lower TP of S$0.16 (previously S$0.61)

We lowered FY19e earnings to marginal profitability. Any turnaround in profits is earmarked in FY20e. Our target price is based off FY20e earnings and a PE multiple of 30x. This PE multiple was derived via a benchmark against other e-retailer comparables.