036800.KQ - Nice Information & Technology

[Poor Charlie]

To those looking at South Korea, I’d like to present an idea for discussion: Nice Information & Telecommunications.

 

 

Nice I&T is the largest payment processor/acquirer in South Korea.  While there are some differences between the South Korean and Western payments markets, Nice’s business has many of the qualities found in its Western counterparts.  Consider that over the last twelve years, Nice has:

• Increased revenues from 44.3 billion won to 366.4 billion won, a 19% growth rate;
  
• Increased earnings per share from 388 won to 3,849 won, a 21% growth rate;
  
• Maintained returns on equity above 20% despite large cash balances; and
  
• Grown the business at a double-digit rate every year, including 25% in 2008 and 26% in 2009.
  

Perhaps most remarkable of all: Despite growing at a 20% clip and paying out 10% of earnings, Nice has increased net cash and investments from 1.3 billion won ($1.2 million) in 2009 to 150.8 billion won ($136 million) today.  That’s a 75% cash conversion rate from a business growing at 20%.

 

What’s different about Nice from Western counterparts is price.  The payment networks (Visa & MasterCard) and the processors/acquirers (Global Payments, Worldpay, etc.) trade at premium prices—teens-multiples of operating income or higher.  Nice, on the other hand, trades at a discount:

• EV / EBIT = 1.5x
  
• EV / Net income = 2x
  
• Price / Earnings = 6x
  

I look forward to discussing the company with you.

 

--------

See attachment for my spreadsheet.

 

Note: EV = Market Cap + Debt – Cash – Investments.  I excluded customer deposits because from what I understand, they offset settlement funds (receivables) and machines on loan to customers (PP&E). 

 

Disclaimer: I do not speak Korean, I have an incomplete understanding of the Korean payments market and I haven’t been able to do my normal level of diligence on this company.  I own Nice as part of basket of Korean stocks I started buying in 2013 and posted it because I need to understand the company better before I make it a normal-sized holding.

NICE_IT.pdf

[Jurgis]

Sorry to ask, but after Fido closed access to Korean stocks aren't Korean stocks pretty much inaccessible to US investors? Apart from opening account in Korea?

 

(I haven't followed the situation diligently, I may be wrong.)

[Poor Charlie]

Sorry to ask, but after Fido closed access to Korean stocks aren't Korean stocks pretty much inaccessible to US investors? Apart from opening account in Korea?

 

I’m not familiar with Fidelity or other US discount brokerages.  I don’t want to give a brokerage endorsement because my Korean broker is expensive and hard to deal with.  If anyone has had a good experience with a Korean broker for small partnerships, I’d love to hear about them. 

[siddharth18]

Why are they holding so much cash and have an abysmal 1.3% div yield?

[Poor Charlie]

Why are they holding so much cash and have an abysmal 1.3% div yield?

 

Since the Asian crisis in 1997, many Korean companies have held large balances of non-operating assets—cash, stocks, equity in affiliates, excess real estate, etc.  I believe there was an attempt to introduce something like a forced payout ratio by the government last year, but it didn’t get anywhere. 

 

As a matter of preference, I don’t mind companies that maintain excess capital—as long as they’re growing at high ROEs. 

 

[Guest Schwab711]

If I could buy it without too much hastle I would. I know other good investors like it. I think you have a good eye here.

 

I think the only issue is Nice's digital payment solution, held in a different entity, will eventually canabalize Nice I&T. NIT should do well though.

[Poor Charlie]

I think the only issue is Nice's digital payment solution, held in a different entity, will eventually canabalize Nice I&T. NIT should do well though.

 

Hi Schwab

 

If you’re referring to NICEPAY, I believe that it’s a 100%-owned subsidiary of Nice I&T. 

 

[Packer16]

A short-term IMO reason why this is cheap is there is a price cap on small transaction fees so the growth driver going forward will be transaction volume versus both pricing & volume.  The impact of this can bee seen in a revenue & operating profit decline in the 1H 2018 results.  There have been some buybacks this year but smaller than the 2017 buybacks.

 

Packer

[Poor Charlie]

A short-term IMO reason why this is cheap is there is a price cap on small transaction fees so the growth driver going forward will be transaction volume versus both pricing & volume. 

 

Hi Packer.

 

What do you mean by ‘price cap’? There was a ruling last year that lowered swipe fees industrywide, but I’m not sure this had much effect on Nice.  As far as I know, Nice charges per-transaction fees (as opposed to ad valorem), which are already low.  I would think most of the hit was taken by issuers via lower interchange fees.

 

The impact of this can bee seen in a revenue & operating profit decline in the 1H 2018 results.  There have been some buybacks this year but smaller than the 2017 buybacks.

 

If I remember correctly (not at my computer), 1H revenues were up something like 17%.

[Packer16]

My understanding is the fees would effect lower priced transactions which Nice has its share.  The revenues declined from w115.2m in 1H2017 to w107.4m in 1H2018.  Net Income increased from w15.3m in 1H2017 to w16.1m in 1H2018.  (see NICE IR books - 1H 2018 & 1H 2017)  So there was some effect on revenues (down 7%) & given the operational leverage in these types of businesses, the market does not like revenue declines.  Other processors like KSNET have had a revenue decline of 4% but an operating income decline of 40% (there maybe some other items in here also).  IMO this is a one-time adjustment.  Part of the decline is due to the decline in the Korean market overall (down about 9% YTD overall). 

 

Packer

[s8019]

The revenues declined from w115.2m in 1H2017 to w107.4m in 1H2018.

 

It looks like some frankennumber from management accounts. Consolidated reporting show no such thing.

 

Anyway my (highly uninformed) impression after grand total of 1 hour research is that pessimism may be somehow related to that they missed the boat on mobile O2O platform market. So at some point in the future new O2O platforms may throw previous generation payment gateways out of the window.

 

Whether this concern is legitimate? That is an interesting question, I have no idea.

 

 

[Poor Charlie]

The revenues declined from w115.2m in 1H2017 to w107.4m in 1H2018.  Net Income increased from w15.3m in 1H2017 to w16.1m in 1H2018.  (see NICE IR books - 1H 2018 & 1H 2017)

 

Where are you getting your numbers from?  I’m getting mine from regulatory filings on DART.  Also, If I look at Nice Holdings’ IR slides (http://eng.nice.co.kr), I see figures similar to those on DART: 179 billion won in 1H 2018 vs 154 billion won in 1H 2017.  I believe KICC and KG INICIS are up y/y by a similar amount.  KSNET was down by low SD.

 

As an aside, I’m confused by KSNET.  They seem to have more volatile results and higher margins.

[Poor Charlie]

Anyway my (highly uninformed) impression after grand total of 1 hour research is that pessimism may be somehow related to that they missed the boat on mobile O2O platform market. So at some point in the future new O2O platforms may throw previous generation payment gateways out of the window.

 

This is a good question.

 

My concern is that someone like Naver or KaoKao get traction with an Alipay-like system.  I believe they have been pushing this.  On the other hand, the Korean payments market is different from the four-party system.  My understanding is the processors/acquirers provide more than just terminals and merchant processing—they also provide a switching/authentication function as well as issuer processing (this is something I don’t fully understand).  Terminals and switching would go away under an Alipay system, but merchants and issuers would still need processing support.

 

I’d love to get other opinions on this.

 

[Packer16]

The revenues declined from w115.2m in 1H2017 to w107.4m in 1H2018.  Net Income increased from w15.3m in 1H2017 to w16.1m in 1H2018.  (see NICE IR books - 1H 2018 & 1H 2017)

 

Where are you getting your numbers from?  I’m getting mine from regulatory filings on DART.  Also, If I look at Nice Holdings’ IR slides (http://eng.nice.co.kr), I see figures similar to those on DART: 179 billion won in 1H 2018 vs 154 billion won in 1H 2017.  I believe KICC and KG INICIS are up y/y by a similar amount.  KSNET was down by low SD.

 

As an aside, I’m confused by KSNET.  They seem to have more volatile results and higher margins.

 

You are right the revenue numbers from the same page in the 2017 IR package do not include NICE payment revenues so the 2018 revenue numbers including NICE payment revenues did increase.  However, from the Q2 2018 results consolidated financials DART filings (http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20180814002409), the 6mo EBITDA (Operating Income plus D&A) has declined by 6% (w26.9b 1H2018 v. w28.7b 1H0217).  KSNET is the a player owned by UEPS & the declining revenue numbers are from their reporting.

 

Packer

[Poor Charlie]

You are right the numbers for the 2017 package do not include payment so the 2018 revenue numbers did increase.  However, from the DART filings the 6mo EBITDA (Operating Income plus D&A) has declined by 6% (w26.9b 1H2018 v. w28.7b 1H0217).  KSNET is the a player owned by UEPS & the numbers are from their reporting.

 

What do you mean by “the 2017 package do not include payment so the 2018 numbers are correct”? Also, could you refer me to your source documents?

 

KSNET has been losing share and going through a restructuring.  UEPS acquired it in 2010 for $235 million, 2.3 times revenues and 11.6 times EBITDA. 

 

[s8019]

ke Naver or KaoKao get traction with an Alipay-like system.  I believe they have been pushing this.  On the other hand, the Korean payments market is different from the four-party system.  My understanding is the processors/acquirers provide more than just terminals and merchant processing—they also provide a switching/authentication function as well as issuer processing (this is something I don’t fully understand).  Terminals and switching would go away under an Alipay system, but merchants and issuers would still need processing support.

 

I’d love to get other opinions on this.

 

There is another potential disrupter. It may not fly but who knows.

 

http://www.koreaherald.com/view.php?ud=20181118000058

 

Too hard pile imo

[kms8717]

Glad to meet- I'd like to add some thoughts here as a local investor in Korea.

I am of the view that NICE I&T is a great value, and potentially a good investment from here.

 

Valuations are obviously low, and it's hard to think it's simply "undiscovered." Rather, it's just widely avoided, and there's no bid and even the sell-side don't really cover. But I believe it is fundamentally undervalued, and when there's simply a perception change, there could be a drastic re-rating and catch-up to value.

 

Obviously the fear is on the fee cut and Alipay-like system disruption(and gov-led Zeropay).

 

My view in a nutshell is that in the next 1-3yrs, company will preserve VAN earnings while PG and also international expansion(Indonesia/Vietnam) adding growth.

 

Gov resets card processing fees every three years, and the new fee structure will be put in place from Jan '19(and stay quiet for at least 3 yrs).

 

Gov one-sidedly imposes card fee cuts, and card companies negotiate with VANs for VAN fees(sort of like Merchant Discount Rate). VANs then negotiate with VAN agencies who are largely independent, 4-5 person organizations(financed by VANs) that actually run around and install/maintain POS/CATs for new/existing merchants (~12% merchants are closed/replaced each year)

 

During the past 4-5yrs when the Gov's pressure on card processing fee got really intensified, NICE I&T(along with KIS - another NICE group affiliate VAN company) aggressively increased their M/S in order to better their negotiating leverage with card companies. Together, they own 30% of the merchant M/S(18%(#1), 12%(#4) respectively).

 

Despite the growth in M/S, NICE I&T's earnings largely stayed flat during this period - because it has not been as aggressive as other smaller VANs in cutting VAN agency costs to fortify their relationships with these independent organizations and increase their VAN M/S. Due to better pay, many agencies have turned exclusive NICE agencies. The recent card fee cut is effectively around -10 ~ -12% on the card companies' revenue. Many smaller VANs' net margin is below that.  Meaning, many smaller VANs will die out in this cycle and bigger players like NICE I&T will assimilate M/S.  Smaller VANs will put their biz up for sale, and NICE obviously has more than enough cash to purchase them and consolidate the industry further.    NICE already has a bigger M/S # than the largest card company Shinhan's does for its card M/S #. Growing NICE's M/S means it's harder for individual credit card companies to aggressively pass on the effect of card fee cut to NICE.

 

NICE nonetheless believes gov's push to cut processing fees will not stop here for good- so their goal is to add another revenue stream, i.e. directly monetize merchants to diversify source of income and raise ARPU. To do this, POS is key. NICE group acquired #1 POS maker OK POS in 2015, who has #1, 50% M/S. POS penetration is around 30%, so that is around 15%, around 50% penetration of NICE's merchant relationships.

 

Globally, processing companies are evolving to "wrap value around transactions." Square in the US is showing all the possibilities with S/W in POS(revenue/inventory management, HR, Compensation, CRM..) - Global Payments, First Data's Clover do similar things, and are well-received by investors. In Brazil, StoneCo earns good percentage of their revenue from providing finance solutions to merchants. As a financial infra group, NICE has all the businesses(credit rating biz, VAN, POS etc.) ready to realize this future better than anyone.  From my recent communication with the IR at NICE I&T, strategic direction is to firmly set on this course, and they're willing to acquire to add S/W revenue(which is currently near zero).

 

They're currently sitting on pile of cash - and with disappointingly small dvd, market is not assigning much value to the cash. However, they have shown better than avg. capital allocation capabilities in the past - as illustrated by local PG acquisition in 2015 and Indonesian PG J/V in the same year and increasing equity ownership since then. Recently they've invested in Vietnam operation.  Indonesian PG is already a solid #3 player - Indonesia is about 2/3 and Vietnam 1/6 of Korea's GDP, so together should double the TAM for the company. 

 

Briefly on Alipay-like system disruption(and Zeropay).  QR code succeeded in China because there was no already existing credit card infra. Plus there is MPM(Merchant Present Mode) and CPM(Customer Present Mode) for QR payment. CPM is the one similar to simply handing off cards(QR) to merchants, and this requires hardware infra(POS). Merchants don't like duplicate investments, and it's more economic to add QR solutions on top of the existing POS - meaning VAN can charge card-like VAN fees to these new QR pay players (already doing it for Kakaopay). Even for the gov-led Zeropay, they started off as strongly criticizing VAN for causing extra cost in the system, and now recently announced VANs are essential players for adoption. But chances are Zeropay will never really take off because Koreans are already used to card-infra, and if those really dying to use phones to pay, they use Samsung pay, which does not bypass the current VAN infra.

 

To sum up,

 

As the 3yr cycle of a new card fee structure just begins, the uncertainty of this new cycle is starting to be removed in the VAN industry. VAN consolidation will be expedited, and the leading player NICE I&T will do what it takes to preserve its VAN earnings and set it for a sustainable growth with M&As. PG and International biz will start to add 10-20% of earnings contribution starting this year, and it is growing at almost 100%+ CAGR. There are signs that they'll start increasing the dividends as well. Given the so much potential upside, I find this company to be of great value.  Would love to get this thread more active and let many more know of this investment opportunity.

[Spekulatius]

It seems interesting enough, as are some other stock on the quite cheap Korean markets, but with no way to buy them for most investors ( even with interactive Brokers accounts) there wont be much excitement here. Opening an account with a Korean broker and going through tax hassles to buy a few shares just doesn’t to be worth it, unless I do money management for a living.

[Packer16]

I like the company & its model.  It has developed a payment ecosystem where it can add value at most steps in the process & has a dominant share in numbers of the steps.  You can invest in Korea & alot of other non-IB markets through Pershing/BNY or one of its introducing brokers.  The minimums are on the order of $30k per year so if your portfolio is big enough it may make sense. 

 

Packer

[Poor Charlie]

KMS8717

 

You’re just the type of person I was hoping to engage with when I started this thread.  Thanks for your excellent post!

 

Below are some of my questions and comments:

 

Valuations are obviously low, and it's hard to think it's simply "undiscovered." Rather, it's just widely avoided

 

Obviously the fear is on the fee cut and Alipay-like system disruption(and gov-led Zeropay).

NICE trades at 5x last year’s earnings (1x net of cash).  You’re probably right that some of the discount is due to the interchange rate cuts and competitive threats, but I also think it’s the result of peculiarities in the Korean market.  Korean stocks can go years without reflecting underlying fundamentals.  Most people I talk to want to ascribe these divergences to company-specific factors—illiquid stock, controlling shareholder, disruptive competition, cyclical or secular forces, etc.  My experience is that it’s often simply mispricing that takes longer than normal to correct.

 

Gov resets card processing fees every three years, and the new fee structure will be put in place from Jan '19(and stay quiet for at least 3 yrs).

 

NICE nonetheless believes gov's push to cut processing fees will not stop here for good

My understanding is that the last rate cut was in the fall of 2017, which has been working its way through the system over the last year.  In their most recent quarterly slide presentation, NICE said that these rate cuts should stop after the third quarter of 2018.  I realize it’s hard to handicap this given how capricious governments can be, but do you expect further cuts?  Could you elaborate on your comment about NICE believing there are more cuts to come?

 

Gov one-sidedly imposes card fee cuts, and card companies negotiate with VANs for VAN fees(sort of like Merchant Discount Rate).

 

During the past 4-5yrs when the Gov's pressure on card processing fee got really intensified, NICE I&T(along with KIS - another NICE group affiliate VAN company) aggressively increased their M/S in order to better their negotiating leverage with card companies. Together, they own 30% of the merchant M/S(18%(#1), 12%(#4) respectively).

 

Despite the growth in M/S, NICE I&T's earnings largely stayed flat during this period - because it has not been as aggressive as other smaller VANs in cutting VAN agency costs to fortify their relationships with these independent organizations and increase their VAN M/S.

 

NICE already has a bigger M/S # than the largest card company Shinhan's does for its card M/S #. Growing NICE's M/S means it's harder for individual credit card companies to aggressively pass on the effect of card fee cut to NICE.

The Korean payments market is interesting.  You have two parties: the card brands (i.e., the issuers) and the VANs (i.e., the acquirers/processors.  There’s no Visa/Mastercard in the middle to handle the switching, and the card brands side of the market is fragmented.  Given these dynamics, it seems like the VANs would have more market power than acquirers in non-Korean markets, handling some of the switching functions (like V/MA) in addition to the merchant processing.  On the other hand, unlike Visa and Mastercard, which were able to raise switching fees in the face of falling interchange rates (after Durbin), VAN fees have been cut alongside interchange. 

 

I’d love to hear your thoughts on this. 

 

Briefly on Alipay-like system disruption(and Zeropay).  QR code succeeded in China because there was no already existing credit card infra.

The Korean payments market is one of the most developed in the world.  My observation is that developed payments markets are less susceptible to change: The marginal benefit of a new payment system isn’t high enough to justify the cost of scrapping an existing payment system that works OK. 

 

 

Plus there is MPM(Merchant Present Mode) and CPM(Customer Present Mode) for QR payment. CPM is the one similar to simply handing off cards(QR) to merchants, and this requires hardware infra(POS). Merchants don't like duplicate investments, and it's more economic to add QR solutions on top of the existing POS - meaning VAN can charge card-like VAN fees to these new QR pay players (already doing it for Kakaopay).

There’s a lot I don’t understand about Chinese payments: Do merchants use acquirers/processors to accept Alipay/WePay on all transactions?  Do merchants use the same infrastructure to accept Alipay/WePay and UnionPay?  Why do wealthier Chinese use Alipay/Wepay when they can use UnionPay and get the benefit of incentives, cash back, revolving credit, etc.?  Would Koreans, who are used to those credit card benefits, switch to an escrow-type payments platform without those benefits?

 

 

I realize that's a lot of questions.  Don't feel obligated to answer them all (or any).

 

Thanks again for your insightful original post!

 

[kms8717]

Thank you for starting the thread and your excellent questions. Here's my stab at addressing them.

 

Korean stocks can go years without reflecting underlying fundamentals.  Most people I talk to want to ascribe these divergences to company-specific factors—illiquid stock, controlling shareholder,

 

disruptive competition, cyclical or secular forces, etc.  My experience is that it’s often simply mispricing that takes longer than normal to correct.

 

Having spent some time in the buyside both in the U.S and Korea, I have to say the biggest difference is the lack of patient capital. People are swayed more easily by geopolitical factors, a few

 

dominant cyclical industries driving the whole economy, and somewhat whimsical gov hurting the predictability of bizs. Thus retail investors are more short-tempered, and institutional funds mostly don't

 

have lock-ups in place to protect their investments, and their volatile retail money (out)flows causing forced sales, etc.

Long way of saying I agree with you that mispricing may tend to last longer here, but catch-up to value(and over-reaction) can also hapen quite instantaneously. I think you'd agree that it's a wrong

 

takeaway to think that value investing simply doesn't work here, but it just requires more patience.

 

My understanding is that the last rate cut was in the fall of 2017, which has been working its way through the system over the last year.  In their most recent quarterly slide presentation, NICE said

 

that these rate cuts should stop after the third quarter of 2018.  I realize it’s hard to handicap this given how capricious governments can be, but do you expect further cuts?  Could you elaborate on

 

your comment about NICE believing there are more cuts to come?

 

Last rate cut was in 2015. The year was significant in many fronts: 1) gov decided that it will only affect the card fees in every 3 years(vs. almost every year) to reduce its influence on the industry and give the industry more time to adjust to new changes. 2) In '15, gov/card/VAN companies fixed the VAN revenue/cost structure a bit - on the revenue side, the card van fee was changed to be variable fee(vs. fixed fee previously). VANs' fantastic run up up till this point was because they benefitted from the smaller and more frequent payment trend. So organic growth rate became more of a GDP type industry. But on the cost side, gov prohibited VAN kickbacks to merchants(cost), which offset the revenue cut.  Considering the net effect, NICE did not want this change, but A) it was the gov wish, and B) it was able to negotiate with card companies(given its #1 position in the market) to slow down the impact on the revenue cut by spreading over the fee structure change over 3yrs. The effect of the 3yr P cut ended ~3Q18.

 

Given how significant card fee cut has been over the past 10yrs combined with the fact that the majority of the SMB merchants already effectively pay negative card fees because of tax redemption being outsized than the reduced card fees, VAN industry seemed to have expected fee cut would not resume and may reverse in 2019. Yet Moon regime continues to display questionably strong left-wing

 

policies, and the card companies just experienced another 10-12% fee cut. Given the gov stance, all the talk of blockchain removing "intermediary costs," I think processing companies and card companies alike would have to find other ways to make money to sustainably grow. That's why I mentioned NICE also shifting its strategy to simply grow M/S but to seek other-than-processing revenue.

 

The Korean payments market is interesting.  You have two parties: the card brands (i.e., the issuers) and the VANs (i.e., the acquirers/processors.  There’s no Visa/Mastercard in the middle to handle

 

the switching, and the card brands side of the market is fragmented.  Given these dynamics, it seems like the VANs would have more market power than acquirers in non-Korean markets, handling some of the

 

switching functions (like V/MA) in addition to the merchant processing.  On the other hand, unlike Visa and Mastercard, which were able to raise switching fees in the face of falling interchange rates

 

(after Durbin), VAN fees have been cut alongside interchange. 

 

This is a very prudent point. I think the reason why is although VAN service covers the switching function like V/MA, while V/MA are effectively a duopoly, 12-13 VANs in Korea provide not so differentiated service, including the switching. So pricing power is definitely not as formidably strong as V/MA. Plus, although in the U.S card companies pay merchant acquirers and merchant acquirers then pay merchants for the customer transacted payment "while keeping some for itself(MDR)," in Korea card companies pay merchants directly, and pay VANs for their service. So another nuance in terms of why negotiating power is less strong for VANs despite their indispensable service.

 

YET this is not to say it simply is an inferior model - NICE has gathered meaningful M/S enough to really matter in the whole payment system, and I'll explain later what this may mean later.

 

The Korean payments market is one of the most developed in the world.  My observation is that developed payments markets are less susceptible to change: The marginal benefit of a new payment system isn

 

’t high enough to justify the cost of scrapping an existing payment system that works OK. 

Again, completely agree with you. Many "sth, sth Pay" companies spent hundreds of millions of USD on marketing, even tried to install its own payment hardware, etc., but because you need omnipresence and can't beat card companies' extending credits/pay incentives(partially financed by merchant paid card fees), many of them already gave up and shook hands with VANs to cooperate. Kakao for example. Merchants want one simple solution/hardware. But being a most widely used app, Kakao has a chance to extend its domination to include payment function. Monopolizing a segment in the structure could take all the negotiating power, so this can be a problem. I think NICE found a way to combat this too - explained later.

 

There’s a lot I don’t understand about Chinese payments: Do merchants use acquirers/processors to accept Alipay/WePay on all transactions?  Do merchants use the same infrastructure to accept

 

Alipay/WePay and UnionPay?  Why do wealthier Chinese use Alipay/Wepay when they can use UnionPay and get the benefit of incentives, cash back, revolving credit, etc.?  Would Koreans, who are used to

 

those credit card benefits, switch to an escrow-type payments platform without those benefits?

From what I understand, Chinese never had proper payment infra(but high-enough smartphone penetration), so they took on MPM QR method and that became a culture/norm. However, because it causes problems such as fraud, QR phishing, etc. big franchises have already adopted CPM QR/barcode method, which requires a VAN POS-like system. Although Chinese experience makes Korea's VAN infra look poised for disruption, it really is not IMO. Existing infras can simply adapt and evolve. There just hasn't been much incentive to do so because it's been so profitable, but now with some external forces potentially threatening profitability, VANs can go this way.

 

------

Intentionally left out some answers above to address here. http://www.etnews.com/20190124000317  I think this local article is potentially the key to where NICE is headed. Article says local card companies(including most of the majors) gave up on creating/marketing their card mobile apps and agreed to outsource to NICE for what they call "super app" - which provides QR payment solutions servicing all the major card brands in Korea.  Seems like NICE has a chance to own a platform going forward.  Card companies agreed on doing this, probably because 1) a fragmented approach will lose to big ICT players like Kakao or Naver or Payco 2) NICE and card companies' interests are aligned in that they all want the credit card to survive 3) NICE can quickly roll out this system to its 30% M/S, but also if it gets popular (by end-users), merchants managed by other VANs will have to extend QR solutions and maybe NICE could leverage this app to win further M/S.

 

What gets stocks to be re-rated could be bizarrely simple at times in Korea, considering how much wait and research effort you put in - once people find themselves using a payment app operated by NICE, they could instantly see it as a fintech company. And in fact, it is a fintech company. They own all the valuable merchant payment data, and they're moving in that direction. 

 

[Poor Charlie]

the card companies just experienced another 10-12% fee cut.

About the 10-12% fee cut: was that a recent fee cut?  My understanding is that NICE wasn’t expecting any more fee cuts in late 2018 or 2019. 

 

VAN service covers the switching function like V/MA, while V/MA are effectively a duopoly, 12-13 VANs in Korea provide not so differentiated service

What are your thoughts on the competitive position of VANs in Korea relative to the competitive position of acquirers/processors in non-Korean markets?  Do you consider NICE’s moat to be weaker than companies like Worldpay, Global Payments, etc.?

 

local card companies(including most of the majors) gave up on creating/marketing their card mobile apps and agreed to outsource to NICE for what they call "super app" - which provides QR payment solutions servicing all the major card brands in Korea.  Seems like NICE has a chance to own a platform going forward. 

I noticed this in NICE’s 2018 IR slides (see attachment below).  I don’t speak Korean, so it’s difficult for me to do my normal primary research on things like this.  But it does look interesting.  I have a hard time believing that all the card brands would run their mobile payments through an outside app, but that’s what the article seems to be alluding to.  If that’s the case, this could be a very attractive business. 

 

Thanks again for taking the time to post your remarks!

 

[Note: For those interested, I've attached an updated copy of my NICE spreadsheets.]

NICE_IT.pdf

[Packer16]

Thanks for the further discussion here.  It is interesting in looking at how the different NICE firms have developed & work together to provide revenue to each other.  An example is the OKPOS which is owned by NICE TCM but will provide traffic for NICE I&T.  Also how the NICE Info Services data can drive traffic on NICE I&T network.  It looks like NICE I&T is the net beneficiary of other subs work but trades for the lowest multiple of them all.  NICE TCM appears to have a nice set of projects parking payment & POS (including software) which will also drive NICE I&T network volume. 

 

The question I have has to do with the entrance into Vietnam & Indonesia.  Since both do not have an established payment infrastructure like Korea, how is NICE approaching these markets versus Korea (as they may be more susceptible to payment leapfrog like in China)?  In Vietnam, it looks like NICE is building out a credit bureau & consulting on payment infrastructure with government and has opened a PG, so maybe they can drive some traffic to the PG and blunt a leapfrog with the help of the government as result. 

 

In Indonesia, they have purchased a PG.  My understanding in that market cash & ATMs are used quite a bit with the banks & teleco operators dominating these channels.  Cell penetration is high so the situation is similar to China.  Can NICE I&T develop a coalition like it did in Korea to combat a payment leapfrog?  Do they need to do this to maintain growth as they have pretty high growth now?   

 

Any insights would be appreciated.  TIA.

 

Packer

[kms8717]

Replying to Charlie and Packer-

 

2015-2018 3Q: was the previous 3yr credit card fee cycle, where NICE VAN fee was also negotiated down

 

2019 starts a new 3yr cycle - 10-12% was the average credit card fee cut imposed by the gov, and I'm expecting van fee to be cut by a similar magnitude (as it's been the case past) -

 

how will they make up for this 10-12% cut in P? NICE VAN M/S growing from 18% to 20%(hypothetically) would be 10% growth in Q, offline payment market naturally grows at ~2.5%, and on the cost side, van agency cost can alledgely drop by 1/3 (http://news.mk.co.kr/newsRead.php?year=2019&no=51547), etc.

 

I think NICE VAN biz's moat is not so different from the acquirers/processors outside Korea - economies of scale, trusted brand, seamless payment experience, supporting all types of payment is the most important. It's been heavily relationship-based biz, now the industry is adding/imporing S/W to differentiate and build stronger moat. NICE group's collective 30% M/S compares very favorably against any #1 processing player in other countries. Their presence both offline and online is adding O2O scale synnergy too in their cross-marketing.

 

The card app slide from the 2018 IR presentation is actually a different thing called "App-card," which is NICE dominating(almost a monopoly) mobile card payments because it provides the backend service. One can infer NICE VAN's good relationships with the card companies and good R&D capabilities in the payment space.

 

ICT players(represented by Kakao) and Zeropay(ACH type) effort by the gov are quite a threat for "card companies." Card companies are really feeling the pressure and want to combat this in a collective approach - but they need a 3rd party because of conflict of interests (which is why VANs originated in the first place). NICE seems to be the perfect candidate who can roll this out. Keeping an eye on the further development on this front - but upside here seems quite big.

 

Great points raised by Packer on NICE group's interesting bizs all helping each other in some ways - yet this is paradoxically a reason why NICE VAN seems to be heavily discounted. NICE TCM providing OK POS sales/installment/mgmt services originally made sense, because they provide A/S services to different types of hardwares they sell nationwide, but POS biz should come under NICE VAN. Currently the way group biz is structured, it's not so obvious that NICE VAN will own/benefit the lucrative POS payment data. I hear group mgmt is thinking hard about reshuffling group bizs to optimize and maximize efficiency.

 

On Vietnam and Indonesia - it seems that NICE's relationship with the Vietnamese gov is quite strong. Insiders often talk about replicating NICE's same financial infra bizs in Vietnam - includes Offline VAN service and Online PG. Both will start in 2019. Because of gov support, I think development here could be quicker than Indonesia.

 

Indonesia saw quicker advancements in e-commerce than Vietnam, so the PG industry emerged earlier. So NICE started a local JV here to have a foothold, but with good technical expertise and good partnerships with local Korean ventures, they quickly rose to #3. I believe leapfrogging in the payment space has more to do in the offline side. You still need PGs to serve as a main gateway to assume some credit risk of cyber merchants and provide multiple ways to payment methods by serving as a intermediary.

 

Despite looking really meager in terms of revenue generated from Indonesia, it's actually because their accounting is net revenue(backing out bank fees vs. Korea where they do gross revenue), so the revenue is actually about 6-8x larger(think 3%(PG rev)-2.5%(bank fee)=0.5%(net rev)), and operating leverage should come much quicker once fixed cost is all taken care of. Think they're close to achieving this milestone this yr.

 

NICE holdings(034310) is interesting too as a standalone investment, because of this group synergy and their multi-year negative earnings from manufacturing investments are turning around this year(ITM semiconductor, BBS wheel), seems like there won't be any more significant manufacturing investments by the holdco, and the chairman passed away last year so there is no need to save inheritance tax(which is very significant in Korea, companies often deliberately suppressing their own share price to save taxes).

[Packer16]

From the examination of the subs, the other interesting one IMO is NICE TCM, especially if they will own the POS data.  The cash distribution business is a cash cow that can feed the POS & parking business, which is great example of technological innovation.  It not quite as cheap as I&T (P/E of 12x & EV/EBITDA of 5x) but probably has more near term growth prospects with parking & POS.  Hold co as you state is also interesting & it appears these guys are fine with spin-offs, which IMO is how some of the Korea discount can disappear. 

 

NICE Info Services is also interesting as this is where the "big data" analysis will be done.  It appears to be a real growth market in Korea (maybe 3x the current analysis size based upon US  market).  Also, if they set up the credit bureau/VAN business in Vietnam then it appears they also do it in Cambodia, Laos & Myanmar.  This unit (NICE Info Svcs) is valued closer to global comps (9.7x EBITDA & P/E of 21).  I guess the question here is how big can Vietnam get?  At this point the Vietnam revenue is W6.2b.  The grow of revenues to approach us comps is about W60bn on a current revenue of W375bn.     

 

BTW these guys do a good job of disclosing their plans in the English shareholding disclosures.

 

Packer