Kaspi [KSPI]

Executive Summary

• Kaspi is the new super app of Kazakhstan. It provides users with Kaspi QR, an innovative way for consumers to do mobile payments, and the ability to control one’s finances online with consumer lending. Over the years, the company added many features to its platform: B2C marketplace, e-Grocery, travel services, government services, B2B payments and more.
• Kaspi’s success started with the introduction of its free online P2P payments services which attracted a large part of Kazakhstan’s population. Another big success was Kaspi QR payment services. In combination with giving away Kaspi POS systems to merchants for free, the company was able to take over Kazakhstan’s payment industry within a few years.
• Since this app is very sticky for Kazakhs due to the critical services provided (fintech and payments services), the company has built up strong network effects. These 12 million users enables the company to launch additional features on its platform which are shown to be adopted rapidly.
• Co-founders Mikheil Lomtadze (CEO) and Kim Vyacheslav (Chairman) own collectively ~47% of the company. Lomtadze has shown to be a great leader and has managed to establish a strong and innovative culture with an extreme focus on adding value to customers.
• Over past three years, Kaspi has grown revenues and earnings at 40%+ annually. They should be able to achieve over 20% revenue growth over the next five years due to the opportunities in adding and growing features on the platform. The company has a 46% profit margin and is currently available for ~10x normalized earnings.
• Some risks that the company experiences: (i) political unrest which could get out of hand and may change regulatory environment for the company, (ii) weakening economy that is seeing 20% inflation now, (iii) Russia invading Kazakhstan

Early Innings

Once upon a time, in 2002, a young and ambitious Mikheil Lomtadze, born in Georgia, graduated from Harvard Business School with a dream of working for one of the most renowned investors in Russia, Michael Calvey. Despite having no job offer or financial compensation, Lomtadze made his intentions clear and reached out to Calvey, expressing his willingness to work for him for free.

To Lomtadze’s surprise, Calvey was impressed with his enthusiasm and drive and offered him an opportunity to join his team at Baring Vostok. Over the next few years, Lomtadze worked tirelessly, impressing his colleagues with his hard work and dedication, and eventually rose to the position of partner in 2004.

In 2006, Baring Vostok invested an undisclosed amount in Kaspisky, a bank owned by an entrepreneur named Kim. Lomtadze was immediately drawn to the potential of the company and expressed his desire to work with Kim to take the bank to new heights. He was quickly offered a position at Kaspisky and joined the team as an executive.

Through their hard work and determination, Lomtadze and Kim built a company that now serves over 10 million users in Kazakhstan, offering a range of financial products and services that have disrupted the financial services industry. Their success has been recognized by investors, with Kaspi becoming one of the most valuable companies in Kazakhstan with a market capitalization of over $9 billion.

Company description

Once a humble bank, Kaspi has since evolved into Kazakhstan’s Super App, representing a comprehensive ecosystem of fintech services, payment options and e-commerce offerings. The app’s success snowballed, with the growth of one service fuelling the development of others. Today, Kaspi serves over 12.2 million users, representing a whopping 93% of Kazakhstan’s 16-year-old and older population. Users can take advantage of a wide range of government services, payments processing, travel bookings, and financial management tools, all available at their fingertips through a single, streamlined platform.

Kaspi’s unique approach is characterized by a steadfast commitment to improving people’s lives through the development of innovative products and services. This noble mission sets them apart from many other firms, and their dedication to it is evident in the launch of several noteworthy products in the last several years. Among the most significant releases were e-Grocery, Kaspi Postomat, major additions to Kaspi Travel’s product suite and Kaspi Pay B2B. Furthermore, CEO Lomtadze has expressed the importance of this mission many times. Below are two examples.

2021 was the strongest year in Kaspi.kz’s history and perfectly illustrates the power of our Super App business model. Everything we achieved last year however, was the culmination of more than a decade of innovation and product launches. Going forward, innovation at scale and a best-in-class customer experience, are the only ways we can continue to play a leading role in the growth opportunity offered by digitalisation.

Innovation is the root of all value creation in society and the benefits of digitalisation are bigger than Kaspi.kz. We see ourselves as an enabler that must help all our stakeholders benefit from digitalisation. For our consumers, the Kaspi.kz Super App must offer a seamless user experience. For merchants, especially local businesses and SMEs, Kaspi.kz Pay must help them accelerate their growth and contribute to a modern and vibrant Kazakh economy.– CEO and co-founder Mikheil Lomtadze in annual report 2021

Payments – 34% of revenue, 58% net profit margin

Kaspi is at the forefront of the change on how payments are done. In 2018, 26% of all payments were made digitally. At the end of 2021, this increased to a whopping 80% of all payments. The company increased its market share in payment processing from 2% to a remarkable 66% within just one year. This achievement left both Visa and Mastercard trailing behind.

The success of Kaspi can be attributed to two main factors. Firstly, it launched the first P2P platform with minimal fees, which proved to be a major drawcard for many Kazakhs who rapidly joined the platform. Secondly, by using QR codes, Kaspi allowed merchants to bypass the need for expensive third-party POS terminals.

The aforementioned developments facilitated the shift from a society reliant on cash to a cashless one in Kazakhstan, with Kaspi reaping substantial benefits from this trend. Currently, Kaspi’s QR Scan & Pay system accounts for 86% of all acquiring transactions on Kaspi Pay, while Kaspi Pay POS Solutions, which are provided to merchants free of charge, have expanded to 465k devices by the end of 2022.

Marketplace – 25% of revenue, 65% net profit margin

On Kaspi’s marketplace, consumers are now able to buy millions of products offered on the platform by over 300k merchants. These products are often delivered within 24 hours and is usually free for the consumer or they can pick up their order from one of the 3,300 postomats – their own developed delivery locker. This has resulted in an extremely high consumer NPS of 82.

On the other hand, offering fast and free delivery without having established a vast logistics and distribution network is asking for problems. They completely rely on third party delivery services which imposes the risk of not being able to deliver enough packages on time when Kaspi scales its marketplace. This will likely result in unhappy customers. On the other hand, because Kaspi doesn’t invest and isn’t planning on investing in logistics and distribution, it is able to achieve extremely high margins which makes scaling cheaper and easier.

Mobile-commerce still accounts for the majority of GMV ~ 63%, and will likely continue to make up the bulk of GMV as customers prefer to buy in-store. It may take a while for consumers to completely adopt buying online but it may become the same success story like the transformation in the payment system.

Launched at the beginning of 2021, Kaspi’s travel services which include being able to buy airplane and train tickets, reached more than 3 million tickets sold within a year. In 2022, total tickets sold amounted over 11 million.

Fintech – 41% of revenue, 37% net profit margin

The services offered within fintech include car finance, buy now pay later (BNPL), merchant & micro business finance, personal finance, and more. Kaspi has been focused on the short-term consumer credit market which enables them to have flexibility in pricing and the size of financing.

Kaspi has the advantage over other banks that they have more data about many of its customers since the majority of transactions are processed by Kaspi, they are able to track purchases on its marketplace and can see the revenue stream of their merchants.

Revenue breakdown for full year 2022 (2021):

• Interest revenue: 45% (48%)
• Fees and commissions: 18% (22%)
  • Banking service fees and commissions
• Seller fees: 19% (17%)
  • Fees paid by merchants from shopping transactions completed on the Marketplace Platform.
• Transaction & membership revenue: 21% (20%)
  • Fees for processing payments/transactions and fees for cash withdrawals over certain limits and P2P money transfers to other banks’ cards and worldwide.
  • Membership revenue arises from consumers and merchants being subscribed to one for accessing various services on the app.
• Rewards: -3.5% (-5.8%)
  • Rewards are designed to change customer behavior and promote daily user of the app and ensure growth in customer engagement across all platforms.

Market opportunity

As a payment and marketplace company, Kaspi is very much dependent on the spending power of Kazakhstan inhabitants. Since Kazakhstan’s real GDP is expected to grow on average 3+% annually over the medium term, Kaspi should be able to benefit handsomely from this if they are able to retain their current dominance.­­¹

The opportunity on its marketplace platform is significantly bigger. In 2021, 7.8% of the total retail market in Kazakhstan were just online. It may be difficult to get Kazakhs as accustomed to buying online as we do in the West but definitely not impossible. Kaspi has lowered the threshold for buying online a lot since delivery is often fast and free for customers.

By leveraging Kaspi’s Super App infrastructure, their recently launched Kaspi e-Grocery has a lot of room for growth since the market is big but doing groceries online is relatively new. This also means that it will take probably quite some time to get people to adopt to buying their groceries online, if they ever will.

Whereas the majority of the population of Kazakhstan is already present on the app, there still room to get more consumers to use all of the services Kaspi offers. For example, there are 4.5 million active marketplace consumers where there’s the possibility to triple that. Additionally, there are a lot of services and features the company can add to the app to earn money off. They could introduce things like ordering a taxi, introduce social media platforms, wealth management, booking a hotel, introduction of advertisements, music, news, security services, etc.

After they have maxed out these features and services like Tencent has, then there’s even the possibility to invest in other companies and leverage their platform to let that company succeed. But that option should be looked at in ten years and management needs to be well-suited for that kind of capital allocation as well.

Kaspi has already expanded internationally. They have acquired three marketplace platforms in Azerbaijan and have stated to be open for further acquisitions in Eastern Europe or Central Asia where there’s little digital payment and/or online retail penetration.

---

Do you like this write-up so far? If you don’t want to miss any future posts, you can subscribe with your email below.

---

Competition

The success of Kaspi has attracted a lot of eyeballs of competitors which could only yearn of becoming such a dominant app as Kaspi is. Choco is a company that has replicated many of Kaspi’s products and services but never thought of combining all its offerings into one ecosystem. Onai, a national bus-card company that has millions of customers, started rolling out their payment system. Visa and Mastercard are still competitors but seem to continue losing ground and without providing additional benefits like Kaspi is doing, it will be very hard for them to take their market share back.

The sky is way less clear for Kaspi’s marketplace platform than for its payment platform. Namely, Kaspi marketplace isn’t as dominant as other marketplaces like Wildberries, AliExpress and Mechta.kz. It would become interesting if Kaspi will be able to attract real brands to their platform like Nike and Apple.

Competitive advantage

The payment, marketplace and finance platforms are extremely strong additions to each other. They are inter-related products which means that the growth and development of one service contributes to the growth and development of other services, creating a powerful virtuous cycle.

For example, a consumer is using Kaspi to manage one’s finances and is in need of some product. Since he has already downloaded the app and already has an account with Kaspi, it’s really easy and straight-forward to look on Kaspi’s large marketplace to buy the product. Then when he finds it he needs to use a payment system and because his finances are already on the app, it becomes very straight-forward to use Kaspi’s payment system.

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

Furthermore, Kaspi’s marketplace benefits from strong network effects. They are continuously improving the user experience through product and service innovation. Combine that with fast and free delivery for most products and you have a great offering for consumers.

Kaspi’s payment ecosystem also benefits from strong network effects since the more merchants use it, the more consumers will use it to pay and vice versa. As Kaspi Pay is being used by the majority of Kazakhstan’s inhabitants, it will become a lot harder to convince merchants and consumers to use another payment service, especially since Kaspi has a great track record of innovating upon existing products and services.

Let’s take two examples of Kaspi’s payment ecosystem to show how difficult it is going to be to outcompete them. First, Kaspi has a P2P platform on which the majority of transactions are free for its users. Try to improve upon that. Second, Kaspi is providing their POS solutions to merchants for free and provides an ecosystem of which all citizens are part of.

Lastly, I think that we can look at Kaspi like we could can look at Amazon. At least, in terms of philosophy. What makes Amazon such a great company is its relentless focus on innovation through trial and error, and their immense focus on customers. I won’t say that we will see an AWS-like venture shortly but at least, at Kaspi, they have the same philosophy which is continuously repeated by the CEO and expressed through other media. Also, they seem to live up to it as well. They are doing a good job in winning over the people of Kazakhstan and continuously improving its platforms and launching new products and services.

Management

Mikheil Lomtadze, the CEO and co-founder of Kaspi, has been instrumental in scaling and innovating the company over the years. He has placed great emphasis on building a strong culture, driving innovation, and delivering exceptional products to customers. As of the end of 2021, he held a 23.3% stake in the company.

Lomtadze is widely respected as a successful leader in the fintech industry, having been recognized as Kazakhstan’s best CEO for several years in a row by the PwC CEO Survey. He holds an MBA from Harvard Business School and is credited with transforming Kaspi Bank into Kaspi.kz, a comprehensive payment, marketplace, and fintech ecosystem in Kazakhstan.

Kim Vyacheslav is the other co-founder, serves currently as chairman on the board and owns 24.1%. It has been said that he spends most of his time in the capital city of Kazakhstan to maintain good relationships with the government. Furthermore, the fund Mikheil was part of before joining Kaspi was Baring Vostok Funds and owns 28.7%.

Culture

Analysing culture will always be a difficult task but since Lomtadze seems like a strong leader who continuously talks about prioritizing customer needs and innovating on their behave. As for now, the company has done a good job in adding products and services to its platform that customers like to use. We can see that in the fast adoption of those products and services.

Financials

The company grew revenue from 602.9 billion KZT in 2020 to 884.8 billion KZT in 2021 to 1.3 trillion KZT in 2022. That implies a growth rate of 47% and 43%. The company achieved a net profit margin of 46% while it was 49% in 2021 and 44% in 2020.

Risks

• Regulatory risk: Kaspi operates in a highly regulated industry and has close ties to the government of Kazakhstan. Changes in regulations could impact the company’s operations and financial performance. For example, changes in financial regulations or government policies could limit Kaspi’s ability to operate, impose new fees or taxes, or require the company to change its business model. Any of these changes could negatively impact the company’s financial performance.
• Political instability: Protests and civil unrest can lead to disruptions in supply chains, damaged infrastructure, and reduced consumer spending. On the other hand, people still need to buy products, do transactions, and manage their finances. Therefore, Kaspi will only face negative consequences if economic activity experiences a significant and prolonged decline, which is unlikely to occur at present unless a war or other major conflict arises.
• Russia: Kazakhstan’s economy is closely related to that of Russia. The country sent aid to Ukraine when Russia invaded Ukraine and the Kazakh leadership refused to recognize the states of Donetsk and Luhansk as Russian.
• Macro and credit exposure: This is very unlikely to cause Kaspi to go out of business but they will be affected when the Kazakh economy turns bad.
• Dependence on Lomtadze: Lomtadze is definitely an extremely important persona for the company and if he would leave the company it would probably have a big impact on Kaspi’s future. Nevertheless, he has a very large stake in the company, is practically the co-founder, and there are a lot of exciting growth possibilities for Kaspi, so it seems likely that he will hang around for a while.
• Currency risk: The Kazakh tenge has historically been quite volatile and has seen inflation rates of 10% on average with outliers to 20% like it has right now. Significant devaluation of the tenge will have a big impact on Kaspi’s performance if measured in dollars or euros and if the company can’t manage to keep up, it will likely cause the company’s value to decline.

Current valuation

In FY2022, the net income for the company was $1.3 billion which means that we are able to buy the company at a EV/Net Income of 10x even though the company is expected to grow at attractive rates in the near future and there’s strong management in place where one of the founders is CEO and the other is Chairman and both hold a significant portion of the company’s shares. Not to forget they are buying back shares and paying out a dividend which yielded 4% in 2022.

That was the quick and easy valuation analysis, now let’s look at different scenarios and how they may play out. I believe there could be five different scenarios.

The first scenario is the most optimistic. Kaspi could become follow the footsteps of Tencent and be the dominant platform in Kazakhstan with a wide range of products and services. In this case, they have also successfully invested in platforms in neighbour countries. I assume 10% chance for this scenario to play out.

In the second scenario, I expect Kaspi to be less dominant but still able to successfully launch features on its platform and continues to grow its users base and engagement on the platform. A chance of 30% is assigned to this one.

The third scenario, where Kaspi may experience significant competitive threats in marketplace and some of their other features that seemed to have the most potential, like B2B payments, Kaspi Travel, and e-Grocery. I expect this scenario to have a 30% chance of happening as well.

In the fourth scenario, I believe that Kazakhstan could experience a long period of political unrest that significantly impacts the whole economy. Kaspi will try its best to delight customers but if they have little money it will be hard. I expect 20% chance for this scenario to play out.

Hopefully the last scenario would never happen since in this scenario I assume that Russia has invaded Kazakhstan and will destroy large parts of the country. I assume the last scenario has 10% chance of happening.

Taking the collective chances and outcomes, the expected value for this company according to me is ~$18.7 billion. This indicates a discount of 28% to the company’s current enterprise value of $13.5 billion.

For this company, I believe there’s little needed to overcome the expectations of the market if we look at scenario three. But on the contrary, there’s a higher possibility that the bad scenarios of four and five play out compared to companies in the West.

Additionally to the valuation, the company is paying out a dividend I didn’t take into account. This was about 4% in 2022 of current prices and the company also does opportunistically share buybacks.

Checklist

What seems the consensus to think about the prospects of the company?

Since it’s not that difficult to get to the conclusion that Kaspi in itself is a great business, the consensus seems to think that the invasion of Russia in Ukraine and the political unrest in Kazakhstan impose significant risks to the business. This is reflected in the share price of Kaspi.

What is the market missing?

Whereas Putin can be very unpredictable, the chances of Russia invading its other neighbour countries seems unlikely. Furthermore, there’s political unrest in Kazakhstan right now but it seems unlikely that it will result in long period of civil war or something like that. Even if political unrest stays for a while, it will probably have a minor impact on Kaspi’s long term outlook.

What makes this an interesting opportunity?

Besides this is a great company and a great management, Barings Vostok, who holds about 50 million shares, seems to be a forced seller since this is their only holding that they are able to liquefy due to the invasion of Russia in Ukraine.²

Is this company strengthening its relationship with customers by providing superior products, low prices, and efficient service?

Since the company’s focus is on delighting customers, helping merchants, and innovating on its products and services, we can conclude that Kaspi checks this box.

Is the CEO allocating capital in a rational way that will enhance the company’s long-term value?

The company has used most of its money on dividends and R&D. They have a policy to pay out a large amount of earnings to shareholders but also, recently, they lowered dividends to do more share buybacks. This is very opportunistic since the share price has lagged and seems to be significantly undervalued now. Furthermore, they keep focusing on improving current offerings and providing new ones which is where most of the other part of earnings is going.

Is the company underpaying its employees, mistreating its suppliers, violating its customers’ trust, or engaging in any other short-sighted behaviour that could jeopardize its eventual greatness?

The company’s mission is to delight customers and merchants but management also emphasises the importance of a strong culture. So it seems like there are not behaving in any short-sighted behavior.

In which ways would an investment in this company be a disaster?

1. If there would be something like a revolution or a civil war that would significantly negatively impact the economy of Kazakhstan.
2. Russia going in war with Kazakhstan.
3. If the founders and majority holders of the company decide that they want to redirect their forces elsewhere and not try to maximize shareholder return over the long term.
4. If the CEO decides to leave the company and no alternative can be found that could continue on the path where Lomtadze left.

How likely is it that this industry will be disrupted by technological advancement?

Since the super app is full of technology in itself, it’s definitely possible that Kaspi gets disrupted. However, their platforms benefit from strong network effects which makes it unlikely that technological disruption could imperils this structural advantage. Additionally, Kaspi has a strong innovative, customer-oriented culture itself and are likely to stay ahead of the changing needs of consumers.

What are the base rates for this industry and this type of business (model)?
The most well-known example of a super app is Tencent’s WeChat which has seems outstanding success. Other examples include Alipay (China), Gojek (Indonesia), Grab (Southeast Asia), Shopee (Southeast Asia), Amap (China), Taobao (China), Tata Neu (India), and Whatsapp (India). But there are many more that failed miserably but aren’t talked about often. It’s not easy to create a well-working super app and dominating a single market but high user engagement at the beginning and domination of a market/geography is very important for the success of a super app.

What’s interesting to notice is that there’s practically no super app in the West. Probably because we grew up with single-purpose apps which are faster and easier to navigate than super apps.

Is the company or the industry it’s operating in cyclical? What kind of cyclicality and how to adjust for that?

Commerce and banking are very much dependent on the overall economy. The company’s performance is therefore very much dependent on the state of the country. I.e. the regime the president wield, any aspiring conflicts in the country, etc.

What seems bigger? Consumer surplus or supplier surplus? Why? Is the company widening the consumer surplus or smaller?

It’s difficult to give a precise ratio but we can argue that Kaspi is a big positive force for the people of Kazakhstan. They are providing many very helpful services for little or no cost. In return, Kaspi is able to grow fast and generate outstanding margins since those services and products require little capital to operate.

What will impact will rising or falling inflation and interest rates have on the business?

Since 2003, the inflation rate has average 7% annually in Kazakhstan with spikes to 20% in 2008, 2016, and 2022. This relatively high inflation inflates the revenue and earnings growth of Kaspi. Luckily, Kaspi has an asset-light business model, this makes it easy for them to scale.³

Probably because investors are more hesitant to invest in the government of Kazakhstan than in more well-established countries in the West, the short-term interest rate in this country has averaged between 7.5% and 10%.⁴ Right now, it’s about 12%. This means that Kaspi is able to earn significant money of the interest free deposits of customers.

Since Kaspi is both a bank and a marketplace, rising or falling interest rates should be approximately neutral to the business, as long as changes are gradually.

What indicates that this company is relentlessly focused on customers and increasing consumer surplus wherever possible?

As a technology company, when it comes to innovation, we focus on the needs of our users. Our main driver of value creation is to solve relevant problems that improve people’s quality of life. We know that to remain the platform of choice for users, it is necessary to deliver continuous product improvement, ensure a unique experience, and build trust. – Annual Report 2021

In the 2021 annual report, it is further stated that they are focused on the net promoter score (NPS) through surveys and iterate on behave of their conclusions from feedback. In 2021, they achieved a strong NPS of 80, demonstrating that 8 out of 10 consumers recommend the Super App and its services to friends and family.

---

This was the write-up on Kaspi. Thank you for reading and please leave your thoughts here or on Twitter.

If you don’t want to miss any future posts, please subscribe with your email below.

Sources:

1. https://www.statista.com/statistics/436121/gross-domestic-product-gdp-growth-rate-in-kazakhstan/
2. https://thedlf.de/kaspi-aktie-naehe-zum-russischen-schmuddelkind-eroeffnet-einstiegschancen/
3. https://tradingeconomics.com/kazakhstan/core-inflation-rate#:~:text=Core%20Inflation%20Rate%20in%20Kazakhstan,percent%20in%20July%20of%202003.
4. https://www.ceicdata.com/en/indicator/kazakhstan/short-term-interest-rate#:~:text=The%20cash%20rate%20(Policy%20Rate,%2FUSD)%20in%20Dec%202022.

• Annual report 2021
  • “Investment properties are properties held to earn rentals and/or for capital appreciation (including property under construction for such purposes).” Why are they investing in properties? But can’t find anything in the balance sheet about it.
• https://www.pwc.com/kz/en/pwc-news/what-new/talk-with-interesting-people.html
  • “Our mission is to improve the lives of our valued clients, create innovative services and products. The most important thing for our entire team was to build a corporate culture that is focused on creating amazing, innovative services of unparalleled quality for our clients.
    We have always wanted to create a company with perfect service quality, continually innovating and pushing boundaries. This is our main competitive advantage.
    We have very high client satisfaction and loyalty levels around 90 whereas e commerce stores globally have an average of about 40. This high loyalty is achieved through impeccable quality and continuous improvement. We never give up and believe in perfectionism.” – Mikhail Lomtadze
  • “We can make mistakes. But we know how to quickly correct our mistakes and make improvements. I don’t remember firing an employee because of a mistake. A person who does not make mistakes does not learn anything.”
• Some suspicion: https://cbw.ge/business/secret-of-2-billion-what-caused-the-success-of-kazakh-kaspi-at-lse-run-by-mikheil-lomtadze & https://www.forbes.com/sites/daviddawkins/2020/11/25/the-two-billion-dollar-mystery-behind-the-ownership-of-london-listed-kazakh-fintech-kaspi/?sh=7e45761b4a39
  • It is unclear how Lomtadze exactly got his large stake in the company. It took more than a decade to formalize their shareholder agreement and Lomtadze declared that it was made formal at the very last moment before the IPO because the relationship between him and Kim was one of “complete trust and chemistry”.
• https://kazakhvalueinvestor.substack.com/p/kaspikz-lsekspi

Advertisement