TIP829: Kaspi Stock ($KSPI): The Cheapest E-Commerce Monopoly in the World w/ Daniel Mahncke and Shawn O'Malley

15:55Shawn O’Malley:And that's a bit of selling pressure, obviously, on the stock. I mean, again, he owns 20 % of the company, but I don't really take it as a bad sign beyond the fact that there's selling pressure, especially since Mikael kind of continues to buy shares. And we'll probably also talk about it later in the episode, but there are quite sizable investors that are invested and also Tencent, for example, coming in, buying some of those shares. And I can also say there's good news on the SBC stock-based compensation front as well. While most of the US listed tech companies that we look at have quite sizable stock-based compensation, which is never a good thing for us to see, Caspi has less than 0.5 % of revenue in stock-based comps.

16:33Shawn O’Malley:And so basically, if you would look at the share count, it's completely flat over time, and they don't need to spend a lot of money on buybacks to keep it that way, which is also kind of good because sometimes you look at companies and they have high SPC, but they also buyback stock. So the share count doesn't move. But in the end, it actually means that you as a shareholder are paying for that because instead of giving money back to shareholders, they're spending the money on burning issued shares in the first place.

16:58Daniel Mahncke:How about we take a deeper look into the business ecosystem here? Because Caspi's got a lot going on. There's going to be a lot of different things for us to try and wrap our head around today. And you already mentioned some of the features, but that term super app is definitely thrown around in Caspi's context. And as someone who hasn't experienced one yet, we don't really have these super apps in the US in the way that people in Asia would think about it. I definitely want to better understand what that actually means. And so I recently asked you whether you had heard of a company, Rappi, which is an upcoming South American super app.

17:31Daniel Mahncke:And your response is that you don't fully understand how this will become a super app, given that e-commerce, payments, ride sharing, and many other things already have local champions, with the point being they're going to have to conquer a lot of verticals before they can accomplish their goal of being a super app. So maybe you can speak more to that.

17:52Shawn O’Malley:And to be sure, before I get flamed in the comments, I don't know the company quite well. You asked me about it and, you know, sort of I heard about it, which wasn't the case. And I think it's just that the term is so overused by now, because just because you play in different verticals, it doesn't necessarily make you a super app. I mean, Caspi is one, in my opinion, because the three major business units, the major businesses that it operates are all market leaders by a wide margin. And, you know, if they would be standalone businesses by itself, they would be monopolies. So for context, more than 70 % of Kazakhstan's population actively uses Caspi.

18:24Shawn O’Malley:And when I say they actively use it, that means they interact with the app more than 77 times a month. So if you compare that to international players, or maybe the Western equivalents, and sometimes that's not the most accurate thing you can do. But if you would do it, I would say that Caspi kind of looks on the payments front, like Visa plus Square. On the marketplace, you could probably compare it to Amazon and also eBay to some extent. And then on the fintech side, it's something like a SoFi plus a firm. So in the West, just by naming all of these companies, you can kind of get the idea that it's pretty much unthinkable, that there's just one company that covers all of them.

19:00Shawn O’Malley:But in this country, Kazoxan, which again, still has 20 million people, that pretty much all is one app.

19:05Daniel Mahncke:It's really incredible. And if we just take them one at a time, perhaps we start with my favorite area, payments, which I say sarcastically. I have historically not been known for enjoying the complexity of payments businesses, or at least I find them to be complex. But it makes sense since Caspi started as a bank for us to look at this payment side of things. So I assume that that was sort of the foundation and everything else followed?

19:32Shawn O’Malley:Yep, that's how it is. I mean, they currently run about 18 million transactions a day. Of course, your payments at merchants, peer-to-peer transactions, bill pay, and then also some B2B transactions. So the total volume is about$100 billion last year. And the best thing is that this business unit is certainly what drives the margin. So it's responsible for only 16 % of revenue, but about 40 % of net income. So if you do the math, that's higher than 65 % as net income margin, which is just incredible.

20:02Daniel Mahncke:More than 65%. I think that's higher than visas, which speaks to really the quality of the business here. And with a number that high, though. I do wonder if that's going to be sustainable long-term, either due to competition or government intervention.

20:16Shawn O’Malley:It actually is higher than Visa and I checked it before, but I think the reason is that Caspi owns the entire payment ecosystem. So I don't want to get into the details to then bore you, but let's say when you scan a QR code at a merchant or let's say a cafe, for example, the money would go straight from your Caspi account to the merchant's Caspi account. And that basically means there's no middleman. It's all about Caspi's own rails. And that's obviously where usually Visa or MasterCard would take these interchange fees in the middle, but because that's not the case and there is no middleman, that means there's a whole lot of margin for Caspi to ask.

20:47Shawn O’Malley:So every merchant who sets up a QR code and every person who pays their bill in the app is almost pure profit for Caspi because again, processing one more transaction costs them pretty much nothing and there is no middleman to take a card. And the newest product in the payment ecosystem is also kind of crazy. And it's kind of making me wonder sometimes how far ahead some countries are in regards to their tech. And I know it's not politically correct, but sometimes you feel that you're sitting here in Germany and you should, in theory, go into a shop and should pay with the newest thing out there.

21:16Shawn O’Malley:But then you learn that in Kazakhstan, Caspi has just dropped a product, which is called Alacran. And it's basically a pay by palm ecosystem or system basically. So you can just scan your hand and that's it. And half a million people already signed up in the first 90 days. And now that I'm talking about it. I think a while back, perhaps it was when we covered Amazon, you talked about a similar technology and I think it was in Whole Foods. Isn't it right? Or maybe I just mix it up.

21:42Daniel Mahncke:Well, I think they were ahead of their time because it doesn't seem like it really caught on. I thought it was the coolest thing ever. I saw this like palm scan technology at the self checkout for Whole Foods. And then I finally set it up and I was like, there's no way this is going to work or it's not going to scan my hand properly. Or, you know, sometimes when you're checking out with groceries, you're like, I don't want to sit here and spend five minutes setting up an account. I just want to pack my groceries and go. And I finally did. It was pretty easy to set up. And it is incredible. I found myself, my wife used to tease me and say that I would go to Whole Foods to shop just so I could scan my hand at checkout because I thought it was so cool.

22:17Daniel Mahncke:But unfortunately, I think Amazon is fading them out. So that technology, at least in this case, hasn't caught on in the US for whatever reason. And so going to Caspi's marketplace though, in one of our more recent calls in our TIP mastermind community, you talked about the concept of the e-commerce ladder. And so maybe you can elaborate a bit more on that concept and tell us where you see Caspi's marketplace fitting in and what that means for the moat and economics in the business? Yeah.

22:49Shawn O’Malley:So the general idea is to categorize e-commerce companies into three buckets, or you could also say levels. On level one, you have companies that are in the early e-commerce stages. So they're basically offering more low quality products. Oftentimes that means they're unbranded and potentially clothing, for example. Usually also have a pretty slow logistics network that is mostly covered through third-party carriers. And there's no ecosystem surrounding the e-commerce operation yet. So you don't have payments, you don't have your own logistics network. It's pretty much just the e-commerce side.

23:20Shawn O’Malley:And then you kind of try to figure out how to get the product to the customer. So a company on that level is, for example, TikTok Shop, and perhaps also to some extent, Pinduoduo, but that kind of depends on how you look at it. There's certainly also an argument to make that Pinduoduo might be closer to level two. Let's take a quick break and hear from today's sponsors.

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27:06Shawn O’Malley:Right. I mean, to some extent, at least in the long run, you do want to move up the ladder and basically create an ecosystem around the marketplace, because obviously that's where you build a mode and that's also where you make most of your margin. But you are right that level one companies are important because they serve customers who otherwise just wouldn't be able to participate in e-commerce at all. And that can also be quite profitable as well. The only problem is that obviously the barriers to entry by level one are not that high. So, you know, mostly your margin gets competed away over time, which is why you want to move upwards the ladder.

27:38Shawn O’Malley:And the customers mostly live in these tier two or tier three cities. And obviously they prioritize price over convenience and quality. And in part, that's because most purchases on this level one are impulse purchases. So simply because level one marketplaces are built to evoke such purchases. So it's less about the customer generally and more about what the marketplace is incentivizing you to do. And if you buy something that you didn't even know you wanted two minutes ago, you also tend to not care too much about if it takes a bit longer for that product to arrive, because essentially it's not a good that you need for everyday life.

28:14Shawn O’Malley:And then companies on level three are basically the exact opposite. So their customers have a clear purchase intent when they visit the platform. And that's why you expect high quality products and also fast delivery. And in exchange, prices can obviously be higher. And most often customers are also willing to pay for, for example, faster shipping, even if that happens through a subscription like Prime, because obviously nobody likes to pay extra for shipping, but still in theory, they're doing it.

28:41Daniel Mahncke:and judged by caspy's ecosystem i think it's fair to say that they're level three e-commerce players is that right yeah i mean i would certainly categorize them as level three

28:51Shawn O’Malley:although it's quite interesting because caspy's ecosystem is obviously incredible and you have them at the highest level judged by the flywheel and the mode but usually level three e-commerce companies have spent billions of dollars on their logistics flywheel of course to you know have only the best product and especially make sure that you deliver them fast. Melly, for example, has dozens of massive logistics centers. They have thousands of delivery vans. And as you also know, they have their own fleet of airplanes. Caspi, on the other hand, still relies on asset-light third-party logistics networks.

29:25Shawn O’Malley:So the deliveries go through a network of, I think it's more than 10 ,000 so-called self-service parcel lockers. They call them postal mats. And this is quite fast and effective. I mean, 84 % of orders ship free and about half of them show up in under 48 hours. So that's pretty comparable to, for example, Melly or C-limited, but it's also quite easy to copy. And so actually this kind of reminds me of a manga quote. I think he once said that the young man knows the rules and the old man knows the exceptions. And usually I would look at Caspi's asset light logistics network and say, well, that's certainly a weakness.

30:00Shawn O’Malley:But then you have to consider all of the other parts of the ecosystem and the benefits that come from that and just sort of the ridiculous customer lock-in that all of that creates. And when you do that, you sort of realize that the model works perfectly fine for them, at least in their home market.

30:16Daniel Mahncke:Daniel, I think you're dating yourself with that quote there because Munger made it when he was probably 60 years older than we are. So I'm not sure how helpful it is.

30:25Shawn O’Malley:Well, I think that's fair. And to be completely honest, when I looked up the speech where Munger said this, I actually thought the quote went, the smart man knows the rules and the wise man knows the exception. So that would have made us wise men. Unfortunately, now it doesn't fit that well anymore. And I actually believe that there's probably a pretty good chance that I publicly, at some point, misquoted Munger a handful of times on that quote. But getting back to Cusby's marketplace, it is responsible for about 47 % of revenue and 26 % of net income. And the gross merchandise value, or often called GMB, is surprisingly low, actually at 19 billion.

30:57Shawn O’Malley:And that also includes what we will still talk about later, which is an acquisition of a Turkish e-commerce company, which is called Hespi, which is at a GMV of about four to five billion. So if you would basically deduct that from the GMV of only the Kazakhstan home market, you would only get 14 billion in GMV. But then again, we also talk about the dominant player in Kazakhstan. It's not South America, it's not Brazil, it's not Europe, and certainly also not the US.

31:23Daniel Mahncke:How does the take rate look here? I mean, when I look at the ecosystem, Caspi looks pretty mature in terms of all the verticals that it's expanded into, but it's still growing fast in many of these business units. So it is more like a MercadoLibre or a Shopee, which is a subsidiary of C Limited. Or does the company look more like Amazon in the US where you have better take rates, but lower growth.

31:51Shawn O’Malley:It's sort of in between as some business units are more mature and payments is such an example, while others are still in the relatively early stages. So e-commerce is probably the one that I would categorize as being closer to Melly or Shopee. Amazon's All Integrate, for example, is in the 30 to 40 % range. So they pull about 30 to 40 cents of revenue from every dollar that goes across the platform. And that's slightly more when you add the advertising and also the logistics business or basically delivery to it. And Caspi's take rate on the marketplace alone is 12%. And then when you add delivery and also ads to that, you would get to about 16%.

32:26Shawn O’Malley:So it's not very low, but it's also certainly not where Amazon is. And in part that's due to the geography, but also considering it's a monopoly in Kazakhstan, you could imagine that this gap will probably close over time. That's mostly about how quickly can they scale up the ads and the logistics business. And Pure Sales Commission, I think we talked about that also in some of the other episodes, they're more or less the same. And you kind of don't want to push your merchants to pay more money without actually giving more value to them. So that's why you usually don't try to expand your take rate on just pushing up the seller fee.

33:01Shawn O’Malley:And what you do instead usually is you have more advertising opportunities, which is obviously delivering value for the merchant because they can get their product before more eyes on the marketplace. or you build the logistics network and you charge for delivery, which once again, it's a good customer experience. And that's why it also benefits the merchant. So you basically increase the takeaway by charging those fees only if you add value. So if you would look at the advertising product of Caspi, which is the on-platform promoted listings and certainly the highest margin, it is actually going at over 70 % a year.

33:32Shawn O’Malley:So there's certainly a long way to go for it. I think it's about 7 % of merchants that is still today part of the advertising business. So There's plenty of opportunity for further growth and also margin expansion.

33:44Daniel Mahncke:The great thing to me is that we don't really have to guess and try to figure out if the business model will work, right? The advertising business works with pretty much every dominant e-commerce platform we've seen. And so there's really no reason to believe that it shouldn't work with Caspi.

34:00Shawn O’Malley:Right. It's pretty much a proven model that just needs time to grow. But I do see it as having a high likelihood of succeeding, obviously. I mean, delivery is somewhat different. Again, Caspi is special because it's the only level three e-commerce company that I haven't seen with a major logistic network. And the fact that it relies to a large extent, at least on these third-party carriers and the self-parcel lockers, it's not only quite unique, but it's also obviously kind of setting a ceiling for how much you can charge for delivery. Because if you are not a huge part of the ecosystem that actually delivers the parcel from your warehouse to the doorstep, you cannot really charge the same amount of money that Amazon and maybe in the future also, Melly will be able to charge.

34:41Shawn O’Malley:And I should say that Caspi is already monetizing it. So in the beginning, I thought they don't make any money from it, which is not true. They do have a take rate on delivery as well. But again, the ceiling on the take rate that it can achieve there is not comparable to what Amazon or Melly can take in the long run.

34:56Daniel Mahncke:To be fair, Caspi is making its margin with the financing and fintech business, which is much more mature and profitable than Melly's fintech and lending business today. Yeah, that's right. Okay. So speaking about the finance and fintech business, what should we know about that? Any color you can paint there?

35:16Shawn O’Malley:Yeah, I feel that I have to go into much detail again, because obviously it's a great comparison for both Melly and also C Limited, which is also its own payment arm or fintech arm by now. And maybe first I start by saying that fintech is about 38 % revenue and 33 % of net income. So about a third of the business, both in terms of revenue, as well as in terms of net income. And that's generated on about$24 billion of lending last year, because mainly for products. You obviously got the buy now, pay later at checkout, which is what you see with every single marketplace out there. Then you have more regular consumer loans.

35:49Shawn O’Malley:Then you have financing for merchants and small businesses. And then you also have car loans. And I wasn't surprised to see that Caspi has a relatively cheap funding source too, because obviously it was a bank when it started out. So Melly and C are still kind of trying to set up customer deposits at scale to fund the credit book through that because it's just way cheaper than actually getting other funding sources. Caspi already has over 6 million customers with deposits totaling about$14 billion. And those deposits then again fund the loan book. The strong thing about Caspi's loan book is that it's based on data that makes even Melly's data.

36:23Shawn O’Malley:And, you know, it's not easy for me to say that look quite bad. I mean, as a super app, they obviously know everything about the customers. And by the time someone applies for a loan, Caspi knows about their income because, you know, obviously their salary lands in their Caspi account, knows their spending because they use Caspi Pay dozens of times a month. It knows whether they actually pay things back because it's watched them on past Caspi loans. And they even have all sorts of government service activities. So they approve 99.9 % of applications automatically, no person involved in under six seconds.

36:54Shawn O’Malley:And you can also see that in the NPLs, which is a metric that we always look at and standing for non-performing loans. So despite still growing the loan book or the portfolio by over 20 % a year, NPLs hit at only 6%. And that's pretty much the same level as Nubank. And it's about 10 percentage points lower than MercadoLibre.

37:12Daniel Mahncke:One thing that I do see the data though, is that their NPL coverage is below 100%. And for Melly, it's over 150 % for contacts. So is that a risk that concerns you here?

37:24Shawn O’Malley:Yeah, when I first looked at it, I thought it was a bit weird. I think it was back in Malta when I was visiting one of our Mastermind members. And we talked a bit about Caspi and he talked about the company and I was looking it up just at a first glance. And I looked at the numbers and I kind of didn't know why that was happening. So as a quick explanation, NPL coverage is the ratio of provisions. So basically money set aside for expected losses to the NPL balance. So 78 % coverage means that for every dollar of 90 day overdue loans, Caspi holds about 78 cents of provisions against it. Intuitively, you would say, well, that's 22 cents short at least.

37:59Shawn O’Malley:But it also depends on what the lender expects to recover on the non-performing loan. So a secured loan, for example, doesn't need 100 % coverage since you can recover a large chunk of the loan. So car loans, for example, right? You still have the car even if the borrower can't pay. So then you recover a lot of that loan. So my second thought then was to just check the credit mix shift and kind of see what percentage of the loans were actually securitized or backed by an asset. But it turned out it wasn't a lot. It was kind of comparable to Mally. So that was kind of surprising to me because that obviously makes the lending business pretty risky.

38:33Shawn O’Malley:And that's not the impression I had from the management team. I didn't think that's how they operate. But then I looked at the so-called LDG ratio, the loss given default. And it turns out that Caspi does recover significantly more or a larger chunk of an unsecured loan than most other companies, despite it not being asset-backed. And the reason is that it has, again, the best data and also just an uncomparable market position. So since Caspi knows everything about you, they know when money is coming in and also how much. And since Caspi is pretty much vital to almost every person living in Kazakhstan, they just can't afford to lose access.

39:09Shawn O’Malley:So Caspi recovers many loans, even after the 90 days, when most other companies, including Melly and C-Limited can't even dream of getting their money back anymore.

39:18Daniel Mahncke:Well, that's pretty cool, actually, and potentially something we can hope for with Melly at some point. And with both Melly and C-Limited, we discuss the importance of increasing order frequency and order quality to improve their data. And as you said, Caspi can work with data from 77 transactions a month per user, which is just absurd.

39:40Shawn O’Malley:Yeah, it's about, if I do the quick math, about two and a half transactions per day, which I don't know. It's kind of insane. I mean, the average American uses their debit card about 25 times a month, though I could imagine it might be a bit more for you, but Caspi's users are transacting three times as often. And even the government services add this new layer of stickiness. Over 12 million people pull up official documents through Caspi. And while Caspi makes no money on that, at least directly, it sort of builds engagement and trust that strengthens the rest of the ecosystem. So for example, thinking back to COVID, when the government picked Caspi to hand out pandemic relief, that certainly was a way better ad campaign than you could have ever paid for.

40:21Daniel Mahncke:Or you get me wrong, Daniel, is that I don't use a debit card. I only use credit cards. Got to get those cash back in points, right? But anyways, is there also a messaging app or something similar that's integrated for Caspi, right? I mean, WeChat is arguably the biggest super app in the world, even if it's not well known to North Americans. And it started by running the most dominant messaging platform, and then they built into different verticals from there. And one of the advantages of starting with messaging is that it comes with huge network effect benefits that you can then roll into these other types of businesses.

41:00Shawn O’Malley:Well, maybe we've now found the one weakness for why we should also call Caspi not a super app, because no, they don't have one. They are active on pretty much all the verticals that you could think about, but not in messaging. And as far as I know, I think WhatsApp is the dominant messaging app in Kazakhstan. And the network effects of Caspi, therefore, mainly come from its two-sided marketplace and its scale, which I think a lot of our portfolio companies benefit from. So it's not like we underestimate the scale and the network effects that two-sided marketplaces benefit from. And Caspi, again, facilitates about 18 million transactions a day with over 14 and a half million payment users and more than 750 ,000 merchants.

41:37Shawn O’Malley:And again, we're not talking about the US here, it's still Kazakhstan. So you have this typical market and fintech flywheel, which is incredibly strong. So more consumers pull in more merchants, more merchants mean better selection and also better prices and more purchases mean more data, better data means better credit, cheaper credit means more buying. It's the same kind of flywheel that we talked about with all of these companies. And any new entrant would have to reach basically critical mass on both sides of the marketplace, which you and I know that best, is nearly impossible. Not only because it's incredibly difficult to do generally, it's even more impossible if you already have an incumbent like Caspi, the scale, and probably also the political connections in Kazakhstan.

42:18Daniel Mahncke:One of the major differences between the old incumbents and these new tech-first companies is that they seem to always be on the lookout for upcoming competitors to not fall prey to the innovators dilemma. And so that's something we see worldwide. It doesn't matter whether it's with MercadoLibre, Alibaba, Coupang, Shopee, Amazon, or the other big tech companies in the US, all of them have won their market by disrupting old legacy players and then have maintained that market share and expanded into new verticals by being hyper-focused on not allowing the same thing to happen to them. And so that's essentially their rationale behind spending hundreds of billions of dollars on AI right now, right?

43:00Daniel Mahncke:I mean, this might be the first time a technology has emerged with the potential to disrupt their legacy business models for companies like Amazon and Meta and Alphabet. So they have to front run it and ensure that they dominate on all things AI so no other company can take their place and turn them into one of the negative outcomes of the innovators dilemma. And so if the investments work out, that's great. But even if they don't, that does just really, in other words, mean that they keep their old business models and moats in place because AI doesn't end up being the disruptive force that they feared.

43:39Shawn O’Malley:We spent a lot of hours in the last couple of weeks discussing with some of our mastermind members what it means to have these hundreds of billions of dollars invested in AI and data centers and what it could potentially mean for the future modes of companies like Google. And I guess you can say that it's just sort of justifying today's investments by saying, well, even if you just keep your market position, that's probably worth a lot of money. Because if Google keeps being Google for the next 10 or 20 years, the cash flows they will have are 10 times, 20 times larger than whatever they could spend today on AI and data centers.

44:09Shawn O’Malley:And I mean, even if you look at SpaceX going public at a$2 trillion valuation, that probably means the rules have changed to some extent. I know those are famous last words, but if I look at Google and compare it to SpaceX, I'd much rather go with a company that has already built a mode and is printing cash like there's no tomorrow. I think we're on the same page there.

44:31Daniel Mahncke:And speaking of all the advantages Caspi has due to its monopoly-like position, I do want to bring up the topic of what their local competition, if any, looks like. And at the beginning of today's episode, I was a bit surprised when you said that there is actually a local competitor that is the biggest bank in the country. That seems pretty antithetical to really this whole idea of Caspi being this deeply entrenched potential super app. And I would have thought that Caspi would be at this point considered the largest bank in Kazakhstan. So it's surprising to me that it's not. So how should we think about this dynamic between Caspi and some of the other legacy banks and local competitors and whether they're really much of a threat to Caspi's business at this point.

45:18Shawn O’Malley:Yeah, I think the bank you're referring to is called Halik, and it's a great business as well. It is still, as you said, the biggest financial institution in Kazakhstan, measured by assets, deposits, and also corporate loans. And they earn more than a trillion tang in net income. They run 30 plus return on equity, and they also pay a huge dividend, kind of similar to Caspi. And if I had never heard of Caspi, and I would look at Hollick, and I would say, you know, that's a pretty dominant bank. And just as you said, I probably don't think it's possible to still have the sort of monopoly like position that we described for Caspi.

45:52Shawn O’Malley:But I think the bet that the Hollick bank made was a very different one than Caspi. So for them, it was mainly about banking relationships and the banking business in general. And Caspi back in the early 2000s, really doubled down on the consumer relationship. So we're talking daily payments, we're talking a B2C marketplace, and so on. And it turns out in the long run, with a lot of hindsight bias, the consumer side was the more valuable real estate. I mean, software businesses and banks are also data businesses today. And the data Caspi could gather over all that time is certainly a competitive advantage that's impossible for a normal bank to match, even if you are the biggest bank in the market.

46:31Shawn O’Malley:I think it's always easy now, 20 years later, to look back at how sort of the situation has evolved and say, why didn't Harlech Bank kind of try to go into the same direction? But 20 years ago, few people could imagine how important the consumer side and the data would actually get. Of course, it was obvious that it would play a bigger role than in the past, but very few people knew how it would actually play out. And one thing I noticed when I listened to Caspi's CEO is just how focused he is on the customer experience. Harlech optimized mostly for banking products. So for them, it was about having, for example, the best credit card.

47:04Shawn O’Malley:And Caspi looked at things through multi-consumer lens. So how can I make the life of a consumer as easy as possible? And initially, that was simplifying finance and payments. But over time, that kind of spilled over to all other parts of life.

47:19Daniel Mahncke:I don't want to throw a wrench in sort of the narrative here, but Harlech has released its own super app, I understand. And so has that taken share from Caspi? I mean, does that complicate the picture that you're painting here?

47:33Shawn O’Malley:Yeah, the super app was called HomeBank and was originally launched in the mid 2000s. So it's not necessarily a new app, but for the longest time, it was just a banking app. And then in 2023, it was basically transformed and started to integrate things like payments, installments, also a marketplace, and also some of the government services that we talked about before, or Caspi. So they basically try to do what Caspi was doing, but they have only about 10 % of market share, for example, on the payments market. And I think they primarily succeeded in cross-selling the app to the bank's customers, which is not a small number of accounts, but it's also not comparable to the reach that Caspi has.

48:11Shawn O’Malley:And Harlech basically handles the majority of Kazakhstan's corporate banking, state pensions, payroll programs, and sort of the government funding account. So pretty much the exact sort of legacy bank that we talked about in the beginning. So just by integrating e-government services and also the e-commerce engine directly into its super app, Harlech has converted a lot of these passive institutional accounts into active digital consumers, but it's a totally different part of the market than what Caspi is trying to capture.

48:41Daniel Mahncke:Well, I think that's the first time I've ever heard anybody say e-government services. We were joking about that earlier, about how Caspi does so many different things. You can do anything with Caspi, and that's part of the value add and probably helps their relationship with regulators. But that does weaken the bull case if other companies are actually able to offer these governmental services too, right? I mean, it's not a totally unique offering that Caspi is able to provide.

49:10Shawn O’Malley:You know, for a second, I thought you were making fun of English being my second language, but saying you never heard e-governance. No, but you're right. I mean, government services run on government rails and they are obviously open to the public. And that means to multiple banks and the Harleck bank is one of them. And there are a few others too. But I think why I think of it as more of a Caspi service is because Caspi is dominating again, the consumer relationships. And it doesn't sound like a huge mode, especially with other banks also opening up super apps, but there's just no reason, in my opinion, for a consumer to actually go and change and basically spend time on another app, because there are just these deeply integrated habits and network effects and all of that stuff.

49:52Shawn O’Malley:And if it's already sitting on Caspi, I just don't see it moving away.

49:56Daniel Mahncke:There are plenty of examples showing how difficult it is to change deeply ingrained consumer habits. And Apple once tried to do peer-to-peer payments on iMessage and on paper that made a whole lot of sense, but it did not gain much traction. I don't know many people who are sending payments over iMessage.

50:15Shawn O’Malley:Another good example was also in our Spotify episode, because you know, I have YouTube premium and it's one of the best decisions in my life. So in theory, I would also not need to pay for Spotify anymore because I can just use YouTube music, but I never do it. And if I ask my friends who also are subscribed to YouTube premium, none of them is using the music feature. So I think there are many reasons for that, But sometimes it's as easy as saying people like to stick with what they know, especially for things that are sort of their daily habits.

50:44Daniel Mahncke:I take it that you don't believe Caspi will have its monopoly status challenged anytime soon. Is that fair?

50:51Shawn O’Malley:That's fair. I think when I said that Pabrai invested in Caspi with the, you know, heads I win, tails I don't lose much philosophy, then Kazakhstan is the tails part of that equation. So highly profitable business with a huge mode, still growing quite fast. And also, you know, the source for sizable dividend. You could also look at Caspi as more of a growth story. And that's mostly coming from an investment made in late 2024 and kind of early 2025. That's when the deal actually closed. And that's when Caspi bought a 65 % stake in one of the leading Turkish e-commerce companies called Hepsi Burrata for$1.1 billion entirely in cash.

51:28Shawn O’Malley:And for context, Hepsi has about 16 to 20 % market share, depending on the data that you look at. And Turkey has 85 million people versus Kazakhstan's 20 million people. So in theory, in one move, Caspi roughly 5X the size of the market it's going after while owning a dominant player in the country.

51:48Daniel Mahncke:And the bullish framing, I would think, is that five times the addressable market and doing so in a country that's structurally and culturally similar to Kazakhstan in some ways makes it a great place to invest with a team that has run a similar playbook before. And yet, on the other hand, I kind of wonder whether the expansion into Turkey suggests the home market is saturated, right? It's more mature. So they're having to look abroad for growth, which comes with pros and cons.

52:15Shawn O’Malley:That's what I thought about as well. I mean, in obviously limited episode, I kind of mentioned how impressive it was by their ability to expand into Brazil with the success that they had. But you also wondered why they don't just double down on Southeast Asia instead of spending billions to be the number two somewhere across the globe. And in Caspi's case, I think the answer is slightly easier. I think they're completely dominating Kazakhstan, but it's also a small market. And while there's still growth potential in many of their business segments, so for example, e-commerce being one of them, the highest margin business undoubtedly is the payment part of the business.

52:51Shawn O’Malley:And the financial and the banking segment are already quite mature. So I think it makes sense to kind of see what market is similar to where we have been successful and then expand over there. Let's take a quick break and hear from today's sponsors.

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56:43Daniel Mahncke:And they seem to have had some early success, talking about Caspi here, right? Purchase activity has increased 19 % in Q4 last year. GMV grew at a low teens rate and revenue has grown in the high teens. And we're also seeing some operating leverage. So there are definitely signs of early traction, even if I'm a little bit skeptical of their likelihood of, you know, having the same level of success that they had in Kazakhstan.

57:10Shawn O’Malley:I think that's fair. And we'll get to some of the reasons. I think what's mainly different is the competition. So Hapsey is again, the number two, but the other big player in Turkey is Trendyol, which is backed by Alibaba. And again, we kind of have to talk about it. It's Southeast Asia and clearly won that battle, but it's sort of not the same. And just as you kind of doubt that the same will happen for Caspi in Turkey. I think the Turkish market is sort of similar in terms of culture, citizens' wealth, and perhaps also demand, but Caspi just won't have some of the very important advantages that it had in its home market.

57:48Shawn O’Malley:It's hard to kind of overstate how important the monopoly-like position is for Caspi. And yes, of course, it didn't start out with it, but as you said, kind of the political environment and also the fact that you had these legacy banks completely miss out on the majority of the population, that sort of was a good playing field for Caspi to get into and then gain market share. And I'm not quite sure it's the same now in Turkey. And another thing that we need to mention is Caspi didn't need the logistical infrastructure because there were no international competitors in Kazakhstan. And now going into Turkey, they sort of have to do that.

58:22Shawn O’Malley:I mean, the monopoly-like position is also why Caspi didn't need the logistical infrastructure of international competitors and why Caspi has some of the best payment data in the world, why they don't have to cover 100 % of the non-performing loans. And I could keep going with this list for hours. My main point is that a lot of the advantages Caspi had in Kazakhstan do not exist for HAPC in Turkey.

58:44Daniel Mahncke:Well, it sounds like neither of us are bullish on the Turkey expansion.

58:49Shawn O’Malley:I think it kind of comes down to how Caspi approaches it and what success would look like in Turkey. I mean, if Caspi is trying to build a similar ecosystem in Turkey through Haspy, I think that would mean a lot of capex and a low chance of success. But if they know they can't replicate that success and instead kind of try to just copy some of the best practices in e-commerce and finance operations, I could see that as a great opportunity that doesn't come at a huge cost. So that would basically mean improving metrics like order value, order frequency, which you just talked about. And on Caspi, customer purchases 27 times per year on average.

59:26Shawn O’Malley:And on Haspy, it's only seven times. So if you think about just the marginal improvements like that, and consider that the Turkish e-commerce market is growing 10 % to 15 % per year in dollar terms, you can see what might be attractive to enter.

59:41Daniel Mahncke:I think I make 27 e-commerce purchases a month, maybe a week. But obviously, just getting back to it here, how much market share does Trendyol have? Because I think you mentioned Hespi has slightly less than 20%. So I expect Trendyol to top that. And do you know how much Trendyol spends annually and what margins they're operating with? sort of a lot of questions, but I do think it's really important to understand the market dynamics here in Turkey for us to really be able to underwrite Caspi with any conviction.

1:00:16Shawn O’Malley:You know, I'm kind of out here trying to impress you with some of the numbers that Caspi is putting up. And then I'm talking to a guy who orders on Amazon every single day and maybe twice. So obviously that's sort of difficult to do, but no, I definitely agree. I mean, it's incredibly important to kind of figure out what game Caspi is playing in Turkey. And I talked to one of our our mastermind members about Caspi recently, because he's a fund manager from Singapore, who has a small position in the company. And we discussed, you know, how we thought about the investment thesis and also the expansion into Turkey.

1:00:46Shawn O’Malley:And he kind of liked the optionality, but we also agreed that it is a very different market and that understanding how it works, and especially the competitive environment, is just crucial for the thesis. And getting back to your question about, you know, how much money are they spending? Since Alibaba owns about 85 % of Trendyol, we only get the numbers that Alibaba is giving to us on their Turkish operation. And they kind of lump it into this international commerce arm, which had an adjusted EBITDA loss of about$2 billion last year. And the majority of that is supposedly coming from cross-border operations.

1:01:19Shawn O’Malley:So Alibaba is saying that Trendyol itself improved profitability. However, that doesn't really tell us whether they are actually profitable or just came a bit closer in terms of improving profitability. So HASPY, on the other hand, was already profitable when Caspi bought it, operating at an EBITDA to GMV margin of about 2.5%, which doesn't sound that high. But if you compare that to most other marketplaces, it's not that bad. And this certainly has come down over the last few quarters to about only 0.5 % of a margin, which certainly is significantly lower. But that's mostly due to the investments made by Caspi.

1:01:54Shawn O’Malley:So the goal seems to be to not operate at a loss, which proves to me that Mikael kind of doesn't plan to burn money here and gain market share just for the sake of it.

1:02:05Daniel Mahncke:Well, I guess my problem would be that I can't see Hespy taking Trendyall's number one spot. I know that C-Limited did it in their home market, but the difference, as you just kind of said, is that they played on their home turf. They had to fight to win no matter the cost. And with Caspi, we sort of are trying to get the best of both worlds, right? We don't want them to spend ridiculously on the Turkey expansion. But then at the same time, they also have to beat out the local competitors to win market share at the same time. And that is going to require aggressive investment.

1:02:36Shawn O’Malley:This debate is going to remind me of a quote. As you know, I just recently visited Stick, our boss and the CEO of TIP in Aarhus. And it's somewhat of an annual tradition at this point. One thing that he repeatedly said was, you can have anything, but not everything. And there's a cost to everything. That's basically what it means, right? And oftentimes, it's sort of an opportunity cost. And in Caspi's case, I would like to buy a high margin monopoly in Kazakhstan that pays, let's say, a high single digit dividend and also get the upside of having Turkey work out. And the problem is that for Turkey to play out, Caspi needs to spend the money to make with the operations in Kazakhstan.

1:03:15Shawn O’Malley:So the risk sort of is that you make good money and then you throw it off the bat in Turkey. And when I talked to Caspi investors, I sort of hoped they would tell me that their thesis is about Kazakhstan and that Turkey is just this call option that we keep talking about. But it seems to me that most see Turkey as kind of the key part of the thesis. And I'm just not sure I want to bet on the number two e-commerce player in Turkey.

1:03:38Daniel Mahncke:You just mentioned that the dividend is a relatively large part of your thesis. And we don't actually talk about dividends a lot on this show. We've covered a lot of companies. We spend much more time on share buybacks and stock-based comp and a lot less time on dividends. And so perhaps you can give some background on the dividend history and whether you expect the dividend to be a priority going forward for this company. And the reason I bring it up now is because in emerging markets and in frontier markets, a healthy dividend can actually be a sign that the cash is really there, right? There isn't any fraud occurring, which can be hard to verify at a distance, especially an economy that historically has had a lot of trouble with corruption and money laundering and, let's say, nefarious accounting.

1:04:27Daniel Mahncke:And I don't want to imply that I think necessarily anything bad is happening at Caspi at the moment, because I just don't know. But the dividend was suspended last year when Caspi bought Hespi. So that's something to think about. I don't necessarily know, again, whether that spells a doom or anything nefarious, but suspension of the dividend, there could be a good reason for it, right? The acquisition would justify it. But again, it's something that we want to make sure we understand. And one other quick thought is that with COPA, you mentioned that you expect the dividend to be paid out long-term because that's how the management team makes its money.

1:05:05Daniel Mahncke:And based on the insider ownership of Caspi's founders, I would imagine that there's a similar case here too, right? Where they have a strong incentive to pay a dividend out to all shareholders because they want to collect cash dividends from their own ownership stakes in the business.

1:05:20Shawn O’Malley:And that's how I think about it. And that's sort of your margin of safety that you have on the dividend part of the thesis. So that as long as the founders get paid through dividends, I expect them to be a priority just because that's the way they're getting paid. And there's actually an interesting and perhaps somewhat controversial story here. I don't know if it adds to your suspicion about the company and CEOs in that region or not, but Mikael actually has a hobby that I personally quite like, but it's also quite expensive. And in 2024, he bought the English League One football club, Wacom Wanderers.

1:05:54Shawn O’Malley:And I should say that League One kind of sounds like the first league. It's actually the third league. So it's not that high up. So it probably wasn't too expensive. And he did buy them from American owners, which I kind of need to figure out because fortunately, even Sean is now in somewhat of a football mood watching the World Cup here and there, which kind of makes me a bit proud because I was certainly a hope to be part of the reason for that. But anyway, even that one club was not enough for him. He also bought a club in the Kazakh Premier League a year later. And in an interview, he basically said that he has this goal of establishing an integrated youth academy between Kazakhstan and England.

1:06:28Shawn O’Malley:And again, as a football fan, I'm kind of biased to like him even more for that. But also as an investor, I'm kind of wondering whether Caspi pays dividends because the controlling shareholder needs cash for his, let's call it, love for football.

1:06:44Daniel Mahncke:A football habit. It's not such a bad thing. Help out with the dividend part of your thesis, right? Because he would need cash to keep funding these acquisitions.

1:06:53Shawn O’Malley:That's true. At first glance, it's probably a good thing, but he also wouldn't be the first billionaire who suddenly loses interest in owning a club. And if he loses interest and doesn't need the money anymore, in theory, he also doesn't need the dividend anymore. So again, I'm kind of feel like I just fabricating bearish views here because we talked so much about how great the company is. I do generally have a good feeling about the CEO and how he thinks about both the company, but also about tweeting shareholders. And since you don't have any stock-based comp, it's not like you're being diluted if they pay a dividend instead of buying back shares, which again, you mentioned, we kind of usually like to see.

1:07:26Shawn O’Malley:Plus that's also a suboptimal way to stop dilution. Because again, I mentioned it basically just taking cash out of the business to pay back the dilution part of the business, which in general just means, hey, that's cash that you and I don't get as shareholders. So it's not really a much better way to pay back shareholders, but I'm somewhat going on a tangent here.

1:07:46Daniel Mahncke:Well, look, we're talking about Central Asian, former Soviet Republic. So I think at some point we need to talk about the macro here and make sure we understand how geopolitical and currency and all these types of risks that are really beyond our control factor into the thesis today. And there definitely is macro risk involved, right? I mean, currency debasement is a real concern. You've got a legacy of governmental corruption, ties to Russia, which is problematic for us as American and Western European investors. And then you've even had coups in recent history where you've had attempts at overthrowing the government.

1:08:26Daniel Mahncke:And so if we could only bet in isolation on a stable dividend, 10 % earnings per share growth, and have this call option on growth in Turkey, Caspi would absolutely be a no-brainer. This would be like at the current valuation, dump everything you have into Caspi. But the problem is that's not the entire context. You have these other macro risks. And so really, the thing that gives me pause here and the reason that this company trades at seven or eight times earnings is because of the macro and political risks.

1:08:57Shawn O’Malley:I guess I can only invoke Sticky again, saying you can have anything, but not everything. And in this case, you have a company trading at seven times earnings because of everything that you mentioned. And I think the first thing that we should talk about macro-wise is the currency. So Caspian's everything in Kazakhstan, Tang, but you and I would own it in dollars, obviously, since we would buy the stock trading on the NASDAQ and the dividend would also get paid to us in dollars as well. So it's only one thing how the business does in its local currency and another what the local currency is worth if you actually look at it in dollar terms.

1:09:30Shawn O’Malley:So Caspi could have a great year in local terms and you could still be down as an investor if you invested through dollars. So we have that problem with Nubank and Mali too. But this time, the risk is pretty much amplified since Kazakhstan and therefore also the local currency, the tank, are a lot more concentrated. And Kazakhstan's economy is heavily export-oriented. And the main export product is crude oil. So the strength of the currency basically depends entirely on the oil price.

1:09:59Daniel Mahncke:It's sort of similar to the problem we had with Copa, which is an airline and their reliance on jet fuel prices. And in this case, the impact is more long-term and also more difficult to figure out. For example, you would think that with oil prices being relatively high at the moment due to ongoing conflicts in the Middle East, you'd think that would be good for Kazakhstan because it means they'll get more money from oil exports, which should then also support the Tang as a currency. However, the general instability and volatility of oil hurts other parts of the economy, right? Very high oil prices, for example, fuels inflation up and down the supply chain and consumer prices, which then means that the central bank has to step in and raise interest rates.

1:10:49Daniel Mahncke:And that can, again, ripple across the economy and cause deceleration and growth. And that just means there's a lot of very nuanced interrelated dynamics for us to consider. Unfortunately, it's not as simple as just to say, oil goes up, Kazakhstan's currency appreciates. The relation is much more complicated.

1:11:11Shawn O’Malley:I guess the best thing for Kazakhstan would actually to just have a relatively stable oil market at at least a reasonable price. So perhaps oil trading in the$70 range. So you could have expected the local currency to rise after the war driven by higher oil prices. However, the tank's actually been pretty firm, sitting around 490 compared to the dollar. And it's even a touch stronger than it was a year ago. And the reason for that, and you kind of alluded to it, is mostly that the central bank has raised the base rate to 18%, which makes holding in local currency attractive. So the currency has been propped up by higher rates, which is sort of also part of oil going up lately, just because they have all of these interconnections going on in the markets.

1:11:55Shawn O’Malley:And I think the main risk I see long-term still is not necessarily that oil is higher than it should be. It's a perfect world for Caspian, Kazakhstan, but the real risk is just that it's at a sustained low level environment. So that would put long-term pressure, obviously, on the local currency. And the Halux Bank is actually looking for 600 plus to the dollar by the end of next year on lower oil and the government cutting those national fund transfers. So even with oil doing okay right now and the currency being sort of firm, the medium-term outlook is a weaker tank. And that obviously is a sort of headwind for Caspi.

1:12:31Daniel Mahncke:Yeah, that's just the thing that gets me about Caspi. I mean, the business is not an oil business at all. It's really a payments and software business and a data business. But you can't escape the currency headwind and the tie to oil when most of their earnings are being generated in Kazakhstan's local currency. And it's certainly above my pay grade to figure out where oil prices are going to be in the coming years. And nobody really knows the answer to that. And yet, that is going to materially impact the returns that we receive in US dollar terms, really irrespective of the underlying business's performance.

1:13:13Shawn O’Malley:You certainly have to debate it whenever you look at these emerging market companies. But sometimes I just like to simplify and look at the past and see how it is done. And to be fair to Caspi, they grew their revenue at a CAG of over 30 % in the last decade in dollar terms. So that's important, not local currency. The operating profits were growing even faster at 36 % and net income at over 60%. And again, all of that is in dollar terms. So you are accounting for the local currency$2 losses, and it's basically the amount of money or the growth that you would have gotten as an investor in the dollar.

1:13:47Shawn O’Malley:So it's a headwind that they faced for the longest time, and it has not diminished your returns in any meaningful way.

1:13:55Daniel Mahncke:Well, related to that, but even bigger picture, what do we think about the geography, right? I mean, Kazakhstan is sitting right at the border of Russia and China.

1:14:05Shawn O’Malley:You know, this is, I think, the part of the thesis where I'm getting grilled. I mean, we're going from oil prices to bordering Russia and China. And to be honest, I kind of saw myself doing some research into how capable Kazakhstan's defense would be in a scenario, for example, a Russian attack. And while doing that, I kind of just stopped and asked myself, well, what does it say about the margin of safety of this investment when I suddenly have to transition or, you know, kind of pretend to be a military expert, which, you know, I'm obviously, I'm not to the surprise of not that many people. And obviously could pretend that, you know, I have sort of an idea of how the relationship between Russia and China actually work.

1:14:41Shawn O’Malley:But that would obviously only me, you know, speculating about something that I simply don't understand. And I think the only thing I can say is that it seems like Kazakhstan knows how to balance its geographical and, you know, political position in the region. I mean, they did maintain functional relationships with Russia and China and the US and Europe simultaneously, and also still attracted a lot of foreign investment from all of them, which is quite important because, for example, you can build the infrastructure that you need for the oil transports, which we're kind of getting to, because I think the biggest risk is not necessarily whether Kazakhstan will get into any conflict itself, but mostly how other conflicts will impact it.

1:15:22Shawn O’Malley:I mean, Kazakhstan's oil mostly has to physically transit out through pipelines that, for example, go through Russia. And if you would imagine that there's disruption, so that could be sanctions, it could be the war on the Ukraine having an impact on the logistics, or it could even be the Iran situation, you know, some way, shape or form disrupting the regional transport. All of that could sort of bottleneck the export of oil from Kazakhstan. All of these things are just, you know, things that pretty much are known unknowns to me. I just don't know how to account for that.

1:15:54Daniel Mahncke:Caspi could do everything right. And the stock could sell off dramatically in US dollar terms because of something like you said, where there's some sort of bottleneck in oil exports, and the currency just collapses, and your returns fall off dramatically. That is something that truly can happen here. And so that's why you have that PE of seven. And it might look like a bargain, But in reality, it is also just a very large margin of safety accounting for all the unknowns and things that are beyond Caspi's control, right? If this same business was doing just as well in the US or Western Europe, it might be at 20 or 30 times earnings.

1:16:38Daniel Mahncke:And so the fact that it trades at less than 10 times earnings, again, is just that margin of safety reflecting the higher degree of uncertainty and the fact that a number of risks are out of their control, but also very directly hurt the business or could hurt the business to a significant degree. So as the last question on all this, what are your thoughts on the Russia connection specifically? Because I know that's been the center of some criticism and short reports and some speculation that Caspi has been helping launder money for people in Russia and has ties to the Russian government. Obviously, that again, would be problematic for us as US and European investors, where there are very strict sanctions on Russian assets and businesses with connections to Russia.

1:17:30Daniel Mahncke:So how do you think about that here with Caspi and the risks that we would be introducing to our portfolio if we were to actually put real capital into it?

1:17:40Shawn O’Malley:I think I talked to you before we started this episode, and I said that basically the short report is the first thing I looked for with this company, because I thought, you know, if I find anything that I find so, you know, critical to the thesis, I might not even do all the work on the name. So since we're sitting here and, you know, I'm pitching the stock, I didn't think anything will actually come from it from the short report. And just for context, it mainly leaned on Caspi's links to, again, Russia. That means, you know, Caspi having Russian users, Russian business, and so on, which obviously, as you just said, it kind of matters because of the sanctions after the Ukraine war.

1:18:12Shawn O’Malley:And again, Kazakhstan and Russia have a deep historical and, you know, they also have economic ties, obviously still. And they were the last two Soviet republics. There's a long border. I think it's the second longest border of any country on earth between Kazakhstan and Russia. So obviously there is a lot of cross-border commerce and some connection wasn't really a shocking surprise to me. I think many of the claims made in the short report have also been debunked by now. I've also linked to an article in the show notes. if you want to get some more details on that. However, I would also say there were some points, you know, that were brought up that do give me a little pause.

1:18:47Shawn O’Malley:I mean, one of them, for example, is the claim that, as you kind of talked about, Casper was involved in the money laundering activities of Dahan Sajibali, one of the most powerful politicians in Kazakhstan. And to be clear, Casper was certainly not part of the actual laundering process, but there might have been one of the many bank accounts where some of the laundered money went. And that is something that obviously still should be flagged by them. And I guess it kind of shows that ultimately you are still operating in a country like Kazakhstan, where potentially you have to look away when certain people do things.

1:19:20Shawn O’Malley:And obviously that's not great for you as an investor. And it's sort of difficult. I wouldn't be surprised if there's any bad news coming out at any point in the future. I would also say this has been quite some time ago. And personally, I couldn't find anything on, for example, the class action lawsuit that was started. it. I think it never actually gained traction. I also think again, that most of the things in the short report were debunked. And I generally always look at it in sort of two sides. When a short report is coming out, obviously the person who's publishing it has a short position on it.

1:19:51Shawn O’Malley:So they put as much as possibly into that report. And it's also quite good if you cannot actually just debunk it just at the first thought, because the stock is already dropping at that point. So I felt like this report has been somewhat like that, although I wouldn't be surprised if there monetize to Russia that maybe potentially will also hurt the stock to some more. And you will even get a PE that's lower than seven. I mean, the Harlech Bank, for example, is trading at a PE of three to four. So it can certainly still go lower if you invested in Kazakhstan.

1:20:19Daniel Mahncke:When I bought Russian oil stocks at three and four and five times earnings in 2021, I thought I was genius. And then they went to zero when the invasion of Ukraine occurred in 2022, and it became illegal to own Russian assets. And so I'd like to think I was a lot younger and more naive at that time. And yet here I am quite intrigued by Caspi. Not to say that that's a perfect one-to-one comparison, but there is definitely some similarities that I'm sort of feeling tingling down my spine. But let's just go ahead and move forward here. And let me ask if there's maybe anything else we should cover before we talk about the valuation and your final thoughts on the intrinsic value of Caspi and if it's a good fit for our intrinsic value portfolio of about 15 companies.

1:21:12Shawn O’Malley:I think there's only one thing that I still want to bring up and it might explain some of the more recent price actions. So for years, Baring Vostok, which is a PE fund and actually the PE fund that not only backed Caspi from the start, but also the one where Mikhail, the current CEO, worked before he joined Caspi. That fund had a huge 35 % stake in Caspi. And over the last couple of quarters, especially since Caspi went or listed on the NASDAQ, has basically sold part of its stake and taking the gains. And obviously, that means that there was a lot of selling pressure on the stock for the last couple of months.

1:21:48Shawn O’Malley:And that's now largely clear. And I think I kind of refer to it in the beginning of the episode. What I like to see is that both the CEO as well as Tencent stepped in and bought a big block of the Browling Vostok stake. So that obviously took the pressure off. And I think it's also a vote of confidence that the CEO is putting his money into the company. And I also kind of like that the other buyer was not some firm that I'd never heard of, but actually Tencent, which obviously is quite a well-known company that also I've heard tends to have a pretty good idea of what upcoming companies out there.

1:22:20Daniel Mahncke:All right. Well, it's time. Let's talk valuation. I guess I would have expected you to be a bit more bullish on Caspi here, to be honest, but perhaps it's cheap enough to still work with your dividend plus monopoly in Kazakhstan thesis.

1:22:35Shawn O’Malley:I guess I'm only coming across as a bit bearish because I actually like the company a lot, which I think it wasn't that bearish. I think there were also certainly some bullish points brought up, but I think whenever that's the case and I'm bullish on a company, I just like to try to poke holes into the thesis. And to be fair, I'm also a bit spoiled by, again, looking at companies like Amazon, like Melly, like C-Limited, when it comes to e-commerce and payments companies. So I could have easily filled an entire episode, talk about how good Caspi's core business is and why no one can compete with it.

1:23:06Shawn O’Malley:But I think most can quickly agree on that. So figuring out what might be wrong with the business and thesis kind of delivers more value, in my opinion. And again, there's not that much value I can offer when it's about Russia, but especially the Turkish market dynamics are the ones that I think deserve to have a second look. And anyway, long story short, I thought today I would go with somewhat of a different valuation approach today, at least as one option today. I still also have a DCF, but I thought, I just kind of want to mix it up.

1:23:34Daniel Mahncke:Oh, mixing it up. Okay. I assume that has something to do with the dividend or what's the approach you're going to take?

1:23:41Shawn O’Malley:It has. I mean, it's a very simplified model, but I thought if we do talk about a company where part of my thesis is actually the dividend, which you said is not happening that often. I also wanted to go with an approach that is sort of, you know, having the dividend as a major part of the thesis. And my idea has kind of been to test paperized thesis of, you know, heads I win, tails I don't lose much. And I should say that I'm generally, and we kind of discussed the reasons, not betting that this stock gets a higher multiple in any of my valuation approaches. So not in the DCF and also not in this approach.

1:24:11Shawn O’Malley:And what it's basically doing is that I say, okay, well, Caspi pays a dividend of about 8 % at today's stock price, which is about$80. And the question is simply, does a dividend like this on a near monopoly throwing off 50 % return on equity deserve to sit at 8 % or 9 % of a dividend yield? Or should maybe the market accept something lower, like 7 % or perhaps 6 %? So what I did is I basically looked at the history of Caspian and figured out where the yield on average has been sitting. And if so, you're going to figure out, okay, well, what would that mean for the stock price. So it's basically just some simple back of the envelope math.

1:24:44Shawn O’Malley:And if the yield would, for example, compress to about 7%, that would mean that the stock price has to obviously go up. And the total return after I haircut it for the currency and at the dividend, I would collect along the way at about 25%. So that's basically the upside of the market believes the stock should trade at a yield of 7%. If you would get a yield of 6%, the return would be over 40%. And I should say that 6 % to 7 % dividend yield is mostly the historical average for Caspi in the last couple of years. So it's not unrealistic that we get there. And basically the logic here is kind of just like changing the multiple.

1:25:20Shawn O’Malley:It's kind of how does the market view the company? Where should it trade at? Just instead of a multiple, you sort of look at the dividend yield. And by the way, again, I'm not making this up. These are the yields based on historical evidence. And even if the market says, you know what, there's so much stuff going on that I just don't know and don't understand. And they don't re-rate it and say 8 % is dividend yield where you should be. Well, you know, then that's the return that you would get, the 8 % from the dividend. So that's sort of the tails. I don't lose much part of the thesis.

1:25:48Daniel Mahncke:And for the DCF, do you come up with a similar value or do you see the upside as being higher or lower? How do you think of it?

1:25:55Shawn O’Malley:Yeah, that's kind of the interesting part. I would obviously not only do this, you know, sort of back off the envelope math because, you know, it's sort of arbitrary to some extent, but it's kind of interesting if you compare it with another valuation model. And I can say that the DCF is kind of painting a similar picture. It looks more attractive because it not only shows the immediate re-rating potential, but also the annual return potential, which combining growth and the dividend seems quite attractive. I mean, if you would just assume a revenue cake of about 11%, significantly below the historical averages, which again are close to 30%, and a more or less flat net income margin and no multiple expansion.

1:26:30Shawn O’Malley:Again, the expected return would still be over 20 % per year for the next five years. So keep in mind that includes the dividend yield of about 8%. But I don't know, Sean, you got to tell me, am I too biased as always when it comes to these ecosystem-like companies? Because I think I could see us establishing a startup position. I think I would first want to look at especially the Turkish market a bit more. I kind of looked into it. And there are a lot of dynamics. It's in some sense, similar to Kazakhstan. In some sense, it's different. And I think I didn't have enough time to really dig deep into that part of the market.

1:27:03Shawn O’Malley:But yeah, otherwise, I think it's just looking at the spreadsheet. And I think that's not outlandish assumptions looking like quite a good opportunity.

1:27:11Daniel Mahncke:I think you're going to be surprised to hear this because I told that story about having my investments in Russian and oil gas companies just completely wiped out in 2022. But actually, I could be open to this. I've looked into Caspi a bit before, and we both know some very smart investors who are excited about the business. So I don't want to be too close-minded here. And I definitely don't want to immediately roll it out because it's outside of my comfort zone. It feels like a company where there is a huge degree of not knowing what you don't know from what the customer experience in the ground is like to the political realities of Kazakhstan.

1:27:47Daniel Mahncke:But the fact that I'm open to the idea, I think, speaks to how compelling of a picture you've painted here. The data flywheel, the favorable relationship with the government, the deep entrenchment across daily life in Kazakhstan, domination across a handful of verticals. Again, that is all really, really compelling to me as I think about comparing Caspi with the other ecosystem businesses that we've looked at before, Mercado Libre and Amazon and even Uber to an extent. To get this company with the kind of quality and growth prospects that they have at this valuation does almost feel too good to be true.

1:28:30Daniel Mahncke:And I think besides the political risks, the currency risk is what me most. It's not uncommon for emerging market currencies to get cut in half in value in USD exchange rate terms over the course of a decade or so. And we've actually seen that happen with Kazakhstan's currency already, with the point being the company's dependence on one volatile currency creates some very serious risk for us as USD and euro-based investors, which you and I are respectively. And expanding into Turkey, where you've nearly had hyperinflation for a few years now with the Turkish lira, that's not exactly the most inspiring currency diversification effort I've ever heard of.

1:29:11Daniel Mahncke:So I could maybe talk myself into owning it. I could also just as easily talk myself into putting it in the too hard pile just on currency risk alone. I think maybe the best thing to do would be to truly keep it on our radar. And I would be open to a starter position, but also I would love to try and speak to the executives of the company, learn more about the business, maybe do a follow-up episode down the road where we explore what's changed and whether we think the company is worth a spot in our portfolio. But how do you think about it?

1:29:47Shawn O’Malley:I mean, some of the truth of actually managing a portfolio and doing it seriously is that you only want to build positions in stocks that you feel very comfortable in owning. And some of it is also just following a stock for quite some time. So you can do as much research as you want and kind of understand the business. But there's something to say about simply following the stock for some weeks and especially some months, and then kind of see how it actually reacts to market moves and also to market news and all that sort of stuff. And I think that's what's still kind of missing for me. And it's even more important when you just don't have this sort of consumer insight that we both obviously don't have.

1:30:23Shawn O’Malley:You kind of have these patterns and how you think about marketplace companies, how you think about payment companies. And I think that gave me a very good insight in how Caspi generally functions. But there's still a lot of these, again, unknown unknowns that would sort of need to feel a bit more comfortable with. So I'm totally fine with putting it on, you know, high up on our watch list, and then potentially talking to management and getting some new insights, and then we will revisit it and potentially at that point, do start a position in this pretty cheap and phenomenal business. And And I would say with that, let me close it for today with a quote by Jeff Bezos, who I still consider the father of e-commerce players.

1:31:02Shawn O’Malley:And he said, if we can keep our competitors focused on us while we stay focused on the customer, ultimately we will turn out all right. And I feel like this quote kind of fits Caspi's culture quite well. So I thought that's how I would end today's episode. And with that, see you all next time. Thanks for listening to TIP. Follow The Investor's Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs.

1:31:40Shawn O’Malley:Investing involves risk, including possible loss of principle, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them.

1:32:11Shawn O’Malley:Copyright by the Investors Podcast Network. All rights reserved.