A Fool Meets With YuuZoo Corporation Ltd’s Management

Some time back, I was invited by YuuZoo Corporation Ltd’s (SGX: AFC) management team to visit their office and speak with them to understand the company’s business.

YuuZoo is one of the few internet-related companies listed in Singapore and internet businesses may not always be easy to understand. As such, I decided to use the opportunity to find out more about the company’s business, which it terms as “social e-commerce.”

On 7 September, I made the trek down to the company’s office, which is located in Singapore Science Park 2, a quiet building near the National University of Singapore that is isolated from the town’s hustle.

Here’s what I learnt from the management team.

Primary business

YuuZoo’s primary business is to build e-commerce websites that contain elements of social interaction. One way it could work is this: YuuZoo first attracts customers by providing some interesting bits of information online, then the company’s websites will try to sell you some goods that you might be interested in.

The company’s websites work in a somewhat similar manner as to how Facebook’s namesake platform tries to guess your interests and shows you advertisements of prodcts or services that you could be interested in.

There’s more to YuuZoo’s business.

Instead of operating the websites itself, YuuZoo licenses its websites to franchisees who will then operate the websites while YuuZoo supports them with the technological infrastructure needed to run the sites. In such deals, YuuZoo will often end up owning some shares in the franchisees.

A potentially tricky situatioon

Here’s the thing about YuuZoo’s franchisees: The value of the company’s stakes in the franchisees is difficult to determine.

Partly as a result, Moore Stephans LLP, YuuZoo’s auditor, issued a statement on 12 May 2016 saying that it “[has] not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion” on the company’s financial statements for 2015. Moore Stephans has also stepped down as YuuZoo’s auditor for 2016.

The market was visibly spooked as YuuZoo’s shares fell by as much as 12.5% on the day after Moore Stephans’ statement was released. The fall happened despite the fact that YuuZoo came forth to clarify that the valuations of the franchisees were supported by two valuation reports, one from a Big Four accounting firm, and one from a US-based valuation firm.

Since I was not able to look through the valuation reports, I am unable to comment on the valuation issues.

Growth plans

During the meeting, YuuZoo also shared some on-going developments it has for growth.

One would be the company’s tie-up with Etisalat Telecommunications Corporation, a multinational UAE-based telecommunications services provider. YuuZoo and Etisalat had launched their SME Arena portal in August which is targeted at Nigerians.

As described by Fred Lim, YuuZoo’s chief financial officer, SME Arena operates in a similar fashion to Chinese e-commerce powerhouse Alibaba, connecting small business owners to consumers through the internet. The SME Arena web portal allows businesses to list their products on the website and allow consumers to buy them online.

Etisalat has an innovative reputation in Nigeria and wants to establish an e-commerce presence in developing markets. The company’s revenue in 2015 came in at 51.7 billion AED (where AED refers to the United Arab Emirates Dirham), which roughly equates to S$19.2 billion.

This puts Etisalat’s revenue at a slightly higher level than Singapore Telecommunications Limited’s (SGX: Z74) revenue of S$17.0 billion in its fiscal year ended 31 March 2016.

Etisalat’s desire to build e-commerce businesses could make it a strategic partner for YuuZoo. But, the e-commerce space is highly competitive and YuuZoo and Etisalat are clearly not the only ones who sees opportunity in emerging markets. E-commerce companies such as Amazon, eBay, Jumia, and Konga are all in Nigera, for instance.

YuuZoo is betting that Etisalat’s large customer base will allow the joint venture to quickly gain traction and overtake its competitors.

A Fool’s Take

My meeting with YuuZoo had covered other developments in the company, including its expansion into China and the possible launch of franchisee web portals next year.

YuuZoo is trying to grow its business and since there’s no such thing as a guarantee when it comes to future growth, the ride for its shareholders may be a roller coaster.

Meanwhile, the company has had trouble generating cash flow. In 2015, it earned a profit of S$32.7 million, but its operating cash flow was a negative S$5.7 million. The first-half of 2016 was more of the same – despite having S$27.1 million in profit, operating cash flow was a negative S$1.2 million.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Wilson Ong doesn’t own shares in any companies mentioned.