Samarkand Group [AQSE: SMK], is a cross-border ecommerce company focusing on connecting Western brands with the Chinese market, the world’s largest ecommerce market. The mission of Samarkand is to make Chinese ecommerce simple, accessible, and profitable for businesses of all sizes. Samarkand’s proprietary software platform, Nomad, covers commerce, distribution, logistics, payments, and analytics, helping the consumer to achieve hassel-free cross-border ecommerce.
Samarkand is one of the most important sites on the Silk Route two thousand years ago, connecting China to the west. On the call last week with the CEO & Co-founder of Samarkand, David Hampstead, he presented the blueprint of Samarkand Global, the new digital bridge between international eCommerce and China.
China: the biggest ecommerce center in the world
China accounted for over 37% of the global ecommerce market, reaching $2.1 trillion in payments value in 2021. The country was followed by the US with $1.5 trillion, while the UK stood at a distant third with $292.1 billion in 2021.
Ecommerce sales in China grew at a compound annual growth rate of 13.3% between 2018 and 2021. This growth was rooted in rising internet and smartphone penetration, increasing consumer confidence in online shopping, the emergence of ecommerce platforms, and the availability of popular alternative payment solutions such as Alipay and WeChat Pay. Even Covid in a way accelerated the development of ecommerce in China due to quarantines and consumers’ unwillingness to contact the disease; online shopping channels have been popularized even more.
China’s live broadcast ecommerce market has also developed rapidly. Since ecommerce platforms tested the live broadcasts in 2016, after just five years of development, this market’s GMV (gross merchandise value) has exceeded one trillion yuan. Compared with Taobao, which took ten years to reach a scale of trillions, the development speed of live broadcast ecommerce can be described as unparalleled. This is something that has still not been fully appreciated by the non-China ecommerce market.
The cross-border ecommerce (CBEC) industry in China has provided international brands with an invaluable route to this expanding market. From 2017, the number of consumers of CEBC in China grew from 118 million to 176.9 million, a nearly 50% increase across five years. The market size of cross-border ecommerce imports in China topped 3.2 trillion yuan (about $459 billion) in 2021, putting the compound annual growth rate of the market at approximately 18% in the past five years, according to a report published by the global consultancy firm EY.
With extensive experience in technology, Samarkand Group’s CEO David Hampstead saw the opportunity of the growing demand for CBEC in China. With his background of building a technology platform across the US and Europe, and some insight and business connections in cross-border commerce in China, he founded Samarkand Group in 2016 in London. Samarkand provides a platform for international brands to extend their client base into China, using their Nomad technology.
Samarkand’s business model
Samarkand’s business model is built upon three complementary activities: Nomad technology, brand ownership, and distribution channels.
Nomad technology solves most of the cross-border shopping difficulties for customers and retailers. Normally, an international purchase does not support a localized payment method. Nomad Checkout integrated the most popular payment methods in China such as Alipay and WeChat pay.
Normal cross-border consumers may suffer from unreliable and expensive logistics services because of a lack of integration of shopping websites and logistic services. Nomad checkout provides shipping by SF express and FedEx, the leading logistics companies in China, making for faster delivery and easier parcel tracking. The other most common difficulties for shopping overseas are customs clearance and tax. Nomad checkout provides seamless custom clearance, the tax and the duties are calculated upfront, leaving no hassle for the customers.
Samarkand also provides ecommerce acceleration. This falls into the range of consultancy, helping international brands expand into the Chinese market with Samarkand’s brand manager, who has expertise in Chinese ecommerce and an understanding of the requirements for international brands. With minimum upfront investment, this provides opportunities for brands to test and observe Chinese consumers’ attitudes towards their product, a first in the UK and European region.
Samarkand owns a few brands in the beauty and wellness sector, which have performed well after acquiring them. These brands have been less affected by the disruptions in China due to their domestic sales and demand. The portfolio brings together unique but complimentary brands providing operating and cost synergies. These brands are each positioned within growing global trends, namely digestive health, reproductive health and natural health & beauty.
The focus of Samarkand is to develop the current portfolio by growing sales in existing domestic markets and accelerating sales in key export markets, primarily but not exclusively in China. For example, Zita West, a reproductive health brand in Samarkand’s portfolio, is generating a healthy level of organic sales from the US, which is another high-potential market.
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Samarkand has also developed a well-established distribution channel, including 13 warehouses across East Asia, Europe, the US, Canada, New Zealand and the UK. The warehouse in China is developed in a bonded free trade zone, which enjoys the lowest tax rate for cross-border ecommerce goods, at 9.1%. In comparison, if the items were shipped directly from the retailer abroad without Nomad Checkout, the tax would range from 15%-50% depending on the item. Health and beauty products fall in the list of 25% cross border tax bracket.
Samarkand also has whitelisted most of its products under its brands, so the product does not need to go through as many tests before selling in China. With their own customs clearance company, Samarkand also reduces the parcel interception rate from 20% to 1%, using the automated cross-border custom service. This again means businesses do not need to commit a great amount of capital to expand into the Chinese market, especially some smaller brands that want to expand their customer base internationally.
Samarkand Group’s growth and partnerships strategy
The growth of Samarkand has been incredible: founded in London in 2016, it acquired Forever Young International Limited in 2017, which provided a great starting brand portfolio of health, food supplements and beauty products. In 2020, Samarkand received a strategic investment from Smollan, a leading international retail solutions company.
Floating on the Aquis Stock Exchange in 2021 pumped more capital into Samarkand fuelling the growth, as well as a £3.15m strategic investment from logistics giant, SF Express (the leading logistic service company in China), creating a great synergy on the distribution side. In the same year, Samarkand Group expanded into Japan, the fourth biggest ecommerce market, with the additional fillip of great demand for Japanese products in China. In 2022, Samarkand Group formed an alliance partnership with FedEx, extending its delivery network as well as integrating the Nomad solution into FedEx clients in China.
Additionally, Samarkand Group could take advantage of the data from Chinese FedEx users to discover potential partnerships which could speed up the client generation process.
Existing competitors and similar businesses
Samarkand has a diverse portfolio, so finding a direct competitor that matches all its fields is impossible. We can find competitors in each sector, and see if Samarkand Group has any advantage against them. On top of that, we can compare the valuation of these companies, to determine Samarkand’s fair valuation, and its future room to grow.
Connecting brands and emerging into China is a hot market. For example, Superordinary is one of the biggest players in the US. Superordinary acquires health and beauty brands and uses its network of influencers and KOLs (Key opinion leaders) to generate brand appearance and demand for its brands. Superordinary had a revenue of $180 million in 2021.
Part of Samarkand’s business falls in this field but in the UK. With a growing network of Chinese KOLs and their influence, Samarkand can market their brands and client’s brand to Chinese customers, generating demand. Samarkand has sought to develop a wider base of channels, including more top-tier social selling channels and emerging marketplaces such as Douyin, the Chinese TikTok. This service in the UK and European region is a first, having great room to grow. With this first-mover advantage in the region, Samarkand’s goal next year is to grow their partnership network as fast as they can. In the near future, we might see some great partnership announcements, according to CEO Hampstead.
In the brand acceleration, global marketing, direct to consumer (DTC) playingfield, Eshopworld (ESW) is one of the strongest players. Based in Ireland, focusing on the European market, ESW facilitates some of the world’s biggest brands like Nike and Victoria’s secret. ESW provides services in compliance, data security, fraud protection, taxes, and tariffs to checkout, delivery, returns, customer service, and demand generation. This is not a direct competitor since ESW does not focus on helping western brands expand into the Chinese market, nor focuses on SMEs. But there exists a great similarity between ESW and Samarkand’s business model, which can give us an example of the sector, and Samarkand’s growth potential in this field. In 2021, ESW’s revenue was €1.24 billion. ESW is also said to be weighing an IPO at a $4 billion valuation.
If we assume Samarkand grew to only 5% of ESW, a modest estimate means 6.5x growth for Samarkand Group in this part of their business. Can Samarkand grow to such a size, in a relatively blue-sky scenario with strong competitive advantages?
Financial growth
Samarkand released their interim results on the 15th of December; after the release, we caught up with David Hampstead again, with the CFO Eva Huang. Below is a summary of the results.
During the period Samarkand’s revenues increased by 15% to £8.3m (H1 2022: £7.2m) with gross margin decreasing to 54% (H1 2022: 57%). The gross margin has decreased from H1 2022 from 57% to 54% but has improved from those levels achieved in FY 2022. The change in gross margin is a result of changes in product mix, sales channels and supply chain pricing pressures, not all could be passed on to customers.
Let us look at revenues from the core activities: brand ownership is up 36% to £3.1m (H1 2022: £2.2m), Nomad technology is down 10% to £2.7m (H1 2022: £3.0m), the distribution business is up 29% to £2.3m (H1 2022: £1.8m). The disruption caused by the widespread COVID lockdowns impacted Samarkand’s ability to fulfil orders to China from the UK warehouse, which affected Nomad technology’s revenue. Samarkand moved inventory to their bonded warehouses and increased sales through their existing B2B distribution channels, minimising the effect caused by the lockdowns.
We can also see Samarkand diversifying their revenues, meaning decoupling profitability with the Chinese economic situation, providing a more stable revenue stream. For example, Zita West, one of Samarkand’s brands, increased revenue by 81% compared to H1 2022, with revenue outside of China growing by 24%, predominantly in the UK.
Adjusted EBITDA loss improved by 48% from £2.6m to £1.4m; given the economic headwind in China, this is great news. Samarkand identified their priorities at IPO, which is to move the business towards profitability. We can see great progress being made in this interim result, improving efficiency in operating leverage and cutting costs. Selling and distribution expenses have decreased to 28% (H1 2022: 46%) of revenue, because of more efficient and targeted advertising spending and product pricing changes to adapt to the increasing distribution and inflationary costs seen in the last six months.
Now, the zero-Covid policy in China seems to be easing off, meaning economic growth should pick up the pace again, and this might also be a catalyst fuelling the fast growth of Samarkand Group, given more disposable income and higher sentiment from Chinese customers.
Based on all these positive signs, Samarkand Global is definitely worth investors’ attention.
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