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MPLS: Benefitting From the Growing Russian Digital and E-Commerce Market

06/26/2018


CSE:MPLS.CN

FSE:48G

GoverMedia Plus Canada Corp. (CSE:MPLS.CN) (FSE:48G) is a Canadian company with a Russian internet technology subsidiary. It operates in various fields including e-commerce, social media, cryptocurrencies, and blockchain. GoverMedia Plus intends to provide a leading-edge online ecosystem for the global Russian-speaking population to engage and interact. The company plans to encompass a myriad of online services into one ecosystem that will provide users with what management calls a “one stop-shop experience.”

The company anticipates multiple revenue streams, including advertising, e-commerce, auctions, professional search, crowdfunding, cryptocurrency payment processing and cryptocurrency trading. The company’s strategy is to develop a global comprehensive online ecosystem that offers most of the internet services an entrepreneur needs so that users can perform online functions in one platform without having to leave the ecosystem.

Earlier this month, GoverMedia formed a partnership with EXMO, one of Europe’s largest cryptocurrency exchanges. This advances the company's strategy to integrate cryptocurrency-related and blockchain-based services in its ecosystem. GoverMedia will create a corporate account on the EXMO exchange, enabling its users to trade cryptocurrencies through the GoverMedia online ecosystem without having to leave it. The company expects this initiative to form a new high-margin revenue stream with minimal associated costs. Through a profit-sharing agreement, EXMO and GoverMedia will share all proceeds that GoverMedia users generate through the EXMO exchange. GoverMedia also expects to benefit from joint advertising towards EXMO's active user base, which encompasses more than 1.4 million active traders located in more than 200 countries.

This is also the initial step in GoverMedia’s efforts to form a broad strategic relationship with EXMO. Founded in 2013, EXMO is among the world’s top 15 cryptocurrency exchanges, according to CryptoCoinCharts. Importantly, EXMO is the leading exchange in Eastern Europe. It boasts roughly 315,000 daily visitors, 53 trading pairs, five fiat currencies including the dollar, euro and ruble, with an average daily trading volume of $50 million.

The company expects the EXMO alliance to help increase its user base, boost user activity and engagement. GoverMedia has registered more than 150,000 total active users and targets one million in the next few years. At the same time, GoverMedia has recorded increased user activity on its e-commerce platform, with positive trends in user engagement.

Overall, management expects to achieve substantial operating leverage as revenue scales. This is because GoverMedia’s operations will consist primarily of R&D, sales and marketing activities, crowdfunding analysis, back-office and administrative activities, customer service, and operations management. In this early stage of the company’s development, it is ramping up its marketing team and recently added several new important hires with significant sales experience, as well as a CFO to oversee the cost structure.

GoverMedia’s target customers include online buyers and internet users, with GoverMedia targeting the rapidly growing online retail Russian community. We are optimistic about the growth of the Russian e-commerce sector. The company intends to leverage the growing internet population in the Russian speaking markets as GDP per capita rises. From 1990 to 2016, Russia’s GDP per capita grew from $3,485 to $8,748, according to the World Bank 2017. This increase fueled growth in consumer spending, as well. While GDP was hurt in 2015-16 by declining oil prices, it has rebounded in recent quarters. “Russia's gross domestic product expanded by 1.5 percent year-on-year in 2017” and “advanced by 1.3 percent year-on-year in the first quarter of 2018,” according to Trading Economics.

The company’s medium-term plan is to establish its business in Russian speaking markets in order to connect Russian-speaking people globally through its proprietary online ecosystem. The Russian speaking market is broad-based. IFRI (Institut Français des Relations Internationales) calls Russians “the second biggest diaspora in the world.” In addition to being the official language of Russia, Russian is also the official language of Belarus, Kyrgyzstan and Kazakhstan. Moreover, according to Babbel Magazine, it is considered an “unofficial language” in Ukraine and many former Soviet countries, including Azerbaijan, Estonia, Georgia and others. Sizable Russian-speaking populations also exist in Cyprus, Finland, Hungary, Mongolia, Poland, China, the U.S. and Israel, according to Babbel, which notes that Russian became the second most widely used language online in 2013. In the longer term, the company hopes to expand internationally, focusing on European, Chinese and North American markets.  

Management believes that the Russian market provides an attractive growth opportunity. Its strategy is to leverage the rising internet penetration of the Russian-speaking population, which has an estimated internet penetration that exceeds 70% according to market research firm GfK. This figure is slightly ahead of data from internet research specialist, eMarketer, which pegged Russian Internet penetration in 2015 at 61%. Nevertheless, both GfK and eMarketer note the rapid growth in internet usage within the market, which could present positive demographics for online retail and e- commerce, social media and crypto, we believe.
GoverMedia also intends to register business users that seek to leverage the retail user base of its platform. Management believes the GoverMedia infrastructure can support entrepreneurs’ daily business operations, as businesses can access the platform to improve customer engagement, maximize marketing budgets, boost revenue and automate business operations.

The Russian market is also characterized by rapidly increasing mobile internet penetration. According to GfK, Russian mobile internet access more than doubled in 2015. The growth of the market is primarily driven by the rise in the adoption of smart devices and gadgets. The digitalization of businesses and systems in Russia further encourage smart device adoption. These patterns are consistent with worldwide mobile adoption patterns.

Roughly 50 million users in Russia – about 42% of the adult population – currently access the Internet using mobile devices. According to eMarketer, Russia had 54 million smartphone users in 2015. That metric was expected to reach about 73 million by 2019, enabling strong market opportunities – according to eMarketer – for digital and mobile advertising to grow. Younger users aged16 to 29 have fueled a significant portion of mobile activity, with roughly 70% of this demographic accessing the internet using phones and 35% using tablets.

Shift to Electronic Commerce Creates Opportunity

A pattern that other global markets have shown is that with increased mobile penetration, there has been a growing trend towards e- commerce. Worldwide e-commerce spending as a percentage of total retail expenditures is projected to reach 9% in 2018, up from 6% in 2013, according to the eMarketer Report. This trend is forecast to continue, reflecting rising consumption among younger, internet savvy users. eMarketer estimates that e-commerce will grow at double-digit rates domestically for the next couple of years.

Not surprisingly, there has been strong e-commerce growth in Russia, as well. The Russian online retail market has grown from R$7.9 billion in 2011 to R$12 billion in 2016, according to the company, and is projected to reach R$90 billion by 2025.

“Approximately 50% of Russians shopped online in 2016,” according to the independent non-profit E-Commerce Foundation, which cites the number of Russian e-shoppers as having grown from 24.0 million in 2013 to an estimated 62.5 million in 2017. That represents a compound annual growth rate of 27%. At the same time, E-commerce Foundation notes that average online spending per shopper rose from €532 in 2015 to an estimated €626 in 2017.

In addition, some 35,000 new online stores are activated each year. Moreover, management indicates that cross-border e-commerce volumes have increased by more than 50%, driven primarily by the growing Chinese consumer purchasing power.

The top categories for Russian shoppers “have remained relatively stable, and are quite similar to Western trends,” according to Yandex’s Russian Search Marketing. Consumer electronics is the most popular category and covers a broad range of products from televisions and cameras to mobile phones and video game systems. In fact, the fourth most popular site in Russia is the online extension of a large electronics retailer in Russia, M.Video. The popular online site supplements the chains’ network of over 350 bricks-and-mortar stores located in more than 150 cities. DNS, the seventh most popular retail site, is another electronics chain in Russia, as is Eldorado. Apparel, the second most popular retail category, includes men’s, women’s and children’s clothing and accessories. Computer hardware and software are also popular shopping categories, as are home goods, healthcare and sporting goods.

The increasing use of the internet and mobile platforms for purchases has also given rise to another factor impacting global commerce: commerce is shifting from a primarily local activity to a multinational and global one, as businesses expand across geographic borders virtually, as well as physically. Enabling online transactions expands the market for many organizations. This is one reason, we believe, why businesses encourage the use of their online e-commerce sites for transactions, often offering preferred terms and discounts for shopping online. This also implies that over time, larger organizations will rely less on purchases in their home markets and more on international consumption. As noted, over time GoverMedia aims to expand internationally, focusing on European, Chinese and North American markets.  

Moreover, as noted GoverMedia’s platform can process cryptocurrency transactions, enabling users to pay with bitcoin and other crypto. On June 20, 2018, GoverMedia Plus announced the full integration of cryptoprocessing payment technology within its ecosystem.

Blockchain is the underlying digital architecture that supports many digital cryptocurrencies. It is a decentralized and encrypted ledger that offers a secure method to store records and other information in a way that can be verified. Each block in the blockchain contains a hash a digital fingerprint or unique identifier and timestamped batches of prior transactions, as well as the hash of the previous block. The hash connects the blocks and prevents any block from being altered or inserted between two existing blocks. Each new block reinforces the verification of the previous block and therefore the overall blockchain. This characteristic is also believed to make it transparent if an attempted hacking tries alter any part of the blockchain.

Blockchain technology has broad applications. Among other features, it can be used to process transactions, manage medical records, and verify and confirm proof of ownership. Blockchain can also record and track intangible assets such as intellectual property, patents, copyrights, or branding. According to event-participant BTCS, "More than just the foundational basis for digital currency, the blockchain has the ability to impact all industries on a global basis that rely on or utilize record keeping and require trust.”

GoverMedia is developing services leveraging the use of blockchain. The blockchain market is forecast to grow to $7.683 billion by 2022, up from $241.9 million in 2016, according to a December 2017 study by market research firm Markets and Markets, a compound annual growth rate of 79.6%, reflecting rising demand for blockchain and valuation of cryptocurrencies. Increased regulatory oversight of cryptocurrency could drive demand for cryptocurrency accounting software and services.

According to IBM, blockchain architecture gives participants the ability to share a ledger that is updated, through peer-to-peer replication, every time a transaction occurs. Peer-to- peer replication means that each participant (node) in the network acts as both a publisher and a subscriber. Each node can receive or send transactions to other nodes, and the data is synchronized across the network as it is transferred. Blockchain is viewed as a secure option for financial transactions that also provides flexibility and scalability.

According to Techrepublic, “Blockchain is a public ledger technology that uses digital signatures and cryptographic hashing to provide a record of secure transactions that cannot be altered.” Specifically, blockchain is thought to be safe, immutable and transparent because no single person or party within the chain can alter the record without the agreement of all parties in the chain. We are optimistic about the outlook for blockchain technology and the expected rising usage of blockchain.

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