FSMART:- Diminishing Return Phase.

FSMART once was one of the best performers in 2015-2016 it produced return approximately +300%, it can triple your capital within 2 years and for the compound annual growth rate (CAGR) roughly 73% per year since the first day of IPO in late 2014 at 5 baht/share (IPO price 2.5 bath/share) to ending of 2016 at 20 baht/share. It was trading at 42.x times of earning and 14.x times of book value at the end of 2016. But nightmare of investor has emerged in late 2017, FSMART turn into a “fallen angel” within 6 months its price stared to collapse from nearly peak at 21 baht/share in November 2017 to 10 baht in the early of 2018 declined by more than 50%.

Price chart

Why those sophisticated investors or institutional funds have to rapidly unload this stock out of portfolio?

Besides the tight valuation and technology disruption risk (the market always acknowledged this fact along the way up and down), I think it’s that FSMART is in the diminishing return phase and its performance and operating figures can be described by the law of diminishing return.

It doesn’t mean that FSMART is not investable, every company has its own value.

What is “Law of Diminishing return”?

 “In economics, diminishing returns is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.

The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant will at some point yield lower incremental per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.”

Source: https://en.wikipedia.org/wiki/Diminishing_returns


Business Overview

Source: Annual report 2017

  • FSMART operates “Boonterm” kiosk in the franchise system through 200 agents nationwide as well as the Boonterm kiosk co-management with Business Partners in more than 40 projects e.g. 7-Eleven, Family Mart, Lawson, Tesco Lotus,108 Shop, The Mall, Tops Supermarket, CP Freshmart, TOT, MRT, the Transportation Company, PTT, Esso, Susco,HomePro and Big C Mini etc. in order to expand customer base to reach more target groups of customers at the same time increase the number of Boonterm kiosk to cover all area nationwide especially in urban district, convenient shop, supermarket, places of education, dormitories and industrial estate.
  • Target group: customers with low to moderate income who mainly use the pre-paid mobile phones and are able to manage micro transaction of at the minimum of 10 Baht. Customers can complete transaction by themselves by inserting coins or banknotes to pay the bill through our online payment kiosk via the online system that connects with Boonterm network
  • FSMART has 124,653 kiosks throughout the country.

Products and Services: There are three major services which contributed more than 90% of total transaction value.

  • Prepaid mobile Top up of all network such as AIS 1-2 call, DTAC, Truemove, CAT, TOT and so on but most of prepaid top up transaction value came from AIS. The company claims that 35% of total prepaid subscribers use boonterm kiosks and 22% of market value top up through FSMART’s channels. The revenue model is
    • Customer will pay service charge accordingly to amount of top up value that
      • Top up value 10-20 baht/transaction, Customer pays 2 baht/transaction of service charge.
      • Top up value from 21 – 99 baht/transaction, Customer pays 3 baht/transaction of service charge.
      • Top up value over 100 baht/transaction, service charge is waived except the kiosks at 7-Eleven (convenience store) that customer need to pays 5 baht/transaction of service charge.
    • Network operators pay 5% of top up amount to FSMART.
  • Money Transfer: This service targets the customer who has no bank account and want to transfer money to other people’s bank account with cash. Now there are 2 banks (Kasikorn and Krungthai) available to the service and company plans to cooperate with Bangkok Bank and Bank of Ayudhya (Krungsri) in the future. The revenue model is
    • Customer pays service charge accordingly to amount transferred from
      • Below 1,000 baht/transaction, customer pays 30 baht/transaction
      • 1,000 – 3,000 baht/transaction, customer pays 50 baht/transaction
      • 3,000 – 4,000 baht/transaction, customer pays 60 baht/transaction
      • Over than 4,000 baht/transaction, customer pays 70 baht/transaction
    • Avg. amount per transaction less than 1,000 baht.
    • These service charge from customer is equally separated into 3 parts to the bank, agent and company. Therefore, company only received 1/3 of service charge that make total yield seems to declined but I think it’s not the point.
  • Bill payment and other services

Is FSMART facing with Law of diminishing return?

rev and operating figure.JPG

  • FSMART had strategy in the past to rapidly increase the kiosks as much as they can in order to gain market share and plays the “winner take all” game and the company had done really well on this strategy which led them to be no.1 in online topup in Thailand. The Kiosk has been increasing from 35,000 kiosks in 1q14 to 130,404 kiosks as of ending 1q18 (latest quarter).
  • Total transaction value including mobile top up, money transfer and other services also increased from 2,310 mb per quarter in 1q14 to 10,421 mb in 1q18. However, the services revenue grew with slightly slower pace than transaction value growth due to total yield (%commission yield + %service charge yield) has been decreased for approximately 200 basis point from 10.31% in 1q14 to 8.06% in the latest quarter. Why is that?

transac and rev change.JPG

Please note there is limitation on data gathering due to the company began to provide revenue breakdown on each quarter in 2017.

  • Mobile top up transaction value accounts roughly 78% in total transaction value in 1q18 while its revenue accounts for 85% of total revenue. Money transfer service revenue has increased %share to total revenue from less than 1% in 2q16 to 8% in 4q17. Therefore, main contributors to total revenue are mobile top up and Money transfer service.
  • As you can see, the change in transaction value of mobile top up compares to previous quarter in 2017 increased by +259 mb, +413 mb, +154 mb, +176 mb in 1q17,2q17,3q17 and 4q17, respectively but the change in revenue in mobile top up increased only 9 mb, 33 mb, 8 mb and 3 mb for the same period. It means that yield of Mobile top up is deteriorating and the gross profit from mobile top up service accounts approximately 80% of total gross profit.

yield breakdown.JPG

  • On the figure above, Blended yield (Total revenue/Total transaction) was 9.75% in 2q16 and it was continuously dropping to 8.08% in 1q18 but it may be the low yield of new service (money transfer – 4.5% yield) and it’s undeniable that the most of impact came from declining in Mobile top up yield for 84 basis point (9.81%-8.97%) compares to 2q16. The incremental mobile top up transaction value would turn into revenue with lower yield than the past which pulled outstanding yield of Mobile top up down to 8.97%. In addition, total transaction value in 1q18 increased by 336 mb compares to 4q17 but you can see the revenue in 1q18 had small change by +9 mb which made %yield of incremental change in transaction value declined to 2.72% in 1q18 that led to lower of blended yield to 8.08% in 1q18 as i mentioned.
  • % Yield on incremental amount of mobile top up (Change in mobile top up revenue / Change in Mobile top up transaction value) in 1q17, 2q17, 3q17 and 4q17 was 3.47%, 7.99%, 5.19% and 1.7%, respectively while you can see no materially change in %yield of incremental of money transfer service with 4.47%-4.70% in 2017, this made outstanding yield of money transfer service remained stable at 4.4x%. Why is that?


(source: company presentation – opportunity day 4q17)

  • Blended gross profit margin was deteriorating from 26.3% in 2q16 to 20.9% in 4q17 due to the declining in GPM of mobile top up (lower of yield) and money transfer service and another effect from sharp increasing in depreciation expense from new kiosks placement.


  • If we took depreciation expense back in gross profit in order to eliminate the bias of high investment in that period, we still saw the declining in GPDAM (Gross profit before depreciation and amortization margin) from 40% in 2015 to around 37%-38% in recent period.


  • What I like the most is about this company is the capability to produce EBITDA each year and how they can control SG&A. Let’s imagine that what if the company start to slow down their expansion plan when they have sufficient coverage?

The important questions to FSMART are

  • What is the reason of declining in mobile top up yield? How will they improve yield of mobile top up? Is it possible to do so?
  • Is it possible, that money transfer yield will decrease as mobile top up yield in the future?
  • How long the customer is willing to pay service charge fee for 3-4% of their transferred amount?
  • How many unprofitable kiosks are out there?
  • How fast is technology adoption of their target group? and so on.


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