International Opportunities #2: GPW - Warsaw Stock Exchange. A bet on Poland's future
Stock exchanges have been great businesses in the past. Will GPW follow?
'This piece is an opinion and for information purposes only, and it isn't investment advice. Seek a duly licensed professional for investment advice.'
Housekeeping
Good morning fellow coffee-drinkers. The last newsletter on Thungela Resources was well received, so here I am writing the second iteration.
Just like last time, the report is in no way a deep dive and needs much further investigation before investing.
As always, feel free to contact me on Twitter @InvestRoiss or leave your comment below. I am currently not long GPW but will probably build a position in the coming months ( I will buy over Interactive Brokers to have access to the Polish Stock Exchange).
Introduction
The Warsaw Stock Exchange, Gielda Papierow Wartosciowych w Wrszw SA in Polish (GPW for short), is similar to the New York Stock Exchange, Nasdaq, or the London Stock Exchange. If you managed to not butcher the name as I did - Awesome! Stock Exchanges have historically been great companies. Returns on ICE (owns the NYSE), Hong Kong, Euronext, and London have been exceptional over the last decades.
They are monopolistic and facilitate the trade in stocks, derivatives and commodites, opening the public to new ways to save their money. Poland has an atrocious percentage of wealth in stock, and investing in GPW is a long-term bet on the Polish Economy. With a low market cap of just 1.8b złoty or around USD 450m, it is a company that has room to grow.
Why Poland?
Poland in Europe doesn't have the reputation it deserves. With their conservative government and their high crime rates in the past, it is easy to overlook the significant changes in the Polish economy. Poland has been the fastest growing economy in Europe of the past 30 years and has an even higher growth rate than Korea, Singapore, and Thailand.
Poland is now the largest economy in the CEE region and the 7th largest economy in the EU, even bigger than Sweden.
The household assets have quadrupled since 2006; however, only 5% are in equities (up from around 4% in 2019). Most of the money is in deposits.
This money is sitting idle, and while the Polish Central Bank (Poland has its own central bank) has raised rates to 0,5%, more and more people discover that owning stocks leads to a much higher rate of return. While only 5% is in equities in Poland, it's more than 50% in Estonia and more than 30% in the US. Enough room to grow.
One of the remarkable things about Poland is its high-tech hubs. Warsaw and Krakow are leaders here, with many European companies outsourcing their programming to Poland. Both cities have been prime destinations of "Digital Nomads" due to the mixture of culture, closeness to nature, and costs. As a result, those have a thriving startup scene. The most well-known one is probably CD Project Red, creator of The Witcher Game Series and Allegro - the Amazon of Poland. Venture capital investments into Poland have exploded in the last two years trying to find the next unicorn. Some of those startups will inevitably list on the Warsaw Stock Exchange in the future.
Warsaw stock exchange
The company went public in 2010, and since then, while there have been ups and downs, the stock has been flat. Currently, the price is even below the IPO price.
The company, in contrast, does have solid performance. Revenue growth of 6.6% is nothing spectacular, but the company has added different markets (such as commodities) and has always been profitable. There has been a decrease in revenue in Q2 2021 by 3% due to the commodity market. The equity market is still growing.
Compared to other stock markets, it is one of the cheapest ones. The South African Stock Exchange (JSE) is close, but it doesn't offer the political stability and growth that Poland has shown over the last decade.
The company pays a high dividend, and I believe this is due to the government of Poland owning 35% of the equity enjoying a reliable paycheck.
With Allegro going public in 2020, the Warsaw Stock Exchange had its biggest listing by far. With a valuation of currently $13b, it is bringing a massive boost of capital and publicity to Poland. The hype was also there with CD Project Red. After their lousy launch of the long-awaited game Cyberpunk 2077 with many bugs, the publicity however was negative. As more and more polish people move some of their money into brokerage accounts, even bad publicity can be positive.
Problems
While Poland is growing, the new government has made questionable decisions regarding LGBT rights, and those developments could influence digital nomads and engineers to leave the country.
Another problem is that the rising living costs in Poland might deter companies from continually outsourcing their development projects. Outsourcing is a two-edged sword. On the one hand, it can quickly boost rising economies; on the other, it can move as quickly as it came.
Potential hick-ups are with GPW itself. While developments in the company and the behavior of investors in Poland are positive, there is no clear catalyst for valuations to improve. Improving business results will likely raise the stock price, but it doesn't mean that valuations will re-rate to a higher level. I don't believe it will be stagnant for another decade, but the opportunity cost might not be worth it.
The last problem is in regards to the European Union. Nearly all Polish exports end up in a European country. Suppose the European Union has significant problems or even the default of several countries (Italy, Greece, and Spain were pretty close). In that case, it could lead to an appreciation of the Polish Zloty and hindering exports.
Conclusion
While there are great opportunities in the market, I would rate GPW very highly. A high dividend yield limits the downside, while economic forces raise the upside. GPW is a company that comes with high opportunity costs but deserves a closer look and probably a deep dive.
If you are interested in a deep dive, please comment below or write me on Twitter @InvestRoiss. I would also appreciate you sharing my posts.
Great article!
I am a GPW shareholder. My point of view: Downside risk is quite limited (valuation, dividend), there is upside potential (growth in trading, new initiatives) and you are remunerated nicely to just sit and wait (high dividend).
GPW invests heavily in new initiatives and has a goal beyond financial goals (creating a regional leading exchange...). This seems to be an issue for the market, but personally, I think this could become a major catalyst for growth if whatever of these projects will lead exceptional success.
I bought it but sold it for imho a better opportunity. The problem with GPW is that it has very slow growth in revenues, I am not sure why. Trading volumes and value on the Warsaw stock exchange are not growing very fast, valuations are cheap. Allegro was overvalued at IPO and lost value since. That may have turned many new investors in the WSE off. A decent dividend stock but there still has not been a shift to retail investing yet in Poland to support growth in GPW.