QIWI - Regulatory Risk Increases

QIWI warned yesterday about several regulatory initiatives that increase uncertainty and can potentially adversely affect revenues related to betting and e-wallets. Given than this uncertainty remains high, we have revised our model to consider a scenario under which QIWI continues to be one of the two payments processors for betting companies, but has to cut its commission (as bookmakers will seek cost optimization), and will see some pressure on its e-wallet usage. We do not yet consider a scenario under which QIWI completely loses its betting-related business, which we estimate will contribute around 40% to payment services net revenues in 2020, but we have increased our cost of equity to 20.5% to account for the risks. These changes lead us to downgrade QIWI to SELL and cut our target price by 53% to R934 ($12.24) per share. > New betting-related regulation calls for single payment processor, increased taxation. The draft law, which was submitted to the Duma on November 13, would entail creating a state-controlled "unified gambling regulator," which would transfer the tax to sports federations in real time. The state-owned company that would be created to carry out this function would have the right to create a single center for processing interactive bets, i.e. instead of the current two centers, for one of which QIWI is the payment processing partner. The draft bill also changes the basis for the targeted deductions paid by bookmakers to the sports federations. According to Interfax, the Finance Ministry is considering its own legislative proposal to increase taxation of bookmakers, which was supported by the president in early October but is currently being discussed only at the level of the government. If adopted, this could have a negative impact on QIWI's betting yield as bookmakers will seek to optimize costs.> E-wallet regulation is tightening. The draft law targets introducing a special form of reporting to account for the foreign e-wallets of both Russian and cross-border transactions. This would not directly impact QIWI's operations at this stage, but it demonstrates the high level of attention the regulator is paying to e-money and electronic wallets. There is a risk that some cross-border operations in QIWI's e-wallets could be affected, but it is also possible that the government will take the next step and tighten domestic regulation of e-wallets. > Valuation. On our new estimates, QIWI is trading at P/E 2021E of 10.5. The upside to our estimates is if the regulatory risks do not materialize or materialize to a lesser extent, or if QIWI becomes the single payment processing partner for the whole industry (instead of being one of two as it is now). The downside risk is if it loses its betting-related business and regulation is significantly tightened for e-wallets domestically.