Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

Rakuten Q2 21 results were mixed with better revenue as core businesses did well but steeper losses as mobile spending grew. The company has not changed broad guidance that peak losses will come in FY21 but roaming costs appear to be a larger issue than we thought with an impact on both margins and the timing of new user acquisition. That makes slippage in network deployment targets slightly more problematic although there should also be some offset from good results in eCommerce which grew YoY despite lapping the very strong lockdown quarter.

Rakuten Q2 21 results were mixed with better revenue as core businesses did well but steeper losses as mobile spending grew. The company has not changed broad guidance that peak losses will come in FY21 but roaming costs appear to be a larger issue than we thought with an impact on both margins and the timing of new user acquisition. That makes slippage in network deployment targets slightly more problematic although there should also be some offset from good results in eCommerce which grew YoY despite lapping the very strong lockdown quarter.

Rakuten (Neutral) - Q2 21 Results Reaction: Roaming Costs Have Become a Big Deal

By year-end we expect there will be two newly minted public fintech companies in Asia as IPOs for Kakao Pay (August) and PayTM (Q4-ish) move ahead. These are both potential comparables for Softbank Group’s PayPay of which Z Holdings is the leading shareholder. Comparatively, proposed valuations for Kakao Pay ($7-11bn) and PayTM ($24-25bn) are much higher but these are also later stage businesses with established track records and offer some insight into what PayPay can turn into over time. We currently value PayPay at its carry value of $500mn but as monetization starts, we expect management aspirations for a unicorn valuation can be reached. This report includes forecasts updated for Q4 results, guidance, and the acquisition of Yahoo trademark rights from Verizon.

By year-end we expect there will be two newly minted public fintech companies in Asia as IPOs for Kakao Pay (August) and PayTM (Q4-ish) move ahead. These are both potential comparables for Softbank Group’s PayPay of which Z Holdings is the leading shareholder. Comparatively, proposed valuations for Kakao Pay ($7-11bn) and PayTM ($24-25bn) are much higher but these are also later stage businesses with established track records and offer some insight into what PayPay can turn into over time. We currently value PayPay at its carry value of $500mn but as monetization starts, we expect management aspirations for a unicorn valuation can be reached. This report includes forecasts updated for Q4 results, guidance, and the acquisition of Yahoo trademark rights from Verizon.

Z Holdings (Buy) - Asian Fintech App IPOs Highlight Potential PayPay Upside

KDDI posted results that were largely in-line with consensus forecasts for Q4 and slightly ahead of our forecasts for FY21. As with recent quarters, operations were characterized by relative weakness in consumer offerings but strength in sales to corporates. The company sent a strong message on shareholder returns with the dividend going from ¥120 to ¥ 125 (the 20th straight year of increases) and a ¥150bn share purchase program (both in-line with our expectations). On the aggregate, with all telcos reporting, the incumbents are guiding to financial stability despite regulatory-driven price reductions and a more aggressive investment program by new entrant Rakuten. At 6x EBITDA and 12.5x EPS, KDDI shares look attractive and we remain at Buy.

KDDI posted results that were largely in-line with consensus forecasts for Q4 and slightly ahead of our forecasts for FY21. As with recent quarters, operations were characterized by relative weakness in consumer offerings but strength in sales to corporates. The company sent a strong message on shareholder returns with the dividend going from ¥120 to ¥ 125 (the 20th straight year of increases) and a ¥150bn share purchase program (both in-line with our expectations). On the aggregate, with all telcos reporting, the incumbents are guiding to financial stability despite regulatory-driven price reductions and a more aggressive investment program by new entrant Rakuten. At 6x EBITDA and 12.5x EPS, KDDI shares look attractive and we remain at Buy.

KDDI Q4 20 Results: Slightly Better Guidance and Solid Shareholder Returns

<a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a>  posted results for Q4 ahead of Redex / consensus expectations with FY21 guidance that is better than our forecasts but worse than consensus. Importantly, the company is targeting flat operating income YoY despite meaningful mobile price reductions as profit growth from Enterprise sales, Distribution, and Internet offset consumer erosion. The only disappointment in the results may be an unchanged dividend and whilst the company did not close the door on increases later in the year, there was not much enthusiasm either. Still, with results and guidance that are largely better than our expectations, we remain at Buy.

Softbank Corp (9434 JP)  posted results for Q4 ahead of Redex / consensus expectations with FY21 guidance that is better than our forecasts but worse than consensus. Importantly, the company is targeting flat operating income YoY despite meaningful mobile price reductions as profit growth from Enterprise sales, Distribution, and Internet offset consumer erosion. The only disappointment in the results may be an unchanged dividend and whilst the company did not close the door on increases later in the year, there was not much enthusiasm either. Still, with results and guidance that are largely better than our expectations, we remain at Buy. 

Softbank Corp Q4 20 Results/FY21 Guidance – Holding the Line on Mobile Pricing Changes

Sky Perfect JSAT operates Japan’s only direct-to-home (DTH) video service and is Asia’s largest satellite operator. As a well-known consumer-facing service, the former is better known and has often driven sentiment but the key to unlock value may be in the latter as the space industry expands. An increase in space industry investment brings new opportunities but also heightened competition from low-earth satellite fleets albeit at less intensity than its global peers. On balance, we think the changes are positive and we initiate coverage at Buy with a ¥640 FY21-end target price.

Sky Perfect JSAT operates Japan’s only direct-to-home (DTH) video service and is Asia’s largest satellite operator. As a well-known consumer-facing service, the former is better known and has often driven sentiment but the key to unlock value may be in the latter as the space industry expands. An increase in space industry investment brings new opportunities but also heightened competition from low-earth satellite fleets albeit at less intensity than its global peers. On balance, we think the changes are positive and we initiate coverage at Buy with a ¥640 FY21-end target price.

Sky Perfect JSAT - Upside Potential in Space Business (Initiation of Coverage)

Japan

NTT DOCOMO, INC. provides various types of telecommunication services including cellular phones, satellite mobile communication, and wireless LAN Network. The Company also sells cellular phones, and other equipment.

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NTT Docomo Inc (9437 JP)

Rakuten (Neutral) - Q2 21 Results Reaction: Roaming Costs Have Become a Big Deal

Rakuten posted solid eCommerce/Fintech results but these are overshadowed by mobile operating losses. The good news is peak losses should fall in...

Kirk Boodry

Z Holdings (Buy) - Asian Fintech App IPOs Highlight Potential PayPay Upside

Upcoming IPOs for two Asian fintech companies provide some insight on what Z Holdings PayPay can become once it starts to monetize its business....

Kirk Boodry

KDDI Q4 20 Results: Slightly Better Guidance and Solid Shareholder Returns

KDDI results were in-line and guidance implies growth in other areas can offset consumer mobile erosion. Good report but there may be near-term...

Kirk Boodry

Softbank Corp Q4 20 Results/FY21 Guidance – Holding the Line on Mobile Pricing Changes

Softbank Corp says it will maintain profitability despite regulatory-driven mobile price cuts. The dividend will also be unchanged although...

Kirk Boodry

Sky Perfect JSAT - Upside Potential in Space Business (Initiation of Coverage)

Sky Perfect JSAT is better known for its direct broadcast satellite (DBS) video business but the space business represents more value and has been...

Kirk Boodry

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