Equity Analyst, LightStream Research

Supun Walpola

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Event-Driven

<ul><li>OYO, the largest budget hotel network in India, announced a JV with <a href="https://www.smartkarma.com/entities/19603" target="_blank" data-smartkarma-citation="entities:19603:1">Yahoo Japan (4689 JP)</a> to expand its co-living rental service, "OYO Living", to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology &amp; Hospitality Japan”. </li></ul><ul><li>Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. </li></ul><ul><li>Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture in masses.</li></ul>

OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, "OYO Living", to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology &amp; Hospitality Japan”. Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture in masses.

Yahoo Japan's JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/31" target="_blank" data-smartkarma-citation="entities:31:1">Rakuten (4755 JP)</a> has been under pressure recently from <a href="https://www.smartkarma.com/entities/409" target="_blank" data-smartkarma-citation="entities:409:1">Amazon (AMZN US)</a> and other competitors in its core online mall business and now seems to be giving more attention once again to the original Rakuten Ichiba, including a plan to cut shipping fees, although this also looks like a face-saving way to cut merchant commissions.
Rakuten is also investing in new logistics infrastructure to try and match the customer services levels of Amazon and <a href="https://www.smartkarma.com/entities/18379" target="_blank" data-smartkarma-citation="entities:18379:1">ZOZO (3092 JP)</a>.
As part of this effort, Rakuten just announced a 9.9% stake in a logistics firm called Kantsu. The deal is part of Rakuten's strategy to accelerate the move towards consolidated shipments of orders on Rakuten Ichiba – one of the key weaknesses of the Rakuten model compared to Amazon and Zozo.
Rakuten also just announced its year-end results this week: Domestic GMVs rose 11.2% to ¥3.4 trillion for the year ending December 2018. While GMVs rose and revenue increased by 9.2% to ¥426 billion, operating income on domestic e-commerce fell 17.7% to ¥61.3 billion partly due to higher logistics costs. For 4Q2018, operating income fell 27.3%.

Rakuten (4755 JP) has been under pressure recently from Amazon (AMZN US) and other competitors in its core online mall business and now seems to be giving more attention once again to the original Rakuten Ichiba, including a plan to cut shipping fees, although this also looks like a face-saving way to cut merchant commissions.
Rakuten is also investing in new logistics infrastructure to try and match the customer services levels of Amazon and ZOZO (3092 JP).
As part of this effort, Rakuten just announced a 9.9% stake in a logistics firm called Kantsu. The deal is part of Rakuten's strategy to accelerate the move towards consolidated shipments of orders on Rakuten Ichiba – one of the key weaknesses of the Rakuten model compared to Amazon and Zozo.
Rakuten also just announced its year-end results this week: Domestic GMVs rose 11.2% to ¥3.4 trillion for the year ending December 2018. While GMVs rose and revenue increased by 9.2% to ¥426 billion, operating income on domestic e-commerce fell 17.7% to ¥61.3 billion partly due to higher logistics costs. For 4Q2018, operating income fell 27.3%.

Rakuten to Covertly Cut Merchant Commission Rates?

<a href="https://www.smartkarma.com/entities/15070" target="_blank" data-smartkarma-citation="entities:15070:1">Recruit Holdings (6098 JP)</a> reported its 3Q FY03/19 financial results on Wednesday (13th February). Recruit’s revenue and EBITDA were up 6.0% YoY and 11.1% YoY respectively in 3Q FY03/19. This was mostly due to 1) consolidation of the results of Glassdoor Inc. (the company which operates the employment information website glassdoor.com), 2) steady growth in Japanese staffing operations and 3) growth in beauty and real estate app users during the quarter, partially offset by slowdown in global recruitment activity.<div class="content-highlight">Despite its strong 3Q results and steady topline and bottom line growth over the forecast period, at a FY2 EV/EBITDA multiple of 16.0x, Recruit doesn’t look particularly attractive to us. Recruit’s internet advertising business and employment business peers, <a href="https://www.smartkarma.com/entities/19603" target="_blank" data-smartkarma-citation="entities:19603:1">Yahoo Japan (4689 JP)</a> and <a href="https://www.smartkarma.com/entities/1428" target="_blank" data-smartkarma-citation="entities:1428:1">Persol Holdings (2181 JP)</a> are trading at FY2 EV/EBITDAs of 6.8x and 7.5x respectively.</div><div class="content-caption">Key Financials FY03/18-20E</div><table class="table table-striped"><tbody>
<tr>
<td> </td>
<td>FY03/18</td>
<td>FY03/19E</td>
<td>FY03/20E</td>
</tr>
<tr>
<td>Consolidated Revenue (JPYbn)</td>
<td style="text-align: right;">2,171</td>
<td style="text-align: right;">2,327</td>
<td style="text-align: right;">2,478</td>
</tr>
<tr>
<td>YoY Growth %</td>
<td style="text-align: right;">11.9%</td>
<td style="text-align: right;">7.2%</td>
<td style="text-align: right;">6.5%</td>
</tr>
<tr>
<td>Consolidated EBITDA (JPYbn)</td>
<td style="text-align: right;">258</td>
<td style="text-align: right;">288</td>
<td style="text-align: right;">312</td>
</tr>
<tr>
<td>EBITDA Margin %</td>
<td style="text-align: right;">11.9%</td>
<td style="text-align: right;">12.4%</td>
<td style="text-align: right;">12.6%</td>
</tr>
</tbody></table><div style="text-align: left;" class="content-caption">Source: Company Disclosures/LSR Estimates</div>

Recruit Holdings (6098 JP) reported its 3Q FY03/19 financial results on Wednesday (13th February). Recruit’s revenue and EBITDA were up 6.0% YoY and 11.1% YoY respectively in 3Q FY03/19. This was mostly due to 1) consolidation of the results of Glassdoor Inc. (the company which operates the employment information website glassdoor.com), 2) steady growth in Japanese staffing operations and 3) growth in beauty and real estate app users during the quarter, partially offset by slowdown in global recruitment activity.Despite its strong 3Q results and steady topline and bottom line growth over the forecast period, at a FY2 EV/EBITDA multiple of 16.0x, Recruit doesn’t look particularly attractive to us. Recruit’s internet advertising business and employment business peers, Yahoo Japan (4689 JP) and Persol Holdings (2181 JP) are trading at FY2 EV/EBITDAs of 6.8x and 7.5x respectively.Key Financials FY03/18-20E

 
FY03/18
FY03/19E
FY03/20E


Consolidated Revenue (JPYbn)
2,171
2,327
2,478


YoY Growth %
11.9%
7.2%
6.5%


Consolidated EBITDA (JPYbn)
258
288
312


EBITDA Margin %
11.9%
12.4%
12.6%

Source: Company Disclosures/LSR Estimates

Recruit Holdings Reports Strong 3Q Results; Remains Expensive

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

<div class="content-caption">

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/078/315/original/2019-02-09_12-04-43.png?1549681495" class="editor-image img-responsive" data-smartkarma-image-id="78315"></figure>
Source: Japan Analytics
</div>
TUMBLING DICE - After <a href="https://www.smartkarma.com/entities/18379" target="_blank" data-smartkarma-citation="entities:18379:1">ZOZO (3092 JP)</a> (-52%) and <a href="https://www.smartkarma.com/entities/27149" target="_blank" data-smartkarma-citation="entities:27149:1">Mercari (4385 JP)</a> (-50%), <a href="https://www.smartkarma.com/entities/8197" target="_blank" data-smartkarma-citation="entities:8197:1">CyberAgent (4751 JP)</a> is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector's leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.
PASSIVE PERILS - We will discuss the 'perils ' of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the 'perils' of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace <a href="https://www.smartkarma.com/entities/19521" target="_blank" data-smartkarma-citation="entities:19521:1">Furukawa (5715 JP)</a> in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/078/317/original/2019-02-09_12-52-50.png?1549684397" class="editor-image img-responsive" data-smartkarma-image-id="78317"></figure>
<div class="content-caption">Source: CyberAgent Way 2018</div>
SUMMARY - CyberAgent's business has three 'pillars', internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these 'pillars' have degraded significantly,  while the fledgeling TV business remains in 'up-front' investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called 'Abema Towers' in March. We shall refrain from making any analogies to the <a href="https://en.wikipedia.org/wiki/Skyscraper_Index" target="_blank">Skyscraper Index</a>. 
<div class="content-highlight">
This Insight will review: - 
<ul>
<li class="">CyberAgent's growth strategy</li>
<li class="">The company's track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins </li>
<li class="">The three main business segments - Internet Advertising, Game Software, and Media</li>
<li class="">Cash Flow and Valuation</li>
</ul>
We will also attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market's current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago. 
</div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/078/318/original/2019-02-09_13-06-39.png?1549685220" class="editor-image img-responsive" data-smartkarma-image-id="78318"></figure>
<div class="content-caption">Source: CyberAgent Way 2018</div>
VISION SHIFT? - In previous years, CyberAgent had a clear vision statement - 'To create the 21st century's leading company'. The company's recent performance has led to a change of tone, and CyberAgent is now rather more modestly just 'Aiming to be a company with medium to long-term supporters'.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at 'all sixes and sevens and nines'. In the search for new 'supporters', we encourage CyberAgent to just 'keep on rolling', letting the dice fall where they may. 
<center><iframe src="https://www.youtube.com/embed/6U8JlcB_BzA" width="963" height="722" frameborder="0" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="allowfullscreen"></iframe></center>
<div class="content-caption">Exile on Main Street/Tumbling Dice - Jagger/Richards 1972 </div>




Source: Japan Analytics

TUMBLING DICE - After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector's leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.
PASSIVE PERILS - We will discuss the 'perils ' of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the 'perils' of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

Source: CyberAgent Way 2018
SUMMARY - CyberAgent's business has three 'pillars', internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these 'pillars' have degraded significantly,  while the fledgeling TV business remains in 'up-front' investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called 'Abema Towers' in March. We shall refrain from making any analogies to the Skyscraper Index. 

This Insight will review: - 

CyberAgent's growth strategy
The company's track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins 
The three main business segments - Internet Advertising, Game Software, and Media
Cash Flow and Valuation

We will also attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market's current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago. 


Source: CyberAgent Way 2018
VISION SHIFT? - In previous years, CyberAgent had a clear vision statement - 'To create the 21st century's leading company'. The company's recent performance has led to a change of tone, and CyberAgent is now rather more modestly just 'Aiming to be a company with medium to long-term supporters'.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at 'all sixes and sevens and nines'. In the search for new 'supporters', we encourage CyberAgent to just 'keep on rolling', letting the dice fall where they may. 

Exile on Main Street/Tumbling Dice - Jagger/Richards 1972 

<a href="https://www.smartkarma.com/entities/19603" target="_blank" data-smartkarma-citation="entities:19603:1">Yahoo Japan (4689 JP)</a>  reported 3Q FY03/19 financial results last Monday (04th February). Revenue and OP were on par with consensus. YJ revised the lower range of its FY03/19E OP guidance upwards by JPY7bn to JPY140bn mainly due to lower than expected growth related expenses (expenses for new challenges as per the management). Meanwhile, the upper limit of the FY03/19E OP guidance of JPY143bn remains unchanged. The revised OP guidance for FY03/19E is JPY140-143bn.<div class="content-caption">Key Financials FY03/17-21E</div><table class="table table-striped"><tbody>
<tr>
<td></td>
<td>FY03/17*</td>
<td>FY03/18*</td>
<td>FY03/19E</td>
<td>FY03/20E</td>
<td>FY03/21E</td>
</tr>
<tr>
<td>Revenue (JPY bn)</td>
<td style="text-align: right;">           865</td>
<td style="text-align: right;">           909</td>
<td style="text-align: right;">           956</td>
<td style="text-align: right;">        1,022</td>
<td style="text-align: right;">        1,095</td>
</tr>
<tr>
<td>YoY Growth %</td>
<td style="text-align: right;">-</td>
<td style="text-align: right;">5.1%</td>
<td style="text-align: right;">5.2%</td>
<td style="text-align: right;">6.9%</td>
<td style="text-align: right;">7.2%</td>
</tr>
<tr>
<td>OP (JPY bn)</td>
<td style="text-align: right;">           179</td>
<td style="text-align: right;">           186</td>
<td style="text-align: right;">           153</td>
<td style="text-align: right;">           158</td>
<td style="text-align: right;">           168</td>
</tr>
<tr>
<td>OP Margin %</td>
<td style="text-align: right;">20.7%</td>
<td style="text-align: right;">20.4%</td>
<td style="text-align: right;">16.0%</td>
<td style="text-align: right;">15.5%</td>
<td style="text-align: right;">15.4%</td>
</tr>
<tr>
<td></td>
<td style="text-align: right;"> </td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td>Media Business</td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td>Revenue (JPY bn)</td>
<td style="text-align: right;">           282</td>
<td style="text-align: right;">           288</td>
<td style="text-align: right;">           303</td>
<td style="text-align: right;">           305</td>
<td style="text-align: right;">           307</td>
</tr>
<tr>
<td>OP Margin %</td>
<td style="text-align: right;">57.5%</td>
<td style="text-align: right;">58.7%</td>
<td style="text-align: right;">48.0%</td>
<td style="text-align: right;">50.0%</td>
<td style="text-align: right;">52.0%</td>
</tr>
<tr>
<td> </td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td>Consumer Business</td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
<td style="text-align: right;"></td>
</tr>
<tr>
<td>Revenue (JPY bn)</td>
<td style="text-align: right;">           512</td>
<td style="text-align: right;">           597</td>
<td style="text-align: right;">           652</td>
<td style="text-align: right;">           717</td>
<td style="text-align: right;">           789</td>
</tr>
<tr>
<td>OP Margin %</td>
<td style="text-align: right;">12.7%</td>
<td style="text-align: right;">12.6%</td>
<td style="text-align: right;">9.5%</td>
<td style="text-align: right;">10.0%</td>
<td style="text-align: right;">10.0%</td>
</tr>
</tbody></table><div style="text-align: left;" class="content-caption">*Some data points are not comparable with the latest figures due to a segment reclassification in FY03/19. </div><div style="text-align: left;" class="content-caption">Source: Company Disclosures and LSR Estimates</div>

Yahoo Japan (4689 JP)  reported 3Q FY03/19 financial results last Monday (04th February). Revenue and OP were on par with consensus. YJ revised the lower range of its FY03/19E OP guidance upwards by JPY7bn to JPY140bn mainly due to lower than expected growth related expenses (expenses for new challenges as per the management). Meanwhile, the upper limit of the FY03/19E OP guidance of JPY143bn remains unchanged. The revised OP guidance for FY03/19E is JPY140-143bn.Key Financials FY03/17-21E


FY03/17*
FY03/18*
FY03/19E
FY03/20E
FY03/21E


Revenue (JPY bn)
           865
           909
           956
        1,022
        1,095


YoY Growth %
-
5.1%
5.2%
6.9%
7.2%


OP (JPY bn)
           179
           186
           153
           158
           168


OP Margin %
20.7%
20.4%
16.0%
15.5%
15.4%



 






Media Business







Revenue (JPY bn)
           282
           288
           303
           305
           307


OP Margin %
57.5%
58.7%
48.0%
50.0%
52.0%


 







Consumer Business







Revenue (JPY bn)
           512
           597
           652
           717
           789


OP Margin %
12.7%
12.6%
9.5%
10.0%
10.0%

*Some data points are not comparable with the latest figures due to a segment reclassification in FY03/19. Source: Company Disclosures and LSR Estimates

Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run

Japan

LY Corporation operates as an internet search engine "Yahoo! JAPAN". The Company provides electronic commerce and settlement finance services for small medium enterprises and individuals. LY also operates media business including search linked advertising and display advertising services.

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LY (4689 JP)

Yahoo Japan's JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, "OYO Living", to...

Supun Walpola

Rakuten to Covertly Cut Merchant Commission Rates?

Rakuten (4755 JP) has been under pressure recently from Amazon (AMZN US) and other competitors in its core online mall business and now seems to be...

Michael Causton

Recruit Holdings Reports Strong 3Q Results; Remains Expensive

Recruit Holdings (6098 JP) reported its 3Q FY03/19 financial results on Wednesday (13th February). Recruit’s revenue and EBITDA were up 6.0% YoY...

Supun Walpola

CyberAgent: Tumbling Dice

TUMBLING DICE - After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in...

Campbell Gunn

Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run

Yahoo Japan (4689 JP) reported 3Q FY03/19 financial results last Monday (04th February). Revenue and OP were on par with consensus. YJ revised the...

Supun Walpola

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